Taihan Electric Wire Company Ltd and Another v. Lee Chi Yuen Arctic and Others

HCA 454/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 454 OF 2013

____________

_____________

D E C I S I O N

_____________

APPLICATION

1.I shall use the same abbreviations in my decision on 1 November 2013.  In that decision, I ordered costs on a nisi basis, in favour of D1, D3-D7 (“collectively the defendants”) with certificates for 2 counsel, after dismissal of TGH’s application for a Mareva injunction.  The defendants seek variation of the costs order for a higher scale of indemnity basis.  The written submissions have been considered.

2.In the following analyses, I shall refer to TGH as the paying party although it should be remembered that TEC should also be liable together with TGH for the period in which TEC was the 1^st plaintiff before its withdrawal. 

LEGAL PRINCIPLES FOR GRANT OF INDEMNITY COSTS

3.The principles governing the award of costs on indemnity basis have been set out by the Court of Final Appeal in Town Planning Board v Society for Protection of the Harbour Ltd (2004) HKCFAR 114, at 123-124:

“(i) The court has a broad discretion to determine how costs shall be paid and whether indemnity costs should be ordered under Order 62, rule 28(3) and section 52A of the High Court Ordinance, Cap 4.

(ii) The successful party should show, in order to obtain an order for costs on an indemnity basis, that the case has some "special or unusual feature" (Overseas Trust Bank Ltd v. Coopers and Lybrand [1991] 1 HKLR 177 at 182J, per Godfrey J; Sung Foo Kee Ltd v. Pak Lik Co. (A firm) [1996] 3 HKC 570 at 575C-D).

(iii) The courts have rejected the proposition that an award of indemnity costs will only be made where a case has been brought with an ulterior motive or for an improper purpose or where there is some deception or underhand conduct on the part of the losing party.

(iv) The courts have emphasized the undesirability of attempting to define the circumstances in which orders for indemnity costs are to be made. It has been said that the discretion is not to be fettered or circumscribed beyond the requirement that taxation on an indemnity basis must be “appropriate”.

(v) While the grounds upon which costs are awarded must be connected with the case. This may extend to any matter relating to the litigation and the parties' conduct in it, and also to the circumstances leading to the litigation, but no further.

4.At first instance [2004] 1 HKLRD 127, Chu J also stated as follows:

“12. In my view, the very fact that costs are not imposed by way of punishment suggests that the circumstances justifying the award of indemnity costs are not limited to the conduct of the litigation. In Choy Yee Chun v. Bond Star Development Ltd[1997] HKLRD 1327, the appellant argued that the judge erred in taking into account events prior to the institution of the proceedings in making an indemnity costs order. Stock J (as he then was) in rejecting that argument, referred to the judgment of Buckley LJ in Scherer v. Counting Instruments Ltd [1986] 1 WLR 615 at p.619, which said that while "the grounds upon which costs are awarded must be connected with the case, this may extend to any matter relating to the litigation and the parties' conduct in it, and also to the circumstances leading to the litigation, but no further" : at 1338G-H.

13. Further, given the underlying rationale is to indemnify the successful party, it will be open to the court to use the indemnity costs award to achieve a fairer result for the successful party. In Petrotrade Inc. v. Texaco Ltd[2002] 1 WLR 947, Lord Woolf MR pointed out that an award of costs on standard basis will almost invariably mean that a successful party has to pay part of his costs out of his own pocket, and that an indemnity costs order would avoid that element of unfairness: see also McPhilemy v. Times Newspapers Ltd (Costs)[2002] 1 WLR 934 at p.943D-F. Although Petrotrade Inc. v. Texaco Ltdand McPhilemy v. Times Newspapers Ltd (Costs) are cases on Part 36 offer under the English CPR, the discussions on the nature of indemnity costs order and the use of it to redress elements of unfairness inherent in the legal process are of general application.”

5.I have considered the various examples in the authorities referred to me by counsel on both sides when the court imposed indemnity costs.  Of importance was the instance where an unfounded claim of fraud has been held to be a special feature such as to justify an order for costs on indemnity basis: Hobbins v Royal Skandia Life Assurance and anor [2012] 1 HKLRD 977, per Reyes J at paras 140-142.

GROUNDS FOR THE DEFENDANTS’ APPLICATION

6.The defendants have put forth 3 grounds in support of their applications:

A. TGH’s refusal to discontinue its application for Mareva injunction after the court’s refusal to grant an interim injunction at the first inter partes hearing (“the 1^st Mareva decision).

B. TGH’s failure to show a good arguable case against any of the defendants and lack of cogency of evidence for an allegation of fraud at the substantive hearing (“the 2^nd Mareva decision”);

C. TGH’s inordinate delay before withdrawing the Mareva application against D3 (Yuanzhi) and D4 (Winful).

A. TGH’s refusal to discontinue its application for Mareva injunction after the 1^st Mareva decision

7.TGH had failed in the Mareva application at the ex parte stage.  At the 1^st inter partes hearing of the Mareva application, this court dismissed the application on the grounds of:

(i) Lack of urgency (para 31 of the 1^st Mareva decision);

(ii) TGH’s abuse of the court process as against Yuanzhi and Winful (paras 29, 31 and 39);

(iii) TGH’s lack of a good arguable case (para 43);

(iv) TGH’s material non-disclosures (paras 44-52).

8.Mr Zimmern acting on behalf of the defendants submits that, at the latest, by the time of the 1^st Mareva decision, it should have been abundantly clear to TGH that it had no merit in its Mareva application.  Hence, TGH should not have proceeded further with it.

9.Further, on 25 April 2013, the defendants through their solicitors (save for Yuanzhi who was unrepresented at the time) sent a letter to the plaintiffs’ solicitors in which the plaintiffs were invited to, amongst others, agree to the dismissal of the Mareva application but the plaintiffs refused.

10.Without disrespect to Mr Zimmern, insofar as merits (para 7(iii) above) were concerned, the reasons for finding lack of good arguable case in the 1^st and 2^nd Mareva decisions respectively were quite different because of some change in the plaintiffs’ evidentiary basis. 

11.In the 1^st Mareva decision,^, this court did not grant the interim injunction on the ground that to impose one hastily on the evidence of Lau without affording an opportunity for the defendants to file their evidence was not fair (para 34 of the 1^st Mareva decision).  There were inadequacies in the plaintiffs’ case looking at the endorsement of claim and the evidence, amongst which were the lack of a pleaded case on who the parties to the conspiracy to defraud were, lack of foundation for a cause of action for breach of contract and that the cause of action on knowing receipt and dishonest assistance was not based on evidence but “supposition” (para 35 of the 1^st Mareva decision).  There were also difficulties in respect of the causes of action against other individual defendants (para 37-38, 41-42).  In fairness to the plaintiffs, they did drop their claims against D8-D11 after the 1^st Mareva decision. 

12.In the 2^nd Mareva decision, many of the reasons in the preceding paragraph no longer applied with the filing of the statement of claim.  This time the lack of good arguable case was premised largely on lack of creditability in Lau’s evidence.

13.Insofar as para 7(i) was concerned, it was relevant to the ex parte and 1^st inter partes hearing only.  It had no impact on the issue of merits.

14.Insofar as paragraph 7(ii) was concerned, it was relevant to merits as against Yuanzhi and Winful and this will be further dealt with under issue (C) below. 

15.With regard to para 7(iv), by the time of the substantive hearing, TGH had not argued against the fortification of the undertaking in damages.  It was not relevant to the merits of the arguable case.

16.Ground A is not substantiated, save in relation to Yuanzhi and Winful.

B.  TGH’s failure to show a good arguable case against any of the defendants and lack of cogency of evidence for an allegation of fraud

17.TGH’s application was dismissed in the 2^nd Mareva decision after a substantive hearing on the grounds of:

(i) Lack of credible evidence from Lau (paras 65-77);

(ii) Lack of a good arguable case against Lee, Yuanzhi and Winful, and only serious issues to be tried were found as against D5-D7 (para 77 & 82); and

(iii) Balance of convenience was in favour of D5 (paras 97 & 102).

18.It is of importance not to lose sight of how this court came to the view of lack of a good arguable case.  Reliance on a convicted fraudster (Lau) to establish one’s case is not, on its own, fatal, although there are great risks involved.  Much depends on whether there is independent, weighty evidence to support the fraudster’s assertions. The supporting affidavit of Lau did provide evidence of fraud, although there was a mismatch in his affidavit and the statement of claim filed afterwards.  This court nevertheless accepted that the statement of claim was capable of being read in the way advanced by TGH’s counsel (para 49 of the 2^nd Mareva decision).  The question of Lau’s credibility aside, there was sufficient evidence from Lau’s supporting affidavit to support the pleaded case (para 50).

19.After the 1^st Mareva decision, TGH was let down by Lau who declined to provide an affidavit in reply on its behalf.  Despite that, TGH was able to establish what would have been a good arguable case on the merits against Lee, Yuanzhi and Winful, from 2 out of 3 pieces of evidence (ie the REPO transactions and Everlong transaction) which came to light after the ex parte hearing (para 64 of the 2^nd Mareva decision).  There was also a finding of risk of dissipation of assets in the light of Lee’s earlier lies (paras 86, 87, 91 and 93 of the 2^nd Mareva decision).

20.The balance was tipped against the granting of a Mareva injunction because of (a) the failure of Lee to provide an affidavit in reply, (b) his withdrawal of the police report against Lau in respect of the Everlong transaction, and (c) his failure to disclaim the contents of his own Confession Statements or his previous affirmations (paras 77 & 96).  Although items (b) and (c) concerned matters in existence before Lau filed his first affidavit in support dated 9 April 2013, item (a) was not something within the expectation of TGH in view of its settlement agreement with Lau. 

21.In my view, this was not an entirely unfounded case of fraud.  Nor was it an opportunistic move or tactical interlocutory “nuclear weapon” (to use Mr Zimmern’s description) on the part of TGH to take out this Mareva application, and to pursue it after 2 failed attempts.  TGH had been let down by its own witness.  It had changed its evidentiary course since commencement of the Mareva application.  It was as a result of the court’s weighing of the evidence that it was found that a good arguable case was not made out.  TGH (or its legal advisers) might have been a little too confident of their case but that was far from saying that they had abused the process in proceeding after the 1^st Mareva decision.  These views applied to Lee, and D5-7 whose defence was partly dependent on whether a good arguable case was established against Lee. 

22.Mr Zimmern draws to my attention that the REPO and Everlong transactions only accounted for approximately US$1.1m, compared to the total claim of US$36m.   He submits that such circumstances went beyond what could commonly be described as “ordinary hostile litigation”.  With respect, I do not see how the quantum of the claim had lengthened the substantive hearing of the Mareva application. 

23.Considering all circumstances surrounding the pursuit of the Mareva injunction, I am not satisfied that there were unusual or special circumstances to arouse the court’s indignation.  It is not appropriate to penalize TGH with indemnity costs as against Lee, D5-D7.

C.  TGH’s inordinate delay before withdrawing the Mareva application against D3 (Yuanzhi) and D4 (Winful)

24.D3 and D4 stood in a totally different position.  In the 1^st Mareva decision, I stated that asking for another Mareva injunction against Yuanzhi and Winful was a clear abuse of process in view of the existence of the Mareva injunction against them in the 2011 Action. 

25.An additional Mareva injunction in the present action would not have added protection to TGH but had wasted the costs of Yuanzhi and Winful.  In addition, it had created a juridical disadvantage to Yuanzhi in that it was left unrepresented during most part of the pre-hearing stage of the Mareva application until its withdrawal (para 29 of the 1^st Mareva decision).

26.However, TGH had not withdrawn its Mareva application against Yuanzhi and Winful until 5 working days before the substantive hearing.  In their written submission, Messrs Jones Day acting on behalf of TGH has completely failed to address this delay in withdrawal.

27.I am of the view that the plaintiff’s abuse of process was clearly a “special feature” that warranted imposition of costs on indemnity basis as against Yuanzhi and Winful and I so order.

CONCLUSION

28.I summarize my order as follows:

(1) As regards D1, D5-D7, the order nisi in their favour with certificate for 2 counsel is made absolute without variation.  The costs shall be taxed forthwith in the absence of agreement on quantum.  Cost of the summons to vary the costs order shall be to TGH to be taxed at the same time and set off against costs payable to D1, D5-D7.

(2) As regards D3 and D4, the order nisi is varied so that costs in their favour with certificates for 2 counsel shall be taxed forthwith on indemnity basis in the absence of agreement on quantum.  Costs of the summons to vary the costs order shall also be to D3 and D4 on indemnity basis to be taxed at the same time.

29.The fees of Mr Barrie Barlow SC and Mr Zimmern shall be apportioned equally among the defendants whom they represented at different stages.

30.I thank the lawyers for their assistance.

Jones Day for the 2^nd plaintiff

Mr Richard Zimmern, instructed by Smyth & Co for the 1^st, 4^th‑7^th defendants

Eversheds for the 3^rd defendant