K&Lgates (A Firm) v. Ding Yu and Another

HCMP 1569/2015

MISCELLANEOUS PROCEEDINGS NO1569 OF 2015

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D E C I S I O N
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A. THE APPLICATION

1.The plaintiff (“KLG”) seeks an order for the taxation of 5 bills of costs (“the bills”) issued pursuant to a retainer agreement signed with D1, D2 and another (collectively “the clients”).

2.D1 (“DY”) has not filed any acknowledgement of service.  D2 (“HKF”) opposes the application.  The remaining client, DY’s sister (“DXH”) has been detained in the Mainland. 

B.  BACKGROUND

3.In HCA 992 of 2010 (“the Action”), Macau First sued DY and DXH over the shares in HKF.  DY filed a counterclaim against his brother Ding Gang (“DG”) and Macau First.  The core issue of the Action was: who was the sole ultimate beneficial owner of shares in HKF, DY or DG?  No substantive relief was claimed against HKF.

4.At the commencement of the Action, HKF was purportedly under the ownership and directorship of DY and DXH.  The judgment handed down on 20 August 2014 (“the Judgment”) held that the shares in HKF were held by DY and DXH on trust for Macau First.  In other words, DG was the ultimate beneficial owner of HKF.  At present, HKF is under the new management of DG.

5.Ten months after the Judgment, KLG suddenly appeared and claimed costs of about $2.15 million against the clients for services allegedly provided during and after trial of the Action.  KLG relies on the retainer agreement dated 14 March 2013 executed by the clients, under which the clients are jointly and severally liable for KLG’s fees.

6.KLG had never been solicitors on record for the clients in the Action. Instead, Orrick, Herrington & Sutcliffe (“Orrick”) had been handling a part of the interlocutory applications for DY’s camp.  Shortly before the trial of the Action (“the Trial”), Dexter Lam & Co came on record.  Mr Ngo, a solicitor, had been a member of Orrick but later joined KLG.  I saw him appear inside the court room from time to time during the Trial.

7.KLG now seeks an order for taxation of the bills pursuant to s.67(2) of the Legal Practitioners Ordinance, Cap 159 (“LPO”). HKF disputed liability and raised a counterclaim seeking, amongst others,

(1) A declaration that the retainer agreement, insofar as it concerns KLG and HKF, was unfair and unreasonable and should be set aside, or otherwise taxed, by virtue of s.60(2) of LPO (“the LPO ground”).

(2) Under the consent order dated 9 July 2010 in the Action, HKF was only allowed to use its assets to settle “reasonable legal expenses” (“the consent order ground”).  (The point about legal expenses being capped at $10,000 per week was not pursued.)

C. LEGAL PRINCIPLES UNDER LPO

8.S.67(2) LPO permits a solicitor to apply for taxation of his bill.  Such an application is a summary proceeding. The plaintiff must demonstrate a prima facie case, whereupon the burden falls upon the defendant to show that he has a bona fide arguable defence to the claim for a taxation: Baker & McKenzie (a firm) v The Grande Holdings Ltd and ors, HCMP 1971/2010, Au Yeung J, 17 May 2011, at §§10-14. These principles were not challenged on appeal in CACV 102 & 103/2011, 16 November 2012.  See also HKCP 2016: Vol 1, §28/4/1 at p 667.

9.Under s.60 LPO, the court has the power to interfere with retainers in respect of contentious business even though they appear to be lawful and regular on their face.  S.60 provides as follows:

“(1) No action shall be brought upon any such agreement as is referred to in section 58 [i.e. an agreement in respect of contentious business], but the court may, on the application of any person who is a party to, or the representative of a party to, the agreement, or who is, or who is alleged to be, liable to pay, or who is or claims to be entitled to be paid, the costs due or alleged to be due in respect of the business to which the agreement relates, enforce or set aside the agreement and determine every question as to the validity or effect thereof.

(2) On any such application the court-

(a) if it is of opinion that the agreement is in all respects fair and reasonable, may enforce it;

(b) if it is of opinion that the agreement is in any respect unfair or unreasonable, may declare it void and may order it to be given up to be cancelled and may order the costs covered thereby to be taxed as if the agreement had never been made; (emphasis added)

(c) in any case, may make such order as to the costs of the application as it may think fit.”

10.The meaning of “fair and reasonable” was examined by Lord Esher in Re Stuart ex p Cathcart [1893] 2 QB 201 at 204-205:

“…With regard to the fairness of such an agreement, it appears to me that this refers to the mode of obtaining the agreement, and that if a solicitor makes an agreement with a client who fully understands and appreciates that agreement that satisfies the requirement as to fairness. But the agreement must also be reasonable, and in determining whether it is so the matters covered by the expression “fair” cannot be re-introduced.  As to this part of the requirements of the statute, I am of opinion that the meaning is that when an agreement is challenged the solicitor must not only satisfy the Court that the agreement was absolutely fair with regard to the way in which it was obtained, but must also satisfy the Court that the terms of that agreement are reasonable.  If in the opinion of the Court they are not reasonable, having regard to the kind of work which the solicitor has to do under the agreement, the Court are bound to say that the solicitor, as an officer of the Court, has no right to an unreasonable payment for the work which he has done, and ought not to have made an agreement for remuneration in such a manner…” (emphasis added)

11.The fairness and reasonableness of an agreement is to be determined at the time at which the agreement was made, having regard to the circumstances in which it was made and to the retainer in connection with which it was made.  See Piper Alderman (a firm) v Australian Medic-Care Co Ltd [2011] SASC 234 at §47, Stanley J, following In re Stuart, and McNamara Business & Property Law v Kasmeridis (2007) 97 SASR 129 (CA).

12.In deciding whether a costs agreement is “fair and reasonable”, the Court is to have regard to all relevant circumstances: Piper Alderman, at §49. 

13.Even if the Court finds that a costs agreement is not fair or reasonable, the Court retains a discretion to refuse relief, see Frigger v Shepherd [2014] WASC 477, at §29.

14.The burden of proving unfairness or unreasonableness rests upon the client wishing to set aside the costs agreement: s.60(2)(b); Frigger v Shepherd, at §§22, 27.  That casedealt with a different statutory scheme under the Act s.288 of Western Australia, which imposed duties on a solicitor to make various disclosures to a client when entering into a retainer agreement.  However, I do not see why the same burden of proof should not apply under the Hong Kong provision.

D. ANALYSES OF KLG’S CASE

15.I see no difficulty in proceeding summarily with this application as only legal issues are involved. 

16.The retainer agreement was signed by DY on behalf of HKF.  A round chop of HKF was applied instead of the usual rectangular company chop.  There was no board resolution authorizing DY to execute the retainer agreement. 

17.Nevertheless, at the time the retainer agreement was entered into, the only shareholders and directors on record were DY and DXH and they were also parties to the retainer agreement.  Shareholders’ unanimous consent will bind the company, even on matters that the articles reserve to the directors: In re Duomatic Ltd [1969] 2 Ch 365.  Even a sole director of the board can bind the company: Aspial Investment Ltd & anor v Mayer Corporation Development International Ltd, FAMP 2/2013, 7 October 2013, §8, Tang PJ.

18.On the face of it, KLG has demonstrated a prima facie case that the retainer agreement was valid and enforceable.

E. THE LPO GROUND AS A DEFENCE

19.I analyze the LPO ground from 5 angles: (1) the role of HKF in the Action; (2) the use of company funds for the Action; (3) several liability for costs; (4) duplication of legal representation; and (5) sourcing of international litigation funding.

E1. Role of HKF in the Action

20.The retainer agreement emerged 14 days after the Trial in the Action started on 1 March 2013.  By then, it would have been abundantly clear to the clients and KLG (through Mr Ngo) that the real battle was between DY and DG.  The winner would take all.  (§32 of the Judgment). 

21.KLG’s knowledge was reflected in the bills which described its services as provided (rightly, in my view) in relation to “shareholders dispute litigation”.

22.The claim against HKF was for various orders invalidating multiple entries in its share register plus costs, and no other substantive relief.  It did not matter who owned HKF.  All that HKF had to do was to abide by any court order.  It did not file any witness statement for the Trial. HKF did not, in the words of Mr Tong SC, have “any identity of interest” with DY/DXH in the Action. 

23.As known to KLG, the role of HKF was nominal and the Action was (as far as DY’s camp was concerned) fought for DY’s benefit.

E2. Use of company funds for the Action

24.Save in exceptional circumstances it is improper for a company to take an active role in what is essentially a dispute between its shareholders, and to expend its funds in a partisan way in the legal proceedings.  The test for the company’s participation and expenditure is whether it is necessary or expedient in the interests of the company as whole.  The onus on the company to justify its participation and expenditure is a heavy one. See Yuanta Securities Asia Financial Services Ltd v Core Pacific Investment Holdings (BVI) Ltd & ors, HCCW 804/2013, 17 October 2003, at §§42-44, 48, per Barma J (as he then was); In the Matter of Wah Ying Cheong Company Limited, HCCW225/1996, 14 March 2003, at §16, per Kwan J (as she then was).

25.Given HKF’s limited role, it would have been most costs saving for it (latest after the receivership order was discharged by the Court of Appeal), to inform the court that it would not participate in the Action but would abide by any order that the court shall make.  There was no need for HKF to engage lawyers at all.

26.On the other hand, it was not a situation of DY colluding with his solicitor to strip HKF of assets so as to create an empty judgment for DG if DG should win.  Rather, to DY, HKF was solely his and DXH was his nominee. He was using his own asset to fund the Action.  At the time the retainer agreement was entered into, he did not have an entirely hopeless case in the Action.  Even after trial, and despite the adverse criticisms I made against DY and DG as liars, at least for the period before 1995, this court accepted DY’s version of facts. 

27.However, though DY had his own properties (including one in Hong Kong), his failure to pay Orrick and inability to provide costs on account to KLG meant that the likelihood of KLG ultimately resorting to HKF, instead of DY/DXH, for legal fees was a real possibility.  There is cause for saying that DY/DXH had purported to use company funds for their self interest in breach of the Yuanta Securities principle.

28.KLG has not explained why it was in the interest of HKF to shoulder the costs of DY/DXH.  Nor had KLG advised HKF (a separate legal entity) of the Yuanta Securities principle.  It was not sufficient to say that DY/DXH had agreed to expend the company funds and any advice would just be a mere formality.  This is because a company’s shareholders and management may change.  Liquidators and receivers may step in.  These people may challenge the validity of the retainer agreement under s.60 LPO. 

29.I find that it was unfair and unreasonable for HKF to enter into a retainer agreement with KLG in the circumstances of the Action.

E3. Several liability for costs

30.Mr Tong SC submits that the retainer agreement, if reasonable, ought to have provided for several liability for costs in respect of DXH/DY and HKF.  And yet there was no differentiation between the legal costs of DY/DXH personally and that of HKF.

31.In Burridge v Bellew (1875) 32 LT 807 at 813-814, Amphlett B made the following comments at 813 col 2 to 814 col 1:

“… If in the Court of Chancery there be a joint retainer, each defendant would be liable for the whole of the costs; if there be no joint retainer (and it constantly happens that there is not), the mere fact that the several defendants appear by the same solicitor, that they join in putting in the same answer, join in the same affidavits, and attend joint consultations, would not, to my mind, amount to evidence that there was any joint retainer, particularly in cases where the retainers are separate, because it often occurs in Chancery that there are a number of defendants, some having a large interest, some a very small interest, and some, like trustees, having no interest at all in the case. The expense would be enormous if each of those parties were to appear separately by solicitors and counsel. Therefore they appear together, join in the same pleadings and in the same affidavits, attend at the same consultations, and so a vast expense is saved; but no person in the position of a trustee would ever dream of doing that if he were to be held jointly liable for the costs of a suit in which he had no personal interest. Therefore it is that the taxing master looks at the bill and sees with what proportion of the costs the particular defendant ought to be charged…” (emphasis added)

32.A client should only be charged with costs properly attributable to his claim or defence.  In Baylis v Kelly & ors [1997] 2 Costs L.R. 54, at 217, Chadwick J stated:

“(ii) In taxing that bill the court is to have regard to the overriding principle that the client is to be charged only with the costs properly attributable to the conduct of his defence; (emphasis added)

(iii) Any costs relating solely to the defence of one client should be charged to him, to the exclusion of the other clients;

(iv) The court must have regard to the nature of the defences raised in order to determine whether there were distinct issues in relation to particular defendants – if so, the costs relating to those issues (so far as they can be identified) should be attributed accordingly.”  

33.With respect, Baylis v Kelly is distinguishable in thatthe court there had to rule on whether the retainer was joint or several.  Although the words of Chadwick J are illuminating, they are not applicable to the present case where there is an express provision for joint and several liability.  Rather, Burridge v Bellew will apply so that HKF is liable for the whole costs of KLG, but for my findings in section E2 above.

E4. Duplication of legal representation

34.I can see no reason in principle why 2 firms of solicitors could not act for a party in a case, especially where each firm has different expertise or has a different role to play in the case.  Even if there was overlap in the work done or fees charged, it would be up to the solicitor to show that it was done was, eg with the consent of the client, and fair and reasonable. 

35.Of course, in engaging 2 firms and having only one go on record in the case, the client runs the risk of not being able to recover costs of the other firm on party and party basis.  However, that is not the issue before me.

36.In the present case, Mr Ngo has explained why 2 firms were engaged: DY/DXH experienced cash flow problem.  Orrick would not undertake to deliver backsheets to counsel for the Trial unless DY/DXH put them in funds to cover counsel fees.  DY/DXH could not find a replacement law firm which could allow them some time to dispose of their assets for costs on account.  In view of the imminence of trial, Mr Ngo introduced Dexter Lam & Co to DY/DXH so that:

(a) Dexter Lam & Co would undertake “fronting work” (including court attendance) and deliver briefs, as solicitor o record, to counsel.

(b) Giving Mr Ngo’s familiarity of the case, KLG would undertake other preparatory work for the Trial, eg conference with counsel, preparation of trial materials to assist in cross-examination and submission.

37.Mr Tong SC submits that this was a dishonest and contrived arrangement that did not benefit anyone but KLG who was able to bypass its own practice of having costs on account before acting for the clients. 

38.With respect, whilst the arrangement did have the benefit to KLG described, I do not think that should be regarded as the sole or dominant purpose, still less was it dishonest and contrived.  The arrangement prevented the clients from being left without legal representation in a 53 day trial.  The Action was complex on the facts. No responsible solicitor would have left everything to counsel, with himself sitting idly through the Trial every day.  Without disrespect, Mr Ngo was clearly more familiar with the history of the Action than Dexter Lam & Co who came on record only shortly before the Trial. 

39.In my view, having 2 firms of solicitors with the division of labour as described was not, in itself, unfair or unreasonable in the circumstances of the Action.  If the work undertaken by KLG and Dexter Lam & Co had overlap, the taxing master should look at their respective bills and apply the principle in paragraph 34 above.

E5. Sourcing international litigation funding

40.A portion of the alleged fees relates to KLG’s purported efforts to source international litigation funding for DY/DXH post-Judgment (“the post-Judgment fees”).  It was unfair and unreasonable, on whatever view, to tie them to HKF, which this Court have found to beneficially belong to DG.  

41.There are other matters relied on by Mr Tong SC.  He points out that KLG has not sought to recover its fees first from the assets of DY and DXH.  I do not think that is material to the issue before me.  Then it is submitted that DY/DXH had not disclosed the fee arrangement with KLG in the Action.  In my view, it was privileged until DG was declared to be the beneficial owner of HKF. It is also submitted that part of KLG’s fees was incurred on taking instructions from DY whilst he was giving evidence in the Action.  That may be a matter for disciplinary action and taxation but it does not affect my decision.

42.In summary, I find the LPO ground established.

F. THE CONSENT ORDER GROUND

43.The interim injunction in the Action did not prohibit HKF from “dealing with or disposing of assets held directly or indirectly by it in the ordinary and proper course of business … and from settling its reasonable legal expenses for more than HK$10,000 per week”. 

44.Having regard to my findings in Section E1, E2 and E5 above, it was not reasonable for HKF to incur legal expenses on KLG.

FINDINGS

45.The retainer agreement was on its face valid and binding on HKF, having been signed by its only shareholders and directors.  However, to KLG’s knowledge, the Action was (as far as DY’s side was concerned) fought for DY’s benefit. It was unfair and unreasonable for HKF to enter into the retainer agreement as (1) its role in the Action was nominal; (2) its company funds would be used in a partisan way in the Action; and (3) it requires HKF to bear the post-Judgment fees. Both the LPO ground and consent order ground are established for these reasons.

46.I therefore dismiss the originating summons.  On the counterclaim, I declare that the retainer agreement, insofar as it concerns KLG and HKF, should be set aside under s.60 LPO.

47.On a nisi basis, I order KLG to pay the costs of HKF, with certificates for 2 counsel.  There shall be summary assessment on 1 March 2016 on the papers without the need for an attendance.  HKF shall file and serve a costs statement by 22 February 2016.  KLG shall file and serve its grounds in opposition by 29 February 2016.

48.I thank counsel for their assistance.

Mr Barrie Barlow, SC, instructed by K & L Gates, for the plaintiff

The 1^st defendant was not represented and did not appear

Mr Ronny Tong, SC and Mr Lawrence Cheung, instructed by LCP, for the 2^nd defendant