How long can you as a defendant director afford to do nothing if, after you are sued, the claimant does little or nothing to move its case against you forward? That is the question with which the Hong Kong Court of Final Appeals had to grapple in its recent judgment regarding the liquidated Wing Fai Construction Co. Ltd.
The case concerned proceedings brought by liquidators of Wing Fai Construction against some of its former directors for misfeasance. The original winding up order against the company was made in 2002, but it was not until August 2004 that the proceedings against the directors commenced.
After a lengthy period of inactivity, it was then not until May 2008 that the liquidator applied to take the case forward to trial. The defendant directors argued that there had been an inordinate and inexcusable delay on the part of the liquidators sufficient to justify striking out the claim against them.
The Court of Final Appeal’s Decision
In April 2009, Hong Kong introduced a substantially reformed Civil Justice system, the aim of which was to reduce delay and cost by actively managing cases so as to secure “just and speedy resolution of disputes.” Other common law–based systems including that in the UK have also introduced modernized civil procedure rules.
The Wing Fai Construction case was the first opportunity that the Final Court of Appeal had to apply these principles to a case of alleged “inordinate delay.” Whilst the Court accepted that there had been unjustified delay on the part of the liquidators, it declined to rule that such delay was a sufficiently serious abuse of process to justify striking out the claim. In particular, the Court emphasized that:
…this attitude of ‘letting sleeping dogs lie’ is no longer acceptable post [Civil Justice Reforms] where all parties to a litigation have the obligation to progress an action so that they are brought closer to the resolution of their dispute…
The Court stuck to its guns in December last year when it again rejected an appeal by defendants to dismiss the liquidator’s claim against them, saying:
…there is no place anymore for defendants to adopt the attitude of ‘letting sleeping dogs lie.’ No longer will it be possible (if it ever was) for a defendant to sit idly by and do nothing, in the hope that sufficient delay would be accumulated so that some sort of prejudice can then be asserted.
The decision casts an interesting light on a well-known and often used tactic by defendants facing civil litigation, namely: the avoidance of any action that might provoke the claimant in a seemingly dormant set of proceedings to rejuvenate them. This tactic carries the corresponding potential benefit of saving legal fees.
From now on in Hong Kong and perhaps in other jurisdictions with similar civil procedure rules (including the UK), these tactics may have to be re-evaluated with the possible consequence that additional defense costs may need to be incurred up front by defendants in slow-moving or seemingly dormant litigation.
This may in turn cause tension with D&O liability insurers being asked to foot the bill for defense costs. For example, subtle distinctions between “reasonable costs” and “reasonable and necessary costs” in wordings may take on increased significance. It is one thing to persuade insurers that costs are reasonable. It may prove more difficult to persuade them that costs are also necessary in circumstances where the claimant is seemingly not pursuing the claim.
I am indebted to Tom Fyfe of Clyde & Co for alerting me to the report of this case.