Recent lower court cases in Hong Kong have clarified that a sanctioned offer which seeks to deprive a plaintiff of an entitlement to costs, if accepted in time, is not a properly constituted sanctioned offer in this context. Therefore, where such a sanctioned offer is not accepted and the plaintiff fails to better the offer at trial, the defendant (as offeror) should not expect to reap the costs and interest benefits that would otherwise normally follow under the relevant costs rules. That said, a party is entitled to make an offer to settle that contains an inbuilt costs provision and bring that to the court's attention when the issue of liability for costs falls to be determined.
Offers to settle can come in many different forms. They can be open offers or without prejudice offers. The court rules also provide a permissive and self-contained mechanism for formal sanctioned payments and sanctioned offers. Sanctioned offers often accompany sanctioned payments (into court). The regime for sanctioned payments and sanctioned offers came into effect in April 2009, as part of the civil justice reforms in Hong Kong. That regime was one of the more notable procedural reforms and sanctioned offers have become a common feature of the litigation landscape.
In brief, where a plaintiff obtains a judgment that is better than its own sanctioned offer, it can expect to be awarded extra interest and costs. Where a plaintiff fails to obtain a judgment that is better than a defendant's sanctioned payment or sanctioned offer, the plaintiff can expect to be denied some costs and interest. Depending on the outcome, these provisions can have significant advantageous or adverse consequences for a party.(1)
While the rules of court providing for sanctioned payments and sanctioned offers are part of a procedural code, they do not prevent a party from making an alternative form of offer to settle. A good example is 'without prejudice save as to costs' offers (so-called 'Calderbank offers'), which are common in Hong Kong. A Calderbank offer is particularly useful where a party is unable to make a sanctioned payment or sanctioned offer in order to protect its position as to costs.(2)
In Yim Wai Ling v Yuen Chik Wah(3) the defendants made a sanctioned payment supported by a sanctioned offer to settle the plaintiffs' claim in a residential nuisance dispute involving damage caused by a water leak. There was nothing particularly remarkable about the proceedings and the damage appears to have been relatively minor, although no doubt inconvenient.
The defendants' sanctioned offer contained a provision that if the sanctioned payment was accepted, the plaintiffs would accept costs on a lower scale (in light of the small value of the claim). There followed a round of without prejudice correspondence between the parties' lawyers and provisional agreement on the quantum of the claim, but no agreement as to who should pay costs and in what amount. At one point, the defendants' position appears to have been that there should be no order as to costs between the parties.
At trial, the plaintiffs succeeded in obtaining a relatively modest sum as damages, but failed to better the amount of the defendants' sanctioned payment. The defendants applied to challenge the plaintiffs' entitlement to costs on the basis that while the plaintiffs had won some damages, they had failed to better the defendant's sanctioned payment.
An issue arose as to whether the defendants' sanctioned payment was a valid sanctioned payment.
Following a recent High Court decision, the judge considered that, when taken together, the defendants' sanctioned payment and sanctioned offer sought to deprive the plaintiffs of an entitlement to the usual level of costs if they accepted the sanctioned payment. Therefore, the defendants' sanctioned payment was not valid for the purpose of protecting their position as to costs under the court rule. As a result, the defendants were not entitled to costs.
The defendants also invited the court to exercise a discretion (under the court rule) to take account of the defendants' sanctioned payment and sanctioned offer when determining the issue of costs generally. However, the court declined to do so because the defendants had contested the issue of liability through to trial and had lost in what was a neighbour dispute that need not have gone to trial.(4)
The judge also appears to have considered that the plaintiffs were not without blame for bringing a claim to court that could otherwise have proceeded in the small claims tribunal and, therefore, the plaintiffs' costs were assessed on a lower scale.(5)
Unfortunately, the nature of the dispute in Yim Wai Ling v Yuen Chik Wah appears to be such that the irrecoverable costs of either party are likely to far exceed the amount in dispute (assuming the parties' lawyers were charging at normal recoverable court rates).(6)
Somewhere along the way, the parties appear to have lost sight of the benefit of settlement.
Yim Wai Ling v Yuen Chik Wah applies the High Court case of Wong Yim Man v Wong Ho Ming,(7) which decided that a settlement offer containing an alternative costs provision (thereby seeking to deprive an offeree of an entitlement to costs, if accepted within time) is not a valid sanctioned offer for the purposes of the relevant court rules. On the wording of those rules, such an outcome may not be surprising, even if it appears rather restrictive.
However, as noted in previous updates, the courts in Hong Kong have proven adept in exercising a residual common law discretion to make adverse costs orders against a party that goes to trial having refused a reasonable offer to settle – for example, a reasonable offer made without prejudice save as to costs.(8)
For those defendants wanting more certainty in routine civil disputes involving money, they should be more prepared to accept some exposure for costs where they wish to make use of the regime for sanctioned payments and sanctioned offers. Equally, those plaintiffs that wish to avoid adverse costs orders should be more ready to accept reasonable written settlement offers.
For further information on this topic please contact David Kwok or David Smyth at Smyth & Co in association with RPC by telephone (+852 2216 7100) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(1) Rules of the High Court and District Court, Order 22, Rules 23 and 24. Often crucial is the timing of the sanctioned offer or sanctioned payment. The earlier it is, the more 'carrot and stick' there is. See citation at note 7, paragraph 46.
(4) Supra note 1 and Order 22, Rule 2(4). In any event, the court appears to have considered that the defendants had not given a prior written warning to the plaintiffs that they would apply to invoke the court's discretion under the rules – Etratech Asia-Pacific Ltd v Leader Printed Circuit Boards Ltd  2 HKLRD 1184.
(5) In effect, 'reasonable expenses', given that legal representation is not generally permitted in the Small Claims Tribunal in Hong Kong – Small Claims Tribunal Ordinance (Cap 338), Sections 19 and 24.
(7)  3 HKLRD 249. In particular, see paragraphs 18, 45 and 46 of that judgment – for example, "In my view, the Offer does not fit in the O.22 mechanism due to its inclusion of a term as to costs"; and "However, to alter the nature of a sanctioned offer in order to enable it to include a term as to costs would only do violence to the well-planned and self-contained mechanism in O.22".
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