ORIENTAL PROPERTIES LLC v. JOHNSON STOKES & MASTER (a firm)

HCMP 1281/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1281 OF 2005

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J U D G M E N T

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1.  This summons is an application for the taxation of bills of costs rendered by a firm of solicitors paid and unpaid and for consequential relief following taxation. 

2.  The matter first came before a Master by Originating Summons.  He ordered taxation of one only of the five bills challenged.  The plaintiff, whose application it is, has appealed the order.  This is the appeal, by rehearing.

Background

3.  The Plaintiff (Oriental) purchased a debt (the Debt) owed to a number of banks, called for convenience the Scheme Banks, by a company in Hong Kong called Primlaks (HK) Limited and other members of the Primlaks Group (Primlaks).  The Debt up to then was administered by HSBC as the agent, called co-ordinator, of the Scheme Banks.  The defendant (JSM) acted for HSBC.

4.  Primlaks had some years before fallen into financial difficulty which resulted in the setting up of the debt payment facility.  Primlaks struggled to perform and the arrangement had to be restructured several times.  By early 2004 the Scheme Banks had had enough.  HSBC was instructed to close down the facility; it did so by appointing receivers, and otherwise initiated steps to foreclose on two properties in Hong Kong held as security.

5.  The move made by Oriental to takeover Primlaks’ indebtedness was for the purpose of forestalling this.  Oriental is described as having family affiliations with members of the Primlaks Group.

6.  The Scheme Banks agreed to forestall, but not terminate, the foreclosure process, on payment forthwith of an amount to settle fees owed to HSBC to date.  Oriental handed over on account $841,567 on the basis that if the deal did not proceed it would look to Primlaks for reimbursement.  This payment was made in September 2004.

7.  The parties then proceeded to negotiate the terms of the agreement for sale and purchase.  Eventually terms came to be agreed, including the scheduled date for completion, being the date of its signing, 25 February 2005.  By its terms it reflected that the Scheme Banks would be paid free and clear 100 cents in the dollar; that is the sums owed and interest, and all fees and disbursements outstanding to their co-ordinator, HSBC.

8.  It is not disputed that given the level of worth of the two properties held as security, this would have been the inevitable outcome had foreclosure been pursued.

9.  It is also a fact that the move by Oriental was not entirely philanthropic, although one of the goals achieved was to preserve to Primlaks ownership and thus continued use of the properties at risk.  Collateral to the purchase of the Scheme Banks’ debt was a deal undertaken with other banks whose debts were unsecured, to yield for Oriental a prospective profit of US$1 million.

10.  Returning now to the terms of the agreement; the amount of the Debt outstanding as at 25 February was defined as the aggregate of what was owed by Primlaks to the Scheme Banks, in total US$636,632.80, and what was owed to HSBC, that is HK$1,513,297.00.  The figure of $1,513,297 was broken down as follows :

Co-ordinating fee to February 2005	40,000
Legal fees 20 February 2003 to 23 February 2005	821,695
Receivers fees	31,602
	___________
	$1,513,297
	==========

11.  It is perhaps pedantic but worthy of note that the Debt as defined was stated to be the sum total of what was owed by Primlaks to the Scheme Banks and HSBC as at the date of completion, 25 February; thus, were Oriental to have walked away from the purchase at the 11^th hour, the banks and HSBC would have continued to look to Primlaks for reimbursement.  However, the lion’s share of the legal fees incurred was for attendances associated with the sale of the Debt to Oriental.

12.  The purchase price was fixed to match this aggregate of indebtedness, less the downpayment of HK$841,567 already paid, leaving the balance of US$636,632.80 and HK$671,730. 

13.  The agreement at clause 9 provided for payment by Oriental as purchaser for “all costs and expenses (including legal fees and stamp duty) in connection with this sale and assignment …”  Clause 11 was an “entire agreement” clause.

14.  The second tranche of the purchase price was duly paid on completion.  The sale proceeds were used by HSBC to settle the aggregate indebtedness.  This included four bills of costs rendered by JSM for the above total of $821,695.  The first of $301,567 had been rendered in August 2004 and was paid out of the first tranche of the purchase price received in September 2004.  The second, third and fourth bills of $251,286, $169,797 and $99,045 totalling $520,128 were paid out of the balance purchase price in March 2005.

15.  Following completion JSM rendered to its client HSBC a fifth and final bill of $131,783 and this was submitted to Oriental for payment direct.  To date it has not been paid.

16.  Oriental’s management considered the sum total of the legal fees of $953,478 to be excessive and called for taxation of all five of JSM’s bills.  JSM declined to submit to taxation.  These proceedings resulted, by summons of June 2005.

The Issues

17.  What is at issue is whether JSM’s bills or any of them can be categorized as bills of costs chargeable to Oriental and prospectively applicable for taxation under the Legal Practitioners Ordinance (LPO), or whether the first four bills are by the construction of the agreement part and parcel of a consideration negotiated and agreed between contracting parties; thus not taxable.

18.  If by my ruling the bills are found to be prospectively applicable for taxation, there remains to be considered a further issue; that is, whether the first four bills followed by the fifth, which has not been paid, are in effect a series of bills rendered for the one transaction or are separate and distinct.  This is because of different considerations which apply, statutorily and by procedural rules of court, where, as here, taxation is sought post payment of the bills.

The Statutory Position

19.  Pertinent provisions of sections 67 and 68 LPO, are as follows :

“67.     Taxation of bills on application of party chargeable or solicitor or foreign lawyer

 (1)  On the application, made within 1 month of the delivery of a solicitor’s bill or a foreign lawyer’s bill, of the party chargeable therewith the Court shall, without requiring any sum to be paid into court, order that the bill shall be taxed and that no action shall be commenced thereon until the taxation is completed.

 (2)  If no such application is made within the period mentioned in subsection (1), then, on the application of the solicitor or the foreign lawyer, or of the party chargeable with the bill, the Court may, upon such terms, if any, as it thinks fit (not being terms as to the costs of the taxation), order —

(a) that the bill shall be taxed;

(b) that, until the taxation is completed, no action shall be commenced on the bill, and any action already commenced be stayed :

Provided that —

(i) if 12 months have expired from the delivery of the bill, or if the bill has been paid, or if a verdict has been obtained or a writ of inquiry executed in an action for the recovery of the costs covered thereby, no order shall be made on the application of the party chargeable with the bill except in special circumstances and, if an order is made, it may contain such terms as regards the costs of the taxation as the Court may think fit;

(ii) if the bill has been paid, no order under this subsection shall be made where the application for the order is made after the expiration of 12 months from the date of payment of the bill.

…

68.  Taxation on application of third parties

(1)  Where a person other than the person who is the party chargeable with the bill for the purposes of section 67 has paid, or is or was liable to pay, the bill to the solicitor or the foreign lawyer, or to the party chargeable with the bill, that person or his executors, administrators or assignees may apply to the Court for an order for the taxation of the bill as if he were the party chargeable therewith, and the Court may make thereon the same order, if any, as it might have made if the application had been made by that party:

Provided that, in cases where the Court has no power to make an order except in special circumstances, the Court may, in considering whether there are special circumstances sufficient to justify it in making an order, take into account circumstances affecting the applicant but which do not affect the party chargeable with the bill.

…

Provided that in considering any such application the Court shall have regard to —

(a)     the provisions of section 67 as to applications by the party chargeable with a solicitor’s bill or a foreign lawyer’s bill so far as they are capable of being applied to an application made under this subsection;

(b)     the extent and nature of the interest of the applicant.

…”

20.  Order 62 appendices 61, 62 and 63 RHC are also apposite :

“62/App/61      Interim bills — Where the bills delivered are interim bills constituting a series of bills, time for the purpose of section 67(1) and (2) does not begin to run until the last bill in the series or the final account is delivered (Wang Yoeh Yu Ruth v. Chan Victoria  [1988] 1 H.K.C. 687).  Interim bills refer to requests for payment of money on account.  Final bill is one for the total amount of professional costs and disbursements together with any increase or reduction on the interim bills and giving credit for all payments received as a result of previous interim bills (Cobbett v. Wood [1908] 2 K.B. 420).

62/App/62         Separate bills — It is a question of fact whether there are natural breaks in the work done by a solicitor so that each portion of it can and should be treated as a separate and distinct part in itself, capable of and rightly being charged separately and taxed separately as final bills, or whether the bills are merely statements of account or portions of one entire bill (In Re Romer & Haslam [1893] 2 Q.B. 286; Chamberlain v. Bootle & King [1982] 1W.L.R. 1443).

62/App/63         Special circumstances — There is no hard and fast rule as to what constitutes special circumstances as justifying taxation of a bill which has been paid or which has been delivered for more than 12 months.  Misconduct or fraud on the part of the solicitors, or pressure accompanied by overcharge or overcharges so gross as to amount to fraud have been accepted as special circumstances (In Re Boycott (1885) 29 Ch. 571). Bills which are redolent with overcharges and without sufficient explanation for the amounts claimed may also give rise to special circumstances (Wang Yoeh Yu Ruth v. Chan Victoria (above)).”

Oriental’s Position …

was advanced by its Financial Adviser, Mr Edward F.M. van Voorst tot Voorst, who was given leave by the Registrar to represent Oriental.

21.  Mr van Voorst had himself been responsible for negotiating the purchase of the Debt and had direct knowledge of how the sequence of events was played out.  He knew about the first bill of $301,567 which was paid and settled back in September 2004 because the Scheme Banks had insisted on settlement of outstanding costs before moving forward on the assignment of their debt.  He noted that the bill was for work undertaken from February 2003 to August 2004, whilst Oriental only came to be involved in July 2004.  Oriental paid a further $520,128 on completion in February 2005.  What he calls the third bill, but which in fact was what I have termed the fifth, of $131,783, was presented to Oriental in May 2005, which so far Oriental has declined to pay. 

22.  It is his case that by application of Order 62 appendix 61, then section 68(1) and 67(1) LPO, the plaintiff should be entitled to taxation of the whole sum of $953,478.

23.  He acknowledged that some part of the first bill would have been for work prior to Oriental coming on the scene, but the balance, whatever that might be, and all of the remaining bills would have solely related to the negotiation and preparation of the agreement between the parties.  Thus, he submits, they are respectively interim and a final bill in a series of bills for a single transaction; in effect a single bill for the purpose of taxation. 

24.  Appendix 61 was invoked when the application for taxation was made within one month of the final bill. And section 68 is applicable because Oriental may be designated as “the party chargeable with the bill” for the purpose of section 67.

25.  It is apparent that all along Mr van Voorst has treated the costs, or at least the lion’s share of them, as costs to be borne by the purchaser, Oriental, as per clause 9 of the agreement, to preserve to the Scheme Banks the 100 cents in the dollar they had negotiated for.  He argued that this was not a debt that could be passed to Primlaks which was not a party to the sale and purchase of the Debt.  He further said he had throughout the course of the negotiation process queried the level of JSM’s fees and had persistently asked for a breakdown, behaviour consistent with that of the party ultimately responsible for meeting the fees.  HSBC said it would give him this, but only once the sale had been concluded.  It was not willing to do so earlier because only on the date of completion was Oriental committed to the purchase. 

26.  Mr van Voorst attempted to negotiate a taxation clause in the agreement.  This was turned down.  And as he said Oriental was not able to insist on a breakdown and risk the loss of the purchase, for this would have resulted in the eviction of the occupants of Primlaks’ properties and the loss to Oriental of the forecast profit to be achieved.  So, the payments were made under protest and pressure.

Analysis

27.  Given the total amount of fees charged by JSM, Mr van Voorst may well be justified in challenging that for being excessive.  And his argument on the bills forming a series of bills is, if I may say, well researched and a compelling one.

28.  But the first hurdle to be overcome is as to how the first four bills can be categorized.

29.  First and foremost they were not, save for the fifth, bills rendered to and payable by Oriental.  They cannot be categorized as falling into charges incurred under clause 9.  They were part and parcel of the “Debt” broken down into parts which included the sum total of the four bills owing by Primlaks to the Scheme Banks.  The client liable was HSBC, who paid the same out of the downpayment and balance purchase price.  Oriental was not paying the fees, it was paying the agreed purchase price for the Debt.

30.  Oriental did not get to see the breakdown it called for.  But that is beside the point.  The “entire agreement” clause put paid to the call for taxation, payment under protest, pressure and so on. 

31.  And there is a further factor.  If there were to be taxation of the first four bills resulting in a reduction and obligation to reimburse, this would result in a reduction of the purchase price, forcing upon the parties a variation of the agreement without that having been agreed.

32.  Whether or not Primlaks is liable to meet the cost of the transaction so far borne by Oriental will depend on how the documents that define the Debt Oriental has bought are couched. 

33.  Mr van Voorst’s claim that Primlaks cannot be compelled to pay is at odds with the terms of the agreement.  And he negotiated those terms.  It is also at odds with the condition laid down by letter signed by the parties when the downpayment was made back in September 2004; namely, that if the deal did not proceed Oriental could look to Primlaks to recover what it paid.  And Primlaks signed that letter, agreeing to comply.

34.  If after all Oriental cannot claim back the costs from its debtor Primlaks, then it will miss out on some of its forecast profit.  So be it.  That is a commercial consequence that it will have to live with.

35.  As for the fifth bill; this is separate and distinct.  It does fall into the category of a cost incurred by HSBC as vendor and payable by Oriental under clause 9.  JSM does not seriously contest that it is taxable under sections 68 and 67 of LPO, or quarrel with the Master’s order calling for taxation.

Conclusion

36.  The appeal is dismissed; the Master’s order of 23 March 2006 stands.

37.  Costs are nisi.  They are to the defendant, taxed if not agreed.