Sanctioned offers are a significant feature of the litigation landscape in Hong Kong, providing parties a strong incentive to settle their disputes at earlier stages (Rules of High Court and Rules of District Court, O.22).
However, a party desirous of taking advantage of the procedural regime under O.22 and the specified costs consequences which flow therefrom is required to strictly comply with the rules on content and form set out in the Order. O.22, r.2(4) provides that a party is not prevented from making an offer to settle in whatever way he chooses, but “…if that offer is not made in accordance with this Order, it does not have the consequences specified in this Order, unless the Court so orders.”.
A common question that arises is whether an offer containing a term as to costs can be regarded as a valid sanctioned offer.
Although O.22 is silent on whether the inclusion of a costs element in the offer is permissible, the Courts have repeatedly held that an offer containing a term in respect of the parties’ costs is not a properly constituted offer for the purposes of O.22, that even if the parties decide to waive their entitlement to costs and proceed to accept the so-called sanctioned offer, such acceptance cannot retrospectively turn the offer into a sanctioned offer.
Various reasons have been offered in support of this argument and the Courts have concluded that 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” or would lead to a “risk of abuse”.
This rather restrictive approach to the regime under O.22 is particularly disappointing as settlement offers are frequently made inclusive of costs or on a ‘drop hands’ basis. Treating a settlement offer with an inbuilt costs provision as a sanctioned offer could help in early and efficient resolution of disputes by providing the parties the freedom to negotiate the terms of their settlement.
That said, parties who wish to include a term as to costs in their settlement offers can make use of a ‘without prejudice save as to costs’ offer (known as the Calderbank offer), which can be later brought to the Court’s attention when the issue of costs falls to be determined. As the award of costs is always made considering the surrounding circumstances, the Court may, in certain situations (for example, on account of unreasonable conduct of another party), be inclined to exercise their discretion to order costs on an indemnity basis, like in the case of sanctioned offers.
The only limitation is that the Calderbank offer so made should not fall within the exclusionary rule under O.62, r.5(1)(d), which provides that, in exercising its discretion as to costs, the Court may not take the offer into account if, at the time it is made, “…the party making it could have protected his position as to costs by means of a sanctioned payment or a sanctioned offer under Order 22”.
The scope of this exclusion is somewhat uncertain as it seems to be inconsistent with O.22, r.2(4) which allows parties to make an offer to settle in any way they choose.
In CEP Ltd v Wuxi Jiacheng Solar Energy Technology Ltd Co [2016] HKEC 42, the Honourable Mr. Justice Lam, VP rightly expressed his dissatisfaction with this part of O.62 r.5(1)(d) which, according to him, unduly fettered the Court’s discretion on costs, for example, in situations where a Calderbank offer could not be taken into account simply because those advising a litigant took a wrong view on the applicability of O.22.
We agree with the obiter comments of the Court. In the spirit of the underlying objectives in O.1A, the regime in O.22 should be given a permissive rather than mandatory effect and consideration needs to be given to address the lacuna created by the exclusionary rule.
Contacts:
Nick Gall, Senior Partner
Tel +852 3405 7688
nickgall@gallhk.com
Ashima Sood, Associate
Tel +852 3405 7628
ashimasood@gallhk.com
