XCHRX Charter Land Ltd. v. Lucky Plan International Trading Ltd.

DCCJ14267/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 14267 OF 2000

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J U D G M E N T

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1. This matter concerns an enquiry as to whether the plaintiff's solicitors should be personally liable to pay the defendant's costs of the action. The application is made under Order 62, Rule 8 of the Rules of the District Court.

2. In the action the plaintiffs, now in liquidation, claimed against the defendants a sum of $100,000 arising out of an alleged breach of a Settlement Agreement dated 17 January 2000. That Settlement Agreement was made following an action brought in High Court by the defendants, the plaintiffs in that action, HCA 19122 of 1998, for breach of an Agreement of Exchange dated 15 July 1998 entered into between these parties and registered at the Land Registry, Memorial No. 7539307, whereby they agreed to exchange their respective properties set out in the agreement of exchange with a further payment of $250,000 to be paid by the plaintiffs in this action on completion of the contemplated conveyances scheduled to take place on 25 October 1998.

3. The unfavourable economic conditions in 1998 resulted in the plaintiffs being unable to raise the $250,000 and as a result the expected conveyances did not take place.

4. On 11 March 1999, the defendants obtained judgment in that action against the plaintiffs with damages to be assessed. The defendants had caused the amended writ in that action to be registered against the title to the plaintiff's properties as a lis pendens and the plaintiffs, who had now found other buyers, to purchase their properties entered into the Settlement Agreement with the defendants, whereunder the defendants agreed to remove the lis pendens from the register so as to allow the sales to proceed on terms set out in the Settlement Agreement. For present purposes, I do not need to relate any of the other terms of that Agreement.

5. The next material step in that action occurred on 19 July 2000 when Master de Souza assessed the defendant's damages for the plaintiff's breach of the Agreement of Exchange in the substantial sum of $4,042,416 together with interest on that amount at prime rate plus 1 per cent from the date of the writ, 10 November 1998, until the assessment, 19 July 2000, and thereafter at the judgment rate until payment. He also awarded the defendants their costs of the action.

6. That judgment was not satisfied and so on 29 September 2000 the defendants issued a petition to wind up the plaintiffs. On 27 December 2000, the plaintiffs were formally put into liquidation.

7. Meanwhile, also on 29 September 2000, the plaintiffs issued the writ in this action alleging a breach by the defendants of the Settlement Agreement, to which I have already made reference. The writ alleges that under the terms of the Settlement Agreement the defendants undertook inter alia to provide the plaintiff with notices of discharge or release of the lis pendens, the amended writ in High Court Action No. 19122 of 1998, within designated time limits. It is said that by virtue of that failure the plaintiff's purchaser of one of the properties refused to complete its conveyance and would only do so after the plaintiff had reduced the agreed selling price by $100,000, hence the amount claimed in the writ.

8. The defendants say that the proceedings in this court should never have been started or if they were properly started, they should never have been continued once it was clear that they served no proper purpose. Their stance to this action was to have it struck out under Order 18, Rule 19, on the ground that it was frivolous, vexatious or otherwise an abuse of process. They issued a summons to do that on 30 October 2000, some two months before the winding up order was made. That summons was heard by me on 15 January this year, by which time the plaintiffs had been wound up and I upheld the defendant's contention that the claim should be struck out. My reasons appear in a ruling given at that time.

9. It seemed to me that the proper forum for this dispute was the Companies Court in the winding up proceedings, particularly where the plaintiffs were judged to owe the defendants over $4 million as against a very modest claim of $100,000 whose merits could be litigated in those winding up proceedings. I also thought it right to allow a summons to issue against the plaintiff's solicitors to show cause why they should not be personally responsible to pay the defendant's costs in the action, a prima facie case having been made out on the facts as they had up till then been presented to me.

10. I will need to go into some further analysis of the facts when I consider the merits, particularly as I have now heard the solicitor's case as presented to me by Mr Bullett who appears for them, but before I do that it will be helpful to set out the principles which I must now have regard to in disposing of an application such as this. I have had the advantage of hearing comprehensive argument on the matter from Mr Chain for the defendants and from Mr Bullett to who I am most grateful for their assistance.

11. The application is made under Order 62, Rule 8 of the Rules of the District Court, the material parts of which are as follows:

1) Subject to the following provisions of this rule, where in any proceedings costs are incurred improperly or without reasonable cause or are wasted by undue delay or by any other misconduct or default, the court may make against any solicitor whom it considers to be responsible, whether personally or through a servant or agent, an order;

a) disallowing the costs as between the solicitor and his client;

and

b) directing the solicitor to repay to his client costs which the client has been ordered to pay to other parties to the proceedings;

or

c) directing the solicitor personally to indemnify such other parties against costs payable by them.

2) No order under this rule shall be made against a solicitor unless he has been given a reasonable opportunity to appear before the court and show cause why the order should not be made.

12. I am therefore being asked to exercise my power under Rule 8(1)(c). Fortunately, this rule has been the subject of frequent judicial pronouncement and interpretation. Of the modern cases I have found the English Court of Appeal case of Ridehalgh v Horsefield [1994] Chancery 205, of most assistance. Sir Thomas Bingham, Master of the Rolls (as he then was) in giving the judgment of the court has set out a code, if that is not too high a way of expressing it, for a court to adopt when dealing with applications such as these. At page 239(D) to (F), he considered the court's discretion which is to be exercised at two stages. Firstly, at the stage when the court invites the legal representative to show cause. This, he said, is not something to be done automatically or without careful appraisal of the relevant circumstances. I have already exercised that discretion, having regard to the fact that I found the action to be one that in all the circumstances was frivolous, vexatious and an abuse of the process of the court. I considered, therefore, in all the circumstances of the matter that a prima facie case had been made out and I therefore allowed the summons to be issued by the defendants.

13. The second discretion which is in the nature of a residual discretion arises at the final stage. Even if the court is satisfied that there has been impropriety, unreasonable or negligent conduct and that such conduct has caused the other side to incur wasted costs, it is not bound to make an order but in that situation it would of course have to give sustainable reasons for exercising its discretion against making an order. I will therefore need to return to this in the event that I find the requisite degree of fault to have been made out.

14. The jurisdiction as analysed by the Master of the Rolls contemplates a three stage approach:

a) Has the legal representative of whom the complaint is made acted improperly, unreasonably or negligently?

b) If so, did such conduct cause the applicant to incur unnecessary costs?

c) If so, was it in all the circumstances, just to order the legal representative to compensate the applicant for the whole or part of the relevant costs, the final or residual discretion?

15. At page 232(C) to 233(D), Sir Thomas Bingham addressed the meaning of the words "improper, unreasonable or negligent". I take the summary of what he said from the note to Order 62, Rule 11 of the English Supreme Court Practice 1995 at page 1143, being the English equivalent of our Order 62, Rule 8:

"Improper: covered but not confined to conduct which would ordinarily be held to justify disbarment, striking off, suspension from practice or other serious professional penalty.

Unreasonable: aptly described conduct which was vexatious, designed to harass the other side rather than advance the resolution of the case and it made no difference that the conduct was the product of excessive zeal and not improper motive.

Negligence should be understood in an untechnical way to denote failure to act with the competence reasonably expected of ordinary members of the profession.

In adopting that approach the court firmly discountenanced any suggestion that an applicant for a wasted costs order needed to prove under the negligence head anything less than he would have had to prove in an action for negligence (see Saif Ali v Sydney Mitchell & Company [1980] Appeal Cases 198 at 218, 220 and Walter & Company Limited v Neville Eckley & Company [1997] BCC 333 per Sir Richard Scott, Vice Chancellor).

16. At page 233(E), the Master of the Rolls summed up the position as follows:

"We were invited to give the three adjectives 'improper, unreasonable and negligent', specific self-contained meanings so as to avoid overlap between the three. We do not read these very familiar expressions in that way. Conduct which is unreasonable may also be improper and conduct which is negligent will very frequently be, if not by definition, unreasonable. We do not think any sharp differentiation between these expressions is useful or necessary or intended."

17. When considering the pursuit of a hopeless case, the Master of the Rolls considered the following to be relevant (see page 233(F) to 234(F). I read the passage in full having regard to the importance of this particular consideration in this application:

"A legal representative is not to be held to have acted improperly, unreasonably or negligently simply because he acts for a party who pursues a claim or a defence which is plainly doomed to fail. As Lord Pearce observed in Rondel v Worseley [1969] 1 AC 191 at 275, it is easier, pleasanter and more advantageous professionally for barristers to advise, represent or defend those who are decent and reasonable and likely to succeed in their action or their defence than those who are unpleasant, unreasonable, disreputable and have an apparently hopeless case. Yet it would be tragic if our legal system came to provide no reputable defenders, representatives or advisers for the latter. As is well known, barristers in independent practice are not permitted to pick and choose their clients. Paragraph 209 of their Code of Conduct provides, 'A barrister in independent practice must comply with the cab rank rule and accordingly accept only as otherwise provided in paragraphs 501, 502 and 503, he must in any field in which he professes to practice in relation to work appropriate to his experience and seniority and irrespective of whether his client is paying privately or is legally aided or otherwise publicly funded,

a) accept any brief to appear before a court in which he professes to practice;

b) accept any instructions;

c) act for any person on whose his behalf he is briefed or instructed and do so irrespective of

i) the party on whose behalf he is briefed or instructed;

ii) the nature of the case; and

iii) any belief or opinion which he may have formed as to the character, reputation, cause, conduct, guilt or innocence of that person.

As is also well known, solicitors are not subject to an equivalent cab rank rule but many solicitors would and do respect the public policy underlying it by affording representation to the unpopular and the unmeritorious. Legal representatives will of course, whether barristers or solicitors, advise clients of the perceived weakness of their case and the risk of failure but clients are free to reject advice and insist that cases be litigated. It is rarely, if ever, safe for a court to assume that a hopeless case is being litigated on the advice of the lawyers involved. They are there to present the case. It is, as Samuel Johnson unforgettably pointed out, for the judge and not the lawyers to judge it. It is, however, one thing for a legal representative to present on instructions a case which he regards as bound to fail. It is quite another to lend his assistance to proceedings which are an abuse of the process of the court. Whether instructed or not, a legal representative is not entitled to use litigious procedures for purposes for which they were not intended as by issuing or pursuing a proceedings for reasons unconnected with success in the litigation or pursuing a case known to be dishonest. Nor is he entitled to evade rules intended to safeguard the interests of justice as by knowingly failing to make full disclosure on ex parte applications or knowingly conniving at incomplete disclosure of documents. It is not entirely easy to distinguish by definition between the hopeless case and the case which amounts to an abuse of the process but in practice it is not hard to say which is which and if there is doubt, the legal representative is entitled to the benefit of it."

18. On the matter of privilege which also bears on this issue, the position appears at page 236(H) to 237(D):

"Where an applicant seeks a wasted costs order against the lawyers on the other side, legal professional privilege may be relevant both as between the applicant and his lawyers and as between the respondent lawyers and their client. In either case it is the client's privilege which he alone can waive. The first of these situations can cause little difficulty. The applicant's privileged communications are germane to an issue in the application to show what he would or would not have done had the other side not acted in the manner complained of he can waive his privilege. If he declines to do so, adverse inferences can be drawn. The respondent lawyers are in a different position. The privilege is not theirs to waive. In the usual case where a waiver would not benefit their client they will be slow to advise the client to waive his privilege and they may well feel bound to advise that the client should take independent advice before doing so. The client may be unwilling to do that and may be unwilling to waive if he does so the respondent lawyers may find themselves at a grave disadvantage in defending their conduct of proceedings, unable to reveal what advice and warnings they gave and what instructions they received. In some cases this potential source of injustice may be mitigated by reference to the Taxing Master where different rules apply but only in a small minority of cases can this procedure be appropriate. Judges who are invited to make or contemplate making a wasted costs order must make full allowance for the inability of respondent lawyers to tell the whole story. Where there is room for doubt the respondent lawyers are entitled to the benefit of it. It is only when with all allowances made, a lawyer's conduct of proceedings is quite plainly unjustifiable that it can be appropriate to make a wasted costs order."

19. These appear to be the main considerations which I must apply in the first step of the enquiry. With that I now return to the facts.

20. The gravamen of Mr Chain's complaint is that this case should never have been brought or if he is wrong about that, he is content to put it on the basis that when faced with a $4 million judgment which they had little or no prospect of satisfying and the inevitability of their being wound up, the plaintiffs and their solicitors had no business in pursuing this action once it was clear that the defendants were serious about pursuing the winding up petition. This modest claim of $100,000 could and should have been swept up in those winding up proceedings rather than exposing the defendants to the expense of defending an action which was bound to fall away following the winding up, leaving the defendants with an unsatisfied bill of costs against an insolvent plaintiff.

21. As a matter of timing as to when the plaintiff's solicitors should have realised this, Mr Chain relies on a letter from the solicitors dated 13 October 2000 which is marked "Without Prejudice". It contains an unequivocal statement that, "Our client has no cash to satisfy the judgment debt." Mr Bullett submits that marked as it is "Without Prejudice", it should not have been brought to the court's attention by being exhibited to Mr Yip's affirmation of 4 November 2000 in support of the defendant's summons to strike the action out and now in support of this application for a wasted costs order (see page 92 of the Bundle).

22. Mr Chain's reply to that is that there is no magic in the use of the words 'without prejudice' in the letter and that in substance the letter cannot be seen as part of a genuine attempt to negotiate and therefore cannot qualify for the privilege that would ordinarily attach to such communications. He submits there is no invitation to negotiate in the letter. It is a question of take it or leave it.

23. Although the letter must be read as a whole, the material parts of it are in the final two paragraphs:

"In the event that your client refuses to consider an amicable settlement with our client and pursue the winding up petition, the shareholders of our client will not inject any more money into the defendant company and let your client wind it up. In such case your client will get nothing at the end of the day. However, we are instructed that the shareholders are prepared to inject money for a possible settlement should your client be prepared to come back with a sensible offer or an amicable settlement. We shall be obliged if you could advise your client to reconsider an amicable settlement with our client and let us know the proposed terms of settlement as soon as possible."

24. I do not agree with Mr Chain's construction of this letter. Whilst it sets out the stark reality of the plaintiff's financial position it also contains in unambiguous terms an invitation to negotiate and consider an amicable settlement which might save the company from liquidation. In those circumstances, I do not propose to have regard to the letter in my consideration of this matter. Neither will I have regard to the without prejudice letter from the plaintiff's solicitor dated 10 November 2000 at page 77, this also being an attempt to negotiate. This correspondence, therefore, will go from the application.

25. Notwithstanding this, Mr Chain submits that looked at broadly, the solicitors must as a matter of irresistible inference have been aware that their client was on the verge of going under and to pursue such an action in those circumstances amounted to improper, unreasonable or negligent conduct of the type contemplated in the rule.

26. The matter needs to be considered in two stages. Firstly, should the action have been initiated? If the answer to that question is no, then I need go no further and I can pass to the second stage of the application. If the decision to start the proceedings was justifiable, then I must go and consider whether there came a time up to the liquidation itself when the solicitors are to be held to account for the continuation of the proceedings.

27. Their justification for the start and continuation of the action appears in the affirmation of Miss Yeung So-wah dated 19 March this year (pages 4 to 59 of the Bundle). In it she sets out the background to this action which is the High Court Action to which I have already referred and which eventually resulted in the Master's assessment of damages against her client in excess of $4 million. She has also described the terms of the settlement agreement, the alleged breach of which by the defendants is the basis for the plaintiff's action in this court.

28. Two matters arise from this which undoubtedly favour the solicitors. Firstly, the settlement agreement was of vital importance to the plaintiffs because it provided them with a means to sell the properties at the best price possible in a falling market and of raising some much needed capital whilst at the same time safeguarding the defendant's rights who were already in possession of an interlocutory judgment in the action. Secondly, once the Master's assessment of damages was known, the solicitors, on instructions, pursued an appeal against that order as a matter of urgency. A detailed notice was settled by very experienced junior counsel who had been representing them.

29. In those circumstances it is very difficult to see how these solicitors can be said to have acted in the way required before a wasted costs order can be made. On the face of it there was an actionable breach of the settlement agreement, albeit for a very modest amount, but a claim which the plaintiffs were fully entitled to bring and counsel had also felt able to settle very detailed grounds of appeal against the Master's assessment. I am by no means convinced that they can be criticised for starting the action. Looked at it overall the matter was still very much in the air and although the plaintiffs had their backs to the wall, they had instructed the solicitors to start the action which they did.

30. Where the party seeking an order such as this bears a high burden, Mr Chain has failed at this stage of the enquiry to make out his case. I must therefore pass on to see whether any time after that until the liquidation the solicitor's behaviour is such as to qualify for a wasted costs order being made against them.

31. In relation to this part of the litigation, the inter partes summons seeking the dismissal of the action had been issued on 30 October 2000. Prior to that the defendant's solicitors had already put the solicitors on notice that they were going to take this step but they had failed to respond in any constructive way. See the defendant's solicitor's letter to the plaintiff's solicitors dated 25 October 2000, page 94 of the Bundle which sets out the argument, albeit briefly, and the reply to that letter on 30 October 2000, page 96, and 6 November 2000, page 98, rejecting the way in which the matter was being put. From that it seems to me that the earliest date that one can properly take is 6 November 2000 when by virtue of that letter, page 98, it became clear that the plaintiffs would not give way on this action. Miss Yeung says that this was done on her client's instructions (paragraph 4 of her affirmation of 19 May 2001, page 68 of the Bundle) where she explains that the action had been brought on the express instructions of her clients and against her advice, not as to the merits but on the grounds of aggravation and costs. She says, to use her words,

"...however, the plaintiffs insisted to pursue the subject claim against the defendant contrary to my advice. Hence the claim was issued on the express instructions of the plaintiffs."

32. I have some anxiety over this passage in her affirmation because any advice that she may have given her clients and their instructions to her would be subject to legal professional privilege. Although she has not expressly said whether her clients have waived privilege over this passage, I assume they have otherwise she would not have set it out as part of her case. I was not addressed to the contrary by Mr Bullett although I had been on the question of the without prejudice correspondence. The evidence is before me and I intend to act on it as part of the material which I shall have regard to.

33. On the assumption that this is right, it is clear that by 6 November the solicitors were continuing to act in an action that they had advised against on the grounds that it would not be cost effective. By 6 November the appeal that had been initiated against the Master's decision had now foundered through lack of funds and an inability to provide security for costs in the appeal. The last of the payments in respect of the preparation of the appeal was for the transcript on 28 September 2000 (see Exhibit YSW8, page 74). By 6 November it is clear that the plaintiffs were a sinking ship. The appeal was no longer viable. The winding up petition was being pursued. The debt owed was for over $4 million and this action for $100,000 remained and was being firmly pursued on the plaintiff's behalf by the solicitors (see the correspondence pages 94 to 98) and even without recourse to the passage at page 68 in Ms Yeung's affirmation of 19 May 2001, it is clear that this same situation emerges from a broad appraisal of the facts as they appear from the rest of the papers before the court.

34. When analysed in this way, it seems to me that the solicitors can justly be said to have acted either improperly, unreasonably or negligently. I say that well aware of the fact that this is a jurisdiction to be exercised slowly and after the most careful reflection and mindful of the difficulties which solicitors find themselves in when acting on behalf of intransigent or difficult clients who may not be disposed to take perfectly sound advice.

35. Whilst, as I have already found, the solicitors were perfectly right to have started the proceedings on behalf of their clients in late September, they were acting in a fast moving situation which required careful handling. By 6 November, this minor action for $100,000 had become a meaningless exercise and amounted to an abuse of process. By that time they had continued to lend their name to the proceedings which had by then become an abuse of process. They should have withdrawn from that date rather than write the letter of 6 November informing the defendant's solicitors that they would have to fight the matter to a conclusion before the court. Thereafter, what was by then clearly on the cards occurred. The High Court wound up the plaintiffs on 27 November 2000 and on 15 January 2001 this action was struck out as an abuse of process.

36. Before coming to a final determination I remind myself again of the Master of the Rolls' words in Ridehalgh v Horsefield supra. at page 234(E):

"It is not entirely easy to distinguish by definition between the hopeless case and the case which amounts to an abuse of process but in practice it is not hard to say which is which and if there is doubt the legal representative is entitled to the benefit of it."

37. In this matter I have no doubt. Whilst initially justifiable, this action by virtue of changing events became a meaningless exercise in the expenditure of legal costs, nuisance value and nothing else. As from 6 November 2000 this was already the case and as from that date the solicitors lent and continued to lend their assistance to it. Whilst it is never easy to be precise about the appropriate date in a changing situation, in selecting 6 November on the correspondence I have tried to give the solicitors as much latitude as possible. This is the outside date.

38. From that finding I now briefly turn to the second limb of the enquiry which is to decide whether the solicitor's conduct has caused the applicant to incur unnecessary costs. Plainly, this can only admit of one answer which is in the affirmative. Faced with an opponent who was minded to continue the action, they were obliged to pursue the application to have it struck out which they succeeded in doing on 15 January 2001.

39. Lastly, I come to the question of my residual discretion. Is it in all the circumstances just to order the legal representatives to compensate the applicant for the whole or part of the relevant costs? Having regard to my finding of impropriety, unreasonableness and negligence for the reasons which I have been able to provide, there are no proper grounds for now refusing to make a wasted costs order.

40. Accordingly, the solicitors must pay the defendant's costs of the action as from 6 November 2000, including the costs reserved by me on 15 January 2001 with certificate for counsel on that day and it must also follow that they must pay the defendant's costs of this application with certificate for counsel. All these costs orders will be taxed on a party and party basis, and I make these orders for costs orders nisi in the usual way.