Real Gold Mining Ltd v. Securities and Futures Commission

HCAL 69/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO. 69 OF 2011

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BETWEEN

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Before: Hon McWalters J in Court

Date of Hearing: 30 August 2011

Date of Judgment: 8 September 2011

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JUDGMENT ON COSTS

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Introduction

1.On 22 August 2011 the applicant filed a Notice of Application for Leave to apply for Judicial Review.  I declined to grant leave on the papers and called for an oral hearing.  I invited the putative respondent, the Securities and Futures Commission (SFC) to appear at the hearing which took place on 30 August 2011.  Both parties filed submissions and authorities.  In the course of the hearing the applicant indicated that it did not wish to pursue the application for leave which I thereupon dismissed.  The putative respondent applied for its costs of the hearing but submitted that if I was minded to award costs to it, the costs should not be taxed on a party and party basis but on an indemnity basis.

Awarding Costs to a Putative Respondent

2.There is little in the way of guiding principles on this subject.  In Sky Wide Development Ltd & Ors v Building Authority CACV 321/2008 the Court of Appeal recognized that a power exists to award costs in favour of the putative respondent but saw the exercise of the power as the exception and not the norm.  Tang VP said at paragraph  28 of his judgment :

“I agree that it takes unusual circumstances for an award of costs to be made against an applicant for leave and that the court should be sparing in the exercise of such discretion.”

3.The Court of Appeal dismissed the appeal and positively affirmed the correctness of the decision of Lam J at first instance to award costs to the putative respondent.  There is nothing in the Court of Appeal’s judgment that adversely impinges on any of the comments made by Lam J and so I also have regard to his judgment in the same case which is reported in [2009] 1 HKC 450.  From his judgment I derive the following principles :

(i)  the discretion to award costs is not limited to the situation where the application for leave is frivolous or vexatious.  Indeed in the Court of Appeal judgment Tang VP said at paragraph 25 :

“The discretion of the court in relation to costs on such applications is broad.”

(ii)  The fact that a putative respondent was requested by the court to attend to make submissions is a relevant factor in the exercise of the costs discretion but account must also be taken of the reason why the court invited the putative respondent to attend.

4.I would add to this list one other factor and that is that the oral hearing and the attendance of the putative respondent is necessitated solely or partly because the applicant has not discharged the obligation on it of making full and frank disclosure of all material facts and law.  In respect of the law, I am referring to where legal rights are being claimed and legal principles are being asserted but the existence of such rights and principles are questionable or uncertain.  This extends to drawing the court’s attention to any defence reasonably available to the putative respondent and how the applicant would respond to that defence.  Even where the hearing has been prompted by other matters but it becomes apparent in the course of the hearing that the applicant has failed in some way in respect of its ex parte obligation then it seems to me that this is a factor that can be taken into account.

The Law in Relation to Indemnity Costs

5.I take the relevant legal principles to be those set out by the Court of Final Appeal in Town Planning Board v Society for Protection of the Harbour Ltd (2004) 7 HKCFAR 114.  From the judgment of Li CJ in that case I distill the following principles :

(i)  the usual costs order in favour of a successful litigant is that the party be awarded costs on a party and party basis in accordance with the statutory test laid down in Order 62, rule 28(2);

(ii)  an award of costs on an indemnity basis, is an award on a more generous basis laid out in the statutory test in Order 62, rule 28(4A).  An indemnity basis costs award will usually enable the successful party to recover more of his costs than under a party and party award;

(iii)  consequently an award of costs on an indemnity basis may be perceived as a fairer award;

(iv)  nevertheless the existence of a difference between an indemnity award and a party and party award is not on its own a sufficient basis for awarding indemnity costs;

(v)  it is undesirable to attempt to define the circumstances in which an order for indemnity costs are to be made as the discretion is not to be fettered or circumscribed beyond the requirement that the award on this basis must be appropriate;

(vi)  the general principle is that the grounds from which costs are awarded must be connected with the case and this may extend to any matter relating to the litigation and the parties’ conduct in it, and also to the circumstances leading to the litigation, but no further;

(vii)  to obtain an order for costs on an indemnity basis the successful party has to show that the case has some “special or unusual feature”;

(viii)  such features would be where a case has been brought with an ulterior motive or for an improper purpose of where there is some deception or underhand conduct on the part of the losing party but the discretion to award costs on an indemnity basis is not limited to these situations.

6.Further definition of what constitutes a “special or unusual feature” is not possible.  However I think it is apparent from the case law that the award of costs on an indemnity basis is regarded as an exceptional one for the court to make and in making such awards courts are quite often viewed as acting robustly in response to the circumstances before them.  Usually the award is prompted by a desire of the court to benefit the successful party, perhaps because the special or unusual feature causes the judge to conclude that the justice of the case demands it, or by a desire of the court to mark its disapproval of the conduct of the unsuccessful party ‑ conduct that is sometimes described as an affront to the court and which so disturbs it that it evokes this strong response from it (see the judgments of the Court of Appeal in Sung Foo Kee Ltd v Pak Lik Co (a firm) [1996] 3 HKC 570 and Choy Yee Chun v Bond Star Development Ltd [1997] HKLRD 1327).

Analysis

7.The application for leave sought to judicially review six decisions of the SFC that it allegedly took in respect of the applicant’s property that the SFC acquired pursuant to its powers in the course of conducting an investigation into the applicant.  The SFC had executed a search warrant at the premises of the applicant and in so doing seized electronically stored material.  In response to the applicant’s claim that some of this material was protected by legal professional privilege (LPP), the SFC agreed to seal the seizures and not examine them until the applicant had reviewed them for the purpose of identifying what was protected by LPP.

8.Subsequently the SFC acquired from the applicant’s IT service provider a copy of the applicant’s electronically stored material that the service provider was keeping as a back-up.  The applicant claims a right to inspect this material, to be provided with a copy of it and to require the SFC to enter into the same sealing protocol in respect of it in order to preserve its rights to claim LPP over it.  The applicant says that it is concern at protecting its rights in respect of this back-up material that prompts it to apply for leave.

9.The six decisions in respect of which it seeks leave are :

(1)    The decision of the Commission to not inform the Applicant of the Commission’s decision to obtain electronic data and/or physical information owned by the Applicant or copies thereof (collectively “Information”) from the Applicant’s IT service provider, thus denying the Applicant the opportunity to claim legal professional privilege (“LPP”) and relevance in respect of that Information in the same way that the Applicant has so done in respect of similar or identical Information which the Commission had previously obtained directly from the Applicant pursuant to a search warrant which was issued on 5 July 2011 and executed on 6 July 2011.

(2)    The decision of the Commission to not confirm whether it has obtained Information from the Applicant’s IT service provider and/or any other third party, thus denying the Applicant the opportunity to claim LPP and relevance in respect of such Information.

(3)    The decision of the Commission to not undertake that it has sealed the Information which it has obtained from the Applicant’s IT service provider and that it will not review that Information until the Applicant has reviewed the same for LPP and relevance.

(4)    The decision of the Commission to not undertake that it will seal Information (if any) obtained by it from any third party (other than the Applicant’s IT service provider) until such time as Applicant has reviewed the Information for LPP and relevance.

(5)    The decision of the Commission to not allow the Applicant to inspect the Information which the Commission has obtained from the Applicant’s IT service provider and Information (if any) obtained by the Commission from other third parties, so that the Applicant can confirm whether that Information has been sealed.

(6)    The decision of the Commission to not provide the Applicant with a copy of the Information which the Commission has obtained from the Applicant’s IT service provider and Information (if any) obtained by the Commission from other third parties, so that the Applicant can review that Information for LPP and relevance.

10.Decisions 1 – 3 concern the actions of the SFC in respect of the material obtained from the service provider; decision 4 addresses material obtained or yet to be obtained from 3^rd parties and decisions 5 and 6 relate to both the material seized from the service provider and material obtained or yet to be obtained from third parties.

11.Underlying these decisions and the contents of the applicant’s correspondence with the SFC is an assumption that the applicant has a right to review the seized material prior to the SFC accessing it in order to determine not just whether there are, within the material, documents protected by LPP, but also to determine whether that material is relevant to the SFC’s investigation.  Other rights which are claimed are the right to be informed by the SFC that it has acquired materials belonging to the applicant from third parties, the right to inspect such materials and the right to a copy of them. All these rights are for the purpose of enabling the applicant to review the materials so that it can determine whether any of them are protected by LPP or are relevant to the SFC’s investigation.  In order to appreciate the boldness of the applicant’s claim that it has these rights, it is necessary to remember the context in which its claim to them is being made; i.e. the applicant is asserting them as a suspect in a criminal investigation against the very law enforcement body investigating it.

12.There are, in addition, a number of factual questions arising from the seizure of the materials from the applicant’s IT service provider.  In respect of decisions 1 – 3, the applicant has known of this seizure since 10 August 2011, has indicated its intention to claim LPP in respect of them and has now obtained the SFC’s assurance that it, the SFC, will employ the same sealing protocol in relation to them as has been agreed between them in respect of the original seizure.  In these circumstances the applicant has not explained why it says this decision is still a live issue.

13.In respect of decisions 2 and 3 the applicant does not explain in the affirmation why it cannot obtain from its IT service provider a copy of the documents that the provider handed to the SFC.  Its counsel sought to provide an explanation in court but that was not the appropriate place to do so.  Such explanation as the applicant wished to advance should have appeared in its affirmation.

14.In relation to decisions 4 – 6 there is no factual groundwork laid to show that there is any information belonging to the applicant in the hands of third parties that the SFC could acquire.

15.In the Notice of Application for Leave there is a section entitled “grounds on which the relief is sought”.  In this section the applicant merely repeats the six decisions and at the end of each adds the words :

“is unreasonable, an unlawful interference with the applicant's fundamental right to confidential legal advice, and a denial of natural justice.”

This section then ends by saying that these grounds are supported by the affirmation that is filed in support of the application.

16.This affirmation is filed by the Company Secretary of the applicant and it exhibits the correspondence between the applicant and the SFC.  The affirmation is essentially factual in its content providing background information to the SFC’s investigation, a chronology of the applicant’s dealings with the SFC and a description of each document exhibited to the affirmation.  At paragraph 53 of the affirmation the deponent affirms that the applicant :

“…… merely wishes to protect information that is owned by it, and which may be in the possession of third party custodians, including but not limited to One Solution [the applicant’s IT service provider].”

17.In respect of the legal principles the deponent merely affirms that he has been :

“advised and verily believe that, in all the circumstances, the decisions of the Commission as set out in paragraph 3 above are unreasonable, and constitute an unlawful interference with the rights of the Applicant and a denial of natural justice.”

18.There is no doubt in my mind that this application engages points of important legal principle in the area of search warrant law.  Given the full amplitude of the rights claimed by the applicant and of the assertions of legal principle that it advances in support of such rights, it is extraordinary that there is no reference to authority, analysis of law or discussion of legal principle. Rather than recognizing that the rights being claimed and the legal principles being asserted are quite novel and rather bold ones, the applicant treats them as though they are legally uncontroversial, require no justification and admit of no reasonable contrary argument.  This is quite unacceptable in an ex parte application.  It is quite clear to me that that this application could never have been dealt with on the papers.  The applicant, in failing to discharge the obligation imposed upon it to make full and frank disclosure, has necessitated an oral hearing and the appearance of the putative respondent.

19.I am of the view that in these circumstances it is proper to award the putative respondent its costs.  The issue then arises of whether those costs should be taxed on a party and party basis or on an indemnity basis.  In addressing this issue I have had regard to the conduct of the applicant generally in relation to this application.  However, there are some additional matters that I wish to mention.

20.The applicant maintains that the filing of the application was prompted by its need to protect its LPP rights in respect of the material seized by the SFC from the applicant’s IT service provider.  Yet it is quite clear to me that prior to the application being filed, the SFC had agreed to provide the same assurance in respect of this material as it had given in respect of the material it seized from the applicant’s own premises.  This of course is an assurance limited only to the protection of the applicant’s LPP rights in respect of the material.

21.The applicant seizes upon a paragraph in the SFC’s letter of 16 August to suggest that the assurance of the SFC is not clear and may be qualified. This paragraph must be placed in context.  To do that I have quoted the assurance first and the paragraph which is of concern to the applicant appears after it and this is the sequence in which they appear in the SFC’s letter.  In order to distinguish the two paragraphs from each other I have reproduced the paragraph that is of concern to the applicant in italics :

“Your allegations that the Company’s back-up information held by the IT service provider will not be afforded the same treatment as the information seized from the Company and that the Commission has not paid the same degree of respect regarding the Company’s legal rights to its information are wrong and without merit or foundation.

No undertaking is necessary in respect to the seized materials or any other materials obtained by the Commission in the course of its investigation.  Neither is there a basis for the Commission to give any undertaking in this regard.”

22.However the italicized paragraph is clearly written in response to that part of the applicant’s letter of 12 August 2011 that demands that the SFC gives the three undertakings that are the subject of decisions 4 – 6 in the application for leave.  In my view it is a deliberate misreading of the SFC’s letter to say that the SFC has not agreed to protect the LPP rights of the applicant in the material seized from its IT service provider.  It is clear that it was the refusal by the SFC to give the additional undertakings ‑ undertakings whose legal basis was highly questionable ‑ that triggered the leave application and it is disingenuous of the applicant to claim otherwise.

23.As I have mentioned an issue in almost all the decisions that are the subject of the leave application is the legal right of the applicant to review for relevance materials belonging to it that the SFC has seized in the course of its investigation.  This issue is repeated in the demands made by the applicant in its letters to the SFC.  The SFC at no stage accepted that the applicant had this right but in all the letters, bar one, the SFC was silent on this issue.  The SFC accepted the applicant was entitled to request an opportunity to vet the seized materials for the purpose of identifying those documents protected from seizure by LPP.  The SFC silence on the right to vet for relevance was an implicit rejection of the applicant’s contention on this issue.  That this was an important issue between the parties and an important legal issue underlying the application for leave must have been apparent to the applicant and its legal adviser.  Yet nowhere is this issue adverted to.  For example the applicant at no stage indicates that the SFC recognizes the right of the applicant to vet for LPP but not the right of the applicant to vet for relevance.

24.The one SFC letter where it addresses this issue is dated 28 July 2011 where it said :

“We reiterate that we reserve our right to challenge any unjustified assertion of LPP, and the decision as to relevance of any documents or records seized rests with our Commission.” (Emphasis added)

25.In the applicant’s affirmation each exhibited letter is referred to but, naturally enough, the reference is only accompanied by a brief description of its contents.  This particular letter is referred to in paragraph 36 of the affirmation where the deponent’s description of it is as follows :

“In that letter the Commission reserved its right to challenge any “unjustified assertions of LPP”.”

26.The omission of not mentioning the SFC’s one and only explicit refutation of the applicant’s right to review the seized materials for relevance is an extraordinary one.  At the hearing of the application for leave this applicant sought to explain this omission by saying that the statement in the affirmation was not intended to mislead and that its purpose was solely to act as an introductory reference to the letter and as such a summary description of the contents of the letter was all that was required.  In the circumstances of this case I am not convinced of this explanation.

27.For all the reasons I have set out in this judgment as to why the putative respondent is entitled to its costs and for the further reasons set out above I am of the view that in this case it is appropriate for those costs to be taxed on an indemnity basis and I so order.

Mr. Andrew Bruce, SC, instructed by Messrs O’Melveny & Myers, for the Applicant

Mr. Gerard McCoy, SC, for the Putative Respondent, Securities and Futures Commission