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Think Thrice Before Refusing Mediation or Rejecting a Sanctioned Offer/Payment

2010-07-01

One of the innovative procedures introduced by the Civil Justice Reform to shorten legal proceedings, effective from April last year, is settlement by sanctioned offers or sanctioned payments under the modified O.22 of the Rules of the High Court (Cap. 4A) (or Rules of District Court (Cap. 336H) as the case may be).  Practice Direction 31  (“PD 31”) which requires parties in most civil proceedings to first consider mediation also came into effect in January this year.  The Court of First Instance in a recent judgment Golden Eagle International (Group) Ltd. v. GR Investment Holdings Ltd., unreported, HCA2032/2007, 25/06/2010, emphasized the rationale of these measures and illustrated how the powers of the Court under the new rules should be exercised.  

I.          Adverse cost consequences of non-acceptance of a sanctioned offer/payment  

Under the modified O.22 r.24(4), a Defendant who rejects a Plaintiff’s sanctioned offer (and the Plaintiff does better at trial) shall be ordered to pay (i) indemnity costs and (ii) interest of up to judgment rate plus 10% on both the costs and sum awarded, unless the Court considers it unjust to do so.  For detailed elaboration of the mechanism, please refer to our earlier newsletter: Important Notice to All Litigation Clients: Sanctioned Offer/Payment.  

Rationales  

Hon. Lam J. adopted the explanation of these powers under O.22 r.24 by Chadwick LJ. in McPhilemy v Times Newspapers (No 2) [2001] 4 All ER 861 that they are not meant to be penal in nature.  Rather, they aim at achieving a fairer result for the winning party.  The rationales of which can be summarized as below:  

1.            In relation to the power to award enhanced interest on judgment sum under O.22 r.24(2), it is “to compensate the successful claimant for the inconvenience, anxiety and distress of having to resort to and pursue proceedings which he had sought to avoid by an offer to settle on terms which (as events turned out) were less advantageous to him than the judgment which he achieved.” 

2.            In relation to the power to award costs on an indemnity basis under O.22 r.24(3)(a), it is “to address the element of perceived unfairness which arises from the fact that an award of costs on the standard basis will, almost invariably, lead to the successful claimant recovering less than the costs which he has to pay to his solicitor.”; and  

3.            In relation to the power to award enhanced interest on costs under O.22 r.24(3)(b), it is “to redress…the element of perceived unfairness which arises from the general rule that interest is not allowed on costs paid before judgment …. So, in the ordinary case, the successful claimant who has made payments to his own solicitor on account of costs in advance of the trial will be out of pocket even if he obtains, at the trial, an order for costs in an indemnity basis. … he will get nothing to compensate him for the costs of money (or the loss of the use of money) which he has had to bear before trial in relation to payments which he has made on account of costs.”.  

Illustration  

In Golden Eagle International (Group) Ltd. v. GR Investment Holdings Ltd, the Defendant rejected the sanctioned offer made by the Plaintiff in early January 2010 but the Plaintiff eventually did better at trial in April 2010.   The cost sanctions of the unsuccessful Defendant were held as follows:-

1.         Enhanced interest on the judgment sum (O.22 r.24(2))   Generally speaking, enhanced interest for the judgment sum could be awarded for the period after the time the Defendant could have accepted the sanctioned offer without leave of the Court (that is, within 28 days pursuant to O. 22 r.6(7)), and up to the date of judgment.  

The usual practice in a commercial case is to award 1% above prime rate on the judgment sum for this pre-judgment period.  

In the present case, however, parties had agreed upon interest on judgment sum from date of writ to date of judgment at judgment rate (i.e., 8%) which was 3% above prime rate.  Hon. Lam J. considered that such agreement already carried an enhanced element as far as pre-judgment interest on the judgment sum is concerned.  In the circumstances, adopting the rationale of McPhilemy v Times Newspapers (No 2)where double compensation by the exercise of this power was disallowed when the jury award of damages in that case had already taken care of such perceived unfairness.  Hon. Lam J. adopted the agreed draft order of the parties and ordered pre-judgment interest at the judgment rate.  

2.         Costs on an indemnity basis (O.22 r.24(3)(a))  

Hon. Lam J. had no difficulty in concluding that the Defendant should pay the Plaintiff costs on indemnity basis incurred after the time the Defendant could have accepted the sanctioned offer without leave of the Court.  

3.         Enhanced interest on costs (O.22 r. 24(3)(b))  

In another English case KR v Bryn Alyn Community (Holdings) Ltd [2003] PIQR P562, Waller LJ. referred to the part of the judgment of Chadwick LJ. (cited above) and went on to say that:

“If an order is made to pay costs on an indemnity basis, it is unlikely to be unjust to make the party pay interest on those costs for the period when litigation is being funded when acceptance of a Pt 36 offer should have led to it not being funded.  There may be cases where evidence will demonstrate actual dates when clients had put up funds and from which interest will run.  Without such evidence the court can do no more than Chadwick LJ did and make the interest run from the date when the work was done or liability for disbursements was incurred.”  

Hon. Lam J. adopted a similar but modified approach in the present case.  In the absence of evidence of actual payment of costs and bearing in mind that it was not a substantial period (approximately 4 months), Hon. Lam J. borrowed the well-established approach in working out interest for special damages in personal injuries litigation, that is, to award interest half of the rate on all costs incurred after the time the Defendant could have accepted the sanctioned offer without leave of the Court.  

As regards the interest rate, O.22 r.24(3)(b) only sets the maxima at 10% above judgment rate. Hon. Lam J. considered that the appropriate rate should be one that can generously reflect the costs of money to the Defendant.  Based on the submission of the parties, the judge accepted that 4% above prime rate in Hong Kong was 1% above judgment rate, and he adopted that as a generous assessment of costs of money.  

II.         Adverse cost consequences of a party unreasonably refusing mediation  

To avoid the adverse cost order, the burden is on the refusing party to provide a reasonable explanation for refusing mediation.  As set out in the PD 31, this is a relevant consideration in assessing whether a higher basis of taxation should be ordered against the refusing party in respect of costs of the action incurred after the date of refusal.  

Illustration  

In Golden Eagle International (Group) Ltd. v. GR Investment Holdings Ltd, on account of the Defendant’s unreasonable refusal to mediate, the Defendant was held liable to pay costs to the Plaintiff on common fund basis.  But for the judge’s earlier decision on the costs under O.22 r.24 (as set out above), the cost sanction would have been applicable to all the costs incurred after the date of refusal to mediate.  As the matter stands, the effect of the cost sanction was applicable to costs incurred between 4 May 2009 (date of refusal to mediate) and 1 February 2010 (last day for the Defendant to accept the Plaintiff’s sanctioned offer without leave).  For this period, the Defendant shall pay the Plaintiff’s costs to be taxed on common fund basis.  

In reaching this conclusion, the Court took into consideration the followings:

1.         Nature of the case  

Hon. Lam J. rejected the Defendant’s argument that the dispute in the present case was unsuitable for mediation.  The dispute in the present case was a simple contract dispute and a one-off dispute that did not raise any point of law the determination of which would provide guidance for the future, whether for the parties or others in the trade.  

Whilst the judge recognized that in some cases there is a need to have legal proceedings on foot for the purpose of urgent or interlocutory injunctive relief, once such protection is in place there can still be scope for the parties to resolve their difference by mediation.  However, the present case was not one where injunctive or other protective relief was sought.  

2.         Reasonable belief of a strong case  

In England, a party could rely on having a strong case as the ground for refusing mediation in circumstances identified by Dyson LJ. in Halsey v Milton Keynes General NHS Trust [2004] 1 WLR 3002.  However, Hon. Lam J. considered that such scenario is unlikely to occur in Hong Kong.  

Having concluded that the Defendant’s case did not fall within this category, Hon. Lam J. nevertheless left open this question: whether in light of the mechanism provided in PD 31 in Hong Kong, a party could rely on having a strong case as the ground for refusing mediation. 

3.         No prospect of success of intended mediation   Hon. Lam J. observed that the wide difference between the parties in previous correspondence could not be regarded as an indicator that mediation would have no prospect of success.  On the contrary, the process of mediation very often could bring about changes in attitudes and it could succeed in cases where previous attempts to settle had failed.

Moreover, a party cannot rely on his own unreasonable obdurate attitude to justify a refusal of mediation on the ground that it has no prospect of success.

4.         Dis-proportionality of mediation costs

In the present case, the claim and the counterclaim were RMB 12 million odd and RMB 7 million odd respectively.  Parties did not give the Court any estimates as to the costs of mediation.  Hon. Lam J. commented that in respect of a case of this nature, even with the engagement of a fairly experienced mediator in Hong Kong, the costs for a reasonable attempt in mediation (say a 2-day session) should not be more than $80,000.  Thus, the costs of mediation could not be regarded as disproportionately high.

Conclusion

Golden Eagle International (Group) Ltd. v. GR Investment Holdings Ltd. demonstrated the courts' willingness to take a robust approach to impose cost sanctions under the new rules.  When making a decision whether to mediate or whether to reject a sanctioned offer/payment proposed by the opponent, parties should carefully assess the strength of their case and bear in mind the possible cost consequences in the intended litigation.


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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2010

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