DEACONS v. WISEKING MINING INVESTMENT CO LTD

HCA 1221/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1221 OF 2011

(Partially transferred from DCCJ 3097/2010 pursuant to the

Order of Deputy District Judge J Wong on 31 May 2011)

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REVIEW OF TAXATION

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Introduction

1.  This is an application for review of a solicitor own client taxation by the defendant, the paying party.

2.  Broadly summarized, the defendant’s complaints were threefold, relating as they do to the hourly rates of the various fee-earners allowed, the multiplicity of fee-earners employed at any given time on any given work, and the redundant engagement of staff from the corporate services department of the plaintiff.

Background

3.  The plaintiff’s bill of costs related to non-contentious business.

4.  The plaintiff rendered legal services to the defendant between 21 January 2010 and 21May 2010 on an acquisition project entitled Project Mega. The project concerned the sale of the defendant’s shares and the underlying assets to a company listed on the Hong Kong Stock Exchange (GEM Board).  The matter involved a proposed offshore disposal of the equity interest in the defendant which in turn held a number of mining projects in China.

5.  The work undertaken by the plaintiff was on any view complicated and somewhat uncommon in the sense that it was not the run of the mill non-contentious business generally done by solicitor firms and called into play specialized legal knowledge and expertise on a whole range of legal disciplines.  The envisaged transaction was valued at some HK$2.4 billion and involved corporate restructuring, loan capitalization, drafting of VSA agreement and circulars, due diligence on Listco and subsidiaries and the drafting of announcements and circulars relating thereto, the issuance of ordinary shares, non-redeemable convertible preference shares, convertible bonds, promissory notes and associated drafting and advice on the terms thereof, not to mention considerable amounts of cash.

6.  The complex project undertaken entailed careful consideration to ensure that it was feasible.  As the purchaser was to issue listed shares and other convertible instruments and the percentage of those listed shares to be paid to the defendant as consideration was considerable, there was a distinct risk that the transaction might trigger a ‘reverse take-over’ that had to be avoided.  It was necessary to have on board a solicitor experienced with listing rules and the capital market.

7.  The underlying assets to be sold by the defendant were mining rights of certain mines in China.  Accordingly, the project would necessarily be closely monitored by the Hong Kong Stock Exchange.

8.  The issue of resolving the dilution of shareholding and reversing the allotment of further shares entailed tax consideration.  The involvement of a solicitor with tax expertise was therefore also mandatory.

9.  As happened, the plaintiff’s engagement abruptly ended on 21 May 2010 following disagreement amongst the shareholders of the defendant.  The project completely stalled.

Taxation on solicitor own client basis

10.  The statutory regime for taxation on a solicitor and own client basis is provided for in Order 62 rule 29.  It is pertinent and necessary to distinguish between contentious and non-contentious business.  Here one is seized of matters that are entirely non-contentious in nature.

11.  Order 62 rule 29 (insofar as it is material) provides:

“ (1) On the taxation of a solicitor’s bill to his own client (except a bill to be paid out of funds provided by the Legislative Council pursuant to section 27 of the Legal Aid Ordinance (Cap.91), or a bill with respect to non-contentious business) all costs shall be allowed except in so far as they are of an unreasonable amount or have been unreasonably incurred.

(2) For the purposes of paragraph (1), all costs incurred with the express or implied approval of the client shall, subject to paragraph (3), be conclusively presumed to have been reasonably incurred and, where the amount thereof has been expressly or impliedly approved by the client, to have been reasonable in amount.

(3) For the purposes of paragraph (1), any costs which in the circumstances of the case are of an unusual nature and such that they would not be allowed on a taxation of costs in a case to which rule 28(2) applies, shall, unless the solicitor expressly informed his client before they were incurred that they might not be so allowed, be presumed, until the contrary is shown, to have been unreasonably incurred.”

12.  On a proper and fair construction of Order 29 rules 1 to 3, it seems reasonably clear that the conclusive presumptions are inapplicable to a taxation of purely non-contentious business.  Equally clear is that on such a taxation, all costs will be allowed except insofar as they are of an unreasonable amount or have been unreasonably incurred.  Where there has been unreasonable or exorbitant billing, such errant or excessive costs shall be disallowed or taxed down as appropriate.  Whether costs have been unreasonably incurred or clearly excessive would be determined by the circumstances of each case.

13.  In assessing the appropriate hourly rates and the work done and charged, I am also duty bound to consider the matters adumbrated in paragraph 1(2) of Part II of the First Schedule to Order 62.  It provides:

“ 1.(2) In exercising his discretion under this paragraph or under rule 32(2) in relation to any item, the taxing master shall have regard to all relevant circumstances, and in particular to (pertinent in this case) –

(a) the complexity of the item or of the cause or matter in which it arises and the difficulty or novelty of the questions involved;

(b) the skill, specialized knowledge and responsibility required of, and the time and labour expended by, the solicitor or counsel;

(c) the number and importance of the documents (however brief) prepared or perused;

(d) the place and circumstances in which the business involved is transacted;

(e) the importance of the cause or matter to the client;

(f) where money or property is involved, its amount or value;”

(words in italics mine)

14.  All the above matters to be considered are not dissimilar to those mentioned in rule 5 of the Solicitors (General) Costs Rules.

15.  Against this backdrop, I turn then to address the defendant’s several complaints.

Hourly rates of the fee earners

16.  A distinct feature of this taxation was the absence of a signed retainer or letter of engagement.

17.  A solicitor named Simon Tang of Messrs Kenneth CC Man & Co (who recommended the plaintiff to the defendant and ostensibly acting on behalf of the defendant at that juncture) enquired from Myles Seto of the plaintiff on 28 January 2010 at 4.54 am in these terms:

“Hi Myles,

Regarding the proposed S&P transaction:

1. How would you set about restructuring the 2 layer BVI company on top of the Hong Kong company? When do you propose that it will be done?

2. I missed out on the discussions on the profit guarantee the other day at the meeting. Can you enlighten me on that?

3. Can you give me the details of the court case on the deferred non-voting right shares that you mentioned?

4. Can you give me the fee quote on your firm’s services on the transaction? I need to advise Mr. Lam (of the Defendant) on that.

Many thanks. I can have a chat with you on the above if you are free today.

Best,

Simon” (parenthesis mine)

18.  This email elicited an email response from Myles Seto later on the same evening.  The first three paragraphs offered advice on the restructuring of the defendant and the establishment of two BVI companies for the purpose.

19.  The fee enquiry was addressed as follows:

“4. It is quite difficult for us to give a ballpark figure or estimate of our fee for the present case as we are unable (sic) how the matter and the negotiation among the parties will proceed. In order to give an indication of what our fees will be, I set out below the hourly rates of the handling members for your reference:

Franki: HK$6,800

Alex: HK$6,500

Myles: HK$5,400

Shermie: HK$3,200

Please note that the above are our rates for year 2009. We normally adjust our hourly rates at the beginning of a calendar (sic) and the adjustment of our hourly rates for year 2010 is yet to be announced.

Please feel free to let me know and discuss further if you have any concerns or queries on any of the above.

Best regards,

Myles”

20.  As is patent from the above exchanges, work on the project had already begun in earnest even in the absence of a signed retainer.  The commencement of the plaintiff’s engagement as can be seen from the bill taxed was 21 January 2010.

21.  On 13 April 2010, Shermie Chan of the plaintiff emailed Simon Tang saying:

“As discussed between you and Myles, please find attached copy of our invoice (no. 1327987) for our fees and disbursements incurred in relation to Project Mega up to 31 March 2010 for your kind attention. The original of the invoice will be delivered to you shortly.

As you will appreciate, there are a number of issues relating to the transaction which are not foreseeable at the beginning (such as the various discussion to resolve the dispute re the share allotments in 2009). Hence we are unable to give a meaningful fee estimate for this project, and we will charge on time-spent basis.

If you have any question or comments regarding the above, please do not hesitate to let us know.

Kind regards,

Myles / Shermie”

22.  On the following day, 14 April 2010 Simon Tang advised Myles Seto by email as follows:

“Regarding the 2 bills that you sent to Wiseking, Mr. Lam would like your firm to set out the scope of your legal service to be provided to Wiseking and the lawyers’ hourly rates. He also asked for the fee estimate, even though I have told him what you have told me on the cover e-mail of your 2nd bill, saying that it is not possible to do an estimate on the fees. He would also like to sign a retainer agreement with your firm regarding the above.

I would suggest your firm to perhaps draft a retainer agreement in respect of your services to be provided to Wiseking. In this draft agreement, subject to what you think is best, you may include a fee cap on assumption that no unforeseeable complication will occur. That’s to say, the way forward matters would only be to mainly deal with the loan capitalization, and the VSA agreement (with the drafting the circular as additional item).

My impression is that the existing fees will only be settled once the retainer agreement has been signed.

Regards,

Simon”

23.  Myles Seto came back to Simon Tang by email on 5 May 2010 advising:

“Please find attached a scanned copy of our engagement letter setting out rough estimates of our fees for client’s consideration. As mentioned in our previous e-mails and telephone discussion, it is very difficult for us to give any precise figure for our fee to be incurred under the present matter in view of the potential changes of the structure as well as the numbers of parties to be involved. In any case, we hope the estimates as set out (sic) our engagement letter will be able to give client some ideas on how we will charge our fees, though it should be noted that the figures therein are only estimates.

We shall be grateful if you could forward the same to client, arrange for the countersigning of the engagement letter and return a countersigned original of it for our custody. If client has any queries on the engagement letter, please feel free to let us know.”

24.  The defendant did not oblige by signing and returning a copy of the retainer.

25.  It was apparent from the various exchanges passing between the parties to date that there was no complaint about the level of fees invoiced till then or the hourly rates to be charged by the plaintiff as first intimated in the email of 28 January 2010 previously referred to.  As is evident from the evidence, throughout the engagement of the plaintiff until the project unraveled on 21 May 2010, no such complaints had been forthcoming from the defendant. As desirable as it was for the defendant to have a fee cap, the plaintiff was unable to oblige given the nature of the work undertaken as Myles Seto had explained.

26.  The material parts of the unsigned retainer dated 5 May 2010 read:

“Project Team

The supervising partners on this matter are Alexander Que and Myles Seto, who will be assisted by a Hog Kong-based associate Shermie Chan and other colleagues as from time to time required.

We may also bring in associates, paralegals and translators from other Practice Groups / Departments to assist in this project if and when required. We will always endeavour to assign our personnel in a way designed to ensure timely and economical handling of this matter.

Our Costs

Our costs are primarily time-based. We will charge our costs in accordance with the actual amount of work carried out and the time incurred. Our hourly charge-out rates vary according to the seniority and experience of the lawyers and paralegals involved.

We charge by reference to 6 minute units. Our hourly charge-out rates are adjusted periodically, usually with effect from 1^st January each year. To ensure optimal cost-efficiency, we always assign lawyers of the appropriate experience and level to handle the relevant work under the supervision of a partner.

The current hourly charge-out rates of the lawyers who will be principally in charge of handling this matter are:-

Alexander Que : HK$6,500

Partner

Myles Seto : HK$5,400

Partner

Shermie Chan : HK$3,200

Associate

We expect that much of the advice and assistance will be provided by Shermie Chan and other colleagues of our team (where applicable) under Myles’ and/or Alexander’s supervision.

Barring any unforeseeable complexity, we expect that our fee for advising on the pre-disposal restructuring, attending to the discussion and negotiation among the indirect shareholders of your company in relation to the proposed restructuring and/or loan capitalization, and preparing the relevant documents in respect of the same will approximately be HK$180,000 (exclusive of disbursements).

Assuming that there will not be any prolonged negotiation among the parties and again barring any unforeseeable complexity, it is expected that our fee for our services in relation to the Transaction (excluding our services in attending any negotiation meetings with the parties and in conducting the due diligence exercise on Listco) will be approximately HK$800,000 to HK$1,000,000 (exclusive of disbursements).

Assuming that the announcements and circular of Listco will be prepared by the lawyers for Listco, and in usual forms and contents normally adopted in transactions similar to the Transaction, our fee for reviewing and commenting on such announcements and circular should be in the range of HK$80,000 to HK$120,00 (exclusive of disbursements).

For your information and record, up to the date of this letter, we have issued three invoices to your company totaling HK$542,079 for our work done up to 30 April 2010.”

27.  It is pertinent to note from the unsigned retainer that pursuant to the defendant’s expressed wish, Frankie Cheung with a charge-out hourly rate of HK$6,800 had been removed from the team working on the project.  I shall refer to him again when I come to address the hourly rates of the fee earners in turn.

28.  The circulars regularly published by the Law Society after consulting the Judiciary since 1985 to inform its members of the hourly rates allowable on taxation came under scrutiny in the recent decision of David John Kennedy v Kelly Cheng and Robert Yip, FAMV NO 33 of 2008 and FACV NO 30 of 2008.  The last such circular issued was in 1997, some considerable time ago.  Those rates have not been revised.

29.  As to how one should approach them, the Hon Mr Justice Chan PJ very helpfully observed:

“ 32.     … However, in my view, while Hong Kong had undergone periods of inflation and recession since 1997, it is unrealistic to suggest that our financial and economical conditions have remained static in the last 15 years.  That is certainly not true with regard to the levels of office rentals and salaries for supporting staff.  These changes clearly have a consequential effect on the hourly rates charged by solicitors (and also counsel’s fees).  So while one should not completely ignore the 1997 rates, I think taxing masters should not feel constrained to start with figures higher that those rates.  How much higher depends on the taxing masters’ “knowledge and experience” of the current situation of the average solicitor or executive employed by the average firm (See Kerr J (sitting with assessors) in Leopold Lazarus Ltd v Secretary of State for Trade and Industry, unreported, The Times, 8^th April 1976.)

  37.     … In my view, the Law Society’s hourly rates should be applied with flexibility bearing in mind the appropriate approaches to be adopted in different types of taxation.

  38.     For these reasons, I am of the view that while the 1997 hourly rates are usually a useful reference, it would not be right in the present case to adopt these rates as the starting point.”

30.  So guided, for the purpose of this review, the 1997 hourly rates though a relevant consideration will not be adopted as the starting point when assessing the rates of the fee earners in this matter.

31.  The report commissioned by the Law Society on solicitors’ scale rates from KPMG dated 27 March 2013 was put in evidence to support the contention that the rates charged by the plaintiff were in line with the usual charge out rates for such work by firms of the plaintiff’s standing.

32.  I am not persuaded that the KPMG report is of much assistance.  First of all, it was simply put into the bundle for the review without any attempt to justify its relevance or import.  There was no submission premised on it other than a passing reference by the plaintiff that it offered justification for the hourly rates sought.  Secondly, although the Judiciary has now been supplied with a copy, consultation has hardly begun.  Thirdly, and this is by far the most salient factor, the bill in this case was rendered for work done in the opening months of 2010 while the proposed revised hourly scale rates at 7.1.14 of the report are more pertinent to 2013.  I need say nothing further about this report.

The hourly rates under review

Franki Cheung

33.  Objection was taken to the involvement and role played by Franki Cheung as well as his hourly rate.  It was said that he was entirely redundant to the project and contributed no more than an introduction of the defendant to the plaintiff. That he was the partner who introduced the matter to the plaintiff was accepted.

34.  Admitted as a solicitor in 1985, Franki Cheung was by the time of the plaintiff’s engagement one of the preeminent practitioners specializing in Mergers and Acquisitions with particular expertise in international trade in China as readily seen in his CV.

35.  I accepted that his role in the initial stages of the engagement was crucial, necessary and proper to ensure that the solution for and the direction of the envisaged transaction was identified.  The matter the plaintiff was instructed to deal with was a highly complex transaction involving, as we have previously outlined, issues pertaining to mining rights in China.  Franki Cheung’s involvement was limited to Stage 1 of the bill, withdrawing thereafter at the defendant’s request.  The defendant knew that he was playing an active role prior to that time and had benefited from his contribution and advice in consultations and discussions.  It seems disingenuous to now say that the plaintiff should not be remunerated for his services.  The objection to his participation is without merit.

36.  Franki Cheung claimed an hourly rate of HK$6,800, his usual charge out rate at the material time.  The rate was taxed down to HK$6,000 to fairly reflect the level of expertise he brought to bear on the project.  As is equally applicable to the consideration of the fees of the other fee earners whose rates have been challenged, the special features of this case involved a high value transaction of a genuinely complex nature requiring specialized legal expertise.  There were cross jurisdictional considerations as PRC mining rights were to be assigned.  It was a matter of considerable importance to the client, the defendant.  There were numerous documents to be drafted, revised and perused.

37.  Despite the absence of any material or discussion indicating the anticipated time frame for successful completion of the project, it must have made commercial sense for the matter to proceed expeditiously to fruition from the defendant’s perspective.  It therefore comes as no surprise that even as discussions on fees proceeded, the plaintiff with the full knowledge and consent of the defendant had commenced working in the latter part of January 2010.

38.  In these circumstances, the taxed down rate of Franki Cheung shall remain undisturbed given his standing and expertise.

James Bertram

39.  James Bertram was admitted in 1971 and his charge out rate was HK$6,800 an hour.

40.  A Hong Kong tax expert and a consultant of the plaintiff, James Bertram was engaged on the tax issues involving the “undoing” of the allotments of shares by the defendant to the ultimate shareholders.  Such allotments were done by the defendant before the plaintiff’s engagement, purportedly with the view to evade a payment obligation of its immediate sole shareholder by diluting that sole shareholder’s equity interest in the defendant.  The “undoing” of such allotments had Hong Kong stamp duty implications as it might well involve the transfer of Hong Kong stock.  He was consulted and advised on the various models proposed to implement the “undoing” of the allotment, which expertise the other fee earners plainly lacked.  His CV was included in the papers both on taxation and in this review.

41.  I see no basis for further lowering his hourly rate from the taxed down rate of HK$6,000 to HK$5,000 as urged by the defendant.

Alexander Que

42.  Alexander Que’s charge out rate in the bill was HK$6,500.  He was admitted as a solicitor in 1997 and a partner of the plaintiff’s Corporate Finance Practice Group.

43.  As previously stated, the project involved the disposal of interest to a company listed in Hong Kong with implications for a reverse take-over if certain conditions were met.  This fee earner contributed his expertise on the Listing Rules and on the Takeover Codes.  The project involved the payment of consideration by different means including shares in the listed company, convertible and exchangeable instruments to be issued by the listed company. Alexander Que supervised the drafting of the transaction documents to ensure compliance with the listing rules and the practice pertaining to listed companies.  His involvement and expertise was crucial to the successful completion of the project.

44.  I considered that his hourly rate previously reduced to HK$6,000 was appropriate.  I maintain that view.

Myles Seto

45.  He was the supervising timekeeper on the project and a partner of the plaintiff’s China Practice Group.  His admission as a solicitor dates back to 1998.  On this matter, his charge out rate hourly was HK$5,400.

46.  Myles Seto’s principal practice was in the area of Sino-foreign cross-border mergers and acquisitions.  The engagement involved a proposed offshore disposal of the equity interest in the defendant which held a number of mining projects in the PRC to a listed company in Hong Kong.  On the transaction he was actively engaged with management and supervision.  His involvement and contribution was no less demanding and significant than the fee earners dealt with above.

47.  I do not consider it appropriate to reduce his hourly rate as suggested.  His rate of HK$5,400 remains undisturbed.

Shermie Chan

48.  This fee earner was admitted as a solicitor in 2004 with a charge out rate of HK$3,200 an hour.  She featured largely in the bill and was temporarily replaced when she took ill.  Her involvement was substantial but was supervised given the complexity of the project.  That she was tasked to do a considerable portion of the work speaks of the plaintiff’s consideration for costs effectiveness and the interest of the client.  I did not tax down her hourly rate at all.

49.  Shermie Chan was an associate of the plaintiff’s China Practice Group at the time.  She took care of the day-to-day handling of the matter, including the drafting of legal documents and correspondence with the defendant and other interested parties as well as attending meetings and conference calls with them.  Her contribution was as material as it was necessary and helped move the project along briskly.

50.  Her hourly rate cannot be viewed as excessive or inappropriate given the nature of the engagement.  The defendant’s proposal to reduce her rate by HK$200 is rejected.

Joanne Lau, Cindy Chan and Serena Fong

51.  These three individuals were from the plaintiff’s Corporate Services Practice Group.  They assisted with the matter in no small measure.

52.  Their expertise lay in handling and generating corporate matters for Hong Kong companies such as allotment of shares, preparation of resolutions, etc.

53.  One of the models in the transaction for “undoing” the previous allotments was the conversion of a certain debt owing by the defendant to its original sole shareholder into shares in the defendant such that the percentage of shareholding of such shareholder would be significantly increased.  These three fee earners assisted in the preparation of the corporate documents required for such debt capitalization.

54.  Another model considered involved a denial of the validity of the previous allotments and their practical experience would have assisted such an application.

55.  The defendant submitted that their functions could well have been performed by paralegals or trainee solicitors at lower costs.  I disagree. Their hourly rates were not excessive or unreasonable.  It was more cost effective to have fielded them with their qualification and experience in corporate matters.  The scope of their involvement involved more than simply filling out pro forma forms and circulars.

56.  Their respective hourly rates remain allowed as claimed.

Use of multiple fee earners

57.  The defendant complained that several fee earners were frequently engaged on any particular task thereby generating a larger bill than was justified.

58.  Where I considered the participation of certain fee earners unjustified, it was disallowed.  Where the work could have been done efficiently in less time, the time charges were appropriately reduced.

59.  The plaintiff was tasked with a complicated matter that had to be done expeditiously and properly in the most cost effective manner.  The involvement of more than one fee earner on a particular piece of work is justified if each of those fee earners can demonstrate that they have significant and tangible contributions to make.  In the circumstances of this case, the fee earners complained of contributed their particular expertise and experience.  There was plainly no duplication of work as was suggested.  This was a large scale project that had to be handled efficiently, expertly and expeditiously if the project was to materialize for the benefit of the defendant.  This the plaintiff was doing until the project abruptly collapsed.

60.  In my considered view, there is no substance in this complaint.

Conclusion

61.  The application for review having failed in its entirety, it must be dismissed with costs to the plaintiff, such costs to be taxed if not agreed and to include any costs reserved in respect thereof.