HUNG FUNG ENTERPRISES HOLDINGS LTD AND ANOTHER v. THE AGRICULTURAL BANK OF CHINA

HCA 16459/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 16459 OF 1998

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CACV 235/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CIVIL APPEAL NO 16459 OF 1998

(ON APPEAL FROM HCA NO 16459 OF 1998)

BETWEEN

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REASONS FOR DECISION

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The preliminary issues

1. There are two preliminary issues which I have to resolve:

(1)  Whether there was any undue delay on the part of the defendant in commencing the taxation proceedings in HCA 16459/1998 and CACV 235/2010; if so, what should the sanction be;

(2)  Whether the defendant’s claim of costs which are common to the defence of the main action and its counterclaim has been quantified in a way which is wrong in principle.

Delay

To J’s costs order

2. For the purpose of this application, the following dates and events are important:

4 October 2010	After a full trial in HCA 16459/1998, To J, having dismissed the plaintiffs’ claim and allowed the defendant’s counterclaim, made an order nisi, by which he ordered the plaintiffs to pay the defendant’s costs of the counterclaim but made no order as to the costs of the plaintiffs’ claim
15 October 2010	The defendant filed a summons to vary To J’s costs order
28 January 2011	To J dismissed the defendant’s summons and made his costs order absolute
14 June 2012	The Court of Appeal dismissed the plaintiffs’ appeal (CACV 235/2010) but varied To J’s costs order by granting certificate for two counsel.  The Court of Appeal also made an order nisi on the costs of the appeal against the plaintiffs
28 June 2012	The Court of Appeal’s costs order nisi became absolute
23 April 2013	The Court of Final Appeal refused the plaintiffs’ application for leave to appeal
26 May 2014	The defendant filed Notice of Commencement of Taxation in both HCA 16459/1998 and CACV 235/2010

3. To decide whether there was any undue delay on the part of the defendant in commencing taxation proceedings pursuant to To J’s costs order, the first matter which the court has to determine is the completion date of that costs order.

4. Despite the suggestion made in Mr Wong’s written submissions that it should be 18 October 2010 (being 14 days after the order nisi), he accepted in court that the completion date should be 14 June 2012.  Mr Wong’s concession must be correct for two reasons:

(1) As recognised by Mr Wong, To J’s costs order was varied subsequently by the Court of Appeal.  Under such circumstances, the completion date should be “the date of the judgment or order of the Court of Appeal” pursuant to O.62 r.22(9)(b)(i) ie 14 June 2012.

(2) Even if the Court of Appeal did not vary To J’s costs order, the completion date could not have been 18 October 2010 because it is incorrect to ignore the defendant’s application to vary To J’s costs order nisi by summons filed on 15 October 2010.  Although this application was dismissed by To J eventually, the fact remains that To J’s costs order was not made absolute until 28 January 2011.  In such a case, the completion date would be the date on which the order is “made absolute or varied (as the case may be)” pursuant to O.62 r.22(9)(a)(ii).

5. The defendant should have commenced taxation proceedings within 3 months after the completion date, ie 14 September 2012, but it did not do so until 26 May 2014.  There is therefore a delay of around 20.5 months on the part of the defendant.

6. The question is whether the 20.5 months’ delay is inexcusable as submitted by the 2^nd plaintiff.

The first period

7. Although Mr Wong for the 2^nd plaintiff accepted that the completion date in relation to To J’s order eventually fell on 14 June 2012, he submitted that the defendant should be considered to be guilty of a 42-month delay (counting from October 2010 to 26 May 2014), instead of a shorter delay of slightly less than 2 years (counting from the completion date of 14 June 2012 to 26 May 2014).

8. I would therefore deal with the period before the completion date which I described as “the first period” first.

9. Mr Wong referred me to the judgment in Commissioner of Inland Revenue v Li & Fung (Trading) Ltd (No 2) [2014] 4 HKC 61 in which the learned Master had this to say in paragraph 24 thereof:

“…In essence, whether the existence of a connected on-going proceeding would justify delaying the commencement of a taxation proceeding, in my view, depends on the facts of each case. When it is considered that there is a real likelihood that the outcome of an on-going matter in the same proceedings such as a pending appeal – subject to other considerations such as the time likely to be required for the disposal of the pending proceedings, the nature of such proceedings etc – may likely impact on the ultimate costs liabilities of the parties, it may be reasonable to withhold taxation proceedings until the conclusion of the on-going proceedings. If, however, the on-going proceedings may only result in the setting-off of costs liabilities against each other, it would unlikely be a sufficient excuse for delaying the taxation proceedings.”

10. Mr Wong, in reliance of this authority, submitted that since none of the parties raised any issue regarding the counterclaim part of To J’s costs order, there was never any risk that the appeal might impact the counterclaim costs award.  Hence, it was said that the defendant should have started taxation proceedings there and then, and failure to do so should be regarded as “delay” for the purpose of O.62 r.22(5).

11. A quick answer to Mr Wong’s argument is this.  The period of time before the completion date should simply be disregarded when the court considers the issue of delay.  If the completion date of To J’s order falls on 14 June 2012, any “failure” to commence taxation proceedings before that date cannot be regarded as delay at all.

12. In relation to the judgment in Li & Fung quoted above and Mr Wong’s submissions, I have the following additional observations to make:

(1) As to when a receiving party would be regarded as excusable in withholding taxation proceedings while there are on-going proceedings, on my part, I would put it no higher than that if, at the material time, it can reasonably be said that it is possible for the on-going proceedings to have an impact on the subject costs order, the receiving party would be justified in withholding taxation proceedings;

(2) In the event the on-going proceedings are appeal proceedings like the present case, so long as the appeal is not apparently unarguable, the receiving party should be excused in delaying commencement of taxation proceedings;

(3) While it is true that none of the parties in the present case appealed against To J’s judgment on the counterclaim, I do not accept that “there was never any risk that the appeal might impact the counterclaim costs award”. This is because, in the event that the plaintiffs’ appeal on their claim were allowed (I am satisfied that the plaintiffs’ appeal could not be said to be unarguable before the appeal hearing), it was open to the Court of Appeal to make any costs order which it considered just, including varying To J’s costs order on the counterclaim;

(4) As a matter of fact, in the plaintiffs’ Notice of Appeal, the plaintiffs expressly asked the Court of Appeal to, among other things, (a) set aside To J’s order whereby the plaintiffs were obliged to pay the defendant’s costs of the counterclaim and (b) order the defendant to pay the plaintiffs’ costs incurred in the court below;

(5) Even assuming Mr Wong is right in that “there was never any risk that the appeal might impact the counterclaim costs award”, I take the view that it is sensible for the defendant to wait until the final conclusion of the entire proceedings before commencing taxation proceedings.  This is because it was not until then that the respective positions of the parties could be confirmed, and it was not until then that the parties could begin any meaningful negotiation on costs. In this regard, I have not lost sight of the case of Li & Fung,in which it was held that potential setting-off of costs liabilities resulted from on-going proceedings would unlikely be a sufficient excuse for delaying taxation proceedings.  However, after all, whether an excuse is sufficient would have to be considered on a case by case basis.  As far as the present case is concerned, I take the view that, realistically and practically, it is far easier and more likely for the parties to come to agreement on costs when they have the finalised full picture.  That cannot be achieved if there are on-going proceedings between the parties, especially when the on-going proceedings are actually the same legal proceedings in which the subject costs order was made.

(6) I have also not forgotten that under the CJR, parties are expected and encouraged to move their proceedings forward expeditiously.  However, on the other hand, one of the other purposes of CJR is for saving costs.  As Mr Wong put it, sometimes there may be conflict between these concepts.  Under such circumstances, the court would have to undertake a balancing exercise.  In the context of the present case, the court is given a wide discretion so that the right balance can be struck.

The second period

13. This concerns the period between the completion date and the date when the CFA refused the plaintiffs’ application for leave to appeal (ie 23 April 2013).

14. In view of the complexity of the present case, in my view, it is understandable for the defendant to focus on the plaintiffs’ further attempt to appeal instead of on the taxation of costs at the material time.

15. My observation set out in paragraph 12(5) above on finalised full picture is also applicable.

16. I therefore take the view that it was excusable for the defendant not to commence any taxation proceedings before the plaintiffs’ attempt to appeal was proved to be in vain totally on 23 April 2013 in the circumstances of the present case.

The third period

17. I now come to the third period of delay which covers a total of 13 months from 24 April 2013 to 25 May 2014.

18. In my judgment, if I accept that it is reasonable and excusable for the defendant to wait until the final conclusion of the whole case before starting the taxation proceedings, it would be unreasonable for the court to expect the defendant to commence taxation proceedings right on the following day after the plaintiffs’ application for leave to appeal to the CFA was dismissed by the CFA.  A reasonable period of time should be given to the defendant for the preparation of its bills, and such a period should not be regarded as a period of “undue delay”.

19. On the other hand, I cannot accept Mr Liu’s argument that it was excusable for the defendant to take as long as 13 months to commence taxation proceedings.

20. While reasonable time should be given to the defendant for the preparation of the bills for taxation, in my view, such time should not be more than 3 months, even having taken into account:

(1) the complexity of the case;

(2) the fact that the case lasted for 12 years;

(3) the fact that the defendant had to distinguish items in relation to its counterclaim from those in respect of the plaintiffs’ claim; and

(4) the defendant’s obligation to commence taxation proceedings in respect of CACV 235/2010 as well (see further paragraph 30 below).

21. I would therefore conclude that there was undue delay on the part of the defendant for a period of 10 months.

The plaintiffs’ inaction

22. I agree with the learned Master in the Li & Fung case that, in the light of what Chief Justice Ma held in Wing Fai Construction Co Ltd (in liquidation) v Yip Kwong Robert [2012] 1 HKLRD 589, the approach of “letting the sleeping dogs lie” is no longer acceptable in our jurisdiction and that what Ma CJ held therein is equally applicable to the taxation procedures.

23. In the present case, Mr Wong frankly admitted that the 2^nd plaintiff did not do anything other than “letting the sleeping dogs lie”.  Neither did he take issue on the suggestion that the court should take this matter into consideration when deciding on the sanction to be imposed.

24. The 1^st plaintiff has been wound up on 28 January 2013. Joint and several liquidators have been appointed on 11 November 2013.  No assets have been recovered so far and the chance of any recovery of assets has been described as “remote” by the liquidators, whose attendance at this hearing was excused.  There is no evidence, and it is extremely unlikely, that the 1^st plaintiff has done anything in respect of To J.’s costs order.

25. I should therefore take into account the plaintiffs’ inaction accordingly when I decide on the sanction to be imposed.

The sanction to be imposed

26. Having taken into account:

(1) the length of the undue delay; and

(2) the inaction on the part of the plaintiffs,

I ordered that there be a global deduction of 10% of the amount to be allowed under the bill filed pursuant to To J’s costs order.

The Court of Appeal’s costs order

27. The Court of Appeal’s costs order nisi was made on 14 June 2012.  No application for variation was made by either party.  Therefore the order became absolute on 28 June 2012 which would be regarded as the completion date by virtue of O62 r22(9)(b)(ii).

28. As aforesaid, the plaintiffs did attempt to appeal against the judgment of the Court of Appeal.  Such an attempt was not proved to be in vain until 23 April 2013 when the CFA refused to grant leave to appeal to the plaintiffs. For reasons which I already explained, I am of the view that it was excusable for the defendant not to commence taxation proceedings before 23 April 2013.

29. A period of allowance should also be given for the defendant to prepare for the commencement of taxation proceedings after it was finally confirmed that the plaintiffs could not take the case further.

30. When I dealt with the bill in respect of To J’s order, I ruled that a period of 3 months should be given to the defendant for the preparation of the bill in respect of To J’s costs order.  I mentioned that I had taken into account the fact that the defendant was also required to prepare the bill in respect of the Court of Appeal’s costs order.  I did so because I am of the view that:

(1) It is reasonable to expect that the same law costs draftsman would be engaged for the preparation of both bills.  It is not only natural but desirable.  Indeed, it was confirmed by Mr Liu in court to be the case;

(2) It is also sensible for the taxation proceedings of both bills be commenced at the same time because it is desirable for directions be given for both bills at the same time and ultimately for them to be taxed by the same taxing Master one immediately after another.

31. By reasons of the aforesaid, although the bill in the appeal case should be relatively less complex, I would also allow 3 months as the reasonable period which the defendant required in the preparation of the commencement of taxation proceedings in respect of the appeal.  Hence, the undue delay on the part of the defendant in commencing taxation proceedings in CACV 235/2010 is also 10 months.

32. Having taken into account the period of undue delay and the plaintiffs’ inaction, I also ordered that there be a global deduction of 10% of the amount to be allowed under the bill of the costs of the appeal.

Quantification of costs common to both the claim and the counterclaim

33. This argument is only applicable to the bill in HCA 16459/1998.  In that bill, in relation to those items of costs which are common to both the main claim (to which the defendant is not entitled) and the counterclaim (to which the defendant is entitled), the defendant invariably stated “charged at 10%” – meaning that the defendant is claiming for 10% of the common costs as the costs of the counterclaim.

34. Mr Wong for the 2^nd plaintiff, relying on the principle laid down in Medway Oil and Storage Company, Ltd v Continental Contractors, Ltd & Others [1929] AC 88 which was followed in Peter Man Ho Laye v Tam Ma Lai and another (HCA 1780/2009, unreported, 3 February 2012), argued that it is wrong in principle for the defendant to quantify its costs of the counterclaim in such a way.  He submitted that for this reason, the defendant should be ordered to redraft its bill.

35. The relevant principle was referred to by Deputy High Court Judge Au-Yeung (as her Ladyship then was) in paragraphs 7 to 9 of the case of Peter Man Ho Laye and may be summarised as follows:

(1) Where a claim and counterclaim are both dismissed with costs, upon the taxation of the costs, the true rule is that the claim should be treated as if it stood alone and the counterclaim should bear only the amount by which the costs of the proceedings have been increased by it.  No costs not incurred by reason of the counterclaim can be costs of the counterclaim. 

(2) In determining whether costs have been incurred on a claim or counterclaim, the court looks to the substance and not the form. 

(3) Where there are costs common to an issue (eg counsel’s brief), the proper approach is to divide it in accordance with the principle aforementioned.  A taxing master should not “apportion” the brief fee as such. He should, instead, ask himself (i) how much would the brief fee be if there had only been the claim and (ii) by how much the brief had increased as a result of the counterclaim.

36. In my view, while it would be wrong in principle for the taxing master to apportion mechanically common items when considering what amount, if any, should be awarded to the defendant as its costs incurred in relation to the counterclaim, there is nothing wrong for the defendant to draft its bill of costs in the way it did. 

37. When the defendant states in the bill that in respect of the consideration of an affirmation, a fee earner would charge “2.5 mins [charged at 10% of 25 mins]”, the defendant is simply alleging that the defendant’s solicitor has spent another 2.5 minutes in considering the subject affirmation as a result of the counterclaim.  Whether the defendant is able to persuade the taxing master that this is reasonable or necessary is a matter to be decided in the substantive taxation hearing. 

38. For this reason, I consider it unnecessary for the defendant to re-draft its bill.  I do not think it may serve any meaningful purpose.  In the above example, it can be envisaged that, even if the 2^nd plaintiff’s request is acceded to, the defendant would simply delete the percentage and keep the “2.5 mins” as the time claimed to have been spent on the item.

39. To conclude, I am of the view that there is nothing wrong in format in the defendant’s bill of costs filed in HCA 16459/1998 and I do not consider it necessary for the said bill to be re-drafted.

Costs

40. In this application, the main battleground between the parties was the first preliminary issue (on undue delay) in respect of which the 2^nd plaintiff had succeeded.

41. While the defendant did successfully argue that there was nothing wrong in the format of its bill of costs filed in HCA 16459/1998 and that the sanction for delay should not be as serious as suggested by the 2^nd plaintiff, I am of the view that overall the 2^nd plaintiff should be regarded as the successful party since it has obtained an order for global deduction in relation to the defendant’s bills.

42. Having said that, I considered that it would only be fair if the defendant’s success in relation to the 2^nd preliminary issue would be reflected in the costs order herein. 

43. Having taken all matters into account, I ordered that the defendant should pay 50% of the 2^nd plaintiff’s costs of the application, with certificate for counsel.

44. The 2^nd plaintiff’s costs were summarily assessed pursuant to O62 r9A(1)(a) at $74,000.  The defendant was therefore ordered to pay $37,000 to the 2^nd plaintiff within 14 days of the date of the hearing.