Cost issues when making sanctioned payments/offers

Executive Summary

• The prima facie rule under Order 22, rule 20 (1) of the Rules of the High Court and the Rules of the District Court is that when a plaintiff accepts a sanctioned offer or sanctioned payment to settle the whole claim (without requiring the Court’s leave) he is entitled to his costs of the proceedings up to the date of accepting the sanctioned offer or sanctioned payment, “unless the court orders otherwise” (“the Otherwise Proviso”).
• Two recent cases demonstrate when the court will depart from the prima facie rule:-

1. Wong Ka Chi v Cheung Li Glass Engineering Company Limited and Kam Kee Steel’s Works Limited (DCPI 2013/2014)
   
   In this case, the plaintiff was ordered to pay the defendants’ costs because he had rejected the defendants’ previous settlement offers in the same terms as the sanctioned payment eventually accepted by him.
2. Wong Chim Hing v Discovery Bay Transit Services Ltd (HCPI 254/2011)
   
   The plaintiff in this case commenced proceedings in the High Court but accepted a sanctioned payment in an amount within the District Court’s jurisdiction. The plaintiff’s costs were taxed on the District Court scale.

• In order for a defendant to benefit from the Otherwise Proviso, it is crucial that he gives a prior warning to the plaintiff at the time of making the sanctioned offer or sanctioned payment of his intention to invoke the Otherwise Proviso upon the plaintiff accepting the sanctioned offer or sanctioned payment.

Plaintiffs’ entitlement to costs upon accepting a sanctioned offer or payment

Under both the High Court and District Court Rules (Order 22, rule 20(1)), where a defendant’s sanctioned offer or sanctioned payment to settle the whole of the claim is accepted (without requiring the court’s leave), the plaintiff is entitled to his costs of the proceedings up to the date of serving his notice of acceptance of the sanctioned offer or payment, unless the court orders otherwise. In the recent cases of Wong Ka Chi and Wong Chim Hing, the court considered the Otherwise Proviso.

The court’s approach in exercising discretion under the Otherwise Proviso

The Wong Ka Chi case usefully sets out the proper approach to be adopted by the court when exercising its discretion under the Otherwise Proviso, as follows:-

1. Order 22, rule 20(1) plainly envisages that upon acceptance of the sanctioned offer or sanctioned payment, the plaintiff is, prima facie, entitled to his costs of the proceedings up to the date of serving the notice of acceptance. The prima facie rule may, however, be displaced when the court orders otherwise by applying the Otherwise Proviso.
2. By virtue of the Otherwise Proviso, the court retains a discretion to depart from the prima facie rule, but the discretion should only be exercised in exceptional circumstances.
3. While it is impossible to exhaustively state the exceptional circumstances that justify a departure from the prima facie rule, the burden rests squarely on the party seeking to invoke the Otherwise Proviso to establish such circumstances.
4. The defendant should give a written warning to the plaintiff (at the same time as making the sanctioned offer or sanctioned payment) that he will apply to invoke the Otherwise Proviso upon the plaintiff accepting the sanctioned offer or sanctioned payment.

The Wong Ka Chi case

In the Wong Ka Chi case, the Plaintiff accepted the Defendants’ sanctioned payment and the Defendants applied to the court to invoke the “Otherwise Proviso”, seeking an order that the Plaintiff pay the Defendants’ costs of the proceedings. On appeal, the court held that the Defendants had shown that there were exceptional circumstances justifying a departure from the Plaintiff’s prima facie entitlement to costs because:

1. The sanctioned payment accepted by the Plaintiff was in identical terms to two previous offers made to him 9 months and 3 months respectively before proceedings had been commenced.
2. At the time the second offer was made, the Plaintiff and his legal advisors had an expert medical report and so had sufficient information to evaluate the reasonableness of the second offer.
3. The Defendants and their insurer had done all they could in order to achieve an amicable settlement with the Plaintiff prior to the action being commenced.

Since the Defendants had given the Plaintiff prior written warning that they would invoke the Otherwise Proviso before issuing the application to seek costs, the court said that there was no reason why the Otherwise Proviso should not apply and ordered the Plaintiff to pay the Defendants’ costs of the proceedings.

The Wong Chim Hing case

The earlier case of Wong Chim Hing demonstrates how the Otherwise Proviso can be invoked by a defendant where the plaintiff commences proceedings in the High Court, but accepts a sanctioned payment in an amount within the District Court’s jurisdiction (i.e. up to HK$1 million), a common scenario in personal injury actions. In such situations, defendants and their insurers will argue that since the settlement is within the District Court jurisdiction, costs should be taxed on the District Court scale. Conversely, plaintiffs will argue that they had a reasonable prospect of obtaining an award of over HK$1 million, had the case proceeded to trial, and their costs should therefore be taxed on the High Court scale.

In the Wong Chim Hing case, the Plaintiff had commenced proceedings in the High Court, but accepted a sanctioned payment of HK$700,000 i.e. within the District Court’s jurisdiction. The court held that:

• Where a plaintiff commences proceedings in the High Court and accepts the defendant’s sanctioned offer or sanctioned payment (without requiring the court’s leave) the plaintiff is prima facie entitled to have his costs of the proceedings, up to the date of serving his notice of acceptance, taxed on a High Court scale, regardless of whether the amount of the sanctioned offer or sanctioned payment is within the District Court jurisdiction.
• However, by virtue of the Otherwise Proviso, the court has the discretion to depart from the prima facie rule in exceptional circumstances. Acceptance by a plaintiff (who commenced proceedings in the High Court) of an amount less than HK$1 million would constitute an exceptional circumstance for the exercise of the court’s discretion to make an otherwise order that costs be taxed on a District Court scale.
• There may of course be other considerations, such as the complexity of factual or legal issues involved, which would justify proceedings being brought in the High Court.  One could not exhaustively state all circumstances which may be relevant to the exercise of the court’s discretion to invoke the Otherwise Proviso. However, where a plaintiff accepts a sanctioned payment of less than HK$1 million, the defendant has a good prospect of obtaining an order for costs to be taxed on a District Court scale, unless he has a good reason to justify having brought proceedings in the High Court.
• An order for costs to be taxed on a District Court scale, in High Court proceedings, should not, however, readily be made in cases where the amount of the sanctioned payment is close to the District Court jurisdictional limit, as to do so would be to unduly penalise a plaintiff who had a good prospect of obtaining judgment after trial of over HK$1 million, but who was willing to settle at a discount to avoid litigation risks and in order to achieve a speedy resolution of the case.

Again, where the defendant wishes the court to make an order for costs on a District Court scale in High Court proceedings, he must give the plaintiff written warning (at the time he serves the notice of sanctioned payment) of his intention to invoke the Otherwise Proviso upon the plaintiff accepting the sanctioned payment and must apply promptly for such order after the sanctioned payment is accepted. 

Significance of the two cases

Both of the above judgments are favourable to defendants and their insurers as they show the court’s willingness to depart from the prima facie rule that the plaintiff is to have his costs of the action up to the date of accepting a sanctioned offer or sanctioned payment.

As the court said in the Wong Ka Chi case, it is time for plaintiffs and their legal advisors to wake up to the fact that the court will strictly adhere to the underlying objectives of the court rules (to increase cost-effectiveness, ensure a case is dealt with expeditiously, facilitate settlements etc), particularly in situations where a party has unreasonably refused to accept offers made at an early or pre-action stage of proceedings and then subsequently accepts a sanctioned payment in the exact same amount, without good reasons.

In order to invoke the “Otherwise Proviso” it is important for defendants and their legal advisors to ensure that they give the requisite and appropriately worded written notice of their intention to do so at the same time as making the sanctioned offer or sanctioned payment.