Directors be aware of personal liability for costs
Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd [2018] HKCFI 899
Following their ultimate success in the Court of Final Appeal ((2015) 18 HKCFAR 364), the Wu Yi parties applied to the Court of First Instance to make Ben Lee, a director of Big Island Construction (HK) Ltd (the “Non-party”), to be personally liable for their costs in, inter alia, the Court of First Instance. In a recent 2nd stage judgment handed down on 26 April 2018 (the “2nd Stage Judgment”), which followed the 1st stage judgment handed down on 29 July 2016 (the “1st Stage Judgment”; collectively, the “Judgments”), Madam Justice Au-Yeung (the “Judge”) ordered the Non-party to personally bear the costs of the Wu Yi Parties in the Court of First Instance.
The order was made pursuant to section 52A of the High Court Ordinance (Cap. 4, Laws of Hong Kong) (the “HCO”). The section confers a wide discretion on the court to determine “by whom and to what extent” costs of and incidental to the proceedings before the court are to be paid. The court only has to be satisfied, in the exercise of its discretion, that it is “in the interests of justice” to make an order to award costs against a non-party.
The Judgments applied Sun Focus Investment Ltd v Tang Shing Bor [2012] 5 HKLRD 853 and confirm that an application under section 52A of the HCO is a summary procedure which involves a 2-stage process:
In the 1st stage, the Court first considers whether the party should be joined for the purposes of costs. At this stage, the court will only refuse the joinder if it is plain and obvious that the application amounts to an abuse of process. The applicant does not need to show an “arguable” case, nor is it open to the non-party to challenge the application on the ground that it has “no real prospect of success”.
In the 2nd stage, the Court will consider the matter further and decide whether to order the non-party to personally bear the costs. The overall consideration will always be whether it would be in the interests of justice to do so. In this stage, the court will only make an order of costs against a non-party in plain and straight cases.
The Judge applied the dictum of Bokhary PJ (as he then was) in The Liberty Container (2007) 10 HKCFAR 256 at §§28 & 30 and Lord Brown in Dymocks Franchise Systems (NSW) Pty Ltd v Todd & ors [2004] 1 WLR 2807 at §§25(3) and 29, in which it was held that where a non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs, since the said non-party is regarded as “the real party” to the litigation. In the present case, the Judge held that the Non-party was the real party to the litigation, on the basis that he had control and management of the actions, funded the litigation, would have benefitted financially from the actions, and had caused the losing party to pursue a false claim or defence in the action.
Whilst the Judge observed that there was delay by the successful parties in taking out the applications under section 52A of the HCO, and that there was a lack of warning to the Non-party that they were minded to take out such applications in due course, the Judge held that there was no prejudice caused to the Non-party, and that the lack of warning in itself was irrelevant in view of the litigation misconduct of the Non-party. Furthermore, any prejudice arising from delay could have been remedied by reducing the amount of interest that the successful parties could charge.
In the interest of justice, the Judge made an order that the Non-party do bear the costs of the Wu Yi Parties personally.
Key takeaways from these decisions
Practitioners should properly advise their clients (particularly directors of companies or funders of litigation) to be well aware of the serious possibility that, should the litigation fail, the successful party may be able to seek for and obtain an order that a non-party (e.g. individual director or funder) be personally liable for costs pursuant to section 52A of the HCO, if such non-party could be regarded as “the real party” to the litigation.
The Courts have made it clear that a non-party costs order can be made against a director even if he had acted in good faith and without impropriety (§12 of the 1st Stage Decision, applying Goodwood Recoveries Ltd v Breen [2006] 1 WLR 2723 at §59 per Rix LJ).
If there is an anticipated application for costs against a non-party pursuant to section 52A of the HCO, practitioners should properly advise their clients to warn such non-party at the earliest opportunity of the possibility that a costs order may be sought against him or her. This will lay the proper groundwork for such anticipated application and negate any suggestion that the non-party was prejudiced by a lack of warning.
Lawrence K F Ng and Kaiser Leung represented the Wu Yi Parties in the 1st Stage Application.
Lawrence K F Ng represented the Wu Yi Parties in the 2nd Stage Application.
Lawrence K F Ng and Kaiser Leung co-authored this Case Report.
Click here for the 1st Stage Judgment and the 2nd Stage Judgment.
