DEACONS (a firm) v. WHITE & CASE LTD LIABILITY PARTNERSHIP AND OTHERS

HCA 2433/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2433 OF 2002

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JUDGMENT

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1. This is an application for discovery; in fact, for further and better discovery, brought by the Plaintiff against the Defendants.

2. The application flows from my findings on the issue of liability in this action. On 24th October 2003 I found in favour of the Plaintiff in damages against all Defendants to be assessed, with a right to elect an account of profits against the 3rd and 4th Defendants. By further judgment of 13th November I gave the same right of election as against the 1st and 2nd Defendants as well. On the same date I ordered discovery relevant to the Plaintiff's election between damages or an account of profits, to be complied with by 8th January 2004, with a supporting affidavit.

3. On 21st January the Defendants filed a document described as the Defendants' first combined list of documents and on 27th January a verifying affidavit.

4. The list of documents identified 47 separate matters and a total of 404 documents. The verifying affidavit was completed by a Mr. Latchford described therein as the Chief Financial and Administrative Officer of the 1st Defendant based in New York. He deposed that the documents in the main are bills and proformas which relate to work carried out by the Defendants for the period from August 2002 to date which in their judgment related to matters for which the Plaintiff may be entitled to an account of profits if that be the remedy it elects. By 'proforma' is meant a record of billable time recorded on the particular file or matter.

5. As for expenses, he deposed that there is within the 1st and 2nd Defendants no accountancy undertaken whereby expenses are allocated to a specific fee earned, though that can be carried out. In the meantime he stated that the aggregate revenue of the 2nd Defendant for the period in question was $16.1 million and the overall expenditure, including what is referred to as 'partner compensation', came to $23.49 million.

6. On 2nd March 2004 Messrs. Clifford Chance (CC) for the Plaintiff wrote to Messrs. Johnson, Stokes & Master (JSM) for the Defendants pointing out various deficiencies and followed this up with the summons for further discovery that is now the matter before me. The application seeks within 14 days a further and better list of documents as specified or falling within classes of documents set out in an attached schedule, with copies to be supplied, together with a verifying affidavit.

7. The schedule referred to was attached to the summons. However in subsequent correspondence between the solicitors it came to be replaced by an amended version and it is this which is now the subject of this application. It is I think appropriate to set out the amended schedule, and I do so hereafter:-

1. Revenue

To the extent not already discovered, all bills issued by the First and/or Second Defendants, and all "proformas" generated by either of them, in respect of all matters worked on by, or referred from, the Second Defendant's Business Restructuring Department (including, without limitation, the Third Defendant, the Fourth Defendant, Mr Darton, Mr Leifer and Mr McDonald) since August 2002 irrespective of whether that work:-

(a) was done for a client which was formerly a client of Deacons or otherwise;

(b) was generated by the Second Defendant's Business Restructuring Department or was referred to it by another department of the Second Defendant or by any other office of the First Defendant.

For the avoidance of doubt, this discovery should include:

(i) In respect of any past or current matter falling within the above description, all documents evidencing whether the First and/or Second Defendants will or may be instructed in the future to undertake further work relating to, or connected with, that matter.

(ii) All documents evidencing cross-referrals of work, whether in the business restructuring field or in any other field, and revenue and work in progress thereby generated, within the Second Defendant and/or across the First Defendant's international network, where those referrals are directly or indirectly from or attributable to any member of the Second Defendant's Business Restructuring Department since August 2002.

2. Expenses

All documents detailing, and/or providing a breakdown of, the specific expenses incurred by the Defendants in generating revenues included within category 1 above, including but not limited to:

(a) The First Defendant's audited accounts for 2002 and 2003

(b) The Second Defendant's audited accounts for 2002 and 2003

(c) Management accounts for 2003 for both the First and Second Defendants

(d) Documents providing a detailed breakdown of the US$23.49 million of office overheads said to have been incurred by the Second Defendant between August 2002 and January 2003 in the affidavit of Mr Latchford dated 27 January 2004.

(e) Management accounts or their equivalent from August 2002 for any office of the First Defendant outside Hong Kong (including separate, special purpose entities where applicable) which has generated such revenue.

3. Benefits accruing to Third and/or Fourth Defendants

All documents evidencing any salaries or other emoluments, any share in any profits, bonuses, increases in compensation or any other financial advantages which have accrued to the Third and/or Fourth Defendants as a result of their joining the First and Second Defendants.

5. Financial relationship between First and Second Defendants

All documents evidencing the financial inter-relationship between the First and Second Defendants and demonstrating whether they operate as separate partnerships or whether income and/or profits are pooled and then distributed by the First Defendant.

6. Damages

All documents in the possession, custody or power of all or any of the Defendants evidencing damage (being loss of existing or future business or referrals of business or loss of goodwill) suffered by the Plaintiff as a result of their tortious and fiduciary breaches, including without limitation the documents specified in category 1 above.

8. Specific documents

Without limitation to the discovery sought above:

(a) Documents, including bills and proformas, evidencing revenue and/or work in progress in respect of Standard Chartered Bank matter 4642119-19 and in respect of any Standard Chartered Bank matter subsequent to matter number 26.

(b) Proformas for each of the matters identified in the Defendants' first combined list of documents dated 21 January 2004 for which proformas have not already been discovered.

(c) All bills issued in respect of SK Networks matter 4620179-4 including the invoices numbered 684108 and 4603381.

(d) All bills issued in respect of BRI Finance Limited matter 4618320-2 including invoices numbered 4602577, 4602592, 4603035, 4603036, 4603063 and 4603101.

(e) All bills and proformas in respect of Standard Chartered Bank matter 4642119-6.

8. Prior to the hearing the solicitors for the parties corresponded with a view to agreeing some of the issues or at least reducing the matters in contention. To this extent there was some success; it is I think appropriate to spell out what has been agreed and what remains for me to rule upon.

1. Revenue

9. The Defendants are prepared to give discovery of the bills and proformas asked for, on a quarterly basis, but there is a dispute about the phrases 'all matters worked on' and 'all documents evidencing cross-referrals of work'. As well it seems reference to the 2nd Defendant's Business Restructuring Department needs to be tidied up as there is no such entity in the 2nd Defendant. The Defendants also take issue with the inclusion at (i) because they do not understand what is meant. As an addendum under this head the Plaintiff seeks discovery of all timesheets generated by the fee earners of the Department from which the proformas derive. The Defendants oppose this.

10. I shall return to deal with these issues.

2. Expenses

11. With the removal of the first three lines under this head, this is now agreed.

3. Benefits Accruing to Third and/or Fourth Defendants

12. Amended, thus to read 'Documents evidencing annual salary return, bonus award, contract revisions evidencing changes in compensation which have accrued to the 3rd and/or 4th Defendants as a result of their joining the 1st and 2nd Defendants', this is now also agreed.

5. Financial Relationship between First and Second Defendants

13. The Defendants are prepared to respond by giving answers to provide this specific information sought but object to providing documents, on the basis that this is not a proper matter for discovery. The Plaintiff's viewpoint is that if there are documents it is entitled to view them.

6. Damages

14. The Defendants position is that there is no more discovery to give or at least no more beyond that given or to be given in respect of the account. The Plaintiff responds that this should be verified by affidavit. The Defendants oppose the need for an affidavit.

8. Specific Documents

15. The Defendants are willing to give discovery of all matters under this head.

16. I come now to deal with the issues in turn.

1. Revenue

17. Under this head has to be resolved the following:-

(a) Should the Plaintiff be entitled to discovery in respect of 'all matters' or should there be a limited selection?

(b) given that there is no Business Restructuring Department, whose matters should be caught?

(c) What is the purpose and meaning of the discovery sought at (i)?

(d) Should the Defendants be required to discover the timesheets?

18. The starting point is that there should be discovery sufficient to enable the Plaintiff to make an informed election as to which remedy to pursue in equity and common law.

19. It is the Plaintiff's contention that the discovery should be in connection with all matters generated or worked on by the members of the Business Restructuring Department (leaving aside for the moment who these are, in the absence of such a Department) whether the client in question was a former client of the Plaintiff or not and whether the file in question is a business restructuring matter or not. The reasoning behind that is because an account for profit is not always caught by the common law principles of causation, remoteness of damage and measure of damage. There does need to be established a reasonable connection between breach of duty and the profits for which the fiduciary is accountable. Even so the rules in equity are not strictly defined; there have been awards for all profits made without attempt to separate such part of profits attributable to the breach of a fiduciary duty. The consequence of the Defendants' breaches was that the Plaintiff lost an established and successful business with established clients, goodwill and reputation. In such circumstances it might well be entitled to an account of all profits generated by the departed team.

20. On the issue of timesheets, the Plaintiff seeks discovery because they are the base documents from which the proformas emerge. Without them the Plaintiff would be wholly dependent on the Defendants' account.

21. The Defendants at the outset were prepared to concede only to discovery in respect of those matters undertaken for clients who were formerly clients of Deacons. But before me Mr. Hunsworth representing them said that they no longer disputed the inclusion of all matters undertaken falling into the category of the specialist skills of the members of the departing team. What however should be excluded is such work undertaken that is unrelated to business restructuring. As to the timesheets, the Defendants object to discovering these upon the basis that there is no benefit or point in the Plaintiff having access to them when the information contained therein in summary form is recoverable from the proformas. To call for discovery of the timesheets would require a huge amount of manpower and time for no good purpose, at least not in connection with the Plaintiff's election; time enough for these, for verification purposes, as and when the election is made and the trial is resumed.

22. My ruling is that discovery should be limited to 'all matters only where the client was a client of the Plaintiff prior to August 2002; otherwise, for all matters in the field of or pertaining to business restructuring'. I do not find it conceivable that a claim could lie in respect of any other matter worked on, for a client who had no prior connection with the Plaintiff.

23. There being, by all accounts, no Business Restructuring Department in the 2nd Defendant these words should be excluded, leaving the five named protagonists and 'any associate or other employee working under the directions or supervision of them or any of them'. I do not see the need for the inclusion of (i) which is to be excluded. In (ii) reference in the second line to 'any other field' should be excluded, unless it relates to work undertaken for a former client of Deacons.

24. I find no good reason for the inclusion under this head of timesheets. That will take the issue of election no further. Time enough for audit purposes if there is then a need.

5. Financial Relationship between First and Second Defendants

25. In a letter of 18 June 2004 expanding on what was required by the Plaintiff under this head, CC wrote to JSM as follows:-

".........

13. The reason for the request is that our clients must know whether the Second Defendant is financially independent from the other international offices of White & Case (or any of them) or, if not financially independent, the nature of that dependence. This is in order that our clients can satisfy themselves that: (i) all revenue generated by lawyers of the Second Defendant is reflected in the Second Defendant's accounts; and (ii) all expenses recorded in the Second Defendant's accounts are expenses properly attributable to the Second Defendant.

14. The specific information we seek in relation to revenue includes:

(a) whether there is or can be a revenue credit where work is referred from the Second Defendant to another office of White & Case (for example, if the matter referred was one which did not require any work in Hong Kong by the Second Defendant);

(b) the basis on which inter-office bills are raised and accounted for (for example, where there is an existing matter in Hong Kong for which work on a discrete issue is referred to another office); and

(c) the basis on which revenue is accounted for when time recorded by members of the Second Defendant is billed from, and payable to, another office of White & Case (for example, the invoice to the Foreign Bank Steering Committee of SK Global dated 30 June 2003 which included substantial time recorded by Hong Kong fee-earners, but was billed from and payable to the First Defendant in New York. We refer to document 53 of your clients' first combined list).

15. The specific information we seek in relation to expenses includes:

(a) whether any fee, calculated as a percentage of revenue or on any other basis, is payable to the First Defendant or an associated entity in consideration for the Second Defendant being allowed to use the "White & Case" name;

(b) whether expenses incurred in or by any office of White & Case outside of Hong Kong are recorded in the accounts of, or are otherwise charged to, the Second Defendant. If so, what those expenses are and the basis on which they are charged;

(c) specifically in relation to the "cost of central operations" referred to at paragraph 19 of Mr Latchford's affidavit, discovery of the "allocation principles" to which he refers, both generally and in respect of the period from August 2002 and December 2003; and

(d) whether there are regional management costs which the Second Defendant incurs or contributes to, and the basis on which they are charged.

........."

26. In principle the Defendants do not object to responding to the specific matters raised. It has been submitted on their behalf that documentary production is not appropriate, at least not prior to receipt of the answers that they are prepared to give. I agree. This matter is to stand adjourned with liberty to restore if the answers sought are not forthcoming or are otherwise unsatisfactory by a given period of time that I shall come to.

6. Damages

27. The Defendants claim to have no discovery to give or none to give beyond that intended in compliance with the discovery in respect of the account. That may be so; but I share the view of the Plaintiff that this is a matter that should be confirmed by affidavit. The Defendants have demonstrated no good reason why this should not be done, or why there should not be a verifying affidavit as sought.

28. That I believe concludes all matters, save as to timing. 14 days is too short. I fix 8 weeks, with liberty to apply. I adopt the same time frame for compliance with the matters raised at 5 in the schedule before liberty to restore arises.

29. Costs will be in the cause, nisi at first instance.