LAW SHUK HOI v. LO LOK FUNG KENNETH AND OTHERS

HCMP 1053/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1053 OF 2008

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JUDGMENT ON COSTS

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1.  The court had written submissions on costs from the parties after the judgment of 26 July 2010. In view of the arguments advanced, the court heard further oral submissions on costs on 10 December 2010.

2.  As between the two main protagonists, the Plaintiff (represented by Mr Chan SC at the costs hearing) submitted that costs of all the parties should be paid out of the trust fund.  By way of alternative, counsel contended that there should be apportionment based on the parties’ respective degrees of success in respect of issues arisen in the proceedings.

3.  On the other hand, Mr Yu SC for the 2^nd to 5^th and 7^th and 8^th Defendants contended that his clients’ costs should be paid by the Plaintiff.

4.  The other defendants also asked for their respective costs to be paid out the trust fund.  However, there is an issue on the extent to which they should have their costs in the light of the neutral stance adopted by them on the substantive issues.

Costs of the Neutral Defendants

5.  I shall first deal with the costs of the other defendants.  As far as they are concerned, by virtue of their neutral stance, the present proceedings fall within the scope of the first category identified in Re Buckton [1907] 2 Ch 406.  There is no submission that I should depart from the general rule that beneficiaries’ costs in such case should come out of the trust fund and to be assessed on indemnity basis.  Subject to the comments below on the extent of their participation, I shall order accordingly.

6.  Regarding the extent to which their costs of participation in the proceedings should be allowed, notwithstanding the submissions of Mr Chan, I do not see any valid basis for distinguishing the position of the 9^th Defendant from that of the other neutral defendants. Even though the 9^th Defendant does not have any direct interest under Clause B(3)(a), the construction of that clause could have significant impact as regards Clause B(3)(b) which arguably has a charitable element. The 9^th Defendant, as parens patriae, has a duty to ensure that proper submissions were made to the court to uphold the validity of a potentially charitable trust.

7.  Before the substantive hearing, this court held a pre-trial review on 8 June 2010.  The purpose of the pre-trial review was to ascertain the stances of the parties in respect of the construction issues. The 1^st and the 9^th Defendants indicated that they take a neutral stance.  The court noted their positions and ordered that their attendance at the substantive hearing be excused.  The court further indicated that if legal representatives attended on their behalf, such costs would not be allowed.  Despite that, 1^st and 9^th Defendants attended the substantive hearing by legal representatives holding watching brief.

8.  As regards the 6^th Defendant, his solicitor informed the court on 8 June that his client had not yet instructed counsel and he needed time to consider the matter with counsel.  This court directed that if the 6^th Defendant did not take a neutral stance, he should file his skeleton submissions by 24 June.  Otherwise, he would be treated as agreeing to be abided by the outcome of the proceedings and his attendance at the substantive hearing would be excused.

9.  The 6^th Defendant did not file any skeleton submissions by 24 June.  Yet at the substantive hearing, Mr Fung SC and Ms Wong appeared on his behalf.  Though Mr Fung referred the court to one case, in essence he adopted a neutral stance on the issues argued between Mr Shieh SC and Mr Yu.  

10.  In such circumstances, I do not think the neutral defendants should get their costs in respect of the substantive hearing on 6 July 2010.  Subject to this qualification, the neutral defendants (viz. 1^st, 6^th and 9^th Defendants) shall have their costs out of the trust fund, such costs to be taxed on indemnity basis.

Costs between the Plaintiff and the other Defendants

11.  Turning to the position as between the Plaintiff and the other defendants, in the light of the submissions advanced before me, the issues on costs are as follows,

(a)     Is the present originating summons an ordinary construction summons or hostile proceedings commenced by the Plaintiff for his personal benefit?

(b)    Could the Plaintiff seek protection as to his costs position by a Beddoe application  and what is the significance, if any, of his failure to do so?

(c)     Should Order 62 Rule 6(2) be applicable in respect of the Plaintiff’s costs?

(d)    If the ordinary rule as to hostile litigation is applicable, which party is the successful party for the purpose of costs consideration?

(e)  Should there be any apportionment of costs regarding the following issues argued at the substantive hearing: (i) default position; and (ii) extrinsic evidence?   

Submissions

12.  On the nature of the proceedings, Mr Chan submitted that the Plaintiff commenced these proceedings in his capacity as a potential fiduciary seeking the court’s determination on a difficult point of construction for the benefit of the estate.  Though the Plaintiff adopted the primary position arguing for the construction of Clause B(3)(a) as a discretionary power at the substantive hearing, Mr Chan submitted that the Plaintiff actually placed before the court all possible constructions for consideration.  Mr Chan reminded the court that the position as to outright gift had been abandoned at the hearing and the Plaintiff did not adopt a hostile stance.

13.  In his written submissions, counsel said the Plaintiff only took such primary stance at the hearing (viz. contending that the instrument created a fiduciary power without any obligation to distribute) in the light of the indication by the court at the pre-trial review that the Plaintiff should adopt a position in order to assist the court.  The Plaintiff merely put forward submissions on the interpretation of the instrument which otherwise would not be made by any of the defendants.

14.  Mr Chan further said the present proceedings should not be regarded as a trial of preliminary issue in HCA 1820 of 2007 notwithstanding that the originating summons was taken out after the pleadings in the High Court Action were filed.  He said the only plaintiff in the High Court Action is Wendy Law, the 7^th Defendant in the present proceedings, and her claim could be defeated for want of locus without resolving the construction issue.  Also the question as to the default position was not raised in the High Court Action.  Thus, the present proceedings should be regarded as a separate set of proceedings.

15.  Mr Yu contended otherwise.  He invited this court to have regard to a chronology of the relevant events, including those in the High Court Action.  The Deceased passed away in 1996.  Requests were made to the Plaintiff for an account of the fund in July 2007 and the writ in the High Court Action was issued in November 2007.  The claim in the writ was for account.  A defence in the High Court Action was filed by the Plaintiff (as defendant in the writ action) on 30 January 2008.  In that defence, the Plaintiff denied at para. 9 that the instrument gave rise to any valid trusts whether as alleged or at all.  He also denied Wendy Law had any locus to bring the claim.  Paragraph 10 of that defence pleaded that Clause B(3)(a) of the instrument was open to several possible constructions and at paragraph 11 the Plaintiff said he would issue a construction summons in due course and seek a stay of the writ action.

16.  The originating summons in the present proceedings was issued on 4 June 2008.  In his first affirmation filed in these proceedings, the Plaintiff stated his position at para. 13 that he denied the Letter of Wishes gave rise to any valid trusts (whether as alleged by the plaintiff in the High Court Action or at all).  In his second affirmation filed on 30 September 2008, the Plaintiff said at paras. 10 and 12 that the settlor (his father) told him he could use the assets transferred to him in whatever way he likes.  Mr Yu submitted that it shows that the Plaintiff contended that the transfer was an outright gift.  Though such position was no longer maintained at the substantive hearing, the Plaintiff only made that clear at a very late stage.

17.  On 16 October 2008, Deputy Judge Mayo ordered a stay of the High Court Action pending the determination of the present proceedings.  Mr Yu submitted that in view of the history of the matter, the present proceedings were clearly prompted by the High Court Action and the originating summons was a defensive procedural manoeuvre by the Plaintiff to hive off part of the dispute between the parties in the High Court Action.  Mr Yu further invited the court to have regard to the practical results if the court were to agree with the Plaintiff in his primary submissions.  Counsel said the constructions advocated by the Plaintiff would result in advancing his personal interest.  

18.  Mr Yu said were his clients’ contentions on proper construction of the relevant clause rejected by the court, there is little doubt that they would be asked to bear the costs of the present proceedings.  Thus, given the background, there was no reason why the Plaintiff should not suffer the same fate when his contention was rejected.

Discussion

19.  In general, a trustee is entitled to come to court to seek guidance on the construction of a trust instrument and unless he acts unreasonably he would get the costs of such exercise from the trust fund. This general rule is reflected in Order 62 Rule 6(2).  Mr Chan submitted that the word trustee should be given a wide interpretation to encompass a person likes the Plaintiff.

20.  For my part, I do not think it is necessary for me to rule on the scope of Order 62 Rule 6(2).  Even if the scope of that rule is not as wide as that contended for by Mr Chan, I am prepared to hold that as a matter of common law, in general a fiduciary appointed by an instrument can come to court to seek guidance on points of construction or the administration of the fund placed in his hands for the benefit of others on the basis that the costs of such exercise should be borne by the fund.  In my view, such a right of indemnity as to costs stems from the appointment of the fiduciary to the office.  In this connection, the rationale for such indemnity in favour of trustee as explained by Lindley LJ in Re Beddoe [1893] 1 Ch 547 at p. 558 equally applies to such a fiduciary.  But as in the case of a trustee falling within the scope of Rule 6(2), the right to indemnity is subject to two exceptions where the court may order otherwise: (1) where the fiduciary acts unreasonably; or (2) where he has in substance acted for his own benefit rather than for the benefit of the fund.

21.  In the present case, Mr Yu contended that the Plaintiff acted in substance for his own benefit in the present proceedings. Is he right?

22.  Whilst the history of the matter is relevant, in my judgment the fact that the Plaintiff only took out the present proceedings after the commencement of the High Court Action cannot be determinative as to the character of the proceedings.  I can see that there are cases where a trustee or a fiduciary can still legitimately take out a construction summons (or other Order 85 applications) to seek guidance from the court after he has been made a defendant in another set of proceedings challenging certain acts or omissions on his part in the administration of the trust fund in the wake of conflicting views amongst the beneficiaries.

23.  For the purpose of determining whether the proceedings were litigated for a trustee or a fiduciary’s own benefit, it is more pertinent to have regard to the stance adopted by that person and whether such stance could be said to be advanced for the benefit of the settlement as a whole.

24.  In this connection, I shall first dispose of the suggestion that the Plaintiff took the stance as he did in the wake of the court’s indication.  I have listened again to the digital recording of what transpired at the Pre Trial Review on 8 June 2010.  What the court did on that occasion was to enquire with the Plaintiff the stance he would take.  Such enquiry was made in order to facilitate the court’s exercise of its case management power.  The court was concerned about the relevance of some extrinsic evidence and it depended on the positions adopted by the parties. Counsel for the Plaintiff informed the court that the position of the Plaintiff would be set out in his skeleton submissions to be filed.  At no point in time was it suggested on behalf of the Plaintiff that as he was only coming to court to seek guidance to protect himself as a potential fiduciary he would only put before the court the various possible constructions without preferring one over the others.  With respect, I do not think there is any merit in the submission that the Plaintiff only adopted a particular position at the behest of the court.

25.  The character of the proceedings can be gleaned from the evidence of the Plaintiff.  Even though he ultimately did not rely on his second affirmation at the substantive hearing (as he contended that such evidence would not be relevant for the construction exercise), what he had said in that affirmation clearly set out his stance in commencing these proceedings.  Thus it should be taken into account for the purpose of deciding whether the proceedings were in substance fought for his own benefit.  As mentioned, he had already stated in his defence in the High Court Action and his first affirmation that he denied there was any trust.  In the evidence filed by the Defendants to these proceedings, the affirmation of the 5^th Defendant canvassed evidence suggesting that the intention of the settlor was to create a trust.  Against that background, the Plaintiff responded in his second affirmation and referred to matters at paras. 6 to 16 pointing to the intention of the settlor to make a gift to him.  He concluded by saying as follows at para. 16,

“I verily believe that My Father intended that I would be beneficially entitled to the shares in Kandos, Venus and LPHL which My Father transferred to me pursuant to the Letter of Wishes and the other provisions in the Letter of Wishes were merely wishes which he wanted me to follow as far as possible.”

26.  In short, the Plaintiff said he could do whatever he likes with the transferred properties and it was up to him to decide whether he would follow the wishes of the Settlor set out in the Letter.

27.  Though the Plaintiff retracted from that position by the time of the substantive hearing (by abandoning a contention based on outright gift), his primary position was that the settlement vested upon him a power which he was not obliged to exercise and upon default he could have the property beneficially.

28.  Thus, according to his case, the Plaintiff could not be compelled by the court to exercise the power and if he chose not to, by default the property would become his at the end of the day.  Amongst all the parties in these proceedings, the Plaintiff is the only person who advanced this contention before the court.  And it is not difficult to see that the Plaintiff was serving his personal interest in advocating such construction.  

29.  Indeed, apart from the Plaintiff, I cannot see how that contention (as compared with the other contentions advanced before the court) would benefit other parties in these proceedings.

30.  I conclude that Mr Yu was correct in his submission that in substance the Plaintiff was acting for his own benefit rather than for the benefit of the fund in the present proceedings.  Therefore, the case falls within an exception to the general rule that a trustee or fiduciary should get his costs from the estate.

31.  The above analysis in effect deals with the second and third issues as well.  In Re Beddoe [1893] 1 Ch 547 at p. 557, Lindley LJ cautioned against a trustee engaging in litigation without the sanction of the court,

“But a trustee who, without the sanction of the court, commences an action or defends an action unsuccessfully, does so at his own risk as regards the costs, even if he acts on counsel’s opinion; and when the trustee seeks to obtain such costs out of his trust estate, he ought not to be allowed to charge them against his cestui que trust unless under very exceptional circumstances. If, indeed, the judge comes to the conclusion that he would have authorized the action or defence had he been applied to, he might, in the exercise of his discretion, allow the costs incurred by the trustee out of the estate; but I cannot imagine any other circumstances under which the costs of an unauthorized and unsuccessful action brought or defended by a trustee could be properly thrown on the estate.”

32.  This approach was applied by our Court of Appeal in Sin Hua Bank Trustee Ltd v Ip Cheung-kwok [1991] 1 HKLR 639.

33.  In the present case, the Plaintiff did not make any Beddoe application whether in defending the High Court Action or prosecuting the present set of proceedings.  Mr Chan accepted that a Beddoe application can be made but counsel submitted that it would not be necessary for a construction summons.  I am prepared to accept that in the usual type of cases where a trustee is coming to court for guidance under Order 85, including construction summons, it may not be essential for a trustee to make a Beddoe application first.  But as I have explained above, the present case is unusual in that the circumstances suggest the Plaintiff did have a strong personal interest in the matter.  Not only did he wear the hat of a trustee/fiduciary, he furthered his personal interest in advocating that he is the ultimate beneficiary of the property transferred to him under the settlement (be it in terms of his original position of outright gift or in terms of his final position of power with a gift over to him personally in default of exercise).

34.  Given such circumstances, I see no reason why the Plaintiff should be absolved from the consequence of his failure to apply for a Beddoe order.  Had he made such an application, given his different roles and his personal interest, applying the principles that were laid down in Alsop Wilkinson v Neary [1996] 1 WLR 1220, it is unlikely that the court will grant a pre-emptive costs order in favour of the Plaintiff.  Like the situation in HSBC International Trustee v Tam Mei Kam HCMP 716 of 2004, 11 Oct 2004, the Plaintiff would be told on such application that if he wished to advance a contention in favour of a particular beneficiary (viz. himself in the present context), he could not get the trust fund to pay his costs if he failed.

35.  I now come to the question of which party can be regarded as the winner in substance.  Mr Chan submitted that by reference to the relief prayed for in the originating summons, the Plaintiff actually got the relief in terms of the determination of the questions raised.  Counsel said because of that the Plaintiff was successful.

36.  With respect, I cannot accept that submission. The court always looks into the substance of the dispute between the parties rather than simply has regard to the relief granted to determine costs. Judging from the way in which the arguments were deployed in the course of the filing of evidence (before the abandonment of the outright gift contention by the Plaintiff) and then in submissions (after the issues had been narrowed down by the time of hearing), the main issue between the Plaintiff and the non-neutral Defendants was whether the settlement created a trust.  On this issue, I held in favour of these Defendants.  They should be regarded as the successful parties in respect of that issue.     

37.  Mr Chan submitted that these Defendants did not succeed over two issues: (1) the default position; and (2) admissibility of extrinsic evidence.  I agree I should take this into account.  But neither did the Plaintiff succeed in respect of these two issues.  I rejected the primary case of the Plaintiff on the default position.

38.  As regards the admissibility of extrinsic evidence, it has to be considered on two different levels.  The first is the position at the time when the evidence was filed (when the Plaintiff had yet to abandon his contention of outright gift).  As thing stood, I do not think the Plaintiff could criticize the defendants for filing affirmations on extrinsic evidence at that stage though I see some force in the criticism against the evidence on the assets forming the subject matter of the trust.  The second level is the position when the case was actually argued.  What I said in my judgment on admissibility of extrinsic evidence focused on that position.  Even on that level, neither party emerges as wholly successful on the question of admissibility of evidence.

39.  But, as I said, it is right that I should take into account of these matters in the overall order as to costs that I would make.  In the present circumstances, given the length of the substantive hearing and the relative success of the parties on the various issues, I think it would be more appropriate to make a proportionate costs order instead of an issue based costs order.

40.  Having regard to all relevant circumstances, I am of the view that a fair order for costs as between the Plaintiff and the non-neutral defendants (viz. those represented by Mr Yu) is that the Plaintiff shall personally pay 85% of the costs of those defendants to be taxed on party to party basis if not agreed.  For reasons given, the Plaintiff should not be allowed to get any indemnity from the trust fund in respect of his own costs or his liability as to the costs of the defendants.

41.  I shall order the Plaintiff to pay personally the costs of Mr Yu’s clients in respect of the costs hearing (also on party to party basis).  The other defendants can get their costs of the costs hearing from the trust fund (on indemnity basis).