MARK GERARD FAIRBAIRN v. MARK JONATHAN ROBERTS AND OTHERS

HCMP4200/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4200 OF 2003

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REASONS FOR DECISION

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1. This is the Respondents' appeal against the Master's Order of 4 February 2004 dismissing the respondents' application by summons for discovery under Order 24 rule 3 of Rules of the High Court. At the conclusion of the appeal, I dismissed the appeal. I now reduce my reasons into writing.

Background

2. The claimant is a solicitor and was previously with the firm Deacons. The respondents are the capital partners of Deacons. After the claimant left Deacons to join another firm of solicitors, White & Case, there were arbitration proceedings between the claimant and the respondents relating to the restrictive convenant the claimant had with Deacons. The claimant succeeded in the arbitration and was also awarded the costs of the arbitration. The present proceedings were commenced by the claimant to tax his costs.

3. In their list of objections to the claimant's bill of costs, the respondents raised by way of preliminary objection the following:

"The claimant's employer, White & Case, agreed to subsidize the claimant's expenses of the arbitration. The claimant has therefore actually incurred no costs of the arbitration. Nothing is therefore allowable. If the claimant disputes his proposition, he should give discovery of all documents relating to the subsidy promise."

4. It is common ground that there is in existence an agreement between the claimant and White & Case relating to the claimant's legal expenses for the arbitration proceedings. The correspondence before the court suggests that as early as July 2003, the respondents had asked for discovery of documents relevant to the agreement. The request was declined by the claimant.

5. On 17 November 2003, the respondents issued the present summons applying for an order that the claimant gives discovery of:

(1) the agreement between the claimant and White & Case to pay or reimburse the claimant's legal costs of the arbitration; and

(2) documents evidencing any payments made under that agreement.

6. On 4 February 2004, after hearing the parties, the Master dismissed the application with costs against the respondents. The respondents appeal against the Order.

Preliminary issues

7. The claimant, in opposing the application, raises two preliminary objections. Firstly it is said that the point about the claimant not having personally incurred any costs should have been made before the arbitrator, and it is too late to raise it on taxation. Mr Burns submits that this is against the doctrine of res judiciata in the wider sense. Secondly, it is said that the present application is defective because it should have been made under Order 24 rule 7 and not under Order 24 rule 3, and the requisite affidavit to lead a rule 7 application has not been filed. I will deal with these issues in turn.

8. On the first issue, Mr Burns points out that the parties had made extensive submissions to the arbitrator, before the award was made. It is argued that the respondents could have and should have raised the argument on breach of the indemnity principle in their submissions to the arbitrator. I do not agree. What the arbitrator and the parties were concerned with in the arbitration proceedings was whether the respondents should be held liable for the costs of the arbitration. Ultimately the arbitrator resolved that dispute in favour of the claimant and made an award for costs against the respondents. In the taxation proceedings, the objective is to determine the extent of the respondents' liability in terms of costs by reference to the costs and expenses the claimant has incurred. An important element that sets the extent of the respondent's liability is the principle of indemnity, under which the claimant can only recover by way of taxed costs expenses that he has actually incurred: see Harold v Smith 5 H & M 381 cited in Gundry v Sainsbury [1910] 1 KB 645. It is therefore within the duty of the taxing master to ascertain whether the indemnity principle is satisfied and if it is not, the liability of the respondent on costs may either be reduced or even be extinguished.

9. In Bailey v IBC Vehicles Ltd [1998] 3 All ER 570, 572g-573c, Judge LJ, after stating that a taxing master has jurisdiction to order discovery and seek information on the bill being taxed, gave an emphatic warning against the over enthusiastic deployment of the power. Plainly, it is within the taxing master's power to investigate whether the indemnity principle has been satisfied and in warranted cases, to seek further information on the bill, although care should be taken to avoid unnecessary and costly satellite litigation.

10. In my view, the doctrine of res judicata, even in the wider sense, does not operate to bar the respondents from raising in these taxation proceedings an objection grounded upon the principle of indemnity. It is not too late for the respondents to raise the point, and to seek discovery on the point.

11. On the second issue of whether this is a proper discovery application under Order 24, I readily agree that the summons is not happily worded and does not set out clearly what relief is sought. Mr Shaw has at the appeal confirmed that the respondents are proceeding under Order 24 rule 3, and further clarified that the respondents are asking for discovery by list of documents.

12. Although discovery is not administered as a matter of course in taxation proceedings, in appropriate cases it is open for a paying party to seek discovery by list of documents against the taxing party. Order 24 rule 3(1) is wide enough to encompass this. In the present case, it is open to the respondents to seek discovery by list of documents on the specific issue as to the claimant's personal liability for costs incurred in the arbitration.

The relevance of the documents sought

13. The crux of the claimant's opposition to the application is that the documents sought are irrelevant. It is said that the agreement between the claimant and White & Case on reimbursement of the costs is irrelevant to the question of whether the claimant is entitled to recover costs from the respondents under the arbitration award.

14. There is no real dispute between the parties as to the legal principles relevant to the issue. They have been set out in the judgment of Yuen JA in Lam Lai Wah Susanna v. Pacific Century Insurance Co Ltd [2003] 2 HKC 520, 523 at para.10, and are as follows:

"In determining whether a claiming party ("the winning party") can recover costs against the other party ("the losing party"), the steps for consideration can be summarized as follows:-

(1) The first question to be asked is: did the winning party employ the solicitors in the action? In answering this question, it matters not that the solicitors were chosen or appointed for the winning party by a third party on his behalf, so long as they acted for him with his knowledge and assent.

(2) If the answer is "Yes", it is presumed that the winning party had a prime facie obligation to remunerate the solicitors, because that would be the ordinary basis on which a professional person is employed to represent a party.

(3) It is for the losing party to rebut that presumption. The presumption is not rebutted simply by evidence that a third party had also undertaken to pay the solicitors' costs. However, the presumption would be rebutted if there is evidence of an agreement made by the solicitors with the winning party, or with the third party, that under no circumstances would the winning party be liable to them for the costs of the litigation incurred on his behalf."

15. In these taxation proceedings, the core question for the taxing master is whether it has been shown that the claimant is, under no circumstances, liable to pay Herbert Smith the costs incurred in the arbitration. Any documents that may shed light on this question is relevant and discoverable under the Peruvian Guano principle. It is not, as the claimant contends, confined to an agreement directly between the claimant and Herbert Smith, or to an agreement directly between Herbert Smith and White & Case. In my view, the documents sought by the respondents in the present application and, in particular the agreement between the claimant and White & Case, may show the nature and the extent of the liabilities of the claimant and also White & Case on the costs of the arbitration, whether between themselves or towards Herbert Smith. It may therefore shed light on the cause to be determined by the taxing master. Hence in principle, the documents sought are relevant and capable of being the subject matter of discovery.

Is the order for discovery necessary?

16. Subsequent to this hearing before the Master, the claimant had filed two affidavits, one made by himself and the other by a partner of Herbert Smith. The gist of the affidavit evidence is that firstly, there is no arrangement whereby the claimant is not obliged to account to White & Case any costs recovered from the respondents, and secondly, there is no agreement whereby Herbert Smith would not look to the claimant for costs incurred for the arbitration. The affidavit also states that Herbert Smith regards the claimant as its client and has always looked to the claimant for payment of the costs incurred.

17. Had this discovery application been one made under Order 24 rule 7, the two affidavits would have put an end to the matter given that it is not open to an applicant, in the absence of evidence to the contrary, to refute the assertions that there is no agreement relevant to the issue, and to insist on an affidavit under rule 7.

16. As for an application under Order 24 rule 3, Order 24 rule 8 provides that the application may be refused if the court is satisfied that the discovery sought is not necessary either for disposing fairly of the cause or matter or for saving costs. Unlike under rule 13 where the burden is on an applicant to showing that it is necessary for the fair disposal of the case to order discovery, in the present case, it is for the claimant who opposes discovery to show that it is not necessary.

17. By the two affidavits, the claimant and Herbert Smith had stated on oath the arrangement as to costs. The materials before the court in these proceedings do not provide ground for casting doubts on the affidavits. Having regard to the contents of the affidavits and the relevant legal principles in Lam Lai Wah Susanna v. Pacific Century Insurance Co Ltd, the documents sought to be discovered will not take the issue any further, and is unlikely to lead to the issue being determined in the respondents' favour. That being the case, the discovery of the documents is not necessary for a fair disposal of the issue.

18. In so saying, I am fully aware that the present application or appeal is not about a determination of the question of whether the indemnity principle has been breached. I am not adjudicating on the point. It is a question reserved for the taxing master. But in considering whether the respondents' application should be disallowed by reason of rule 8, the analysis in the preceding paragraph is relevant.

19. For the reasons indicated above, the respondents' appeal has to be dismissed.

Costs

20. Mr Shaw accepts in principle that the costs of the appeal should follow the event. He however points out that but for the two affidavits that were filed on 19 March 2004, the discovery sought should and would have been allowed on appeal. He therefore submits that there should be two costs order. The first is that the costs before the Master and of the appeal up to 18 March 2004 are to be paid by the claimant to the respondents. As to the costs of the appeal after 18 March 2004, they are to be paid by the respondents to the claimant. As a compromise and for simplification sake, Mr Shaw says that it will be appropriate to make no order as to costs.

21. Mr Burns, on the other hand, seeks to uphold the costs order made by the Master and further asks for the costs of the appeal be to the claimant. He argues that the two new affidavits do no more than confirm what had already been stated in correspondence between the parties' solicitors. In particular, it is pointed out that the claimant's solicitors had already mentioned in correspondence that there was no non-reimbursement agreement between the claimant and White & Case and there were no documents evidencing such an agreement. Mr Burns says that the respondents should not have taken out the application. He also draws attention to an offer made by the claimant without prejudice save as to costs on the disposal of the appeal. That was made after the two affidavits were filed.

22. In my view, the two new affidavits are of importance. As Mr Shaw points out, they take the claimant's position further than what had been asserted in solicitors' correspondence, especially with regard to whether the claimant is under a duty to account or to pay back to White & Case any costs recovered from the respondents. Additionally, the respondents are not bound to accept the position stated in correspondence. It is open to them to press for discovery by making an application to court. They will not be permitted to take the matter further when the claimant deals with the position on oath. As the preceding part of this Decision shows, the documents sought are as a matter of principle relevant. But for the two affidavits that bring into place Order 24 rule 8, discovery should have been ordered under Order 24 rule 3, and this appeal would have been allowed.

23. In the circumstances, the costs of the application before the Master, and the costs of the appeal up to and including 18 March 2004 should be to the respondents against the claimant. Since the respondents persisted with the appeal after the affidavits were filed and have lost it, costs should follow the event and they should pay the costs incurred after 18 March 2004.

24. It is not appropriate to direct that there be no order as to the costs before the Master and of the appeal, as proposed by Mr Shaw, since the claimant does not agree to it

Conclusion

25. The orders that I make are as follows:

(1) The respondents' appeal is dismissed.

(2) The costs of the respondents' summons and of the respondents' appeal up to and including 18 March 2004 be to the respondents in any event, to be taxed if not agreed.

(3) The costs of the respondents' appeal after 18 March 2004 be to the claimant in any event, to be taxed if not agreed.