JOHNSON STOKES & MASTER (a firm) v. JACKIN TOTAL FULFILMENT SERVICES LTD AND ANOTHER

HCA 304/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 304 OF 2007

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HCMP 736/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 736 OF 2007

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(Heard Together)

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J U D G M E N T

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1.  The plaintiff, (“JSM”), is a firm of solicitors and the 1^st defendant, (“Jackin”), is its client.  In No. 304 of 2007 action, JSM claims against Jackin for an unpaid balance of fees and disbursements incurred in respect of arbitration proceedings brought by Jackin.  It also claims against the second defendant (“HH”) who is a shareholder and director of Jackin as guarantor of a disbursement in respect of the fees of leading counsel briefed by JSM.

2.  By summons dated 26 February 2007, JSM applies for summary judgment against both defendants under Order 14 of the Rules of the High Court.  By a summons dated 16 March 2007, Jackin applies for stay of these proceedings under section 181 of the Companies Ordinance.  By an Originating Summons dated 19 April 2007, Jackin applies for taxation of the bills in respect of which these proceedings have been brought.

Background

3.  Jackin as claimant brought arbitration proceedings against IBM Engineering Technology (Shanghai) Co. Ltd (“IBM”) in about August 2000.  In January 2001, Jackin retained JSM to act for it in place of its original solicitors.  This retainer was terminated in January 2002, after which Jackin retained, in turn, two other firms of solicitors, before retaining JSM again in July 2003 to act for it in connection with the outstanding quantum hearing in the arbitration proceedings.  Jackin instructed JSM to brief, and JSM briefed Mr Richard Fernyhough QC to advise and appear for it at the quantum hearing.  HH entered into three personal guarantees for leading counsel’s fees and refreshers.

4.  The fees and disbursements claimed in this action relate to work done by JSM in relation to the quantum stage of the arbitration proceedings.  The quantum hearing took place between 17 January 2005 and 2 February 2005.  Jackin succeeded on one of its two heads of claim.  The final award was issued on 30 July 2005, and Jackin subsequently recovered about HK$119 million from IBM in about June 2006.  On 29 April 2006 the arbitrators issued their award on costs giving Jackin 90% of its costs on liability and 75% of its costs on quantum but whether it has recovered any of those costs is not clear.

5.  It appears that Jackin ended its first retainer of JSM because it considered that the estimated legal costs of the remaining part of the arbitration proceedings were too high.  It also had disputes with its other solicitors over those solicitors’ fees, but these matters are not particularly relevant here.  There is also an outstanding claim by one HBFP Ltd, a firm of accountants who gave procession services to Jackin in the arbitration, and it is HBFP Ltd which has presented a petition for the winding up of Jackin on the basis of its unpaid fees.  The petition is to be heard in July this year.  This is the basis for the application for stay.

6.  In all, JSM billed Jackin for a total of about $14.51 million for its services.  Some $9.36 million was paid, plus leading counsel’s brief fee of £82,000.  I do not need to set out all the different bills presented and payments made.  These proceedings are concerned specifically with the balance which JSM claims in respect of two bills, one dated 31 December 2004 and the other dated 1 August 2005.  The final figure claimed is $5,149,920.56 in respect of fees and disbursements.  A figure of £70,067.90 in respect of refreshers due to Mr Fernyhough was also claimed but HH paid the refreshers by way of a bank draft March 2007.  There is also a claim for contractual interest at 2% per month on the unpaid fees and disbursements.  A similar claim for interest on counsel’s refreshers, though included in the Amended Statement of Claim, has been dropped.

7.  The two bills referred to above were not itemised.  Jackin requested a breakdown of these and another bill in August 2005.  Ultimately, JSM provided Jackin with itemised bills of costs in respect of the two bills on 21 April 2006 and it is not in dispute that this is the effective date of the bills for the purposes of considering whether there should be taxation of them under the provisions of section 67(1) of the Legal Practitioners Ordinance.

Issues

8.  There is no dispute that the bills were presented and remain unpaid.  HH has exhibited to her latest affirmation a draft Defence and Counterclaim.  In it the defendants say that the bills ought to be taxed and reserve their rights to apply for a stay.  They also raise a counterclaim for professional negligence in the arbitration.  Evidence in support appears in HH’s affirmations.

9.  It is agreed that, if this is a genuine bona fide cross-claim, it will raise a triable issue, such that the defendants will be entitled to unconditional leave to defend.  The first issue is, therefore, whether there is any substance in the counterclaim; the second issue is whether the bills should be taxed, either because Jackin has the right to taxation, or as a matter of discretion under section 67; and the third issue is whether stay should be granted. 

The counterclaim

10.  Essentially the counterclaim, as it appears in the draft Defence and Counterclaim and in paragraphs 18 of the 1^st affirmation of HH is that IBM wrongfully failed to follow Jackin’s instructions concerning discovery of documents, and failed to produce to the Tribunal certain documents which Jackin provided.  The arbitration claim arose from the wrongful termination of by IBM of a contract between it and Jackin for services.  Jackin succeeded on liability, but only partially on quantum.  It claimed two components of loss, namely loss in build to plan (BTP) services and loss in build to order (BTO) services.  It failed in respect of the BTP claim.  This failure was caused by the negligence of JSM.  Had the undiscovered documents been discovered and had the other documents been put in evidence, Jackin would not have failed in respect of this head of claim.

11.  The performance of the contract required Jackin to procure production of CD-ROMs in Hong Kong, which IBM would arrange to import into the PRC.  This was the “BTP modus operandi”.  However, after six months of the operation of the agreement, the PRC authority, namely the State Press and Publication Administration or SPPA issued a notice, “Notice 560”which imposed a ban on the importation to the PRC of, inter alia, CD-ROMs.

12.  In the quantum hearing, IBM relied on the Notice, arguing that it amounted to force majeure which prevented it from performing the BTP part of the agreement, and therefore Jackin was not entitled to recover its losses on the BTP services from June 1998 onwards, notwithstanding any wrongful termination.  IBM succeeded in this line of argument, and the Tribunal refused to award damages for loss in BTP services.  Jackin says that these would have amounted to US$27,047,000 including interest.

13.  Jackin’s case is that in fact IBM was one of a list of companies permitted by the Chinese Customs to import CD-ROMs into the PRC from 1998 to 2001 despite the issuance of Notice 560 in June 1998.  Other companies were similarly listed.  These matters were known to Jackin.

14.  Jackin therefore instructed JSM to make a request for disclosure of IBM’s importation and customs documents.  Such documents would have formed conclusive evidence that CD-ROMs could have been imported legally even after Notice 560 had been issued.  JSM sought discovery of such documents, by a letter dated 7 December 2004 addressed to the Chairman of the Tribunal.  IBM filed an affidavit of one Anthony Ching Fong dated 23 December 2004 who said that IBM had no importation documents as it had not itself imported any CD-ROMs.

15.  HH says in her 1^st affirmation, and this is echoed in the draft Defence and Counterclaim, that JSM “nonetheless insisted and instructed the plaintiff to pursue the disclosure request as IBM’s response was contrary to the 1^st defendant’s knowledge.”  However JSM advised Jackin otherwise.  JSM’s approach was clearly reflected in its advice letter to Jackin dated 22 November 2004.

16.  It is true that in that letter JSM passed on to Jackin the advice of Mr Fernyhough that it was a fact that the CD-ROMs had been imported without problems or difficulty, and this was alluded to in the Partial Award; and that Anthony Ching Fong’s witness statement stated that CD-ROMs produced by offshore vendors were delivered to IBM post termination.  It was also noted that Mr Fernyhough considered that Jackin should preserve its goodwill with the Chairman of the Tribunal and apply for specific discovery of other more critical documents.  It is however difficult to see how a solicitor could be regarded as negligent in passing on to his client the opinion of senior counsel, particularly when that counsel’s fees and refreshers have been paid.

17.  In Paragraph 31 of her 1^st Affirmation, HH says that in August and September 2005 Jackin made its own inquiries and learnt that IBM had been one of the listed companies or units in the Chinese Customs’ list of companies or units importing CDs from 1998 to 2002 and that this proves that IBM had been permitted to import CDs despite Notice 560.

18.  This list was exhibited to HH’s 3^rd Affirmation, filed at the last minute before the hearing.

19.  Also exhibited is a PRC legal opinion to the effect that the documents — they have been referred to as the “Customs List” — are statistical reports from the Information Centre of the General Administration of Customs.  They show that between 2000 and 2002, IBM imported CDs, and that in 1998 and 1998 an entity using the same numerical code as IBM imported CDs.  The statistics also cover IBM associated companies other than the Shanghai arm, though what relevance that has, if any, is not clear; but they do not show now many CDs were imported in any given year.  Further, the code for CDs would cover CD-R and CD-RW as well as CD-ROMs.

20.  Jackin also claims that it had obtained importation documents relating to one Pan West Ltd which showed that it had imported CD-ROMs after the issue of Notice 560.  These documents would have shown that Notice 560 was not meant to be a complete ban on importation, so that IBM could have still been allowed to import CD-ROMs legally.  However, JSM failed to adduce those documents in evidence.

21.  So far as the allegations relating to discovery are concerned, there is in fact no correspondence, and nothing specific in HH’s affirmations to support the allegation that instructions for the further pursuit of the same specific discovery were given by Jackin, or not followed by JSM, after the filing of Fong’s affidavit of 23 December 2004.  The advice letter referred to by HH as showing JSM’s “attitude” does not assist, because whatever the advice in that letter, JSM did seek specific discovery, in a series of correspondence from 22 November 2004 onwards.  IBM stated throughout that it had not imported and CD-ROMs into the PRC and had no documents to disclose.  JSM insisted, and ultimately on 17 December 2004 IBM agreed to provide a verifying affidavit, and that is the affidavit of Mr Fong.

22.  It cannot therefore be said that JSM failed to comply with instructions prior to 23 December 2004; Neither the affirmation nor the draft Defence and Counterclaim condescends to particulars of non-compliance after that date.

23.  Even if there was such non-compliance, two questions remain: what more could JSM have done, once the affirmation of Fong had been filed; and, would it have made any difference?

24.  Mr Huggins SC argues that in Hong Kong and indeed in English law, once a party from whom specific discovery is sought swears an affidavit that he does not have the documents sought, that is an end of the matter.  It is conclusive; see Jones v Montevideo Gas Co. (1880) 2 QBD 556 at 558; John Baptist Wu v Tsoi Kay [1992] 1 HKC 475; Alexina Investments Ltd v Keyserberg Ltd, HCA 6359 of 1992.  That, he says, is the end of the matter; JSM could have pursued it no further.

25.  Mr Kat, who appears for Jackin, argues that the arbitrator is the master of his own procedure and is not bound by the Rules of the High Court.  JSM could have pressed the matter further.  At least they could have sought to have Mr Fong cross-examined on his affidavit.  That may be, but there is no evidence that there was anything in JSM’s or even Jackin’s knowledge or possession at the time, which might have been advanced to persuade the Tribunal, composed predominantly of English and Hong Kong leading counsel, to go behind the logical approach of the Rules.

26.  No doubt it may be said that the Customs List might “fairly lead to a train of enquiry” (see Compagnie Financiere du Pacifique v Peruvian Guano Co.(1882) 11 QBD 55, 63) but there is no suggestion that it was then in the possession, custody or control of IBM.  Therefore, even if Jackin had instructed JSM to pursue the matter further after 23 December 2004, and JSM had made a successful application to cross-examine Mr Fong, there would have been nothing to put to him beyond Jackin’s bare assertion that IBM had been importing CD-ROMs.  It is therefore most unlikely that JSM could have extracted any further documents from IBM even if it had been instructed to, and had attempted to do so. 

27.  In any event it seems that even if Jackin could prove non-compliance with a proper instruction (and a reasonably competent solicitor is not necessarily required to follow every idea which comes into the client’s head; he may advise against them where that is necessary and proper) there is still a major obstacle, which appears from the reasoning of the Tribunal in its Final Award.

28.  At paragraph 152 the Tribunal set out the issues for decision; it said that it would have to decide the scope of Notice 560, and whether it applied to the facts of the case.  If it did, then, consideration would have to given to whether IBM would be able to apply successfully for a licence to import.  If Notice 560 applied, and no permission would have been granted, the Tribunal would have to decide whether the Notice was unforeseeable, unavoidable and insurmountable, thus constituting an event of force majeure.

29.  The Tribunal went on to find that Notice 560 established the principle that no further approval would be given for domestic publishing units to process overseas CDs, VCDs, CD-ROMs and the like but any special requirement would be subject to centralised examination and approval by the SPPA.  Notice 560 applied to IBM.  If it had made such application, approval would not have been given; the Tribunal did not consider that it could show “special needs”.  Notice 560 was not insurmountable; and it amounted to force majeure.

30.  This is a very short and restricted account of what the Tribunal found, and no doubt a longer explanation would have been clearer; but what is clear is that the Tribunal was only concerned with the legal effect of Notice 560, and whether IBM could legally import CD-ROMs.  It was not concerned with the question of whether IBM had in fact imported them.  The documents of which Jackin says IBM should have obtained discovery would only have shown factual importation.

31.  It is argued that, if there had been factual importation, it must also have been legal importation, or else the Chinese Customs, which enforced Notice 560 would not have permitted it.  The procedure under Notice 560 required the specification of the Customs post through which the products were to be imported.  The Customs List shows or at any rate infers that the Customs must have permitted importation and that must have been subject to the approval of the SPPA.  Of course that does not necessarily follow.  As I have indicated, it may lead to a train of inquiry but that is as far as it goes; and in any event, there is nothing to indicate that JSM could have obtained the Customs List from IBM by specific discovery or in any other manner.

32.  As to the allegations in relation to JSM’s having failed to adduce the Pan West documents which would have shown that Notice 560 was not meant to be a complete ban on importation, the Tribunal clearly recognised in any event that Notice 560 was not a complete ban, and permission to import might be obtained if special reasons could be shown.  Failure to adduce the Pan West documents would have made no difference.

33.  It follows that even if Jackin could establish negligence on the part of JSM it could not establish any causal connection between the negligence and the adverse finding of the Tribunal on the BTP claim.

34.  It is of course noted that allegations of negligence never really surfaced in any concrete form before JSM served a statutory demand on HH.  It is true that there were expressions of dissatisfaction beforehand; but that is as far as it went.  Notwithstanding Mr Kat’s arguments on this point the counterclaim appears to be another instance of that common phenomenon in the Hong Kong courts, namely the baseless counterclaim raised at the last minute to try to avoid paying out on an indefensible claim. 

35.  I conclude that the counterclaim is not a genuine and bona fide defence and this is a proper case for Order 14.  On close examination the “moonshine” referred to in Codd v Delap (1905) 92 LT 510, cited by Godfrey JA in Man Earn Limited v Wing Ting Fong [1996] 1 HKC 225 can be seen glimmering through the smoke and mirrors.

Right to Taxation

36.  Jackin’s argument is that the JSM is not in any event entitled to judgment on its untaxed bills where those bills are challenged.  Mr Kat relies on Turner v O Palomo SA [1999] 4 All ER 353.  He says that at best JSM could have an order for taxation.

37.  In Turner, the Court of Appeal held that there was nothing in the UK legislation (which the Ordinance follows) that took away the need for the solicitor to prove that his fees are reasonable, if they are challenged, absent any express agreement as to what they should be.  Further, the common law jurisdiction of the court is not excluded.  See the judgment of Evans LJ at 368.

38.  It cannot be right that the effect of this judgment is to give the client an absolute right to taxation; if that were so the statutory provisions referred to below would be otiose.  It is no doubt right that the common law right to taxation of a challenged bill remains, but this does not mean that a simple challenge is enough to raise a triable issue on an Order 14 application in respect of an itemised bill.  At 363, paragraph 37, Evans LJ approved the approach of giving leave to defend in respect of disputed items of an itemised bill without embarking on a full-scale taxation or inquiry into the whole bill, but noted that the solicitors, as they were entitled to, had delivered a gross sum bill and the most the defendant could be expected to do was to challenge the reasonableness of the total sum claimed.  The Hong Kong Court of Appeal followed this approach with regard to itemised challenge in Oldham, Li and Nie v Wong Lin Chooi, CACV 319 of 2005.

39.  Here we have itemised bills.  Although there is a generalised challenge to them, there is no specific challenge to any individual item.  I do not think it enough for Mr Kat to call into question, from the bar table, the hours charged by individual solicitors, and in any event when those are examined, as Mr Huggins examined them, they seem not unreasonable for the periods concerned.

40.  Insofar as Jackin seeks to rely on the challenge as raising a triable issue for the purpose of Order 14, I cannot see that it does.  Everyone thinks his solicitor is overcharging him and a challenge on that sort of basis is no better than a bare denial.  I do not accept that Jackin has a right to taxation or that the best that JSM can have is an order for taxation.

Taxation as a matter of discretion

41.  The scheme of section 67(1) and (2) of the Legal Practitioners Ordinance, Cap 159 is as follows.  Within one month of presentation of the bill, the client may apply to have it taxed, and the court shall order accordingly.  No action may be taken on the bill, until it has been taxed.  If no such application is made, the client may still apply; and if the application is made within one year of the presentation, the court may order taxation on such terms as it thinks fit.  If the application is made more than one year after the presentation, the court will only order taxation if the client can show special circumstances.

42.  The Originating Summons was filed on 19 April 2007.  The effective date of the itemised bills is 26 April 2006, i.e. within one year.  Taxation is therefore in the discretion of the court.

43.  There is no affidavit evidence in support of the Originating Summons.  Leaving aside the technical point that an Originating Summons must, by Order 28 Rule 1A, be filed within 14 days after the defendant has acknowledged service, there is no specific challenge to any item of the bills.

44.  I respectfully agree with the view expressed by Deputy Judge To in Simmons & Simmons v Dillon, HCA 2784 of 2003 at paragraph 25:

“It is impossible to list all the factors that the Court should consider whether to exercise its discretion under section 67(2) and the terms on which such discretion is to be exercised.  But, the intention of the applicant, whether he was aware of his right to taxation, the timing of the application and whether on the face there is any suggestion of over-charging are obvious factors to be considered.  In general, the discretion should be exercised in favour of taxation unless the application is an abuse of proceedings or not bona fide made.”

45.  HH knew, for this appears in her first affirmation, that Jackin had the right to an order for taxation, if applied for within 1 month, and Jackin knew from its disputes with its other solicitors of its rights to taxation.  Yet when JSM suggested taxation as a means of resolving the dispute, this was rejected.

46.  The application for taxation comes at the last minute.  Like the counterclaim it appears to be tactical in nature and its bona fides must be as questionable as that of the counterclaim.

47.  Jackin has only raised generalised complaints; in the words of their letter of 28 April 2006, the amount of the bills was “unreasonable, overcharged and far from your estimation and/or our expectation”.  There is no specific challenge to any item.  I cannot say, by looking at the itemised bills themselves, that any items and in particular those referred to by Mr Kat are apparently excessive; indeed as I have indicated they seem reasonable enough given the periods over which the work was undertaken.

48.  For these reasons I consider that this is not a proper case for exercise of the court’s discretion in favour of taxation.

Stay

49.  The general principle is that where a petition has been presented which may result in a winding-up or scheme of arrangement, no creditor should thereafter gain priority over others of his class.  A stay of proceedings against the company should be granted unless there are exceptional circumstances.  The question is whether exceptional circumstances can be found here.

50.  In the first place, as I have found, there is no genuine and bona fide defence here.  The lack of a bona fide defence, and hence the non-existence of a genuine dispute between the parties was taken into account, in finding exceptional circumstances for refusing a stay, by Kwan J in Get Nice (Union) Finance Ltd v Luen Cheong Tai International Holdings Ltd, HCA 1831 of 2002.

51.  In the second place, there appears to have been dissipation of assets.  Though it is an inactive company, Jackin obtained over $119 million on the basis of the Final Award.  What, if anything, it recovered in costs is not known.  According to the 4^th affirmation of HH, Jackin has assets of about $8 million though examination of the exhibited balance sheet shows that these assets are composed almost entirely of sums due from a subsidiary and other debtors.  What has happened to the costs is not known, and the inference must be that they have been siphoned off.

52.  In the third place, it is noted that, although these proceedings were begun on 10 February 2007 and the Order 14 summons was served on 7 March 2007, the application to stay was not made until 16 March 2007 when the Order 14 call-over hearing was fixed for 19 March 2007.  Again there seems to be a strong tactical element in Jackin’s procedural moves.

53.  Finally, JSM through counsel undertakes that they will not proceed with execution of any judgment they obtain, until the winding-up proceedings have been disposed of or until further order of court.  Prior to the decision on the winding-up, there will therefore be no question of JSM gaining priority over other creditors.

54.  It seems to me that in all the circumstances this is a proper case for refusing the stay.

Orders

55.  I make the following orders:

(1)	There be final judgment in favour of the plaintiff against the 1st defendant in terms of Items (a), (c), (d) and against the 2nd defendant in terms of Item (f) of the prayer of the Amended Statement of Claim and the costs of the action and the Order 14 summons to be taxed if not agreed;
(2)	The Originating Summons be dismissed with costs in favour of the plaintiff to be taxed if not agreed;
(3)	The defendant’s summons for stay be dismissed with costs in favour of the plaintiff to be taxed if not agreed.
(4)	There be order in terms of the defendant’s summons to file further affirmations (dealt with at the early stage of the hearing, but no formal order was then recorded) with costs to the plaintiff to be taxed if not agreed.

Since this judgment is to be handed down the costs orders are nisi.