YEUNG YEUK SUT v. TSE CHUN YIP AND OTHERS

HCA 682/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 682 OF 2006

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D E C I S I O N

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1. Pending sealing of the allocatur, the Paying Party applies to vary the taxed profit costs on the ground that (1) there were contingency fee arrangements; and (2) breach of the indemnity principle, by the Receiving Parties.  The parties agreed that no affirmation evidence would be filed and were content for me to resolve those 2 issues on a bundle of correspondence and submissions.

Background

2. The Receiving Parties and their solicitors (“CMKI”) entered into an agreement for fees as embodied in a letter dated 10 April 2006 (“the Retainer”).  It was an agreement for fees to be charged on time basis at the rates specified therein.  Those rates have been adhered to in the bill for taxation (“the Taxation Bill”).

3. Below is a short chronology of the relevant events:

28.08.2008	Trial adjourned part-heard after 6 days.
09.12.2008	Resumed hearing.
10.12.2008	Deputy Judge Carlson ordered the Plaintiff’s claim to be struck out on the ground of abuse of process.  He ordered costs of the action be to D1 and 4 on indemnity basis to be taxed if not agreed.
23.04.2009	Bill for taxation (“the Taxation Bill”) filed. A total $1,805,925 was claimed, of which $1,071,074was for profit costs.
24.08.2009	Paper taxation done and parties were informed of the outcome.
06.10.2009	Oral taxation at the request of the Paying Party. Paying Party requested for and Receiving Parties consented to provide their office bill before the allocatur was sealed.  I gave a direction (“the Direction”) accordingly.
07.10.2009	LCD for the Receiving Parties wrote to seek confirmation of the Paying Party as to the amount of costs allowed on taxation: total of $1,373,937, of which $791,998 were profit costs.  The Paying Party faxed back asking for production of the office bills to prove the Receiving Parties’ legal costs.
19.11.20009	CMKI wrote to the Paying Party’s solicitors stating that all communications between CMKI and their own clients were legally privileged and strictly confidential.  They were not aware of the Direction unless the Paying Party could produce to them any sealed order as such.
01.12.2009	Sealing of an order containing the Direction.
02.12.2009	CMKI served a copy of their office bill dated 2 November 2009 (“the Office Bill”) to the Paying Party pursuant to the sealed order.  The client was charged a total of $1,597,845, of which $791,000 were profit costs.
11.12.2009	CMKI served a revised office bill also dated 2 November 2009 (“the Revised Bill”).  It showed the same amount of costs and disbursements charged to the client but with additional remarks.  (See below.)
16.12.2009	Letter from CMKI to the Receiving Parties to confirm various matters (“the Confirmation Letter”)..
18.12.2009	Receiving Parties signed the Confirmation Letter. (See below.)
21.12.2009	Hearing before me to vary the taxed costs.

4. The Office Bill effectively broke up the total costs charged into 2 major periods (collectively “the 2 Periods”):

(i)  The 1^st Period was from March 2006 to August 2008 (2 years and 5 months) from commencement of the action up to about the time when it was adjourned part-heard.  A total of 112.75 hours was charged under 5 defined stages, plus disbursements for (presumably the same) 5 stages. 

(ii)     The 2^nd Period was from September 2008 to 2 November 2009 (1 year and 2 months) up to conclusion of the oral taxation.  A total of 85 hours were charged, plus disbursements.  The substantive work appeared to be for the 2 days’ resumed hearing and taxation proceedings.

One immediately queries why the relatively lighter work in the 2^nd period would cost 75% of the costs under the 1^st period.

5. The Revised Bill purported to give an answer.  For the 1^st Period, it was asserted that “there [were] works done in excess of the said 112.75 hours, which [were] to be billed subject to the taxation.”  For the 2^nd period, it was asserted that “particulars of all works done during March 2006 up to October 2009 were stated and described in the Taxation Bill (prepared by Law Costs Draftsman), which was duly provided to Clients and filed with the Taxing Master for taxation.”  One would immediately ask why and which part of the costs for the 1^st Period was included in the 2^nd Period. 

6. Shortly before the present hearing to vary the taxed costs, the Receiving Parties signed the  Confirmation Letter prepared by CMKI in the following terms:

“We write to confirm that:

1.    We are instructed by [Clients] to issue informal interim bills on profit costs for works done by our firm (“Interim Billing”) in respect of and/or during the period from March 2006 to August 2008 (“Relevant Period”). [Note: this Relevant Period was the same as the 1^st period referred to in paragraph 4 above.]

2.    It is agreed that the Interim Billing is of interim nature, not final and did not reflect and show the whole amount of our firms’ profit costs in respect of and/or during the Relevant Period.

3.    It is agreed that we shall issue and serve a final bill of costs (“Final Bill”) which is to account for both the Interim Billing as well as the outstanding amounts of all costs and disbursements, which have not yet been billed and/or charged in respect of and/or during the Relevant Period and thereafter up to the conclusion of the Action, including the taxation proceedings if any (“Outstanding Amounts”).

4.    It is agreed that the Outstanding Amounts (as stated in the Final Bill) are subject to, according to and/or in line with a bill of costs to be prepared by a law costs draftsman or a Court’s costs assessment on a taxation bill prepared by a law costs draftsman if there is taxation proceedings (whichever lower).

5.    We have issued and served upon Clients the Final Bill on about 2^nd November 2009, and that the Outstanding Amount (as stated in the Final Bill) is subject to, according to and/or in line with the Court’s costs assessment on 6^th October 2009.”

7. The issues are whether or not there was a contingency fee arrangement and whether there has been a breach of the indemnity principle. 

I.  Was There a Contingency Fee Arrangement?

The Statutory Provisions

8. The relevant provisions under the Legal Practitioners Ordinance, Cap. 159 (“LPO”) are as follows:

“58.   A solicitor may make with his client an agreement in writing as to his remuneration, in respect of any contentious business done or to be done by the solicitor for the client, which provides that the solicitor shall be remunerated either by a gross sum or by salary, or otherwise, and at either a greater or a less rate than that at which he would otherwise have been entitled to be remunerated.”

“62.   Subject to the provisions of sections 59, 60 and 61, the costs of a solicitor in any case where any agreement has been made in pursuance of the provisions of section 58 shall not be subject to taxation, nor to the provisions of section 66 with respect to the signing and delivery of a solicitor’s bill.”

“64.   Nothing in section 58, 59, 60, 61 or 62 shall give validity to –

…

(b)     any agreement by which a solicitor retained or employed to prosecute any action, suit or other contentious proceedings stipulates for payment only in the event of success in that action, suit or proceeding; …”

9. A contingency fee arrangement is any arrangement whereby a solicitor is to be rewarded only in the event of success in litigation by the payment of any sum (whether fixed, or calculated either as a percentage of the proceeds or otherwise).  This is so, even if the agreement further stipulates a minimum fee in any case, win or lose.  See section 4.16 of Guide to Professional Conduct Volume 1 of the Law Society of Hong Kong. 

Application to the Present Case

10. The Retainer did not stipulate for payment only in the event of success of the Action.  The profit costs were not calculated with reference to the proceeds of litigation.  Nor was there a minimum fee prescribed for the client.  Costs charged for the 1^st period could not be regarded as a minimum fee as submitted by Mr. Ho for the Paying Party.  In my view, the Retainer was not a contingency fee arrangement but a perfectly lawful arrangement.  The Office Bill, on its face, properly charged the client in accordance with the Retainer for the 2 Periods.

11. Mr. Ho relies on a paragraph in the written submission of Mr. Tang for the Receiving Parties to support his argument that there was a contingency fee arrangement.  That paragraph states,

“In short, the profit costs of $451,000 of the [1st] Period as stated in the Interim Bill are not final and D1 & 4 has (sic) agreed to be liable to further profit costs of the [1st] Period exceeding $451,000 subject to taxation and the Final Bill.”

Mr. Ho submits that the Receiving Parties would not be liable for their Solicitors’ costs if they lost the action as there would be no taxation of a losing party’s costs.  I respectfully differ from Mr. Ho’s view.  If the clients had lost, a final bill could still be delivered and there could be solicitor-client taxation of the costs.

12.  Mr. Ho also refers to sections 58 and 62 of the LPO to show that between solicitor and client, fees could not be taxed.  In my view, section 62 only bars taxation of solicitors’ fees which are in the nature of a gross sum, salary or bears an element of being fixed and certain.  However, I do not have to give a definitive view on this legal issue as this case can be resolved on other bases.

II.  Was There Any Breach of the Indemnity Principle?

The Indemnity Principle

13. Costs as between party and party are given by the law as an indemnity to the person entitled to them; they are not imposed as a punishment on the party who pays them, nor given as a bonus to the party who receives them: Gundry v. Sainsbury [1910] 1 KB 645. 

14. “Where the recovering party has agreed with its solicitors on the amount of costs to be charged, that party is not entitled to recover upon taxation a sum higher than that agreed.  This is the indemnity principle.  However, when drawing up the bill for taxation, the solicitors are not limited by this ceiling.  Thus, the amount of costs stated in the bill may be greater.  The amount allowed on taxation may not exceed the ceiling.  If it is the former case, the ceiling would apply and limit the amount recovered accordingly.”  See paragraph 62/App/3 of the Hong Kong Civil Procedure 2010.  (emphasis added)

15. With a change of culture after the Civil Justice Reform (“CJR”), I have reservations as to whether or not the words in italics in the preceding paragraph still hold true.  This is because under paragraph 17(7) of PD 14.3, a solicitor has to certify on the taxation bill that what he claims (not what he actually seeks to recover after taxation) does not exceed his client’s liability to his firm[1].    This is to encourage frankness on the part of the receiving party so that the paying party can make realistic figures for settlement.   A solicitor who draws up the bill for an amount exceeding his client’s liability to his firm and still signs the certificate without qualifying it, runs the risk of breaching the indemnity principle.  In Bailey v. IBC Vehicles Ltd. [1998] 3 All ER 570, Henry LJsaid,

“Order 62 rule 29(7)(c)(iii) requires the solicitor who brings proceedings for taxation to sign the bill of costs.  In so signing he certifies that the contents of the bill are correct.  That signature is no empty formality.  The bill specifies the hourly rates applied and the care and attention uplift claimed.  If an agreement between the receiving solicitor and his client … restricted (say) the hourly rate payable by the client that hourly rate is the most that can be claimed or recovered on taxation. The signature of the bill of costs under the rules is effectively the certificate of an officer of the Court that the receiving party’s solicitors are not seeking to recover in relation to any item more than they have agreed to charge their client under a contentious business agreement.

The court can (and should unless there is evidence to the contrary) assume that his signature to the bill of costs shows that the indemnity principle has not been offended. …

For the avoidance of doubt, I also agree that the taxing officer may and should seek further information where some feature of the case raises suspicions that the whole truth may not have been told.  And the other side of a presumption of trust afforded to the signature of an officer of the court must be that breach of that trust should be treated as a most serious disciplinary offence.

For the avoidance of doubt I also agree that the [costs] officer may and should seek further information where some feature of the case raises suspicions that the whole truth may not have been told.  On the other side of a presumption of trust afforded to the signature of an officer of the Court must be that breach of the trust should be treated as a most serious disciplinary offence.” 

Comparison – Global Approach or Item by Item Basis?

16. A comparison is to be made between the costs to which the order relates and the amount payable by the receiving party to his solicitor “in respect of those costs”.  The comparison may have to be on an item by item basis.  In General of Berne Insurance Co. v. Jardine Reinsurance [1998] 1 WLR 1230, May LJ said,

“The comparison is not global and may require in appropriate circumstances an item by item comparison.  The exact nature of the comparison will of course depend on the nature of the contentious business agreement.  If the agreement itself is not itemized but for a gross sum and if the costs order relates to the entire action with no items at all disallowed, there would be a single comparison.  This will perhaps rarely be the case, since in most litigation there will be items of work which are properly the subject of a charge to the client but which would be disallowed on taxation.  If the agreement is itemized, there can be an itemized comparison and in my view there should be. “

May LJ left open the question of what constitutes an “item”.

17. “If the receiving parties and their solicitors have made an agreement limiting the maximum hourly rates payable by the receiving parties or limiting the maximum costs of any other item, that agreement provides both a measure and a ceiling for the hourly rate or the other item in question.”  See paragraph 62/App/3 of the Hong Kong Civil Procedure 2010; General of Berne Insurance Co. v. Jardine Reinsurance [1998] 1 WLR 1230, at 1243E.

18. In doing an item by item comparison, taxing master should be wary of the costs implications.  The comparison can cost the Court, as in the present case, more time than the paper taxation plus oral taxation.  It can also end up with costly satellite litigation which CJR aims to curb.  As in the present case, Mr. Ho prepared a 3-page minute, painstaking, comparison of the figures in support of his argument. 

19. I will also bear in mind some general principles:

(i)   Disbursements and profit costs should be compared separately.

(ii)  The respective definition of profit costs and disbursements should be consistent with that in taxation.  For example, the Office Bill treated photocopying costs to be disbursements whereas in taxation, they ought to be treated as profit costs.

(iii)    Costs referable to parts of the litigation for which the receiving party did not have the benefit of an order for costs have to be taken out of account in determining the application of the indemnity principle: General of Berne Insurance Co. v. Jardine Reinsurance [1998] 1 WLR 1230.  For example,costs charged to a client because of the need to pay the opponent under a time summons should be taken out of account.

Which Bill Should Be Used for Comparison Purposes?

20. Should the Office Bill or Revised Bill be used to decide if the indemnity principle has been breached and the “ceiling” amount recoverable?

21. CMKI wanted to use the Revised Bill.  They admitted that they were careless in not stating the genuine position in the Office Bill.  There was no secret dealing with the client and there was no pro bono service. 

22. I accept that there was no pro bono service in this case.  In addition, the Retainer did permit CMKI to issue interim bills (see clause 5) although they were not produced, if they ever existed.   However, the Office Bill could not have been an interim bill within the meaning of clause 5.  The Office Bill was dated 4 weeks after the oral taxation.  It was expressly stated to be served pursuant to the Direction.  It was not marked as an “interim bill”.  Anyway, since the litigation and taxation were over, why would it be necessary to produce an interim bill?  There was no time pressure in preparing a final bill since CMKI appeared to be unaware of the Direction.  It was not stated to be for just part of the proceedings but covered all steps including taxation.  To an objective reader of this Office Bill, what other purpose could it serve but to inform the clients that they were liable for the amount and for the period stated therein?

23. The Revised Bill, on the other hand, was served another 9 days later.  CMKI did not even cut-and-paste the figures from the Taxation Bill and purport to charge the client for them.  The notes added were an after-thought and self-serving.  They were inconsistent with the Retainer which did not state that the costs recoverable from the client were subject to taxation at all.  CMKI simply failed to prove that the “agreement” as to taxation was made before the costs order or before the Taxation Bill was served. 

24. I place no weight on the Revised Bill and find that the Office Bill represented the liability of the clients to CMKI on costs. The Office Bill should be used for comparison purpose to decide if the indemnity principle has been breached.

Comparison

25. The Retainer stated that “[CMKI’s] works concerning the Action are deemed to have commenced on 3 April, 2006.  Why this date was chosen was not clear.

(i)  It becomes immediately apparent that the costs claimed under Stage 1 in the Taxation Bill should be wholly irrecoverable under the indemnity principle.

(ii)  It is also clear that part of the work in Stage 2 of the Taxation Bill in relation to the preparation and filing of the writ on 29 March 2006 until 2 April 2006 was also irrecoverable under the indemnity principle.

26. Mr. Ho has in his submission purported to set out the comparison based on the 5 defined stages in the Office Bill.  However,

(i)  There was an apparent flaw in it.  As rightly pointed out by Mr. Tang for the Receiving Parties, Mr. Ho has left out items like photocopying charges which should form part of the profit costs. 

(ii)  Mr. Ho has adopted the 5 defined stages in the Office Bill for comparison purpose.  The bases for computation was unclear and it was not possible to correlate his figures with those in the Taxation Bill or the taxed amount.

The parties should thus work out the correct figures for my approval based on the principles set out in this Decision.

Conclusion

27. I summarize my findings as follows:

(i)  There was no contingency fee arrangement.  The terms governing costs between solicitor and clients were contained in the Retainer.  CMKI has failed to prove the existence of an agreement with clients for fees to be subject to taxation.

(ii)  There was breach of the indemnity principle in that the Taxation Bill claimed for an amount exceeding the client’s liability to CMKI as reflected in the Office Bill.  The Revised Bill carried no weight.

(iii)  It is appropriate to do an item by item comparison in this case to see if the indemnity principle has been breached and the extent thereof.  The parties should work out the figures along the principles set out in paragraphs 16-19, 24 and 25 above.

Other Matters

28. The written submission of Mr. Ho has referred to Calderbank letters and a sanctioned offer on costs.  It was not appropriate to refer to them when we were still dealing with the question of costs taxed under the Deputy Judge Carlson’s order.  I have therefore completely disregarded those matters in coming to this Decision.  The question of costs of the taxation proceedings itself is not straightforward and I will not even make an order nisi at this stage.  I also reserve the question of interest.  I adjourn this case to a date to be fixed with one hour reserved to deal with all outstanding issues, including approving the figures under paragraph 27(iii).

29. On balance, I am not satisfied that CMKI has deliberately breached the indemnity principle.  It may be due to changes brought about by CJR that led to the breach.  Unless there is other evidence forthcoming,

I do not see any need to investigate professional conduct.