MICHAEL YAP AND ANOTHER v. LAI YIP DYEING FACTORY LTD AND OTHERS

HCA 1084/2011 &

HCA 447/2018

[2023] HKCFI 1732

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1084 OF 2011

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 447 OF 2018

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(Heard Together)

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DECISION

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A.   Application for Wasted Costs Order

1.  The trial of HCA 1084/2011 was fixed to start on 2 May 2023 with 10 days reserved.  HCA 447/2018 was ordered to be tried immediately thereafter with 9 days reserved.

2.  On 2 May 2023, the first day of the trial of HCA 1084/2011, Counsel for the 2^nd, 3^rd and 4^th Defendants, Mr Kenny Lau, confirmed to the Court that his clients no longer contested the Plaintiffs’ claims in the action^[1].  They conceded judgment be entered against them as claimed.  They also conceded that they should pay costs on an indemnity basis.

3.  At the same time, for HCA 447/2018, Mr Lau, who also appeared for the Plaintiffs in that action, confirmed to the Court that his clients decided to withdraw their claims wholly in the action.   Again, they conceded that the action be dismissed, and that they should pay costs on an indemnity basis.

4.  Immediately after the Court made the said orders as so conceded, Mr Samuel Wong (Mr Edward K H Ng with him), Counsel for the Plaintiffs in HCA 1084/2011 and the 2^nd and 3^rd Defendants in HCA 447/2018 stood up and applied, on behalf of behalf of his clients in both actions, for an order under Order 62 rule 8 of the Rules of the High Court for an inquiry into the conduct of (a) those instructing Mr Kenny Lau, i.e. Messrs Peter Mo & Co (“PMC”), Solicitors for the 2^nd, 3^rd and 4^th Defendants in HCA 1084/2011 and the Plaintiffs in HCA 447/2018, (b) PMC’s predecessors, Messrs B Manek & Co (“BMC”), as well as (c) Mr Kenny Lau^[2], as to whether wasted costs in both actions should be personally paid by them (the “Application”).

5.  To avoid confusion, in this Decision below, I shall describe Mr Kenny Lau’s clients, i.e. the 2^nd, 3^rd and 4^th Defendants in HCA 1084/2011 and the 1^st and 2^nd Plaintiffs in HCA 447/2018 as “the Losing Parties”.  And Mr Samuel Wong’s clients, i.e. the Plaintiffs in HCA 1084/2011 and the 2^nd and 3^rd Defendants in HCA 447/2018 will be called “the Winning Parties”.

B.   Decision

6.  I dismiss the Application.  No basis advanced by Mr Wong for the Winning Parties can get off the ground. 

C.   Reasons for the Decision

7.  First, Counsel for the Winning Parties submit that according to the Court of Final Appeal in Ma So So v Chin Yuk Lun & Anor (2004) 7 HKCFAR 300, in making the Application, the Winning Parties “only need to show a prima facie case”^[3].  This is a misreading of Ma So So and is fundamentally misconceived.  The Court of Final Appeal did not hold that once a prima facie case has been shown by the Applicant, an inquiry on wasted costs order should be made.  Rather, in Ma So So, Li CJ set out the following points of which lawyers should take caution before advising their clients to apply for a wasted costs order:

(1)  The making of a wasted costs order is a summary jurisdiction.   It should be strictly confined to questions which are apt for summary determination. (paragraph 8)

(2)  Questions which are apt for summary disposal are usually clear cases.  The jurisdiction should be invoked where the need for such an order is reasonably obvious, and when there is a clear picture of the fault of the lawyer. (paragraph 9)

(3)  Save in the clearest case, application against the lawyers acting for an opposing party are unlikely to be apt for summary determination, since any hearing to investigate the conduct of a complex action is itself likely to be expensive and time-consuming. (paragraph 10)

(4)  Ultimately, the summary jurisdiction is discretionary.  The court is not bound to make a wasted costs order.  The aggrieved party has no right to an order. (paragraph 13)

(5)  In deciding whether to call on the solicitor to show cause as required by Order 62 rule 8(2), the Court should not proceed automatically.  It has a discretion whether to proceed further and may decline to do so.  (paragraph 15)

(6)  The strength of the prima facie case is but one matter which the court must consider. The stronger the prima facie case shown, the greater is the inclination (but only an inclination, not a must, still the discretion remains) to proceed. (paragraph 16)

(7)  Apart from the strength of the applicant’s prima facie case, the proportionality of the exercise, i.e. the comparison between the likely costs of the application and the amount of wasted costs sought, is “a most important matter the court has to consider”.  If a disproportionate amount of costs is expected to be incurred in the application, the court should give this matter great weight. (paragraph 16)

8.  Second, Counsel for the Winning Parties submit^[4] that the counterclaim in HCA 1084/2011 was brought with an ulterior motive or for an improper purpose, the motive being that the counterclaim was a tactical ploy to prevent the Winning Parties from applying for summary judgment in relation to their claim.  In their submission, the Losing Parties’ withdrawal of the counterclaim at the eleventh hour demonstrates that there was never an honest and reasonable cause of action in the counterclaim since the very beginning.  They ask the Court to draw an inference that such a tactic must be adopted by the Losing Parties at the advice of their legal advisors. 

9.  There is no merit in this submission.

10.  In HCA 1084/2011, the Plaintiffs claimed for debt due.  A defence of set-off was put up.  The counterclaim was derived from the set-off, being return of the money overpaid after the set-off.  

11.  If the Plaintiffs in HCA 1084/2011 considered the defence of set-off was not arguable and there was no triable issue, they should have applied for summary judgment under Order 14.  By the same token, if they considered the counterclaim (which was derived from the defence) disclosed no reasonable cause of action, or was scandalous, frivolous or vexatious, or prejudiced, embarrassed or delayed the fair trial of the action, or was otherwise an abuse of the process of the Court, they should have applied to strike out the counterclaim under Order 18 rule 19.  No such application was made.  

12.  What the Winning Parties now accuse the Losing Parties are squarely within the bounds of summary judgment and striking out: “improper purpose” and “never an honest and reasonable cause of action in the counterclaim since the very beginning”.  If they had not done so, and instead let the action go to trial, it is not now open to them to make these complaints by way of the Application^[5].

13.  Importantly, there is simply no evidence to support the accusations that the counterclaim was brought with the alleged improper purpose and that there was never an honest and reasonable cause of action.

14.  Counsel for the Winning Parties argue that withdrawing the counterclaim at the eleventh hour demonstrates that there was never an honest and reasonable cause of action since the very beginning, and one can infer that such a tactic must be adopted at the advice of their legal advisers.

15.  This argument does not hold water.  There is no evidence showing why the counterclaim was withdrawn and why at such late stage, notwithstanding the substantial amount of the debts claimed and a lot of costs already incurred.  There is no evidence showing what advice was given by Solicitors and Counsel for the Losing Parties in relation to the withdrawal of the counterclaim.  No doubt such advice (if any) is protected by legal professional privilege.  There is no evidence showing that the Losing Parties agreed to waive the privilege.  As such, even if such advice was given, it cannot be disclosed.

16.  All in all, there is no evidence showing the existence of the alleged improper purpose and the alleged tactic.  I do not consider there to be drawn any inference from the withdrawal of the counterclaim against the Losing Parties’ legal advisers.  There is a lot of room for doubt.  In these circumstances, it is far from satisfactory that an inquiry into the responsibility of wasted costs should be made.  I have borne in mind the following caution reminded by Li CJ in Ma So So:

“In the absence of any waiver, the respondent solicitor would be unable to disclose what advice and warnings he had given to his client and what instructions were received from his client. So, the respondent solicitor would find himself at a great disadvantage in defending the application. In these circumstances, the court must make full allowance for his inability to tell the whole story. Where there is room for doubt, the respondent solicitor is entitled to the benefit of it. Only rarely will the court be able to make full allowance or to conclude that there is no room for doubt. Further, the court must satisfy itself that it is in all the circumstances fair to make the order. These considerations lead to the position stated in Medcalf v Mardell (Wasted Costs Order) [2002] UKHL 27 at para.23 that:

Only exceptionally could these exacting conditions be satisfied. Where a wasted costs order is sought against a practitioner precluded by legal professional privilege from giving his full answer to the application, the court should not make an order unless, proceeding with extreme care, it is (a) satisfied that there is nothing the practitioner could say, if unconstrained, to resist the order and (b) that it is in all the circumstances fair to make the order.” (paragraph 12)

17.  Third, in relation to HCA 447/2018, Counsel for the Winning Parties asks the Court to investigate into the conduct of Solicitors and Counsel for the Losing Parties, “taking cumulatively”^[6] the following circumstances^[7], that:

(1)  HCA 447/2018 was brought on the advice of BMC and was a “calculated attempt to delay the trial of HCA 1084/2011 after exchange of evidence”.  As any prudent solicitors and counsel^[8] would be “well aware that the claim was bound to fail from the onset”, BMC had failed to ensure that their clients had, again, “an honest and reasonable cause of action”.  Therefore, one could infer that HCA 447/2018 was brought with an ulterior motive or for an improper purpose and with the positive input of legal advisors.^[9]     

(2)  Having taken over BMC as solicitors for the plaintiffs in HCA 447/2018, PMC failed its continuing duty to ensure that they have an honest and reasonable cause of action.  There being no honest and reasonable cause of action is further demonstrated by the fact that they decided not to contest the Winning Parties’ claim at the eleventh hour, despite there being no change in circumstances and evidence since 2017-2018.  This indicates that this is coordinated with the assistance of solicitors and there was never an honest and reasonable cause of action in HCA 447/2018 Action since the very beginning^[10].

(3)  The application for HCA 447/2018 be tried after HCA 1084/2011 must have necessarily delayed the trial of HCA 1084/2011, depriving the Winning Parties from reaping the fruits of the judgment in HCA 1084/2011 at an earlier date.  PMC have given positive input leading to the consolidation.  However, as there was no reason for PMC to advise to consolidate HCA 1084/2011 with HCA 447/2018, the only reason was it was a calculated attempt to delay the trial of HCA 1084/2011.^[11] 

18.  I reject that the above three circumstances described by Counsel for the Winning Parties justify, whether taken into account cumulatively or singly, making an order inquiring into the responsibility of wasted costs.

19.  In relation to paragraph 17(1) above, the Winning Parties referred to a plea of reliance on section 26 of the Limitation Ordinance for postponement of limitation period on the basis of fraud or concealment at paragraph 21 of the Statement of Claim and say that this plea is based on legal advice of BMC and the Court should infer the bringing of HCA 447/2018 is a “calculated attempt to delay the trial of HCA 1084/2011 after exchange of evidence”^[12]. This is a bald assertion.  In making this assertion, the Winning Parties did not provide other facts or context which enables such inference to be drawn, without facts or context showing it to be the case, no reasonable man can infer from a plea of postponement of limitation period to say that the commencement of a legal action is a calculated attempt to delay the trial of another action.

20.  What the Winning Parties might seem to have suggested is: After exchange of evidence, the Losing Parties considered that their case in HCA 1084/2011 was so weak that they wanted to delay the trial.  Therefore, they commenced a new action of HCA 447/2018 (notwithstanding their case in HCA 447/2018 was also weak), with a view to seek consolidation of the two actions, so that the resolution of the whole thing could be delayed, as was now so.

21.  HCA 447/2018 was a derivative action the issuance of which required leave pursuant to section 168BC of the Companies Ordinance.  The application for leave was dismissed by Harris J in the first instance but was allowed on appeal by the Court of Appeal^[13].   Mr Wong placed heavy reliance on the judgment of Harris J in dismissing the application for leave to issue the derivative action and asserted that this action was one which had no prospect of success and that any prudent solicitors would be well aware that the claim was bound to fail from the onset.   Mr Wong went on to submit that by continuing to commence HCA 447/2018, BMC had failed to ensure that their clients had an honest and reasonable cause of action, and therefore one could conclude that HCA 447/2018 was brought with an ulterior motive or for an improper purpose and with the positive input of legal advisors^[14].

22.  I reject the submission for the following reasons:

(1)  Without going through the evidence and investigation at the trial, neither the Winning Parties nor this Court is in any position to conclude that HCA 447/2018 has no prospect of success.  As the Court of Appeal held in the CA Judgment, the task of the judge in considering whether to grant leave to commence HCA 447/2018 is simply to consider whether or not there exists a serious question to be tried, and it is no part of the judge’s function in such an application to make any findings of fact at all^[15]. It was exactly that the judge’s conclusion of no prospect of success that the Court of Appeal found error:

“However, in this case, with respect, it seems to us that the judge was in error in going into the evidence in the depth that he did, and coming to conclusions as to the merits of the claim against the 2^nd (and by extension, the 5^th) respondent, when the arguments put forward by the 2^nd respondent were very much disputed by the applicants. Thus, in relation to the difficulties which the judge had with the report by the Company's auditors, it seems to us that the existence of such difficulties could not be resolved on the papers at this stage, and called for further investigation and evidence from the auditors, which would be forthcoming in the event of a trial, rather than treating it as inherently improbable. Similarly, so far as the possible explanation of loss of yarn through wastage was concerned, this too was a matter that called for further investigation and evidence, particularly when the figures being suggested by the respondents were disputed by the applicants. Additionally, the judge does not seem to have dealt with the allegations of misappropriation involving sales of yarn and payment of proceeds into the 2^nd respondent's personal accounts. In these circumstances, while we appreciate that the judge may have seen little benefit to the Company in having what appeared to him to be weak claims pursued on its behalf, even if one were to accept that the claims were not particularly strong (as to which we express no views), we do not think that they could be said to be so weak as to raise no serious question to be tried.” (paragraph 11 of the CA Judgment)

In other words, even though the claim might “appear” to be weak, without investigation and evidence at the trial, it would be an error to conclude that there was no prospect of success.

(2)  By the same token, and with the Court of Appeal’s comment that their Lordships do not think the claims could be said to be so weak as to raise no serious question to be tried, it would be even more disturbing, and more plainly wrong for the Winning Parties now to suggest that any prudent solicitors would be well aware that the claim was bound to fail from the onset.  This suggestion is directly contrary to the holding in the CA Judgment.

(3)  Even assuming that the case of the Losing Parties in both proceedings is hopeless, there is no evidence showing that solicitors and counsel acting for the Losing Parties have done anything which misled this Court.  There is also no evidence showing that the legal team for the Losing Parties have knowingly lent their assistance in any part of these proceedings which are an abuse of the process of the court.  The applicable principle in this respect is well explained by Sir Thomas Bingham MR in the English Court of Appeal judgment in Ridehalgh v Horsefield [1994] Ch 205 at p. 233 from letter F:

“Pursuing a hopeless case

A legal representative is not to be held to have acted improperly, unreasonably or negligently simply because he acts for a party who pursues a claim or a defence which is plainly doomed to fail. As Lord Pearce observed in Rondel v. Worsley [1969] 1 A.C. 191, 275:

‘It is easier, pleasanter and more advantageous professionally for barristers to advise, represent or defend those who are decent and reasonable and likely to succeed in their action or their defence than those who are unpleasant, unreasonable, disreputable, and have an apparently hopeless case. Yet it would be tragic if our legal system came to provide no reputable defenders, representatives or advisers for the latter.’

As is well known, barristers in independent practice are not permitted to pick and choose their clients. …

As is also well known, solicitors are not subject to an equivalent cab-rank rule, but many solicitors would and do respect the public policy underlying it by affording representation to the unpopular and the unmeritorious. Legal representatives will, of course, whether barristers or solicitors, advise clients of the perceived weakness of their case and of the risk of failure. But clients are free to reject advice and insist that cases be litigated. It is rarely if ever safe for a court to assume that a hopeless case is being litigated on the advice of the lawyers involved. They are there to present the case; it is (as Samuel Johnson unforgettably pointed out) for the judge and not the lawyers to judge it.

It is, however, one thing for a legal representative to present, on instructions, a case which he regards as bound to fail; it is quite another to lend his assistance to proceedings which are an abuse of the process of the court. Whether instructed or not, a legal representative is not entitled to use litigious procedures for purposes for which they were not intended, as by issuing or pursuing proceedings for reasons unconnected with success in the litigation or pursuing a case known to be dishonest, nor is he entitled to evade rules intended to safeguard the interests of justice, as by knowingly failing to make full disclosure on ex parte application or knowingly conniving at incomplete disclosure of documents. It is not entirely easy to distinguish by definition between the hopeless case and the case which amounts to an abuse of the process, but in practice it is not hard to say which is which and if there is doubt the legal representative is entitled to the benefit of it.”       

23.  Given the benefit of doubt, negative inference should not be drawn against the solicitors and counsel for the Losing Parties, even assuming they were pursuing a hopeless case^[16].  This is not to mention that they are not pursuing hopeless case, as remarked by the Court of Appeal in the CA Judgment^[17].

24.  The Winning Parties’ argument referred to in paragraph 17(2) above can be quickly disposed of by the same reasons explained in paragraphs 15 and 16 above.  Similar to the argument mentioned in paragraph 14 above, Counsel for the Winning Parties submitted that in HCA 447/2018, PMC failed its continuing duty to ensure that their clients had an honest and reasonable cause of action and the fact that they decided not to contest the Winning Parties’ claim at the eleventh hour, despite there being no change in circumstances and evidence since 2017-2018, further demonstrated that there was no honest and reasonable cause of action. Same as what was explained in paragraphs 15 and 16 above, there is no evidence showing why the Losing Parties’ claim in HCA 447/2018 was withdrawn at such late stage and what advice was given by Solicitors and Counsel for the Losing Parties in relation to the withdrawal.  Since such advice (if any) is protected by legal professional privilege and there is no evidence showing that the Losing Parties agreed to waive the privilege, it would be unfair and in fact wrong in principle to infer wrongdoings on the part of the legal team for the Losing Parties.

25.  As to the last point raised by Mr Wong for the Winning Parties and summarized in paragraph 17(3) above, the Winning Parties further alleged that as there was no reason for PMC to advise to consolidate HCA 1084/2011 with HCA 447/2018, the only reason was it was a calculated attempt to delay the trial of HCA 1084/2011.  I see no logic in this saying.  Firstly, again, there is no evidence on what advice was given to the Losing Parties on the issue of consolidation and as explained above, as a matter of principle, no adverse inference can be drawn against PMC.  Secondly, to be precise, there had not been an order of consolidation.  On 27 August 2019, Master Ho ordered that HCA 447/2018 was to be tried with HCA 1084/2011 together or immediately one after the other.  Counsel for both parties appeared at that hearing.  There had been no appeal against that order.  If the learned Master considered there was no reason for such trial arrangement, he would not have made the order.  As such, there is no basis to accuse the legal team for the Losing Parties that seeking such trial arrangement was a “calculated attempt” to delay.  The accusation has no factual foundation and must be rejected.

D.   Disposal

26.  For the above reasons, the Application is unmeritorious.  It is dismissed with costs of the Application be paid by the Winning Parties to the Losing Parties, to be taxed if not agreed.