Hong Kong courts provide guidance on sanctioned offers

There have been a number of recent cases in which the Hong Kong courts have provided guidance on the effect of sanctioned offers.  The trend appears to be that sanctioned offers and payments are on the increase and that the rules as to their effect will be strictly enforced.  The cases are of importance to parties making and receiving sanctioned offers and payments, or considering whether to make or accept them.

What is a sanctioned offer or payment?

Hong Kong procedural rules provide that parties may make settlement offers during proceedings which need to comply with certain requirements regarding form and content.  For example, where a defendant makes a settlement offer of the payment of a sum of money, the offer needs to be made by way of a payment into court. 

If the receiving party does not accept the offer, and the offering party manages to "do better" after trial under the judgment, the offering party may obtain significantly increased costs or, in the case of the plaintiff, significantly enhanced interest on any amount awarded.  The aim of the sanctioned offer rules therefore is to incentivise parties to settle.

What are the recent cases about?

There are three very recent cases that are noteworthy:

1. In Etratech Asia-Pacific Ltd v Leader Printed Circuit Boards Ltd [2013] HKEC 608 the Court considered the rule which states that, where a defendant accepts a plaintiff's offer, the defendant is liable to pay the plaintiff's costs up to the date of acceptance, if the offer was accepted within 28 days of receipt, "unless the court otherwise orders".  The defendant argued that the court should make a different order as the plaintiff had "grossly exaggerated" its claim in the first place.  The judge held that the general rule (ie, that the defendant bears the plaintiff's costs) should only be departed from in exceptional circumstances and that the defendant needed to give the plaintiff prior warning of its intention to make an application for a different costs order before the plaintiff accepted the payment, failing which the court will not depart from the general rule.
2. In Mega Yield International Holdings Ltd v Fonfair Co Ltd [2013] HKEC 769 the Court considered the interaction between what it called the "payment-in rule" on the one hand and the "deprivation rule" on the other hand.  According to the "payment-in rule", the plaintiff will generally be awarded its costs if it refuses to accept a sanctioned payment made by the defendant and obtains a judgment for a higher amount.  On the other hand, the "deprivation rule" allows the court to deprive the successful plaintiff of costs relating to certain issues on which the plaintiff is not successful.  The Court considered that the "payment-in rule" trumps the "deprivation rule" and should only be departed from in exceptional circumstances.
3. In Limbu Dharamaraj v ISS Adams Secuforce Ltd and another [2013] HKEC 510 the Court had to consider a "sanctioned offer" that did not strictly comply with the rules on content and form set out in the procedural rules.  The court held that a party that wants to take advantage of the sanctioned offer regime needs to follow its rules to the letter. 

Take away points

• Sanctioned offers and payments are a potentially potent weapon which can be very effective if used wisely, and it is advisable to keep the possibility of making them under constant review.
• In order to ensure that sanctioned offers or payments have their full effect it is important that they comply strictly with the rules on content and form.
• The court is likely to enforce the costs (and, where applicable, interest) consequences provided for in the rules and will only exercise its discretion to depart from those consequences in exceptional circumstances.