Kao, Lee & Yip (A Firm) v. Donald Koo Hoi Yan and Others
Read the full judgment text of CACV 32/2006 on BabelCite. This Court of Appeal judgment was delivered on 8 November 2006.
1. This is an appeal from the order of Reyes J dated 23 December 2005 dismissing the plaintiff’s motion that the 1 st defendant be committed for contempt of court for failure to comply with (a) paragraph 2 of the order of Mayo J dated 21 January 1994; (b) paragraph 1 (2) (b) and (c) of the order of Ma CJHC (sitting as an additional judge of the court of first instance) dated 19 September 2003; and (c) paragraph 1 of the order of Deputy High Court Judge Muttrie dated 21 January 2004 and ordering
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cacv 32/2006 in the high court of the hong kong special administrative region court of appeal civil appeal no. 32 of 2006 (on appeal from HCA NO. 8847 of 1993) ______________________ BETWEEN
______________________ Before: Hon Le Pichon, Cheung JJA and Sakhrani J in Court Date of Hearing: 24 October 2006 Date of Handing Down Judgment: 8 November 2006 ___________________ J U D G M E N T ___________________ Hon Le Pichon JA: 1.This is an appeal from the order of Reyes J dated 23 December 2005 dismissing the plaintiff’s motion that the 1st defendant be committed for contempt of court for failure to comply with (a) paragraph 2 of the order of Mayo J dated 21 January 1994; (b) paragraph 1 (2) (b) and (c) of the order of Ma CJHC (sitting as an additional judge of the court of first instance) dated 19 September 2003; and (c) paragraph 1 of the order of Deputy High Court Judge Muttrie dated 21 January 2004 and ordering the plaintiff to bear the costs on an indemnity basis. At the conclusion of the appeal judgment was reserved which we now give. Background 2.To facilitate an understanding of the complaints of the plaintiff grounding the contempt proceedings, it is necessary to set out a chronological account of the salient events which I do below. 3.The plaintiff, Kao, Lee & Yip is a firm of solicitors. The 1st defendant had been a partner of that firm but whilst still a partner had set up his own firm, Koo & Partners (“K & P”). Litigation ensued. 4.The plaintiff sought injunctive relief in January 1994. Mayo J refused to grant an interlocutory injunction and, instead, ordered on 21 January 1994 that 1st defendant “maintain an account of all work which is undertaken by [K & P] in relation to any former client of the plaintiff until trial or further order” (“the 1994 order”). 5.The trial of the action was heard by Ma J (as he then was) in 2002. Judgment was delivered on 2 April 2003. It was held that 1st defendant had breached his fiduciary duty and had also diverted legal work involving the Bank of China Group from the plaintiff to K & P. The relevant part of the order dated 2 April 2003 read:
6.Some five months later, by an order made by consent dated 19 September 2003, detailed directions for the taking of the account so ordered were given. For present purposes, the following part is relevant:
Hereafter, I shall refer to this order as “the 2003 order”. (Pausing here, it is to be noted that the 2003 order was to facilitate the taking of the account of profits ordered on 2 April 2003. That account was limited to the 12 month period from 1 October 1993 to 30 September 1994. So although paragraph 1 (2) (b) did not specify an end date and read literally would extend to the date of the 2003 order, given the purpose of the 2003 order, in my view, it would make little sense to read the order as requiring production of the account ordered by Mayo J beyond the period of the account i.e. 30 September 1994.) 7.The 28 days available for 1st defendant to comply with the order of 19 September 2003 (which, it is to be noted, was a consent order) proved inadequate. Various extensions were agreed or applied for and granted. On 21 January 2004, Deputy Judge Muttrie granted a final extension to 4 p.m. on the 18 February 2004 for compliance with the 2003 order. This was an ‘unless’ order, the effect of non-compliance being the grant of leave to the plaintiff to commence committal proceedings. 8.In the 1st defendant’s 10th affirmation dated 20 January 2004 filed in support of his application for an extension of time which led to the making of the 2004 order, a list of files opened by K & P for the Bank of China Group entities for the period of the account (“the BOC list”) was exhibited as DK-8. A list of files opened for non-Bank of China Group entities for the same period was also exhibited. These were said to have been prepared in performance of paragraph 1 (2) (c) and (d) of the 2003 order. The BOC list disclosed that (1) there were some 2000 files, (2) the 1st defendant’s accounting expert Ian Robinson (“Mr Robinson”) was in the process of analyzing the data and documents, (3) time was needed because certain files remained to be located. Exhibit DK-14 to the affirmation contained, inter alia, a list showing a total of 36 files with the entry “cannot find file” under the column “Fee Amount Excluding Disbursements”. 9.On 16 February 2004, shortly before the deadline, Mr Robinson, filed an affidavit in which he stated that he had been instructed by the 1st defendant to review the files opened by K & P during the period from 1 October 1993 to 30 September 1994 and to estimate the profit earned by K & P in respect of assignments where the Bank of China or its related entities was a client of K & P. He went on to say that his work was based on documentation made available to him and that:
Mr Robinson concluded that for the period of account, the Bank of China work had generated a net loss of $830,777. 10.It will be seen from Mr Robinson’s first affidavit that he was not in any position to verify the accounts as he had neither conducted an audit nor any independent verification of the information given to him. As regards the 1st defendant, his 11th affirmation filed on 17 February 2004, the day before the deadline, merely exhibited certain working documents prepared by his office. In pertinent part, this read:
There was no verification of any account. 11.At paragraph 8 of his 11th affirmation, the 1st defendant made reference to the matter of the “missing files” first disclosed in his 10th affirmation referred to earlier (see paragraph 8 above). In paragraph 19 of his 11th affirmation, the 1st defendant exhibited DK-20 said to be the updated position of the missing files as at 16 February 2004. That exhibit purported to show a list of 68 files for the period of account which could not be found. The 68 files listed included a number of files in respect of which (1) the fee had been waived; (2) the fee was known but the nature of the work was not known and the files themselves were missing; and (3) there was no information whatsoever concerning the fee amount or the work done and the files themselves could not be found. 40 of the 68 files fell within category (3). 12.On 24 March 2004, a sealed copy of the 2003 order endorsed with the penal notice was personally served on the 1st defendant. Personal service of the 1994 order was also effected on 10 May 2004. 13.The plaintiff filed its expert’s report and took out a summons on 29 March 2004 seeking, amongst other relief, verification of the account ordered to be taken under paragraph 1 (2) (c) of the 2003 order (“the verification summons”). As will become apparent this summons was not heard until over a year later (see paragraph 20 below). 14.In May 2004, the experts for the parties met with a view to narrowing the issues. This resulted in Mr Robinson filing two further affidavits in July and August of 2004 revising the profit figures upwards turning the loss of $830,777 into a net profit of over $1.3 million. 15.The plaintiff then applied for and obtained an order from Waung J for interim payment in the sum of over $12 million to be paid on or before 29 September 2004. 16.In October 2004, the plaintiff, by letter, pressed the 1st defendant to comply with paragraph 1 (2) (c) of the 2003 order and threatened contempt proceedings. This was followed in November 2004 by the service of a sealed copy of the 2004 order endorsed with the penal notice on the 1st defendant. 17.Then on 16 December 2004, the plaintiff made its application for leave to commence committal proceedings which was granted on 23 December 2004. This was followed by the notice of motion dated 30 December 2004 for committal. 18.The next relevant event is the filing, on 4 April 2005, of the sixth affidavit of Mark Lovell Side, the 1st defendant’s solicitor. In that affidavit, Mr Side sought to proffer reasons for the missing files:
In paragraph 13, Mr Side dealt with the advice he had given the 1st defendant on the issue of verification and implicitly accepted the absence of any verification by the 1st defendant at the time Mr Side made his sixth affidavit. 19.On the same day (4 April 2005) the 1st defendant filed his 16th affirmation which stated as follows:
Paragraph 4 proceeded to set out the 9 classes of documents referred to. 20.As mentioned above, the verification summons (issued in March 2004) was not heard by Deputy Judge Muttrie until April 2005. In his ruling of 19 May 2005, the judge came to the conclusion that the 1st defendant must file an affirmation himself to verify the account in order to comply with paragraph 1 (2) (c) of the 2003 order and ordered that that be done within 28 days from the date of his order. Deputy Judge Muttrie also ruled on the issue of connected files and ordered that those files must be included in the account although the accountability of the connected files was a matter which could not be resolved until the account was actually taken. On 3 August 2005, Reyes J extended the deadline to 1 September 2005. 21.The 1st defendant engaged another accounting expert, Andy Choi, who filed his 1st affirmation on 31 August 2005. Mr Choi incorporated some of the plaintiff’s arguments regarding the accounts and adjusted them accordingly. This brought the net profit to over $3.8 million subject to the resolution of the connected files issue. 22.On 5 September 2005, the 1st defendant filed his 17th affirmation in which he stated as follows:
23.The contempt proceedings were heard by the judge in December 2005. The judgment below 24.The judge dismissed the plaintiff’s application for committal for contempt on the basis that neither the requisite mental element nor the actus reus had been made out.
The applicable legal principles 25.The mental element required for civil contempt lies at the heart of this appeal. A convenient starting point for that would be the speech of Lord Oliver in Attorney General v Times Newspaper Ltd [1992] 1 AC 191 at 217-18:
That passage highlights the following matters: (1) that there is a distinction to be drawn between civil contempt and criminal contempt in relation to the mental element that is required; and (2) that in civil contempt, liability is strict in the sense that an intention to interfere with or impede the administration of justice is not required. 26.These were recognized by Ma J (as he then was) in Citybase Property Management Ltd v Kam Kyun Tak [2003] 2 HKC 98 at 103 H which the judge below cited in paragraph 12 of his judgment. He held that proof of an intention to disobey the order is not required. All that has to be shown is that the alleged contemnor knew the facts which gave rise to the contempt and that the conduct was not accidental. 27.What was stated by Lord Oliver in his speech in the Times Newspaper case can be traced back to the principle as enunciated by Warrington J in Stancomb v Trowbridge Urban District Council [1910] 2 Ch 190 at 194:
28.That principle was approved by the House of Lords in Heaton’s Transport (St Helens) Ltd [1973] AC 15 at 109A-F, in the Times Newspaper case and more recently in Director-General of Fair Trading v Pioneer Concrete (UK) Ltd [1995] 1 AC 456 at 479D-E where Lord Nolan opined (at 479 G-H) that it was also:
29.Those authorities establish beyond peradventure that contempt is conduct which was “neither casual nor accidental and unintentional.” See per Millett J in Spectravest Inc v Apernit Ltd [1988] FSR 161 at 174 where it was also held (at page 173) that it is not necessary to prove that the alleged contemnor appreciated that his conduct would constitute a breach of the order. Moreover, it is also well settled that the fact that the act or omission is bona fide and based on legal advice is not a defence. See Re the Mileage Conference Group of the Tyre Manufacturers’ Conference Limited Agreement [1966] 1 WLR 1137 at 1162E-1163A. 30.Mr Grossman SC who appeared for the 1st defendant challenged the traditional approach. He based his challenge on the decision of the English Court of Appeal in Irtelli v Squatriti [1992] QB 83 which he submitted was the other of the two lines of authorities said to exist on this topic. He relied on Irtelli for the proposition that, in civil contempt, it must also be shown that the alleged contemnor knew that his conduct was in breach of the order. In other words, that a deliberate intention to breach the order must be shown. 31.In Irtelli the plaintiff obtained an injunction against the appellants who were the freehold owners of the property in question restraining them from “selling disposing or otherwise dealing with seeking to sell dispose or deal with” that property. Thereafter the appellants executed a charge over the property in favour of the second defendants. The appellants did not appear before the judge on the hearing of the motion for committal and no adequate explanation was given for their absence by their solicitor. The judge committed them to prison. On appeal, the Court of Appeal allowed fresh evidence to be adduced and in the light of that evidence decided that it was impossible to conclude that the appellants had intentionally breached an injunction. 32.Irtelli cannot be reconciled with the traditional approach applied in Stancomb, Heaton’s Transport, Spectravest and Attorney General v Times Newspapers Ltd discussed earlier, all of which pre-dated Irtelli. See Daltel Europe Limited (In Liquidation) & Ors v Harran Ali Makki & Ors [2005] EWHC 749 at para. 42. I do not consider that they could be distinguished on the basis that they concerned liability of corporations for contempt and the issue of vicarious liability for contempt as Mr Grossman SC sought to suggest. The statement of principle in Stancomb approved by the House of Lords without qualification in subsequent cases was not restricted to corporations. 33.For my part, I would consider it right to follow the traditional approach for the following reasons. First, the facts in Irtelli were somewhat special. There the appellate court was principally concerned with the question whether fresh evidence should be admitted. The fresh evidence adduced and accepted by the Court of Appeal in that case was that the appellants had been misled by the solicitor who was acting for them in the court below who assured them that there was no risk of imprisonment and no real need for them to appear before the judge. Understandably that was a matter of considerable concern to the court. Although there had been a breach of the court order, there was no practical loss to the plaintiff because by the time of the committal hearing there was no equity left in the property. Second, the plaintiff was not represented on the appeal and none of the authorities establishing the traditional approach such as Stancomb, Heaton’s Transport and Spectravest was cited to the court. Third, there is no indication or suggestion in the judgments in Irtelli that the court was there departing from an established line of authorities. Had that been the case, one would have expected the court to expound on the reasons for so doing. Fourth, subsequent to Irtelli, the House of Lords in the Pioneer Concrete case has reaffirmed the principle stated in Stancomb, albeit that Irtelli itself does not appear to have been cited. 34.None of the authorities reviewed above other than Citybase (which reflected the traditional approach) was mentioned, much less considered, by the judge below. Although the judge professed to follow Citybase, he did so subject to three observations which fundamentally altered and qualified the Citybase principle. The judge also stated various propositions of law in his judgment, some of which appeared to be contrary to well-established principles. But as no authorities were cited, it is difficult to discern the legal bases for them. This appeal
35.The circumstances which led to the making of the 1994 order are relevant. Mayo J refused an injunction which the plaintiff was seeking because of the “far greater risk of injustice being caused” if an injunction were granted than if it were withheld. He was conscious of the difficulty of quantifying damages if the 1st defendant were restrained from acting for any of the plaintiff’s clients if, at the end of the day, the plaintiff was not entitled to any injunction at all. He went on to say this (at p.7 of his judgmeng):
The 1994 order was therefore intended for the protection of the plaintiff should it prevail in its action against the 1st defendant. The account ordered to be maintained was thus to facilitate the quantification of the plaintiff’s damages in that eventuality. Being himself a solicitor, the 1st defendant should not have had any difficulty in understanding what had to be done for that end to be achieved. 36.In the 17 affirmations filed by the 1st defendant running to many pages, there is but a single paragraph that deals with the 1994 order and its compliance. That is to be found in paragraph 4 of his 10th affirmation dated 20 January 2004:
37.Notwithstanding that statement and assurances, it is recorded in paragraph 45 of the judgment that:
38.As noted in paragraph 11 above, there were 40 files in the third category about which little is known other than that those files had been opened. In some of those cases, the date the particular file was closed was also known. Even where a file description exists, there is simply no way of ascertaining the value of the fees earned because of the absence of particulars of the work done. In my view, the fact of these missing files, prima facie, must be evidence of non-compliance with the 1994 order. Whilst I accept that in contempt cases it is for the plaintiff to prove its case beyond reasonable doubt, once it has shown that there had been a breach of the order, it falls to the 1st defendant to explain why that is not so by showing that their loss was “casual or accidental and unintentional”. The 1st defendant failed to do that in the present case. 39.The judge approached the matter in this way:
40.The evidential basis for paragraph 54 appears to be paragraph 12 of Mr Side’s sixth affidavit quoted in paragraph 18 above. The first matter to note is that Mr Side had no first-hand knowledge of such matters. If that evidence were to be adduced, it seems to me it must come from the 1st defendant. Moreover, that paragraph is nothing more than general observations based on speculation rather than hard fact. In any event, Mr Side was not there purporting to relate what he had been told by the persons who had personal knowledge. In my view, there was no proper evidential basis for paragraph 54 of the judgment and no proper basis for dismissing the missing files as being a ‘de minimis’ matter. How can it be said with any degree of confidence that none of those files was valuable or significant or that none had generated significant work and thus fees for K & P? 41.Applying the quasi-strict liability test as explained by Lord Oliver in the Times Newspaper case, I have no doubt whatsoever that non-compliance with the 1994 order had been proved beyond a reasonable doubt. 42.It should also be mentioned that apart from the missing files, there were also 700 out of the 2000 or so files in question about which the 1st defendant was unable to provide particulars. The BOC list (referred to in paragraph 8 above) gave information under the following headings:
Under the “file description” column a short description was given of the nature of the file, for example, “Term loan facility up to HK$80M”. However, for about 700 of the files, the entry read “(No details provided)”. Whilst in these cases the fee amount was shown under the relevant column, that information might have been derived not from the file itself but from ledger entries. It is therefore unclear whether or not these files were “missing” or were in fact available. If the latter, it would seem surprising that the nature of the work carried out by the 1st defendant, an account of which the 1st defendant had been required by the 1994 order to maintain, could not be ascertained. 43.As regards these files, the judge dealt with them as follows:
44.With respect, that approach is unsustainable in view of the terms of the 1994 order and the total absence of any explanation for the “problematic files”. It is not a case where there had been a flood or a fire damaging or destroying those files. Whilst the absence of particulars for the 700 files could be said to be of less significance because the amount of the fee was known, it must nonetheless render the task of quantification of profits more difficult and speculative. Coupled with the missing files discussed earlier, I have no hesitation in concluding that the 1st defendant had failed to comply with the 1994 order.
45.In view of the conclusion that there had been a breach of the 1994 order, it must follow that there had also been a breach of paragraph 1 (2) (b) and (c) of the 2003 order. This is because approximately 8 out of the 12 months in the period of account under the 2003 order overlapped with the period covered by the 1994 order. Thus non-compliance with the 1994 order must also necessarily mean non-compliance with the 2003 order. 46.I would add this. Even if (contrary to my view) there had been no breach of the 1994 order and, for present purposes, proceeding on the basis that the judge was correct in his view that the 1st defendant’s 16th affirmation filed on 4 April 2005 constituted compliance with paragraph 1 (2) (c) of the 2003 order, the 1st defendant’s non-compliance prior to April 2005 was accompanied by the necessary mental element. As noted in paragraph 29 above, reliance on legal advice in good faith is no defence.
47.What I have said about non-compliance with the 2003 order must also apply to the 2004 order. 48.In so far as the judge took the view that non-compliance with this order “[did] not provide a free-standing basis” on which to hold the 1st defendant in contempt, I would disagree. Under that order, the 1st defendant was given until 18 February 2004 to comply with the 2003 order. On any view, leaving aside the question as to compliance with the 1994 order itself, the 1st defendant did not verify any of the documents produced pursuant to the 2003 order until, at least, 4 April 2005, a delay of some 14 months. As noted above, whilst the finding of reliance on legal advice which turned out to be wrong would be very relevant to the question of penalty, it does not excuse or provide a defence to contempt proceedings. Conclusion 49.Mr Grossman SC submitted that the committal proceedings should never have been brought because in the first place there was no contempt and if there had been any contempt, it was so trivial that it should be disregarded as it did not cause any prejudice to the plaintiff. It was also said that even on the plaintiff’s case, the 1st defendant’s 17th affirmation filed on 5 September 2005 verified the accounts in acceptable form, so by the time of the application came before the judge in December 2005, any contempt would have been purged and there was nothing whatsoever to be gained by the application. Of course, Mr Grossman’s submissions were premised on there having been compliance with the 1994 order. But, as I have shown, that premise was false. 50.For these reasons, I would set aside the judgment below and allow the appeal. I would also make an order nisi that the costs here and below be borne by the 1st defendant on an indemnity basis. 51.That leaves the question of penalty. Although it is open to this court to decide that question in an appropriate case, in my view, the present case is not such a case. It is a matter that should be remitted back to the court of first instance for determination. Ms Eu SC submitted that in the event the plaintiff were successful in the appeal and the matter were to be remitted back for determination, it should not be restored for hearing before the same judge but should go before a different judge. I agree. Hon Cheung JA: 52.I agree with the judgment of Le Pichon J A. I would add the following observation. Strength of the authorities 53.The contempt in this case is breach of a court order. The strength of authorities for nearly a century from Stancomb v. Frowbridge Urban District Council [1910] 2 Ch. 190 (Warrington J) to Director General of Fair Trading v. Pioneer Concrete (UK) Ltd [1995] 1 AC 456 (House of Lords) showed that
see Arlidge, Eady & Smith on Contempt 3rd Ed Para 12–81. Accidental non-compliance 54.In terms of ‘accidental’ non-observance of a court order, Lord Wilberforce in Heatons Transport (St Helen’s) Ltd. v. Transport & General Workers’ Union [1973] AC 15 described this as either ‘ casual ’or ‘ accidental and unintentional ’. 55.I would refrain from putting a further gloss on these words. They are clear enough. The 1st defendant did not say the non-observance of Mayo J’s order was ‘casual’. He said the omission was ‘accidental’. What is important for him is to show how the accident occurred. In this case apart from saying that there were missing files he has not showed why this occurred in the first place. It is not an answer to say that it was a ‘trivial’ breach because only a small percentage of the files was missing. He has to show that this happened accidentally. This he has not done. The same applies to items in the accounts in which particulars or details could not be provided for and he had to resort to estimations. Hence he was in breach in not ‘maintaining’ a proper account as required by Mayo J. Hon Sakhrani J: 56.I agree with the judgments of Le Pichon JA and Cheung JA. Hon Le Pichon JA: 57.Accordingly, there will be an order in terms of paragraphs 50 and 51 above.
Ms Audrey Eu SC and Mr Jin Pao, instructed by Messrs Kao, Lee & Yip, for the Plaintiff/Appellant Mr Clive Grossman SC and Mr Samuel Chan, instructed by Messrs Tanner De Witt, for the 1st Defendant/Respondent |
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