XCHRX XINYUAN TRADING CO. LTD. v. N P H PETROCHEMICAL LTD.

HCA 18159/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. A18159 OF 1998

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CACV 276/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 276 OF 1998

(ON APPEAL FROM HCA NO. 18159 OF 1998)

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REVIEW OF TAXATION

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Introduction

1. The question arising from this review of taxation often appears but hitherto has not been made subject of a written judgment in Hong Kong. The question is this. On a party and party taxation, if two counsel have been instructed by the successful party who now claims for the fees of both, and the employment of the leader is found to be justified, under what circumstances will the employment of the junior be allowed as well?

2. Before I attempt to answer this question, it is necessary to first set out the circumstances leading to the present application. The facts are largely taken from the judgment Mortimer VP in CACV No.276 of 1998.

3. By a contract dated 25th June 1998, the defendant agreed to sell to the plaintiff a quantity of oil. Under the contract and on the defendant's instructions, Jian Sing Bank ("JSB") issued a letter of credit dated 3rd July 1998 in favour of the plaintiff for US$1.58 million. On 14th July 1998, the Bank of China ("BOC") presented to JSB a full set of documents required by the letter of credit. These included a draft drawn by the defendant on JSB payable to the order of BOC at 90 days after sight.

4. Following JSB's acceptance of the draft and the documents, BOC discounted the draft and paid the defendant on about 23rd July 1998. Thereafter the plaintiff discovered that the ultimate sub-purchaser of the oil only received a small percentage of oil and not the amount stated in the presented documents - the invoice, the bill of lading and the receipt. The plaintiff contended that the defendant had admitted in meetings between the parties the short shipment and that the documents were forged. However, BOC was not informed of the allegations either by the plaintiff or JSB. Instead they requested BOC's consent to extend the draft's maturity date from 15th October 1998 to 15th November 1998. This request was declined and BOC demanded payment on the due day.

5. The plaintiff then commenced proceedings against the defendant and applied for an injunction to restrain BOC, a non-party to the proceedings, from demanding payment under the letter of credit on the ground of alleged fraud. Before the judge, it was additionally argued that BOC could not demand payment because it was a mere collecting bank and was in these circumstances simply an agent of a fraudulent defendant. BOC was then represented by junior counsel. On 6th November 1998, the judge granted the injunction on the basis that there was a serious question to be tried whether BOC was a negotiating bank or a collecting bank.

6. BOC appealed. Leading counsel was instructed in addition to the same junior counsel. The Court of Appeal on 5th March 1999 allowed the appeal and discharged the injunction. Mortimer VP stated a number of cogent reasons why it was necessary to allow the appeal and discharge the injunction:

(1) The letter of credit was on its face a negotiable credit. BOC discounted the draft for value and made payment to the defendant. Thereafter BOC was the holder for value and entitled to payment in its own right and not as agent of the defendant. The right of payment on documentary credits is usually unaffected by the underlying transactions and any dispute about it. As a holder for value, BOC, not being tainted in any way by any allegation of fraud, was entitled to demand payment.

(2) Secondly, the circumstances in which the court will interfere to prevent payment to a bank on documentary credits are extremely limited. In cases where fraud is alleged, it will only do so where the bank is fraudulent or knowingly assists in fraud so that the documentary credit is tainted. The integrity of documentary credits as a completely separate transaction from the underlying contract has long been recognised as essential for international trade. The courts must be vigilant not to diminish this fundamental principle.

(3) BOC was not a party to the action and no claim is made by the plaintiff against BOC. It is trite law that the courts can only intervene by way of granting an interlocutory injunction to a party in proceedings who asserts a cause of action against the other party.

7. Both the plaintiff and JSB, another non-party to the proceedings, appeared before the judge to support the application for injunction and before the Court of Appeal to resist the appeal. The Court of Appeal therefore ordered that costs of the appeal and the costs below should be borne not only by the plaintiff but also JSB.

8. The taxation of BOC's bills of costs came before me on 15th February 2000. BOC is dissatisfied with my following decisions:

(1) The hourly rate the handling solicitors, Ms. Tong and Mr. Lam. I reduced their rates from $4,000 to $3,800.

(2) The brief fee of junior counsel for the injunction hearing before the judge. I reduced it from $40,000 to $25,000.

(3) The brief fee of junior counsel for the hearing before the Court of Appeal. The amount claimed is $100,000. I taxed it off in toto.

(4) The quantum of senior counsel's brief fees for the hearing before the Court of Appeal. I reduced it from $300,000 to $200,000.

9. I heard the substantive arguments on review on 15th June 2000. On the 16th, BOC applied to the Court of Appeal for an order to amend the costs order under the slip rule by adding "certificate for two counsel". The application was however dismissed by the Court of Appeal as misconceived and improper.

10. I now turn to the individual items.

Solicitors' hourly rate

For the injunction proceedings

11. At this stage of the proceedings, Ms Tong, admitted in 1975, was the only fee earner involved. The summons for injunction was taken out on 26th October 1998, returnable on 6th November. Initial instructions were taken from client on 29th October. Junior counsel was then instructed to prepare the affirmation in opposition and for the hearing. The importance of the matter to BOC, the amount at stake and the urgency involved certainly justified the engagement of a senior solicitor like Ms Tong. I reduced the rate to $3,800 mainly because there was heavy reliance on counsel. I have now considered the matter afresh. Perhaps I had given too much emphasis on the reliance on counsel. I note that counsel did not hold any conference with client either for taking instruction or for preparing for the injunction hearing. That was possible, presumably, because of the instruction and assistance given by Ms Tong to counsel. She had contributed significantly to the proper conduct of the proceedings. I will therefore allow Ms Tong the rate of $4,000 as claimed.

For the appeal hearing

12. Ms Tong and Mr Lam, admitted in 1981, were involved. Apart from the usual correspondence and attendances, they gave preliminary advice on appeal and advice after conference with counsel. No further evidence was required or filed. The appeal hearing was to take place on 5th March 1999. The effect of urgency had by then largely subsided. Senior and junior counsel had been instructed to prosecute the appeal and there was heavy reliance on them. In light of the work done by the solicitors, the reduction of their rates was, in my view, proper. And I am not persuaded otherwise by Ms. Tong.

Junior counsel's brief fees for the injunction hearing

13. The brief fee covered the work done by counsel by way of preparation for representation at the hearing and attendance: see Loveday v. Renton & Another (No.2) [1992] 3 All ER 184, followed in Yeung Shu & Another v. Alfred Lau & Co. (a firm) [2000] 1 HKLRD 231, CA. On review, I have the benefit of reconsidering junior counsel's preparatory work. It was indeed quite substantial. Having regard to this and para. 2(5), Part II of the 1st Schedule of Order 62, I now take the view that the fee of $40,000 is justified and will allow it in full.

Junior counsel's brief fees for the appeal hearing

14. At the taxation hearing, I have already allowed the employment of senior counsel. To justify the employment of junior counsel, Ms. Tong relies on Juby & others v. London Fire and Civil Defence Authority; Saunders v. Essex County Council, 24th April 1990, an unreported decision of the English Queen's Bench Division (Commercial Court) referred to in the Supreme Court Practice 1999, para. 62/A2/12. There, the general approach to adopt when two counsel have been instructed is to ask (1) whether it was reasonable to instruct a leader? and (2) if so, whether it was reasonable to instruct a junior in addition to the leader also? The Juby test is therefore in substance one of reasonableness.

15. In the Juby case, the court was dealing with the standard basis under the English Order 62 rule 12(1) which allows a reasonable amount in respect of all costs reasonably incurred. The standard basis is equivalent to the common fund basis (which had been abolished in England but still exists in Hong Kong): see Sun Foo Kee Limited v. Pak Lik Company, CA No.68 of 1996, per Godfrey JA. On a taxation on the common fund basis, there shall be allowed a reasonable amount in respect of all costs reasonably incurred, and the ordinary rules applicable on a taxation as between solicitor and client where the costs are to be paid out of a common fund in which the client and others are interested shall be applied, whether or not the costs are in fact to be so paid: Order 62 rule 28(4), RHC. The basic questions are (1) are the costs to be taxed reasonably incurred? and (2) if so, is the amount incurred reasonable, and if not, what is the reasonable amount? See Ngan Wun Yeung v. Lok Sin Tong Benevolent Society [2000] 2 HKC 404, at p.413. In considering whether any step was reasonable, the correct viewpoint to be adopted by a taxing master was that of a sensible solicitor sitting in his chair and considering what in the light of his then knowledge was reasonable in the interest of his lay clients: Francis v. Francis & Dickerson [1955] 3 All ER 836. Accordingly, in a common fund taxation where reasonableness is the touchstone, the case for adopting the Juby test is very strong. Here, the BOC's bills of costs were taxed on the party and party basis. Is the Juby test applicable? Ms. Tong submits that it is. With respect, I disagree. The reason is apparent when the party and party basis is examined more closely.

Why the Juby test not applicable

16. Order 62 rule 28(2) provides that costs allowed on a party and party basis are "all such costs as were necessary or proper for the attainment of justice or for enforcing or defending the rights of the party whose costs are being taxed".

17. A number of statements can be readily extracted from the authorities:

(1) It is fiction that taxed costs are the same as reasonably incurred: Berry v. British Transport Commission [1962] 1 QB 306, CA. "... I should for myself prefer to see the abandonment of the fiction that taxed costs are the same as costs reasonably incurred and its replacement by a statement of principle that the law for reasons which it considers to be in the public interest requires a litigant to exercise a greater austerity than it exacts in the ordinary way, and which it will not relax unless the litigant can show some additional ground for reimbursement over and above the bare fact that he has been successful": per Devlin LJ at p.323.

(2) The essence of this head of taxation is "necessary or proper" and it is the strictest basis of taxation: EMI Record Ltd. v. Ian Cameron Wallace Ltd. & another [1982] 2 All ER 980, per Megarry VP at p.982.

(3) The words "necessary" and "proper" are not interchangeable; thus proper costs may include costs not strictly necessary: Ex parte South Dublin RDC, Gilson v. Bennet [1920] 1 IR 75; Re Mecury Model Aircraft Supplies Ltd. [1956] 2 All ER 885.

(4) On the question of necessity, "costs chargeable under a taxation as between party and party are all that are necessary to enable the adverse party to conduct litigation and no more. Any charges merely for conducting litigation more conveniently may be called luxuries, and, must be paid by the party incurring them": Smith v. Buller [1875] Eq 473 at p.475 per Mallins VC.

18. On the question of propriety, there was suggestion that "proper" meant "reasonably incurred": see Pecheries Ostendaises (Soc. Anon.) v. Merchants' Marine Insurance Co. [1928] 1 KB 750; Lyon v. Lyon [1952] 2 All ER 831; Francis v. Francis & Dickerson, supra. The Francis case was followed by Deputy Registrar Oliver in Chang Lan-sheng v. A.G. [1968] DCLR 33, a case I referred the parties to in the course of submission.

19. The English cases cited above were decided under the old English Order 65 rule 27(29) (the predecessor of Order 62) which provided:

"On every taxation the taxing master shall allow all such costs, charges, and expenses as shall appear to him to have been necessary or proper for the attainment of justice or for defending the rights of any party. But save as against the party who incurred the same no costs shall be allowed which appear to the taxing master to have been incurred or increased through over-caution, negligence, or mistake, or by payment of special fees to counsel or special charges or expenses to witnesses or other persons, or by other unusual expenses."

This rule was then applicable to all forms of taxation, common fund and party and party alike. The court in the Pecheries Ostendaises case was dealing with a party and party taxation. At p.762, Atkins LJ, after referring to Order 65 rule 27(29), said, 'That rule is the guiding rule in the taxation of costs. It is intended to sum up generally the principles upon which costs are awarded....It is a rule which is intended to give to the successful litigant a full indemnity for all costs reasonably incurred by him in relation to the action.' This dictum is, in my view, just another way of expressing the well-known indemnity principle in a taxation inter partes. It did not necessarily support the general proposition that in a party and party taxation, "proper" meant "reasonably incurred". Indeed, it is against the weight of authorities to suggest that it did. The taxations in both the Lyon case and the Francis case were on the common fund basis. The court was not considering the meaning of "proper" in the context of a party and party taxation. And I am not aware of any subsequent English decision applying the Francis case in a party and party taxation.

20. For the above reasons, I decline to follow the Chang Lan-sheng case and do not accept that on the party and party basis, "proper" means "reasonably incurred". While costs incurred through over-caution, negligence or mistake are obviously improper and therefore not recoverable in a party and party taxation, I do not think there is any hard and fast rule applicable to all cases for determining if a particular item of costs is proper. It really depends on all the circumstances of the case that comes before the taxing master. And he or she has to take into account all the relevant factors including those in paragraphs 1(2) and 2 in Part II of the First Schedule to Order 62.

21. Because of the material difference between the party and party basis and the common fund basis, the Juby test does not apply in the present case.

The correct approach

22. I will approach the two counsel question in a party and party taxation as follows.

23. In the absence of a court order, whether to allow two counsel on taxation is a matter of the taxing master's discretion. The Court of Appeal will not interfere unless it can be shown that the master has erred in principle: Gorfin v. Odhams Press Ltd. [1958] 1 All ER 578, CA.

24. After the abrogation of the two counsel rule, the client and his solicitor, when instructing counsel, have to decide whether to instruct a leader and if so, whether to instruct a junior also? Depending on the choice made, the client will be represented either by a junior counsel alone, or by leading counsel alone, or by both. On taxation, the taxing master has to determine whether or not the costs were necessary or proper and he must necessarily do so after the event, when leading counsel was in fact instructed. Because leading counsel can now accept instructions without a junior, the first step is to ask whether it was necessary or proper to instruct a leader, even if one counsel was required or actually briefed. In this connection, the following factors are relevant:

(1) the nature of the case;

(2) difficult questions of fact or law;

(3) the complexity, difficulty or novelty of the issues involved;

(4) the skill, specialized knowledge or expertise required for the case;

(5) where money or property is involved, its amount or value;

(6) the importance of the matter to client;

(7) the general importance of the case, for example as affecting other cases;

(8) if a junior counsel has already been instructed, the experience, competency and seniority of that junior;

(9) whether the other side has instructed a leader: see British Metals Corporation Ltd. v. Ludlow Brothers (1913) Ltd. [1938] Ch 774.

These above list is not exhaustive. Depending on the circumstances, other reasons why a leader is required may exist.

25. The next question is if a leader is instructed, should a junior be instructed also. Again, the taxing master will have to decide if the employment of the junior was necessary or proper in the circumstances. Particular reasons why a junior may be necessary or proper include:

(1) assisting with the proper preparation of the case, for example, when the case was complex or heavy documentation is involved;

(2) assisting with the court proceedings by, for example, examining or cross-examining some witnesses, or dealing with a certain part of the case, for example, expert evidence or damages, etc;

(3) carrying out legal research on difficult or novel questions of law.

Again, these reasons are not exhaustive. Other may exist. But I do not think that senior counsel's own wish to have a junior to assist him is relevant. Instructing a junior is justified only if the interests of lay client require so: cf. para.3, Annex 6 of the Hong Kong Bar Code.

26. Where a junior counsel has been instructed first and a leader is subsequently instructed, the same questions arise, namely, was it necessary or proper to instruct the leader and if so, was it necessary or proper to instruct or to retain the junior. The relevant factors are the same.

Application to the present case

27. The question is whether it was necessary or proper to retain the junior counsel for the appeal hearing? Ms. Tong stresses the importance of the case to BOC and the banking industry as a whole. I have already taken that into account when ruling that employment of senior counsel was justified. Ms. Tong submits that there were serious factual disputes. She is referring to the allegations of fraud. But those allegations did not affect BOC's position. For it was accepted that BOC was neither fraudulent nor tainted by the alleged fraud. Further, the appeal did not involve any difficult questions of law. Whatever arguments might have been advanced, the Court of Appeal decided the appeal on well-settled legal principles. I do not think junior counsel was required to do any in-depth or further research for the purpose of the appeal. The skeleton argument used at the appeal hearing was in substance a reproduction of the one used at the injunction hearing. The appeal, lasted for slightly more than 2 hours, was argued by senior counsel. Junior counsel had not taken an active part in the oral argument. Having considered all the circumstances, I am not satisfied that the employment of junior counsel was necessary or proper. And I am not persuaded otherwise after hearing Ms. Tong.

Senior counsel's brief fees for the Court of Appeal hearing

28. The brief fee covered the preparatory work for the appeal and the attendance. As noted, the hearing lasted slightly more than 2 hours. The skeleton argument was substantially the same as the one used in the first instance. Insofar as BOC was concerned, the allegations of fraud did not affect its position. The legal issues involved are well-settled. In the circumstances, I do not accept Ms. Tong's submission that the brief fee of $300,000 was justified. It was clearly excessive and unreasonable. The reduction to $200,000 is proper.

Conclusion

29. For the above reasons, I will allow the review on the hourly rate of Ms Tong for the injunction proceedings and junior counsel's brief for the injunction hearing. The rest of the review fails and I dismiss that part accordingly. In light of my decision, I will make an order nisi that there shall be no order as to costs for the review, to be made absolute within 14 days after handing down.