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23 April 2019
A couple of recent first-instance decisions demonstrate the courts' wide discretion to award costs between parties based on a higher rate of recovery (referred to as an 'indemnity basis'). Such costs are not literally an indemnity – the receiving party does not recover all of their costs from the paying party. While indemnity costs are not the norm, many parties and their legal representatives often seek such costs without sufficient regard to whether this is actually justified. An award of indemnity costs must be justified by reference to some special or unusual feature in the case, whether at an interlocutory stage or at trial. This is the overriding principle that underpins the courts' wide discretion in such matters.
In civil proceedings in Hong Kong, an award of costs is at the discretion of the courts and, as a general rule, a losing party should expect to be ordered to pay a winning party's costs. There are various degrees of winning and the courts, therefore, have a wide discretion. That discretion is particularly prevalent when awarding the costs of interlocutory applications and of pre-trial hearings.
Costs can also be ordered on an issue-by-issue basis where a party has clearly won on one or more discrete issues but not others. It would be fair to state that the courts in Hong Kong are generally quite conventional when it comes to awarding costs and the 'loser pays' principle is the norm.
The basis for assessing an award of costs between the parties varies but the usual distinction is between normal costs (on a party-and-party basis) and indemnity costs.
Party-and-party costs are those that are necessary and proper for the receiving party to have incurred, with the benefit of the doubt being given to the paying party. On an indemnity basis, costs are allowed – except to the extent that they are unreasonably incurred (or unreasonable in amount), with the benefit of the doubt being given to the receiving party. As a rough rule of thumb, the difference between the two can be a recovery rate of approximately 60% to 65% or 70% to 75%.
Disputes as to costs and the basis for their assessment are common.
In Choi v Yau,(1) the plaintiff's claim was dismissed because the court found that, on balance, it had been advanced on the basis of a promissory note that was of doubtful validity and, therefore, the plaintiff had by necessary implication put forward a false case.
The court granted the defendant's application for indemnity costs because where a party puts forward a false document this constitutes a special circumstance which could give rise to an award of indemnity costs. In this instance, the higher incidence of costs was ordered to take effect from when the defendant filed his amended defence and counterclaim raising an issue as to authenticity of the promissory note.
In awarding indemnity costs, the court noted that the costs incurred as a result of the costs disputes could have been dealt with by an application without a hearing – therefore, the court substantially reduced the costs recovered by the defendant for the application itself.(2)
In re Qantex Capital Markets Ltd,(3) the court dismissed the plaintiff's application for summary judgment (judgment without trial). The underlying proceedings arose out of the defendants' resignation en masse from the plaintiff. Most of the defendants had been derivative traders and they apparently joined a competitor. In the process, they are each stated to have tendered an amount of money in lieu of their notice periods. A dispute arose as to (among other things) how to calculate the payments in lieu of notice pursuant to Section 7 of the Employment Ordinance – in particular, whether those payments should include the defendants' quarterly bonuses. The plaintiff proceeded on the basis that this raised a discrete determination of a point of law in respect of which summary judgment was appropriate.
The court disagreed and considered that the issue of whether the discretionary bonuses formed part of the wages of an employee was fact dependent and based on the relevant contractual provisions. This required evidence at trial; therefore, the court dismissed the plaintiff's application for summary judgment.
The defendants applied for their costs to be paid on an indemnity basis as from the date of their filing evidence in opposition to the plaintiff's application. The court awarded the defendants indemnity costs (to be assessed) and, in the course of doing so, appears to have considered that the plaintiff's application for summary judgment had been opportunistic – in the sense that it ran the risk of being found wanting by the court.
While the two cases are very different, they both help to demonstrate what may constitute a special feature or circumstance that justifies an award of indemnity costs. In the one case, a plaintiff was found to have relied on a false document; in the other, the plaintiff may have been too bold (as a matter of procedure) for the court's liking.
In both cases, the court's award of indemnity costs was from a certain date (the defendant being entitled to costs on the usual party-and-party basis before that date) – namely, from the date on which the court considered that the plaintiff could have, for example, withdrawn or amended their claim or backtracked from a procedural strategy which the court later criticised (so as to justify an order for indemnity costs).
Besides these two cases serving as examples, there are established instances where an award of indemnity costs is likely to follow – for example, a winding-up petition that is dismissed as an abuse of process or a failed challenge to enforcement of an arbitral award.(4)
Whether an award of indemnity costs makes any difference to paying parties (besides the extra financial burden) is difficult to know. A receiving party also needs to take into account its irrecoverable costs of any application before seeking an award of indemnity costs.
For further information on this topic please contact David Smyth or Warren Ganesh at RPC by telephone (+852 2216 7000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
(4) An award of indemnity costs may also be justified where an applicant seeking ex parte (without notice) injunctive relief has committed a serious and deliberate non-disclosure: Co A v Co D  HKCFI 941, 12 April 2019.
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