YAU CHIU WAH v. GOLD CHIEF INVESTMENT LTD & ANOTHER

HCA 807/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 807 OF 2001

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J U D G M E N T

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Background

1. The application before the court involves the Plaintiff and a firm of solicitors, Messrs D.S. Cheung & Co. ("DSC & Co."). The Plaintiff seeks an order that DSC & Co. do indemnify her in relation to all costs expended by her since 6 March 2001. The application is made under RHC Order 62 rule 8. I will deal with the exact ambit of this summons further below.

2. On 20 February 2001, the Writ in the present action was issued in which the Plaintiff made a claim against the 1st Defendant for the sum of $4.95 million (this being the outstanding balance of a loan made by the Plaintiff under a loan agreement dated 6 November 2000), together with interest and costs. The loan had been for $5 million for a period of three months, at the end of which the 1st Defendant was to repay the principal sum together with $750,000.00 as interest. The 1st Defendant had repaid only $800,000.00. The Plaintiff's claim against the 1st Defendant was also on the basis of a dishonoured cheque for $5.75 million (less the $800,000.00 that had been paid by the 1st Defendant). As against the 2nd Defendant, the Plaintiff's claim was on the basis of a guarantee also dated 6 November 2000 that had been provided by the 2nd Defendant to guarantee the 1st Defendant's obligations.

3. On 19 February 2001 (the day before the Writ was issued), the Plaintiff sought against the 1st Defendant and obtained from Waung J, a Mareva injunction on assets in Hong Kong up to the limit of $4.95 million. The particular assets that were identified in the Mareva injunctions were shares held by the 1st Defendant in a Hong Kong company called Prosper eVision Limited ("PeV"). PeV was a company set up by the 1st Defendant, together with the 2nd Defendant, to introduce into the Mainland interactive broadband TV. A part of Waung J's order read as follows:

"1. Restriction on Disposal of assets

...........

(2) If the total unencumbered value of the 1st Defendant's assets in Hong Kong exceeds HK$4,950,000, the 1st Defendant may remove any of those assets from Hong Kong or may dispose of or deal with them so long as the total unencumbered value of its assets still in Hong Kong remains above HK$4,950,000.

...........

2. Disclosure of information

(1) The Defendant must inform the Plaintiff in writing within 14 days from today of all its assets of an individual value of HK$4,950,000 or more in Hong Kong, whether in its own name or not, and whether solely or jointly owned, giving the value, location and details of all such assets. The 1st Defendant may be entitled to refuse to provide some or all of this information on the grounds that it may incriminate it.

(2) This information must be confirmed in an affidavit which must be served on the Plaintiff's solicitors within 14 days after this Order has been served on the Defendant." (Emphasis added)

4. It was also ordered by Waung J that as regards the amount that the 1st Defendant could spend on legal advice representation, this was to be limited to $100,000.00.

5. On 20 February 2001, the Plaintiff applied by summons to continue the Mareva injunction and for its part, on 22 February 2001, the 1st Defendant applied by summons to set aside Waung J's said order.

6. On 23 February 2001, on a normal summons day, Yeung J adjourned both summonses and discharged the 19 February 2001 order upon the 1st Defendant providing a number of undertakings including the discovery obligations earlier ordered by Waung J. No undertaking was, however, given in respect of paragraph 1(2) of the Order set out above.

7. By an affirmation dated 6 March 2001 made by one Yu Won Kong, Denis, a director of the 1st Defendant ("Mr Yu"), served in compliance with the discovery order made by Waung J, he gave the following details of the 1st Defendant's assets in Hong Kong (of an individual value of HK$4,950,000.00 or more):-

"Particulars
Details of Assets	Value (HK$)		Location
244,169,585 shares of Prosper eVision Limited (closing price was $0.159 per share as at 28 February 2001		38,822,964.01	3 million shares held with Sun Hung Kai Securities Investment Services Limited and share certificates of the remaining shares are kept in Beijing, PRC"

8. This affirmation was filed on the same day. It is the costs as from this date that the Plaintiff now seeks an indemnity from DSC & Co.

9. No hint was given that these 244,169,585 shares in PeV or any part thereof ("the Shares") were encumbered or had any value as at 28 February 2001 (using their closing price) other than the stated one of $38,822,964.01. This affirmation was filed by DSC & Co. on behalf of the 1st Defendant. The reference of DSC & Co. on the backsheet was given as "TT/DSC/P0055/B00164 LIT". "TT" refers to Ms Teresa Tsang ("Ms Tsang"), "DSC" refers to Mr Cheung Doi Shu ("Mr Cheung"), now the senior partner of DSC & Co. (then its sole proprietor).

10. On 20 April 2001, the two applications I have referred to in paragraph 5 above came before me (sitting as a Recorder) for determination. In the course of that hearing, I specifically asked Mr Austen Wither ("Mr Wither") who represented the 1st Defendant at that hearing, whether the Shares were encumbered. The relevance of this inquiry seemed at that time fairly obvious. For example, if the Shares had indeed been encumbered, it would then have been necessary to find out the true value of them and the likelihood of the encumbrance being discharged. If the Shares had little or no value (or a value less than the Plaintiff's claim), it would then have been necessary to look closely at the amount of expenses that the 1st Defendant should be allowed, not to mention the discovery order. As stated above, the 1st Defendant through Mr Yu had deposed to the fact that it held the Shares which were said to be worth some $38,822,964.01. However, by a letter dated 11 April 2001, the Plaintiff's solicitors specifically asked DSC & Co. whether the Shares were encumbered. This was in response to a letter from DSC & Co. dated 10 April 2001 in which the Plaintiff had been asked whether she would be willing to agree to the lifting of all restrictions on the amount that the 1st Defendant could spend on legal advice and representation (Waung J had placed a cap of $100,000.00 on this aspect, as mentioned above). There appears to have been no substantive reply to the question raised by the Plaintiff's solicitors in the 11 April 2001 letter.

11. By a judgment handed down on 15 May 2001 ("the 15 May 2001 Judgment"), I discharged the Mareva injunction granted by Waung J by reason of material non-disclosure on the Plaintiff's part, but granted a new injunction. Part of my reasons in dealing with the aspect of risk of dissipation, related to the Shares:-

"(5) Given the factors referred to above, the fact that the 1st defendant's assets are liquid become significant. In Mr Dennis Yu's second affirmation (served in compliance with the order for discovery made under the injunction granted by Waung J), he refers to the fact that the 1st defendant has 244,169,585 shares in PeV, of which 3 million are held at Sun Hung Kai Securities Investment Services Limited, with the share certificates for the balance being kept in Beijing. By a letter dated 11 April 2001 from the plaintiff's solicitors to the 1st defendant's solicitors, enquiries were made as to whether these shares were encumbered. I also asked this question of Mr Wither to which there was no answer. In my view, this is not satisfactory"

12. Following the 15 May 2001 Judgment, the Plaintiff applied by a summons dated 28 May 2001 for an order that the 1st Defendant state on oath whether the Shares were encumbered. In the affirmation in support of this summons, the Plaintiff's solicitor, Mr Victor Chan ("Mr Chan") pointed out the Plaintiff's concern over the diminishing value of the Shares since the time Mr Yu made his said affirmation dated 6 March 2001. It was stated by Mr Chan:-

"No doubt whether any of the Shares have been encumbered and if so, the extent to which they have been encumbered would affect the effectiveness of any Mareva injunction obtained herein as well as the further conduct of the proceedings herein by the Plaintiff. It must therefore be implicit in the Undertaking given to the Court by the 1st Defendant that the 1st Defendant must not only disclose the gross value of the Shares based on the open market price thereof but also disclose if any of the Shares have or have not been encumbered and if so, full particulars of those encumbrances including the extent to which they have been encumbered and the net value of the Shares after taking into account of the liability under those encumbrances, so as not to mislead the Court or the Plaintiff."

13. In his affirmation, Mr Chan also referred to a number of letters that had been sent by his firm to DSC & Co. enquiring about whether the Shares were encumbered:- see the said letter dated 11 April 2001 and the letters dated 24 April 2001, 27 April 2001, 4 May 2001, 16 May 2001 and 21 May 2001. In particular, in the letter dated 24 April 2001 from the Plaintiff's solicitors to DSC & Co., it was stated:-

"iii. This is most unsatisfactory as no doubt as whether the Shares were encumbered and if so, the extent to which they have been encumbered would be highly relevant not only to whether your client has fully and properly discharged its undertaking given to the Court on 23rd February 2001 but also the continuous prosecution of our client's claims herein including the continuation of the Order;"

14. On 12 June 2001, the matter came before me again in which the final form of the injunction which I had granted was in issue as well as the question of the costs of the 20 April 2001 hearing. In addition, the 1st Defendant (again represented by Mr Wither) sought an increase on the limit imposed in respect of legal advice and representation from $100,000.00 to $1,000,000.00. I granted this application despite resistance from the Plaintiff. In my judgment given that day ("the 12 June 2001 Judgment"), I said this:-

"(b) In relation to the amount that the 1st defendant should be permitted to spend on legal costs for the action, the figure which I allow for legal costs is $1 million. The 1st defendant must be allowed to defend the action properly. A Mareva injunction is not made to cause disruption. Its function is to freeze a party's assets in the face of a risk of dissipation. Expenditure on matters such as daily living expenses and legal costs will always be allowed where the amounts sought are reasonable. Mr Chan, for the plaintiff, submits that it is necessary to ascertain the totality of the 1st defendant's assets before such an allowance can be made. I disagree. Only where the amount sought is unreasonable or excessive, then perhaps it may be relevant to look at the totality of the plaintiff's assets. However, I am of the view that a figure of $1 million is neither excessive nor unreasonable."

15. On 13 June 2001, the day after I made the said order, a consent summons was filed in relation to the Plaintiff's 28 May 2001 summons (referred to in paragraph 12 above). A consent order was accordingly made by Mr Recorder Kenneth Kwok SC on 13 June 2001.

16. In compliance with the consent order, Mr Yu made an affirmation dated 15 June 2001 (filed only on 20 June 2001) in which it was revealed for the first time that 241,169,585 of the Shares had been encumbered under a loan agreement dated 8 January 2001 made between a Chinese company, Beijing Dong Hua Investment Company Limited, the 1st Defendant and China Convergent Corporation Limited (formerly the 2nd Defendant). Only 3 million shares in PeV were unencumbered and said to be worth only $549,000.00 as at 8 June 2001. This affirmation was filed by DSC & Co., again with the reference "TT/DSC/P0055/B00164 LIT".

17. This revelation (for the first time as far as the Plaintiff was concerned) provoked an accusation by the Plaintiff's solicitors that Mr Yu's earlier affirmation (dated 6 March 2001) had been misleading in deposing to the fact that the 1st Defendant had assets worth $38,822,964.01:- see the letter dated 29 June 2001 from the Plaintiff's solicitors to DSC & Co.

18. On 23 October 2001, the Plaintiff took out a summons seeking an order that Mr Yu be cross-examined on the two affirmations I have earlier identified. This application was heard by me on 8 January 2002 and I made an order that day acceding to the Plaintiff's summons. In my Reasons for Decision handed down on 22 January 2002 ("the 22 January 2002 Reasons for Decision"), I took the view that the picture presented by the 1st Defendant of its financial position was far from satisfactory. I was referring precisely to the fact that most of the Shares were encumbered and how this did not emerge until a late stage, despite constant inquiries from both Plaintiff and the court. See in particular:- paragraphs 22 to 26 of the 22 January 2002 Reasons for Decision. Further, I said this in relation to the increase of the amount for legal advice and representation from $100,000.00 to $1 million ordered by me on 12 June 2001:-

"(5) I would not have allowed the increase if I had known that the available assets of the plaintiff [clearly this should be a reference to the 1st Defendant] were non-existent. Indeed, it would have been pointless to increase the amount from $100,000 to indeed any figure if there were no assets freely available to the 1st defendant. No explanation has been given to me (and none was given when the 1st defendant served its affidavit evidence in response to the present summons) as to why an application was made for an increase in the allowance for legal fees when, apparently, the 1st defendant had no available assets. This gives rise, as the plaintiff submits, to an inference that there may be other assets which the 1st defendant has not disclosed. I see the force in these submissions."

19. By a consent order dated 14 May 2002 ("the Tomlin Order"), the Plaintiff settled the action with the 1st and 2nd Defendants but expressly without prejudice to the Plaintiff's right to seek an order for costs against DSC & Co.

20. At all material times, DSC & Co. was of course the 1st Defendant's solicitors and it continued in this capacity until 22 April 2002 when I gave an order giving leave to that firm to cease to act. The solicitors who handled the case on behalf of the 1st Defendant were Ms Tsang and Mr Wither. I shall deal presently with their involvement as well as that of Mr Cheung and a Mr Colin Hiles, the manager of the firm ("Mr Hiles").

The present summons

21. By a summons dated 13 September 2002, the Plaintiff originally sought an order that DSC & Co. should indemnify her in relation to all costs expanded by her since 6 March 2001 in relation to "(a) the continuation of the Order made by the Honourable Mr Justice Waung on 19 February 2001; (b) the investigation in the financial position of the 1st Defendant, to be taxed, if not agreed". The hearing of this summons was fixed for hearing before me on 20 November 2002. On that day, it was clear that both sides needed to clarify their position. I therefore gave directions allowing the Plaintiff leave to amend the summons and also gave leave to DSC & Co. to supplement its affidavit evidence.

22. The Plaintiff duly amended her summons on 26 November 2002 to make clear that the costs in respect of which the Plaintiff wanted DSC &Co. to indemnify her, were those in relation to the 20 April 2001, 12 June 2001, 8 January 2002 and 27 February 2002 hearings (as well as those of the consent summons made on13 June 2001). The only hearing I have so far not dealt with is the one that took place on 27 February 2002. This was a short hearing before me for an extension of time of 7 days to the 1st Defendant to file a further affirmation following the 8 January 2002 hearing.

23. Although costs orders were made in relation to these four hearings, the Tomlin Order expressly stated that as between the Plaintiff and the Defendants, it was agreed that the parties would bear their own costs in the action (therefore including the four hearings) but without prejudice to the Plaintiff seeking costs against DSC & Co. as the solicitors formerly acting for the 1st Defendant.

24. The substantive hearing of the amended summons took place before me on 25 March 2002. Mr C.Y. Li acted for the Plaintiff, Mr Paul Shieh for DSC & Co. Although oral submissions concluded that day, both parties have since lodged further written submissions (dated 1 April 2003 for the Plaintiff, dated 8 April 2003 for DSC & Co.) and are content that I resolve the matter without a further oral hearing.

25. Before identifying the various issues I have to decide in this application, I first deal with the relevant law.

Law

26. RHC Order 62 rule 8(1) states as follows:-

"Personal liability of solicitor for costs

8. - (1) Subject to the following provisions of this rule, where in any proceedings costs are incurred improperly or without reasonable cause or are wasted by undue delay or by any other misconduct or default, the Court may make against any solicitor whom it considers to be responsible whether personally or through a servant or agent an order-

(a) disallowing the costs as between the solicitor and his client; and

(b) directing the solicitor to repay to his client costs which the client has been ordered to pay to other parties to the proceedings; or

(c) directing the solicitor personally to indemnify such other parties against costs payable by them."

27. Although the Plaintiff's amended summons does not state the precise basis for the application, I am in the present case concerned with the question whether costs (incurred by the Plaintiff) have been wasted by the misconduct or default of DSC & Co. This is by far the most usual form that an application under Order 62 rule 8 takes.

28. The authorities on the court's general approach in such applications are numerous. The usual starting point is to refer to K.B. Chau & Co. (a Firm) v China Finance Trust and Investment Corporation [1995] 2 HKLR 567 applying the well-known case of Myers v Elman [1940] AC 282; see also Hong Kong Civil Procedure 2002 Vol. 1 at paragraphs 62/8/1 to 62/8/8.

29. It is unnecessary for me to repeat the general principles that guide the court in such applications. They are to be found in the above authorities. Nevertheless, I wish to emphasise some aspects of this jurisdiction which are relevant in the present application.

30. First, in examining a solicitor's conduct, one must have regard not only to his role as the legal representative of his client but also to his position as an officer of the court. A solicitor's obligation here is that while he is expected to act in the best interests of his client, he must not overstep the mark by undermining or in any way obstructing the administration of justice by the courts. The discharge of a solicitor's duties towards his client must not cause him to be in breach of his duties to the court:- cf. Arthur J.S Hall & Co. v Simons [2002] 1 AC 615.

31. The duty owed to the court is expressly referred to in the Legal Practitioners Ordinance Cap 159. Section 3(2) states that every solicitor shall be an officer of the court and is subject to its jurisdiction. Rule 2(f) of the Solicitors Practice Rules under that Ordinance states that a solicitor should not do or permit to be done on his behalf anything which compromises or impairs or is likely to compromise or impair his duty to the court.

32. The duty owed to the court means that a solicitor, like a barrister, has a critical role to play in the administration of justice. As Sir Thomas Bingham MR said in Ridehalgh v Horsefield [1994] Ch. 205 at 227 C-D, "The court's jurisdiction to make a wasted costs order against a solicitor is founded on breach of the duty owed by the solicitor to the court to perform his duty as an officer of the court in promoting within his own sphere the cause of justice". This passage was cited with approval by the Court of Appeal in K.B. Chau & Co. at 573. In litigation, the courts rely on solicitors to facilitate their arriving at a just result in any given dispute. As I have said above, a solicitor must not do anything to undermine or in any way obstruct the administration of justice. Obviously, he must not do anything to mislead or deceive the court. Courts have to rely on the integrity and honesty of solicitors. In addition, a solicitor must not use his position to obtain an unfair advantage for his client. One often hears a reference to litigation "tactics" but this must not be misunderstood. While everyone would accept that a solicitor should act at all times in the best interests of his client, he must also be scrupulously fair to the other side. He must not mislead, deceive or otherwise act unfairly, for litigation in the courts is a serious legal contest, not a game.

33. The present case concerns one of the most important aspects of the administration of justice: discovery. Much has been said and written about how discovery has got out of hand in modern litigation. Whatever its excesses, the basic principle is the notion that justice is served by the parties revealing all relevant factual matters and documents within their possession, custody and power. In the Mareva injunction context, as in the present case, discovery orders are frequently made ordering a party to disclose the extent of his assets.

34. A solicitor's duty in relation to discovery is to ensure that his client properly complies with his obligations in this context. The duty is not limited merely to preventing the client filing an affidavit which, to his knowledge, is false. The solicitor must actually explain to his client the extent of his obligations in relation to discovery and take reasonable steps to ensure that this obligation is fulfilled:- see Myers v Elman at 304 and 322. As Megarry J said in Rockwell Machine Tool Company Limited v EP Barrus (Concessionaires) Limited [1968] 1 WLR 693, at 694, "Many litigants (and not least corporate litigants) have little appreciation of the scope of discovery, and the duty of making full disclosure".

35. In relation to an order for disclosure of assets under a Mareva injunction order, a solicitor has the responsibility to ensure that the party for whom he acts makes proper discovery:- see Gee: Mareva Injunctions and Anton Piller Relief (4th Edition) at 134.

36. Secondly, the exercise of the court's jurisdiction to order a solicitor to pay costs personally under Order 62 rule 8 does not depend on dishonesty, personal obliquity or behaviour such as would warrant disciplinary action being taken. While mere mistake or error of judgment may not necessarily be enough, misconduct, default or even negligence will be if this is serious or worse still, gross. See here:- Myers v Elman at 319, Ridehalgh at 227 and K.B. Chau & Co. at 573 and 577.

37. Thirdly, I wish to highlight an unusual feature that sometimes occurs in proceedings under Order 62 rule 8. Normally, in any hearing before the court, one expects that all available evidence within the powers of the parties to adduce, is in fact produced. The consequence of this is that where a party does not produce evidence he is expected to adduce, this omission can give rise to adverse inferences being drawn against him. However, in Order 62 rule 8 cases, it sometimes occurs that the solicitor who is the subject matter of the application is handicapped in presenting his case by his client (or former client) refusing to waive privilege, thereby effectively preventing the solicitor from presenting the full picture to the court.

38. In Ridehalgh, Sir Thomas Bingham MR recognised the problem and said this at 237:-

"The respondent lawyers are in a different position. The privilege is not theirs to waive. In the usual case where a waiver would not benefit their client they will be slow to advise the client to waive his privilege, and they may well feel bound to advise that the client should take independent advice before doing so. The client may be unwilling to do that, and may be unwilling to waive if he does. So the respondent lawyers may find themselves at a grave disadvantage in defending their conduct of proceedings, unable to reveal what advice and warnings they gave, what instructions they received. In some cases this potential source of injustice may be mitigated by reference to the taxing master, where different rules apply, but only in a small minority of cases can this procedure be appropriate. Judges who are invited to make or contemplate making a wasted costs order must make full allowance for the inability of respondent lawyers to tell the whole story. Where there is room for doubt, the respondent lawyers are entitled to the benefit of it. It is again only when, with all allowances made, a lawyer's conduct of proceedings is quite plainly unjustifiable that it can be appropriate to make a wasted costs order."

39. I emphasise the last part of this quoted passage. A court must make full allowance for any inability on the solicitor's part to tell the whole story. Where there is room for doubt, the solicitor is entitled to the benefit of it. Only when it can be seen that, even with the allowances made for the client or former client refusing to waive privilege, a solicitor's conduct is plainly unjustified would it then be appropriate to make a wasted costs order.

40. This poses a real problem in practice. Where it is the client who makes an application against his own solicitor under Order 62 rule 8, it would appear that there will be implied a waiver of all relevant privileged matters:- see Medcalf v Mardell [2002] 3 WLR 172, at 187 (paragraph 31) referring to Lillicrap v Nalder & Son [1993] 1 WLR at 94. Where, however, as in the present case, it is the other side in the proceedings who makes the Order 62 rule 8 application against the solicitor, that solicitor's client may have no wish or incentive to become involved in this aspect of the proceedings. Quite apart from anything else, the client may not wish to spend time or money seeking advice in relation to such an application and where the litigation has in fact come to an end, the incentive to become involved again becomes even further lessened. The solicitor is then left with a refusal on the part of the client to waive privilege. In Medcalf v Mardell, again at 187 (paragraph 31), Lord Steyn referred to this situation as a "systemic problem".

41. In the same case, Lord Bingham of Cornhill referred to and approved that part of his judgment in Ridehalgh (set out in paragraph 38 above), but (in paragraph 23 at 184-5 of his speech) made various points which I can summarise as follows:-

(1) Where a solicitor facing an application for a wasted costs order is unable to give a full account of events by reason of privileged material (and the client does not waive privilege) the court must proceed very carefully. As he says at 184, "Speculation is one thing, the drawing of inferences sufficiently strong to support orders potentially very damaging to the practitioner concerned is another".

(2) It is perhaps only on rare occasions that a court will, even after making full allowance for the handicap the solicitor finds himself in, conclude there is no room for doubt in holding that the solicitor has been at fault. The reason for this is that a court must necessarily proceed with the utmost caution where it does not have the full facts before it.

(3) Where a solicitor's professional reputation is at risk of being tarnished (an inevitable consequence of an order under Order 62 rule 8), the court must be fair to him in the light of the handicap on privileged material l have referred to.

(4) Lord Bingham of Cornhill summarises the position in this way at 185, "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 that the practitioner could say, if unconstrained, to resist the order and (b) that it is in all the circumstances fair to make the order".

42. The existence of privileged material (for which no waiver is given by the client) does not by itself operate as an absolute bar to a wasted costs order under Order 62 rule 8. It is but one, albeit important, part of the court's approach to such applications. Once the benefit of the doubt is given to the solicitor concerned, any element of unfairness is removed and should a wasted cost order still be made in the circumstances, the solicitor has no cause to complain:- see Medcalf at 194-195 at paragraphs 61-2 per Lord Hobhouse of Woodborough.

43. But what is meant by privileged material in the context of solicitor-client communications? Generally, almost anything exchanged in confidence between the solicitor and his client is privileged, providing the solicitor is acting in his professional capacity. In other words, any confidential communications to or from a solicitor in connection with the professional capacity in which a solicitor is engaged (i.e. giving legal advice) will generally be privileged. Here, I would refer to the useful commentary on the subject in Hong Kong Civil Procedure 2002 Vol. 1 at paragraph 24/5/8 and to the decision of the English Court of Appeal in Balabel v Air India [1988] Ch. 317.

44. Not only are the contents of the communications themselves privileged, I believe also any fact which may directly or indirectly reveal the contents of privileged matters or which may by a process of inference lead to such revelation, is also privileged:- see Passmore: Privilege at 247-8 referring to Gardner v Irwin [1878] 4 Ex D 49, at 53 and Derby v Weldon (No. 7) [1990] 1 WLR 1156. For convenience, I shall call these facts "peripheral facts". Thus, relevant dates of communications between solicitor and client may be held to be privileged if by their being disclosed to the other side, this may lead to the revelation of privileged matters. An example of this is where a party is asked when he consulted lawyers in the context of the happening of an event (such as the termination of a contract). By finding out the date of communications with the lawyer, the other side might then be able to piece together the contents of legal advice given in relation to that event.

45. Whether or not such peripheral facts are privileged will vary from case to case depending on the relevant circumstances. In Pang Yiu Chung v Commissioner of Police [2002] 4 HKC 579, Hartmann J held that the fact of monies being paid to a solicitor was not privileged. The crucial aspect was that such payments were not covered by legal professional privilege as they were "unconnected to advice given or sought":- see paragraph 34 of his judgment at 593. Where the relevant fact or document (of which disclosure is sought) is not connected with legal advice given or sought, it is not privileged:- see Conlon v Conlons Limited [1952] 2 All ER 462, at 466; R v Manchester Crown Court ex parte Rogers [1999] 1 WLR 832, at 839. It follows that where any fact or document (peripheral or otherwise) is connected with legal advice given or sought, it will be privileged. None of the authorities cited by Mr Li says otherwise and indeed it would be surprising if they did. There was a vague attempt to submit that where an "objective fact" was involved (by which was presumably meant facts rather than opinions or advices and this term therefore includes dates, etc), privilege could not attach. This is simply not so. The test is, as I have stated, whether the fact or document is connected to legal advice sought or given.

46. Fourthly, I wish finally to emphasise that in Order 62 rule 8 applications, it is not enough for the applicant merely to show misconduct or default. The applicant must also demonstrate a causal connection between the misconduct or default and the costs which are said to have been wasted:- see Ridehalgh at 237.

47. With these principles in mind, I now turn to the complaints made by the Plaintiff in this application.

Was DSC & Co. guilty of misconduct or default?

48. Mr Li submitted before me that DSC & Co. has been in dereliction of duty and there was misconduct on its part. The relevant factual background to the Plaintiff's application has already been set out above. Of the background, the most crucial fact is that it was not until the 15 June 2001 affirmation of Mr Yu that it was revealed for the first time (and some 4 months after the discovery order under the Mareva injunction was first made) that the Shares were encumbered.

49. The Plaintiff puts her case against DSC & Co. in a number of ways. These have changed in emphasis over the course of the hearings and in the latest written submissions provided on her behalf. Essentially, the Plaintiff submits as follows:-

(1) DSC & Co., whether through Mr Cheung himself, Mr Hiles, Mr Wither or Ms Tsang, actually knew or ought to have known that the Shares were encumbered and therefore somehow deliberately assisted the 1st Defendant in keeping this information from the Plaintiff and the court. The material period of time under consideration here is from February 2001 (when the Writ was issued and the Mareva injunction first obtained and discovery ordered) to 15 June 2001 when it finally came to light that a vast proportion of the Shares was encumbered.

(2) Alternatively, DSC & Co. (through the same people referred to above), if it did not possess the knowledge as stated above, nevertheless failed to discharge the duty on it as solicitors to advise properly or impress upon the 1st Defendant in the strongest possible terms as to the impact and effect of the discovery obligations contained in the Mareva injunction that was granted and continued. The result of this failure was that the 1st Defendant was allowed to make an affirmation (the affirmation of Mr Yu dated 6 March 2001) that was misleading in not stating that the Shares were encumbered. Both the Plaintiff and the court were accordingly misled as to the true picture and it was not until 15 June 2001 when the true facts were revealed.

50. Before dealing with each of these submissions, I would just like to add the following points in relation to the way I have approached the present application:-

(1) DSC & Co. will be responsible if it is shown that any of its solicitors has been guilty of misconduct or default at the relevant time. Mr Cheung, who was the sole proprietor of DSC & Co. for a large part of the relevant period, accepts responsibility for any misconduct or default on the part of those in his employment at the relevant time.

(2) A Mareva injunction is a remedy that is granted only in exceptional cases. It has been commonly referred to as one of the law's "nuclear weapons":- see Bank Mellat v Nikpour [1982] FSR 87, at 92. However, given that its function is to prevent the injustice of a defendant dissipating his assets before judgment, once granted, it will contain all necessary features to ensure that it operates effectively. As I remarked in the 22 January 2002 Reasons for Decision, Mareva injunctions are exceptional orders "but once granted, they must be made effective and practical":- see [2002] 2 HKLRD 832, at 840 (paragraph 16). A discovery order requiring a party to disclose assets is one of the more common features of a Mareva injunction. Its importance is easily seen. The identification of assets enables sufficient protection to be given to a plaintiff whether by the "freezing" effect of a Mareva injunction itself or by notification to relevant third parties. Furthermore, the value of disclosed assets is also an important aspect, again for the same reasons. In my view, there can be no doubt that in the case of any asset that is ordered to be disclosed as part of a Mareva injunction order, it is important also to divulge whether or not the asset is encumbered. The extent of an encumbrance is of course relevant to the value of the asset.

51. I now deal with the Plaintiff's submissions.

52. As far as Mr Cheung and Mr Hiles are concerned, I have little hesitation in rejecting the Plaintiff's submissions in relation to them.

53. Mr Cheung

(1) The case made against Mr Cheung was that not only was he the sole proprietor (later senior partner) of DSC & Co. during the time the Mareva injunction was in force, he had also at one stage been a director of the 1st Defendant (between 7 December 2001 and 20 March 2002) and also the chief executive officer and a director of the 2nd Defendant (between 21 November 2000 and 1 February 2002). The 1st Defendant was a subsidiary of the 2nd Defendant. Mr Cheung also remains to this day the managing director of PeV. PeV is a subsidiary of the 1st Defendant. Thus, it is said that he knew or must have known about the Shares being encumbered. It will be recalled that the vast proportion of the Shares were encumbered as a result of the loan agreement dated 8 January 2001 made between Beijing Dong Hua Investment Company Limited, the 1st Defendant and the 2nd Defendant.

(2) The Plaintiff makes a further point against Mr Cheung. It is said that as Mr Cheung's initials appeared in the reference given in the backsheet of Mr Yu's 6 March 2001 affirmation and also in various letters emanating from DSC & Co. dealing with the Mareva injunction, so it must follow that Mr Cheung must have knowingly permitted Mr Yu to make a misleading affirmation.

(3) Mr Cheung has made two affirmations. He deposes to the fact that he was not involved in the said loan agreement dated 8 January 2001 and only came to know about it (though not specific details) until later. He also states that given his position within the 1st Defendant, the 2nd Defendant and PeV, he left the running of DSC & Co. to others. As far as litigation was concerned, he left this to Mr Wither. The conduct of the present proceedings was left to others, although (as one might expect) Mr Cheung was informed at least on one occasion by Mr Wither in relation to what happened at the 23 February 2001 hearing. Administrative matters of the firm were left to Mr Hiles. These steps were taken pursuant to Rule 2.05 of the Hong Kong Solicitors Rules of Professional Conduct. Moreover, so as to avoid any conflict of interest on the company side, he left it to others within the companies to make the relevant decisions on legal representation and other matters in the present action. The instructions to DSC & Co. in the present proceedings were given by Mr Yu and one Mr Eddy Lo ("Mr Lo"), then the Chief Financial Officer of the 2nd Defendant and PeV.

(4) Mr Cheung's explanation for the presence of his initials in the references given in the backsheet to Mr Yu's affirmation and in the correspondence, is that he was the sole proprietor of the firm at the time even though he had no personal involvement in the Mareva injunction proceedings. When DSC & Co. became a partnership in December 2001, it became no longer necessary to refer to Mr Cheung and the correspondence thereafter shows this to be so.

(5) Based on the material before me, I am not satisfied that a case on actual, presumed or any other form of constructive knowledge has been made out by the Plaintiff against Mr Cheung. He appears not have known at the material time there was an encumbrance on the Shares. Nor has it been shown that he was aware either of the progress of the Mareva injunction proceedings or the inter-solicitor correspondence dealing with the particular aspect of encumbrances on the Shares. He left the running of the litigation to others. His version of events has not been challenged in cross-examination, the Plaintiff not having sought an order to this effect. It is said it was "inconceivable", "incredible" or "unbelievable" that Mr Cheung did not know of the encumbrance on the Shares. This is pure speculation. If anything, the facts show otherwise.

(6) Given Mr Cheung's lack of involvement in relation to the Mareva injunction proceedings, he personally would not have had the obligation to advise in relation to the proceedings and specifically on the aspect of discovery. I accept that Mr Cheung was the sole proprietor of the firm but I equally accept he was entitled to delegate the handling of the litigation to others. Indeed, given his relationship with the two Defendants and PeV, it is right that he did not have any professional involvement in the Mareva injunction proceedings.

54. Mr Hiles

(1) In relation to Mr Hiles, the Plaintiff contends that as he was the deputy chairman and a director of the 2nd Defendant (between 15 December 2000 and 10 January 2002), as well as the administrative manager of DSC & Co., he therefore must have been aware of the said loan agreement and must also have been involved in the Mareva injunction proceedings. Much play is made of the fact that Mr Hiles has not come forward to give his version of events.

(2) However, I am of the view that again, the Plaintiff has failed to demonstrate that degree of knowledge on Mr Hiles' part of relevant matters (or indeed any knowledge). There is no evidence (nor even an assertion) to suggest that Mr Hiles had any involvement in either the loan agreement or the Mareva injunction proceedings. In fact, Mr Cheung in his second affirmation states that Mr Hiles had no management role in the 2nd Defendant nor had any role in the Mareva injunction proceedings. Again, there was no challenge to this by way of an application to cross-examine Mr Cheung.

(3) Similarly, as in the case of Mr Cheung, since Mr Hiles was not involved in the handling of the litigation and the Mareva proceedings, he did not have any duties to advise. The Plaintiff's alternative submission therefore also fails in relation to Mr Hiles.

55. I now turn to the case-handlers within DSC & Co. who were actively involved in the Mareva injunction proceedings. They were of course Mr Wither and Ms Tsang. The case against them seems prima facie to be at least sustainable and I confess initially upon reading the papers to have been of the view that their conduct of the Mareva injunction proceedings on behalf of the 1st Defendant left much to be desired. In this context, the following facts and matters are of note:-

(1) As solicitors in charge of the Mareva injunction proceedings, Mr Wither (who seems to have largely taken on an advocate's role) and Ms Tsang (who was the actual solicitor having the day-to-day care of the proceedings), must have appreciated the duty that was incumbent on them in relation to discovery (see paragraphs 33 to 35 above). In my view, a solicitor when advising a client who has been ordered to make discovery of assets under a Mareva injunction order, must make it clear to the client that not only must there be full and proper disclosure, there must also be frank disclosure. This will mean that where the value of any asset may be qualified or affected by any matter that is not obviously apparent, this must also be disclosed. The existence of an encumbrance is precisely such a matter which ought to be revealed. Otherwise, a discovery order made pursuant to a Mareva injunction becomes less effective and may even be seriously undermined. It will be recalled that paragraph 1(2) of the Mareva injunction granted by Waung J on 19 February 2001 actually uses the word "unencumbered" (see paragraph 3 above).

(2) In the present case, there is the added feature that in the correspondence with the Plaintiff's solicitors, it must have been apparent to the case-handlers at DSC & Co. that the issue of whether any part of the Shares was encumbered, was a matter about which the Plaintiff was very concerned. I have already referred in paragraph 10 above to the said letter dated 11 April 2001 from the Plaintiff's solicitors to DSC & Co. when it appears this question was first raised.

(3) Further, the question of whether the Shares were encumbered was specifically raised by me at the 24 April 2001 hearing, to which the answer given by Mr Wither was that he did not know. Ms Tsang was with him at the time and she told Mr Wither she did not know the answer either.

(4) In fact, as the person in day-to-day charge of the litigation, Ms Tsang clearly knew the importance of the question of whether the Shares were encumbered. She was responsible for the preparation of all court documents in relation to the Mareva injunction proceedings. There is a draft affirmation of Mr Yu in connection with the discovery order in which underneath the reference to the Shares, someone (no doubt Ms Tsang) has written "disclose how many are pledged if any". This draft affirmation led to the 6 March 2001 affirmation of Mr Yu in which the reference to the Shares and the stated value of $38,822,964.01 was unqualified.

(5) The question whether the Shares were encumbered was also relevant to the 12 June 2001 hearing when Mr Wither on behalf of the 1st Defendant sought an increase in the limit of spending for legal advice and representation from $100,000.00 to $1,000,000.00. I have already referred to the judgment I gave that day and what I had to say about this aspect in the 22 January 2002 Reasons for Decision (see paragraph 18 above).

56. With the above matters in mind, the following questions (among others) in relation to DSC & Co.'s handling of the case then arise:-

(1) Given that the importance of the question whether the Shares were encumbered was known at least to Ms Tsang, why did it take until Mr Yu's affirmation dated 15 June 2001 (as I have said, some 4 months after the discovery order in the Mareva injunction was first made) for the encumbrance to be revealed?

(2) Why was no reference made to any encumbrance in the affirmation of Mr Yu dated 6 March 2001 (especially as the relevant loan agreement was dated 8 January 2001)?

(3) Why was a non-committal answer given to the court at the 20 April 2001 hearing and why was the matter not brought up or clarified by DSC & Co. at the 12 June 2001 hearing (when the question of whether the Shares were encumbered was of relevance to the application for variation made by the 1st Defendant)?

57. In my judgment, however, these and other questions that arise in relation to the conduct of the Mareva injunction proceedings by DSC & Co. (and in particular by Mr Wither and Ms Tsang) can only really be answered or at least put in a proper and fair perspective if DSC & Co. were free to disclose the full extent communications to and from its client, the 1st Defendant. It is clear that DSC & Co. is not free to disclose its communications with the 1st Defendant, except to a very limited extent. By a letter dated 4 November 2002, Messrs Herbert Smith (DSC & Co.'s solicitors in the present application) sought the 1st Defendant's consent to disclose documents and information relevant to the defence of the present application but which were privileged. In a fax dated 6 November 2002 from Herbert Smith to the 1st Defendant, copies of privileged documents for which consent was sought to disclose, were enclosed. Full consent, however, was not forthcoming. By a letter dated 7 November 2002, the 1st Defendant only gave limited consent to some of the documents. These documents have been exhibited in the affirmations before the court. By a letter dated 20 November 2002, Herbert Smith repeated the request to the 1st Defendant that a waiver be given in relation to all documents and information concerning the litigation from 19 February 2001 to 22 April 2002 (when DSC & Co. ceased to act for the 1st Defendant). By a letter dated 5 December 2002 in reply, the 1st Defendant declined beyond the limited consent given in its 7 November 2002 letter. As a result of the lack of general consent, DSC & Co. has been unable to produce all the material it would otherwise have wanted to present to the court. Mr Cheung in his second affirmation refers to a statement that had been provided by Ms Tsang for the purposes of the present application but this statement has not been produced owing to the refusal on the 1st Defendant's part to waive privilege.

58. I now give some instances of where the refusal to waive privilege assumes considerable importance in the present application (there are no doubt others):-

(1) A basic question arises as to when DSC & Co. first knew that the Shares were encumbered. Obviously, at some stage, the firm must have known for sure about this since it no doubt prepared and filed the said affirmation of Mr Yu dated 15 June 2001. Mr Li submits that the answer to this question cannot be privileged and that therefore this is the complete answer that effectively destroys DSC & Co.'s position in this application. I am not persuaded that this is correct at all. First, for DSC & Co. to reveal when it knew for sure that the Share were encumbered, must mean the disclosure of communications (whether written or oral) to and from its client to members of the firm. All this would evidently have been in the course of the giving and obtaining of legal advice. Secondly, it is likely that the question of whether the Shares were encumbered was an ongoing one and would involve many solicitor-client communications. I say this is likely because the question of whether any property is encumbered includes not only an analysis of the nature of the encumbrance itself but also enquiries as to how far the encumbrance bites into the asset. For example, if the encumbrance is a charge or a pledge, there would have to be enquiries made as to the extent to which any underlying indebtedness has been discharged or even to the existence of other securities. All these enquiries would be directed to the ultimate question which is to ascertain the value of the asset concerned. There is some hint that there must have been ongoing discussions between DSC & Co. and the 1st Defendant over the status of the Shares. I have already referred to the draft affirmation of Mr Yu in which an enquiry was made (probably by Ms Tsang) as to whether the Shares were pledged (see paragraph 55(4) above). Since Mr Yu's affirmation dated 6 March 2001 made no reference to any pledge, it can be inferred that there must have been some communications with the solicitors in the meantime. Added to this is the fact that when I asked Mr Wither at the 20 April 2001 hearing whether the Shares were encumbered, the response from him and Ms Tsang was that they did not know. This is suggestive of ongoing communications. Mr Li hinted at the responses being deliberately misleading. I am not prepared on the existing material and in the absence of any cross-examination to make a finding to that effect at all. Thirdly, if communications between DSC & Co. and the 1st Defendant as to the question of encumbrances on the Shares or the dates of such communications were to be divulged, this may also likely lead to a reasonable guess at the sort of legal advice that the 1st Defendant was receiving from DSC & Co. at the time and that (for the reasons stated in paragraphs 43 to 45 above) cannot be disclosed without a waiver of privilege.

(2) Mr Li rightly focuses on the importance of the following events: Mr Yu's affirmation dated 6 March 2001 (which did not hint that the Shares being encumbered), the 20 April hearing (when no answer was given to my question about the Shares) and the 12 June 2001 hearing (when an increase in the allowance for legal representation and advice was sought by the 1st Defendant). He submits that an explanation is required for DSC & Co.'s conduct. I would agree with this. However, in my view, Mr Shieh is right when he says that DSC & Co. cannot give a proper explanation without divulging privileged matters for which no consent to disclose has been given. The documents in respect of which consent has been given by the 1st Defendant to be revealed, provide at best an incomplete picture. In relation to the 6 March 2001 affirmation of Mr Yu, Mr Cheung says this in his second affirmation:-

"I verily believe that I am precluded by the terms of Gold Chief's partial waiver of privilege contained in its letter, being page 1 of exhibit 'DSC-6',from giving Teresa Tsang's explanation from her statement as to why the reference to any pledge of the shares contained in the (first) draft affirmation was deleted and on whose instructions this was done."

59. Out of completeness, I should also mention in this context that in an affirmation made for the purpose of DSC & Co.'s application to cease to act for the 1st Defendant (the affirmation of Wong Chi Yuen dated 11 April 2002), it is stated that when Mr Wong made enquiries of Mr Yu and Mr Lo of the 1st Defendant in relation to the issue of the Shares being encumbered, he was told that both Mr Wither and Ms Tsang had already been informed at an earlier stage that the Shares were in fact encumbered. It was further asserted by the 1st Defendant to Mr Wong that Ms Tsang then allegedly advised that it was unnecessary to disclose this fact in Mr Yu's affirmation dated 6 March 2001. This version has obviously been denied and in the absence of any further evidence or cross-examination, I am not prepared to attach any weight to these allegations made by the 1st Defendant.

60. In the circumstances, I am of the view there is simply insufficient material to enable me confidently, properly or fairly to accede to the Plaintiff's submissions in this application. I wondered at one stage whether, given the lapse of time between the granting of the Mareva injunction and the time when it was finally revealed by the 1st Defendant that the Shares were encumbered, at least some criticism could be made of DSC & Co. that they adopted a rather leisurely attitude to what was a serious matter. On reviewing the evidence (or lack of it) and the circumstances, I am unable even to make that criticism.

61. For the above reasons, I am of the view it has not been shown that DSC &Co. was guilty of misconduct or default.

Causation

62. It is unnecessary to deal with this aspect given my conclusions on the previous issue. The Plaintiff's main contention here was that had she known about the Shares being encumbered, serious thought would have been given to abandoning the whole action or at least the Mareva injunction proceedings. Mr Shieh submits convincingly that the conduct of the Plaintiff even after it was disclosed that the Shares were encumbered, demonstrates that the Plaintiff would have carried on nevertheless with the litigation and the Mareva injunction proceedings. He also submits that the 20 April 2001 and 12 June 2001 hearings were not directly involved as such with the issue whether the Shares were encumbered. The contention was that the hearings would have had to take place anyway.

63. I hope I will be forgiven if I do not deal with these submissions on causation. It seems to me that without a concrete finding as to how exactly DSC & Co. may have been guilty of misconduct or default, there is simply no starting point in relation to causation. One can, I suppose, try to deal with each possible situation of misconduct or default (not that one can necessarily be exhaustive anyway) but this seems rather pointless.

Outcome

64. I therefore dismiss the Plaintiff's application.

65. As to costs, I would make an order nisi that each side bears its own costs. It seems to me that where a large and critical part of the evidence is missing owing to privilege not having been waived and that this evidence, if revealed, may or may not have enured to the benefit of the solicitor involved, this is the right order. Of course, where it can be shown that the application was misguided in the first place or somehow unreasonably taken out or continued, this may be different. However, while fully accepting I have not heard the parties as to costs, it does not seem to me in the circumstances that the Plaintiff has taken out either a misguided or misconceived application nor that she has acted unreasonably in doing so or continuing it. This order for costs will also apply to all reserved costs.