WISON (SHANGHAI) CHEMICAL ENGINEERING CO LTD v. SIMMONS & SIMMONS (a firm)

HCMP 629/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 629 OF 2007

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AND BETWEEN

HCMP 664/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 664 OF 2007

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(Consolidated pursuant to the Order of Hon B. Fung J dated 4 July 2007)

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D E C I S I O N

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1.  This is an application for security for costs against the plaintiff on the ground that the plaintiff is ordinarily resident out of the jurisdiction.

Background

2.  The plaintiff is an industrial enterprise incorporated in the Mainland.  The defendant was the former solicitors of the plaintiff in relation to its proposed listing in Hong Kong.  The defendant was engaged in February 2003.  The listing was rejected in March 2005, and the second attempt was aborted in March 2006 due to the dispute between the plaintiff and a private investor.  The engagement was terminated on 8 February 2007.

3.  The dispute concerned 3 unpaid fee bills of the defendant:

(1)	41000403	(issued on 17 January 2006)	$2,027,319.81
(2)	41006649	(issued on 5 March 2007)	$2,059,943.30
(3)	41006650	(issued on 5 March 2007)	$510,290.17
		Total:	$4,597,553.28

4.  The proceedings first started by Originating Summons dated 30 March 2007 for an order to tax the 1^st bill outside the 12 months period of delivery under s.67 of the Legal Practitioner’s Ordinance (Cap. 159) (“LPO”). 

5.  In the supporting evidence filed, the plaintiff disputed liability to pay the 3 bills at all.  Hence, I directed that the issue of liability should be decided before quantum.  By reason of serious dispute of facts as to whether there were any oral agreement of the terms of the retainer and whether revised estimates of costs were sent by the defendant to the plaintiff and also as to related discovery, the parties agreed at my suggestion that the proceedings should take the writ action procedure with proper discovery.

6.  The plaintiff then filed the Statement of Claim seeking a declaration that it is not liable to pay the 3 bills on the grounds that:

(1)	There is an agreed fee structure for charging under the written engagement agreement subject to an oral agreement for a fee cap of $2.1 million;
(2)	The 3 bills were dishonest and fraudulent:
	(a)	the plaintiff well knew that there was an agreed fee structure;
	(b)	under no circumstances did the plaintiff agree to pay other than under the agreed fee structure;
	(c)	the plaintiff had paid in full under the agreement fee structure;
	(d)	in any case, the charges were in excess of actual time spent;
	(e)	the plaintiff has overcharged dishonestly and fraudulently;
(3)	The defendant only provided a summary of work done and failed to provide a financial breakdown as to the task undertaken, seniority of staff and time involved.

7.  The plaintiff also relied on breaches of the solicitors’ Professional Guide to inform the client how the fee will be calculated, confirmation of oral estimates in writing, and no substantial variation from the estimate unless the client has been informed of the changed circumstances.

8.  The plaintiff also claimed the return of the original papers held by the defendant on an unpaid solicitor’s lien, and damages for conversion.

9.  The Statement of Claim did not mention any application for taxation.  Mr Mok, SC for the plaintiff, indicated that the application for taxation is not abandoned, but merely to await the finding on liability, and suitable amendments will be made for clarification.

10.  Mr Mok however indicated that the claim of damages for conversion is abandoned.

11.  The Defence denied that there was a fixed fee arrangement in place, and averred that the written engagement agreement only gave estimates of costs on the basis of actual time spent, which estimates were revised from time to time in the light of further work due to various complications which had been communicated to the plaintiff.  The plaintiff has so far paid $3,537,391.74. 

12.  The defendant counterclaimed the payment of the 3 outstanding bills.

13.  The plaintiff denied ever receiving any of the 4 revised costs estimates from the defendant.

Issues

14.  There is no issue as to ordinary residence outside the jurisdiction, or that the giving of security would stifle an otherwise genuine claim. 

15.  The issue is whether a non-resident plaintiff would in the circumstances be excused from giving security where there is a counterclaim which is the obverse or the other side of the coin of the claim.

16.  Mr Mok resisted the application on the grounds that:

(1)	Upon dropping of the claim of damages for conversion, the claim and the counterclaim raise the same issues and are two sides of the coin and the issues are going to be fully litigated anyway even if the claim were stayed upon non-payment of the security for costs (see BJ Crabtree (Insulations) Ltd v GPT Communication Systems Ltd (1990) 59 BLR 43);
(2)	In substance, the defendant/counterclaimant is seeking payment of the bills and is as much an “attacker” as the plaintiff (see Brand Farrar Buxbaum Llp v Samuel-Rozenbaum Diamond Ltd & Anor [2003] 1 HKLRD 600);
(3)	The Court should not attempt to go into the merits of the case because it cannot be clearly demonstrated at this stage whether the plaintiff or the defendant will have a high degree of probability of success or failure;
(4)	In looking at the broad picture, even assuming the revised estimates were received, the last estimate was only to the tune of $2.5 million, and would hardly justify the ultimate total bill of $ 8 million.

17.  Mr McCoy SC, for the defendant, submitted that:

(1)	Where there is a counterclaim arising out of the same matter as the claim, it does not necessarily follow that the plaintiff cannot be required to give security;
(2)	If security were ordered and the plaintiff did not make payment, the plaintiff’s claim will be stayed and the counterclaim will continue and the plaintiff can still advance all its arguments and defend the counterclaim;
(3)	If security were not ordered and the defendant succeeds in the counterclaim, the defendant would be at risk of not being able to have the judgment debt and costs order satisfied given the non residency of the plaintiff;
(4)	The plaintiff failed to show a high degree of probability of success in relation to the fee cap and fraud;
(5)	The plaintiff’s conduct of the case has been radical and inconsistent and the defendant should be protected from wasteful costs;
(6)	It was out of fairness and openness that that the defendant filed a counterclaim as it could have waited until the determination of liability.

Discussion

18.  It is trite that an order of any security for costs is in the discretion of the court, and the court may consider the merits of the plaintiff’s claim.  In the case of the plaintiff is genuine and strong, no order for security would be granted.  On the other hand, an order for security would usually be granted if the plaintiff cannot clearly demonstrate that it has a high degree of probability of success at trial.  However, that is not to say that every application for security for costs should be made the occasion for a detailed examination of the merits of the case.  It is not the function of the court, when faced with an application for security for costs, to make a “preliminary run” at deciding the ultimate success or failure of the claim.  Parties should not attempt to go into the merits of the case unless it can be clearly demonstrated one way or another that there is a high degree of probability of success or failure (see Hong Kong Civil Procedure 2008 Vol. 1 p. 430 para. 23/3/3). 

19.  Mr Mok referred to cases in support of the proposition that security for costs ought not be imposed where there are a claim and a counterclaim raising essentially the same issues.

20.  In BJ Crabtree, Bingham LJ said at p. 54:

“

… it does not appear that he paid attention to the factor which seems most important to me, namely the fact that these two claims - the claim by the plaintiffs and the cross-claim by the defendants - raise essentially the same issues and are going to be fully litigated anyway so far as one can tell.”

21.  And Parker LJ said at p. 55:

“

Here, the situation is that, if the money is not paid into court and the plaintiff’s claim is therefore stayed, the defendant will still raise issues on the counterclaim which are precisely the same as the issues which he would raise on the claim.  In the result, findings might be made on the counterclaim which clearly showed that the plaintiff’s claim which had been stayed would be lifted and there would then be judgment for the plaintiff on the claim (notwithstanding the fact that he had not paid money into court) with appropriate orders as to costs.  This being the situation, it appears to me that the only effect of the application for security will be that, if the money is not paid in, the defendant has the right to begin rather than the plaintiff.  That seems to me to be nothing less than the use of the rule to obtain some tactical advantage rather than to obtain protection.”

22.  In Success Wise Ltd v Dynamic (BVI) Ltd HCA 1463/2004 (dated 1 December 2005), Recorder Yu SC cited BJ Crabtree and referred to the dictum of Parker LJ as irrefutable logic (para. 12).

23.  Recorder Yu referred to cases which adopted a different approach.  In Easy Watch Products Manufactory Co Ltd v Epson Precision (Hong Kong) Ltd HCA 3943 of 2002 and Bestway Inflatables & Material Corporation v Greyland Trading Ltd HCA 3709 of 2002, the courts looked upon the substantial overlapping of issues between the claim and counterclaim as a reason for discounting the quantum of security to be ordered, rather than as a factor pointing against the exercise of discretion.  In Vigers Hong Kong Ltd v Junsa Development Ltd HCA 5173 of 1998 and Winghing Investments Ltd v Lee Hoi Wing and Li Tung Ping, the Managers of Li Tak Kau Tso HCA 15600 of 1999, the fact that the counterclaim arose out of the same matters as the claim neither affected the Court’s exercise of discretion to order the plaintiff to give security nor the quantum for security (para. 18).

24.  Recorder Yu noted that apart from BJ Crabtree not being cited in any of the other lines of cases, it seemed that the difference between the two lines of cases was whether the counterclaimant should be regarded as an “attacker” in Ma J’s terminology in Brand Farrar Buxbaum (para. 19).

25.  In Brand Farrar Buxbaum, security for costs was sought against a corporate third party intervener in interpleader proceedings under s.357 of the Companies Ordinance (Cap.32) as if it were the “plaintiff”.  Ma J (as he then was) held that in the context of interpleader proceedings, one must look at substance and not form and decide who essentially was the “attacker” or plaintiff (pp. 605I to 607E).  His Lordship said at p. 611 para. 26 that:

“

… it should not be forgotten that the judgment creditor is at least also as much an ‘attacker’ or plaintiff. I refer here to the same facts and matters set out in para.19 above. In these circumstances, where both parties can be regarded as ‘attackers’ or plaintiffs, in my view, this is a legitimate factor to take into account in the exercise of discretion.  In Samuel J Cohl Co v Eastern Mediterranean Maritime Ltd (The Silver Fir) [1980] 1 Lloyd's Rep 371, both the plaintiff and defendant were ordered to provide security for costs to each other since both were resident outside the jurisdiction. If that had been the situation in the present case, I might then well have considered making a similar order.  It would, in other words, be entirely fortuitous that the judgment creditor was resident within the jurisdiction.”

26.  Recorder Yu said that if the counterclaimant was as much an “attacker” as the plaintiff and it is merely fortuitous who started proceedings first, it would be a factor in treating both claimant and counterclaimant in the same way as far as security is concerned (para. 19).

27.  In Karpex (HK) Ltd v Yasmine Printing (China) Ltd CACV 124/2006 (dated 10 July 2006), Cheung JA cited the same passages in BJ Crabtree but distinguished it and ordered security against the plaintiff because there was nothing to litigate on the counterclaim in that case.

28.  I have on unfettered discretion to order what is just in the circumstances of the casetaking into account therelevant consideration in BJ Crabtree.

29.  It is common ground that the claim and counterclaim go to the issues of the engagement agreement made between the parties and the plaintiff’s liability to pay under the three disputed invoice.  Resolution of these issues will presumably dispose of both the claim and the counterclaim.

30.  Mr McCoy submitted that notwithstanding BJ Crabtree, the defendant needed protection against the foreign plaintiff by reason of its very weak case and its conduct of the proceedings so far:

(1)	The choreography of flip-flop charted first an application for taxation, then the allegation of fee cap, and lately fraud against an internationally renowned firm of solicitors;
(2)	The alleged fee cap of $2.1 is inconsistent with the payment of an extra $1.3 million so far;
(3)	The allegation of fraud depends to a very large, if not full extent, on the alleged fee cap, and is far-fetched and without an iota of evidence;
(4)	The Statement of Claim pleaded that the engagement agreement was partly oral and partly in writing, yet the affidavit of Ms Luk, the plaintiff’s company secretary, deposed that the written agreement was the sole basis of the charge;
(5)	Ms Luk deposed that from the plaintiff’s record, the revised costs estimates were not received, yet the plaintiff replied that there was no document when asked to produce the record.

31.  Mr Mok replied that:

(1)	It is not possible to conclude on the merits at this stage because the case involve the allegation and denial of an oral agreement, and discovery of the time sheets will reveal the bases of charge;
(2)	The receipt of the costs estimates was denied because the plaintiff had no record as such;
(3)	Ms Luk was only saying that written engagement letter was the sole basis of charge rather than deposing to any oral agreement.

32.  Mr Mok submitted that given that the defendant’s last costs estimate was only $2.5 million and the total costs billed is over $8 million, and that in the skeleton bill for security, and the defendant is charging an extravagant $1.8 million for 4 appearances before the Court in the present proceedings so far, there is a strong likelihood that the defendant’s bills will have at least 1/6 taxed off, and the plaintiff be entitled to costs of the taxation.  Even if the plaintiff were to lose on the fee cap and/or fraud, it probably means that the plaintiff will not be entitled to the full costs, or worse still, in the more remote possibility that an adverse costs order be made against the plaintiff on those issues, the costs on taxation can act as a set off against such costs.

33.  Mr McCoy pointed out that there were drastic changes in circumstances and complexities in that the first listing was rejected, and there was a dispute with a private investor leading to the 2^nd listing being aborted.  Hence, there is no such high probability that the plaintiff will be successful on taxation, and be entitled to costs thereon.

34.  He also pointed out that the hourly rates under the engagement agreement were reduced from the normal rates chargeable in the present proceedings, and the defendant cannot be criticized for being too vigilant in fending an unwarranted allegation of fraud.

35.  Further, Mr McCoy submitted that it was fortuitous that the counterclaim was brought, as the defendant could have waited until the determination of liability.  Hence, it should not work unfairly against the defendant.

36.  I note that under s.67(2) Proviso (i) of the LPO, the Court could have imposed terms as to the costs of the taxation in ordering taxation of a bill delivered after the expiration of 12 months of the bill, and under s.67(2)(b), if the bill is ordered to be taxed, until taxation is completed, no action shall be commenced on the bill, and any action already commenced be stayed.  I also noted that the dispute of facts which precipitated the conversion of the application as if begun by writ was raised by the plaintiff.  Be that as it may, the counterclaim is on foot and not withdrawn or stayed pending the main action.  That is the state of affairs before me now.

37.  On the pleaded case and disclosed materials on the fee cap and fraud, I do not see that the plaintiff has a high degree of probability of success.  As to the possible outcome of taxation, even assuming that the plaintiff shall have the 1^st bill taxed, I am not equipped to say that the plaintiff has a high chance of success in taxation that will produce any favourable costs order to act as set off against any possible adverse cost order.

38.  However, the claim and counterclaim are exact mirror image of each other.  In the circumstances, the reasoning in BJ Crabtree is apposite.  As according to Mr McCoy that even where the claim were stayed upon non-payment of the security, the plaintiff could still defend the counterclaim with the resolution of the same all issues.  If so, an order for security would in effect be making the plaintiff pay security as the defendant to the counterclaim but without the effect of stay for non-payment.  It may be that if there were separate issues in the claim not covered in the counterclaim, security for costs might be imposed thereon.

Conclusion

39.  In the premises, I dismiss the defendant’s application for security for costs.

Costs

40.  I make an order nisi that the defendant do pay the costs of and incidental to this application to the plaintiff in any event.