BB v. KO

Redacted and amended version for publication

HCCT 7/2020

[2023] HKCFI 2661

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 7 OF 2020

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D E C I S I O N

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Background

1.  This is the application made by Mr XXXXXXXXXX (“KO”), by his summons issued on 19 September 2022 (“Summons”), to set aside the order of this Court made on 16 March 2020 (“Enforcement Order”) granting leave to the Plaintiff (“BB”) to enforce an arbitral award made on 20 December 2019 (“Award”). The Award was made in an arbitration in Chicago, Illinois, USA which had been commenced by BB against KO on 27 July 2018 (“Arbitration”).

2.  The Enforcement Order provided for leave to KO to apply to set aside the Enforcement Order within 28 days after service of the Enforcement Order on him, and that the Award shall not be enforced until the expiration of such time. No application for setting aside was made within the period of 28 days, and on 29 December 2020, judgment was entered in Hong Kong in terms of the Award (“Judgment”).

3.  By the Summons, KO now seeks an extension of time to set aside the Enforcement Order and the Judgment, since the Summons was issued more than 2 years after the 28 days specified in the Enforcement Order.

4.  The Award arose out of a dispute between KO and BB under an engagement agreement entered into between them on 9 December 2017 (“Agreement”), and KO’s failure thereunder to pay legal fees owed to BB for services rendered by BB. The Agreement was governed by the law of Illinois and provided for arbitration in Chicago, Illinois of disputes arising out of or relating to the Agreement and the relationship between KO and BB.

5.  BB is a top law firm in the United States, specializing in “high stakes litigation”. KO is a successful businessman, having founded XXXXXXXXXXXXXXXXXXXXXXXX (“UEC”) which is a multi‑billion‑dollar XXXXXXXXXXXX company, and one of the world’s largest manufacturers of XXXXX products. He was (until May 2017) Chairman and a director of UEC, and President and Director of XXXXXXX (“AU”).

6.  In the year 2000, KO had caused AU to invest in XXXXXXXXXXXXXX (“WR”), and by 2011, KO controlled approximately 20% of the shares of WR through UEC and AU. Disputes with WR arose in 2012, when WR forcibly redeemed all of AU’s shares and removed KO from the board of WR. According to KO, the redemption of the shares was at a substantial discount.

7.  On 19 February 2012, WR commenced legal proceedings against KO, UEC and AU in the Nevada State Court, USA (“US Litigation”). It has never been disputed that KO was sued personally as one of the defendants in the US Litigation. On KO’s case, the US Litigation was commenced by WR in an attempt to preemptively counter any claim that may be made by AU, that its shares in WR were undervalued.

8.  KO was ousted from the management of UEC and removed as the Chairman and director thereof in May 2017. The lead lawyers who had represented UEC, AU and KO in the US Litigation withdrew from representing KO, and KO had to look for alternative legal representation. Another firm of lawyers (“HH”) continued to represent KO for a transitional period.

9.  On 9 December 2017, the Agreement was entered into between BB and KO. KO never disputed that the Agreement was signed by him.

10.  The Agreement recited that BB would represent KO “in litigation relating to WR currently pending in Clark County, Nevada”, and that BB’s engagement was limited to representing KO, and not his companies or their subsidiaries. The Agreement also provided that:

(1)  BB would “provide overall strategic litigation direction and serve as lead trial counsel” on KO’s behalf, and on behalf of UEC and AU in the event that KO should regain control over those entities, in the US Litigation;

(2)  HH or another firm chosen by BB in consultation with KO shall serve as local counsel and assist BB as necessary;

(3)  BB’s lawyers were not admitted to practise in Nevada, and would be seeking to represent KO through the court’s pro hac vice practice; and

(4)  BB was not being retained as lead counsel in KO’s litigation in Hong Kong, although BB might provide strategic advice regarding that matter.

11.  It is not disputed, that under the Agreement, BB was to charge a flat monthly fee of US $600,000, a trial fee of US $75,000 per day, and a “success bonus” ie a contingency fee of one-third of the difference between the total recovery of the defendants in the US Litigation and the value of a Promissory Note which had been issued by WR, capped at US $50 million, and that such fee was chargeable irrespective of whether KO regained control of UEC, or not.

12.  On 8 March 2018, WR agreed to a settlement with UEC and AU, under which WR paid to these companies approximately US $2.63 billion and withdrew the claims made in the US Litigation against KO (“Settlement Agreement”). On KO’s evidence, he derived no direct personal benefit from the Settlement Agreement, as he was specifically excluded therefrom, and the entire settlement sum was paid to UEC and AU only. It is KO’s position that he had never personally received any legal advice from BB, and that in fact, the settlement was contrary to his instructions and against his wishes.

13.  Not having received payment from KO under the Agreement, BB commenced the Arbitration on 27 July 2018 to recover their fees due. On 20 December 2019, the Tribunal issued the Award, finding that BB was entitled to the contingency fee of US $50 million, and KO was ordered to pay to BB a sum of US $49,651,513 as damages for breach of the Agreement, with interest and costs.

14.  After judgment had been entered in Hong Kong in terms of the Award, BB obtained by way of enforcement in May 2021 a Charging Order Absolute over KO’s assets in Hong Kong, being his shareholding in XXXXXXXXXXXXXX (“OHL”), XXXXXXXXXXXX (“OFA”) and XXXXXXXXXXXX (“AHK”). BB was also able to obtain in June 2022 a garnishee order nisi over dividends declared by OHL in favor of KO, of over HK $57 million.

15.  It was only in September 2022, that KO applied for time to set aside the Enforcement Order, and the Judgment entered pursuant thereto. The grounds of the setting aside, as disclosed in the supporting affirmation of KO made on 3 February 2023 (“KO 2”) are that the Arbitration and the Award are in respect of a contingency fee arrangement, which is illegal and not capable of settlement by arbitration in Hong Kong and is against the public policy of Hong Kong, and that the amount of the fees claimed by BB are manifestly excessive, disproportionate and unconscionable. In his affirmation, KO also claimed (inter alia) that: (1) he did not receive any personal benefit under the Settlement Agreement; (2) he had never received any advice from BB personally; (3) the Settlement Agreement was against his wishes and without his instructions; and (4) he did not understand the terms of the Agreement.

16.  KO’s application for extension of time to set aside the Enforcement Order and the Judgment is opposed by BB. It was pointed out that the application was 2 years out of time, and KO has not given any good explanation for his delay. Further, BB claims that there is no permissible ground to set aside the Award under section 89(3) of the Arbitration Ordinance (“Ordinance”), as the Agreement is not illegal, and enforcement of the Award for KO’s payment under the Agreement is not contrary to the public policy of Hong Kong.

Extension of time

17.  Counsel for BB relies on this Court’s decision in Sky Power Construction Engineering Ltd v Iraero Airlines JSC [2023] 3 HKLRD 654, where the relevant principles for the exercise of the Court’s discretion to extend time to set aside an enforcement order are set out, in the light of the guiding principles of the Court of Final Appeal, in Astro Nusantata International BV v PT Ayunda Prima Mitra (2018) 21 HKCFAR 118, and the factors considered in Terna Bahrain Holding Co WLL v Al Shamsi [2013] 1 Lloyd’s Rep 86. The relevant principles and factors are set out at paragraphs 17 and 18 of the judgment in Sky Power, and will not be repeated here.

Delay

18.  As reiterated in Counsel’s submissions made on behalf of BB, there has been a delay of more than 2 years from the period of 28 days specified at paragraph 2 of the Enforcement Order. On any account, the delay is substantial.

19.  The reasons for the delay, so far as can be ascertained from KO’s evidence, is that essentially, he had been challenging the Arbitration in the United States, having appealed to vacate the Award, and then contesting the validity and enforcement of the Award in the US Courts, and then the Courts in Japan. He had been given to understand that he should focus on the challenge against the Award in the US, because if the Award was vacated, or otherwise ruled invalid or unenforceable, the enforcement proceedings elsewhere would have to cease. KO also claimed that he had not been advised by his solicitors in Hong Kong, to apply to set aside the Enforcement Order or the Judgment in Hong Kong.

20.  On KO’s case, it was only on 8 February 2022 that the Appeal was dismissed by the US Court of Appeals, and it was only in December 2021 when KO changed his legal team in Hong Kong that he considered it prudent to consider his further options, and it was in early 2023 that he was made aware of the ground that the Award may be contrary to the public policy of Hong Kong, and that there was a basis to set aside the Enforcement Order and the Judgment.

21.  I agree with the submissions made on behalf of BB, that it was KO’s own considered decision to focus on his Appeal and the proceedings in the US to challenge the Award, and to leave aside the resistance to enforcement proceedings already initiated by BB from March 2020 (when the Enforcement Order was made), to December 2020 when the Judgment was entered. This was notwithstanding the fact that there were steps taken and orders obtained by BB in Hong Kong on the basis of the Judgment, namely the Charging Order Nisi in May 2021, and the Garnishee Order in June 2022.

22.  As Counsel highlighted, in the interim of the Judgment and the Summons, BB had applied to the Court in Tokyo for enforcement of the Award, and KO had appealed against the order made by the Tokyo Court for compulsory execution of the Award. His appeal was dismissed in June 2021.

23.  It cannot sensibly be said that KO had been ignorant of the fact that the Award and the Judgment can be enforced in Hong Kong. The law is clear, that it was open to him to challenge enforcement of the Award in Hong Kong, without first seeking to appeal against the Award or to set it aside in the US. Yet, KO decided to refrain from taking any action to resist enforcement and to set aside the Enforcement Order in Hong Kong, until September 2022. Even on KO’s case that he had been waiting for the outcome of his challenge against the Award in the US, the Summons was issued more than 7 months after the US Court of Appeals had (in February 2022) confirmed the judgment of the US District Court, made in March 2021 to confirm the Award and to dismiss KO’s application to vacate the Award.

24.  KO’s claim, that he was waiting for the appeal in the US and chose to focus on that, instead of resisting enforcement elsewhere, is also inconsistent with the fact that he had taken active steps to oppose enforcement of the Award in Japan in 2021, before the issue of the Summons in September 2022.

25.  The excuse given for not taking action before September 2022, that KO was not aware of the option to set aside the Enforcement Order and the Judgment until early 2023, or after the dismissal of his appeal in the US, is further contradicted by events in Hong Kong in 2021. As Counsel for BB pointed out, at the hearing of the charging order absolute on 4 May 2021, when KO was legally represented, the Master had specifically asked whether KO had applied to set aside the Judgment. In a letter from BB’s solicitors to KO’s then solicitors dated 18 June 2021, the former had pointed out the fact that any application to set aside the Enforcement Order was out of time. Further, in KO’s affirmation made on 20 August 2021 in opposition to an application by BB for post-judgment disclosure, he had already claimed that if the US Court to vacate the Award or rule it to be invalid or unenforceable, he would be applying to the Hong Kong Court to set aside the Enforcement Order. The claim that he had no knowledge of such an option is hence unbelievable.

26.  As a further reason for delay, KO relied on his medical condition in August 2021, and from late February to early March 2022, when he had to undergo medical examinations, treatment and surgery. According to KO, this had hampered the preparation and giving of instructions to his lawyers, at a time when he was engaged in multiple proceedings in various jurisdictions. I have taken into consideration the fact that he may have been inactive for the time around August 2021 and in the limited period between February and March 2022. On the evidence, however, he had a large team of lawyers working for him and who can be expected to be looking after his interests. As Yeung J noted in another case concerning KO, when KO had purported to explain his failure to comply with a disclosure order made by the Court on the ground of his poor health, KO’s disclosed medical condition did not result in his cognitive impairment. It is not credible that it had been impossible for him to have given simple instructions to his lawyers to seek setting aside of the Enforcement Order and Judgment in Hong Kong.

27.  Any change of lawyers in Hong Kong around December 2021 is not a good reason for inactivity, as changes in the legal team have rarely been accepted by the Courts as a good excuse for lack of action.

28.  Overall, so far as KO’s reasons for the delay of 2 years are concerned, I do not accept that there has been any good or satisfactory explanation shown.

Prejudice

29.  The prejudice to BB, if extension of time was granted to KO, is that they would be delayed in enforcement of a final award made in the Arbitration, to which KO had agreed to be bound under the arbitration clause contained in the Agreement. This is against the general policy of upholding the finality of an arbitral award made in a consensual process of dispute resolution.

30.  On KO’s case, there is no prejudice to BB which cannot be compensated by costs.

31.  The delay in enforcement, and whether it causes prejudice, should not be considered in isolation from the merits of the proposed setting aside application. As emphasized by the Court of Final Appeal, it would be inappropriate to promote the importance of certain factors to be considered, and according to others a secondary status. All should be looked at in a broad, unrestricted approach.

Merits of the setting aside application

32.  If KO has merits in the intended application to set aside the Enforcement Order, it would be unjust to shut him out from having his valid claims and rights determined by the Court. If there are no merits in KO’s application to set aside, then it can be said to be grossly unjust to delay KO’s enforcement and recovery of the fruits of the Award at the Judgment, when KO himself has sat on his application for 2 years.

33.  BB is correct in contending that KO’s claims, that the fees are exorbitant, or are unsupported by particularized bills as to the time spent on work allegedly done, and are disproportionate etc, have all been determined by the Tribunal in the Arbitration. The claim made in the Arbitration was for recovery of BB’s fees, in relation to work done by them pursuant to the terms of the Agreement. The Tribunal found, on the merits, that BB were entitled to the fees they claimed, and that the contingency fee arrangement was reasonable, valid and recoverable under its governing law of Illinois and the law of Nevada where the legal services were performed. The Tribunal had considered the claims made by KO that BB’s fee was unconscionable, disproportionate to the time spent by the lawyers, unreasonable and unenforceable, but rejected all these arguments on the evidence adduced, concluding that the fee arrangement was reasonable in all the circumstances of the case. This is a finding on facts and on law, which this Court does not review.

34.  The main ground relied upon by KO 2 is that it would be contrary to the public policy of Hong Kong to enforce the Award which gives effect to a contingency fee arrangement under the Agreement. In the submissions of Counsel for KO, filed for the hearing on 6 October 2023, Counsel referred to the fact that the contingency fee arrangement under the Agreement (“Arrangement”) related partly to litigation in Hong Kong, such that the Arrangement is champertous (relying on Wallersteiner v Moir (No 2) [1975] 5 QB 373). Counsel relies on the relevant public policies underlying the prohibition on champerty, as being: (1) to avoid the perversion of justice and endangering the integrity of judicial processes; and (2) to avoid strangers trafficking in or “gambling” on the outcome of the litigation. Counsel also referred to the public policies underlying the prohibition on maintenance as being to discourage officious intermeddling in litigation, which leads to oppression and the general encouragement of litigiousness (Unruh v Seeberger (2007) 10 HKCFAR 31)

35.  Although KO had referred in KO 2 to the ground of his application to set aside the Enforcement Order as being on the basis that the Award is in respect of the Arrangement which is illegal, not capable of settlement by arbitration in Hong Kong, and against public policy in Hong Kong, it was only when Counsel served his submissions for the hearing on 6 October 2023, that reliance was placed on the fact of the Arrangement being partly for litigation in Hong Kong. It was on the basis that the Arrangement for fees related at least partly to legal services for the purposes of litigation in Hong Kong, that Counsel submitted that the Arrangement should not be enforced by the Hong Kong Court. Throughout his sworn evidence, KO had referred only to the US Litigation, as being the matter for which BB had been instructed for him.

36.  This gives support to the complaint made by BB, that KO’s Summons and setting aside application is an abuse of process, since the Summons did not specify the grounds for the intended setting aside application, and it should not be necessary for BB and the Court to speculate on the precise ground or grounds relied upon by KO in his claim that the Enforcement Order and Judgment should be set aside. This is precisely the mischief sought to be avoided in the courts’ determination that a summons to set aside an arbitral award or an enforcement order must identify the grounds relied upon and must be served together with an affidavit, which sets out the relevant facts relied upon to support the ground or grounds (KB v S [2016] 2 HKC 325; Sky Power Construction Engineering Ltd v Irearo Airlines JSC [2023] 3 HKLRD 654; O 73 r 5 (4), r 10 (6A)).

37.  As submitted by Counsel for BB, and I agree, despite the lapse of more than 2 years from the time when the Enforcement Order was made, KO was still unable to set out in either the Summons or KO 2 in support thereof the precise ground relied upon by him, and all the relevant facts which he claims to support his application - notwithstanding the fact that, as he claimed, the Summons was issued at a time when he had already changed his lawyers and taken legal advice on opposing enforcement of the Award in Hong Kong, and whether he had grounds so to resist enforcement.

38.  If the Arrangement is illegal or contrary to the public policy of Hong Kong by virtue of the fact that it related to litigation conducted in Hong Kong, this is a highly material and an obvious fact which should have been set out clearly in KO 2. The fact that it was not renders the claim now made, that the fees and the Arrangement are champertous under Hong Kong law or public policy because it affected litigation in Hong Kong, incredible.

39.  Whereas KO was completely silent as to the litigation which was being conducted, or contemplated, in Hong Kong at the time when the Agreement was made, Counsel referred to the fact that firstly, the Agreement had a sentence which stated that BB was not being retained as lead counsel in KO’s litigation in Hong Kong, but they might provide strategic advice regarding that matter. Secondly, Counsel placed reliance on the fact that even in the evidence of BB which was filed in the Arbitration, BB’s partner (Mr L) had referred to the fact that he had traveled extensively in furtherance of KO’s interests, including making three trips to Hong Kong, and that he had communicated regularly with counsel representing KO in the US and in Asia. L also claimed that he had worked with KO and his representatives “in coordinating (KO’s) strategy for litigation matters across the globe”, and had coordinated with KO’s counsel handling matters for KO in Hong Kong, prepared for and attended meetings with KO’s legal teams in Hong Kong, reviewed pleadings, evidence and witness testimony from KO’s Hong Kong litigation, and attended hearings and pre-hearing strategy sessions in Hong Kong.

40.  On BB’s case, KO’s reliance at the hearing on the existence of Hong Kong litigation in support of his claim of the Arrangement being champertous and against prohibition on maintenance amounts to ambush, since BB have not been given the reasonable opportunity to respond to these allegations.

41.  In any event, Counsel for BB argued that the Arrangement in the present case does not engage the doctrine of maintenance and champerty. It was pointed out that BB’s entitlement to the contingency fee hinges solely upon the successful outcome of the US Litigation commenced in the courts of Nevada USA. There are no concerns that either KO or BB would be encouraged, by reason of the Agreement or the Arrangement, to maintain, intermeddle with or gamble on the outcome of any judicial process in Hong Kong.

42.  In my view, there is in fact no clear evidence adduced by KO in this case as to what litigation there was in Hong Kong at the relevant time of the subsistence of the Agreement: whether such litigation in Hong Kong was only being contemplated, or was actually in place and being conducted by or with BB’s strategic advice or input. L’s general reference to having given strategic advice, and meeting with KO’s lawyers in Hong Kong, is not sufficient to show that he had done work for litigation being or to be conducted in Hong Kong, as opposed to co-ordinating what the lawyers retained in Hong Kong were doing for the purposes of or assisting in the US Litigation, or litigation elsewhere outside Hong Kong.

43.  As Ribeiro PJ highlighted in his judgment in Unruh v Seeberger (2007) 10 HKCFAR 31 at 69:

“… the fact that an arrangement may be caught by the broad definitions of maintenance or champerty is not in itself sufficient to found liability. The totality of the facts must be examined asking whether they pose a genuine risk to the integrity of the court’s processes. In R (Factorframe Ltd) v Transport Secretary (No 8), Lord Phillips MR stated: ‘… one must today look at the facts of the particular case and consider whether those facts suggest that the agreement in question might tempt the allegedly champertous maintainer for his personal gain to inflame the damages, to suppress evidence, to suborn witnesses or otherwise to undermine the ends of justice.’ It is not enough simply to say that it is the type of agreement which ‘savours of’ champerty.” (Emphasis added)

44.  Without the necessary facts as to the Hong Kong litigation, the subject matter to which it related, and whether and how the Hong Kong litigation affected or was affected by the US Litigation which formed the basis of the contingency fee Arrangement, it is simply not possible for the Court to evaluate and determine whether there was a genuine risk to the integrity of the process of the Court in Hong Kong, and whether there was a danger or encouragement of trafficking or gambling in the outcome of such Hong Kong litigation, suborning of witnesses, etc.

45.  It must also be borne in mind that under section 89(2) of the Ordinance, it is for KO to prove that one or more of the grounds set out in section 89(2) exist, and in order for him to invoke section 89(3), KO must at least establish and prove the facts on which the Court may find that enforcement of the Award would be contrary to public policy. The facts required to support the claim of public policy are all within the knowledge of KO, who had participated in the US Litigation and in the Arbitration when he contested the fees due to BB, and there is no conceivable reason why he could not have disclosed these facts when he applied to set aside the Enforcement Order if the facts existed, and were true. In none of KO’s affirmations has he ever alluded to the Hong Kong litigation, and what it was about.

46.  I am not satisfied, on the evidence adduced in this case, that grounds exist to justify refusal of enforcement of the Award, on the basis that it gives effect to a fee arrangement which perverts justice or endangers the integrity of the judicial process in Hong Kong, or encourages trafficking in or gambling on the outcome of any litigation then existing in Hong Kong, or amounts to officious intermeddling in litigation in Hong Kong.

Other matters relied upon in the Submissions

47.  The only grounds referred to in KO 2 filed with the Summons are public policy, and the fees being excessive, disproportionate and unconscionable. They were not even set out in the Summons, but I have given consideration to them.

48.  No other grounds for setting aside were disclosed in KO 2, and the matters referred to in Counsel’s submissions, that the Agreement was made without KO’s authority or knowledge, such that there was no valid arbitration agreement and that the tribunal had acted without jurisdiction, will not be considered - and should never have been raised by Counsel.

Disposition

49.  Having carefully considered all the relevant factors and the circumstances in this case, I conclude that there is no good reason to grant time to KO to set aside the Enforcement Order and the Judgment.

50.  Even if I should have granted an extension of time to him, I have considered the merits of his application, and I am not satisfied that enforcement of the Award should be refused on the ground of public policy.

51.  The Summons is accordingly dismissed, with the order that KO should pay to BB the costs of the application, on indemnity basis, with certificate for Counsel.