SUN LEGEND INVESTMENTS LTD v. HO YUK WAH, DAVID AND OTHERS

HCA 1212/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1212 OF 2002

____________

____________

AND BETWEEN

          ____________

AND

HCA 2915/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2915 OF 2002

(transferred from DCCJ No. 1967 of 2002)

____________

BETWEEN

____________

AND BETWEEN

____________

(Consolidated by Order of Master Woolley dated 31 October 2003)

__________________________

DECISION  ON  COSTS

___________________________

Background

1.  In both actions the plaintiffs sought to recover sums of money in the way of payments made by purchasers of properties in the Beijing and Dongguan developments that had been held by the Firm in their capacity as the solicitors for the developers but applied, by deduction, by the Firm against outstanding legal fees allegedly owed.  In both actions the Firm counterclaimed for the amount due for legal fees in accordance with bills rendered.

2.  The reasons for judgment were handed down on 18 September 2009.  In short, I found for the Firm in both actions, accepting their entitlement to have made the deductions, and for the Firm on the counterclaim against the original developers in the Beijing action, but for NWD on both counterclaims.

3.  Costs orders nisi were made in the following terms:

(a)     the costs of both actions to the Firm, on a party and party basis;

(b)    20% of the costs of NWD in both counterclaims to be paid by the Firm.

4.  Mr Pow, for Sun Legend and NWD, now says that Sun Legend is entitled to judgment on the counterclaim in the Dongguan action because, as an assignee from the original developers of the debt allegedly owed by the Firm to the original developers, it cannot be liable on the counterclaim.  He says further, that as Sun Legend is entitled to judgment on the counterclaim in the Dongguan action, it must also be entitled to costs on that counterclaim. 

5.  He next says that the orders for costs to NWD on both counterclaims should not be limited to 20%, but should be simply the usual orders to which a successful party is entitled for costs, with the Taxing Master undertaking the appropriate apportionment.  Mr Szeto, while arguing there should be no costs to NWD on the counterclaims, was content to accept my apportionment of 20%.

The procedural steps:

6.  The Dongguan action was originally commenced by 東莞市東城區房地產開發公司, New World Sun City Ltd, and Dongguan New World Garden Trade Construction Co Ltd, (collectively, the original plaintiffs), the first two of those three parties being the shareholders in Dongguan New World Garden Trade Construction Co Ltd, which in turn was the joint-venture company used to carry out the Dongguan project.

7.  The funds held by the Firm, which were applied to part payment of solicitors fees claimed by the Firm, were the property of those three companies.  The instructions given to the Firm to act in respect of the Dongguan project, it was found in the trial, came from those three companies. Consequently, it was those three companies who were, at law, liable to the Firm for the solicitors fees incurred.

8.  The writ in the Dongguan action was issued on 28 March 2002, and the statement of claim was filed on 30 April 2002.  A defence to the statement of claim was filed by the Firm[1]on 10 June 2002.  In that defence the Firm asserted (para 18) a right to set-off against any fees due, funds held on behalf of the original plaintiffs, pursuant to Rules 7 of the Solicitors Accounts Rules Cap 159.

9.  On 26 October 2002, the original plaintiffs assigned the benefit of the Dongguan action to Sun Legend.  In effect, the original plaintiffs assigned to Sun Legend the right to any monies that had been held by the Firm on behalf of the original plaintiffs.

10.  On 16 December 2002, upon an ex parte application by the original plaintiffs, Sun Legend was substituted as the plaintiff, presumably[2] pursuant to O 15 r 7(2), which provides:

“Where at any stage of the proceedings in any cause or matter the interest or liability of any party is assigned or transmitted to or devolves upon some other person, the Court may, if it thinks it necessary in order to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, order that other person to be made a party to the cause or matter and the proceedings to be carried on as if he had been substituted for the first mentioned party.

An application for an order under this paragraph may be made ex parte.”

11.  There is no suggestion that Sun Legend did not duly serve the order as required by O 15 r7(4).  By O15 r 7(5), the Firm was entitled, should they have wished to dispute the substitution of the plaintiffs, to apply for discharge or variation of the ex parte order, that application being required to be made within 14 days after service of the order.  No such application was made.

12.   Nearly five years after Sun Legend was substituted as plaintiff, on 30 November 2007, the Firm amended its defence, and filed a counterclaim, naming as defendants to that counterclaim Sun Legend and NWD.  The counterclaim was for the total amount of the bills rendered.  The basis for the entitlement to claim the amount due was pleaded by repeating the allegations in the defence, and asserting that by virtue of those allegations the sum was due by the defendants to counterclaim, and, by way of alternative, a quantum meruit.

13.  On 16 January 2008, Sun Legend re-amended a re-amended Reply, the document constituting a Re-Re-amended Reply.  At the same time Sun Legend took the opportunity to file a defence to the counterclaim, that defence constituting a bare denial. 

14.  NWD, although it had been joined in the action as a 2^nd Defendant by counterclaim, did not file any defence.

15.  The document comprising the Re-Re-Amended Reply and Defence to Counterclaim filed was incorrectly titled, completely omitting that portion of the title relating to the counterclaim, notwithstanding that it included a defence to the counterclaim.  In its terms, it referred only to Sun Legend as making the assertions in the defence.    No point was taken as to either of these points at trial, and I assume the parties treated the defence that was filed by Sun Legend as being a defence to the counterclaim by both Sun Legend and NWD.

16.  Sun Legend did not plead, or raise in argument during the trial, the proposition that as an assignee of the debt it could not be liable on the counterclaim for the fees due.

The consequences of the assignment:

17.  The law is that, whether an assignment is legal or equitable, (in this case it was a legal assignment), the assignee takes the benefit of the assignment subject to equities having priority over the rights of the assignee.  Thus, the assignee of a chose in action cannot acquire a better right than the assignor had, and the assignee takes a chose in action subject to all the equities affecting it in the hands of the assignor which are in existence before notice is received by the debtor: see Snell’s Equity para 3-22.  The effect of this rule is that the assignee of a debt takes the rights to the debt subject to any equitable right of set-off that might exist at the time of the assignment.

18.  But, with certain exceptions which are not relevant here, (for which see para 30 below), the assignee does not take the debt subject to any burden there might be on the creditor.  In this respect the distinction between set-off and counterclaim becomes important.  While a set-off will invariably constitute a counterclaim, a counterclaim will not always constitute a set-off. 

19.  The following passage from Halsbury’s Laws of England, 5^th Edn Vol.11 para 641 sets out the distinction between set-off and counterclaim:

“Set-off is distinguishable from counterclaim both in its application and in its effect.  In its application set-off is limited to money claims, whereas counterclaim is not so limited.  Any claim in respect of which the defendant could bring an independent claim against the claimant may be enforced by counterclaim subject only to the limitation that it must be such as can conveniently be tried with the claimant’s claim.  Thus not only claims for money, but also other claims such as a claim for an injunction or for specific performance or for a declaration may be the subject of a counterclaim.

In its effect set-off is essentially different from counterclaim in that set-off is a ground of defence, a shield and not a sword, which, if established, affords an answer to the claimant’s claim wholly or pro tanto, whereas counterclaim as such affords no defence to the claimant’s claim, but as a weapon of offence which enables a defendant to enforce a claim against the claimant as effectually as in an independent action.  Where facts pleaded by way of counterclaim constitute a set-off they may be additionally pleaded as such.”

20.  The position is neatly illustrated by the following example in Snell’s Equity para 3-26:

“Thus where a builder assigned the amounts due to him under a building contract, the debtor (the owner of the building) was entitled to set off a claim in respect of defects in the building but he was not entitled to counterclaim against the assignee for damages.”

Snell cites Young v Kitchen (1878) 3 Ex D 127 as authority, and refers also to Pan Ocean Shipping Co Ltd v Creditcorp Ltd [1994] 1 WLR 161 as another illustration of the rule in practice.

21.  In these proceedings, by the counterclaim, the Firm sought from Sun Legend a debt due, said to be arising as a result of a retainer of solicitors, or alternatively a quantum meruit.  The Firm did not dispute that funds held by them, received from purchasers of properties in the developments were the property of the original developers.  The Firm justified its appropriation of those funds by reliance upon Rule 7 of the Solicitors Accounts Rules.

The argument by the Firm for liability of Sun Legend:

22.  Mr Szeto, for the Firm, makes two arguments to say that Sun Legend is liable.

23.  First he says that Sun Legend is liable, not because of the assignment, but because of the consequences of the application made and the effect of the subsequent order for substitution.  He relies upon the following passage in Hong Kong Civil Procedure 2010 Vol 1 15/8/7, from the commentary on O 15 r 8, that Rule being entitled: “Provisions consequential on making an order under rule 6 or 7”:

“Once the substituted person becomes a party in the action, the following consequences ensue namely:

(1)     the substituted party is placed on the exact position of the party whom he has replaced (Chorlton v Dickie (1879) 13 Ch D 160; Johnston v English (1886) 55 LT 55; Cockshott v London etc Co (1878) L J  Ch 120)”

24.  The argument made was that the effect of the substitution order was that that order rendered Sun Legend liable in all respects, including any burdens there might have been on an original party.  That, said Mr Szeto, followed from the use of the words: “the exact position of the party whom he has replaced”.

25.  I reject the argument.  The three authorities cited are all authorities on procedure and practice points.  What is clear from those authorities is that if any procedural step has been taken prior to the assignment, for example, service of documents or notice of some act, that procedural step is effectual against the substituted party and need not be repeated.  Mr Szeto’s argument requires that a substantive rule of law, that an assignee takes subject to equities, but not the burdens of the creditor, has been amended by a rule of procedure contained in the High Court Rules.  That is plainly not the case.

26.  The second argument made was that Sun Legend was liable on a quantum meruit.  But the argument advances his position no further.  Quantum meruit is part of the law of restitution which prevents a person from obtaining a benefit from another which it is against conscience that he should keep without payment.  The party liable on a quantum meruit is the party for whom work is done, and who has not paid for that work, whether because the contract for the work has been terminated by breach, or for some other reason a contract has not come into existence.

27.  I cannot see any basis at all upon which it might be argued that Sun Legend, as the mere assignee of a debt due, might be said to have been the beneficiary of the work done by the solicitors.  This argument must fail also.

28.  Mr Pow is right.  Sun Legend are entitled to judgment on the counterclaim.

29.  There are certain limited circumstances where it is arguable that where it is a condition of enjoying the benefit of that which is assigned, then unless a burden is assumed, the assignee cannot enjoy the benefit without discharging the burden.  By way of example, in Halsall v Brizell [1957] Ch 169, a right to use estate roads and sewers was conditional upon payment of the proportion of maintenance of those facilities.  The assignee of the right was held liable to the owner for that compensation.  That decision was approved in the House of Lords in Rhone v Stevens [1994] 2 AC 310 at 322.

30.  Although an assignee takes subject to a cross-demand available to the debtor against the assignor only if the cross-demand would have been available as a set-off as between the assignor and the debtor, there are arguments available to say that that is not always the case.  In Bank of Boston Connecticut v European Grain and Shipping Ltd [1989] 1 AC 1056 Lord Brandon formulated the test by reference to whether the defendant’s counterclaim could be characterised as “flowing out of and inseparably connected with the dealings and transactions which also give rise to” the claimant’s claim.  The issue is discussed at length in The Law of Set-off, 3^rd Edn, Derham, (OUP) see paras 17.05-17.09.  It is possible to conceive of such a formulation in the present case, on the part of the Firm, but as no such argument was made I say nothing more about the matter other than to indicate the possible availability of the argument.

The position of Sun Legend:

31.  Sun Legend neither pleaded, nor argued at trial, the limits of the liability it faced as an assignee.  As I have stated at paragraph 14 above, the defence filed by Sun Legend to the counterclaim amounted to nothing more than a bare denial.  In fact, as an entity, in the course of the consideration of the case, Sun Legend did not feature except to the extent that its presence as an assignee was noted.  The argument in relation to the counterclaim in the Dongguan action was restricted entirely to the liability of NWD.

32.  It would have been open to Sun Legend to have defended the counterclaim on the basis that at law it could not have been liable for the debt claimed.  Indeed, having regard to the substantive law, and that the only issue was a pure legal issue, it would have been open to Sun Legend to have sought summary judgment on the counterclaim under O 14A.  This was arguably a clear case for the application of that Order.  But Sun Legend were apparently not advised to take that step.

33.  Equally, had the Firm wished to pursue the counterclaim against the original plaintiffs they would have been entitled, within the required time, to apply to discharge the ex parte order substituting Sun Legend as plaintiff.  Had they done so it is entirely likely that the original plaintiffs would have remained plaintiffs in the action for the purposes of the counterclaim, and Sun Legend would have been joined as a plaintiff to pursue its rights under the assignment.  But the Firm were apparently not advised to take that step.

Costs in the proceedings:

34.  It is now necessary to examine the consequences of the foregoing circumstances and conclusions in respect of orders for costs in the proceedings.

35.  The starting point, and the position of Mr Pow, is set out in the following passage from The Law of Set-off, para 1.06:

“The distinction between set-off and counterclaim is relevant to the question of costs.  Costs are within the discretion of the court, but the general rule is that the successful party pays the costs of the unsuccessful party.  Since a setoff gives rise to a defence, it follows that if the defendant’s cross-claim the subject of the set-off exceeded the claimant’s claim, the defendant will have succeeded in defending the action, and accordingly the defendant, rather than the claimant, ordinarily would be entitled to an order for costs.  A counterclaim on the other hand ordinarily results in two judgments.  The approach of the courts usually has been that the claimant is entitled to the costs of this claim, if successful, and the defendant has awarded the costs of the successful counterclaim.  The circumstances of the particular case may warrant different orders, but these are the prima facie positions.”

36.  Just as in England, in Hong Kong costs are within the discretion of the court, but the general rule is that the successful party pays the costs of the unsuccessful party: see O 62 r 3 and Hong Kong Civil Procedure 2010, Vol 1 paras 62/2/6 and 62/3/3.

37.  The only basis that Sun Legend can be said to have relied upon to entitle the original plaintiffs to recover the funds that had been deducted by the Firm was that there was no contractual relationship entitling the Firm to legal fees as they asserted.  That argument failed, and the Firm was found entitled to the set-off.  In that respect I accept Mr Szeto’s submission that the judgment on the counterclaim is in reality merely declaratory, reciting the correct legal result and the facts as found by the Court in dismissing the claim.

38.  Further, Sun Legend resisted the counterclaim, joining in the argument that there was no obligation on the part of the original developers in both actions by way of quantum meruit.  This argument failed, although in the case of the Dongguan action, in the absence of the original plaintiffs in the proceedings no judgment could be entered against them for the balance due by way of legal fees having regard to the set-off that had been applied.

39.  In all of those circumstances, exercising my discretion, I am satisfied that the proper order for costs is that the Firm must have its costs on the claim, and Sun Legend is entitled to judgment on the counterclaim together with costs to the date upon which the defendant’s Hearsay Notice was filed, those costs to be taxed on a party and party basis..  In other words, Sun Legend gets its costs for the procedural steps prior to trial, but not for the trial itself.

40.  Mr Pow said that NWD should have the whole of its costs on both counterclaims.  He referred me to O 62 r 7 and to the decisions in Beaumont v Senior & Bull [1903] 1 KB 282 and Korner v H Korner & Co Ltd [1951] 1 Ch 10.  Upon these authorities he advanced the argument that the allocation of the costs was a matter that was best left to the Taxing Master.

41.  The cause of action in which the Firm succeeded was a cause of action against the original developers, all effectively subsidiaries of, or at least represented by NWD.  Because of the relationship between the original developers, Sun Legend and NWD, they were all represented by the same solicitors and counsel.  Having regard to the time spent on trial on the NWD liability issue, it seemed to me to be appropriate to limit the costs to NWD on the counterclaim to 20% of those costs.  That was a generous apportionment of the time.

42.  I have had careful regard to Mr Pow’s argument that the matter is best left to the Taxing Master, but I am not persuaded that that is so in the present case.  The order that I have made reflects the proportion of the trial taken up in respect of the counterclaim.  The real argument mounted by NWD was that its subsidiaries had not reached any agreement with the Firm in respect of fees.  That argument failed.

43.  Accordingly, the order nisi that NWD will be entitled to 20% of the costs on the counterclaim, to be taxed on the party and party basis, is made absolute.