COMMISSIONER OF INLAND REVENUE v. LI & FUNG (TRADING) LTD

HCIA 3/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO 3 OF 2010

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R U L I N G

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A.  The preliminary objection

1.  In these taxation proceedings, there are altogether 3 bills of costs filed by Li & Fung (Trading) Limited (“LFT”), the party entitled to the payment of the costs of these proceedings, in respectively nos. HCIA3/2010, HCMP541/2011 and CACV86/2011.  The party liable to pay the costs in these proceedings is the Commissioner of Inland Revenue (“Commissioner”).

2.  A preliminary objection based on Order 62 rule 22(5), Rules of the High Court, was raised in the Commissioner’s List of Objections to the bills. In the objection, the Commissioner asked the taxing authority to deduct globally a percentage of the costs to be taxed in each of these bills of costs on the ground of LFT’s alleged undue delay.

B.  The material facts

3.  To put the matter in context, it is necessary to briefly summarize the material facts (which are largely undisputed) of these proceedings taken from the detailed chronology of events attached to the Skeleton Submissions of Mr Gilchrist, solicitor for LFT.

4.  Broadly stated, the underlying disputes of the parties in these proceedings arose from the Commissioner’s assessment of LFT’s profits tax for various financial years. LFT disagreed with the said assessment, and took the matter further to the Board of Review, against which decision, the Commissioner later made an application for “Stated Case”.  The “Stated Case” application was subsequently remitted to the Court of First Instance. This application formed the subject matter of the proceeding in action no HCIA 3/2010 filed on 1 April 2010.

5.  After Reyes J dismissed a summons by the Commissioner in HCIA 3/2010 on 28 March 2011, the Commissioner filed an Originating Summons, no. HCMP 541/2011, for leave to appeal to the Court of Appeal, which was later dismissed with costs on 1 April 2011.

6.  Proceedings in HCIA 3/2010 were disposed of on 18 April 2011 by Reyes J who ordered the dismissal of the Commissioner’s “Stated Case” application with costs.

7.  The Commissioner appealed against Reyes J’s dismissal by filing an appeal, no CACV 86/2011 on 16 May 2011, which appeal was later dismissed by the Court of Appeal on 19 March 2012 with costs.

8.  By the deadline date for the application for leave to appeal to the Court of Final Appeal on 16 April 2012, the Commissioner had not filed any application.  Thus, by this date, these proceedings were completely concluded.

9.  Between April 2012 and October 2012, subsequent to the conclusion of these proceedings, the parties’ legal representatives-  according to the correspondence and telephone attendance records Mr Gilchrist submitted to the court – were engaging in “without prejudice” discussions to settle on a global basis of all the outstanding issues concerning the tax assessments and other related tax matters and proceedings.

10.  On 4 February 2013, LFT sent to the Commissioner draft bills of costs in respect of the costs orders made in its favour as set out above.

11.  On 15 February 2013, LFT filed the Notices of Commencement of Taxation together with the three bills of costs of these proceedings to have the costs awarded to it under the above costs orders taxed.

C.  The lengths of delay

12.  Relying on Order 62 rule 22(1) which requires a receiving party to commence taxation proceeding within 3 months, the Commissioner’s law costs draftsman (“LCD”) submitted that – based on the calculation of 3 months being the period from the date of the costs orders having been made in these proceedings and the date LFT should have commenced taxation – there have been delays of 22 months, 23 months and 11 months respectively of the bills filed in HCIA 3/2010, HCMP 541/2011 and CACV 86/2011.

13.  The LCD, relying on the global percentage deductions for undue delay having been previously made by taxing masters[1] , urged the court to impose the Order 62 rule 22(5) sanction by globally reducing 25% of the costs to be taxed in the bills of costs in both HCIA 3/2010 and HCMP 541/2011 and 10% in CACV 86/2011.

14.  The LCD’s calculation of delays by counting from date of the making of the orders nisi (in respect of the costs orders made in HCIA 3/2010 and CACV 86/2011) is not entirely correct. It is because according to Order 62 rule 22(9) sub-sub rules (a) (ii) (in respect of a costs order made in the Court of First Instance) and (b) (ii) (in respect of a costs order made in the Court of Appeal), the “completion date” as specified in Order 62 rule 22(1) should be counted from the date of the making of the costs order absolute (not from the date of the order nisi).

15.  Accordingly, the lengths of delay (in respect of the costs orders made in HCIA 3/2010 and CACV 86/2011) – when properly computed in accordance with Order 62 rule 22(9) – should have been, as shown in the table below, 18.5 months and 7.5 months respectively in HCIA 3/2010 and CACV 86/2011. As for HCMP 541/2011, though the date of the order used for the calculation was indeed the date of the order absolute, the LCD has somehow appeared to have rounded up the actual period of delay of 22.5 months to 23 months.

Case No	Date of Absolute Order	Date when taxation should have been commenced under rule 22(1)	Length of Delay
HCIA 3/2010	2/5/2011	2/8/2011	18.5 months
HCMP 541/2011	1/4/2011	15/7/2011	22.5 months
CACV 86/2011	2/4/2012	2/7/2012	7.5 months

D.  Reasons for the delay

16.  Mr Gilchrist, in his Skeleton Submissions, provided two reasons to justify LFT’s delay in commencing taxation:

(1) First, there had been on-going proceedings.  It was contended that as a result of the Commissioner’s bringing of the appeal, there was thus a possibility that the appeal court would reverse the previous costs orders having been made.  It would not have been, Mr Gilchrist submitted, commercially sensible for LFT to incur extra costs for commencing taxation before the ultimate costs liabilities could be finally determined[2].

(2) Second, the parties had been engaging in settlement discussions after the disposal of these proceedings in April 2012. Undisputedly, a successful settlement would have obviated any need for taxation.

17.  For these two reasons, Mr Gilchrist contended that there had not been any undue delay in commencing taxation.  The court, it was submitted, should not impose any sanction when the taxation proceedings have in fact been commenced within the 2-year limitation period and in full compliance with the procedures and rules.

18.  If, however, LFT, were found to have unduly delayed the commencement of the taxation proceedings, Mr Gilchrist urged the court to exercise its discretion not to impose the sanction by taking into account all the relevant circumstances of the case “to achieve a just result”[3].

19.  These proceedings, it was submitted, are subject to a proper consideration of the rules made under the Civil Justice Reform (“CJR”). Relevantly, the new Order 1A rule 2 requires a court to give effect to the underlying objectives as well as of a party’s conduct, such as the kind espoused by Chief Justice Ma in Wing Fai Construction Co Ltd (in liquidation) v Yip Kwong Robert[4] , a striking out application heard by the Court of Final Appeal (which is to be further discussed in §48 below).

E.  Discussion – whether there is “undue” delay

E.1  Order 62 rule 22

20.  Under Order 62 rule 22(1), if a party entitled to costs fails to commence taxation proceedings within 3 months after the completion date, a taxing master is empowered to:

(1) On application, compel a receiving party to expeditiously commence taxation by disallowing the commencement of taxation in the event that the taxation is not commenced within the specified time (rule 22(3)).

(2) impose a sanction for undue delay (irrespective of whether an order has been made under rule 22(3)) by: (a) making such order as he thinks fit as to the costs of any application or as to the costs of the taxation; (b) disallowing any part of the costs to be taxed pursuant to the costs order; and (c) disallowing interest or reducing the period for which interest is payable or the rate at which interest is payable in relation to the taxed costs or any part of those costs (rule 22(5)).

E.2  Any undue delay

21.  Whatever way the “completion date” for taxation is to be computed, there is little dispute that LFT has not commenced taxation within the 3 months’ time as stipulated in Order 62 rule 22(1).  But before the sanction provisions under rule 22(5) are to be engaged, any such delay must be “undue”, which must be inexcusable or inordinate.

E.2.1  On-going proceedings excuse

22.  Whether a particular delay is excusable will depend on the facts of each case.  The existence of other on-going litigation between the same parties had been held before the CJR not an excusable reason (See: The Bank of New York[5]). But post-CJR, an on-going arbitration could be a justifiable reason (See: Zebra Industries (Orogenesis Nova) Ltd[6]).

23.  Neither of these cases, in my judgment, can provide much guidance to me as to what circumstances would constitute undue delay which is by and large case-sensitive.  The categories of excuses hence should not be viewed in a strait- jacket.

24.  In this case, the on-going proceedings essentially refer to the appeal brought by the Commissioner to the Court of Appeal with the justification having been based on the possibility of the Court of Appeal overturning the previous costs decisions, which might have the consequence of reversing the previous costs orders. In essence, whether the existence of a connected on-going proceeding would justify delaying the commencement of a taxation proceeding, in my view, depends on the facts of each case.  When it is considered that there is a real likelihood that the outcome of an on-going matter in the same proceedings such as a pending appeal – subject to other considerations such as the time likely to be required for the disposal of the pending proceedings, the nature of such proceedings etc – may likely impact on the ultimate costs liabilities of the parties, it may be reasonable to withhold taxation proceedings until the conclusion of the on-going proceedings.  If however, the on-going proceedings may only result in the setting-off of costs liabilities against each other, it would unlikely  be a sufficient excuse for delaying the taxation proceedings.

25.  In this case, the tax disputes between the parties were first remitted to the Court of First Instance in April 2010 by the commencement of HCIA proceedings, which were disposed of within a year in April 2011.  Within the fairly short time frame of one year, there had been proceedings filed by the Commissioner for an application for leave to appeal against an interlocutory order,  and later in May 2011, for the substantive appeal in the Court of Appeal.  In such a case, the parties must have conducted the proceedings in very tight time schedules.

26.  The issues involved in these proceedings also appear to have been particularly complex as reflected by the representations of both parties involving the engagements of eminent Queen’s Counsel and local counsel.  Under such circumstances, LFT, in my judgment, was justified in focusing on the preparation of the appeal, which might produce an outcome of reversing the lower court’s costs orders having been made in HCIA3/2010 in its favour.  In the circumstances, given the tight time schedules, the complexity of the proceedings, and the appeal by the Commissioner, I’d be inclined to accept that LFT was justified to wait until the conclusion of the appeal before commencing taxation proceedings in both actions HCIA3/2010 and HCMP541/2011.

E.2.2  Settlement negotiations excuse

27.  When the time for a further appeal expired on 16 April 2012, LFT would then have been under a duty to take steps to commence taxation proceedings in respect of the costs of the three actions if costs could not be agreed.

28.  LFT however sought to excuse itself for the delay based on the alleged negotiations of costs between the parties.

29.  One of the underlying objectives under Order 1A rule 1(e) is to facilitate the settlement of disputes.  If there had indeed been negotiations for the settlement of the costs, this would be within the spirit of the CJR, and will likely be a good excuse for withholding taxation proceedings for the purpose of saving costs and expenses.

30.  Coming back to LFT’s explanation, Mr Gilchrist, whilst accepting that the documents and correspondence that he had submitted to this court do not directly allude to any negotiations on costs, he contended however that the parties’ negotiations for a global settlement were intended to have also included costs.

31.  Since the only documents LFT relied on in support of the alleged negotiations for costs are the correspondence and the telephone attendance records Mr Gilchrist produced at the taxation hearing, I can only examine these documents to find out if such contention can be supported. From the documents that I have read, the only oblique reference to costs is found in the highlighted part of a sentence in the 1st draft settlement proposal entitled “Framework of Settlement Proposal” having been enclosed with the letter dated 11 September 2012 from Clifford Chance (for LFT) to the Department of Justice (for the Commissioner).  The highlighted part of that sentence appears under a sub-heading described as ‘Principles’ and is in Item 2 of the draft proposal, which highlighted part reads, “An amicable settlement will no doubt save time, costs and resources of both parties and bring certainty and finality to the revenue of the Government of the HKSAR and the tax affairs of LF Group [LFT] in line with CACV 86/2011 and, where appropriate, BR39/04.”[7]

32.  Despite having found a reference having been made to one of these proceedings, case no. CACV 86/2011, in the highlighted part of the said sentence, I am however unable to find or infer from it any reference to costs. All I can read from the highlighted part of that sentence is a reference to the benefit of a settlement, and that a settlement would be in line with the decision of the Court of Appeal.  The other part of the said draft proposal, Item 3, all relate to tax matters or other outstanding proceedings relating to tax matters between the parties, but there was nothing on costs.

33.  Having carefully read the highlighted part of the sentence in Item 2 of the draft settlement proposal and the rest of the documents, I cannot find any documents showing that there had been any negotiations on costs of these proceedings as Mr Gilchrist’s asserted.

34.  For these reasons and in the absence of any evidence to support Mr Gilchrist’s contention that the settlement negotiations have or were intended to have included the costs of these proceedings, I am unable to accept LFT’s reason for the delay on the ground of the alleged negotiations for costs.

35.  In my judgment, therefore, LFT should have - within the three months as from around mid-April 2012 (the expiry of the appeal period) to mid-July 2012 – actively negotiated costs with the Commissioner, and if there was no prospect of agreement, commenced taxation.

36.  LFT neither negotiated costs (as I have found) nor commenced taxation in respect of the costs of these proceedings within the required period of three months in accordance with Order 62, rule 22(1).

37.  I do not find the three bills of costs in these proceedings are particularly complicated though the amounts claimed are substantial.  When costs could not be agreed, LFT should have without delay instructed a law costs draftsman to draw up the bills, but LFT has clearly failed to do.  Had LFT done so, it could have filed the bills within the 3 months by mid-July 2012.  By the time LFT commenced taxation on 15 February 2013, there had already been undue delay of 7 months. I do not accept Mr Gilchrist’s that the fact that taxation was commenced within the time limit of 2 years could amount to a good excuse.

38.  Before deciding if any and what sanction is to be imposed for the proper exercise of the court’s discretion, I should however consider all the relevant factors of this case.

F.  Exercise of discretion

39.  One of the factors that Mr Gilchrist asked me to take into account is the Commissioner’s conduct in having failed to apply for immediate taxation, as it would have been entitled to under Order 62 rule 22(3).

40.  It was contended that a party’s conduct, as having been firmly established in the striking out application in the Court of Final Appeal decision of Wing Fai Construction Co Ltd, supra, is a relevant consideration under CJR.

41.  Given the complete inaction on the part of the Commissioner in taking the necessary step to counteract the delay it is now complaining of, Mr Gilchrist therefore contended that the Commissioner’s conduct is opportunistic and it should not be allowed to reap the benefit of LFT’s delay.

42.  These taxation proceedings took place after the commencement of the CJR; hence the relevant CJR rules apply.  Under this regime, not only is a court required under Order 1A rule 2 “to give effect to the underlying objectives” of the CJR rules when exercising any of its powers with “the primary aim in exercising the powers of the Court to secure the just resolution of disputes in accordance with the substantive rights of the parties”, the parties and their legal advisers are also required to assist the court to further the underlying objectives (Order 1A rule 3).

43.  In the circumstances, I agree with Mr Gilchrist that the Commissioner’s conduct is one of the relevant factors that I should also take into account.

44.  As discussed in section E.1 above, if a receiving party delays in commencing taxation within 3 months, a receiving party may face two consequences, one of which is an order of immediate taxation upon an application by a paying party under Order 62 rule 22(3) by ordering that unless the receiving party commences taxation proceedings within a specified period or the amount due is agreed between the parties, the costs order shall be wholly discharged.  Such similar provision, before the CJR, was previously regarded as a protection available to a paying party[8].

45.  Before CJR, similar powers of ordering taxation and sanctions for undue delay were also provided in the former Order 62 rule 22.  Previously, the time allowed for commencing taxation was only one month and the sanctions a court could impose were not as so well defined as they are under the present Order 62 rule 22(5).  These changes, it is believed,  have been designed to – as stated in the Consultation Paper on Proposed Legislative Amendments for the Implementation of the CJR (April 2006), at p8 – meet the objective of CJR of ensuring that “a case is to be dealt with as expeditiously as is reasonably practicable and to facilitate settlement of disputes”.

46.  Ensuring a case is dealt with as expeditiously as it reasonably practicable and to facilitate the settlement of disputes are two of the underlying objectives specified in Order 1A rule 1(b) and (e).  Apart from the duty of the court to give effect to the underlying objectives, Order 1A rule 3 (as discussed in §42 above) imposes a duty on parties and their legal advisers to further the underlying objectives.  Thus, the Commissioner and LFT would now be subject to this new duty, which, in the present case, requires them to negotiate costs to facilitate settlement and in the event that costs could not be agreed, to take reasonably practical steps in ensuring that the taxation proceedings are to be dealt with expeditiously.

47.  LFT, being the receiving party, has the carriage of the action. It thus bears the ultimate responsibility of ensuring that taxation proceedings be commenced expeditiously within three months as required by Order 62 rule 22(1).  In having failed to do so, LFT and/or its legal advisers have failed to give sufficient regard to the duty of furthering the underlying objectives in ensuring the expeditious disposal of the taxation proceedings.

48.  Whilst LFT bears the ultimate responsibility in commencing taxation without delay, the Commissioner, as the paying party, is also required to take the necessary step to further the underlying objectives upon the LFT’s delay, which would be, in the present case, to resort to the protection accorded to a paying party under Order 62 rule 22(3) by making an application to compel LFT to commence taxation.  The Commissioner’s inaction is, in my view, analogous to the conduct of the applicant (i.e. the defendant) in Wing Fai Construction Co Ltd, supra, whose conduct had been described by Ma CJ as having adopted the attitude of “letting sleeping dogs lie” by sitting “idly by and do[ing] nothing, in the hope that sufficient delay would be accumulated so that some sort of prejudice can then be asserted”[9].

49.  Before the CJR, when there was then no statutory duty imposed on a party in civil proceedings to further the underlying objectives, the taxing authority had refused to deprive a paying party’s right of benefits for its inaction (See: the Bank of New York[10]), for it had been held that[11], prejudice (to the paying party) was not a prerequisite for the exercise of the court to impose sanction for undue delay for the reason that  interest was to run from the date of the costs order until payment.  Thus, any delay was found to have caused prejudice to the paying party[12].

50.  True that it may be that due to the delay, a paying party will be required to pay more interest on the taxed costs, the receiving party’s delay however is not entirely without benefit to a paying party for the latter would have “nevertheless enjoyed an advantage in keeping hold of its money in the meantime”[13].

51.  The parties (not just one party in a proceeding), as already discussed, are required by Order 1A rule 3 to assist the court to further the underlying objectives.  The widened scope of Order 62 rule 22, however, has seemingly after the CJR led to a surge of objections in taxation proceedings by a paying party basing on a receiving party’s undue delay under Order 62 rule 22(5).  Yet, on the other hand, there have been very few applications made under Order 62 rule 22(3) by the paying party to compel a receiving party to commence taxation. This phenomenon is, probably, due to a misguided view held by a paying party in believing that the duty imposed by Order 1A rule 3 only applies to a receiving party.

52.  Such view, after the CJR, may no longer be supported. As the discussions above have shown, the obligations under Order 1A rule 3 apply to parties, not just one party, to the proceedings.  If therefore, when a paying party, in appropriate cases, has chosen to lie idly by without an explanation, and later take advantage of the accumulated delay of the receiving party in commencing taxation proceedings, a taxing authority may take into account of such conduct in the exercise of a court’s discretion under Order 62 rule 22(5).

53.  In this case, apart from relying on the period of LFT’s delay, the Commissioner has neither written to LFT to discuss the costs nor resorted to the protection having been accorded to it against the latter’s delay under Order 62 rule 22(3).  In my judgment, the Commissioner’s lack of explanation for its inaction makes it just for me to also take into account its conduct.

54.  Next, I should also take into account the length of undue delay, which according to my finding, has been a relatively short period of 7 months.  If sanction were to be imposed, I must however, for the following reasons, reject the global percentage deduction the LCD advocated in this case.

(1) First, the delays ranging from 8 months[14] to 5 years[15] in the cases referred to by the LCD were much more serious than the present proceedings.

(2) Secondly, all of the said cases but one[16] was pre-CJR decisions. Prior to the CJR, there was no time limit for commencing taxation.  The new Order 62 rule 22(7) now imposes a time limit of 2 years for the commencement of taxation.  As a consequence of the new time limit, excessive delays longer than 2 years will unlikely occur, and the sanctions of global deductions previously imposed by the court may not be an applicable guide.

(3) Thirdly, before the CJR, the type of sanction a taxing master was empowered to impose for undue delay under the old Order 62 rule 22(3) was much narrower in scope, which only provided the taxing authority to disallow any item contained in a bill of costs. Reducing a specified percentage of taxed costs – as shown by the cases mentioned in § 13 above – had been commonly adopted by taxing masters under the old Order 62 rule 22(3).  The global deduction approach, when considered in the light of the widened scope of the sanction powers now available in the new Order 62 rule 22(5), may, in some cases, appear rather arbitrary, or even unjust.

55.  The sanctions now available are much wider in range, which include not only a disallowance of the taxed costs, but also a deduction of a period of interest on the costs to be taxed.

56.  Having considered all the relevant factors discussed above, I should, in order to mark the court’s disapproval of LFT’s undue delay, exercise the discretion to impose sanction.  However, the proper sanction to be imposed, in my judgment, should also appropriately reflect the Commissioner’s similar disregard of its duty to assist the court in furthering the underlying objectives of the CJR as already discussed above.

57.  For the foregoing reasons I do not consider it appropriate to sanction LFT by a global deduction of the costs to be taxed.  In my judgment, given the Commissioner’s conduct, I should exercise my discretion to deprive LFT of its interest on such costs for only a period of 5 months rather than the full period of undue delay of 7 months in order to achieve a just result.

58.  In conclusion, I shall disallow interest on the costs to be taxed in each of the three bills for 5 months from around mid-July 2012, say 15 July 2012, to around mid-December 2012, and say 15 December 2012.

Order and directions

59.  In respect of the Commissioner’s preliminary objection, it is ordered that there shall be no interest from 15 July 2012 to 15 December 2012 on the costs to be taxed in each of the three bills of costs filed in these proceedings.

60.  As for the costs of this objection, I will hear submissions at the resumed taxation hearing that has been adjourned part-heard.   Since some of the remaining items to be taxed concern  arguments on whether the costs claimed by LFT in respect of the costs having been incurred for the application for the admission of overseas counsel are recoverable , I direct counsel from the Department of Justice should attend the adjourned hearing in respect of this objection as I have noted in this objection that the LCD, though highly experienced, has not been able to render sufficient assistance to me concerning some of the submissions Mr Gilchrist made. Thus, in the future, it would be highly preferable - and indeed necessary in some cases – for solicitors to attend a taxation hearing whenever an objection, such as the present one, involves substantial legal submissions.