YEUNG YEUK SUT v. TSE CHUN YIP AND OTHERS

HCA 682/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 682 OF 2006

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DECISION

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1.  This Decision should be read in conjunction with the one dated 2 February 2010 in this case (“the February Decision”).  I adopt the same terminology in the present Decision.

Background

2.   After provisional taxation by me on the papers, the paying party successfully had the taxed profit costs reduced to $791,998 at an oral hearing on 6 October 2009.  I summarily assessed their costs at $10,000 which should be set off against the taxed costs. 

3.   There was clear breach of indemnity principle in that the amount of profit costs claimed in the Taxation Bill ($1,071,074) exceeded the liability ($820,840) of the receiving parties to their solicitors CMKI.

4.   The following issues have been adjourned since the February Decision:

A.   The extent to which the receiving parties have breached the indemnity principle;

B.    Whether or not the sanctioned offer made by the receiving parties on 4^th August 2009 had been beaten and, if so, what sanctions should be imposed;

C.   Whether or not the paying party should be exempted from payment of part of the interest on costs;

D.   Costs of the taxation proceedings as a whole.

Issue A: The extent to which the receiving parties have breached theindemnity principle

5.   I have to deal first with issues raised in paragraph 25 of the February Decision, namely, recoverability of costs incurred prior to the deemed commencement date of the retainer. 

(i)  Under Stage 1 of the Taxation Bill, Mr. Tang explained that 2 letters which pre-dated the commencement date of the retainer were produced by the receiving parties to CMKI for perusal and handling after early April 2006.    The period covered by Stage 1 merely represented the “issue dates” of the 2 letters.   He proposed merging the costs incurred in Stage 1 into Stage 2.  Without disrespect, this is not permissible.  The work done was described as “communications” with Plaintiff’s former solicitors and not “perusal” of prior correspondence.  I maintain my view that costs claimed and initially allowed ($667) under Stage 1 of the Taxation Bill are irrecoverable. 

(ii)  Under Stage 2 of the Taxation Bill, although it was said to have started before commencement of the retainer, from the schedule annexed to the Taxation Bill, only one letter involving SI for 5 minutes ($333.33) fell outside the period of the retainer and was irrecoverable.

It will become apparent from the analyses below that whether or not these 2 items were included in the taxed amount would not affect the issue of breach of the indemnity principle.

6.   In the present application, the paying party also challenged the hourly rate of Mr. Tang as having breached the indemnity principle.  He was described as a partner in the retainer letter dated 10 April 2006 but he only became a partner on 1 April 2007.  In a letter dated 23 March 2007, there was evidence that Mr. Tang was charging $2,500 per hour.  The paying party suggested that Mr. Tang’s hourly rate should be capped at $2,500 per hour before he became a partner and $3,500 thereafter.

7.   In opposition, Mr. Tang produced undisputed evidence that the client retained his firm on 10 April 2006.  He agreed that the retainer was only later reduced into a formal agreement signed after April 2007 but backdated to the date of the formal Board Resolution.  I accept such evidence.  The retainer letter has provided for the agreed (and/or ratified) hourly rates of fee earners.  I see no reason for going behind an agreement which was entered into long before the taxation started.

8.   I now come to the item by item comparison.  In my February Decision, I have left open the question of what an “item” was.  Each party’s approach to this question was different.  Both parties took pains to prepare numerous tables for comparison purposes. 

The Paying Party’s Approach

9.   The paying party used the stages in the Office Bill as the bases and reconstructed the Taxation Bill accordingly. By so doing, Mr. Ho went into minute details of breakdowning the figures in the Taxation Bill as claimed, as taxed down and as allowed on taxation.  He produced altogether 4 pages of figures (revised and added from time to time) and came to the conclusion that in some stages the indemnity principle was breached.  He claimed that applying the indemnity principle, the amount recoverable was only in the region of $500,000.

10.   In my view, Mr. Ho’s approach was not acceptable given that the stages as classified in the 2 Bills were completely different. The classification in the Office Bill was not based on progress of the litigation whereas the classification in the Taxation Bill was. The reconstruction exercise imposed on the Taxation Bill a structure that was never intended and was against the requirements of PD 14.3.   It required both parties and the Court to do another examination of the Taxation Bill after the formal taxation was over. 

11.   Mr. Ho’s approach involved a reversion to the old practice under which a receiving party would set out each and every piece of communication and conference with dates and time spent respectively.  That practice had been abandoned when the new format for a bill of costs for taxation was put to use pursuant to PD 14.3 post-CJR.  The receiving parties in this case have properly claimed for correspondence andconference costs as global amounts in the Taxation Bill.  (This was in accordance with paragraph 17(5) and (6) of PD 14.3.)  Those global figures often straddled 2 stages of the Office Bill.  The reconstruction done by Mr. Ho necessarily involved breaking up those global figures.  It took each party long hours to check to see if the amounts claimed and allowed were correct for each stage. Mr. Tang has demonstrated that the paying party’s calculation was erroneous in that the correspondence / conference times globally taxed off have not been reflected in his calculation.  The question is: when a taxing master made a global deduction to correspondence / conferences, how could one know which letter in which Stage of the Taxation Bill has suffered a deduction and which one did not, except in the clearest of cases?

12.   Moreover, some items in the Taxation Bill could not be reconstructed in the way proposed by Mr. Ho.  For example, item 82 in Stage 4 of the Taxation Bill was for 50 hours of consideration of “evidential documents received by client and/or other parties including but not limited to those documents inside the agreed and/or non-agreed documents bundles for trial.”  As submitted by Mr. Tang (which I accept) it could not have been the case that all those 50 hours were only spent in Stage 4.  The work done would have been spread over several stages and put under Stage 4 only for convenience.  (This is a common phenomenon in bills. It appeared that item 86 in Stage 5 of the Taxation Bill, being 4 hours for considering pleadings and statements filed in DCCJ 5949 of 2006; and legal research of 2 hours not classified under any Stage, were of the same effect.) 

13.   Finally, Mr. Ho had “assigned” items of costs to the wrong stage of the Office Bill.  For example item 97 under Stage 5 of the Taxation Bill was for perusal of the typed notes prepared by counsel and transcript concerning the first 6 trial dates which ended part-heard on 28 August 2008.  Mr. Ho “assigned” such time to Stage 5 of the Office Bill which ended on 31 August 2008.  As Mr. Tang submitted, and which I accept, he had rendered such perusal work far beyond 31 August 2008 to prepare for the resumption of the trial.  The Taxation Bill did not disclose any other purpose in relation to this perusal.  Item 97 must have been incurred in the final stage in the Office Bill.

14.   Mr. Ho claimed in his written submission that the receiving parties “agreed to compare the profit costs in respect of the Office Bill and Taxation Bill (after taxed) on item and item basis but counter-propose that the time intervals applied shall be in accordance with those of various stages in the Taxation Bill.  Therefore, unless the Honourable Court directs or otherwise, it is no longer necessary for [the paying party] to deal with the comparison stated in [the receiving parties’] submission as the comparisons are partly item by item and/or (partly) global basis”.  I cannot agree with this view.  Mr. Tang has clearly stated in his written submission that parties ought not to engage in “painstaking” comparison of every single “item” in the Taxation Bill and the Office Bill, in order to save costs and time.  However, he had proposed several alternative approaches in opposition to Mr. Ho’s stance.

The Receiving Parties’ Approach

15.   Mr. Tang produced 5 tables which were subsequently revised and added to become 7.   My analyses are as follows.

16.   Table A1 correctly showed the amount claimed and allowed in the various stages under the Taxation Bill.  It could  immediately be seen that the amount claimed ($1,081,140) was in breach of the indemnity principle.  The amount allowed on taxation ($791,998) did not appear to have breached the indemnity principle at first glance until one went into some detail.

17.   Table A2 purported to “assign” the amount I have allowed for general care and conduct ($12,000) to the 5 stages in the Taxation Bill, pro-rated according to the taxed profit costs of a particular stage over the total taxed profit costs for all 5 stages.  I reject this Table. This formula for assignment was against the general practice in taxation, under which 5 minutes per month of the litigation was allowed for general care and conduct.  The present case started from the month of April 2006 to December 2008 (33 months).  Any excess for general care and conduct could be treated as part of the costs for the 5th stage after the trial was over, as costs were awarded on indemnity basis.  I hasten to add that however the $12,000 were assigned would not have any impact on whether or not the indemnity principle has been breached.

18.   Table A3 showed the amounts claimed for profit costs for various stages in the Office Bill.  I accept the calculation therein.

19.   Table A4 reconstructed the costs claimed under the Taxation Bill by pro-rating them according to the number of months under a particular stage of the Office Bill.  I find pro-rating to be an incorrect approach as the actual amount of work done in each stage/each month varied greatly in this case.  CMKI did not charge on monthly basis.  The pro-rating gave no regard to the real situation.  I place no reliance on Table A4.

20.   Table A5 compared Tables A4 and A2.  It showed breach of the indemnity principle to the extent of $97,054 (i.e. $820,800 - $69,181.40 - $193,564 - $118,157.20 - $342,843.40).  As Table A4 was prepared on a basis that I have rejected, the views proposed in Table A5 could not be accepted.  Moreover, this Table conveniently ignored the 2 broad periods of charging by CMKI as can be seen below.

21.   Table A6 purported to make 4 sets of direct comparison between the Office Bill and the Taxation Bill without any “assignment” of costs.  I reject the first 3 sets as they were not comparing like period with like.  As for the 4^th set of comparison, it simply compared the total amount in the Office Bill with the Taxation Bill.  Whilst this had the advantage of simplicity, it ignored the manner of CMKI charging the receiving parties.  It also conveniently avoided the item by item comparison.  I reject it as well.

22.   Table A7 gave 3 sets of alternative comparison.  The 3 sets assumed that both bills should only be divided into 2 broad stages.  It relied on Table 5 which I have rejected.  I reject Table A7 as well.

Comparison of 2 Broad Periods of Charging

23.   The Office Bill disclosed CMKI charging the receiving parties by 5 stages ranging from 2 to 12 calendar months.  They did not seem to bear any relationship to the progress of the litigation.  It appeared that CMKI just billed the receiving parties as and when the former deemed appropriate.  However, the Office Bill could be broadly divided into 2 major periods for comparison as stated in the February Decision:

(i)    From the time the retainer started on 3 April 2006 to 31 August 2008 when the trial was adjourned part-heard (“the 1^st Period”); and

(ii)  From 1 September 2008 up to 2 November 2009 being the date of the Office Bill during which the trial and taxation were completed (“the 2^nd Period”).

24.   For the 1^st Period, all 5 stages in the Office Bill should be treated as one item.  The amount that should fall into the definition of “profit costs” according to taxation law wouldbe $478,300 made up of:

Professional charges	$451,000
Photocopying, postage, travelling & other miscellaneous expenses	6,300
Photocopying, postage, travelling other miscellaneous expenses	1,600
Photocopying, postage, travelling & other miscellaneous expenses	2,400
Photocopying, postage, travelling & other miscellaneous expenses	11,000
Photocopying, postage, travelling & other miscellaneous expenses	6,000
Total	$478,300

25.   One should compare this amount with the taxed costs of the equivalent period, i.e. the first 4 stages of the Taxation Bill and part of the 5^th  up to 31 August 2008.  Adjusted taxed costs of the first 4 stages were already $451,162.67[1].  Although the parties have not provided me with the taxed costs for the 5^th stage up to 31 August 2008, such costs were easily identifiable and I can say with certainty that they were in the region of $200,000.  Thus, the indemnity principle was breached and so the receiving parties could only recover $478,300 for the 1^st Period.

26.   For the 2^nd Period, the amount that should fall into the definition of “profit costs” according to taxation law would be $342,500 made up of:

Professional charges	$340,000
Photocopying, postage, travelling & other miscellaneous expenses	2,500
	$342,500

27.   Mr. Ho asked for breakdown of this amount.  I declined to order for such.  Mr. Ho should bear in mind that this was not a solicitor-client taxation but a party-and-party taxation (although on indemnity basis).  The Court was not assessing the remuneration of the solicitor but was determining how much should be paid to the receiving parties to reimburse them for the expense which they had properly incurred in carrying on the proceedings: paragraph 62/App/2 Hong Kong Civil Procedure 2010.  Moreover, the breakdown was simply not necessary for the purpose of deciding whether the indemnity principle has been breached.  That said, the enormous amount charged to the client could have been for perfectly valid reasons, e.g. as stated in the course of taxation, some costs in the 2^nd Period was of a solicitor-client nature that was not covered by the costs order.

28.   The amount I have allowed on taxation for the 2^nd Period was $130,098[2]  according to Mr. Ho.  The indemnity principle was not breached and so the receiving parties couldrecover$130,098.

29.   Therefore, under the indemnity principle, the receiving parties can only recover $608,398 (i.e. $478,300 + $130,098).  There was overall breach of the indemnity principle by $183,600 (i.e. $791,998 - $608,398).

Issue B: Whether or not the sanctioned offer made by the receiving parties on 4^th August 2009 had been beaten and, if so, what sanctions should be imposed

30.   On 4 August 2009, the receiving parties made a sanctioned offer to settle all costs (including disbursements) in lieu of taxation at $1,400,000.  The offer was not beaten having regard to my finding in the preceding paragraph.

Issue C: Whether or not the paying party should be exempted from payment of part of the interest on costs

31.   The costs order was made on 10 December 2008.  The Taxation Bill was filed in April 2009.  It took more than a year since filing of the bill to have the taxation disposed of by this Decision. 

32.   Negotiation had only ended up in narrowing down of a small number of items for taxation.  The paying party had not made any sanctioned payment.  They have not paid even the non-disputed taxed costs notwithstanding the allocatur has been sealed.  But for my order for part payment into court, the paying party would not have provided a cent of taxed costs.   

33.   I see no good reason for exempting them from payment of any interest on costs. 

Issue D: Costs of the taxation proceedings as a whole.

34.   The paying party asked for costs of the taxation proceedings on indemnity basis.

35.   I have found for him on this application for variation of the taxed costs and prima facie costs should follow the event.  However, I have taken into account the overall circumstances and the conduct of the parties.

36.   The breach of the indemnity principle by the receiving parties was great but I am not satisfied that CMKI committed the breach intentionally.  It was probably due to a change of the taxation law post-CJR that brought about the breach.  CMKI had demonstrated serious efforts in coming to a settlement with the paying party by open correspondence, making sanctioned offer and without prejudice negotiation but was not successful.  Its request for the paying party to prepare a bundle of documents for hearing was not even acceded to.

37.   On the other hand, the paying party was aggressive.  But for the painstaking way in which Mr. Ho presented the comparison of figures, this application would not have taken the course it did.  The original time assigned for this application was one hour but it turned out to be over 4.  Numerous tables, revised tables and written submissions were churned out.  Most of the comparisons were not accepted. Each party spent over 20 hours on preparation and hearing of this application.  One party involved the LCD. The time and effort spent on this application was more than the total spent on the paper taxation plus oral taxation.  This is a typical piece of satellite litigation done after the substantive litigation was over.  It could have been avoided if the paying party had asked for an oral taxation right from the start and adopted a more realistic approach.

38.   In the premises, I will only award costs to the paying party on party-and-party basis, summarily assessed at $35,000.  This will cover all the proceedings under the February Decision and this Decision.

Conclusion

39.  I answer the 4 issues as follows:

Issue A: The amount claimed ($1,081,140) in the Taxation Bill was in breach of the indemnity principle.  The amount allowed on taxation ($791,998) has also breached the indemnity principle.   The receiving parties can only recover $608,398 as taxed profit costs.  The extent of breach was $183,600.

Issue B: The sanctioned offer was not beaten.

Issue C: The paying party should not be exempted from paying any interest.

Issue D: Costs covering all the proceedings under the February  Decision and this Decision be to the paying party summarily assessed at $35,000.

40.   Allocatur is to be sealed.  An amount has been paid into court pursuant to my order on 21 December 2009.  There should be payment out with interest forthwith to the receiving parties in part settlement of taxed costs due to them.

[1]  (Nil for stage1) + ($67,456 - $333.33 for stage 2) + ($258,057 + $633 for stage 3) + ($116,350 for stage 4) + ($9,000 for general care and conduct for 27 months from April 2006 to June 2008)

[2]  It comprised the scale costs of $6,667, items 96 to 100 of the Taxation Bill, part of the conferences and communication covering 1 September to 10 December 2008 and the profit costs for taxation less amounts taxed off.  It appears the calculation was to the benefit of the receiving parties.