DELCO PARTICIPATION BV v. STEPHENSON HARWOOD (A FIRM)

HCMP 1553/2018

[2019] HKCFI 410

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1553 OF 2018

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R U L I N G

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1.  There is before the court an originating summons that was issued on 24 September 2018 seeking pre-action discovery. As events have turned out, that application has been withdrawn in the light of what is said on behalf of the defendant solicitors, Stephenson Harwood, by a partner of the firm, Voon Keat Lai, in his first affirmation made on 2 January 2019.

2.  Very shortly, the background to the originating summons is this. The plaintiff (“Delco”) was a shareholder in a company called Chiho‑Tiande Group Limited (“CT”). Another shareholder in CT was HWH Holdings Limited (“HWH”). On 1 December 2004, Delco, engaged Stephenson Harwood to represent it in a proposed sale of its shares in CT to an independent third party purchaser.  The scope of the retainer was the preparation and negotiation of the transaction documents in respect of the proposed sale.  As it turned out, the contemplated sale to an independent third-party purchaser fell by the wayside, and the purchaser then became HWH.

3.  On 23 January 2015, Delco and HWH executed a sale and purchase agreement in respect of 115,179.91 shares in CT at the price of $2.50 per share.  For all intents and purposes, Stephenson Harwood’s retainer ceased upon the execution of that sale and purchase agreement.  The evidence shows that Stephenson Harwood managed the contemplated escrow arrangements for the implementation of that agreement but that was not part of the scope of the retainer.  

4.  Subsequently, on 16 February 2015, CT announced that there would be a new investor in its shares who was committed to invest US$50 million if CT were prepared to place its shares to the investor and a deposit of US$50 million had been received.  It later emerged that the new investor was USUM Investment Group Hong Kong Limited (“USUM”). 

5.  On 27 March, CT announced that it had entered on 21 March 2015 into a subscription agreement with USUM whereby USUM agreed to subscribe for a total of 456,900,000 CT shares at the price of HK$9.01 per share, a considerable increase on the price achieved by Delco in its sale to HWH. 

6.  Delco harboured misgivings as to what Stephenson Harwood might have been aware of in the course of carrying out their retainer concerning the possibility of a new investor coming on the scene being prepared to pay a much higher price for CT shares than that agreed by Delco and HWH.  This led to a long exchange of correspondence between Clifford Chance on behalf of Delco and Stephenson Harwood.

7.  The essential point taken on behalf of Delco was based on rule 8.03 of the Hong Kong Solicitors’ Guide to Professional Conduct which makes it clear that a solicitor must pass on to his client all information which is material to the subject matter of the retainer, regardless of the source of the information.  Clifford Chance sought wide‑ranging disclosure as to the contents of Stephenson Harwood’s file in respect of its retainer relating to the sale by Delco of its shares in CT.

8.  Stephenson Harwood’s response was that given the cessation of the retainer, the client’s entitlement to documents within the file was limited to those documents which were in the ownership of the client.  Clifford Chance insisted that if there was an obligation to pass on information during the course of the retainer, there would be an obligation on Stephenson Harwood to disclose any information that had any relation to the USUM offer that came to be announced in March 2015. 

9.  In the course of the correspondence, in a letter dated 31 January 2018, Stephenson Harwood stated unequivocally that they had no knowledge whatsoever of USUM’s intended investment of CT before Delco concluded the share sale and purchase agreement with HWH on 23 January 2015.  Stephenson Harwood also emphasised that they were entirely unaware of any circumstances giving rise to a conflict of interest in the course of carrying out the Delco retainer.  Towards the end of the correspondence, Clifford Chance very responsibly stated that Delco at that stage of the matter had no claim it intended to make against Stephenson Harwood in respect of the Delco retainer.

10.  The originating summons was issued, as I have said, on 24 September 2018. It was supported by an affidavit sworn by a Mr Erik Hammerstein dated 12 September 2018.  In that affidavit, it was said, as was essentially necessary to be said to found an application for pre-action discovery, that Delco was intending to bring a claim against Stephenson Harwood in respect of the Delco retainer.  Little, if anything, was said in the affidavit about Stephenson Harwood’s clear statement that they had had no knowledge of the USUM investment prior to 23 January 2015 when the Delco retainer terminated. Nor was attention given in Mr Hammerstein’s affidavit to Stephenson Harwood’s statement that they were wholly unaware of any circumstances in the course of the Delco retainer giving rise to a potential conflict of interest.

11.  Section 43(2) of the High Court Ordinance provides that “the costs of and incidental to proceedings for an order under sections 41 and 42” (those being sections providing for pre-action discovery) “incurred by the person against whom the order is sought shall be awarded to that person unless the Court of First Instance otherwise directs”. Order 62, rule 3(12) is to the same effect.

12.  In the ordinary way, therefore, where documents are ordered to be disclosed under section 43(2), the party making disclosure is entitled to its costs.  The entitlement assumes that the party ordered to make disclosure is entitled to resist disclosure and have the applicant satisfy the court that it is an appropriate case for pre-action disclosure.

13.  It is submitted on behalf of Stephenson Harwood that it inevitably follows in this case where the originating summons has not been proceeded with that Stephenson Harwood’s costs in resisting the summons should be paid by Delco.

14.  On behalf of Delco, Mr James Man has drawn the court’s attention to the fact that, notwithstanding section 43, the court has a discretion not to award costs in favour of the party ordered to make pre‑action discovery.  Mr Man also submitted that the rationale of the rule in favour of costs for the party making disclosure is that such a party is entitled to insist on the privacy of his documentary information. 

15.  Mr Man argued that this case fell outside the usual because Stephenson Harwood owed an obligation to Delco under rule 8.03 to pass on to Delco all information that was material to the subject matter of the Delco retainer.  Indeed, he went so far as to submit that Delco were entitled to persist with demands for documents in the face of Stephenson Harwood’s statement that they were unaware of any potential grounds of conflict of interest because that was only a matter of their subjective intention, whereas there might exist somewhere within Stephenson Harwood’s computerised files information that they had received which would have had a bearing on the Delco retainer.

16.  I found that argument to be an unattractive one.  It is, in my judgment, plain that Stephenson Harwood had reviewed its files before making that statement as one would expect of a reputable firm of solicitors such as Stephenson Harwood. In my judgment, in the light of the correspondence from Stephenson Harwood, the issuance of the originating summons was misconceived.  It was withdrawn, as I have said, in the face of Mr Voon Keat Lai’s affirmation.  In my view, Stephenson Harwood are undoubtedly entitled to the costs incurred in resisting the originating summons.  Prima facie, they are not entitled to the costs incurred in the course of conducting the correspondence prior to the issuance of the summons but in resisting the summons, time may well have been spent, as I am sure it was, on a review of that correspondence, and the costs of that work will be recoverable.  

17.  Mr Isaac Chan on behalf of Stephenson Harwood submits that the court should award costs on the indemnity basis.  He argued that disputes as to costs ought to be discouraged and that given the provision in section 43(2) of the High Court Ordinance and order of rule 62.3(12), the resistance to the application for costs by Stephenson Harwood is so far out of the ordinary that the court should mark its displeasure by ordering indemnity costs. 

18.  Having given this submission considerable thought and read the entirety of the correspondence and bearing in mind that Delco showed some flexibility on the question of costs in making proposals falling short of an acceptance of the liability for paying costs but indicating a readiness to join in some sort of discussions that would avoid a court hearing, I have concluded that this is not a case where indemnity costs ought to be ordered.  I am bound to say it came very close to such an order but for the reasons I have given, I do not order that the costs should be paid on an indemnity basis. In the circumstances, I make an order that the costs of and incidental to this application be paid by the Plaintiff to the Defendant, to be taxed if not agreed.