Melvin Waxman and Another v. Li Fei Yu and Another

HCA 1972/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1972 OF 2012

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BETWEEN

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D E C I S I O N

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Introduction

1.This is the hearing of the Plaintiffs’ application to vary my costs order nisi made on 19 July 2013 when dismissing the 2^nd Defendant’s application to stay the action on the ground of forum non convenience.  

2.The Plaintiffs filed an affirmation made by their solicitor exhibiting a draft affirmation of the 1^st Plaintiff in support of the application.  The 2^nd Defendant filed an affirmation of Bai Ping in response to the matters set out in the 1^st Plaintiff’s draft affirmation.  Mr Shieh, counsel for the 2^nd Defendant, objects to the Plaintiffs’ affirmation as it sought to introduce further evidence without the leave of the court.  Had the issue of costs been immediately dealt with at the time of delivery of the decision, arguments would have proceeded on the basis of such materials as were before the court.  I agree with Mr Shieh and give no consideration to the two affirmations.

The applicable legal principles – an introduction

3.It is trite that the issue of costs is a matter of discretion for the court.  Subject to certain well established legal principles, the court has wide discretion in costs, particularly in respect of costs of interlocutory proceedings.  Counsel dispute about what these principles are and how they are to be applied in the present case.  Mr Shieh supports the costs order nisi as one which is well within the court’s discretion to make.  On the other hand, Mr Kam, counsel for the Plaintiffs, argues that there is a general rule that costs follow the event and the burden is on the unsuccessful party to justify a departure from that general rule.  He relies on a line of authorities, starting from the English authority of Cooper v Whittingham (1880) 15 Ch D 501 in 1880 to the Hong Kong Court of Final Appeal authority in Regent National Enterprises Ltd v Goldlion Properties Ltd FACV 10/2008 delivered in September 2009.   

4.With no disrespect to counsel, I think they have quite failed to appreciate that since the Civil Justice Reform (“CJR”) in 2008 there is a distinction between costs in interlocutory proceedings and costs in other proceedings and a change in the court’s approach to costs in interlocutory proceedings.  To my understanding, this change in approach has not been really argued before the courts.  In my view, the authorities cited by Mr Kam have to be understood against the backdrop of the CJR in 2008.

The courts’ approach pre-CJR

5.The High Court’s jurisdiction in costs is basically derived from section 52A(1) of the High Court Ordinance, which provides that costs of and incidental to proceedings in the Court of First Instance shall be the discretion of the court, and the court shall have full power to determine by whom and to what extent the costs are to be paid.  The section confers a wide discretion on the court but such discretion must be exercised judicially.  The practice is described in Hong Kong Civil Procedure 2013, Vol 1 at paragraph 62/2/6 as follows:

“Wide though the discretion is, it is a judicial discretion, and must be exercised on fixed principles, that is according to rules of reason and justice, not according to private opinion (Sharpe v Wakefield [1891] AC 173); or even benevolence (Kierson v Joseph L Thompson & Sons Ltd [1913] 1 KB 229, 231), and the exercise of discretion even by a judge sitting alone must be justifiable (Ritter v Godfrey [1920] 2 KB 47).”

These principles remain good law post-CJR and are applicable to costs in interlocutory proceedings as well as other proceedings alike. 

6.Order 62 spells out the detailed rules.  Rule 2 is about the scope of application of the Order.  Rule 3 provides for entitlement to costs.  Rule 3(2) is pertinent for the purpose of the present discussion. The pre-CJR version of rule 3(2) was as follows:

“(2) If the Court in the exercise of its discretion sees fit to make any order as to the costs of or incidental to any proceedings, the Court shall, subject to this Order, order the costs to follow the event, except when it appears to the Court that in the circumstances of the case some other order should be made as to the whole or any part of the costs.” (My emphasis underlined.)

There are two points to be noted.  First, under the former rule 3(2), there was no distinction between costs in interlocutory proceedings and other proceedings.  Second, this rule required the court to exercise its discretion, if such discretion was to be exercised, by ordering costs to follow the event except under special circumstances.  Thus, the former rule 3(2) did prescribe a general rule that costs to follow the event except under special circumstances.  This general rule applied across the board to interlocutory proceedings as well as all other proceedings.  It also formed the basis of the costs orders awarded in pre-CJR cases. 

7.The above rule is probably the general rule referred to by Mr Kam.  However, all the authorities quoted by Mr Kam were pre-CJR cases.  Cooper v Whittingham was decided in 1880.  The Court of Final Appeal Judgment in Regent National Enterprises Ltd v Goldlion Properties Ltd was delivered in 2009 but in respect of an action which commenced in 2006.  Tai Yip Dyeing Factory Ltd v Kong Hoi Sang HCA 2917/2004 was decided in 2007.  The costs orders in these cases were not in respect of costs in interlocutory proceedings.  United Phosphorus Ltd v China Merchants Shipping & Enterprises Co Ltd CACV 244/1998 was delivered in 2000.  It was an appeal against an interlocutory decision relating to forum non conveniens issue.  The costs order concerned was in respect of the costs of the appeal and whatever costs order made in the court below was a decision pre-CJR.  Similarly, Wynn Las Vegas, LLC v Lam Kwok Hung HCA 2161/2007, OTC International AG v Perfect Recovery Ltd HCCL 11/2007 and GFI Group Private Limited and Daniel Christopher John Prince HCA 170/2008 were interlocutory decisions delivered in 2008 but the actions were commenced pre-CJR. 

8.In those cases, the court ordered costs to follow the event, simpliciter.  However, only a few of them were about costs in interlocutory proceedings.  And in any event, all those cases were pre-CJR cases.  If indeed there is a distinction between the court’s approach to costs in interlocutory proceedings and costs in other proceedings post-CJR, those authorities do not support Mr Kam’s contention that the general rule of costs following the event except in special circumstances is also applicable to costs in interlocutory proceedings post-CJR.

9.I now turn to my decision in Botanic Ltd v China National United Oil Corporation, which was delivered in August 2008. The action was commenced in 2005 and was therefore a pre-CJR case to which the general rule of costs following the event would have applied.  As in the present case, the defendant was unsuccessful in their application to stay the proceedings in a forum non conveniens challenge.  I departed from the general rule in view of the nature of the issues in dispute and ordered the successful plaintiff to be awarded costs of the application only if it is successful in the action.  I did not elaborate as it was an order nisi and I preferred to leave it to the parties to argue the matter fully should either of them wish to vary the order.  But the reason must be obvious to the parties.  The agreement in dispute was international in nature in that it was made between two parties domiciled in different jurisdictions for services to be rendered in a third jurisdiction.  There were numerous issues relating to PRC law raised in that case which, in my view, was probably applicable to the agreement.  The hearing took four days and the decision ran up to 61 pages.   It was a case in which the factors in favour of the Hong Kong forum and Beijing forum were finely balanced.  While holding that the defendant failed to show that Hong Kong was not only not the natural or appropriate forum for the trial and that there was another forum which was clearly or distinctly more appropriate, I could not help entertaining some lingering doubts if Hong Kong court could apply PRC law as surely as the court in Beijing and if I had not erred in my interpretation or understanding of the issues relating to PRC law argued before me.  I thought justice would be better served if the successful plaintiff should only have the costs if it would ultimately succeed in the action.  Hence, I departed from the general rule under the former rule 3(2).

10.While not actually challenging the correctness of the exercise of my discretion in Botanic Limited, Mr Kam quoted OTC International AG v Perfect Recovery Ltd in which Stone J differentiated between the issue of where the trial was to take place and the merit of the parties’ case at trial.  Stone J obviously took an issue-based approach and totally ignored merit and the possible outcome at trial when deciding the successful party’s entitlement to costs in the interlocutory proceedings.  Such an approach is not at all uncommon.  Costs are in the discretion of the trial judge.  That discretion has to be exercised depending on the facts of the particular case and where justice as perceived by the trial judge lies.  The approach adopted by Stone J and the costs order he made were within the very wide scope which reasonable disagreement is possible.  For reasons as given in my preceding paragraph, the same is true of my decision in Botanic Limited.

The courts’ approach post-CJR

11.Following the CJR, the rules in Order 62 including rule 3 were substantially amended. Specifically, in respect of rule 3, the phrase, “other than interlocutory proceedings” was inserted into rule 3(2) and a new rule 3(2A) specifically directed at costs of and incidental to interlocutory proceedings was introduced.  The new rule 3(2) and rule (2A) read as follows:

“(2) If the Court in the exercise of its discretion sees fit to make any order as to the costs of or incidental to any proceedings (other than interlocutory proceedings), the Court shall, subject to this Order, order the costs to follow the event, except when it appears to the Court that in the circumstances of the case some other order should be made as to the whole or any part of the costs.

(2A)  If the Court in the exercise of its discretion sees fit to make any order as to the costs of or incidental to any interlocutory proceedings, it may, subject to this Order, order the costs to follow the event or make such other order as it sees fit.” 

(My emphasis underlined.)

The amendment to rule 3(2) and the introduction of rule 3(2A) specifically applicable to costs in interlocutory proceedings makes it clear that the legislative intent was to distinguish between costs in interlocutory proceedings and costs in other proceedings. Under the new rule 3(2), the general rule of costs to follow the event is preserved for costs in proceedings other interlocutory proceedings.  But a different approach is provided under the new rule 3(2A) for costs in interlocutory proceedings.  Under this new rule, the court may order costs to follow the event or make such other order as it sees fit.  The court is no longer required to apply the general rule of costs following the event except in special circumstances, though that principle remains as one of the options. The court may make such other order as it sees fit.  Rule 3(2A) gives the court even wider discretion than that under rule 3(2) in respect of costs in other proceedings. 

12.In Recommendation 122, the Working Party on Civil Justice Reform recommended:

“The principle that the costs should normally ‘follow the event’ should continue to apply to the costs of the action as a whole. However, in relation to interlocutory applications, that principle should be an option (which would often in practice be adopted) but should not be the prescribed ‘usual order.’ Costs orders aimed at deterring unreasonable interlocutory conduct after commencement of the proceedings should be given at least equal prominence in practice, with the court being directed to have regard to the underlying objectives mentioned in relation to Recommendation 2. These powers should not apply to pre-action conduct.”

The learned authors of Hong Kong Civil Procedure 2013 Vol 1 opined at paragraph 62/3/3B that the principle that costs normally follow the event is no longer the prescribed usual order but is instead just an option.    I agree entirely with that opinion.  In my view, Recommendation 122 supports my interpretation of the new rule 3(2) and 3(2A) above and the court’s approach to the issue of costs in interlocutory proceedings.

13.Apart from rule 3(2A), rule 5 empowers the court to take into account special matters in exercising its discretion of costs. This rule is of general application and applies to costs in interlocutory proceedings as well as to other proceedings.   This rule provides:

“5(1) The Court in exercising its discretion as to costs shall, to such extent, if any, as may be appropriate in the circumstances, take into account-

…

(e) the conduct of all the parties;

…

(2) For the purpose of paragraph (1)(e), the conduct of the parties includes –

(a) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

(b) the manner in which a party has pursued or defended his case or a particular allegation or issue;

(c) whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim; and

(d)     conduct before, as well as during, the proceedings.”   

14.There is a wide spectrum of interlocutory proceedings.  It is impossible to make any meaningful list of all the circumstances which are relevant for considering what is the appropriate type of costs orders in each factual situation.  Generally, the ultimate merit of the claim or defence are not relevant, but the lack of merit or a real risk of such lack of merit is.  If at the end, a claim is bound or is likely bound to fail, the opponent should not be burdened with unnecessary interlocutory proceedings and all the costs that those proceedings will incur.  If a party pursues interlocutory proceedings for the purpose of delaying the evitable or for the purpose of seeking an impossible claim, he should be deprived of his costs even if he succeeds in the interlocutory proceedings.  Hence, an order that a successful party shall have his costs only if he succeeds in the action, or bear his own costs or even pay the opponent’s costs are possible options under the new rule 3(2A), depending on the court’s perception of where justice lies.

15.As for how the new rule 3(2A) operates in practice, I have not been referred to any decision in which this rule has been argued.  I am not aware of any either.  In view of the prominence given to the CJR, I assume that where the court ordered costs to follow the event in interlocutory proceedings, it must be a conscious decision of the court to adopt the general rule as the one which it thought best served the interest of justice in the circumstances of the case before it than ignorance of the new options available or a mis-application of the general rule which no longer exists.  As observed by the Working Party on Civil Justice Reform, costs to follow the event would often be the case, though it is no longer the prescribed rule.  I now turn to examine some of the recent decisions.  I shall not refer to the usual costs orders made in respect of ordinary interlocutory applications such as applications to amend pleadings, etc.  In respect of those matters, justice obviously requires that costs to follow the event or that costs be awarded against the party who sought the indulgence of the court.

16.In Jotron As and Stanley Chang t/a Hong Kong Instech Trading Co HCA 378/2010, 20 May 2011, Sakhrani J dismissed the plaintiff’s application to strike out the defendant’s counterclaim as an abuse of process and alternatively to stay the counterclaim on ground of forum non conveniens with costs to the defendant.  Costs followed the event.  No reason was given for the costs order.  There was some degree of overlap between the two applications. The forum non conveniens arguments were purely legal arguments on a trite legal principle.  In the circumstances, it was open to Sakhrani J to adopt the issue-based approach.  The costs order could well be justified as one which the court saw fit in the circumstances.

17.In Mendlowitz & Associates Inc and Winner International Group Ltd and Another HCA 574/2009, 14 May 2010, the plaintiff commenced action in Hong Kong and obtained a Mareva injunction against the defendants.  After having commenced action in Canada, it sought to stay the Hong Kong action, discharge the injunction and later sought leave discontinue the Hong Kong action.  Au J granted the applications.  He awarded costs of the injunction to the plaintiff but awarded the costs of the stay application and costs of the action other than the costs of the injunction to the defendant.  So, the costs of the interlocutory injunction followed the event.  The defendants sought leave from Au J to appeal against that order, contending that they should be awarded those costs as the respondents’ costs in the cause.  In rejecting that argument, Au J quoted Auld LJ’s dictum in  Bushbury Land Rover Ltd v Bushbury Ltd [1997] FSR 709, and said in paragraph 29:

“29. … Auld LJ said as follows at 712:

“In my judgment, that argument [that the normal costs order for interlocutory injunction should be the respondent’s costs in the cause unless there was anything to justify a departure] … ignores the clear distinction between entitlement to interlocutory relief and final judgment which underlines Lord Diplock’s identification in American Cyanamid Co v Ethicon Ltd [1975] AC 396 of the criteria on which the court should exercise its discretion whether to grant the former.  The fact that a plaintiff may succeed ultimately does not demonstrate that he should have been granted interlocutory relief when the merits of the matter were still unresolved and the court was balancing convenience.  Final judgment provides no hindsight, tipping the earlier balance one way or the other.”

See also:  Hong Kong Civil Procedure 2010, para 29/1/44.

30.    There is thus nothing wrong in principle for this Court, in the exercise of its discretion, to look at the merits of the application for the Injunction on its own to decide what proper costs order should be made in all the circumstances, without “linking” it to what may happen at the end of trial or to the action itself.”

While Au J ordered costs to follow the event, he did not do so, at least expressly, by applying the general rule under the former Order 62 rule 3(2) which was inapplicable post-CJR or under any other general rule as submitted by Mr Kam, but under the new rule 3(2A) by looking at the merits of the interlocutory application.  In fact, it has always been accepted, whether before or after CJR, that where the respondent consents to the interlocutory injunction for the purpose of holding the ring, the proper order would be costs in the cause, but where the injunction was ordered after a contested hearing, costs to follow that event is the appropriate or usual order. In my view, this approach best serves the interest of the justice in an interlocutory injunction application and such costs orders are the type of orders which the court would see fit to make, depending on the factual circumstances of the particular case.  As for Au J’s order staying the action, against which there was no appeal, it must have been made on the ground that the court saw fit to do so as that was the end of the action and there would no longer be any trial.  It was not, in my view, made pursuant to the general rule contended by Mr Kam.

18.In 深圳市量子景順投資管理有限公司And Huang Binghuang and another HCA 1093/2009, 9 February 2011, Master Marlene Ng allowed the defendant’s application to set aside a judgment and ordered that the costs of and occasioned by the application be the defendant’s costs in the cause.  The reason she gave was that the application was made to enable the defendant to raise a defence and counterclaim but there was the possibility that defence may eventually turn out to be unmeritorious.  This costs order must have been made as an exercise of the discretion under the new rule 3(2A) as being what the court saw fit.  

19.Summing up on the post-CJR position, I think the court has much wider discretion as to costs in interlocutory proceedings. Unlike other proceedings, the general rule of costs following the events do not apply.  The court is entitled to take into account all the circumstances of the case, including those set out in rule 5, to make such order as it thinks fit. In the exercise of its discretion, the court may take the issue-based approach or may take into account merit of the parties’ case or the possible outcome of the action.  The circumstances of interlocutory proceedings are so numerous that it is impossible to make any general rule.  Costs to follow the event and costs be to the successful party’s costs in the cause are obvious options.

20.As for the onus of proof, I think it is the same post-CJR as it was pre-CJR.  It must be the successful party’s burden to satisfy the court as to the type of costs order it is entitled.  To begin with, the successful party is assisted by the general rule of costs to follow the event.  By the mere fact of being successful, the successful party has discharged the evidential burden of showing it is entitled to costs.  Thus, effectively, the evidential burden is on the unsuccessful party to adduce sufficient evidence or argument that some other or lesser order is appropriate, such as no order as to costs, costs be to the successful party’s costs in the cause or costs to the unsuccessful party.  In the absence of evidence or convincing argument to the contrary, the successful party would also have discharged the legal burden.   Costs to follow the event would be the appropriate order to make.   If the unsuccessful party is able to discharge that evidential burden, it will be the legal burden of the successful party to show that he is entitled to the costs order which he seeks.  In reality, having heard the interlocutory application, it would be quite obvious to the court what costs order would best serve the justice between the parties without relying on the burden of proof.

The appropriate costs order in the present case

21.When making the said costs order nisi in the present case, I said in paragraph 62 of the decision:

“62. In view of the nature of the issues in dispute, this is a case in which it is appropriate that the Plaintiffs should be awarded their costs of this application only if they are successful in the action. I therefore make a costs order nisi that the costs of the 2^nd Defendant’s application be to the Plaintiffs’ costs in the cause with certificate for two counsel.”

I did not elaborate as I preferred to leave it to the parties to argue the matter fully should either of them wish to vary the order.  The order only represented a provisional view of what I thought fit in the circumstances.  Basically, I took a similar view as I did in Botanic Limited.  There are a number of issues raised in this case, including PRC law.  The defendant failed to show that Hong Kong was not only not the natural or appropriate forum for the trial and that there was another forum which was clearly or distinctly more appropriate.

22.Mr Shieh supports the costs order nisi. He argues that the factors in favour of the Hong Kong forum and the Xiamen forum are finely balanced and what ultimately tilted the balance in favour of the Hong Kong forum was my finding that the proper law of the alleged Shareholders Agreement was Hong Kong law.  He further argues that this could only be a provisional view at the interlocutory stage and it would be entirely open to the trial court to find that PRC law is the proper law, in which event the plaintiffs will fail.

23.With respect, I do not entirely agree.  On further thought, I think I was wrong to have put the present case on the same basis as Botanic Limited.  While I have found factors in favour of both jurisdictions, they are not finely balanced.  First, the plaintiffs founded this action as of right against the 2^nd Defendant.  Second, I have found that the governing law of the shareholders’ agreement in dispute is Hong Kong law and that the difficulties and problems arising from a beneficial interest under a system of law which does not recognise that interest do not exist.  These are strong factors in favour of the Hong Kong forum.  Mr Shieh has not referred me to any other complex legal issues which may arise if the trial is to take place in Hong Kong but which may not arise if the trial is to take place in Xiamen.  The factors in favour of the two forum are not finely balanced. 

24.One of my considerations in Botanic Limited is the PRC law element.  Many of the disputes in that case have to be resolved on PRC law.  In the present case, if Hong Kong law is the governing law of the agreement, the significance of PRC law element is very much reduced.  Unlike Botanic Limited, the remaining PRC law issues are few and not complicated.  The concern that the Hong Kong court may not be able to interpret and apply PRC law as surely as the Xiamen court do not exist.   The present case is distinguishable from Botanic Limited.

25.Mr Shieh argues that my finding of Hong Kong law as the governing law of the agreement is only a provisional one and it is entirely open to the trial court to take a different view.  That is true.  But having heard arguments on this issue, I do not think that possibility real.

26.Looking at the matter afresh, this is a case in which the 2^nd Defendant sought to challenge jurisdiction of this court in an action which the plaintiffs founded as of right and the action is in respect of breach of a shareholders agreement, the governing law of which is Hong Kong law.  There is nothing to suggest a lack of merit or a real risk of such lack of merit.  Under such circumstances, merit of the parties’ case is not an important consideration.  An issue-based approach is appropriate.  The question is whether it was reasonable for the 2^nd Defendant to have challenged the jurisdiction of this court.

27.On the face, the answer must be an emphatic “no”. The 2^nd Defendant has failed to convince me otherwise.  It can be argued that the subject matter is in Xiamen and there are elements of PRC law involved such that it was reasonable for the 2^nd Defendant to have challenged the jurisdiction of this court.  Given the fact that the plaintiffs founded this action as of right in Hong Kong and that the claim is in respect of the breach of a shareholders’ agreement, the governing law of which is Hong Kong law, it was, in my view, unreasonable to have challenged the jurisdiction of this court.  The 2^nd Defendant raised this jurisdictional issue and lost.  Consistent with the spirit of the CJR, such unreasonable interlocutory conduct should be deterred.  It is therefore appropriate to order the 2^nd Defendant to bear the costs of these proceedings. 

Conclusion

28.Accordingly, I review my costs order nisi and replace it with an order that the 2^nd Defendant shall pay the Plaintiffs’ costs of the application, including the costs of this hearing, such costs are to be taxed if not agreed.

Mr Hugh Kam, instructed by Oldham, Li & Nie, for the Plaintiffs

Mr Paul Shieh SC, instructed by Skadden, Arps, Slate, Meagher & Flom, for the 2^nd Defendant