Introduction

There has been a number of recent cases in Hong Kong in which successful parties have been awarded their costs on a more generous basis against unsuccessful parties – known as an 'indemnity' basis (in contrast to what is commonly called a 'standard' or 'party and party' basis). A recent example in the Court of Appeal is Qiyang Ltd v Mei Li New Energy Ltd.(1) There have also been recent first-instance judgments in which awards of 'indemnity costs' have been made. One might be forgiven for sometimes thinking that orders for indemnity costs are a norm, but they are not. In any event, an award of indemnity costs is not literally an indemnity in (for example) a contractual sense. In Hong Kong, a party awarded the costs of litigation (against a paying party) is still likely to end up being out of pocket as regards some of its costs.

Background

One cannot understand civil litigation in Hong Kong without understanding the cost rules and appreciating that (as yet) there is no formal regime for third-party funding of commercial litigation (other than in a miscellany of situations permitted by the courts).

The courts have a wide discretion as regards an award of legal costs between parties to civil litigation. An overriding principle is that a receiving party cannot recover more in costs than it actually incurs with its own lawyers – this is known as the 'indemnity principle' but does not mean that a receiving party recovers all of its costs.

Usually the winning party is awarded costs at trial, although who that party is may not always be clear. A court can order costs outcomes based on different issues in dispute between the parties.

As a rough rule of thumb, where costs cannot be agreed between the parties they are usually assessed by the court on a standard basis. The party awarded legal costs at trial might expect to be allowed approximately 60% to 65% of its costs.

Costs are awarded by the courts on an indemnity basis where a special or unusual feature of a case makes this appropriate. The courts have traditionally been reluctant to define the specific circumstances in which indemnity costs will be ordered, preferring to determine matters on a case-by-case basis. Costs assessed on an indemnity basis could typically result in approximately 75% or more being allowed.(2)

The difference between costs awarded on a standard and an indemnity basis is often difficult to explain. In short, costs awarded on a standard basis are usually allowed insofar as they are necessary or proper; costs awarded on an indemnity basis are usually allowed save where they are unreasonable.

In this context, the courts' discretion to award indemnity costs is different to (for example) a party's right to claim costs pursuant to an indemnity in a contract (where applicable) or to the procedural regime for enhanced costs as part of a formal sanctioned offer/payment.(3)

Recent decision(s)

In the Qiyang Ltd case, the Court of Appeal ordered the effective appellant (an individual) to pay the receiving parties' legal costs on an indemnity basis in light of her conduct of the appeal. The appeal had been struck out by the Court of Appeal because of the appellant's non-compliance with an 'unless order' and her late decision not to proceed with the appeal. The Court of Appeal appears to have considered that the appellant's conduct of the appeal amounted to an abuse of process – therefore, constituting a 'special feature' justifying an order for indemnity costs.

As noted, there have also been several recent decisions of the Court of First Instance in which orders for indemnity costs have been made.(4) Some of these decisions arise out of unmeritorious winding-up petitions or unsuccessful applications to challenge arbitral awards, where orders for indemnity costs are more common.

Comment

There has been comment in Hong Kong that orders for indemnity costs may be becoming too prevalent. However, they are not the norm.

It is not uncommon in Hong Kong to see parties making unwarranted applications for costs to be awarded on an indemnity basis against an opponent and there is a perception that this is happening more often. For example, it is quite possible that in high-value or high-profile commercial disputes some parties might seek indemnity costs without enough thought being given to whether such costs are actually justified.

There is also the point that, in terms of items of costs allowed or amounts awarded, it is sometimes difficult to ascertain the difference between costs assessed on a standard basis or an indemnity basis (which does not assist in those cases where indemnity costs are justified).(5)

Indeed, such are the uncertainties concerning disputes as to costs, parties often try to agree costs rather than applying for an assessment (known as a 'taxation'). Costs may often be wrapped up as part of an overall settlement – perhaps, for example, a 'drop hands' settlement with 'no order as to costs'.

A takeaway point for the uninitiated is that a party which is awarded costs in litigation will incur some irrecoverable costs in any event. That party will also have to seek to recover costs where the paying party refuses to pay or is unable to pay – the ability of the other party to pay should be one of the first matters to consider when considering litigation in Hong Kong.

The purpose of an award of legal costs is to reimburse a receiving party's reasonable costs. It is not an indemnity despite the nomenclature used.

For further information on this topic please contact David Smyth or Warren Ganesh at RPC by telephone (+852 2216 7000) or email (david.smyth@rpc.com.hk or warren.ganesh@rpc.com.hk). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) CACV 146/2016, November 22 2017. Also see first-instance decisions in same case: [2016] 4 HKLRD 790 and HCA 420/2011 (April 20 2017).

(2) The difference in the amount of costs awarded is more apparent with respect to costs that are summarily assessed (eg, following certain interlocutory hearings).

(3) Rules of court, Order 22.

(4) For example – Re Cosmigo Ltd, HCMP 905/2017, November 8 2017; Lim Hang Young v L&A International Holdings Ltd, HCCW 169/2017, November 14 2017. An electronic search of reported cases will show other recent examples.

(5) Supra note 2. The hourly recovery rates in the High Court and the District Court are set against certain 'benchmarks' depending on the level of experience of the lawyers and certain of their staff. These are benchmarks – costs can be awarded at a higher or lower rate, depending on the discretion of the court (often known as 'masters'). These rates have not changed for 20 years but look likely to increase in early 2018. This would be a significant development.

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