The Incorporated Owners of King Yip Factory Building v. Kwun Wah Flower and Plant Manufactory Ltd
Read the full judgment text of CACV 128/2003 on BabelCite. This Court of Appeal judgment was delivered on 7 November 2003 before Yuen JA, Yam J.
Civil procedure – costs – order nisi for costs of action and counterclaim – counterclaim succeeding in establishing an equitable set-off against the claim – effect on costs of the action – whether the trial judge erred in refusing to vary the costs order nisi – appellate review of discretionary costs orders – apportionment of costs where successful cause of action first pleaded in re-re-amendment – reliance on pre-amendment Without Prejudice and Calderbank offers. The dispute concerned a 1995 written agreement between the Incorporated Owners of a building and an owner of two 13th-floor units for the repair and sharing of costs of the building's roof, where the work was not completed. After a three-day trial, the judge found the IO had breached the agreement, that the agreement was not an entire contract, and that the Owner was entitled to complete the work and claim half the cost from the IO under an implied term pleaded only in the Re-Re-Amended Defence and Counterclaim filed in November 2001, giving judgment for the IO for $33,926 and for the Owner for $118,500 with the judgments to be set off. The Owner applied to vary the costs order nisi for the action, contending that its counterclaim operated as an equitable set-off that extinguished the claim, and relying on three earlier settlement offers. The trial judge refused the application on the basis that no finding of equitable set-off had been made in the judgment; the Court of Appeal held that this was a relevant matter which the judge had left out of account, and that the facts found in the judgment itself established an equitable set-off because the Owner's cross-claim flowed out of and was inseparably connected with the same agreement that gave rise to the claim. Applying the principle that a defendant who successfully asserts a set-off is ordinarily entitled to costs of both action and counterclaim, the Court of Appeal nevertheless limited the Owner's costs of the action to the period after the Re-Re-Amended Defence and Counterclaim, since the only ultimately successful cause of action (the implied term) was first pleaded in that re-re-amendment, with the Plaintiff retaining costs of the action up to that date. The Owner could not rely on the pre-amendment Without Prejudice and Calderbank offers because no defence found to be valid by the judge had been pleaded at the time. The Court of Appeal allowed the appeal, set aside the judge's order save for the costs of the counterclaim, and gave the Defendant the costs of the action from the re-re-amendment date, the costs of the variation application, and the costs of the appeal and the application for leave, with Certificate for Counsel.
Legal issues: Whether the trial judge's costs order nisi should be varied to give the Defendant the costs of the action based on equitable set-off · Whether the Owner's entitlement to costs of the action should be limited to costs incurred after the filing of the Re-Re-Amended Defence and Counterclaim · Whether the Owner could rely on pre-amendment Without Prejudice and Calderbank offers to obtain a more favourable costs order
Outcome: Appeal allowed; the judge's order of 12 March 2003 was set aside (save for the costs of the counterclaim, which stood) and the costs order was varied as set out in paragraph 40 of the judgment.
Cited by 11 cases
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CACV000128/2003 CACV 128/2003 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 128 OF 2003 (ON APPEAL FROM DCCJ NO. 24390 OF 1996) -----------------------------------
Coram: Hon Yuen JA and Hon Yam J (in Court) Date of Hearing and Judgment: 7 November 2003 Date of Reasons for Judgment: 13 November 2003 ------------------------------------- REASONS FOR JUDGMENT ------------------------------------- Hon Yuen JA: 1.On 12 March 2003, Judge CB Chan declined the Defendant's application that she vary an order nisi for costs that she had made after trial of an action involving a claim and a counterclaim. The Defendant appealed. 2.At the conclusion of the appeal, we allowed the appeal, set aside the judge's order, and varied the costs order in the manner set out in paragraph 40 below. After hearing submissions, we gave the costs of the appeal and the application for leave to appeal to the Defendant. We said that we would reduce the reasons for our decision into writing to be handed down. We do so now. Background facts 3.The trial involved a dispute between the Incorporated Owners of a building ("the IO") and an owner of two units on the 13th floor, which was immediately below the roof of the building ("the Owner"). Part of the roof were common parts and part of it was owned by the Owner. 4.Sometime in 1995, water was seeping from the roof, and a written agreement in Chinese was made between the IO and the Owner, which provided that the IO would arrange for and supervise the repair of the entire roof, and then the IO and the Owner would each pay half of the repair charges. 5.As events transpired, the repair work started by the IO was not completed. The reason for this was disputed. 6.There were mutual accusations of breach of the written agreement. The IO alleged that the work could not be completed because a tenant of the Owner had refused to permit access to part of the roof. 7.The Owner denied that, and instructed its own contractor to complete the work. Claim 8.The IO issued a writ in the District Court for $83,630, being a half share of the cost of labour and material and fees for removal work, and the entire cost of debris removal. Defence 9.The Owner's case was amended a number of times. By the time of trial in October 2002, the Owner's case was set out in a Re-Re-Amended Defence and Counterclaim filed the year before, on 14 November 2001. 10.By way of defence, the Owner denied that it was liable to pay the IO anything, as it alleged that the agreement was an entire contract which the IO had failed to perform. 11.However the Owner also pleaded that further or alternatively, it was not liable for the sum claimed by the IO "due to the Defendant's entitlement to set-off the same by the Counterclaim hereof" (emphasis added). Counterclaim 12.In the Counterclaim, the Owner alleged (amongst other things) that there was an implied term that if the IO failed to complete the repairs, it (the Owner) would be entitled to engage its own contractor to complete the work and to be reimbursed half of the cost by the IO [paragraph 4A(b)]. It counterclaimed $125,000 being half of its contractor's charges, and $6,000 surveyor's fees. Judgment 13.The trial took 3 days. The judge heard evidence from the IO committee chairman, its supervisor, the workman, the Owner's director, the tenant and the Owner's contractor. 14.The judge found: (a) it was the IO which had breached the written agreement, but (b) the agreement was not an entire contract; (c) part (1/5) of the work done by the IO was effective; (d) there was an implied term as pleaded in paragraph 4A(b), so that (e) the Owner was entitled to complete the work and claim half the cost from the IO. Order 15.After making various calculations for the quantum, the judge gave:
16.The judge further directed that the one judgment and costs be set off against the other and that execution do issue for the balance only. The result of the setting off of the judgment sums was that the IO had to pay the Owner a net sum of $84,574. Application for variation of Costs Order nisi 17.The Owner applied to the judge to vary the part of the costs order nisi relating to the costs of the action. It sought an order that the IO be ordered to pay its costs of the action; alternatively, such other costs order as the court thought fit. 1st ground - Equitable set-off 18.In support of the application, the Owner submitted, first, that as its counterclaim amounted to an equitable set-off of the IO's claim, the counterclaim had wholly extinguished the claim. As the IO's claim had been unsuccessful, it should therefore pay the costs of the action. 2nd ground - Offers of settlement 19.Secondly, the Owner referred to various offers of settlement which it had made on the following dates and terms:
20.The IO resisted the application for variation of the costs order nisi on the ground that the Owner's offers for settlement had already expired by the time the Owner amended its defence and counterclaim (on 14 November 2001) to plead the implied term on which it succeeded in its counterclaim. Costs order made absolute 21.The judge dismissed the Owner's application to vary the costs order nisi and gave the costs of the application to the IO. The Owner sought to appeal the order. Leave to appeal was granted by the judge on 19 May 2003. Principles in appeals from discretionary orders 22.On appeal, it was common ground that an order to award costs is made in the exercise of the court's discretion. It was also common ground (and indeed well-established law) that an appellate court should not interfere with the exercise of a judge's discretion unless it is satisfied that the judge has erred in law or in principle, or if he has taken into account some matter which he should not have taken into account, or has left out of account some matter which he should have taken into account, or if the decision was so plainly wrong that it must have been reached by a faulty assessment of the weights of the different factors which have to be taken into account (cf Alltrans Express Ltd v CVA Holdings Ltd [1984] 1 WLR 394, applied in Lakhan v Wu Wing Tat [1987] 3 HKC 54). Judge's reason for not considering set-off in costs decision 23.The judge declined to vary the costs order nisi because she thought she was bound by the terms of her judgment such that she was not at liberty to consider the effect of an equitable set-off on the costs order. 24.The judge said at paragraph 29 of her written decision on the application for variation:
25.With respect to the learned judge, it is clear from the facts found and set out in the judgment itself that the Owner's defence of equitable set-off had been established. Equitable set-off 26.The defence of equitable set-off operates where there is "a cross-claim flowing out of and inseparably connected with the dealings and transactions which also gave rise to the claim" (Bank of Boston Connecticut v European Grain & Shipping Ltd, also known as Colonial Bank v European Grain & Shipping Ltd [1989] 1 AC 1056, 1101E -1103D, HL). After that judgment of the House of Lords, it has been held in the Court of Appeal in England that the court should also consider separately the question whether it would be manifestly unjust to allow one claim to be enforced without taking into account the other (Bim Kemi AB v Blackburn Chemicals Ltd [2001] 2 Lloyds Rep 93, paragraphs 38-39). 27.In the present case, the Owner had raised the set-off in its pleadings (paragraph 12 of the Re-Re-Amended Defence and Counterclaim). 28.At trial, the judge found that the Owner was entitled to be paid $118,500 by the IO by reason of an implied term in the same agreement on which the IO's claim was based. The implied term was to the effect that if the IO failed to complete the work (for which work the IO made the claim in the action), the Owner would be entitled to complete the same piece of work and claim reimbursement (for which the Owner made the counterclaim). 29.It is clear, therefore, that the judge had in fact found that the Owner's cross-claim flowed out of and was inseparably connected with the dealing and transaction which gave rise to the claim, in other words, that there was an equitable set-off. (The issue of legal set-off not having been argued, I do not propose to examine the question whether there was a legal set-off). 30.Further, the judge had directed in the judgment itself that one judgment be set off against the other and that execution should only issue for the balance. Therefore, if the question of justice needed to be considered separately (Bim Kemi, supra), it is clear that the question has been answered in favour of the Owner. 31.Therefore, even though the words "equitable set-off" may not have been expressly referred to at trial, it is clear from the facts found and set out in the judgment itself that that defence had been established. Mr Hectar Pun, counsel for the IO on the appeal (though not before the judge), fairly accepted that all the ingredients of a set-off were present and that the essence of the judgment was a finding of set-off. 32.So analysed, it seems to me that with respect, the judge fell into error when she thought that no finding of equitable set-off had been made in the judgment. This was an important matter that she had left out of account when exercising her discretion on costs. This court therefore can, and in the interests of saving further costs, should itself reconsider the issue of costs, taking into account the Owner's success in having established a set-off. Effect of set-off on costs 33.A set-off is most relevant to the issue of costs. Its effect is stated in The Law of Set-Off, Derham (3rd ed) at paragraph 1.06:
34.That practice is set out in Hong Kong Civil Procedure 2002 at paragraph 15/2/7:
35.Normally therefore, a defendant who has successfully asserted a set-off should be awarded costs of both action and counterclaim. Costs of action before Re-Re-Amended Defence and Counterclaim 36.However, it should be noted that in the present case, the Owner succeeded in its counterclaim in establishing a set-off only on the basis of the implied term pleaded in paragraph 4A(b). This cause of action - which was the only ultimately successful one - was not pleaded until the Re-Re-Amended Defence and Counterclaim was filed in November 2001. There is therefore ground for limiting the Owner's entitlement to costs of the action to the costs incurred after this date. (Indeed Mr Pun suggested that the costs of the Counterclaim should also be limited to after this date, but there was no cross-appeal from the IO. As for Mr Pun's suggestion that the costs of the action should be reduced to reflect the fact that the Owner was unsuccessful on other issues even though it was successful in the result, it was not shown that those issues were so improperly or unreasonably raised that there should be a departure from the normal rule that costs should follow the event - Hong Kong Civil Procedure 2002 para. 62/3/3 p.862). 37.Mr Simon Ho, counsel for the Owner, submitted that the Owner's entitlement to costs of the action should not be limited to after the date of the Re-Re-Amended Defence and Counterclaim, as he submitted that even before then, the Owner had pleaded that it had suffered loss and damage as a result of the IO's breach. 38.That may be so, but the cause of action based on the implied term pleaded in paragraph 4A(b) was the only legal plank on which the Owner's counterclaim was accepted by the judge. The judge did not accept that the money expended was loss and damage suffered as a result of the IO's breach. That is clear from paragraph 21 of the judge's written decision on costs (p.9 M - p. 10C). The Owner cannot in this appeal challenge the judge's reasons for the judgment. Offers of settlement 39.Nor can the Owner rely on the Without Prejudice and Calderbank letters prior to the filing of the Re-Re-Amended Defence and Counterclaim. Before the re-re-amendment was filed, no defence found to be valid by the judge had been pleaded. On the state of the prior pleadings, the IO was entitled to reject the offers, the last of which elapsed in June 2000. Order 40.By reason of the matters set out above,
Hon Yam J: 41.I agree.
Representation: Mr Hectar H. Pun, instructed by Spencer Lee & Co for Plaintiff (Respondent) Mr Simon Ho instructed by Ho & Ip for Defendant (Appellant) |