YIFUNG DEVELOPMENTS LTD v. LIU CHI KEUNG RICKY AND OTHERS

HCA 1341/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1341 OF 2014

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D E C I S I O N

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1.  There are 3 matters before the court:

(1)   Ricky Liu’s application to vary a costs order nisi;

(2)   Solicitors for YDL (“Linklaters”) showing cause as to why they should not bear costs of Ricky Liu; and

(3)   YDL to make representation as to whether the mandatory injunction made on 17 November 2014 (“the injunction”) should be set aside for non-disclosure and whether the present action was necessary.

(1)  Ricky Liu’s application to vary a costs order nisi

2.  On 25 April 2016, upon dismissing the authority summons taken out by Ricky Liu, I ordered, nisi, that

(a)   Ricky Liu should have costs of the authority summons up to and including 31 July 2015.  Linklaters were to show cause as to why they should not bear such costs within 14 days from the date of the judgment.

(b)   Half of the costs of the authority summons from 1 August 2015 onwards shall be paid by Ricky Liu to YDL. 

3.  Ricky Liu sought variation asking for costs of the 2-day hearing of the authority summons.  Alternative to Linklaters’ potential costs liability, Ricky Liu asked for YDL’s directors (ie Mr Fok, Mr Gronow and Mr Batchelor) to pay his costs. I will deal with the directors’ liability after analyzing Linklaters’ liability to bear costs.

4.  It is well established that a successful party may be ordered to pay costs to the unsuccessful party or be deprived of his costs where he raises issues or makes allegations improperly or unnecessarily: Hung Fung Enterprises Holdings Ltd v Agricultural Bank of China [2012] 3 HKLRD 679, §§100-102, Kwan JA, following Re Elgindata Ltd (No.2) [1992] 1 WLR 1207, 1214A-D, Nourse LJ.

5.  At the hearings, the core issue was whether there was authority to sue or ratification.  It was a question of fact and law and not discretion.  The court’s role was not to determine how stubborn a party was or to investigate the route by which that party came to the right decision. 

6.  The underlying objectives of the Rules of the High Court are, amongst others, to ensure that a case is dealt with as expeditiously as is reasonably practicable and to promote procedural economy.  The parties have a duty to assist the court to further these underlying objectives and decide which issues need full investigation. 

7.  As affidavits are filed, it is incumbent on the parties and their legal representatives to review the merits of their application or grounds of opposition. If they can come to terms on the merits but not on costs, a short hearing or paper application for costs is the right course.

8.  Unfortunately, neither party took this approach which would have disposed of the core issue in a more economical way and both must bear the blame.  The success of Ricky Liu in showing that the action was commenced without authority has been reflected in the order nisi for YDL to bear the pre-ratification costs.  The fact of YDL lacking even a board resolution to commence the action, succeeding on only one out of 4 lines of arguments and making unjustified complaints that Ricky Liu lacked locus or abused the process have been reflected in the order nisi that YDL could only recover half of the post-ratification costs.  I see no reason why Ricky Liu can further ask for costs of the hearing.

9.  I see no reason to vary the costs order and I make it absolute.

(2)  Linklaters showing cause as to why they should not bear costs of Ricky Liu

10.  When a solicitor purported to act for a client in an action, he impliedly warranted that he had the authority to represent the client.  When it later transpired that in fact he did not have such authority, he had acted in breach of the implied warranty.  The court would normally order him to personally pay the costs needlessly incurred by the opposing party.  Grand Field Group Holdings Ltd v Tsang Wai Lun Wayland & ors [2010] 5 HKC 441, §12; Airways Ltd v Bowen [1985] 82 LSG 1863, p 7.  Note that in those cases, there was no ratification.

11.  This was because the supposed client was not a party to the proceedings in the ordinary sense and the promisee of the warranty has lost the ability to recover from that “client” the costs of the proceedings in the event of a costs order in the promisee’s favour.  This was usually quantified as the amount of costs thrown away by the promisee in relation to the proceedings from the first participation in them of the solicitor until the promisee was apprised of the solicitor’s lack of authority: Skylight Maritime SA v Ascot Underwriting & ors [2005] EWHC 15, §16.

12.  The situation is different where there was ratification as stated in Bowstead & Reynolds on Agency, 20^th ed, §9-072:

“Ratification. It may be assumed that the agent is not liable where the principal ratifies. Here again there is no loss to the third party, but it may be more plausibly argued that there was no breach of warranty at all (unless perhaps the principal initially refused to ratify, thereby causing expense to the third party), on the basis that the agent warrants that he has authority or that the principal will ratify.

13.  In Chan Chi Ming v Brilliant Rise Container Depot Ltd & anor [2009] 4 HKC 458, the solicitors who acted for a deregistered company was ordered to personally bear the wasted costs of the plaintiff.  The solicitors successfully applied for reinstatement of the company, and belatedly validated all prior acts done and all instructions given by the company in and for the conduct of the action during its deregistration period.  The Court of Appeal held that the orders of reinstatement and validation retrospectively removed the basis upon which the wasted costs order had been made and thus set aside the wasted costs order (§§47-49).

14.  In the present case, any lack of authority was cured by ratification.  The ratification related back and was deemed equivalent to antecedent authority: Danish Mercantile Co Ltd & ors v Beaumont & anor [1951] 1 Ch 680, 687-688.

15.  The ratification also meant that Ricky Liu was not left without a remedy.  He could recover costs against the principal YDL: Bowstead & Reynolds and Skylight above.

16.  In the premises, Linklaters should not be asked to bear costs.

17.  I have additionally considered whether or not Linklaters should personally bear the costs of their client YDL.  At the outset, I have directed Linklaters and Mr Bartlett SC to consider the potential conflict of interest between YDL and Linklaters.  However, Mr Bartlett SC insisted that there was no conflict of interest and he informed the court that YDL would not seek to recover costs from Linklaters. 

18.  This case was commenced without even a board resolution.  Clearly the solicitors had acted without authority initially.  That said, the present case in fact showed unity of purpose of all the stakeholders (ie mortgagee, receivers, shareholders, Lender Director and directors), as recognized in paragraphs 95 and 106 of the judgment.  Linklaters all along took instructions from Mr Fok and Mr Gronow, as persons constituting the entire board of directors of YDL. 

19.  Linklaters drew to my attention that there was no letter before summons to question the authority of Linklaters.  I place little weight on this.  Even with the issue of the authority summons, YDL had taken a convoluted route until 31 July 2015 to ratify the action.

20.  Having considered all circumstances, I am satisfied that Linklaters need not personally bear the pre-ratification costs.

Personal liability of YDL’s directors for costs

21.  Directors can be made personally liable if they were the real parties to the litigation or would benefit from it: Dymocks Franchise Systems (NSW) Pty Ltd v Todd & ors [2004] 1 WLR 2807, §§25(3) and 29; cited by the Court of Final Appeal in The Liberty Container (2007) 10 HKCFAR 256, at §§28 & 30, per Bokhary PJ.

22.  In the present case, the action was taken out to recover YDL’s own assets.  The directors could not have been the true beneficiaries to the action or the summons.  There was no basis to make them personally liable.

(3)  YDL to make representation as to whether the injunction should be set aside for non-disclosure and whether the present action was necessary

23.  In the reply submission of Ms Chan SC (“the reply submission”) in the authority summons, it was stated that:

“42.1 Fok and Gronow repeatedly alleged that they urgently required to obtain the YDL’s seals and chops so as to perform their duties, which led to this Court acceding to their application and criticized Ricky for having misrepresented the position about the seals and chops …

42.2   As recently revealed by the evidence submitted by Fok and Gronow to the PRC Court on 23.6.2015, in fact, even before the commencement of the action, on 9.6.2014, [Mr Fok and Mr Gronow] had already passed resolution to cancel YDL’s then seals and chops.  Such crucial fact, which undermined the utility of the action and the application for injunction, had been concealed by Fok and Gronow from the Court.”

24.  This triggered the court’s concern as to whether or not the injunction in this action was obtained by material non-disclosure and whether this action was necessary.

25.  YDL’s representation dated 17 May 2016 disclosed that the reply submission was an exaggeration.  YDL had not invalidated its corporate seal.  It created a new business chop and invalidated the old one by the resolution.  Ricky Liu has not identified the specific evidence in support of the reply submission. Rather, for the reasons given in paragraph 10 of Linklaters’ letter dated 17 May 2016, Ricky Liu should have known of the creation of the new chop.

26.  The action and the mandatory injunction sought were justified because YDL was seeking to recover its own assets (including an invalidated old chop) from the ex-directors including Ricky Liu.  The chops and seals formed only a small part of the subject matter of the action and the injunction application.  It would have been better if existence of the new chop had been brought to the court’s attention before the injunction was granted, but that would be more relevant to the issue of urgency of granting the injunction.  At the inter partes hearing, the court would have ordered delivery up of the old seals and chops even if new ones had been created.

27.  There were various reasons that led the court to grant the injunction. In fact, Ricky Liu misled the court to believe that all the ex-directors had handed over the chops and seals.  The old chop and seal were in the possession of Ricky Liu and he had not surrendered them to YDL until 3 months after the injunction was granted.

28.  I see no reason to question the taking out of the present action and the injunction.  Having considered YDL’s representation, there is no need for the court to investigate further.

29.  As it was Ricky Liu who triggered the court’s concern, costs of YDL making representation should be borne by him.

Conclusion

30.  I dismiss Ricky Liu’s application to vary the costs order nisi and for the directors of YDL to bear costs. I make the costs order nisi absolute.  Costs of Ricky Liu’s summons to vary should follow the event and be to YDL.  I apportion, nisi, 20% of the hearing time and Mr Bartlett SC’s fees for these applications.

31.  I have dismissed YDL’s summons to vary the costs order nisi and the application to amend that summons with costs to Ricky Liu.  YDL’s costs should be set off against the costs in the preceding paragraph, so that overall there should be no order as to costs on each party’s summons.

32.  I am satisfied that Linklaters should not bear costs of the authority summons.

33.  I am satisfied on the representation of YDL that the action and the injunction shall stand.  As it was Ricky Liu’s conduct which led to the relevant enquiries, I order, nisi, that costs are to be borne by him.  I apportion, nisi, 20% of the hearing time and Mr Bartlett SC’s fees for this matter.

34.  The net effect is that fresh costs statements shall be filed and served by YDL pursuant to the preceding paragraph within 14 days of the handing down of this decision and grounds of objection are to be filed by Ricky Liu within 7 days thereafter.  If any party or Linklaters wants to dispute the apportionment or any costs order in relation to this hearing, they should do so by written submission of not more than 1 page within 7 days, without the need to file a summons.

35.  I thank counsel for their assistance.