The issue of liability for costs plays a big part in the settlement of protracted civil litigation in Hong Kong. In particular, where the parties refuse to bear their own costs, which party will pay the other's costs becomes an important consideration. As another recent case demonstrates, without prejudice settlement offers can (among other things) seek to protect a party's position as to costs. Such offers are a common feature of the local litigation landscape for good reason. Depending on the circumstances, a party may choose to make a formal sanctioned offer or sanctioned payment (or both) or a 'without prejudice save as to costs' (Calderbank) offer – they are not mutually exclusive and require careful consideration (for further details please see "Without prejudice save as to costs offers" and "Sanctioned offers and old-style Calderbank offers").
In Chan Chi Wai v Chan Sau Wah,(1) the underlying dispute between the parties arose out of rival claims to two residential properties. The parties were family members – including five brothers (the two plaintiffs and three of the defendants).
The plaintiffs were successful at trial but the trial judge made a provisional order that there be no order as to costs as between the parties. This was a bit unusual in that, although the courts have a wide discretion as to costs (including making issue-based costs orders), costs usually follow the event – namely, the unsuccessful party is ordered to pay the successful party's costs and the burden is on the unsuccessful party to show why a different costs order should be made. This is a general rule and the courts' overall discretion is wide.
Relevant case law in Hong Kong suggests that appellate courts do not like to interfere with the lower courts' exercise of discretion when it comes to determining who should pay costs. These same cases make it clear that the lower courts should not adopt a mechanistic approach – however, departures from the general rule should be based on sound principle taking into account the facts of each case.(2)
In Chan Chi Wai, the court initially made no order as to costs because it appears to have had concerns about the fairness of the plaintiffs' claims and whether they had (for example) unreasonably sought to drive too hard a bargain. At the time of giving judgment, the court was not aware of the plaintiffs' without prejudice save as to costs offer to the defendants on about 10 September 2018. The terms of that offer appear to have been reasonably comprehensive and apparently involved (among other things) selling one of the properties and dividing the net proceeds of sale between the five brothers.
The defendants rejected the plaintiffs' offer. The trial that followed was held over the course of about four days in mid to late October 2018.
As was their right, the plaintiffs applied to vary the costs order. They sought an order that the costs of the whole action or the costs incurred after 10 September 2018 (being the date of their offer) be paid to them. The basis for the plaintiffs' application was that the terms of the court's judgment were more favourable to them than their offer to the defendants or the defendants' offer to the plaintiffs.
While the plaintiffs' offer was confidential as between the parties, it became relevant to the determination of costs once the court's judgment was handed down.
The defendants opposed the plaintiffs' application to vary the court's initial costs order. They considered that the court had been justified in making no order as to costs, even though the plaintiffs had won at trial.
First, the defendants appear to have considered that the plaintiffs had been too uncompromising. Second, the rival claims to the two properties had arisen out of (among other things) the grant of two trusts by the parties' grandmother, who had since died. The defendants argued that they had been justified in defending the plaintiffs' claims and that they had raised genuine and sufficient grounds to doubt the merits of those claims – particularly in the absence of the creator of the trusts (ie, the grandmother). Therefore, the defendants argued that, irrespective of the plaintiffs' offer, the court had been justified in departing from the general rule that the unsuccessful party be ordered to pay the successful party's costs.
In effect, the defendants sought to rely on legal authority to the effect that this was an appropriate case to relieve them (as the unsuccessful party) of a liability for costs.(3)
The issue for determination regarding the issue of costs essentially involved a deliberation between:
- the legal principle relied on by the defendants and what they considered to be reasonable; and
- the general rule relied on by the plaintiffs as the successful party and, more so, in light of their without prejudice offer.
The court held that, on reflection, the starting point should be that the general rule applied – therefore, the plaintiffs were entitled to their costs and the burden was on the defendants to show otherwise.
In particular, the court considered that the defendants' legal arguments did not come within the exception based on the legal authority on which they had relied. The court noted that the scope of the exception was "very narrow".(4) To this extent, the plaintiffs' application to vary the costs order was successful and the defendants should not be relieved of a liability to pay costs.
However, while the plaintiffs were successful, the court also took account of the overall circumstances of the dispute. The proceedings arose out of a dispute between family members and although the court could take into account the conduct of the parties, there was (in fact) little blame to go around. The grandmother was not at fault in creating the trusts or, apparently, in preferring one family member over another. The plaintiff brothers were not to blame – as it transpired, they had made a reasonable global settlement offer of which the court had not been aware at the time of handing down its judgment.
The defendants were also not entirely to blame. While there were evidential problems with the defence at trial, the defendants had sought to settle the case and no adverse inference of misconduct could be drawn against them (or the plaintiffs). The following passage from the court's decision on costs appears to help sum up the position:
If the defendants honestly believed in their cause, they were entitled to make the same criticism of the plaintiffs' uncompromising attitude. Both parties have dug their heels very deep in the sand and stood very firm on their position. I give no weight to such criticisms of the defendants' conduct during the pre-litigation and pre-trial negotiations.(5)
Therefore, the court set aside its initial costs order and replaced it with an order that the plaintiffs be granted their costs after the date of their without prejudice save as to costs offer (on 10 September 2018). As the successful party with respect to the costs dispute, the plaintiffs were also entitled to the costs of the application.
While costs orders are a matter for a court's discretion, which (in turn) is dependent on the facts, this case is an interesting illustration of the exercise of that discretion. The case is also a useful reminder of the basic principles regarding liability for costs and of important relevant appellate court cases.(6)
It is worth noting that there appears to be no suggestion in the case that either party relied on a formal sanctioned offer or sanctioned payment. Presumably, the case may have been one that did not lend itself to making a sanctioned offer or sanctioned payment – in the event of a successful sanctioned offer or sanctioned payment, the court's discretion as to costs is curtailed.(7)
In these circumstances, without prejudice save as to costs offers serve a tactical purpose and are very much alive in Hong Kong.(8) Exposure to a costs liability is a significant factor in the local litigation landscape and often a crucial consideration in settlement deliberations.
(1)  HKCFI 1662, 4 July 2019 ("Decision on Costs"). See also  HKCFI 177, 23 January 2019 (main judgment) and  HKCA 584, 31 May 2019 (defendants' failed application to amend their defence).
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