LI FOOK CHU v. H.H. LAU & CO. (a firm)

CACV246 /2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 246 OF 2005

(ON APPEAL FROM HCA No 247 OF 2003 )

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JUDGMENT

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Hon. Yeung JA:

1.  I have had the advantage of studying the draft judgment of Yuen JA.  I agree with her reasoning and her conclusion.  An order is made in terms of para. 56 hereof. 

Hon. Yuen JA:

2.  This is the Defendant’s appeal from a judgment of Reyes J handed down on 7 July 2005 in which he gave judgment to the Plaintiff against the Defendant in the sum of $2,937,545.90 as damages for professional negligence.

3.  The facts are set out in full in the judge’s judgment.  I will therefore only summarize those facts which are necessary for an understanding of the grounds of appeal and this judgment.

4.  The Plaintiff was a client of the Defendant, the sole proprietor of a solicitor’s firm.  To avoid confusion with the parties in another action with which this action is closely connected, I will refer to the Plaintiff in this action as "the Client" and the Defendant as "the Solicitor".

"Promissory Note"

5.  A Mr Chung Shau Ching (“Mr Chung”) used to work for the Client and the two had become friends with the Client helping out Mr Chung financially. 

6.  On 1 March 1989, Mr Chung signed a document (which has been referred to as “the Promissory Note”) acknowledging that he had borrowed from the Client a sum of $700,000 which he undertook to repay on demand and that until repayment in full, he would pay interest at 9% p.a., the interest to be offset by rentals to be received from a company in England, where Mr Chung had moved.

Events in 1992

7.  In February 1992, Mr Chung stopped making repayments.  This led to demands from the Client’s solicitors in England.

8.  On 8 August 1992, Mr Chung wrote to the Client’s solicitors in England denying that he owed the Client any money.  He required the Client to list the payments and interest claimed and said that if any balance was owing he would settle the outstanding amount as soon as possible.

9.  On 23 September 1992, the Client’s solicitors in England sent a letter of demand to Mr Chung.  No payment was forthcoming.

Consulting the Solicitor

10.  In May 1998, the Client consulted the Solicitor with a view to suing Mr Chung for the money owed under the Promissory Note. 

11.  Shortly afterwards, on 11 May 1998 Verdi Kwan, an assistant solicitor then in the Solicitor’s employ, perused the documents provided by the Client (including those I have referred to in paras. 6, 8 and 9) and wrote a note to the Solicitor. 

12.  In this note, Mr Kwan referred to the document of 1 March 1989 as a Promissory Note, but concluded that because the sum was repayable on demand, the action was not yet time-barred as the  demand had been made only in September 1992.

13.  It is now conceded that that conclusion was wrong as the law is well-established that with regard to promissory notes payable on demand, time under the statute of limitations runs from the making of the note (1 March 1989) and not from the date of demand (23 September 1992).

Issue of Writ and Statement of Claim against Chung

14.  On 26 May 1998, the Solicitor issued a writ against Mr Chung for the sum of $700,000 together with interest at 9% p.a. from 1 March 1989 and costs.  He did not advise the Client of the time bar defence.  

15.  The Statement of Claim contained only one cause of action - a claim on a promissory note.

Chung’s response

16.  Mr Chung was served in England.  He instructed solicitors in England  but not in Hong Kong.  The solicitors in England purported to acknowledge service in Hong Kong and filed a Defence admitting that Mr Chung had signed the Promissory Note but that he had repaid $780,000 to the Client in 1991.  The Defence did not plead the time bar. 

17.  The solicitors in England also purported to take part in the proceedings through correspondence.  The Solicitor raised no objection to that, nor apparently did the masters who gave directions in respect of the proceedings.

Default judgment

18.  Mr Chung did not comply with some of those directions, as a result of which default judgment was given against him on 27 May 1999.

Chung’s application to set aside judgment, raising the time bar

19.  About a year later in May 2000, Mr Chung applied to set aside the default  judgment.  In support of his application, he raised the time bar as a defence.

Counsel’s advice

20.  The Solicitor advised the Client to instruct counsel.  Mr Leo Remedios was instructed.  Mr Remedios advised that there was a good chance of resisting Mr Chung’s application to set aside the default judgment on the ground that his failure to comply with directions had been contumelious, but he also advised that the time bar would be a complete defence to the Client’s claim.

Opposing the application to set aside default judgment

21.  The Client opposed Mr Chung’s application to set aside the default judgment.  It should be noted that the Solicitor did not advise the Client of the alternative option of conceding Mr Chung’s application and recovering the costs he (the Client) had expended in the litigation from the Solicitor himself.

Result of application to set aside default judgment

22.  The Client’s opposition was successful before the Registrar and (on Mr Chung’s appeal) before Tong J. 

23.  However on 15 June 2001, this court (Rogers V-P and Le Pichon JA) allowed the appeal and set aside the default judgment.   The Client was ordered to bear the costs before Tong J and before the Court of Appeal. 

24.  An application for leave to appeal to the Court of Final Appeal was lodged on behalf of the Client.  It was dismissed by the Court of Appeal on 18 September 2001 and by the Court of Final Appeal on 24 December 2001 with costs to be paid by the Client.  In the meantime, further costs had also been incurred in instructing a number of other counsel for advice and appearances in court.  At no stage did the Solicitor advise the Client that an alternative option was to discontinue the proceedings against Mr Chung and to recover the wasted expenses from him (the Solicitor).

Attempt to amend claim

25.  By then it had become obvious that Mr Chung’s next step would be to apply to strike out the claim on the time-bar ground.  The Solicitor approached yet some other counsel, including Mr Jose-Antonio Maurellet. 

26.  On 18 May 2002, Mr Maurellet advised that it was arguable that the document hitherto referred to as the Promissory Note did not constitute a promissory note, but could be “construed as a loan contract evidenced by the Document”.  In this respect, the judge found that no prior attempt had been made by the Solicitor to explore the possibility of including a cause of action based on an underlying loan contract (para. 37).

27.  On 12 July 2002, as forewarned, Mr Chung issued a summons to strike out the claim on the ground that it was time-barred. 

28.  On 25 July 2002, the Solicitor issued on behalf of the Client a summons for leave to amend the claim deleting all references to a promissory note and pleading instead that commencing 1988, there had been a number of loans from the Client to Mr Chung, but that there was an oral agreement (“the oral agreement”) varying the previous loan agreements to the effect that Mr Chung was liable to repay the sum of $700,000 to the Client but only on demand, which demand was later made on 23 September 1992.  The document of 1 March 1989 hitherto referred to as the Promissory Note was now pleaded as an acknowledgment that by that date, Mr Chung had borrowed $700,000 from the Client.

29.  On 17 October 2002, the master refused leave to amend and struck out the Client’s claim.  A Notice of Appeal was filed on behalf of the Client.

30.  However on 19 November 2002, Mr Jat Sew-tong SC was consulted by the Client and he advised that the application for leave to amend was bound to fail.  Having considered the draft Amended Statement of Claim, I agree with the view taken by Mr Jat, the master and the judge that the proposed amendment did not meet the demands of Order 20 rule 5(5). 

31.  Mr Jat also advised the Client that he had a cause of action against the Solicitor for negligence in having failed to advise that the action on the Promissory Note had been time-barred when the writ was issued.

32.  Shortly after receiving Mr Jat’s written advice, the Client changed solicitors, discontinued the proceedings against Mr Chung and issued the writ in the present action against the Solicitor.

Trial

33.  At the trial, the Client and the Solicitor, amongst others, gave evidence.  In a detailed judgment, the judge found that the claim was time-barred (paras.33-35) and that the Solicitor had been negligent in failing to so advise the Client (paras.36-40).  The judge also held that the proposed amendment to plead an oral agreement for a loan payable on demand was doomed to failure for non-compliance with Order 20 rule 5(5). 

34.  The judge also found as a fact that had the Client been advised that  the time bar was available to Mr Chung as a defence, he would not have instituted the proceedings at all (paras.56-57), and that the steps taken by the Client after being made aware of the time-bar - first in July 2000 (in opposing Mr Chung’s application to set aside default judgment) and then in July 2002 (in applying to amend the claim) - were reasonable attempts made to extricate himself from a difficulty that he had been placed in due to the Solicitor’s negligent advice (para.64) and that the Client’s position was “akin” to that of a would-be plaintiff under a duty to mitigate loss (para. 65).

Appeal

35.  The Solicitor appealed.  A number of grounds were set out in the Notice of Appeal but all but one (ground 6) were abandoned at or before the hearing of the appeal.

36.  On appeal, Sir John Swaine SC, leading counsel for the Solicitor, conceded that the Solicitor was liable for part of the costs expended by the Client but he argued that once the Client became aware of the time-bar when he received Mr Remedios’ advice on the point in July 2000, his decision to carry on with the proceedings (and the costs incurred as a result) were not attributable to the Solicitor’s negligence.  It was argued that Mr Remedios’ advice constituted a novus actus interveniens, breaking the chain of causation before and after that advice.

37.  It was argued that accordingly the Solicitor should only be liable for the costs incurred prior to that date (which Sir John Swaine called Stage I) but not those incurred in opposing the application to set aside (which was called Stage II) or those incurred after the application to set aside was finally determined by the Court of Final Appeal’s refusal to grant leave to appeal including the costs incurred for the application for leave to amend the claim (which was called Stage III).   

Discussion

38.  With respect, I do not agree with that analysis.  It is clear that the “but for” test of factual causation does not of itself necessarily lead to liability and I do not think the judge made that the basis of his finding of liability.

39.  The issue is did counsel’s advice on time-bar in July 2000 break the chain of causation between the negligent act (the advice to start the action on the basis that it was not time-barred) and the damage (costs expended in that action)? 

Principles of novus actus interveniens

40.  It may be helpful to go back to first principles.  As the learned editors of Clerk & Lindsell on Torts put it, to break the chain of causation, the novus actus must constitute an event of such impact that it “obliterates” the wrongdoing of the defendant (§2-78).  There are two broad approaches - the causation approach and the fault (or foreseeability) approach (§2-79). 

41.  The causation approach asks whether the intervening act was reasonable in the circumstances (with the courts tending to ask if the intervening act was voluntary or was a forced response).  The less voluntary the act, or to put it the other way, the more forced the response, the more reasonable it was, and hence the less it eclipsed the defendant’s wrongdoing.

42.  The fault (or foreseeability) approach asks whether the intervening act was foreseeable.  The nature of the defendant’s duty is relevant because if the duty was to prevent the very intervention that occurred, he cannot complain that the intervention broke the causal link.   

43.  Whichever approach is applied to the present case, I take the view that the learned judge was clearly correct in finding that there was no break in the chain of causation.        

Client’s reasonable responses were forced by Solicitor’s negligent advice

44.  I deal first with the causation approach.  It must first be noted that this was a case where the Solicitor had given negligent advice to institute proceedings, not merely negligently provided information.  In Banque Bruxelles S.A. v Eagle Star Insurance Co Ltd (on appeal, South Australia Asset Management Corporation v York Montague and others) [1997] AC 191, Lord Hoffmann held (214 E-F):

“The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take.  If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action.  If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken.”      

45.  Having embarked on the proceedings due to the Solicitor’s negligent advice, the Client was forced to respond when Mr Chung took steps in those proceedings, first to set aside the default judgment (Stage II) and then to strike out the proceedings (Stage III).  Sir John Swaine referred to those steps as “satellite litigation”.  With respect, I do not think that label is appropriate. 

46.  When a litigant starts an action, it is for the purpose of obtaining judgment.  If default judgment is obtained, defending it becomes the very core of the litigation.  If the default judgment were set aside and the very existence of the action is then threatened by a strike-out application, then salvaging the viability of the action becomes vital.  I do not see how it can be said that these steps constituted satellite litigation in the sense suggested. 

47.  In my view, where the negligent act of a solicitor is the giving of advice leading to the instituting of proceedings, the defence of a default judgment obtained in those proceedings (Stage II) and the protection of the very existence of the action (Stage III) are responses most certainly forced upon the client by the negligent advice (assuming of course that those responses are reasonable).  Here it was the Solicitor’s negligent advice that placed the Client in that position and to adopt Lord Hoffmann’s words in Banque Bruxelles, the Client’s “reasonable attempt to cope with the consequences of the [Solicitor’s] breach of duty does not negative the causal connection between that breach of duty and the ultimate loss” (219A).   The costs involved in proffering those responses forced upon the Client were thus naturally causally related to the Solicitor’s advice to commence those proceedings and are damages directly and naturally flowing from his breach of duty.

48.  It is accepted on behalf of the Solicitor that it was reasonable for the Client to have taken the steps he did, first to defend the judgment and then to seek to amend the claim so as to resist the strike-out.  That is clearly correct. 

49.  In any event I do not see how it could lie in the Solicitor’s mouth to say that those steps were unreasonable when, despite being in a conflicted position, he remained the Client’s legal advisor throughout, advising him to take those steps (cf. Lloyds and Scottish Finance Ltd v Modern Cars and Caravans (Kingston) Ltd [1966] 1 QB 765, 783) and not advising him that there was an alternative option - that of conceding Mr Chung’s applications, discontinuing the proceedings and recovering the costs he (the Client) had expended in the litigation from the Solicitor himself.  Nor was there any evidence that the Solicitor cautioned the Client against incurring further costs in seeking to take the setting-aside application to the Court of Final Appeal.

50.  If the Solicitor had advised the Client that he had the alternative option of discontinuing the proceedings and recovering costs from himself, and the Client had nevertheless decided to proceed with the steps he took, then there may be an argument that the Client had failed to mitigate his loss.  But there was no advice from the Solicitor on the alternative option.  Therefore no question of true mitigation arises. 

51.  On the causation approach therefore, when the judge said that “Mr Li had to extricate himself from a difficult position that he had been placed in due to bad advice from HHL” (para. 64), he was clearly correct to hold that the Client was forced to respond because the Solicitor’s negligent advice had led him to institute proceedings which were being imperilled, and that it was reasonable for the Client to have sought to oppose Mr Chung’s application in the light of advice from counsel (Mr Remedios for Stage II - para. 63, and Mr K.M. Chong, Mr Maurellet and Mr Lawrence Ng for Stage III - para. 73).  For those reasons, the judge did not accept the argument of novus actus interveniens whether in respect of Stage II (para. 69) or Stage III (para. 72).  

Attempts to resist application to set aside default judgment and strike-out were reasonably foreseeable

52.  As for the fault (or foreseeability) approach, when proceedings are instituted outside the limitation period, then it must be reasonably foreseeable that there is a risk that the other party would come to court to set them aside - as Mr Chung did, albeit belatedly.  When that occurs, then it must also be reasonably foreseeable that the client would act on legal advice to resist his proceedings being set aside - as the Client did, albeit unsuccessfully.  The intervening acts in this case are therefore clearly reasonably foreseeable consequences once the proceedings were instituted on the Solicitor’s negligent advice.

53.  The Solicitor has not suggested that the Client’s attempts to defend his judgment and to resist the strike-out were irresponsible actions.  On the evidence, he could not do so.  As I have discussed previously, the Solicitor remained the Client’s legal adviser throughout and actively sought the advice of a number of counsel in an effort to make the proceedings viable.  In contrast, there is no evidence that he ever attempted to explain to the Client the pros and cons of the alternative option of laying down arms and looking to himself for recovery of wasted expenses. 

54.  To adopt the analogy the Client used at trial, it may be that the Client was a willing and enthusiastic passenger, but even as an intelligent layman, he was not qualified to navigate.  The Solicitor was throughout “the captain of the ship”, trying to reach a destination that was not reachable, but not advising the passenger of the option of returning to shore with his fare refunded.  When eventually Mr Jat informed the Client of that option in November 2002, he accepted it.

55.  In the circumstances, I agree with the learned judge that there was no break in the chain of causation, whether at Stage II or at Stage III.  I should add however that I cannot with respect agree with the judge when he held that the Solicitor’s failure to inform the Client of the futility of the proposed amendment was another instance of the Solicitor’s lack of care in advising the Client (para. 73).  In my view, that criticism was a little harsh of a solicitor when Mr Maurellet had advised (para. 23) that Order 20 rule 5(5) would not be an impediment to the proposed amendment and Mr Ng was (at least initially) of the same opinion.  But in any event, the Solicitor would have been liable for Stage III as there was no break in the chain of causation. 

Order

56.  For these reasons, I would dismiss the appeal with an order nisi that the costs of the appeal be paid by the Defendant (the Appellant) to the Plaintiff (the Respondent).

Hon. Suffiad J:

57.  I agree.