Summary

Following the introduction of formal sanctioned payments and sanctioned offers pursuant to the civil justice reforms adopted in April 2009, it has not been entirely clear to what extent pre-trial Calderbank offers (without prejudice save as to costs) still provide costs protection for an offeror. The recent case of Leung Lai Kwan v Lo Kai Wing [2015] HKEC 842 (HCA 1158/2011) confirms that, in certain circumstances (eg, where a sanctioned offer could not properly be made), the use of a Calderbank offer is appropriate and can provide costs protection for the offeror, subject to the discretion of the court and in the event that the offeree fails to better the offer at trial.

Issue

The plaintiff and the defendant were mother and son, respectively. The dispute related to the alleged gift of a flat in the New Territories of Hong Kong, to the son and his wife, which the mother claimed was merely held on trust for her as sole beneficial owner. Following a four-day trial, the judge dismissed the mother's claim and made a provisional costs order that she pay the son's costs on a normal basis (in accordance with the convention in Hong Kong that liability for trial costs usually follows the outcome of a trial – that is, the loser pays).

When deciding what final costs order to make as between the mother and the son, the judge was asked by the son's legal advisers to consider three pre-trial settlement offers that he had made to the mother (the plaintiff):

  • an offer marked "without prejudice save as to costs" to pay the mother, among other things, a lump sum and, until her death, a monthly sum (the Calderbank offer);
  • an offer marked "Sanctioned Offer" to sell the property and, among other things, to divide the proceeds in half between the two of them (the first formal offer); and
  • an offer marked "Sanctioned Offer" to pay the mother a sum of money which was dependent on avaluation of the property (the second formal offer).

None of these offers was accepted and the case proceeded to trial, where the mother lost.

The parties agreed that neither the first nor the second formal offer was a valid sanctioned offer under the Rules of the High Court. Therefore, it fell to the judge to consider whether the Calderbank offer, or the other two offers, had any impact on the court's discretion as to costs as from the date that the mother could have accepted them.(1)

Court rule

The mother (the plaintiff) argued that, among other things, the Calderbank offer was not a relevant consideration as to the determination of liability for costs by virtue of Order 62 Rule 5(1)(d) of the Rules of the High Court, which provides that:

"(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 -

...(d) any written offer which is expressed to be 'without prejudice save as to costs' and which relates to any issue in the proceedings, but the Court may not take the offer into account if, at the time it is made, the party making it could have protected his position as to costs by means of a sanctioned payment or a sanctioned offer under Order 22."

In short, the mother argued that only a sanctioned payment and/or sanctioned offer falling within Order 22 could have an impact on the court's discretion as to costs, because the son could have made a sanctioned offer and/or sanctioned payment (including paying a sum into court).

Decision

The judge disagreed. He noted that the intent of Order 22 (governing sanctioned payments and offers) and Order 62, Rule 5(1)(d) is that where a known sum or ascertainable sum of money is to be made as a settlement offer, it should be supported by a sanctioned payment if the offeror wishes to take advantage of the cost benefits set out in Order 22 (eg, enhanced costs recovery).

However, as the judge also noted, the court rules plainly recognise that there could be circumstances where it is simply not possible for a party to make a sanctioned payment in conjunction with an offer to settle – in which case the proviso in Order 62 Rule 5(1)(d) will not apply. For example, in this case the terms of the son's Calderbank offer included a monthly payment to the mother until her death. The total amount of the offer would not crystallise (so to speak) until her death and, therefore, could not be paid as a lump sum into court by way of sanctioned payment.

At paragraph 22 of the judgment, the judge observed:

"But when read together, O 22, r 2(4) and O 62, r 5(1) plainly recognise that there may be a myriad of situations in litigation where it is simply not possible for a party to make a payment into court in conjunction with an offer to settle."

The judge specifically rejected the mother's legal representative's rather bold argument that the court could only take into account a sanctioned offer that complied with the Order 22 formalities in exercising its discretion as to costs. The judge considered that settlement offers that do not comply with Order 22 could still have some effect on the court's discretion as to costs (albeit not necessarily the enhanced costs consequences set out in the Order 22 regime).

While the judge did not need to decide whether the Calderbank offer was indeed a Calderbank offer or an 'open offer',(2) he determined that it should be taken into account when considering the issue of entitlement to costs as between the mother and son. As such, the judge varied the provisional costs order so as to award the son:

  • costs on a standard recovery basis until the date of the Calderbank offer;
  • costs on a higher recovery basis as from the date of expiry of the Calderbank offer to judgment; and
  • notably, costs on an enhanced basis from the date that the first formal offer could have been accepted by the mother (although this was to reflect the judge's doubts about the veracity of some of the evidence advanced in support of the mother's claim).

Comment

The court's decision recognises that old-style Calderbank offers are not redundant in Hong Kong, despite the formal regime of sanctioned offers and payments in Order 22. There are circumstances where a sanctioned offer together with a sanctioned payment may not be appropriate and/or impossible (eg, some complex claims for more than just money) – a matter that requires careful consideration. Further, an offer that does not comply with Order 22 can still have some effect as regards the court's discretion as to costs.

It is also not unknown for some claims to have little or no legal merit (or hugely inflated loss figures) in respect of which a defendant (offeror) and its advisers may well baulk at making a formal sanctioned payment in respect of the whole claim, because if the plaintiff were to accept such a payment within time, the plaintiff would usually become entitled to its legal costs.(3) Rather, in these circumstances, defendants often find it more realistic to make a 'drop hands' without prejudice offer.

It is important to note that it remains the case that a defendant in Hong Kong that wishes to reap the benefit of the advantageous costs (and interest) consequences set out in Order 22 must comply with the procedural regime set out in that order – not least, making an offer to pay money by means of a sanctioned payment (into court).(4) In those circumstances, a defendant must "put its money where its mouth is" and accept that if a sanctioned payment is accepted by the plaintiff in respect of the whole claim and within time, the plaintiff will usually be entitled to the costs of the action.(5)

The last word should go to the judge, who noted at paragraph 27 of the judgment:

"A party who is in receipt of an offer which is reasonable and who goes to trial having rejected that offer is always liable to a higher level of costs if they do not do better than the offer that has been rejected."

Warren Ganesh, senior consultant, assisted in writing this article.