LAU KWAI KIU v. BIAN XINTIAN AND ANOTHER

CACV 263/2010 & 281/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS. 263 & 281 OF 2010

(ON APPEAL FROM HCMP NO. 344 OF 2009)

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JUDGMENT

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Hon Yeung VP:

1.  I have read the drafted judgments of Yuen JA and Chu JA in CACV 263/2010 and CACV 281/2010 respectively and I agree with both judgments. Orders will be made in terms of paragraph 63 in respect of CACV 263/2010 and paragraphs 81 and 82 in respect of CACV 281/2010.

Hon Yuen JA:

2.  There are two appeals from Yam J arising from HCMP344/2009 (“the proceedings”).

3.  CACV263/2010 is concerned with the judge’s decision in the dispute between the plaintiff and the defendant regarding Lot 475 in DD177 Lok Lo Ha Village, Shatin, New Territories (“the property”).  It is a piece of land on which a 3-storey house has been built.

4.  CACV281/2010 is concerned with the conduct of the defendant’s solicitors in failing to disclose a relevant letter in the proceedings, as a result of which a wasted costs order was made against them.

5.  I shall deal with CACV263/2010. I have read the draft judgment of Chu JA in CACV281/2010 and I agree with it.        

Background

6.  It is common ground that there is in the New Territories a “Small House Policy” under which every indigenous male villager (who can trace his ancestry to a resident of a recognized village in 1898) can have one concession during his lifetime to enable him to build a small house (commonly known as a “Ting house丁屋 ” ).

6.1     If the indigenous male villager himself owned land, he could apply for a building licence (“BL”) or land exchange (“LX”) to build a Ting house.  It is not material to this appeal to differentiate between the two.

6.2     If the indigenous male villager did not own land himself, he could apply for a Private Treaty Grant (“PTG”) from the government for the lease of land at a concessionary premium of 2/3rd of the full market value.   

6.3     Both types of concessions (i.e. BL/LX and PTG) contained restrictions on alienation. 

6.3.1  -  A villager granted a BL/LX was not permitted to alienate the property for 5 years after the house is built. 

6.3.2  -  A villager granted a PTG was not permitted to alienate the property at all.

6.4     These restrictions on alienation could be removed but

-  only after a certain period of time had passed, and

-  upon payment of a premium. 

It is not necessary for the purposes of this appeal to consider when the restrictions could be removed, or how those premiums were calculated.

7.  As cases which have come to court arising from the alienation of Ting houses show, various devices have been employed by villagers from time to time in their attempt to avoid the “waiting time” and/or “premium” restrictions.  It would also appear from those cases that the Lands Department has, at different times, put in place different measures in its attempt to counteract the villagers’ devices. 

Declarations required from villagers

8.  The Lands Department’s measures included requiring villagers to sign a declaration before the BL/LX or the PTG is granted to them.  It may have been thought that a declaration made before the grant would pre-empt the possible argument that a condition in the grant prohibiting alienation only spoke from the date of the grant and might not cover a pre-grant arrangement.

9.  Be that as it may, it is important to note that different types of declarations were required by the Lands Department through the years, and it is a matter of evidence in each case whether the villager involved had signed a declaration, and if so, which type of declaration.  It is therefore important to read the authorities with care, bearing in mind the evidence adduced in each individual case.

Facts of this case

10.  The registered owner of the property was Lau Kwai Wah (“the deceased”).  The plaintiff Madam Lau Kwai Kiu was his first cousin.  The defendant Madam Bian Xin Tian was his second wife, his first wife having pre-deceased him.

- Declaration signed by the deceased

11.  The deceased applied for a PTG in 1985.  It is important to note the contents of the declaration that he signed - it stated that he was a male indigenous villager who could trace his ancestry back to 1898, that he had not previously received a grant of land under the Small House Policy or acquired such a house from another male indigenous villager, and that therefore he was entitled to a PTG at a concessionary premium.  All these statements were true.

12.  As that application for grant was made in 1985, the deceased would not have been required to sign a declaration which the Lands Department required only after July 1997 (“Declaration B”) which stated that:

“I have never made and have no intention at present to make any private arrangements for my rights under the Small House Policy to be sold to other individual/a developer”.

(See Chung Mui Teck v Hang Tak Buddhist Hall Association Ltd and al. [2001] 2 HKLRD 471, 477). 

13.  There is also evidence in the present case that the deceased was not required to sign any declaration to the effect that “he had not made any agreement with anyone to hold the property on trust and/or to transfer the property at a later time” (see Lands Department letter dated 27 September 2010).     

 - Payment of premium and construction costs

14.  In 1989, the deceased was granted the lot under Conditions of Grant dated 9 March 1989.  A premium of $24,590 was paid to the government by cashier order a few weeks earlier, on 26 January 1989.  The judge accepted that the deceased had received the funds for this purpose from the plaintiff, as the deceased had agreed to apply for a grant in exchange for $100,000. The plaintiff was able to produce copies of cashier orders in favour of the deceased amounting to $100,000, including a bank document identifying her as the drawer of a cashier order in the sum of $50,000.  

15.  A house was then built on the lot.  The judge also accepted the plaintiff’s evidence that she paid the construction costs. She was able to produce receipts for part of those costs.

16.  On 14 September 1994, a Certificate of Compliance was issued.  The plaintiff and her family moved in and have been residing there ever since.  The deceased never lived in the property and died in 2006. 

The plaintiff’s case

- Payments

17.  The plaintiff’s case was based on a common intention constructive trust and/or a resulting trust.  Essentially she relied on her payment of the premium and the construction costs. 

- “Letters of Confirmation”

18.  The plaintiff produced 2 Chinese documents dated 10 May 1989 and 4 March 1992 (called “Letters of Confirmation” at the trial) signed by the deceased in which he transferred the lot to her by way of gift (轉贈) for her to build upon by herself (自行興建), and agreed that after 5 years, he would unconditionally apply to government within 6 months to “formally” transfer the property to her name.  (I pause to note that the word “bequeath” was used in the English translation of the term轉贈.  This is misleading, as轉贈 does not suggest that the transfer would occur only upon the death of the transferor, which is the common meaning of the word “bequeath”).      

19.  The 1989 document was also signed by the plaintiff as “beneficiary” (受益人), and 2 other persons signed as witnesses.  The 1992 document was in the same terms as the 1989 document, except that it was not signed by witnesses.  There was no explanation at trial as to why the 1992 document was signed in addition to the 1989 document.   

20.  It should be noted that there was no reference to the sum of $100,000 (or indeed, any sum) in either of these documents.

- Post-construction events

21.  The plaintiff explained that before the deceased’s death, she had not asked him to apply to government to “formally” transfer the property to her because she did not have sufficient funds to pay the premium to government to remove the restriction against alienation. 

22.  As noted earlier, the deceased died in 2006.  When disputes arose between the plaintiff and the defendant over the property, she plaintiff issued proceedings which were commenced by originating summons.  

The defendant’s case

23.  The defendant raised two defences, first, she denied there was an agreement between the plaintiff and the deceased regarding the property, and secondly, she argued that in any event, such an agreement was illegal and/or in breach of public policy as Special Condition 5(a) of the grant contained a restriction on alienation which provided (where material):

“ ... the Grantee ... having obtained this grant by way of private treaty at a concessionary premium, shall not assign ... part with the possession of or otherwise dispose of the lot ... or any interest therein or any building ... thereon or enter into any agreement so to do, whether directly or indirectly, or whether by way or direct or indirectly (sic) reservation, grant of any right of first refusal, option, power of attorney, building agreement ... or otherwise howsoever”.

Trial

24.  At the trial before Yam J, the defendant was represented by TC Lau & Co (“TCL”) instructing Mr Billy NP Ma of counsel. 

Enquiry with Lands Department

25.  After the hearing but before judgment, the judge wrote to the parties’ respective solicitors proposing that an enquiry be made with the Lands Department as to whether the deceased had signed a declaration to the effect that he had not made or had no intention of making a private arrangement to sell his right to the property to be granted.  This was relevant to the second defence raised by the defendant.

26.  The defendant’s solicitors TCL then informed the court that it had in fact made that enquiry in October 2009, about 8 months before the trial started, and had received a reply from the Lands Department in November 2009 that there was no record of the deceased having signed such a declaration (“the Lands Department Reply”). 

27.  However TCL said that it had neglected to inform the plaintiff’s solicitors, its own counsel Mr Ma or the court about the reply (this was despite the fact that their enquiry letter had been copied to Mr Ma). 

28.  Subsequent to Yam J’s enquiry the Lands Department confirmed in a letter dated 27 September 2010 to the court that the deceased had not been required to declare that “he had not made any agreement with anyone to hold the property on trust and/or transfer the property at a later time”. 

Judgment

29.  The judge found that the plaintiff held the property under a constructive and/or resulting trust, and that the agreement was not illegal as the deceased had not made any false declarations, nor in breach of public policy (following the decision of this court (Chan HCCJ, Liu JA and Wong J in Li Pui Wan v Wong Mei Yin [1998] 1 HKLRD 84).

30.  The judge gave the following orders (“the main judgment”):

“(1) Declaration be granted in favour of the plaintiff that by way of paying the construction cost of the property known as Lot No 475 in DD177, Shatin, New Territories, Hong Kong, the plaintiff obtained the beneficial interest to the said property by way of resulting trust;

(2) Declaration be granted in favour of the plaintiff that under the Agreement dated 10^th May 1989 and 4^th March 1992 respectively signed between the deceased Lau Kwai Wah and the plaintiff, the plaintiff obtained the beneficial interest in the property known as Lot No475 in DD177, Shatin, New Territories, Hong Kong by way of constructive trust;

(3) Specific performance be granted against the 2^nd defendant to execute all relevant legal documents for the conveyance or transfer of the legal title to the property known as Lot No 475 in DD177, Shatin, New Territories, Hong Kong;

(4) There be an order nisi for costs of this action to the plaintiff; and

(5) Further costs order be reserved as a result of the investigation by the Law Society of Hong Kong on concealment of the letter from the Lands Department dated 16^th November 2009 to TC Lau & Co”.

31.  The judge took the view that the Lands Department reply could not have escaped the attention of TCL when the issue of illegality was raised at trial.  He referred the matter to the Law Society and made an order against TCL and the handling solicitor Mr Gabriel Leung Jackson-Lipkin (“the Solicitors”) that they be jointly and severally liable with the defendant for the entire costs of the proceedings (“the wasted costs judgment”).

Appeals

32.  The defendant appealed against the main judgment in CACV 263/2010.  The solicitors appealed against the wasted costs judgment in CACV281/2010.

33.  Although a Notice of Appeal against the main judgment was filed by the defendant’s solicitors, she subsequently filed a notice to act in person.  In the appeal against the wasted costs judgment, Mr Kenneth CL Chan and Mr Ma represented the solicitors. 

34.  The defendant adopted the arguments advanced by Mr Chan and did not advance any arguments of her own. 

35.  Mr Chan argued on behalf of the solicitors that

(1)     the defendant was entitled to have the main judgment overturned, in which event the plaintiff would not be entitled to any costs; but in any event

(2)     the Solicitors should not have to pay the costs of the proceedings.

Government’s rights as lessor

36.  Before I discuss the issues, it should be noted that the government is not a party to this appeal and is not bound by this judgment.  Nothing in this judgment should be construed as affecting the government’s rights as lessor under the Conditions of Grant.  

The main judgment

37.  In the appeal against the main judgment, it was argued by Mr Chan that the judge was (a) wrong in his analysis of the nature of the transaction between the plaintiff and the deceased, and (b) that even if the deceased meant by that transaction to agree to transfer the property to the plaintiff, that agreement was illegal and/or was in breach of public policy.

(a)    Analysis of the nature of the transaction

-  Judge’s mistake in reading the Letters of Confirmation

38.  Mr Chan argued that the judge was mistaken in thinking that the 2 Letters of Confirmation referred to a payment of $100,000 from the plaintiff to the deceased (para.27 of Yam J’s judgment). 

39.  Mr Chan is correct.  Neither Letter of Confirmation referred to any sum of money.  However it is clear in my view that the plaintiff did not base her case on any acknowledgment of payment in the Letters.  Her oral evidence of payment was supported by the copy cashier orders which she produced to court, showing the deceased as payee, and an application form showing herself as applicant for one such cashier order.  The defendant did not proffer any other reason why the plaintiff would have given $100,000 to the deceased.   

-  Taking “judicial notice”

40.  Mr Chan also argued that the Letters of Confirmation only evidenced the deceased’s intention to make a gift of the property to the plaintiff.  He argued that the fact that the deceased also gave a Power of Attorney and made a Will in respect of the property in favour of the plaintiff (which Will was subsequently invalidated by his remarriage) showed that he was the legal and beneficial owner of the property, rather than a trustee for the plaintiff. 

41.  In respect of these documents, the judge took into account “common knowledge among legal practitioners that documents relating to small houses are often misleading because of various government requirements and restrictions in relation to the Small House Policy”.  Mr Chan argued that the judge was wrong to take “judicial notice” of any such practice.

42.  The judge did not use the term “judicial notice” in his judgment.  Judicial notice can of course only be taken of matters so notorious or clearly established or susceptible of demonstration by reference to a readily obtainable and authoritative source that evidence of their existence is unnecessary (see Wai Kam Chiu and anor v Chim Siu Fan CACV376/2007, para. 32). 

43.  The judge was not entitled to make any assumptions about the nature of the documents in the case just by reason of the location of the property in question, but that is not to say that he was bound to accept them at face value.  These documents were not of a binding nature and the judge was entitled, and in fact under a duty, to consider them in the light of all the surrounding circumstances, including the plaintiff’s expenditure of money on, and her occupation of, the property.   

44.  What the documents indicated was that the deceased was acknowledging to the plaintiff that he had no beneficial interest in the property.  That was the purport of the Letters of Confirmation, which were executed before the completion of the property.  Then, within days after the property was completed and the Certificate of Compliance was issued by the Government, he signed a Power of Attorney in her favour enabling her to deal with the property, including applying to the District Officer for his consent to assign the property.  Had the plaintiff been in funds to pay the premium, it was the parties’ intention (as found by the judge) that she would have applied to government to remove the restriction and to have the property assigned to her.

45.  Then, a year prior to cohabiting with the defendant, the deceased executed a Will bequeathing the property to the plaintiff.  Had he not remarried (thereby invalidating the Will) the plaintiff would have been able to acquire the title to the property on his death.  The documents therefore support the plaintiff’s case.  There is no reason why the fact that the Will also deals with assets other than the property, and requires the plaintiff to pay the costs of having the property transferred to her, would detract from that conclusion.

46.  For these reasons, I would affirm the judge’s finding that the plaintiff was the beneficial owner of the property pursuant to a common intention constructive trust and/or resulting trust.

(b)     Illegality and/or breach of public policy?

47.  I then come to the argument that the arrangement was illegal and/or in breach of public policy. 

-   Illegality

48.  The first issue was whether the arrangement was illegal at all.  Mr Chan argued first that the plaintiff procured or induced the deceased’s breach of contract viz SC5(a).

49.  This was not argued before the trial judge and I shall deal with it briefly.  The tort of procurement or inducement of breach of contract consists of the intentional inducement of the breach of an existing and valid contractual obligation.  No contract was in existence at the time when the arrangement was made.  Even if it might be argued that the inducement continued until the PTG was granted, the tort would only be formed if the government suffered damage.  There is no evidence of market values and it cannot be assumed that the government had suffered loss in this case.  The act of inducement is not complete simply at the point of inducement; the tort is not actionable by the person induced.

50.  Secondly Mr Chan argued that the deceased and/or the plaintiff had made false representations or misrepresentations as to the beneficial ownership of the property by reason of dealings with the government in the deceased’s name. 

51.  However as I have noted above, the declaration made by the deceased in this case prior to the PTG contained statements which were all true.  This is where the differences in the declarations required by the government from time to time from villagers applying for concessionary grants should be considered with care.

52.  As for documents signed in this case after the PTG, none of those relied upon in Mr Chan’s skeleton contained a statement by the deceased or the plaintiff as to who was the beneficial owner.

53.  In any event, even assuming that there has been some illegality, perhaps consisting of a conspiracy between the plaintiff and the deceased to injure the government by the deceased prematurely alienating the property to the plaintiff for which the government could have charged an additional premium (which Mr Chan has not argued), the question remains - what is the effect of that illegality on the establishment of the plaintiff’s equitable proprietary interests? 

54.  The tension between on the one hand, the acquisition of equitable proprietary interests and on the other hand, illegality in the carrying out of the underlying transaction pursuant to which those interests were acquired was resolved in Tinsley v Milligan [1994] 1 AC 340.  The House of Lords held that it is not necessarily fatal to a claim of equitable proprietary interests that illegality was involved in their acquisition.  As Lord Browne-Wilkinson explained at p.374D, “the effect of illegality is not substantive but procedural”.  As he held in the same passage, “... the effect of illegality is not to prevent a proprietary interest in equity from arising ... the effect is to render the equitable interest unenforceable in certain circumstances”.

55.  Whether illegality would affect the success of a party’s assertion of proprietary interests in any individual case depends on whether he needs to plead or rely on an illegality to establish those interests.  That is why it is said that the effect of illegality is not substantive but only procedural.  So for instance, if immediately after the plaintiff and the deceased made the agreement for the deceased to apply for a lot, the plaintiff had come to court asking for a declaration that any lot so granted would be owned by her beneficially, I think she would have failed.  That is because she would have needed to plead or rely on the agreement (which for present purposes I assume to be illegal) for her cause of action.   

56.  However if a party does not need to rely on an illegal arrangement to establish proprietary interests, it matters not that the equitable interests were acquired in the course of carrying out an illegal transaction.  In Tinsley, P and D agreed that they would be joint beneficial owners of a house, but they had to buy it in the sole name of P so that D could get payments from the social services.  D used some of the payments from the social services towards the purchase of the house.  When they fell out, P sought possession of the house from D, who counterclaimed for a declaration that the property was held by both in equal shares.  It was held by the House of Lords that D had established a resulting trust from the simple fact of her payments towards acquiring the house.  The resulting trust arising from such payments was not rebutted.  In establishing her claim D did not have to explain the reason for the conveyance in P’s sole name (ie the scheme to obtain funds from the social services).

57.  In Best Sheen Development Ltd v Official Receiver [2001] HKLRD 866, an indigenous male villager signed a declaration that he was the owner of a lot for which he applied for a concessionary building licence.  That was untrue as the lot had been assigned to him by the developer under a sham agreement under which he gave no consideration.  When the government discovered the arrangement, it withheld the execution of the licence.  The developer nevertheless was entitled to a declaration that it was the beneficial owner of the lot because the developer owned the lot to begin with, and it had not passed to the villager under the sham agreement.  The developer did not need to explain why it conveyed the lot without payment.   

58.  That result may be contrasted with Chung Mui Teck, where this court (Rogers V-P and Le Pichon JA) applied the rationale in Best Sheen.  In Chung the plaintiffs were some of the directors of the 1^st defendant Buddhist organization.  The plaintiffs were opposed to the organization’s plans to enter into a joint development scheme with the 2^nd defendant company.  The development scheme proposed was for the organization to assign various lots to indigenous villagers who, as “owners” of the lots, would then apply for building licences from the government on concessionary terms.  The 2^nd defendant would then build houses on the lots, part of which would be at the disposal of the organization, and the rest, of the developer.  The villagers would not have any interest in the houses, and no premium would be paid to the government.       

59.  The villagers involved in the development scheme had been required by government to sign declarations that they had not made private arrangements for their rights under the Small House Policy to be sold to others.  There was also evidence of a practice that even those villagers in the scheme who had signed previous versions of declarations would still have been required to sign fresh declarations as to intent and user before their applications would be approved (p.477G). 

60.  The court held that the scheme could not be performed according to the terms of the deed without the commission of an illegal act (i.e. the villagers making false declarations or misrepresentations in the declarations).  It was therefore held that the plaintiffs were entitled to summary judgment for a declaration that the scheme of development was unlawful and unenforceable.  No proprietary interests had been acquired or divested in that case. 

61.  In the present appeal, it seems to me that, even assuming there was any illegality, the plaintiff can nevertheless establish equitable proprietary interests (under a resulting trust or common intention constructive trust) by reason of her payment of the premium for the grant and the construction costs, even though those interests were acquired in the course of carrying through an illegal transaction (Tinsley v Milligan p375).  She does not need to establish a cause of action by reference to the illegal transaction.     

-   Breach of public policy

62.  I shall now deal with the argument of breach of public policy.  It is in this respect that it is important to see exactly which type of declaration the deceased signed.  As I noted earlier in para.12, the deceased had been required to sign only one declaration and it did not contain any misstatements.  The deceased was not required to declare that he had not made a prior arrangement to transfer the property to, or hold it on trust for, someone else.  As for SC5(a), the parties had intended to apply to government for the property to be transferred to the plaintiff, but this had not been carried out prior to the deceased’s death due to the plaintiff’s lack of funds for the additional premium. There is no evidence that the government would not remove the restriction against alienation in favour of the plaintiff upon payment of the additional premium.  Despite the fact that the government has been aware of this case for nearly 2 ½ years (at least), it has not taken any steps in relation to the property.  So all the evidence in this case points towards it being a “jumping the gun” situation. In Li Pui Wan, the court held that that did not amount to a breach of public policy.  Li Pui Wan is binding on this court and I am not persuaded that it was “plainly wrong”.

63.  Accordingly the defendant’s appeal must fail.  I would dismiss the defendant’s appeal with costs but I would amend paragraphs 1-3 of the judge’s order to read as follows (amendments underlined):

(1)     Subject to the government/lessor’s rights under the Conditions of Grant, a declaration be granted in favour of the plaintiff that by way of paying the premium for the grant and theconstruction cost of the property known as Lot No.475 in DD177, Shatin, New Territories, Hong Kong, the plaintiff obtained the beneficial interest in the said property by way of resulting trust and/or common intention constructive trust;

(2)     Subject to the government/lessor’s rights under the Conditions of Grant, specific performance be granted against the 2^nd defendant to execute all relevant legal documents for the conveyance or transfer of the legal title in the property known as Lot No.475 in DD177, Shatin, New Territories, Hong Kong to the plaintiff subject to the payment of additional premium and other relevant charges to the government by the Plaintiff and subject to the consent of the District Lands Officer”.

Hon Chu JA:

64.  I agree for the reasons given by Yuen JA that the defendant’s appeal should be dismissed with costs.

65.  The trial judge ordered the defendants’ then solicitors and the handling solicitor (collectively “the Solicitors”) to pay the plaintiff her costs of the action on indemnity basis, jointly and severally with the defendants.  His reasons for making the order are (paragraphs 6 and 7 of the Judgment on Costs):

“6. The defendants and their legal team defended the case on the allegation of illegality which they plainly knew were false and/or misleading. I accept the plaintiff’s submissions that the defendants and their legal team have failed to provide any credible explanation for their conduct of concealing the Reply.

7.    Accordingly, the failure to produce the Reply is an unreasonable omission on the part of the defendants’ solicitors, to say the least.”

66.  Mr Kenneth Chan made three arguments on this wasted costs order.  First, he submitted that the trial judge should not have concluded without a full investigation that the Solicitors concealed the Lands Department Reply and that they failed to provide any credible explanation for this.  Second, he argued that there was no causal link between the conduct complained of and the costs that the Solicitors were ordered to pay.  Third, it is said that the wasted costs should be paid on party-and-party basis and not indemnity basis.

67.  The court’s power to make a wasted costs order against a legal representative is set out in Order 62 rule 8(1) of Rules of the High Court, Cap.4A, which provides:

“The Court may make a wasted costs order against a legal representative, only if-

(a) the legal representative, whether personally or through his employee or agent, has caused a party to incur wasted costs as defined in section 52A(6) of the Ordinance; and

(b) it is just in all the circumstances to order the legal representative to compensate the party for the whole or part of those costs.”

68.  Under section 52A(6) of the High Court Ordinance, Cap.4,

“wasted costs means any costs incurred by a party as a result of—

(a) an improper or unreasonable act or omission; or

(b) any undue delay or other misconduct or default,

on the part of any legal representative, whether personally or through an employee or agent of the legal representative.”

69.  The procedure for making an application for a wasted costs order is to be found in Order 62 rule 8B and Practice Direction 14.5.  Paragraphs 16 and 17 of the Practice Direction require the summons to be accompanied by particulars clearly specifying the conduct complained of and stating precisely what wasted costs are alleged to have been caused by the acts or omissions complained of and how much of such costs are being claimed by the applicant.  Order 62 rule 8B(3) also requires the evidence in support of the summons to identify what the legal representative is alleged to have done or failed to do; and the costs that he may be ordered to pay or which are sought against him.

70.  Order 62 rule 8B(1) further provides that the court shall consider whether to make a wasted costs order in two stages as follows:

“(a) in the first stage, the Court must be satisfied that-

(i) it has before it evidence or other material which, if unanswered, would be likely to lead to a wasted costs order being made; and

(ii) the wasted costs proceedings are justified notwithstanding the likely costs involved; and

(b) in the second stage (even if the Court is satisfied under sub-paragraph (a)), the Court shall consider, after giving the legal representative an opportunity to give reasons why the Court should not make a wasted costs order, whether it is appropriate to make the order in accordance with rule 8.”

71.  Parts F and G of Practice Direction 14.5 set out the procedures and considerations in the two stages.

72.  In the present case, the requirements and the procedure contained in the Rules and the Practice Direction had not been followed. First, the plaintiff’s summons contained no particulars.  The supporting evidence did not give a clear and precise indication of what exactly was the act or omission complained of.  Neither did it identify what were the wasted costs and the amount of such costs as claimed by the plaintiff.  A clear indication of the act or omission relied upon for the wasted costs application is important not only because the legal representative has to know what allegations are made against him, but also because of the need to establish a causal link between the legal representative’s conduct and the incurring of the wasted costs in question: Ma So So Josephine v. Chin Yuk Lun Francis and Another [2004] 3 HKLRD 294, at 321B-C.  It is necessary to identify the misconduct or default which triggers the liability so that one can decide what costs were incurred by the plaintiff in consequence. I shall return to this aspect of causation later on.

73.  Secondly, it also appears that the application had not followed the two stage approach as prescribed by Order 62 rule 8B(1) and explained in Ma So So Josephine v. Chin Yuk Lun Francis and Another, supra.  This is relevant to Mr Chan’s first argument.

74.  Looking at the evidence filed in support of the application, it would seem that the application was made on two bases.  Firstly, it was said that the Solicitors deliberately concealed the Lands Department Reply.  Secondly, it was said that the Solicitors should have advised the defendants not to defend the action and should not have pursued the defence of illegality which they knew was unmeritorious. Paragraphs 6 and 7 of the Judgment (see paragraph 64 above) suggest that the trial judge awarded wasted costs on the first basis.      

75.  Mr Kenneth Chan referred to paragraphs 66 and 67 of the main Judgment where, after referring to TCL’s explanation in their letter to the trial judge that the omission to disclose the Lands Department Reply was due to oversight and inadvertence, the trial judge said:

“66. There is a prima facie case that there was concealment of the letter from the Lands Department dated 16 November 2009. The fairer course is to refer this matter to the Law Society for further investigation and action, if any.

67. There shall be an order nisi for costs to the plaintiff. I also reserve the question of further order in respect of costs as a result of the aforesaid investigation of the Law Society.”  

Mr Chan submitted that the trial judge, having previously found a prima facie case of concealment and decided it was better to refer the matter to the Law Society for investigation, should have deferred the making of the wasted costs order until after a full and proper investigation had been carried out by the Law Society. He further argued that, without conducting an investigation, the trial judge should not have concluded the Solicitors were guilty of deliberate concealment and dismissed their explanations as being not credible.    

76.  Both in the Solicitors’ letters to the trial judge and affirmation opposing the wasted costs application, they had maintained that the omission to disclose the Lands Department Reply was due to inadvertence and oversight and was not a deliberate concealment. The plaintiff’s solicitor, on the other hand, maintained that it was a deliberate concealment and raised various allegations of impropriety against the handling solicitor in the affirmation filed in support of the application.  The handling solicitor denied the allegations.  Plainly, these factual disputes cannot be tried and resolved on affidavits.  It is open to the trial judge to decide whether to investigate the issue himself or to leave the investigation to the Law Society. If he were minded to investigate the issue himself, then appropriate directions should be given to enable a proper and fair determination of the factual disputes, including the calling of oral evidence or witnesses.  Without conducting an investigation, the trial judge could not, in the face of the heavily contested affidavit evidence, conclude that it was a concealment for which no credible explanation was given.      

77.  However, the wasted costs jurisdiction does not have to be based on deliberate concealment of the Lands Department Reply; unreasonable omission will be sufficient. There can be no doubt that the Lands Department Reply is a piece of relevant and important evidence. A careful and prudent solicitor would not have omitted to disclose it.  The handling solicitor’s explanation that the Lands Department Reply did not catch his attention because the preparation of witness statements had been completed by the time it arrived was not a reasonable one, considering the relevance and importance of its contents.  The trial judge was correct in finding that the non-disclosure of the Lands Department Reply was an unreasonable omission.

78.  Mr Kenneth Chan’s second argument is that there is no causal link between the omission to disclose the Lands Department Reply and the wasted costs that were ordered.  It was pointed out that the defendants did not defend the action solely on the ground of illegality in that the defendants also disputed the existence of the agreement made between the deceased and the plaintiff and also whether there was a trust over the Property.  It was further pointed out that illegality was only raised in the written and oral submissions, but had not featured in the affirmations or in the oral evidence.  

79.  Under Section 52A(6) of the High Court Ordinance, wasted costs are costs incurred by a party as a result of, inter alia, unreasonable omission.  It was held in Ma So So Josephine v. Chin Yuk Lun Francis and Another, at para.6 that the causal link between the solicitor’s conduct and the extent of costs incurred or wasted must be established.  Here, the defendants relied on three defences and illegality was only one of them.  It had not prolonged the examinations and cross-examinations of the witnesses.  It only affected the preparation of the written submissions and lengthened the oral submissions made at the trial.  It therefore follows that the costs incurred by the non-disclosure of the Lands Department Reply must be limited and cannot extend to the costs of the whole action. There is no basis for making a wasted costs order on the costs of the whole action.  Having regard to all the circumstances of the case, I consider that the wasted costs should be limited to one-third of the plaintiff’s costs of the action.

80.  I turn finally to the basis on which the wasted costs should be paid.  Mr Kenneth Chan submitted that normally wasted costs are payable on party-and-party basis.  This was recognized in paragraph 33 of Practice Direction 14.5. Wasted costs may be ordered to be paid on a higher basis where the conduct of the legal representative is such as to warrant it. In the present case, since the wasted costs order is imposed on the basis of an unreasonable omission to disclose the Reply, it should only be payable on party-and-party basis.

81.  In conclusion, I would allow the appeal of the Solicitors against the judgment on costs and substitute the costs order against them with an order that they jointly and severally with the defendant pay to the plaintiff one-third of the costs of the action to be taxed on party-and-party basis if not agreed.

82.  As to costs of the Solicitors’ appeal, the Solicitors are partially successful in the appeal; they have failed in their primary contention that no wasted costs order should have been made against them at all.  I would order that the plaintiff pays half of the costs of the Solicitors’ appeal to be taxed if not agreed.