SATURN STORAGE LTD v. TSOI, TIN CHUN AND OTHERS

HCA 1265/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO HCA 1265 OF 2012

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DECISION

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The applications

1. By 3 Summonses respectively dated 6 September 2013, 6 September 2013 and 13 August 2013, the 1^st defendant (D1), the 2^nd and the 3^rd defendants (D2 and D3), and the 4^th and the 5^th defendants (D4 and D5) apply for security for costs up to and including the stage of discovery.

2. D1 seeks HK$2,602,733.  His solicitors Messrs Haldanes have filed an outline bill.  [Bundle A 27-33] Mr L Li, counsel acts for the 1^st defendant.

3. D2 and D3 seek HK$1,461,900 [Bundle A 64-69] with the hourly charge-out rates for the partner between $5,000 - $6,000; or alternatively $1,181,750 at the hourly charge-out rate of $4000[1]. Mr Wong, solicitor of Messrs Reed Smith Richards Butler acts for them.

4. D4 and D5 seek HK$2,628,864.70.  [Bundle A 101-105] Mr Johannsson, solicitor of Messrs Tanner De Witt acts for them.

5. The plaintiff is represented by Miss Harrington, solicitor of Messrs Gall.  The plaintiff does not dispute liability.  It only disputes the quantum.

6. In the plaintiff’s written submissions, the solicitor has set out a table for reference:

	Costs incurred	Estimated future costs	Total security sought
D1	HK$1,686,232.97	HK$916,500.00	HK$2,602,733.00
D2 and D3	HK$818,600.00	HK$643,300.00	HK$1,461,900.00
D4 and D5	HK$1,640,264.70	HK$988,600.00	HK$2,628,864.70

Summary of facts

7. The plaintiff has set out the summary of the facts of the action in its Amended Statement of Claim.

8. The plaintiff entered into a contract with D2 and D3 which governs the parties’ rights and obligations in relation to a joint venture company.  D1, D4 and D5 had procured D2 and D3 to breach the contract, causing the plaintiff to suffer loss and damage.

9. It is alleged that the defendants misrepresented the financial health of the joint venture company to the plaintiff in order to induce the plaintiff to enter into at least three separate contracts.  Pursuant to the three contracts, the plaintiff invested significant funds in the joint venture company group.  The plaintiff acted in reliance on the misrepresentations made by D1, D2, D4 and D5 and has suffered loss and damages as a result.

10. The plaintiff’s four heads of monetary claims add up to HK$320 million.

11. The defendants say that apart from the huge amounts of claims involved, the civil disputes among the parties are complex, involving the plaintiff’s allegation that D1 had caused 3 subsidiaries of D3 to enter into unauthorized guarantees, which adversely affected the financial credibility of the joint venture.  Miss Harrington does not dispute that this is a complex matter.

The relevant legal principles

12. The above are common grounds for this application.  The main arguments will be on the quantum only.  The plaintiff complains that the amount sought by D2 and D3 is excessive and the amounts sought by D1, D4 and D5 are grossly excessive[2].

13. The parties rely upon the following legal principles for the applications:

a.  In determining the quantum for the security for costs, the court has a wide discretion and the quantum should be assessed on a broad-brush approach.  Daimler Chrysler Services China Ltd. v Harbour Union Investments Ltd., HCCL 34/2002, (7 May 2004) at §32, adopted by Deputy High Court Judge Pow SC in Wingames Investments Limited & Others v Masgot Land Limited & Others HCA907/2011, 17 July 2012 at §26.

b.  The court may “take a sufficiently cautious view in order to protect the party against whom security was ordered, from the oppression of meeting security likely or liable to exceed the costs which the party seeking security had incurred or was likely to incur, when taxed on a party and party basis” Procon (Great Britain) Ltd v Provincial Building Co Ltd and Another [1984] 1 W.L.R. 557; [1984] 2 All ER 368, CA, per Cunning-Bruce LJ at page 559E; followed by Clough and Power JJA in Cal-Trade Pte Ltd v Mindo Commodity Trading Co Ltd [1989] 2 HKC 112, at page 113E-F.

c.  Sufficient security or security that in all circumstances of the case is just does not mean complete security.  (Hong Kong Civil Procedure 2013, Commentary 23/3/32).

d.  The court may take into account of possible settlement without trial and make an arbitrary discount of the costs estimated as probable future costs.  Procon (Great Britain) Ltd v Provincial Building Co Ltd and Another [1984] 1 WLR 557; [1984] 2 All ER 368, CA.

e.  The applicants for security have the burden to place the reasonable draft bills for the court to make the assessment on the quantum for the security for costs.  Hero Rich International Ltd v Benefun International Holdings Ltd and others [2009] HKCFI 1045.

Discussion

14. Before I commence dealing with the defendants’ skeleton bills of costs, I shall first of all consider the plaintiff’s recommended amounts for the defendants’ security for costs.  After the complaints on the defendants’ bills being unsupported by details, excessive and disproportionate to the proceedings, the plaintiff proposed: “As set out in the Plaintiff’s various letters to the parties [4/58, 4/61, 4/70 and 6/98], a more appropriate level of security to be ordered, for the reasons set out above, is $850,000, as offered by the Plaintiff, for each of (i) D1 (ii) D2 and D3 and (iii) D4 and D5.”

15. It can be seen that the equal amounts for the defendants have ignored the differences in the plaintiff’s allegations against the defendants as pleaded in the pleadings.

16. The Court should consider the nature of the case in order to determine the amount of costs involved.  See Cal-Trade Pte Ltd’s case.  Without going into details of the pleadings, the plaintiff’s case against the defendants can be simply outlined as this.

17. The plaintiff and D3 jointly invested in Titan Group Investment Limited (Storage Co), which together with other subsidiary companies is engaged in the business of onshore petrochemical products storage services in the coastal areas of PRC[3]. In June 2007 the plaintiff, D2, D3 and Storage Co entered into an agreement (“the Agreement”), which governs the rights and obligations of the plaintiff, D2 and D3 in connection with their investment in Storage Co[4], which is jointly owned by the plaintiff and D3[5]. Storage Co has gone into liquidation because, as alleged by the plaintiff, its financial credibility was adversely affected by the unauthorized guarantees[6] that D1 had caused the subsidiaries of D2 and D3, with knowledge of D4 and D5, to provide to the parties outside the Storage Co group, which had the effect of reducing D1’s personal liability under guarantees provided in relation to the same debt – the 2009 unauthorized guarantees[7].

18. D1 denies that the guarantees are unauthorized[8] and he was in breach of the Agreement; that the plaintiff was all along aware of the guarantees; that he had misrepresented to the plaintiff and that the plaintiff had suffered any loss or damage[9].

19. D2 and D3 denied that the guarantees were entered into[10]. Alternatively, they pleaded that the unauthorized guarantees were not legally binding[11]. They deny concealing the guarantees[12]. They also pleaded that there was a history of guarantees by Non-Storage Co Group companies to support borrowings by Storage Co Group companies [13].

20. D4 and D5 do not deny the guarantees having been given, but say that those “unauthorized guarantees” are not valid and legally binding[14]. They further pleaded that it was the plaintiff’s own conduct which prevented Storage Co from being able to raise new debt or equity financing from third parties[15].

21. I shall now deal with the defendants’ skeleton bill of costs vis-à-vis the plaintiff’s comments.

22. It can be seen that the dimensions of defences of D1 are similar to D4 and D5 whereas D2 and D3, being corporate vehicles, play different parts in the transactions.  Mr Wong has taken me through the defence of D2 and D3.  The allegations of breach of fiduciary duty and misrepresentation do not apply to them.  The cause of action against D2 and D3, according to Mr Wong, is breach of contract.

23. The defendants were separately represented by 3 firms of solicitors.  It can be seen from the table above that the costs of D1 are similar to the costs of D4 and D5 whereas D2 and D3 had incurred lesser costs for the time being.

24. I shall therefore deal with the costs of D1 and the costs of D4 and D5 together and the costs of D2 and D3 separately.

25. I have taken the plaintiff’s complaints and comments in the written submissions on board.  Since the assessment should be on a broad-brush basis as according to Daimler Chrysler Services China Ltd, I do not intend to go into detail of them.  I will simply deal with them as follows:

a.  As far as the basis of the draft bills is concerned, the hourly charges for solicitors should make reference to the hourly rates as proposed in the Law Society Circular 08-213 (PA), bearing in mind the views of P Chan PJ in Wing Fai Construction Co. Ltd [2012] HKEC 1388 (CFA) that the market rate has somewhat moved upward and the hourly charge should take into account of the factors as provided in Order 62 RHC under item (2) of Part II of the Second Schedule as follows:

Discretionary costs

1.  (1)   (Repealed L.N. 152 of 2008)

  (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-

(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;

(g)   any other fees and allowances payable to the solicitor or counsel in respect of other items in the same cause or matter, but only where work done in relation to those items has reduced the work which would otherwise have been necessary in relation to the item in question.

b.  It would be reasonable for the defendants to instruct counsel to give advice on the pleadings at an early stage due to the amount of the claim and the importance of the matter to the defendants.

c.  Change of new solicitors will inevitably incur more costs, which should not be borne by the paying party.

d.  Since the draft bills are for assessing the quantum for security for costs on a broad-brush approach, a detailed bill for taxation is not necessary.

e.  Whilst the description may be brief and there is no detail for the works done, it can be seen that the preparatory works were required for this matter.  As such, the comments in Hero Rich International Ltd v Benefun International Holdings Ltd and others [2009] HKCFI 1045 do not apply here.  The Court would simply apply the common sense approach in a taxation setting to make the assessment accordingly.

f.   The time estimated for the preparation for discovery will be subject to the Court’s assessment, taking into account of the factors above and the dimensions of this litigation.

g.  It is noted that the factual matrix of this matter is complicated, which the plaintiff does not quarrel with the defendants.

h.  It is also difficult, if not impossible, to estimate the amount of work and the volume of documents for the discovery.  There may be dispute over the disclosure of the documents too.  But this is too early to fathom.

i.   For the size of this litigation, it is reasonable to have the partner involved at the initial stage.  Counsel will also be instructed to look after the proceedings.

26. Taking into account of the above issues as raised by the plaintiff, I shall now proceed to assess the quantum of the defendants’ bills of costs.

Assessment of the quantum

27. D1’s bill appears excessive taking into account of change of the solicitors and the amount of time for the discovery.  Also, there is no particular for $167,000.  The costs for review of the pleadings for $210,963.33 are extra costs due to change of solicitors.  The costs for the case management preparation and hearings, which amount to $230,000 appears excessive.  The costs for this application for $167,200 also appear excessive, bearing in mind that this application only involves assessment of the quantum only.  The amount for security for costs for D1 is fixed at $1,350,000.

28. As to the security for costs of D2 and D3, Mr. Wong relies upon the draft bill as submitted, Mr Wong agrees that if the hourly charge for the solicitor should make reference to the Law Society circular, the costs should be cut down to $1.18 million.  But I agree that the cap of $4,000 per hour for solicitors of 10 years or more experience is only for reference, which does not bind the court’s discretionary power.  For the complexity and the amount of the claims involved in this case, I consider that the cap can be relaxed.  The plaintiff also complains that there should not be counsel fee of $100,000.  Mr Wong explains that the court had directed that immediately after this application, the parties should seek counsel's advice.  However, I agree that 95 hours for the discovery for the defence of D2 and D3 are on the high side.  Having taken those factors into account, the security for costs for D2 and D3 is fixed at $950,000.

29. As to D4 and D5, I adopt the same approach for D1 to assess their security for costs.  There has not been a duplication of the costs for change of solicitors.  The amount is fixed at $1,400,000.

30. I understand that the parties have filed their mediation certificates and they have no objection to attempting mediation.  The court will encourage the parties to explore this alternative mode for the resolution of their disputes in this matter.

Costs

31. As to the costs of this application, the costs should follow the event.  I have the schedules of costs from the defendants.  Their costs are to be assessed summarily under Order 62 rule 9A RHC.  For D1’s costs, they are assessed at $85,000 (including counsel’s certificate).  For D2 and D3, the costs for today are assessed at $70,000 and for the costs of D4 and D5, their costs are assessed at $70,000 too.

The order

32. I shall now make an order in terms as follows:

a.  The plaintiff shall within 42 days from the date hereof pay into court the amounts as per paragraphs 27-29 supra;

b.  Pending the provision of the security, the proceedings shall be stayed except for the implementation of this order for the security;

c.  Liberty to apply;

d.  The costs of this application shall be as per paragraph 31 supra, to be paid within 14 days from the date hereof.