Introduction
Background
Decision
Comment


Introduction

Re Hydrotech Waterproofing Solutions Ltd(1) is another important decision of the Court of First Instance of the High Court that comprehensively sets out the legal principles for when a non-party may be joined to proceedings and ordered to pay costs. The Court's decision considers the costs liability of the plaintiff company's director and of a non-party company (that had funded the litigation) together with its director. The Court ordered that the non-party company (but not the two directors) be joined to the proceedings and pay the defendant's costs together with the plaintiff. The Court's decision is part of the developing law concerning the Hong Kong courts' power to order costs against a non-party – an issue of particular interest to (among others) litigation funders in insolvency proceedings, company directors, insurers and their insureds.

Background

The plaintiff company's claim against the defendant company arose out of some construction works. The claim was dismissed and the plaintiff was ordered to pay the defendant's costs. The defendant applied for permission to join the following non-parties to the proceedings for the purpose of obtaining costs orders against them:

  • the plaintiff's sole director and shareholder (the plaintiff's director);
  • another company (the non-party company), which had collaborated with the plaintiff in the construction works and funded the plaintiff's claim in order to recover the costs of the works pursuant to a profit-sharing arrangement whereby the plaintiff agreed to pay HK$3 million of the sum recovered from the defendant to the non-party company if the claim succeeded; and
  • the sole director of the non-party company, who had assisted the plaintiff and the plaintiff's director in connection with the construction works (the non-party company's director).

On the defendant's application the issue for the Court was whether to join any of the non-parties for the purpose of considering costs and, if so, whether to order them to pay costs.

Decision

The Court permitted the defendant to join the non-party company and ordered that it pay the defendant's costs together with the plaintiff. The Court declined to join the plaintiff's director or the non-party company's director or make any costs orders against them.

Legal principles
The Court's decision is a comprehensive review of the relevant legal principles that underpin its power and discretion to order costs against a non-party (for further details please see "Court reviews non-party costs orders").(2) Of particular interest is the summary of the principles related to when a non-party director may be ordered to pay costs.

Plaintiff's director
The Court noted that mere control and management of the plaintiff's litigation was not enough (of itself) to justify a non-party costs order against the plaintiff's director. The Court was also not satisfied that the plaintiff's director had acted in bad faith such as to justify a non-party costs order against him – this was particularly the case given that he had acted pursuant to legal advice and genuinely believed that it had been in the plaintiff's best interests to sue the defendant for the recovery of the cost of the construction works.

In the absence of bad faith, the Court stated:

What is demonstrably clear, is that the mere fact that a director controlling a company had caused the company to bring or defend proceedings which the director funded and which ultimately failed is not sufficient to render the director liable for costs.(3)

Non-party company's director
Based on the evidence before it, the Court was also satisfied that the non-party company's director (like the plaintiff's director) had not contracted personally with the defendant. To the extent that he had at times during his evidence referred to himself as being the "party" was to be construed from the perspective of a layman's reference to the company of which he was a director and shareholder. Such a conclusion was consistent with the invoicing and payment arrangements as between the plaintiff and the non-party company. The Court concluded that the non-party company's director was not a real party to the litigation and there was, therefore, insufficient basis to make a costs order against him personally.

Non-party company
The Court's decision to award a costs order against the non-party company is best summarised by the following passage:

From the evidence, it seems clear to me that [the non-party company] had financed the litigation in order to recover for itself the costs of the works it had funded and paid for under the Works Contract, and pursuant to the profit sharing arrangement between the Plaintiff and [the non-party company] . . . . In view of such profit sharing arrangement it is only fair and just that [the non-party company] should pay its share of the costs of the litigation which ultimately failed, as it was one of the real parties in the action. [The non-party company] can be said to be seeking to benefit, for itself, from the Plaintiff's litigation.(4)

Comment

The Court's decision is a useful review of the relevant legal principles – particularly as regards a non-party costs order against a non-party director of a company.

Given the limited confines of litigation funding in Hong Kong, non-party costs orders are not a common feature of the litigation landscape. Such costs orders are usually directed at those who control or finance litigation for financial gain without formally being a party. This is a developing area of the law and should be of particular interest to the likes of (among others) litigation funders in insolvency proceedings, company directors and insurers and their insureds (for further details please see "Non-party costs orders (and liquidators)").(5)

Finally, the Court's decision reviews the general principles applicable to the award of enhanced costs and interest where a plaintiff fails to obtain a judgment that is better than a defendant's formal sanctioned payment. This is summarised in the following passage from the Court's decision (of which litigants and their legal representatives should take note):

I cannot find that the sanctioned payment of $1,000 was not genuine. If the Plaintiff had accepted the sanctioned payment, it would have been automatically entitled to its legal costs up to the acceptance, and that was a reasonable result if the Plaintiff had accepted the payment. In CEP Ltd v Wuxi Jiacheng Solar Energy Technology Co Ltd [2014] 4 HKLRD, the Court also found that a sanctioned payment for a nominal sum cannot be considered to be unreasonable or not genuine as an offer for settlement, bearing in mind the costs consequences.(6)

For further information on this topic please contact Antony Sassi or Jacky Darsono at RPC by telephone (+852 2216 7000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) [2023] HKCFI 601, 27 February 2023 (a decision of Mimmie Chan J arising out of a case in the "Construction List").

(2) Supra note 1, at paras 6–12. Also see section 52A(2) of the High Court Ordinance (Cap 4) and Rules of the High Court (Cap 4A), Order 62, rule 6A ("Costs orders in favour of or against non-parties").

(3) Supra note 1, at para 12.

(4) Supra note 1, at para 28.

(5) A defendant sued by a company in liquidation would usually seek to protect itself by making an application for security for costs. The fact that security for costs has been obtained in such circumstances is a significant factor in the exercise of the courts' discretion to grant non-party costs against liquidators.

(6) Supra note 1, at para 33.