BEIJING CHONGWEN-NEW WORLD PROPERTIES DEVELOPMENT CO LTD AND ANOTHER v. HO YUK WAH DAVID AND OTHERS

HCA 1212/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1212 OF 2002

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BETWEEN

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(Consolidated by Order of Master Woolley dated 31 October 2003)

HCA 1212/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1212 OF 2002

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AND BETWEEN

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AND

HCA 2915/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2915 OF 2002

(transferred from DCCJ No. 1967 of 2002)

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BETWEEN

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AND BETWEEN

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(Consolidated by Order of Master Woolley dated 31 October 2003)

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DECISION  ON  COSTS

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Background

1.  In both actions the plaintiffs sought to recover sums of money in the way of payments made by purchasers of properties in the Beijing and Dongguan developments that had been held by the Firm in their capacity as the solicitors for the developers but applied, by deduction, by the Firm against outstanding legal fees allegedly owed.  In both actions the Firm counterclaimed for the amount due for legal fees in accordance with bills rendered.

2.  The reasons for judgment were handed down on 18 September 2009.  In short, I found for the Firm in both actions, accepting their entitlement to have made the deductions, and for the Firm on the counterclaim against the original developers in the Beijing action, but for NWD on both counterclaims.

3.  Costs orders nisi were made in the following terms:

(a)     the costs of both actions to the Firm, on a party and party basis;

(b)    20% of the costs of NWD in both counterclaims to be paid by the Firm.

4.  Mr Pow, for Sun Legend and NWD, now says that Sun Legend is entitled to judgment on the counterclaim in the Dongguan action because, as an assignee from the original developers of the debt allegedly owed by the Firm to the original developers, it cannot be liable on the counterclaim.  He says further, that as Sun Legend is entitled to judgment on the counterclaim in the Dongguan action, it must also be entitled to costs on that counterclaim. 

5.  He next says that the orders for costs to NWD on both counterclaims should not be limited to 20%, but should be simply the usual orders to which a successful party is entitled for costs, with the Taxing Master undertaking the appropriate apportionment.  Mr Szeto, while arguing there should be no costs to NWD on the counterclaims, was content to accept my apportionment of 20%.

The procedural steps:

6.  The Dongguan action was originally commenced by 東莞市東城區房地產開發公司, New World Sun City Ltd, and Dongguan New World Garden Trade Construction Co Ltd, (collectively, the original plaintiffs), the first two of those three parties being the shareholders in Dongguan New World Garden Trade Construction Co Ltd, which in turn was the joint-venture company used to carry out the Dongguan project.

7.  The funds held by the Firm, which were applied to part payment of solicitors fees claimed by the Firm, were the property of those three companies.  The instructions given to the Firm to act in respect of the Dongguan project, it was found in the trial, came from those three companies. Consequently, it was those three companies who were, at law, liable to the Firm for the solicitors fees incurred.

8.  The writ in the Dongguan action was issued on 28 March 2002, and the statement of claim was filed on 30 April 2002.  A defence to the statement of claim was filed by the Firm[1]on 10 June 2002.  In that defence the Firm asserted (para 18) a right to set-off against any fees due, funds held on behalf of the original plaintiffs, pursuant to Rules 7 of the Solicitors Accounts Rules Cap 159.

9.  On 26 October 2002, the original plaintiffs assigned the benefit of the Dongguan action to Sun Legend.  In effect, the original plaintiffs assigned to Sun Legend the right to any monies that had been held by the Firm on behalf of the original plaintiffs.

10.  On 16 December 2002, upon an ex parte application by the original plaintiffs, Sun Legend was substituted as the plaintiff, presumably[2] pursuant to O 15 r 7(2), which provides:

“Where at any stage of the proceedings in any cause or matter the interest or liability of any party is assigned or transmitted to or devolves upon some other person, the Court may, if it thinks it necessary in order to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, order that other person to be made a party to the cause or matter and the proceedings to be carried on as if he had been substituted for the first mentioned party.

An application for an order under this paragraph may be made ex parte.”

11.  There is no suggestion that Sun Legend did not duly serve the order as required by O 15 r7(4).  By O15 r 7(5), the Firm was entitled, should they have wished to dispute the substitution of the plaintiffs, to apply for discharge or variation of the ex parte order, that application being required to be made within 14 days after service of the order.  No such application was made.

12.   Nearly five years after Sun Legend was substituted as plaintiff, on 30 November 2007, the Firm amended its defence, and filed a counterclaim, naming as defendants to that counterclaim Sun Legend and NWD.  The counterclaim was for the total amount of the bills rendered.  The basis for the entitlement to claim the amount due was pleaded by repeating the allegations in the defence, and asserting that by virtue of those allegations the sum was due by the defendants to counterclaim, and, by way of alternative, a quantum meruit.

13.  On 16 January 2008, Sun Legend re-amended a re-amended Reply, the document constituting a Re-Re-amended Reply.  At the same time Sun Legend took the opportunity to file a defence to the counterclaim, that defence constituting a bare denial. 

14.  NWD, although it had been joined in the action as a 2^nd Defendant by counterclaim, did not file any defence.

15.  The document comprising the Re-Re-Amended Reply and Defence to Counterclaim filed was incorrectly titled, completely omitting that portion of the title relating to the counterclaim, notwithstanding that it included a defence to the counterclaim.  In its terms, it referred only to Sun Legend as making the assertions in the defence.    No point was taken as to either of these points at trial, and I assume the parties treated the defence that was filed by Sun Legend as being a defence to the counterclaim by both Sun Legend and NWD.

16.  Sun Legend did not plead, or raise in argument during the trial, the proposition that as an assignee of the debt it could not be liable on the counterclaim for the fees due.

The consequences of the assignment:

17.  The law is that, whether an assignment is legal or equitable, (in this case it was a legal assignment), the assignee takes the benefit of the assignment subject to equities having priority over the rights of the assignee.  Thus, the assignee of a chose in action cannot acquire a better right than the assignor had, and the assignee takes a chose in action subject to all the equities affecting it in the hands of the assignor which are in existence before notice is received by the debtor: see Snell’s Equity para 3-22.  The effect of this rule is that the assignee of a debt takes the rights to the debt subject to any equitable right of set-off that might exist at the time of the assignment.

18.  But, with certain exceptions which are not relevant here, (for which see para 30 below), the assignee does not take the debt subject to any burden there might be on the creditor.  In this respect the distinction between set-off and counterclaim becomes important.  While a set-off will invariably constitute a counterclaim, a counterclaim will not always constitute a set-off. 

19.  The following passage from Halsbury’s Laws of England, 5^th Edn Vol.11 para 641 sets out the distinction between set-off and counterclaim:

“Set-off is distinguishable from counterclaim both in its application and in its effect.  In its application set-off is limited to money claims, whereas counterclaim is not so limited.  Any claim in respect of which the defendant could bring an independent claim against the claimant may be enforced by counterclaim subject only to the limitation that it must be such as can conveniently be tried with the claimant’s claim.  Thus not only claims for money, but also other claims such as a claim for an injunction or for specific performance or for a declaration may be the subject of a counterclaim.

In its effect set-off is essentially different from counterclaim in that set-off is a ground of defence, a shield and not a sword, which, if established, affords an answer to the claimant’s claim wholly or pro tanto, whereas counterclaim as such affords no defence to the claimant’s claim, but as a weapon of offence which enables a defendant to enforce a claim against the claimant as effectually as in an independent action.  Where facts pleaded by way of counterclaim constitute a set-off they may be additionally pleaded as such.”

20.  The position is neatly illustrated by the following example in Snell’s Equity para 3-26:

“Thus where a builder assigned the amounts due to him under a building contract, the debtor (the owner of the building) was entitled to set off a claim in respect of defects in the building but he was not entitled to counterclaim against the assignee for damages.”

Snell cites Young v Kitchen (1878) 3 Ex D 127 as authority, and refers also to Pan Ocean Shipping Co Ltd v Creditcorp Ltd [1994] 1 WLR 161 as another illustration of the rule in practice.

21.  In these proceedings, by the counterclaim, the Firm sought from Sun Legend a debt due, said to be arising as a result of a retainer of solicitors, or alternatively a quantum meruit.  The Firm did not dispute that funds held by them, received from purchasers of properties in the developments were the property of the original developers.  The Firm justified its appropriation of those funds by reliance upon Rule 7 of the Solicitors Accounts Rules.

The argument by the Firm for liability of Sun Legend:

22.  Mr Szeto, for the Firm, makes two arguments to say that Sun Legend is liable.

23.  First he says that Sun Legend is liable, not because of the assignment, but because of the consequences of the application made and the effect of the subsequent order for substitution.  He relies upon the following passage in Hong Kong Civil Procedure 2010 Vol 1 15/8/7, from the commentary on O 15 r 8, that Rule being entitled: “Provisions consequential on making an order under rule 6 or 7”:

“Once the substituted person becomes a party in the action, the following consequences ensue namely:

(1)     the substituted party is placed on the exact position of the party whom he has replaced (Chorlton v Dickie (1879) 13 Ch D 160; Johnston v English (1886) 55 LT 55; Cockshott v London etc Co (1878) L J  Ch 120)”

24.  The argument made was that the effect of the substitution order was that that order rendered Sun Legend liable in all respects, including any burdens there might have been on an original party.  That, said Mr Szeto, followed from the use of the words: “the exact position of the party whom he has replaced”.

25.  I reject the argument.  The three authorities cited are all authorities on procedure and practice points.  What is clear from those authorities is that if any procedural step has been taken prior to the assignment, for example, service of documents or notice of some act, that procedural step is effectual against the substituted party and need not be repeated.  Mr Szeto’s argument requires that a substantive rule of law, that an assignee takes subject to equities, but not the burdens of the creditor, has been amended by a rule of procedure contained in the High Court Rules.  That is plainly not the case.

26.  The second argument made was that Sun Legend was liable on a quantum meruit.  But the argument advances his position no further.  Quantum meruit is part of the law of restitution which prevents a person from obtaining a benefit from another which it is against conscience that he should keep without payment.  The party liable on a quantum meruit is the party for whom work is done, and who has not paid for that work, whether because the contract for the work has been terminated by breach, or for some other reason a contract has not come into existence.

27.  I cannot see any basis at all upon which it might be argued that Sun Legend, as the mere assignee of a debt due, might be said to have been the beneficiary of the work done by the solicitors.  This argument must fail also.

28.  Mr Pow is right.  Sun Legend are entitled to judgment on the counterclaim.

29.  There are certain limited circumstances where it is arguable that where it is a condition of enjoying the benefit of that which is assigned, then unless a burden is assumed, the assignee cannot enjoy the benefit without discharging the burden.  By way of example, in Halsall v Brizell [1957] Ch 169, a right to use estate roads and sewers was conditional upon payment of the proportion of maintenance of those facilities.  The assignee of the right was held liable to the owner for that compensation.  That decision was approved in the House of Lords in Rhone v Stevens [1994] 2 AC 310 at 322.

30.  Although an assignee takes subject to a cross-demand available to the debtor against the assignor only if the cross-demand would have been available as a set-off as between the assignor and the debtor, there are arguments available to say that that is not always the case.  In Bank of Boston Connecticut v European Grain and Shipping Ltd [1989] 1 AC 1056 Lord Brandon formulated the test by reference to whether the defendant’s counterclaim could be characterised as “flowing out of and inseparably connected with the dealings and transactions which also give rise to” the claimant’s claim.  The issue is discussed at length in The Law of Set-off, 3^rd Edn, Derham, (OUP) see paras 17.05-17.09.  It is possible to conceive of such a formulation in the present case, on the part of the Firm, but as no such argument was made I say nothing more about the matter other than to indicate the possible availability of the argument.

The position of Sun Legend:

31.  Sun Legend neither pleaded, nor argued at trial, the limits of the liability it faced as an assignee.  As I have stated at paragraph 14 above, the defence filed by Sun Legend to the counterclaim amounted to nothing more than a bare denial.  In fact, as an entity, in the course of the consideration of the case, Sun Legend did not feature except to the extent that its presence as an assignee was noted.  The argument in relation to the counterclaim in the Dongguan action was restricted entirely to the liability of NWD.

32.  It would have been open to Sun Legend to have defended the counterclaim on the basis that at law it could not have been liable for the debt claimed.  Indeed, having regard to the substantive law, and that the only issue was a pure legal issue, it would have been open to Sun Legend to have sought summary judgment on the counterclaim under O 14A.  This was arguably a clear case for the application of that Order.  But Sun Legend were apparently not advised to take that step.

33.  Equally, had the Firm wished to pursue the counterclaim against the original plaintiffs they would have been entitled, within the required time, to apply to discharge the ex parte order substituting Sun Legend as plaintiff.  Had they done so it is entirely likely that the original plaintiffs would have remained plaintiffs in the action for the purposes of the counterclaim, and Sun Legend would have been joined as a plaintiff to pursue its rights under the assignment.  But the Firm were apparently not advised to take that step.

Costs in the proceedings:

34.  It is now necessary to examine the consequences of the foregoing circumstances and conclusions in respect of orders for costs in the proceedings.

35.  The starting point, and the position of Mr Pow, is set out in the following passage from The Law of Set-off, para 1.06:

“The distinction between set-off and counterclaim is relevant to the question of costs.  Costs are within the discretion of the court, but the general rule is that the successful party pays the costs of the unsuccessful party.  Since a setoff gives rise to a defence, it follows that if the defendant’s cross-claim the subject of the set-off exceeded the claimant’s claim, the defendant will have succeeded in defending the action, and accordingly the defendant, rather than the claimant, ordinarily would be entitled to an order for costs.  A counterclaim on the other hand ordinarily results in two judgments.  The approach of the courts usually has been that the claimant is entitled to the costs of this claim, if successful, and the defendant has awarded the costs of the successful counterclaim.  The circumstances of the particular case may warrant different orders, but these are the prima facie positions.”

36.  Just as in England, in Hong Kong costs are within the discretion of the court, but the general rule is that the successful party pays the costs of the unsuccessful party: see O 62 r 3 and Hong Kong Civil Procedure 2010, Vol 1 paras 62/2/6 and 62/3/3.

37.  The only basis that Sun Legend can be said to have relied upon to entitle the original plaintiffs to recover the funds that had been deducted by the Firm was that there was no contractual relationship entitling the Firm to legal fees as they asserted.  That argument failed, and the Firm was found entitled to the set-off.  In that respect I accept Mr Szeto’s submission that the judgment on the counterclaim is in reality merely declaratory, reciting the correct legal result and the facts as found by the Court in dismissing the claim.

38.  Further, Sun Legend resisted the counterclaim, joining in the argument that there was no obligation on the part of the original developers in both actions by way of quantum meruit.  This argument failed, although in the case of the Dongguan action, in the absence of the original plaintiffs in the proceedings no judgment could be entered against them for the balance due by way of legal fees having regard to the set-off that had been applied.

39.  In all of those circumstances, exercising my discretion, I am satisfied that the proper order for costs is that the Firm must have its costs on the claim, and Sun Legend is entitled to judgment on the counterclaim together with costs to the date upon which the defendant’s Hearsay Notice was filed, those costs to be taxed on a party and party basis..  In other words, Sun Legend gets its costs for the procedural steps prior to trial, but not for the trial itself.

40.  Mr Pow said that NWD should have the whole of its costs on both counterclaims.  He referred me to O 62 r 7 and to the decisions in Beaumont v Senior & Bull [1903] 1 KB 282 and Korner v H Korner & Co Ltd [1951] 1 Ch 10.  Upon these authorities he advanced the argument that the allocation of the costs was a matter that was best left to the Taxing Master.

41.  The cause of action in which the Firm succeeded was a cause of action against the original developers, all effectively subsidiaries of, or at least represented by NWD.  Because of the relationship between the original developers, Sun Legend and NWD, they were all represented by the same solicitors and counsel.  Having regard to the time spent on trial on the NWD liability issue, it seemed to me to be appropriate to limit the costs to NWD on the counterclaim to 20% of those costs.  That was a generous apportionment of the time.

42.  I have had careful regard to Mr Pow’s argument that the matter is best left to the Taxing Master, but I am not persuaded that that is so in the present case.  The order that I have made reflects the proportion of the trial taken up in respect of the counterclaim.  The real argument mounted by NWD was that its subsidiaries had not reached any agreement with the Firm in respect of fees.  That argument failed.

43.  Accordingly, the order nisi that NWD will be entitled to 20% of the costs on the counterclaim, to be taxed on the party and party basis, is made absolute.

HCA 1212/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION   

COURT OF FIRST INSTANCE

ACTION NO. 1212 OF 2002

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(By Counterclaim)

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(Consolidated by Order of Master Woolley dated 31 October 2003)

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J U D G M E N T

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Background

1.  These proceedings had their genesis in the halcyon days when solicitors were able to charge for conveyancing work in accordance with the Law Society of Hong Kong’s scale of fees.  That scale was based principally upon the value of the transaction, with the fee rising exponentially as the value of the transaction increased.

2.  Very often, a great deal of the conveyancing work which could be undertaken in accordance with the scale fee was the same in each transaction, irrespective of the value of the transaction.  High-value or high volume transactions were very profitable for solicitors.  The repetitive nature of the work meant that it was often quite straightforward simple work, which could be assigned to non-legally qualified employees.  Consequently, in many transactions, the proper charge that might have been imposed on a pure time basis was much less than the scale fee that a solicitor might properly charge.  That was particularly so in relation to new developments where no issue as to the propriety of the title to be conveyed arose.

3.  The events in this case turn upon the excess over and above the amount that the solicitor would earn had he charged on a pure time charge basis.  That “excess” sum has been described in this case as the “potentially lucrative super profits”.

4.  Property developers in Hong Kong became aware of the fees available to solicitors through the Law Society scale charge and the large profits that a solicitor might make were he to act on the conveyancing on a large number of transactions.  In the context of Hong Kong, where a single new housing development might easily produce in excess of 300 apartments to be sold, the so-called super profits available to a solicitor acting for the vendor developer, on the conveyancing on the sale of each of 300 apartments, could be very substantial.

5.  A practice developed, prior to the scale being discarded in 1997, where an arrangement could be made between a property developer and a firm of solicitors in relation to the manner in which the solicitor would be paid for the pre-conveyancing legal work on such a development.  Naturally there were variations of the system amongst different solicitors and different developers.  There has been evidence in this case in relation to the variations in such arrangements adopted by three different law firms.

6.  An example of the practice may be seen in the decisions in Ng Chun Kong v First Star Development Ltd, at first instance, unreported HCA 2450/2004, 19 January 2006, and on appeal, [2007] 3 HKLRD 281.

7.  Broadly the arrangement was that the property developer instructed the firm of solicitors to undertake all vendor conveyancing in relation to the sale of units in a development.  A clause was put in the contract of sale that the purchaser was required to pay the vendor developer’s conveyancing fees on the sale.  With the solicitor thereby ensured of the conveyancing scale fees for all of the sales, the solicitor would undertake all legal work in respect of the development, including all the pre-conveyancing work, and not render an account for any legal work to the developer.  He would, pursuant to the contract of sale, render a scale fee account to the purchaser for the work he had undertaken as the vendor’s solicitor.

8.  A scale fee account having been rendered to the purchaser, the solicitor was entitled to appropriate the fee paid, and it was not necessary for him to send any account to the developer.  In practical terms, the time expended by the solicitor in relation to all the legal work on the new development, both pre-conveyancing, and vendor conveyancing, was compensated by the so-called super profits available from the conveyancing.  It was this element in the arrangement that made the system, in its various guises, successful.

9.  At the centre of this case is a dispute between a solicitor and a property developer, first, as to whether or not there was a fee arrangement made between them, and second, if there was such an arrangement, as to the particular terms of arrangement made for the payment of solicitors fees in relation to two developments undertaken by the property developer in the Mainland.

10.  The factual dispute between the parties is essentially confined to the terms of the arrangement made, if any, between the solicitor and the developer in respect of a project known as the Dongguan project, and a subsequent project known as the Beijing project.  The facts as they are now set out are the facts as I find them.  These facts were essentially not in dispute, save as to the central issues.  Where there has been a dispute as to the facts I have set out how I have resolved that dispute.

The parties to the proceedings

11.  There are two sets of proceedings which were heard together.  The issues are identical in each set of proceedings, although there are minor factual differences.  It is convenient, and not inappropriate, to refer to the original plaintiffs in HCA 1212/2002, (the Dongguan action), the current plaintiff in that action, and the plaintiffs in HCA 2915/2002, (the Beijing action), collectively.  All are either subsidiaries of New World Development Company Ltd, (NWD), or joint-venture partners of NWD.

12.  The original plaintiffs in the Dongguan action were three joint-venture partners, a mainland company, and two other companies in which NWD held significant interests.  In October 2002, these 3 original plaintiffs assigned their claims and their interest in the action to the present plaintiff, Sun Legend, and that company has continued the action.  Nothing turns on this point.

13.  However, an important point to be determined is whether or not, if there is liability to pay the solicitors fees, that liability should fall upon NWD or the joint venture companies who became the plaintiffs in relation to the original actions.  That is an issue which will be dealt with later in this judgment.  Until it is resolved, it is convenient to use the neutral expression “the developers” when referring collectively to NWD and the joint-venture companies.

14.  It is convenient also to refer to the solicitors firm, David Y W Ho & Co, and its individual partners, as the Firm.  Nothing turns on the distinction between the Firm and its individual partners. 

15.  The Firm began with David Ho as a sole practitioner.  During the relevant period of the retainers the Firm went through various different structures.  It began initially with David Ho as a sole practitioner, trading as David Y W Ho & Co, he later being joined in partnership by his sister Jade Ho Yuk Kuen, (Jade Ho), and later again by Brian Chan Man Ho, (Brian Chan).  Subsequently, during the relevant period of the retainers both David Ho and Brian Chan left the Firm, and Jade Ho became sole proprietor.

16.  Both parties sensibly recognised that the evidential burden lay with the Firm.  Consequently, although defendants in the original proceedings, the case commenced with the evidence of the Firm.

The circumstances leading to the proceedings

17.  In 1991, David Ho was a partner in the prominent international law firm, Baker & McKenzie.  Together with others he formed part of the China Practice Group in the Hong Kong office of that firm.  David Ho’s main areas of practice included PRC related matters such as real estate project development, corporate finance, infrastructure and other general investment matters.

18.  In the early 1990s, David Ho had met Peter Cheng, a son of Dr Cheng Yu Tung, the chairman of the New World Group.  Peter Cheng is an engineer by profession, having been educated at the University of California, Los Angeles, and works with his family business, the New World Group.  Since November 1992, Peter Cheng has been a director of New World Development (China) Ltd, and since October 1994, a director of NWD.

19.  NWD is a public listed company.  The majority shareholder in NWD is a private company, Chow Tai Fook Enterprises Ltd, (Chow Tai Fook), controlled by Peter Cheng’s father, Dr Cheng Yu Tung.  Peter Cheng described NWD as a member of, and the leading company of the New World Group.  For many years NWD has been a leading property and infrastructure developer in Hong Kong and China and beyond, with particular interests in hotel developments.  NWD’s hotel interests are largely undertaken under the auspices of New World International Hotels Ltd, (NWH).  A further company mentioned in these proceedings, also in the New World Group, is New World China Land Ltd, (NWCL).

20.  It may be fairly said that the New World Group is a many tentacled entity.  It comprises NWD, and a large number of wholly-owned subsidiaries.  It also comprises a large number of associate companies, affiliated companies, and joint-venture companies in which NWD itself or subsidiaries or associates own varying proportions of interests, from majority interests to minority interests.

21.  David Ho was anxious to secure work, and particularly China practice work, from Peter Cheng and the New World Group.  On 27 September 1991, he wrote a letter, addressed to Mr Michael Fong of NWH.  David Ho’s evidence was, without contradiction, that the letter had been drafted by solicitors in the Baker & McKenzie conveyancing and construction practice groups.  The letter set out the basis for what was described as a “conveyancing fee-off-setting arrangement”.

22.  Following that letter, on 1 October 1991, there was a meeting between David Ho, Peter Cheng, and Stewart Cheng, another son of Dr Cheng Yu Tung.  As a result of that meeting, on 4 October 1991, David Ho sent a further letter, marked “PRIVATE AND CONFIDENTIAL”, addressed to Peter Cheng and Stewart Cheng at NWD.  This letter was also drafted by the Baker & McKenzie conveyancing and construction practice groups.  The letter was in the following terms:

“Mr. Peter Cheng and Mr Stewart Cheng

New World Development Co. Ltd.

32/F New World Tower,

16-18 Queen’s Road C

CENTRAL

Hong Kong

Dear Peter and Stewart,

Re:    Conveyancing Fee – Off-setting Arrangements

Further to our meeting on October 1, 1991 regarding the conveyancing fee off-setting arrangements, I am writing with proposals for our future working relationship with the New World Group.

A.  Basis of the Conveyancing Fee-Off-setting Arrangements

In Hong Kong, solicitors have managed to retain their statutory monopoly over the handling of conveyancing transactions.  Furthermore, they are required by law to charge for their services on the basis of minimum scale fees calculated by reference to a percentage of the consideration.  In addition, solicitors are, in many cases, at liberty to act for both vendors and purchasers, and also on behalf of mortgagors and mortgagees.

Each stage in the conveyancing process (for example purchase and sale agreement, equitable mortgage, formal transfer and legal charge) attracts a separate scale fee.  Even in the case of the conveyance and a mortgage of a single property, the total amount of scale fees payable generally exceeds the fee which would be payable if calculated on the conventional time basis by a considerable margin.  Large developments which generate hundreds of individual transactions based on a single set of precedent documents generate very substantial excess fees, often running into millions of dollars.

Over the years, property clients have come to recognise the substantial size of the profits earned by solicitors on conveyancing work and have sought means by which they can derive some benefit from the system.  Since it would be unlawful for a solicitor either to reduce his scale fees below the statutory minima or to share them with the client in the form of rebates, certain solicitors now operate a system whereby a portion of the surplus of scale fees over notional time costs is allocated to the client in the form of free advice on other areas of law such as tax planning, construction, finance, litigation or China.  Our Hong Kong office consists of over 130 lawyers and is one of the largest and most rapidly-growing local firms.  I enclose an Introduction to Baker & McKenzie Hong Kong which briefly describes the different areas of practice our Hong Kong office offers.  I also enclose a schedule listing the experience of Baker & McKenzie in conveyancing for large property developments in Hong Kong.

One practical problem sometimes encountered is that the client simply does not need enough free legal advice in Hong Kong to absorb the surplus within a realistic period.  We have overcome this problem with some of our clients by making the surplus available to other companies within the client’s group and by providing advice not only in Hong Kong but in certain other jurisdictions through our international network of offices.  I enclose a directory of Baker & McKenzie world wide offices which consists of over 1500 lawyers in 50 offices in over 10 countries throughout the world.

B.  Conveyancing Fee-Off-setting Arrangements Proposal

I would now like to summarise the general principles which underlie the above proposals: firstly, that we are obliged to charge scale fees for conveyancing work payable by the purchasers, which often exceed the amount which would have been payable if calculated on the basis of hourly rates; secondly, that we are prepared to make available an agreed portion of those excess scale fees to absorb fees payable for non-conveyancing work performed by us and our overseas offices generally on your behalf.

I set out below my initial suggestions for putting those principles into practice.  I have tried to keep them as simple and practical as possible and would welcome your comments on them.

1.  I suggest we agree upon a percentage division of the scale fees payable in respect of each major conveyancing assignment.  Within our portion of that percentage split, we will perform in respect of that assignment the full range of conveyancing work normally included in the scale fee.  The agreed balance will be made available to you for your purpose of absorbing fees for other non-conveyancing work.

Because of the variables involved in conveyancing transactions, it is probably not in either party’s interests to agree on a single percentage figure of general application and I suggest we determine the apportionment on a case by case basis.

2.  In the case of your group, our Hong Kong office is of course prepared to make available the conveyancing fee “excess” and allow other fees incurred in Hong Kong to be carried forward against it as from the date when conveyancing work is initially committed to us.

However, given the substantial value of most of your property transactions and the lead times which are often involved, I think we would need to set a limit on the amount of non conveyancing fees which can be carried forward against an anticipated surplus, pending the accumulation of an actual surplus.  We can discuss an initial figure and review it regularly thereafter.

3.   I suggest that non-conveyancing work carried out pursuant to this arrangement is dealt with as follows:

(a) Fees will be incurred in respect of that work at the normal rates applicable at the time it is carried out;

(b) We will endeavour to pre-estimate the level of fees on individual assignments wherever possible, though you will appreciate that such estimates are often difficult and are to be used as guidelines only;

(c) We will regularly inform you of fees incurred against current matters at whatever intervals are convenient to you;

(d) We will bill you in the normal way in respect of any fees incurred in excess of the limit referred to above;

(e)    We will ask you to pay disbursements of non conveyancing matters (Counsel’s fees, etc.) as and when they are incurred.

4.  Assuming the proposals are acceptable to you I suggest we implement them as soon as possible.  We do not as yet have instructions on any property matters likely to yield a scale fee excess though you mentioned that you have a number of projects in mind.

C.  Significant Saving for the New World Group

I would like to demonstrate the above fee off-setting arrangements with the following example.

Based on the assumption that there are 300 units in a property development project and the average size of each of the units is 1,400 sq. ft., and the units are sold at the rate of HK$4,000 per sq. ft., the average price of a unit will therefore be HK$5,600,000.

The estimated conveyancing fees likely to be generated will be as follows:

Fees re sale and purchase agreements –

HK$2,500 x 300 = HK$750,000

Fees re assignments (assuming 40% of the purchases are separately represented)-

HK$31,500 x 300 x 60% = HK$5,670,000.00

HK$15,750 x 300 x 40% = HK$1,890,000.00

    HK$7,560,000.00

Fees re mortgages (assuming 50% of the mortgage work of 60% of the purchasers are handled by the developer’s solicitors and assuming an average loan size of 70% of the purchase price) –

HK$24,600 x 300 x 50% x 60% = HK$2,214,000.00

Therefore the estimated total fees will amount to:

Sale and Purchase Agreements  HK$   750,000.00

Assignments  HK$7,560,000.00

Mortgages    HK$2,214,000.00

      HK$10,524,000.00

40% surplus fees to be used by the New World Group

HK$10,524,000.00 x 40% = HK$4,209,600.00

Based on our experience in implementing the fee off-setting arrangements for other major property developers, we should be able to provide about 40% surplus fees to be used by the New World Group for other non-conveyancing legal work.  In other words, based on the above estimation, Baker & McKenzie’s Hong Kong and overseas offices should be able to provide free legal services to the New World Group for close to the tune of HK$4,209,600.00 which amount should be considered as a significant saving for the New World Group.

As I hope this proposal demonstrates, we are enthusiastic at the prospect of further developing our relationship with the New World Group.  I believe that there will continue to be an excellent match between your legal needs and the services which we are able to provide. 

I will assume a general coordinating role in relation to the allocation and monitoring of matters conducted within this office on your behalf and will also be responsible for implementing, from our side, whatever billing arrangement is eventually agreed between us.

It would therefore be preferable if your instructions in relation to all new assignments were channelled through myself so that we can ensure that they are allocated to the appropriate people. 

Please give me a call when you have had a chance to consider this proposal.

With best regards.

Yours sincerely,

David Ho”

23.  This arrangement, which had the added element of establishing a pool of funds to which the developer might have access for the payment of other legal work that had been undertaken for the developer, or any other entity it might elect, has been referred to in the trial as a “Fee Offsetting Arrangement”, (FOA).

24.  There was no written response to that letter, but it is common ground that shortly thereafter, in February 1992, Peter Cheng instructed Baker & McKenzie to undertake the establishment of a complex holding companies group structure, numerous shareholders agreements and fundraising documentation in respect of a very substantial development being undertaken in Dongguan, Guangdong PRC.  Throughout these proceedings this project has been referred to as the Dongguan Project.

25.  Other than the letter of 4 October 1991, there is no documentary evidence to establish the precise terms of the retainer held by Baker & McKenzie in respect of the Dongguan project.  The primary issue in the trial is to establish those terms.  It was not in dispute that the instructions were given by Peter Cheng.  On behalf of which particular corporate entity, NWD, developers or plaintiffs, the instructions were given is the issue referred to in paragraph 13 above.

26.  Baker & McKenzie duly began to act, in whatever aspects they were instructed on, in relation to the Dongguan project.  This project included a development known as the Palm Island Resort.  The project also included residential developments which were to be marketed in Hong Kong.  It was necessary for Baker & McKenzie to prepare and establish a complex holding company group structure, numerous shareholders agreements and funds raising work in respect of the Dongguan project.  This work was undertaken by David Ho.

27.  The Dongguan project was undertaken by a joint-venture of three companies, one I understand to be a mainland Chinese company, the others, subsidiaries of NWD, New World Sun City Ltd, and Dongguan New World Garden Trade Construction Co Ltd, respectively.  The joint-venture members subsequently assigned their interests against the defendants to Legend Investments Ltd, which company became the plaintiff in HCA 1212/2002, known in these proceedings as the Dongguan action.

28.  In June 1993, Andrew Wong of NWH instructed Baker & McKenzie to advise on the proposed sale of offices and apartments in the Beijing Jingguang Centre, a development being undertaken by NWD in Beijing.  There is no documentary record of the basis on which fees were to be charged in relation to this retainer.  However, all parties agree that the terms of the retainer were the same as the Dongguan project.

29.  The position of NWD is that the developers of the Beijing project were, jointly, Beijing Chongwen-New World Properties Development Company Ltd and China New World Electronics Ltd.  Both of these companies are either subsidiaries of NWD or joint-venture entities in which NWD engaged in the project with other independent corporate entities.

30.  In December 1994, David Ho, together with the entire China property and conveyancing team at Baker & McKenzie, left that firm and the firm of David Y W Ho & Co, (the Firm), was established.  Prior to that time Baker & McKenzie had been acting for the New World Development Group in relation to both the Dongguan and Beijing projects.  That work was transferred to the Firm.  Thus, the Firm became the solicitors to the developers on both the Dongguan and Beijing projects, ultimately giving rise to the dispute now before me.

The termination of the retainers

31.  Between January 1995, and October 2001, the Firm continued to undertake work in relation to the two projects, consequent upon instructions received from the developers of both the Dongguan project and the Beijing project.

32.  On 23 October 2001, a meeting took place in Lan Kwai Fong, between David Ho and Peter Cheng.  There is a dispute between David Ho and Peter Cheng as to the circumstances of that meeting.

33.  David Ho’s evidence was that he requested the meeting to discuss outstanding fees in relation to the Dongguan project and the Beijing project.  He says that he told Peter Cheng that there were substantial time costs outstanding which had not been offset by fees received from purchasers, and that he asked if some of the outstanding time costs could be paid to ease the Firm’s cash flow.  David Ho said that Peter Cheng agreed to consider this proposition, but that it was a difficult time for both him and the New World Group due to the prolonged recession.  David Ho said that it was clear throughout the conversation that Peter Cheng recognised the obligation on New World Group to pay the Firm’s fees.

34.  Peter Cheng’s evidence was that at the meeting he told David Ho that the Dongguan project and the Beijing project had been completed and that there would not be too many more transactions in relation to the units in the future.  He said that the retainers in relation to the Dongguan project and the Beijing project should therefore be terminated.  Peter Cheng’s evidence was that David Ho told him that there were no outstanding financial matters in relation to the two projects.

The bills of costs are rendered

35.  On 29 November 2001, the Firm rendered two bills of costs to NWD.  The two bills of costs were sent under cover of a letter from the Firm, marked to the attention of Peter Cheng.  The letter required payment of the amounts due by 31 December 2001, and recorded:

“If you fail to settle the said bills as aforesaid, we will take appropriate action(s) against you without further notice, including without limitation legal action, set-off, lien, charge or otherwise.”

36.  In relation to the Dongguan project, the bill covered the period 16 December 1994 to 21 November 2001, and was for profit costs in a sum of $7,068,815, together with disbursements of $148,346, making a total sum of $7,217,161.  The bill recorded that a sum of $2,996,455, being monies received from purchasers/mortgagors, and held in the Firm’s trust account, had been deducted and credited towards the bill, leaving a balance due of $4,220,706.

37.  In relation to the Beijing project the bill again covered the period 16 December 1994 to 21 November 2001, with profit costs in the sum of $11,519,680, together with disbursements of $528,233, making a total sum of $12,047,913.  The bill recorded that a sum of $5,731,900, being monies received from purchasers/mortgagors, had been deducted and credited towards the bill, leaving a balance due of $6,316,013.

38.  On 2 January 2002, the Firm sent a revised bill in relation to the Beijing project.  In this revised bill the profit costs were reduced to $9,215,744, and the disbursements to $439,746.  The credit for monies received from purchasers/mortgagors was reduced to $4,182,660, and a new credit was given for what was described as “part settlement from purchase money paid by purchasers together with interest held by us” in the sum of $493,718.72.  The balance now due was $4,979,111.28.  No point was taken by any party in relation to this revision.

39.  It is common ground that if the two bills were properly due, the Firm was lawfully entitled to deduct any sums of money received from purchasers/mortgagors and held in the Firm’s trust account for the credit of the developers, and to credit those sums to the amount due by the developers in relation to the two bills.

NWD and Peter Cheng’s response to the two accounts

40.  Peter Cheng’s evidence was that he received the two bills in mid-December 2001.  He said that he did not read the details of the bills, but that he noticed that the amount of each bill was several million dollars.  Peter Cheng said that he passed the two bills to Miss Lynda Ngan, the Financial Controller for the New World Group, and told her that they should not pay the two bills.  He said that he asked her “to follow up the matter”.

41.  Although Miss Lynda Ngan made a witness statement, she was not called to give evidence.

42.  On 24 January 2002, the original third plaintiff, the Dongguan New World Garden Trade Construction Co Ltd, wrote a letter, in Chinese, to the Firm in the following terms:

“According to your notice dated October 19, 2001, as at September 29, 2001, the total balance in the Hong Kong dollar special account (Special Account) we deposited in your bank together with the interest is HK$3,655,516.27.

We hereby request you to cancel this Special Account and transfer the deposit in the amount of Hong Kong dollars three million six hundred fifty-five thousand five hundred sixteen and twenty seven cents (HK$3,655,516.27) together with the interest accrued and the payments you collected on our behalf from September 29, 2001 to the day when the Special Account is cancelled, to our Hong Kong Representative account on or before 7 February 2002.”  (Account details thereafter followed)

43.  David Ho, on the Firm’s letterhead, also in Chinese, replied promptly on 30 January 2002.  The reply was in the following terms:

“We have received your letter dated January 24, 2002.

Mr Peter CHENG of the NEW WORLD DEVELOPMENT CO LTD has arranged with us to terminate our appointment as the representative solicitors for the developer and mortgagee of the Project.  We have sent our invoice for the services we have provided for the Project (refer to Attachment 1) on November 29, 2001.  However we have not yet received any reply.  Therefore, we have offset the amount due on the invoice against the purchase price and interest held by our firm in respect of the Project totalling HK$3,659,521.37 (refer to Attachment 2) on January 2, 2002.  Would you please pay forthwith the remaining balance totalling HK$561,184.63 as soon as possible.  When all the fees have been settled, we will arrange to deliver the documents relating to the Project retained by us to you or your representative solicitors.”

44.  In statements of claim in relation to each of the Dongguan project and the Beijing project which were subsequently filed, it is pleaded that there was a letter before action from solicitors for the developers of each project, on 22 March 2002.  Although I asked in the course of the trial whether there had been letters before action, these letters were not produced in evidence.

The Writs are issued

45.  Next, four months later, and five months after the two bills of costs were originally issued, on 30 April 2002, the respective joint-venture entities engaged in the Dongguan project and the Beijing project issued two writs.  The proceedings sought to recover from the Firm the sums that had been deducted by the Firm and applied towards the outstanding amount due under the two bills of costs.

46.  The proceedings began with a writ, HCA 1212/2002, issued by the three partners in the Dongguan project joint-venture, on 28 March 2002, against the three individual solicitors who had comprised the Firm.  The writ was indorsed with a claim for the sum of $3,655,516.27 said to be held by the defendants, or the Firm, for the plaintiffs pursuant to an agreement dated 14 June 1996, in relation to the Dongguan project.  Throughout the proceedings this action has been referred to as the Dongguan action.

47.  On the same day a writ was issued in the District Court  by the two partners in the Beijing project joint-venture, again against the three individual solicitors who had comprised the Firm.  The writ was indorsed with a claim for the sum of US$44,238.90 being money said to be received and held by the defendants or the Firm, for the plaintiffs, in relation to the Beijing project.  This action was subsequently transferred to the High Court.  Throughout the proceedings this action has been referred to as the Beijing action.

48.  It is convenient here to note that the agreement dated 14 June 1996, in relation to the Dongguan project was an agreement in Chinese, made between the mainland joint-venture party, and New World Sun City Ltd, and the Firm in relation to the Firm acting as a stakeholder for part of the purchase money in relation to units in the Dongguan project.  It was not suggested by counsel for the developers in the trial that this agreement was in any way definitive of, or even relevant to, the issue to be determined, namely, the terms of payment in relation to the retainer.

49.  On 30 April 2002, a statement of claim was filed in each set of proceedings.  In relation to the Dongguan project, it was alleged that the Firm had been retained by the plaintiffs:

“5  In about January 1995 the Firm was retained by the (plaintiffs) to deal with the legal documents for the sale of units within the Project by purchasers in Hong Kong and to receive purchase monies on behalf of the (plaintiffs).” (sic)

50.  The statement of claim alleged an implied term to abide by the instructions of the plaintiffs, and recited the receipt of monies by the Firm on behalf of the plaintiffs between January 1995 and September 2001.  The termination of the retainer in about October or November 2001 was pleaded.  The demand made on 24 January 2002 was pleaded as was the letter before action dated 22 March 2002.  It was then pleaded that in breach of the implied term of the retainer, the Firm had failed to pay the sums due to the plaintiffs.

51.  In relation to the Beijing project, the pleadings in respect of the retainer and its terms were in all respects identical save that the date of the retainer was merely expressed as being: “In about 1995”, and an allegation was made that the scope of the work in respect of the project was evidenced by a Chinese letter of appointment dated 28 April 1995.

52.  Again, the action was based upon a breach of the implied term of the retainer.

53.  By a consent order made on 10 July 2002, the District Court action in relation to the Beijing project was transferred to the High Court, where it was allocated number HCA 2915/2002.

A defence and counterclaim  is filed on each action

54.  On 11 June 2002, a statement of defence and counterclaim was filed in the Dongguan action and the Beijing action.  The basis of the defence and counterclaim was that there had been an agreement between the developer and the Firm in relation to the payment of fees on a time basis.

55.  Paragraph 5 of that defence specifically pleaded:

“As a result of the aforesaid discussions, it was agreed that (Baker & McKenzie) would be paid for their services rendered on time spent basis at the usual rate charged by (Baker & McKenzie), provided that any costs paid by the purchasers of units in the respective projects would be applied to set off such fees payable to (Baker & McKenzie).”

This plea was repeated in relation to the Firm with particulars of the express oral agreement relied upon being pleaded.  The entitlement of the Firm to the sums deducted against the bill rendered was pleaded.

56.  At the same time, in the Beijing action, a counter claim was brought against the plaintiffs claiming the balance due on the bill.  That sum exceeded the jurisdiction of the District Court and consequently those proceedings were transferred to the High Court.

57.  On 3 September 2002, a reply was filed in the High Court in the Dongguan action, and a reply and defence to the counterclaim was filed in the Beijing action, which by that time had been transferred to the High Court.  In both sets of proceedings the plaintiffs suggested in the pleading that no legal fees would be charged.  The plea was not upon the basis that the Firm would work for free, as Peter Cheng asserted in evidence, but in the following terms:

“(c)    it was agreed between (David Ho) and Peter Cheng that (Baker & McKenzie) would only charge the purchasers of land development projects for all (Baker & McKenzie’s) charges and disbursements unless otherwise agreed or notified by (Baker and McKenzie).”

58.  Subsequently, the Dongguan action also became subject to a counterclaim by the Firm for the balance of the bill rendered in relation to that project. 

59.  By the time of trial the lines were drawn quite clearly.  Both the developers in respect of the Dongguan and Beijing projects sought to recover from the Firm all monies received by the Firm on behalf of the developers, and set off against the two bills that had been rendered.  The Firm resisted those actions, and counterclaimed in each action for the balance of the bills that remained owing.

60.  In the event that the agreement pleaded by the Firm could not be established, the Firm sought to rely upon a quantum meruit to justify the amount of each of the two bills.

61.  An important feature of the counterclaim was that it was brought by the Firm, in respect of both the Dongguan action and the Beijing action, against not only the original plaintiffs, that is the developers of the two projects, but also against NWD.  NWD were joined on the basis of an allegation that the original instruction to Baker & McKenzie by Peter Cheng was on behalf of NWD, and that NWD were engaged in projects through subsidiaries and indirect subsidiaries, who constituted the plaintiffs in the proceedings.

62.  This allegation was denied by the plaintiffs and NWD who asserted that the proper parties to the retainers were the various joint-venture parties.  Thus, the issue referred to in paragraph 13 above arises.

A counterclaim to the counterclaim

63.  In the Beijing action the developers have brought a counterclaim to the counterclaim, in which taxation pursuant to s 67, Legal Practitioners Ordinance, Cap 159, (LPO), of the bill in respect of the Beijing Project is sought.  Taxation is resisted on the basis that the request is out of time and there are no special circumstances to justify taxation now.

The scope of the retainers

64.  Although the pleading by the plaintiffs in each action in respect of the scope of the retainer appeared to limit the retainer merely to acting for the plaintiffs “on the sale of units” in the respective projects, in relation to the Dongguan project to purchasers “outside mainland China”, and in relation to the Beijing project, “to purchasers in Hong Kong”, it is clear that the scope of the retainer was much wider.

65.  During final submissions, counsel for the developers did not object to my description of the scope of the retainer in relation to both projects as being, in reality, to undertake such legal work in respect of each project as the solicitors may from time to time be instructed to undertake.  This included acting for the developers on the sale of units in both projects to purchasers outside the mainland, or in Hong Kong.

66.  That was plainly the case, for there was no dispute at all on the part of the plaintiffs that the work undertaken in respect of both projects extended far beyond merely acting as the solicitors for the vendors, and encompassed a great deal of legal work necessarily undertaken prior to and throughout the development of the project leading up to the stage where units were able to be sold.

The central issue

67.  As I have said, other than the letter of 4 October 1991, there is no evidence in documentary form to establish the basis upon which fees were to be paid in respect of work undertaken in relation to the retainer in respect of the Dongguan project, or the retainer in respect of the Beijing project.

68.  The central issue for consideration is the terms of payment in respect of each retainer.  It is common ground between the parties that the Beijing retainer was on the same terms as the Dongguan retainer.

69.  The cases for parties are clear and in complete contradistinction.

70.  The case for the plaintiffs is put this way by counsel for the developers in the final submissions:

“The term of the retainer was that the original plaintiffs would not be charged or liable for any legal fees and disbursement and the legal fees and disbursement would only be paid by the purchasers.” (sic)

71.  The case for the Firm is that it had been agreed between Peter Cheng of behalf of NWD and its subsidiaries, and David Ho, initially on behalf of Baker & McKenzie, and subsequently in his own capacity with the Firm, that the Firm’s time in relation to instructions received on either project would be charged on a time basis, with the cost of the time being met pursuant to the FOA, as set out in paragraph 22 above.

72.  At the end of the day, the issue is simply one of credibility.  If I prefer the evidence of Peter Cheng, then, subject to the issue of a quantum meruit, to be discussed below, I would be satisfied that the Firm had no entitlement to render the bills.  Consequently the Firm would have no right to deduct funds held by the Firm on behalf of the developers, and apply those funds to the amounts due.

73.  If I prefer the evidence of David Ho, then I would be satisfied that the FOA, set out in the letter of 4 October 1991, formed the basis upon which payment was to be made for the time spent by the Firm in acting upon the instructions received from the plaintiffs, when surplus profits from conveyancing were insufficient to meet the appropriate time charge.

74.  Having considered the whole of the evidence I have reached the conclusion that I prefer the evidence of David Ho to that of Peter Cheng.  I am satisfied, upon the appropriate standard of proof, that in about February 1992, Peter Cheng and David Ho agreed that Baker & McKenzie would undertake such legal work as Peter Cheng may require in respect of the Dongguan project, that legal work to be charged by Baker & McKenzie on a time basis, that charge to be offset by surplus conveyancing fees earned by Baker & McKenzie in acting as solicitors to the vendor developers upon the sales of units in the Dongguan project, which fees were to be paid by purchasers of those units.

75.  I have reached the conclusion that there was an FOA arrangement for the reasons set out below.

The attack on credibility

76.  Counsel for the developers correctly recognised that the case would turn upon the credibility of the primary witnesses, David Ho and Peter Cheng.  Central to the case for the plaintiffs was a concerted attack on the credibility of David Ho.  A number of points were made.  These involved his conduct and practice as a solicitor and his role as a businessman, judgments against David Ho, and his continuation of these proceedings. 

77.  Because of the extent of the attack it is necessary to deal with these points in some detail.

David Ho’s conduct and practice as a solicitor

78.  First, it was asserted that David Ho was entitled only to practice as a Hong Kong solicitor, and had no standing to give legal advice or to carry out tasks required of a PRC lawyer. 

79.  There was no evidence that David Ho did give legal advice in respect of PRC law, or that he carried out the tasks required of PRC lawyer.  I have no doubt at all that a great deal of the financing of China projects is undertaken through banks or other financiers in Hong Kong in accordance with Hong Kong law.  David Ho was perfectly entitled to advise on such matters, even if the project itself was in China.  The evidence showed that David Ho undertook the establishment of companies, membership contracts, and other matters in relation to the developments, all in accordance with Hong Kong law.  Again, he was perfectly entitled to advise on such matters.

80.  In the absence of any evidence that David Ho has acted unlawfully by holding himself out as a PRC lawyer there is nothing in this point.

81.  I expressed the view in the course of the trial that if the arrangement was as David Ho alleged, then the proper administration of the arrangement would involve the solicitor keeping the developer client regularly informed of a number of matters.  These would necessarily include: (i) the time cost accumulated to date, (ii) the fees received from conveyancing transactions, (iii) the amount of those fees available to be applied at any time, and (iv) bills being rendered for developers work upon fees being deducted from the available sum. 

82.  David Ho accepted that none of those steps had been taken.  The submission was made that his failure to do so showed him to be a solicitor who did not comply with solicitors proper accounting practices, and that that was a matter which went against his credit.

83.  While it is right that the best practice might not have been followed, the failure of David Ho to readily supply information to Peter Cheng or NWD as to the state of the arrangement does not lead me to disbelieve him.  In this respect I have regard to the conclusions I have reached as to the propriety of the fee off-setting arrangement, to be dealt with below.  There was no suggestion that the failure to supply information might have constituted a disciplinary offence on the part of David Ho, and in those circumstances little weight may be attached to it.  It is however a factor to which I have had regard when considering whether or not there was such an arrangement.

84.  Further, while it is right that David Ho did not give Peter Cheng regular information to keep the developers informed of the situation, it is not right that nothing at all was sent.  On a regular basis statements were supplied by the Firm to NWD or its subsidiaries of the funds standing to the credit of NWD or its subsidiaries with the Firm.  Thus, at all times, Peter Cheng knew that the Firm was holding money standing to the credit of NWD or its subsidiaries.  On all occasions when such accounts were sent they were endorsed:

“Subject to bill to be rendered.”

85.  It is inconsistent with the assertion that the developers were not to be charged for the legal work that was undertaken, that such an endorsement should be made to the accounts.  It is, on the other hand, entirely consistent with the proposition that a bill would be sent if the work was not otherwise remunerated.

86.  In a similar manner, the auditors to the Firm sent audit requests to the developers requesting the developers to confirm that credit balances were held by the Firm on behalf of the developers.  These audit requests were similarly marked.  These are dealt with below.

87.  One of the reasons David Ho left Baker & McKenzie was that he wished to sit on boards of companies, a practice which was apparently not acceptable to Baker & McKenzie.  The reasons why such a practice might not be acceptable are obvious and sensible.  But that said, it is not uncommon for solicitors to sit on the boards of substantial companies.  It was not suggested that there is anything in the Solicitors Practice Rules, or any ethical basis, (other than of course avoiding conflicts of interest), why a solicitor should not sit on the board of the company.

88.  I did not find David Ho’s desire to be a company director as well as a solicitor a matter which might impact upon his credibility.

Other litigation involving David Ho

89.  As part of the case for the plaintiffs, three judgments of the High Court of Hong Kong, in which David Ho was involved, formed part of the evidence.  The first in time was a summary judgment given against David Ho as guarantor of a debt.  The judgment was in the sum of US$4.1 million.  David Ho’s uncontradicted evidence was that subsequent to the summary judgment being entered against him, he had paid the full amount due.  There is no suggestion that enforcement proceedings were required.

90.  David Ho was perfectly lawfully entitled to resist the summary judgment upon the technical grounds that were taken by senior counsel on his behalf in those proceedings.  Much was made by counsel for the developers of the fact that the judge used the expression “practically moonshine”, when referring to the defences raised.  I am satisfied that the expression was not used in a pejorative sense in relation to the defendants, intending to be a personal criticism of them.  It was rather merely a reflection by the judge, in well-known terms, of the strength of the arguments mounted by counsel for the defendants in the proceedings.  In this respect, it needs to be remembered that the arguments were such that senior counsel felt it appropriate to advance to the court.

91.  That David Ho resisted the application for summary judgment on the basis that was advanced by senior counsel and ultimately found to have no validity does not go at all to his credit.  That he made payment of the judgment in full following the entry of judgment however, does go favourably to his credit.  This submission did not advance the plaintiffs’ case against David Ho as to his credibility.

92.  The second case involved a judgment given against David Ho at first instance in the sum of $32 million.  The judgment was subject to an appeal to the Court of Appeal by David Ho, an appeal which failed.  David Ho frankly admitted that he has not made payment of the amount due under this judgment.  David Ho now lives in Beijing and declined to come back to Hong Kong to give evidence because, as he accepted in cross examination, he would be likely to face enforcement proceedings on this judgment.

93.  The judgment arose out of a commercial dispute in which the plaintiff, a Mr Mak, and David Ho were personally involved.  It has not been necessary for me to consider the content of either the judgment at first instance or in the Court of Appeal in detail, because no point was made as to any finding against David Ho in those judgments that might have gone to his credibility in this trial.  The sole point sought to be made was that David Ho had a judgment of $32 million against him, which remained unsatisfied, and he was not prepared to come to Hong Kong for fear of enforcement proceedings.

94.  David Ho did not resile from those facts in any way, but frankly acknowledged them.  His evidence was that if he had the funds available he would make payment on the judgment.  In the light of his payment of a US$4.1 million judgment there was no reason to doubt that evidence.  The mere fact that a man has a judgment against him does not, necessarily, by itself, render him unworthy of belief.  Neither does the fact that he has not paid that judgment, if he frankly acknowledges the debt and expresses a believable willingness to pay it, if he has the funds.

95.  David Ho’s failure to meet this judgement and his consequent unwillingness to come to Hong Kong for fear of enforcement proceedings were, in the light of his frank acknowledgement of the circumstance, mere facts, which did not detract from his creditworthiness.

96.  In any event, it hardly lay in the mouth of Peter Cheng or NWD and its subsidiaries, to complain that a man who had unsatisfied judgments against himself was not worthy of credit by virtue of that fact.  Peter Cheng was obliged to acknowledge that, in respect of two sets of proceedings brought by the Firm, judgment had been entered  in a High Court action against an NWD subsidiary.  Further, in relation to a number of small claims actions against NWD and subsidiaries, there had been settlement, following the issue of proceedings.

97.  In a third set of proceedings, in the District Court, in which judgment has been entered against NWD subsidiaries in favour of the Firm, no payment has been made, but enforcement action cannot be taken as the judgment is against a BVI company that has no assets in Hong Kong.  That is a circumstance which bore the hallmarks of a deliberate use of the BVI company to evade liability should a judgment be entered against that company.  Were that the case, that would be a factor which might go against the creditworthiness of those who used such a device.

98.  The third decision in which David Ho was involved is that of Re Greater Beijing Region Expressways Ltd, [2002] 2 HKLRD 776.  There, David Ho sought to resist the winding up of Greater Beijing Region Expressways Ltd, on the petition of another shareholder in that company.  The petition was resisted on two issues, whether that other company had locus standi to present the petition, and whether it was clear and obvious that the petition was bound to fail.  These arguments were advanced on behalf of David Ho by leading counsel.

99.  While the petition records that the gravamen of the petitioner’s complaint was that he had lost complete trust and confidence in David Ho because of a number of events, no findings were made to that effect.  The allegations were, solely for the purpose of the application, assumed to be true, but were not examined at all by the judge.  The decision is, consequently, nothing more than a circumstance of a case in which David Ho was personally involved, in which legal argument, properly mounted on his behalf by leading counsel, did not find favour with the judge.

100.  David Ho’s involvement in this case does not advance the developer’s case against him as to his credit in any way at all.

101.  On the whole of the circumstances the attack on the credibility of David Ho, based upon his involvement in litigation, failed.

David Ho as a businessman

102.  It is plain that in the course of his legal practice David Ho came to the view that it would be more profitable to be personally engaged in China transactions than it would be to act as a Hong Kong solicitor in relation to the aspects of China transactions that were undertaken pursuant to Hong Kong law.  Consequently, David Ho became personally involved in a number of PRC transactions.  One of these, the Greater Beijing Expressway situation, was to lead to litigation against David Ho.  Others led to judgments against David Ho.

103.  It is not uncommon for a solicitor, particularly a commercial solicitor, to become involved in business, whether it be through a desire to earn more money, simply to engage in business, or at the invitation of the client.  The submission made was that David Ho was not satisfied to practice law and that his ambition was to be a business person.  I am quite unable to see how that goes against his creditworthiness.

104.  It was said that as David Ho engaged in his client’s business and there was a possible conflict of interest.  It must always be the case that when a solicitor involves himself in his client’s business there is the risk of a conflict of interest.  But there are various ways of dealing with such a conflict of interest, the most obvious of which is agreement by the client to the involvement of the solicitor in the transaction.  Consequently, it does not follow from that that the solicitor becomes a person unworthy of belief.  In this case no particular conflict of interest was identified, nor was it suggested that David Ho had engaged in a particular situation creating a conflict of interest of such a nature that would render his conduct or credit questionable.

David Ho’s departure from Baker & McKenzie

105.  It was submitted that David Ho’s conduct in leaving Baker & McKenzie with almost the entire China practice team, and taking away clients from Baker & McKenzie, was a matter that was adverse to David Ho’s credit.

106.  It is difficult to see what was the adverse aspect of these events.  It is plain from the evidence that at the bottom of the departure was a disagreement between David Ho and Baker & McKenzie over billing, and in particular, whether or not fee-offset arrangements should be used. 

107.  It was not suggested by anyone from Baker & McKenzie that there was any aspect of dishonesty in relation to David Ho as a partner at Baker & McKenzie.  That firm itself engaged in fee arrangements which permitted developers access to legal work in relation to development, the cost of which was met by conveyancing fees arising from the sale of units in the development, arguably a fee-sharing arrangement.  The evidence was that Baker & McKenzie had taken advice on fee offsetting arrangements, and that that firm took the view that such arrangements were not contrary to the Solicitors Practice Rules.

108.  The primary difference in relation to such fee arrangements between Baker & McKenzie and David Ho, which led to David Ho’s departure, appears to be the refinement proposed by David Ho to the fee offsetting arrangements.  This refinement involved the accumulation of a tranche of conveyancing fees to be applied not only to the developer’s legal work on the development, but also any other legal work that developer might have.

109.  It is not at all unusual for a solicitor to leave a large partnership, taking with him his team, in order to set up practice on his own account.  In the absence of specific matters, the fact that a solicitor might leave a large practice, taking with him both staff solicitors and clients, does not render the solicitor un-creditworthy.

The propriety of fee offsetting arrangements

110.  Although the matter was not subject to detailed argument I have given consideration to the propriety of the fee offsetting arrangement sought by David Ho, when considering his creditworthiness.  The issue as to whether or not such arrangements, in whatever form, met the Solicitors’ Practice Rules, or were illegal, does not appear to have arisen in Ng Chun Kong.

111.  There is no suggestion in the evidence that the system of fee arrangements between solicitors and property developers in general use in Hong Kong at that time, was ever tested by the Law Society. 

112.  Certainly, on its face, such a system raises a question as to whether or not the solicitor is sharing the profits he makes from conveyancing with another person.  An arrangement which involves the sharing with another person other than a solicitor, of profits made from conveyancing was then, and now still is, contrary to s 4 Solicitors’ Practice Rules, Cap 159, Sub Leg H, (SPR).  The sharing of profits by a solicitor is also contrary to Chapter 4.15 of the Hong Kong Solicitors’ Guide to Professional Conduct which provides:

“4.15 Subject to the exceptions set out in rule 4 of the Solicitors’ Practice Rules, a solicitor shall not share or agree to share his profit costs with any person other than a practising solicitor.”

There is no relevant exception which covers the type of fee arrangement with which this case deals.

113.  The evidence before me was that solicitors took the view, apparently upon the basis of advice, that because no money changed hands between the solicitor and the developer, and no bill was ever sent to the developer, there was no breach of R 4 SPR or Chapter 4.15 of the Guide.

114.  It seems to me that that is dissembling to an extreme extent.  Quite plainly, however the fee arrangement was formally structured, the reality of the situation was that the solicitor was content to accept the conveyancing scale fee that he received for acting for the developer on the sale of the individual units.  He would do so and not render any bill to the developer for other work done, because the total amount of money that he received through that source was expected to be at least sufficient to meet the total cost that he had incurred in respect of all work undertaken for the developer.  That work included pre-conveyancing work directed to the development, and the conveyancing work undertaken, on a time basis. 

115.  In simple terms, first, on a time basis, a portion of the scale fee was applied by the solicitor, on a notional hourly basis, to the work undertaken for which the scale fee was received.  Then, second, the “lucrative super profits”, or the portion of the scale fee in excess of the time cost of the work undertaken, was applied, again on a notional hourly basis, to the time spent on other work in the development, for the developer, for which no account would be sent to the developer.

116.  There seems to me to be a strong argument that, in those circumstances, the solicitor has shared the profit he has earned on the scale fee, with the developer, to meet the developers’ costs.  The solicitor has shared the profit he has earned on the scale fee because he was not only entitled to the scale fee, but required by the scale to charge that fee as the profit costs on the conveyancing transactions.   It is nothing to the point that the developer was told he would not be charged.  The only reason he was not charged was that his costs were met by the lucrative super profits.

117.  At the end of the day nothing turns on this point as far as the claim itself is concerned.  Counsel for the developers acknowledged that a breach of the Solicitors’ Practice Rules would not render any arrangement so made illegal, and consequently, except in relation to credibility, that there might have been a breach of the Solicitors’ Practice Rules, was largely irrelevant in these proceedings.

118.  Although I am of the view that the practice of Hong Kong solicitors in the fee arrangements that were made prior to the abandonment of the Scale were arguably in breach of the Solicitors’ Practice Rules, I have concluded that this is not a matter that I should hold against David Ho when considering his credit. 

119.  It is plain that the practice was relatively widespread, and it seems that it was engaged in, on the basis of advice.  There is no reason to doubt that the Law Society Council, comprising as it does solicitors from large as well as small firms, would have been well aware that such arrangements were being made.  Apparently no steps were taken to resist the practice. 

120.  In those circumstances the fact that I am of the view that the fact that David Ho promoted an arguably unlawful charging basis in seeking to deal with NWD on the basis of fee offsetting, is not a fact that affects David Ho’s creditworthiness.

The 23 October 2001 meeting

121.  Just as Mr Szeto turned the submission made by counsel for the developers as to litigation involving David Ho, against Peter Cheng and NWD, (see paragraphs 96 & 97 above), so he did in relation to a submission made as to the reason the meeting was called in Lan Kwai Fong on 23 October 2001, at which Peter Cheng terminated the retainers.

122.  The respective cases advanced for the reason for that meeting are set out in paragraphs 33-34 above.  I accept the submission of Mr Szeto that the evidence of David Ho in this respect is to be preferred. 

123.  Peter Cheng asserted in his witness statement that the retainer was terminated in October 2001, because the units in the two projects had almost all been sold, and consequently there was no need for any further work to be done.  He was obliged to accept in cross-examination that that evidence was directly contradicted by the terms of the Initial Public Offering (IPO) documentation of NWCL, a publicly listed company in which the New World Group maintained a substantial, if not the majority, interest, and which included within its assets both the Dongguan project and the Beijing project.

124.  The IPO documentation made it clear that both projects were far from finished, and there were many thousands of square metres of residential and office space yet to be developed and sold in both projects.  In those circumstances Peter Cheng’s assertion for the reason for the meeting was not believable.

125.  Further, it is plain that there was no basis at all upon which David Ho might assert in that meeting that there were no outstanding financial matters in relation to the two projects.  The Firm was holding a very substantial amount of money, in excess of $8 million, on behalf of the developers in respect of the two developments.  Both knew that regular reports had been made to the developers informing them of that position, and regular audit responses had set the matter out.

126.  In those circumstances it is unbelievable that David Ho would say there were no financial matters outstanding.

127.  For the reasons set out in paragraphs 78-128, on the issue of credibility, I preferred the evidence of David Ho.

The assessment of the evidence

128.  It is trite to say that the first requirement for the formation of a contract is that the parties should have reached agreement: see Chitty on Contracts, 30^th Edn., Vol 1 para 21-001.  Usually that agreement is demonstrated by appropriate documentation.  Modern principles of contractual construction require the court to have regard to the commercial background, the context of the contract and the circumstances of the parties when interpreting the words of a contract: see ICS v West Bromwich Building Society Ltd [1998] 1 WLR 896 at 912-913, per Lord Hoffmann.

129.  A similar principle may be applied in determining whether or not an agreement exists.  The only document that could be pointed to by either party that might establish the basis for an agreement was the Baker & McKenzie letter of 4 October 1991.  But there was no written reply to that letter.  The position of David Ho and the Firm was that that letter set out the terms of the agreement.  The position of the developers was that that offer had never been accepted.

130.  In the absence of direct or specific documentary evidence to support either David Ho or Peter Cheng and the developers in their respective views of the terms of the arrangement I have had regard to the commercial background, and the contemporaneous events and documents.  I have examined whether or not those events and documents are consistent with the evidence given by either of the main protagonists.  If that background, those events or any documents are consistent with a particular assertion, then in the ordinary course of events it is more likely than not that the facts contained in that assertion will have occurred.

The response to the bills

131.  The most telling evidence against Peter Cheng’s assertion that first, Baker & McKenzie, and secondly David Ho and the Firm, were to act free of charge for the developers, receiving only such fees as might be paid by purchasers, lies in Peter Cheng’s response to the two bills sent in November 2001.

132.  When he received the bills, although he did not study them carefully, (an extraordinary position for the director of a public company to have taken), he was aware that they amounted to, in total, some $19 million, and had been subjected to a set-off of some $8.6 million, leaving a balance due of approximately $10.4 million.  His response was detailed in his witness statement in the following terms:

“I passed the two bills to Miss Lynda Ngan.  I told her that we should not pay the 2 bills and asked her to follow up the matter.”

Lynda Ngan was the NWD Group Financial Controller.  Peter Cheng made no suggestion in his witness statement that he gave Lynda  Ngan any reason why the bills should not be paid.

133.  In cross-examination, Peter Cheng sought to assert that the decision not to pay the bills was not an instruction given by him to Lynda Ngan, but as a result of a discussion with her in relation to the bills.  His evidence was:

“Q Am I correct that, you have no interest at all to pay the two bills.

A   The fact is I should not pay the two bills.

Q You have decided not to pay those two bills immediately upon seeing that.  Am I correct?

A   Upon seeing the two bills, in fact I did not go into the details of the contents.  I just glanced through the bills and saw some amounts mentioned there involving something like a few million dollars.  And after that I discussed with Miss Ngan.  And after the discussion we decided that we should not pay the two bills.

Q  But that is not what you say under paragraph 26.  In paragraph 26 you said you told Miss Ngan that you’re not going to pay.  You did not discuss with her, and thereupon decided not to pay.  You simply told her you won’t pay”

A   Because she was the Financial Controller, normally when I receive a bill which I found to be problematic, I would take the bill to her and discuss it with her.  And in this case the fact is after discussion with her I told her that we should not pay.

Q  So the decision not paying those the two bills was made there and then?

A   Yes

Q  That was all upon your first reading of the two bills?

A   No, it was when I saw Miss Ngan that we arrived at such a conclusion.”

And later:

“Q So after discussing with Miss Ngan, you decided not to pay without actually reading carefully the contents of the two bills.

A   I did not carefully study the bills.  But Miss Ngan had explained the contents of the bills.  She was the accounting personnel and she knew about that better than me.”

134.  Lynda Ngan may have been the Financial Controller of the New World Group, but it is difficult to see how that position alone would enable her to give any input as to whether or not the bills should be paid.  There was no suggestion at all that she had been involved in the negotiation of the retainers, nor any suggestion at all that she had any familiarity with any arrangements which might have been made for the supply of free legal services, or for some form of fee offsetting system.  There was no evidence whatsoever that Linda Ngan had been involved in the discussions in respect of the manner in which the Firm was to be paid, or that she had been given any information by Peter Cheng prior to the receipt of the bills in that respect.  Quite how any “discussion” of the subject with her could enable Peter Cheng to make a decision as to payment of the bills was never made clear.

135.  Peter Cheng’s evidence as to the steps he took upon receipt of the bills stood in stark distinction to his assertion that there had been an agreement that the Firm would work for free. 

136.  If there had been such an agreement there would have been no need for any discussion with Lynda Ngan over the bills.  If there had been such an agreement the response of Peter Cheng to the receipt of the bills would have been obvious.  He would have immediately, either himself, or have instructed someone, to telephone or write to the Firm reminding them of the agreement and asserting that in those circumstances the bills had been wrongly sent.

137.  But that was not done.  Instead, on 24 January 2002, nearly two months after the bills were received, the letter set out at paragraph 42 above was sent, in Chinese, by one of the joint-venture partners.  No assertion was made in that letter that there had been any agreement that the Firm would work for free.  Promptly after receipt of that letter the Firm replied, demanding payment.  Still, there was no suggestion by Peter Cheng, any of the joint-venture partners, or anyone at the New World Group that the Firm had agreed to work for free, or even on a basis that would result in the developers not being liable at all for legal work.

138.  The letters before action, sent on 26 to March 2002, a further two months later, were not produced in evidence, but there is no suggestion at all that in those letters the point was made that the Firm had agreed to work for free, or even on a basis that would result in the developers not being liable at all for legal work.

139.  In simple terms, the response of Peter Cheng, NWD, and the joint-venture partners upon receipt of the bills was entirely inconsistent with their assertion that the Firm had agreed to work for free.

The proceedings that were issued

140.  When the statement of claim was filed in the Dongguan action on 30 April 2002, although the retainer was pleaded, there was no suggestion that it was a term of the retainer that the Firm had agreed to work for free.

141.  On 11 June 2002, the defence to the Dongguan action was filed, and the defence and counterclaim to the Beijing action was filed.  From both documents it was abundantly clear that the Firm was asserting a fee offsetting arrangement.

142.  On 3 September 2002 a reply was filed in the Dongguan action.  That reply did not assert the position adopted by Peter Cheng at trial, namely that both Baker & McKenzie and the Firm would work for free.  Instead, it pleaded that:

“(c)    it was agreed between (David Ho) and Peter Cheng that (Baker & McKenzie) would only charge the purchasers of the land development projects for all (Baker & McKenzie’s) charges and disbursements unless otherwise agreed or notified by (Baker & McKenzie).”

The reply filed on the same date in the Beijing action was in identical terms.

143.  It was not until an amended statement of claim was filed in the both actions, following an order granting leave to amend made by the Master on 28 July 2004, two years and four months after the first bills were sent on 29 November 2001, that an assertion was first made that the plaintiffs would not be charged or liable for legal fees.  Now, in respect of the Dongguan action the assertion was not that it was Peter Cheng that had reached agreement with David Ho, but that the agreement had been made with one of the three joint-venture parties.  In the Beijing action it was pleaded that Peter Cheng had made the agreement, “acting on behalf” of the joint-venture parties. 

144.  The amended pleading in the Dongguan action is in the following terms:

“4A(3)  Under the retainer given by (Dongguan New World Garden Trade Construction Co Ltd) to (Baker & McKenzie) it was agreed that:

(a)   none of the (joint-venture parties) would be charged or liable for any legal fees and disbursement in connection with the sale of units in the Project:

(b)   instead, the legal fees and disbursements arising the sale and purchase of units in the Project would be paid by the Purchasers.”

With appropriate adjustments for the circumstances, the pleading in the Beijing action was the same.

145.  It is appropriate to note that this pleading does not address the key issue, namely the contention by the developers that the proceeds of conveyancing fees would meet the cost of the pre-conveyancing work.  The Firm does not dispute that the joint-venture partners would not be liable to legal fees in relation to the sale of units in the Project.  The contention of the Firm is that they are entitled to be paid for their work in respect of the pre-conveyancing matters, if the conveyancing fees are insufficient to cover that cost.

Discussion

146.  If, as Peter Cheng asserted, it had been agreed at the outset that Baker & McKenzie would work for free, recovering only such fees and disbursements as might be paid by purchasers of property in the two projects, it is extraordinary that he did not say so immediately upon receipt of the bills. 

147.  It is even more extraordinary that he apparently did not instruct either the joint-venture partner who sent the letter on 22 January 2002, or his solicitors when taking steps to instigate action to recover the sums that had been deducted, that there was a term of the retainer by which it was agreed that no fees would be charged.  Such a term was a complete answer to the deductions that had been made.  It was a complete answer to the bills that had been rendered. 

148.  Yet nothing was said that there might be such a term until the pleading in September 2002, 10 months after the bills were sent, and three months after the specific pleading had been made in the District Court action by the Firm of the terms of the retainer and the set-off arrangement.

149.  Further, this first assertion, made in the Reply, 10 months after the bills were sent, was an assertion which acknowledged that it was open to Baker & McKenzie simply to notify Peter Cheng if charges were to be made.  Consequently, on the basis of that pleading by the developers, it would have been open to Baker & McKenzie, and the Firm, if the conveyancing fees were insufficient to cover the pre-conveyancing work, simply to notify the developers of that fact, and send the bill.  The pleading in the Reply is quite inconsistent with an assertion that an agreement was reached that all work would be done for free.

150.  The next assertion by the developers as to the terms of the retainer, not made until July 2004, two years and four months after the bills were originally sent, and two years after the original defence was filed, for the first time, constituted a clear assertion that there would be no fees charged to the developers.

151.  Had there been an agreement between David Ho and Peter Cheng that no fees would be charged to the developers it is extraordinary that he had not told the New World Group Financial Controller, Lynda Ngan of such an arrangement.  Although he asserted in cross-examination that he told her of that arrangement in a discussion with her after the bills were received, he said nothing of such an arrangement when dealing with the reason for refusing to pay the bill, when making his witness statement.

152.  In his evidence from the witness box Peter Cheng said that in his discussion with Lynda Ngan, he asked her to explain to him how the bills received from the Firm were calculated.  It is quite extraordinary that he should need to ask that question.  If, as he asserted, an agreement had been reached with David Ho that no fees would be charged, then he had no need to ask for that explanation.  In any event it is difficult to see how Lynda Ngan might be able to explain how the Firm had calculated its fees.  She was not involved in the calculation.  That was a matter to be explained by the Firm.  Peter Cheng must have known that it would have been based upon time costing records, to which he could make a challenge.

153.  Although Lynda Ngan had made a witness statement and had provided answers to interrogatories for the plaintiffs she was not called to give evidence.  I accept Mr Szeto’s submission that I may draw an adverse inference against a party who fails to call a witness to deal with certain evidence: see Phipson on Evidence, 16th Edn para 11-15.

154.  The failure to call Lynda Ngan to support the assertions made in the witness box by Peter Cheng, assertions which were not contained in his witness statement, entitles me to reject, in that respect, the evidence of Peter Cheng.

155.  Had there been an agreement that no fees at all were to be charged by the Firm to NWD, I have no doubt at all that the agreement would have been immediately asserted by Peter Cheng.  The consistent failure of NWD or Peter Cheng to make such an assertion over such a long period of time, supports the position of David Ho that there was no such agreement.

Other examples of the fee off-set arrangement

156.  In 1994, the Firm was instructed by a joint-venture between Shun Tak Holdings Ltd, and the New World Group, who had formed a company called Shun Tak Centre Ltd to redevelop the Victoria Hotel at the Macau Ferry Terminal.  In January 1996, David Ho sent an account for legal fees on the Firm’s letterhead, to Miss Daisy Ho of Shun Tak Holdings Ltd.  The letter contained the following statement:

“I am enclosing our interim bill for the amount of HK$2,000,000 with breakdown for our services rendered in connection with the captioned matter for the period from 9 December, 1994 to 15 June, 1995.  As agreed, if our legal costs for future conveyancing work on this project can cover our time cost, we will repay this amount to you.” (sic)

157.  That statement reflects a form of the fee offsetting arrangement pleaded by the Firm.  The account was paid on 17 January 1996, by a cheque signed by Miss Daisy Ho and Peter Cheng.  It was not suggested by Peter Cheng that he was not aware of the terms of the letter or the arrangement set out in it or that he did not agree to it.

158.  On 23 May 1996, a similar letter was sent, again in relation to the Hotel Victoria joint-venture project, this time for $2,508,680, again with a breakdown for the services rendered.  The letter contained the following sentence:

“As agreed, if our legal costs for future conveyancing work on this project can cover our time cost, we will repay this amount to you.”

159.  Again, the account was paid without question.  A third letter, sent on 12 September 1996, this time for the sum of $2,003,000, containing the same statement, was paid without question.  It was not suggested by Peter Cheng that he was not aware of these arrangements, or that he did not agree to them.

160.  The existence of these letters and Peter Cheng and NWD’s plain agreement with the arrangements, tends to support the evidence of David Ho.  It is right that these relate to transactions within Hong Kong rather than the mainland, but they demonstrate plainly the willingness of NWD to engage in fee offsetting arrangements.

161.  On 15 January 1996, David Ho, on the Firm’s letterhead, wrote a letter addressed to Peter Cheng and his brother Stewart Cheng, captioned: “Dalian Bond Tak”.  The letter contained the following sentence:

“As mentioned in our fax, if our legal cost for future conveyancing work on this project can cover our time cost on this matter, we will repay any such covered time cost that you may have paid.”

There is no suggestion by Peter Cheng that he was not aware of, nor that he did not agree to, this arrangement.

162.  On 19 January 1996, David Ho, on the Firm’s letterhead wrote a letter addressed to Peter Cheng and his brother Stewart Chen, captioned: “Dalian New World Centre Dispute”.  The letter contained the following sentence:

“As agreed, if our legal costs for future conveyancing works on this project can cover our time costs, we will repay this amount to you.”

yet again, there is no suggestion by Peter Cheng that he was not aware nor that he did not agree to, of this arrangement.

163.  The circumstances outlined in the preceding paragraphs demonstrate plainly that both Peter Cheng and NWD were well familiar with, and perfectly content to agree to fee-sharing arrangements.  Those circumstances demonstrate also that there was a clear pattern of fee sharing arrangements made between Peter Cheng, on behalf of various entities in the New World Group, and David Ho.  That they were prepared to enter into such fee sharing arrangements is entirely consistent with David Ho’s assertion that Peter Cheng agreed to the fee offsetting arrangement set out in his letter of 4 October 1991.

Bills issued on a “time spent” basis

164.  If, as Peter Cheng asserted, the arrangement made was that no fees would be charged by the Firm, then one would have expected that any bill received by Peter Cheng or NWD, from the Firm, for the work relating to either of the two projects, based on a time basis, would have been rejected.  But that was simply not the case.

165.  First, the three sets of circumstances set out in paragraphs 156-162 above all demonstrate that time costing was undertaken in respect of work undertaken by the Firm for projects in which NWD and Peter Cheng were involved.

166.  In respect of the Dongguan project, vendor mortgages were advanced to purchasers, the mortgage being held by Chow Tai Fook.  A number of these mortgages fell into arrears and arrangements were made for demands to be made of the borrowers, by the Firm on behalf of Chow Tai Fook.  In July 1997, the Firm wrote to Chow Tai Fook, confirming that an arrangement had been made in respect of charges to be incurred and paid in relation to these demands.

167.  In due course, bills were rendered in respect of these demands and were paid.  It is right that the mortgages were held by Chow Tai Fook, and not NWD, but it needs to be remembered that Chow Tai Fook is the Cheng family private company which is a substantial shareholder in NWD.  That Chow Tai Fook held the mortgages was nothing more than a matter of administrative convenience, and undoubtedly had other financial advantages to both NWD and Chow Tai Fook.  Plainly in the whole of the circumstances of the way in which NWD operated, if the arrangement was as Peter Cheng asserted, he would have been entitled to say that no fees should be charged to Chow Tai Fook, as the Firm had been paid by receipt of the conveyancing fees.

168.  The circumstance demonstrates two factors, first that Peter Cheng was well aware that time or individual costing was undertaken by the Firm, and second, that when the arrangement for those charges was proposed, no exception was taken to it. 

169.  That a special arrangement was made in respect of the Firm’s fees in that respect, is consistent with David Ho’s assertion as to the fee offsetting arrangement.

170.  The evidence before me contained numerous other examples of bills issued on a time spent basis where the developer made payment of the accounts.  These were all circumstances where, if Peter Cheng’s assertion were correct, the developer would have been entitled to say that no fee should be charged.  These included bills sent in respect of the Dongguan Project, the Beijing Project, Palm Island Resort, and payments made as a result of the proceedings issued and referred to in paragraphs 96-97 above.

Inherent improbability

171.  A central theme of the argument mounted by counsel for the developers was that it was inherently improbable that the arrangement advanced by David Ho would be accepted by any developer.  In his evidence Peter Cheng was at pains to emphasise that other solicitors, he used particularly the example of firm of Messrs Yung, Yu & Yuen, (YYY), would not make any charge to the developer.

172.  The submission was made that when an arrangement like that could be made there would be no benefit at all for the developer to enter into an arrangement such as that advanced by David Ho, and that consequently it was inherently improbable that such an arrangement would be made.

173.  In fact the reality is to the contrary.  There is a clear advantage to the developer in the arrangement that had been made in Hong Kong conveyancing matters whereby the practice had developed where solicitors charged only conveyancing fees to the purchasers, whether acting for the purchaser or the vendor developer, and no charges to the developer.  The developer faced no legal fees in respect of that particular development.

174.  But as Peter Cheng was obliged to accept in cross-examination, albeit exceedingly reluctantly, in such a circumstance the solicitors would retain the whole of the so-called surplus conveyancing fees.  Under the fee offsetting arrangement proposed by David Ho there was a good likelihood that not only would the developer not have to pay any legal fees in respect of the development, but also that a fund would be established upon which the developer could draw in respect of other legal matters.  That is an additional and exceptional benefit to the developer.

175.  In those circumstances it cannot be said that it is inherently improbable that the developer would agree to such an arrangement.  It is plainly greatly to his advantage.

176.  It was further submitted that it was inherently improbable that a developer would agree to such an arrangement in circumstances where he was in joint-venture with some other company.  It was said that it would be impossible from an accounting point of view to make any adjustment between the various joint-venture partners.

177.  First, the fact that there was a joint-venture in the Hotel Victoria project did not in any way deter Peter Cheng from entering into a conveyancing fee offsetting arrangement on that development.  It is right to acknowledge however that that particular arrangement did not involve the establishment of a surplus fund upon which the joint-venture partners could draw for other legal services.

178.  Second, how the joint-venture partners dealt with the matter of surplus funds was not an issue for the Firm or David Ho.  It was an issue for the joint-venture partners.  However, that was only a matter of accounting between them, and was not a matter which would detract from the attractiveness of the arrangement, or render it inherently improbable.  It would only be a matter of internal accounting, similar to circumstances where, as is often the case in Hong Kong, large corporate entities use a treasury company through which all payments are made, which are then subsequently allocated to the appropriate subsidiaries.

179.  I reject the proposition that the fee offsetting arrangement propounded by David Ho is inherently improbable.

180.  It is right, as David Ho acknowledged, that in respect of PRC conveyancing the so-called surplus expected to be derived might be less, and there may even be a shortfall in which event time costs would need to be settled.  But that is merely a contingency and does not make the arrangement inherently improbable.

181.  It is right too, is that the arrangement proposed by David Ho in 1991, was not that which was in regular use in Hong Kong at the time.  The arrangement apparently in regular use, as evidenced by Peter Cheng’s evidence as to the procedure adopted by YYY, and the decision in Ng Chun Kong, was simply that the vendor conveyancing fees would be sufficient to cover all legal costs in respect of the development.  That David Ho might have developed a refinement of that scheme, containing a distinct advantage to the developer, does not render the proposal inherently improbable.

182.  It was submitted that the fact that there was no written record of the retainer rendered David Ho’s position in relation to the retainer inherently improbable.

183.  First, David Ho would always know that he could rely on the letter of 4 October 1991.  Second, there was no evidence at all to suggest that while the practice of adopting a formal written retainer was undoubtedly an ideal practice for the solicitors to follow, it was a practice followed either, invariably by the profession in Hong Kong, or even invariably at Baker & McKenzie.

184.  Peter Cheng did not suggest that NWD or the joint-venture partners were in the regular habit of formally confirming initial retainer instructions in writing to their solicitors.  No written record of acceptance of the fee sharing arrangement in respect of the Shun Tak development was produced by Peter Cheng, but he did not deny the existence of the fee sharing arrangement.

185.  The absence of a written record of a retainer specific to either project does not render the contention inherently improbable.

186.  It is right that neither Baker & McKenzie, or the Firm rendered bills to the developers to record the time charge basis.  They should have done so, both as a matter of proper practice, and to meet the promise made in paragraph 3(c) of the letter of 4 October 1991.  But again, the failure to render such charges does not render the arrangement inherently improbable.  It is plain from the time recording by Baker & McKenzie, and the “parking” of that time, (discussed at paragraph 198-203 below), that the time was recorded.  That is consistent with a position that if the surplus fees were not enough to meet the time costs incurred, a time recorded charge would be made.

187.  David Ho said that Peter Cheng wanted legal fees deferred in order to improve cash flow.  The submission was made that in respect of such massive development projects the value of legal fees would simply not matter.  The submission is a valid one, but needs to be viewed in the light of the approach of Peter Cheng and NWD to the payment of accounts.  Peter Cheng did not challenge David Ho’s evidence that NWD and its subsidiaries were slow payers.  Indeed in one case, with a BVI subsidiary against which enforcement action is impractical, payment is still outstanding although judgement has been entered.

188.  I do not find it inherently improbable that Peter Cheng would look to take all appropriate steps to improve the cash flow position on a development.

189.  A great emphasis was placed throughout the submissions that it was inherently improbable that a fee offsetting arrangement would be made in respect of the whole of the NWD group.  In this respect the remarks made in paragraph 176-178 above answer the contention.

The Baker & McKenzie position

190.  Much was made by counsel for the developers of a statement contained in an internal Baker & McKenzie document entitled “Dongguan New World Garden File Transfer Action List”, prepared to facilitate the transfer of the legal business from Baker & McKenzie to the Firm.  Under item 8 the following sentence appears:

“B&M agrees to waive the outstanding legal fees owed by NWSC.”

The submission was made that the statement demonstrated that Baker & McKenzie had agreed to charge no fees.

191.  I accept Mr Szeto’s submission that the contrary is in fact the case.  The clear implication from the fact of waiver is that there were outstanding legal fees.  If, as Peter Cheng asserted, the original arrangement made with David Ho, for Baker & McKenzie, was that there was a simple arrangement that no fees were to be charged, there would be no need for Baker & McKenzie to be in a situation where there were outstanding fees which might be waived.

192.  And that there might be outstanding fees was plainly the position taken by David Ho, when he wrote to Baker & McKenzie on 20 January 1995, saying:

“In item 8 of the action List attached to your letter, you agreed to waive the outstanding fees owned by our client.  Please advice any outstanding third party costs reasonably owed by client.” (sic)

Winston Zee of Baker & McKenzie responded on 23 January 1995 in the following terms:

“With respect to item 8 of the Action List, we have checked our record and there is no outstanding third-party cost recorded at the present time.”

193.  In his first witness statement, Winston Zee described the fee arrangement in the following terms:

“I had understood that the fee arrangements between Baker & McKenzie and New World in respect of the Project to be in accordance with then-prevailing conveyancing practice in Hong Kong, namely, that Baker & McKenzie would not look to New World for settlement of its fees, but would recover its fees from the scale fees paid by purchasers of the Project.”

He went on to say:

“6. I derived my understanding from conveyancing practice in Hong Kong at that time, and my understanding of the correspondence with New World at the commencement of this project, as reflected in the letters “A” and “B” hereto, namely the letters of September 27 and October 4, 1991.  According to those letters of September 27, 1991 and October 4, 1991, we would perform the full range of conveyancing work normally included in the scale fee, within our portion of the agreed percentage split of the scale fee payable in respect of the Project.  The understanding was that we would not look to the developer client to pay for any of our conveyancing work.  (The emphasis is mine)

7.  The fee arrangement in 6 above assumed that Baker & McKenzie handled the entire Project from beginning to end.”

194.  In a subsequent witness statement on Winston Zee had this to say:

“I understood that our firm would be remunerated for the legal work performed on the Project from scale fees collected from the purchasers, without any undertaking received from the developer client has to the number of sales and purchases that would be handled by our firm, nor the amount of scale fees collected therefrom.  It was a business risk accepted by our firm, based on the assumption that Baker & McKenzie would handle the entire Project from beginning to end.”

195.  In that witness statement he acknowledged that he had had no prior involvement in the Project and that he had to review the letters contained in the files to ascertain the arrangement between the firm and the client.  In evidence he sought to assert that the “business risk” involved the risk that Baker and McKenzie might go unrewarded for the pre-conveyancing work if there were insufficient conveyancing fees to cover the whole of the costs on an hourly basis.  I do not accept that evidence.  Plainly the correct position is as he set out in his witness statement.  It is right that there was a business risk, but it was on the assumption that Baker & McKenzie would handle the entire project, as he put it: “from beginning to end.”  Having regard to the very substantial scope of the project, a matter relied upon by the developers, the business risk would have been perceived, in 1991, to be minimal.

196.  What is most important however, is that in neither his subsequent witness statement, nor in evidence, did Winston Zee resile from the position he took in both witness statements, namely that the letter of 4 October 1991, provided the basis upon which Baker & McKenzie would charge the developers.

197.  That it was his understanding that there was to be an agreed percentage split of the scale fee, that is a fee offsetting arrangement, is entirely consistent with David Ho’s position in evidence.

198.  Documentation from Baker & McKenzie demonstrated that time records were kept of the work undertaken in respect of the Projects, and other work generally.  These are contained in a document described as a “Client Status Report”, prepared by the Baker & McKenzie accounts/administration department.  The Client Status Report was undoubtedly prepared from time records kept by the solicitors involved in the various transactions.  In those documents a proportion of the fees are recorded as having been set aside under “parked time”.

199.  Winston Zee said that this was an internal accounting document used by Baker & McKenzie to track the amount of work performed by lawyers and paralegals, by multiplying the time recorded with the applicable billing rates.  He said that the schedule did not indicate that the developer client had agreed to pay any fees, nor that any of the “fees collected” were received from the developer client. 

200.  If that is the case, then the schedule arguably demonstrates the fee offsetting arrangement, whereby fees collected from conveyancing were being applied to other work undertaken on behalf of various entities in the New World Group.  A simple reading of the schedule shows that a great deal of the work done is quite unrelated to the Dongguan or Beijing projects.  If, as Winston Zee said, the schedule did not indicate that “fees collected” had been received from the developer client, then they must have been recovered from accumulated conveyancing fees.  That is entirely consistent with David Ho’s position.

201.  Winston Zee had a great deal of difficulty in explaining the use of the expression “parked time”.  First, he said that it was an internal accounting matter which enabled:

 “….lawyers who are not working on conveyancing to get essentially credit for that so that each lawyer, at the end of the year, will show a profit or loss”. 

I am quite unable to understand the relationship of the expression “parked time” with that answer.  He went on to try and explain the answer by saying that it was an aid to determining the year-end bonus so that those who were allocated less profitable work would be entitled to share in the more profitable work, when bonuses were determined.

202.  It is surprising that the matter of “parked time”, was not addressed in Winston Zee’s two witness statements.  It was plain from Winston Zee’s answers that he was anxious not to answer in a way which might favour David Ho.  In those circumstances Mr Szeto was entitled to submit that Winston Zee had had a change of heart and was feeling uneasy, effectively having to admit the involvement of Baker & McKenzie in fee offsetting arrangements in open court.

203.  I accept Mr Szeto’s submission that the objective meaning of the expression “parked time” is entirely consistent with the fee offsetting arrangement as propounded by David Ho.  Quite simply, the expression “parked time” refers to time costing accumulated, but not yet paid for by Baker & McKenzie’s share of the conveyancing fees split, recognised by Winston Zee, (see para 6 from his witness statement, cited at paragraph 193 above).  The internal Baker & McKenzie documentation is consistent with the fee offsetting arrangement as propounded by David Ho.

204.  There was no dispute that at the time the instructions for the Dongguan Project were given, brochures prepared by Baker & McKenzie were sent to New World and Peter Cheng.  These set out the basis upon which Baker & McKenzie would charge on a time basis.  These were produced in evidence and were not challenged.  If, as Peter Cheng asserts, there was an arrangement whereby work undertaken on the projects was to be undertaken for free, irrespective of the amount of conveyancing work, then there would have been no need to supply those brochures with their references to time costing.

The audit confirmations

205.  At regular intervals over a number of years, in accordance with proper audit practice, the Firm, at the request of its auditors, submitted documentation to the joint-venture partners setting out the credit balances held by the Firm in respect of the various projects.  Each of these audit confirmation requests, setting out a credit balance held by the Firm stated also that the balance held was the statement:

“Subject to bill to be rendered”.

206.  These requests were regularly signed and returned by the joint-venture partners without question, on one occasion having been signed and returned with an amended balance.  That an amended balance was returned demonstrates that these documents were carefully considered.  At no stage was there any suggestion that the Firm had no right to render a bill which might in any way affect a credit balance held in favour of the recipient of the audit confirmation.

207.  The acknowledgment of the audit confirmation documents, containing as they did an assertion that they were subject to a bill to be rendered, is consistent with the FOA propounded by David Ho.

Conclusion

208.  The contemporary documents and the actions of the various parties are consistent with a fee arrangement as propounded by David Ho. I am satisfied, on the balance of probabilities, that the retainers were on the basis of the FOA as outlined in David Ho’s letter of 4 October 1991. 

209.  The terms of that letter require agreement between the parties as to an appropriate percentage split of the conveyancing fees, so that a portion is applied on a time costing basis to work undertaken by the Firm, and a portion applied to a fund available to the developers to apply to other legal work.  As it is quite plain that the amount of the conveyancing fees received falls far short of the total time costing for the work in respect of both projects, it is irrelevant that no split was agreed.  Plainly, in those circumstances, any portion of the conveyancing fees to be allocated to the developers fund would first be applied in discharge of fees owing to the Firm arising from the project.

210.  Subject to the question of taxation therefore, I am satisfied that there should be judgment for the Firm in respect of both bills of account.  It follows that the Firm was entitled to make a deduction from the bills rendered, of funds standing to the developers’ credit.  Consequently, claims by the developers must be dismissed, and there must be judgment for the Firm and its members on the claims. 

Who is liable for the bills

211.  When the counterclaims were commenced in each action the Firm joined NWD as a defendant to the counterclaim.  The basis of the joinder was an allegation that the agreement as to fees was an agreement between the Firm and Peter Cheng on behalf of NWD.

212.  The first letter in relation to the fee proposal from Baker & McKenzie, on 27 September 1991 was addressed to Mr Michael Fong at New World Hotels International Ltd.  The second letter, on 4 October 1991, was addressed to Peter Cheng/Stewart Cheng at NWD.  Thereafter instructions were given to Baker & McKenzie to undertake the work on the Dongguan project.  No formal document has been produced in which the original instructions were given.  I draw the inference that the instructions were given orally.

213.  There is a dearth of correspondence between Baker & McKenzie and NWD or the Group or the particular developers prior to 1995, when the instructions were withdrawn from Baker & McKenzie.  Those documents that I have been able to locate in the bundle tend to be addressed to individuals rather than the companies involved and no inference can be drawn from them as to which particular entity gave the original instructions

214.  As part of the evidence a Baker & McKenzie document, entitled “Client Status Reports by Responsible Partner ”, a record of accumulated time in respect of the various clients which the partner acted, were produced.  These show that in July and December 1994, David Ho, as a partner in Baker and McKenzie had been recording times for charging purposes, under the client names of NWD, New World Hotels International Ltd, and Sun City Holdings Ltd.

215.  The equivalent document from the Firm was entitled a “Billing Memo”.  Both produced show as the client, NWDC (the Beijing Project), and Sun City Holdings Ltd, (the Dongguan Project).

216.  In early 1995, when Baker & McKenzie were instructed to cease work with a view to transferring work to the Firm.  This was apparently an oral instruction, confirmed subsequently in Winston Zee’s letter noting the instructions and advising the steps to be taken.  This letter was addressed to New World Sun City Ltd, one of the joint-venture partners in the Dongguan project.

217.  On 10 February 1995, Baker & McKenzie completed a statement of account in relation to monies held by them arising from the Dongguan Project.  That statement was addressed to New World Sun City Ltd.

218.  On 8 September 2003 a Baker and McKenzie solicitor, Mr Rico Chan, wrote to the solicitors of the firm, dealing with issues that have arisen in these proceedings.  The letter asserts:

“We confirm that we were engaged by the developer of the Project, Dongguan New World Garden Trade Construction Co Ltd in relation to the sale transactions of the project.”

I place no weight at all upon that assertion.  First it comes long after the issue as to who would be liable to the fees had arisen.  Second, it is plainly incorrect.  Not even Peter Cheng asserts that the instruction to Baker & McKenzie was limited to the sale transactions of the project.  There is no dispute that the retainer was to undertake all of the legal work in relation to the development from which instructions were to be given, (see paragraphs 64-66 above).

219.  As long ago as 18 April 1995, Brian Chan, then an assistant solicitor to the Firm, addressed a facsimile to the attention of Peter Cheng/Stewart Cheng at NWD and Miss Cynthia Cheng/Miss Maggie Pang and NWDC.  It related to the Beijing New World Centre, and concerned financing to be provided by HSBC.  Yet on 26 October 1995, another facsimile, addressed again to Peter Cheng/Stewart Cheng was sent only to NWDC.  This related to taxation issues in respect of the Beijing New World Centre.

220.  Mr Szeto argued that the consistent theme was that correspondence was invariably addressed to NWD and/or Peter Cheng.  It is right that much correspondence was addressed in this way, and that Peter Cheng accepted that he did not ask the Firm to stop sending information to him in that way.  But it is equally right that other correspondence is directed specifically to the various joint-venture partners.

221.  Both Baker & McKenzie, and David Ho and the Firm, all elected to accept the retainers in these matters on an oral basis, without specifying with particular precision who was responsible for the payment of the fees.  While it is right that the overall fee arrangement agreed upon, and contained in the letter for October 1991, was an arrangement undoubtedly made with Peter Cheng in his capacity as a director of NWD, it does not follow from that fact that the individual instructions given pursuant to that arrangement were necessarily instructions from NWD or the Group.

222.  I am not satisfied that David Ho or the Firm have established, to the required standard of proof, that the instructions in relation to both the Dongguan Project and the Beijing Project came not from the various joint-venture partners in those projects, but from NWD, thereby imposing on NWD an overall responsibility for fees.  It is right that David Ho knew that Peter Cheng was a director of NWD, but David Ho must have known, through his commercial experience, that Peter Cheng also represented many of the myriad of companies in the New World Group.  In those circumstances it was incumbent upon him to satisfy himself who would be ultimately responsible for his fees.

223.  I accordingly reject the claim by David Ho and the Firm of that NWD are obliged to meet any judgment in their favour.  NWD are entitled to judgment on the counterclaim.  The judgment on the counterclaim will be a judgment against the various joint-venture partners who were defendants on the counterclaims.

A “whole project” implied term

224.  As an alternative, should I not find that there was an agreement as to fees, Mr Szeto argued that there should be an implied term that the retainers were for the entire project, and that in terminating the retainers prior to the sale of all of the properties in the two projects, the plaintiffs were in breach of that implied term.

225.  Mr Szeto relies upon the following evidence to substantiate the contention that it was intended by both sides that the retainer was for the duration of the entire project:

(a) The retainer signed between the Beijing Project developers and the State Notary Office in Beijing, in July 1995, appointed the State Notary Office to “handle exclusively” all notary work on sales of properties “until all properties in the Beijing Project were sold”.  The written retainer further provided that the Firm should handle the conveyancing sales in Hong Kong in conjunction with the State Notary Office, and a corresponding written retainer was signed between Firm and the State Notary Office on 4 November 1995.

(b)    In his witness statement, when referring to the transfer of the legal work from Baker & McKenzie to the Firm, Peter Cheng referred to transferring “the whole Dongguan Project”.

(c) In both of his witness statements Winston Zee, after setting out the fee arrangement terms referred to in paragraph 193 above, said:

“The fee arrangement in 6 above assumed that Baker & McKenzie handled the entire Project from beginning to end.”

226.  Winston Zee also took the view that terminating Baker & McKenzie’s retainer, in the middle of the project could result in a right to claim against the client developer for legal fees.  In his first witness statement he said:

“In preparing the file transfer letter of 9 January 1995, I realized that we potentially could have a right to claim against the client developer for our legal fees, but it was our clear intention not to assert such a right against the developer client.”

In his subsequent witness statement he asserted that it was a “business risk” taken by Baker & McKenzie that there may not be enough fees to meet the whole of the cost, because there was no undertaking from the developer as to the number of sales and purchases that would be handled nor the amount of the scale fees to be collected.  But it is significant that he said that that business risk was based on the assumption that Baker & McKenzie would handle the entire project from beginning to end.

227.  There is a substantial inconsistency in Winston Zee’s position, one which he was not asked by counsel for the developers to explain, and which remained unexplained.

228.  In Ng Chun Kong Calvin, trading as Ko & Co v First Star Development Ltd, HCA 2450/2004, (unreported 19 January 2006), a developer terminated a retainer with a solicitor on terms whereby the solicitor would provide legal services to the defendant free of charge in consideration of the solicitor representing the purchases of flats at agreed costs.  There were 2,470 residential flats in the development.  The developer purported to terminate the retainer on the basis of a government change of policy, and offered to pay the solicitor’s outstanding legal costs incurred quantum meruit basis.  The solicitor rejected the offer, and sued for substantial loss of profits.  The basis of the claim was an implied term that the developer would not terminate the retainer so as to deprive the solicitor of the opportunity of earning the fees arising out of the sales. 

229.  In Order 14A proceedings Deputy Judge Mayo found that such a term could be implied in the contract by reason of business efficacy, and that the developer should be held to its bargain if the contract had not been frustrated.  The matter went to the Court of Appeal which did not interfere with that finding.  It is important to remember, however, in respect of this case that it is merely a decision that such a finding was open, as the decision in which the statement was made was a decision on an O 14A application, and there was no detailed discussion of the relevant law.

230.  Mr Szeto relies upon the following passage in Chitty on Contracts, 30th edn, para 13-012:

“Prevention of performance.  By the same token:

‘…if a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances under which alone the arrangement can become operative.’”

Numerous authorities beginning in 1864, and running right through to modern times are cited in support of the proposition.

231.  Counsel for the developers resist this argument by saying that it is absurd to suggest that there would be such a term, firstly bearing in mind that the Dongguan Project was a substantial project with many phases which would take over 10 years to complete.  Secondly it was pointed out that the Beijing Project was equally substantial being valued at RMB26 billion.  Counsel for the developers argued that it was absurd to consider that such massive legal work would be given to a one man firm.

232.  Instead it was suggested that the retainer was on an ad hoc basis, and that there was no discussion or suggestion of retaining, first Baker & McKenzie, or subsequently the Firm on an “entire project” basis.

233.  That argument is inconsistent with the evidence, and equally inconsistent with any form of fee structure, whether that propounded by Peter Cheng, or that propounded by the Firm, in which there is an element which might result in the developer not paying legal fees at all.  In such an arrangement it must be implicit that the work will continue, absent of course matters of negligence, until such time as the solicitor has received such sum in fees as would appropriately recompense for the pre-conveyancing work that has been undertaken.  I have not the slightest doubt that both parties expected that the solicitor would be properly paid for that pre-conveyancing work through the receipt of conveyancing fees.

234.  If the arrangement is of the YYY nature, the solicitor necessarily takes a risk that the value he receives in respect of the scale fee on the conveyancing will adequately recompense him, on a time basis, for the whole of the work he has done.  If the arrangement is of the nature posed by David Ho, plainly both parties anticipate that there will be sufficient conveyancing work, not only to recompense the solicitor on a time basis of the pre-conveyancing work, but also to provide a fund available to the developer for other legal work.

235.  It is right that it appears that there was a massive amount of work available to what appears to be a one-man firm.  But there was no evidence from the developers of other work instructed to other firms of solicitors.  In any event there would be no reason at all why specialist work might not be instructed to other firms, so long as the Firm received sufficient instructions to gather fees from conveyancing to cover the whole of their costs.

236.  Mr Szeto relied also on the decision in Cobbe v Yeoman’s Row Management Ltd [2008] 1 WLR 1752.  In that case a landowner misled a developer to incur substantial expenses in obtaining planning permission in the expectation that a binding contract would be entered into between the parties.  Lord Scott, with whose judgement Lord Hoffmann, Lord Browne of Eaton-Under Heywood and Lord Mance agreed, held that the developer should at least be entitled to a common-law remedy of unjust enrichment or quantum meruit payment for his services in obtaining the planning commission. 

237.  I accept Mr Szeto’s submission that that decision provides an alternate basis upon which the finding can be made in favour of the Firm, that in the absence of a fee offsetting agreement, the firm is entitled to payment for the services provided to the developers, on a quantum meruit basis.

238.  If I am wrong in my conclusion that the fee offsetting arrangement existed, then I am satisfied that the developers were in breach of an implied term not to terminate the retainers until such time as the Firm had been properly recompensed for the whole of their time.

239.  In such circumstances the appropriate order would be that the Firm is entitled to its fees on quantum meruit, and that there be an accounting pursuant to O 43.

Quantum meruit

240.  Finally, as a further alternative, Mr Szeto argued that in the event there was no agreement as to fees, and if the developers were not liable on a “whole project implied term” basis, the Firm was entitled to payment for the work done on a quantum meruit basis.

241.  I am left in no doubt at all that neither Baker & McKenzie, nor David Ho and the Firm, made an agreement with Peter Cheng of behalf of the developers that meant that if the conveyancing fees were insufficient to cover the cost of the whole of the work undertaken, no charge will be rendered in respect of the work done.

242.  In paragraphs 193-197 above I have dealt with the evidence of Winston Zee in this respect.  I reject the contention that Baker & McKenzie were taking a business risk that there would be enough conveyancing to cover the whole of the work undertaken in respect of these very substantial projects.

243.  It follows, that in the absence of a fee agreement, and an implied term that the Firm would be retained for the whole project, that the Firm is entitled to be compensated for the work is undertaken on the basis of a quantum meruit.

The evidence of So Ngok

244.  A Mr So Ngok was called to give evidence on behalf of the developers.  Mr So has been a director of an NWD subsidiary, New World Development (China) Ltd, (NWDC), since 1992.  In re-examination Mr So sought to make assertions as to statements allegedly made by David Ho, which were not merely inconsistent with David Ho’s case, but which were directly contrary to that case. 

245.  He went so far as to assert, again with nothing at all in his witness statement, as to a sentence allegedly omitted from a draft letter.  That sentence was in direct contradiction to the case of David Ho.

246.  Those assertions were quite new and had not been put at all to David Ho.

247.  Both of these matters, if true, were vital pieces of evidence, and would have carried enormous weight against the case to David Ho.  I have no doubt at all that if those matters had actually occurred or existed they would have formed part of his original witness statement.  Leading counsel for the developers was right to apologise to the court that this evidence should come out in this way.  It was so plainly fabricated by Mr So, in order to favour his employer, that I placed no weight whatsoever on any assertion on the part of this witness.

The Plaintiff’s application for taxation

248.  When the accounts for fees were sent in November 2001, no complaint was made as to the amount of the accounts, the complaint which subsequently arose, some months later, was directed solely to the plaintiff’s liability to meet the fees. 

249.  Counsel for the developers complained strongly that it was not until 4 January 2006, that the billing memos, that is the time sheets showing the breakdown of the fees, were delivered by the Firm. 

250.  I reject that criticism completely.  I do so because it was not until shortly before that date that any request was made by the plaintiffs for documentation justifying the fees that had been charged.  It is not normal practice for solicitors when sending an account, to send with the account detailed time costing information.  Instead, the account will contain, as it did hear, a narrative generally and broadly describing the work undertaken.  But such time recording information will always be made available to the client if requested.  It must have been known to the plaintiffs and Peter Cheng at the time the bills were received that it was open to them to ask for inspection of the time sheets recording the time that had been charged.  No such request was made until very late in the proceedings. 

251.  The time sheets in respect of both the Dongguan Project and the Beijing Project were referred to in paragraph 58 of David Ho’s first witness statement, which is dated 14 July 2005.  It was not until a telephone conversation on 4 January 2006, between solicitors then acting for the plaintiffs, and solicitors then acting for the Firm, that the request was made for a copy of the time sheets.  These were immediately supplied. The Firm cannot be criticised in any way for not having earlier supplied details.  They simply not had been asked for those details.

252.  The narrative in the accounts that were sent clearly sets out the general nature of the work undertaken in respect of the fees that were charged.  The narrative is of the type normally seen in a solicitors bill.  The narrative, in the usual way, does not purport to be a precise record of all the work that was undertaken.  The bills, being perfectly normal solicitors bills, and of a type which Peter Cheng must have seen in his business life on a regular basis, are, in the absence of a request for time details, or taxation, straightforward and on their face, actionable.

253.  The statutory basis for taxation is contained in s 67 LPO, in the following terms:

“67    Taxation of bills on application of party chargeable on solicitor or foreign lawyer

(1) On the application, made within 1 month of the delivery of a solicitor’s bill or a foreign lawyer’s bill, of the party chargeable therewith the Court shall, without requiring any sum to be paid into court, order that the bill shall be taxed and that no action shall be commenced thereon until the taxation is completed.

(2) If no such application is made within the period mentioned in subsection (1), then, on the application of the solicitor or the foreign lawyer or of the party chargeable with the bill, the Court may, upon such terms, if any, as it thinks fit (not being terms as to the costs of the taxation) order-

(a) that the bill shall be taxed;

(b) that, until the taxation is completed, no action shall be commenced on that bill, and any action already commenced shall be stayed:

Provided that-

(i)    if 12 months have expired from the delivery of the bill, or if the bill has been paid, or if a verdict has been obtained or writ of inquiry executed in an action for the recovery of the costs covered thereby, no order shall be made on the application of the party chargeable with the bill except in special circumstances and, if an order is made, it may contain such terms as regards the costs of the taxation as the Court may think fit;

(ii) if the bill has been paid, no order under this subsection shall be made where the application for the order is made after the expiration of 12 months from the date of payment of the bill.”

254.  In the counterclaim by the developers to the counterclaim by the Firm in the Beijing proceedings, filed on 9 February 2006, pursuant to an order of the Master made on 11 January 2006, an application for taxation was made in respect of the account rendered in the Beijing proceedings.  No similar application was made in the Dongguan proceedings.  That can only have been a deliberate decision on the part of the developers.  That must be so in the light of the application for taxation made in the Beijing proceedings.

255.  Counsel for the developers, without making a formal application for taxation on the Dongguan bill, developed his submissions in this respect simply on the basis that I should order taxation in respect of both bills of account. 

256.  In the absence of a formal application, and in the absence of any specific explanation as to why no application was made in the Dongguan proceedings I decline to order taxation of the Dongguan bill of account.  To do so this late in the proceedings would make a mockery of both the time-limit and the requirements for special reasons contained in s 67 LPO.

257.  Plainly more than 12 months have expired since the delivery of the bill in respect of the Beijing Project.  If there is to be taxation of the Beijing bill, the obligation is on the plaintiffs to establish that there are special circumstances.  The particulars set out in the counterclaim to the counterclaim as to special circumstances are as follows:

(a) no bill or materials were rendered between the commencement of the retainer and the delivery of the first bill in November 2001;

(b)    the bill was revised a number of times, and the plaintiffs did not know whether a further amended bill would be sent; the bills were delivered when there was a dispute between parties as to the exact term of the retainer, which dispute is ongoing;

(c) the time costing records disclosed in discovery in the proceedings show that the charges are unreasonable, excessive, inflated and exorbitant.

258.  In addition to that pleading it was argued that the plaintiffs did not pursue taxation earlier as they had been advised that taxation was inappropriate, and inconsistent with their case, contesting liability.

259.  In Springbok Shipping (HK) Ltd & Ors v Clayton Wong & Co [1998] 1 HKLRD 225 the Court of Appeal was dealing with a appeal by solicitors against an order for taxation.  The judge had granted the application finding that special circumstances existed in evidence of overcharging, the bills are lacking particularity, and that the client had reserved its right to taxation.

260.  It is firstly noted that the decision provides an answer to the contention set out in paragraph 258 above, that taxation was not pursued as being inconsistent with a challenge to liability.  In Springbok Shipping, Godfrey JA said at p 229C:

“Where a solicitor’s account has been settled, but subject to an express reservation to have a taxation of the solicitors’ bill, that is a “special circumstance”, of very considerable importance.  For my part, I find it difficult to imagine circumstances in which, in the face of such an express reservation, the client should be refused a taxation, though I dare say there may be cases in which that result might follow.”

It must be all the more so plainly open to a client to litigate the issue of liability, at the same time preserving the right to taxation if found liable on the account.  I am of the opinion that failure to require taxation within time, as a result of legal advice, does not constitute a special circumstance.

261.  The argument that no bill or other material was delivered between the commencement of the retainer in November 1991, and November 2001, is nothing to the point.  Once a bill was delivered the right of taxation arose.  The fact that this was the first bill for a long period of time does not support a contention of special circumstances when there has been a failure to require taxation in time.

262.  Equally, the fact that the bills were revised a number of times is irrelevant.  It cannot be a special circumstance to say, “You have revised your bill, and I thought you might revise again, and I was waiting for a further revision.”  Plainly, once the right to taxation arises it ought to be availed of, and that it is not because the bills were revised, cannot be a special circumstance.  If anything that had the effect of extending the time period which must run from the date of the most recent bill. 

263.  The same must be so in respect of the contention that there was a dispute as to liability.  It was open to the plaintiffs to contest their liability, and to demand taxation without prejudice to their right to contest liability, or to simply reserve their rights to taxation within the appropriate time.  If they did not do so as a result of incorrect legal advice that is a matter that they must take up with those who gave the advice.

264.  Next it is said that the bills lacked particularity.  I have already referred to the narrative contained in the bills.  Each bill runs to several pages, describing generally, in the usual way, the nature of the work undertaken.  I am satisfied that the bills do contain appropriate particulars.  If a client is ever dissatisfied as to the particulars they may always ask for detailed time costing sheets.  I reject the argument based on particularity.

265.  The submission was made that it would be inequitable to deny the plaintiffs an opportunity to have the bills vetted upon a technical procedural rule.  I reject that submission.  What must be established, as a matter of law, is special circumstances.  If no special circumstances exist, that the result may be said to be generally unfair, (inequitable), to a party surely cannot constitute special circumstances.  To uphold the submission would be to completely remove the teeth of the requirement that taxation must be sought within an appropriate time.

266.  Finally it is said that the time costing records show that the charges are unreasonable and excessive.  It is unfortunate that counsel for the developers did not draw my attention to the decision in Springbok Shipping in the course of the trial, for that would have made it plain that it would have been proper, in the trial, to deal with the issue of excessive charging by way of evidence.  As it was, whenever questions as to the extent or amount of the fees came up counsel for the developers appeared to accept my contention that that was a matter for taxation. 

267.  The evidence is contained in 20 pages of time costing sheets.  I have reviewed those records.  I am satisfied that there are elements in those time costing sheets which are arguably excessive or exaggerated.  I note in particular the sum of $45,500 has been charged for a trip to Singapore to attend a cocktail reception and a meeting with HSBC.  In respect of attendance at two cocktail receptions in Beijing $21,000 each has been charged, and in addition $21,000 flying time to Hong Kong from Beijing.  Three hours have been charged to attending a dinner with Peter Cheng and others, at which various broad general matters were discussed, no doubt as well as the usual social conversation, the total cost of attending the dinner being fixed at $11,550.

268.  I am bound to say that my review of the time costing sheets did not appear to reveal any other obvious elements of overcharging, but I am satisfied that the elements I have identified are sufficient to justify a claim to the existence of special circumstances.

269.  There will accordingly be an order that the bill of account rendered respect of the Beijing Project be submitted to taxation by the Master.

Interim payment

270.  Mr Szeto said that as liability was established, but taxation allowed, the court should impose an interim payment requirement as a condition to justify taxation.  There is a net amount outstanding of $3,638,923.40 on the bill in respect of the Beijing Project.  It is plain from the terms of s 67 LPO, that an order of taxation made after the expiry of 12 months may be on conditions.

271.  In paragraph 267 above, I identified certain areas of potentially excessive charging, but commented that I could not detect or identify any other areas that might be subject to that complaint.  The Firm has been out of pocket for many years now, although that will to some extent be ameliorated by the payment of interest which must necessarily follow.

272.  But in the whole of the circumstances I am satisfied that an interim payment is justified.  There will be an order that pending taxation, and as a condition of taxation, an interim payment in the sum of $2 million must be made within 28 days.

Summary of findings

273.  I have concluded as follows:

(i)  that the fee offsetting arrangement as set out in the Baker & McKenzie letter of 4 October 1991 was the agreed basis upon which both Baker & McKenzie and the Firm would be remunerated with respect to legal work undertaken on the Dongguan Project and the Beijing Project;

(ii) liability for the bills rendered falls upon the developer plaintiffs; NWD are not liable;

(iii)    if I am wrong in respect of the agreement as to the terms of the retainer, then I am satisfied that the Firm is entitled to be remunerated for its work on the basis of a quantum meruit, the developers being in breach of an implied term that the retainers will not be terminated until such time as the solicitors have been properly remunerated;

(iv)    the bill in respect of the Beijing Project must be submitted to taxation, subject to an interim payment being made in the sum of HK$2 million within 28 days of this judgement;

(v) the judgment for the Firm in respect of the Beijing action will be for such sum as is determined due upon a taxation;

(vi)    the developers have lost the right for taxation of the bill in respect of the Dongguan Project;

(vii)   the judgment for the Firm in respect of the Dongguan action will be for the sum of HK$4,979,111.28;

(viii)  there must be judgment for the Firm and its individual partners on the two claims, which are dismissed.

Costs

274.  Mr Szeto sought costs on an indemnity basis contending that notwithstanding the reference to taxation the Firm are the winners in substance.  The claim for indemnity costs appears to be based solely upon the length of time that it has taken to reach this stage of the proceedings.  That is not a basis for indemnity costs.  The prompt dispatch of the proceedings lay within the hands of the Firm who might well have brought the matter to trial much earlier.

275.  There will be an order nisi that the costs of the proceedings be to the Firm, at a party and party basis.  If there are any interlocutory costs reserved I will deal with them by memoranda.

276.  NWD has been successful in resisting the counterclaim which attempted to bring liability on to it for the fees.  That issue took but a small part of the whole of the proceedings, the primary issue, and upon which most of the time of the trial was spent, being that of whether or not there was an agreement as to fees.

277.  In those circumstances there will be an order nisi that NWD is entitled to 20% of its costs on the counterclaims.

278.  Leave is reserved to apply in respect of the terms of the orders to follow pursuant to this judgment.

HCA1212 & 2915/2002

(Consolidated)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1212 OF 2002

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AND BETWEEN

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(By Counterclaim)

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ACTION NO. 2915 OF 2002

(Transferred from DCCJ NO.1967 OF 2002)

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BETWEEN

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(By Original Action)

AND BETWEEN

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(By Counterclaim)

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(Consolidated by the Order of Master Woolley dated 31 October 2003)

Before : Hon Chu J in Chambers

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DECISION

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1.  By summons filed on 12 February 2008, the defendants by Original Action (“the defendants”) in the above consolidated action apply for leave to (i) set down the trial of the consolidated action in the Technology Court; and (2) use the video conferencing facilities (VCF) throughout the trial. The application is opposed by the plaintiffs by Original Action (“the plaintiffs”). At the heart of the contention is whether the 1^st defendant should be permitted to testify and participate in the trial of the consolidated action through the VCF.

The relevant principles

2.   The use of the Technology Court and its facilities, including the VCF, is regulated by Practice Direction 29. In particular, paragraph 4 provides that:

“It is a case management decision within the discretion of the court or tribunal concerned whether any proceedings or parts of any proceedings should be conducted in the Technology Court.” 

3.  Paragraph 5 of Practice Direction 29 further states that:

“In making the decision, the court or tribunal shall take into account the views of all the parties, the availability of the Technology Court, the subject matter of the proceedings or the relevant part of the proceedings and all other material circumstances, including in particular, whether the proposed use of the Technology Court is likely:

(a)  to promote the fair and efficient disposal of the proceedings;

(b)  to save costs, and/or

(c)  materially to delay disposal of the proceedings.”

4.  In Re Chow Kam Fai David [2004]2HKC645, the petitioner applied for an order that the debtor should attend the trial of the Bankruptcy Petition in person and be cross-examined on his affidavits. In opposition, the debtor applied that, if cross-examination were to be granted, he be permitted to be cross-examined by means of VCF. The judge granted the order for cross-examination and refused the application for the use of VCF. The debtor’s appeal to the Court of Appeal was dismissed.  In his judgment (at paras.16-19), Rogers VP held that an order permitting cross-examination via VCF is discretionary. It is a question of judgment in each case as to whether VCF should be used for the taking of evidence and factors such as the nature of the witness’ evidence and questions of costs and convenience are important relevant consideration. The starting point must be that proceedings were conducted in court and that a party wishing to give evidence using VCF should establish a sound reason for it.  The Court of Appeal agreed with the judge that the desire to remain beyond the reach of an arrest warrant issued against the debtor to enforce an examination order was not such a reason.

5.  Pausing here, it is to be noted that when Re Chow Kam Fai David was decided, Practice Direction 29, though already drawn up, had not yet come into force. The Court of Appeal’s view that the use of VCF is a privilege would have to be read against this background. In my view, the description of the use of VCF as a privilege, in the context, means that the usual or normal way is for witness to attend the trial and give evidence in person, and that VCF evidence is an exception to the norm. It should not be read as imposing a high burden on an applicant to justify the use of VCF.

6.  In connection with what constitutes valid reason for the use of VCF, it is relevant to note the cases of Hong Kong & Shanghai Banking Corp v. Fung Wing King (Executor of Last Will and Testament of Tang Siu, Dec’d) [1973-1976] HKC164 and Attorney General v. Lui Lok alias Lui Mo-lok [1982] HKLR 413.  In the first case, the defendant applied to have his witness examined in Canada because the witness would not come to Hong Kong as he was over 70 years old, had a spinal injury and there was an unsatisfied judgment against him in Hong Kong, such that there was a possibility of enforcement proceedings against him. The Registrar granted the application. In dismissing the appeal, Leonard J (as he then was) noted that the reasons given by the witness for refusing to come might not be very good reasons and did him little credit. However, he considered that the witness was a most important witness for the defendant and that the defence case might be fatally injured by his absence. He was therefore of the view that it was necessary for the purposes of justice that the order made by the Registrar should stand. Mr Szeto submitted that this case demonstrated that the threshold to be overcome by an applicant is not a high one when assessing the reason given for the witness not attending the trial in person. I agree. Although the case involved an application to examine a witness abroad, the principles and approach adopted by the Court are equally applicable.

7.  The second case also concerned an application to take evidence abroad. In that case, the respondent was a police officer normally resident in Hong Kong, but left to live in Taiwan to avoid possible criminal prosecution. In defending the civil action brought by the Attorney General to recover monies believed to have been received by the respondent as bribes or secret commissions, the respondent applied for his evidence to be taken in Taiwan on the ground that a warrant of arrest had been issued against him. The judge at first instance granted the application. The Court of Appeal allowed the appeal, holding that the respondent had not made out a valid reason for the application since by his own choice and action, the respondent had deliberately put himself outside the jurisdiction. The Court of Appeal did not accept that it was simply a matter of doing justice between the parties and considered it was against public policy to grant the application in favour of a fugitive from the justice of the court.

8.   This case is to be contrasted with the more recent House of Lord’s decision in Polanski v. Conde Nast Publications Ltd [2005] 1 All ER 945. The claimant in that case was a French citizen who was a fugitive from justice in the United States. He sued the defendant for libel in respect of an article published in the UK. He applied pursuant to CPR Pt 32.2 for leave to give evidence via VCF as he did not wish to come to the UK and risk being extradited. The judge made the order. The Practice Direction supplementing CPR Pt 32 provides that when the use of VCF is being considered, a judgment must be made on costs saving and on whether use of VCF will be likely to be beneficial to the efficient, fair and economic disposal of the litigation. The Court of Appeal allowed the appeal, holding that the general policy of the court should be to discourage litigants from escaping the normal processes of the law rather than facilitating it.

9.  The Court of Appeal’s decision was considered by Rogers VP in Re Chow Kam Fai David, op cit, at para.22. It was observed that two principles emerged: First, VCF evidence was less than ideal, though this was not the first or foremost consideration in the case.  Second, the court should have regard to all the circumstances in deciding whether it was appropriate to make the VCF order specifically to enable a witness to evade the ordinary process of the law under which he might lose his liberty.

10.  Before the House of Lords, the issue was whether the administration of justice would be brought into disrepute if the claimant’s application were allowed. The House of Lords by a majority reversed the decision of the Court of Appeal and held that a fugitive from justice, despite his status, was entitled to invoke the assistance of the court and its procedures in protection of his civil rights. All the members of the House acknowledged that although evidence given in court is often the best and the normal way of giving oral evidence, in view of technological developments, evidence by VCF is an efficient and effective way of giving oral evidence. In addition, they all agreed that as between the claimant and the defendant, the use of VCF could be efficient and fair and contribute to the economic disposal of the litigation and that it would be appropriate to grant the application. It is only on the issue of whether it is compatible with public interest that the unwillingness of a fugitive of justice to come to the UK can in itself constitute a valid reason for allowing his evidence to be given through VCF that Lord Slynn and Lord Carswell differed from the majority.

11.  Mr Li for the plaintiffs submitted that I am bound by the decision in Re Chow Kam Fai David, but not the Polanski case. This must be right as a matter of stare decisis.  However, this does not mean that I should not pay regard to the House of Lord’s decision in the Polanski case.  It is after all a relevant and highly persuasive authority.  Further, insofar as the first of the two principles summarized by Rogers VP in Re Chow Kam Fai David is concerned, namely, VCF evidence is less ideal, that is clearly reversed by the House of Lords: see also the discussions in the Singaporean case of Peters Roger May v. Pinder Lillian Gek Lian [2003] 2 SLR 381 at paras.26 & 27. That said, however, on a proper reading, it would appear that there is no real difference or conflict between the two cases insofar as the principles on the exercise of the court’s discretion.

12.  The principles to be distilled from the several authorities discussed above are:

(1)     Whether to permit the giving of evidence by means of VCF is a decision within the discretion of the court.

(2)     In general, the applicant should provide a valid reason for the use of VCF. The threshold for valid reason is not a high one, however.

(3)     The court should have regard to all the circumstances of the case. Relevant factors include the matters set out in paragraph 5 of Practice Direction 29, the reason why the witness is unable or unwilling to attend the trial in person, the importance of the witness to the applicant’s case and any prejudice to the other party.

(4)     The witness’ unwillingness to testify in person at the trial because he is a fugitive from justice may, depending on the circumstances of the case, be a good and sufficient reason for making a VCF order.

The present application

13.  With these principles in mind, I now turn to the present application. It should be noted at the outset that there are two parts to the  application. The first is to have the evidence of the 1^st defendant given by means of VCF. The second is to enable the 1^st defendant to observe and take part in the entire trial by means of VCF. I shall deal with them in turns.

14.  The application, which is jointly made by all the defendants, is made on the basis that the 1^st defendant will not and/or cannot come to Hong Kong to attend the trial in person. There are several aspects to it. First, it is said that the 1^st defendant has since 2007 left Hong Kong to settle in Beijing and that he has ceased practising as a solicitor in Hong Kong and sold his interests in the 4^th defendant.  Second, it is said that the 1^st defendant is involved in a number of civil litigation in Hong Kong and is a judgment debtor in an action commenced in 1999. It is not expected the 1^st defendant would return to Hong Kong given that he would be likely to subject to vigorous enforcement actions against him. Third, it is said that he had a spine injury as a result of a traffic accident that happened in Beijing in September 2007 and that he is otherwise in ill health. He is medically advised not to travel to Hong Kong to attend the trial.

The personal circumstances of the 1^st defendant

15.  Mr Li criticised the reasons given as vague and unsatisfactory. I agree that the evidence, particularly on the second aspect, is generalised and lacking in details. Evidently, the 1^st defendant is less than forthcoming in relating the litigation he is embroiled in or the judgment(s) made against him. That said, Mr Li accepted that, to his knowledge, the 1^st defendant is a losing party in a substantial civil claim commenced in the Court of First Instance that went all the way to the Court of Final Appeal. Notwithstanding the lack of particulars as to the physical and financial pressure to which the 1^st defendant is said to be subject, I do not feel able to say that the 2^nd defendant’s affidavit evidence that the 1^st defendant had decided not to come back to Hong Kong to testify at the trial of the consolidated action should not be believed. While the reasons for the 1^st defendant’s decision not to return to Hong Kong, as observed by Leonard J in the Fung Wing King case, do him little credit, it cannot be disregarded as being completely unreasonable or unacceptable. It is also relevant to note that the enforcement actions that he is trying to avoid do not relate to the claims or counterclaims in the consolidated actions. I do not consider this is a case that involves consideration of public interest or public policy, as in the Polanski case or Lui Lok case. 

16.  As to the medical reasons, I share Mr Li’s reservation on the medical opinion that the 1^st defendant is medically unfit to withstand the pressure of trial. Whether he is testifying in person or via VCF, the 1^st defendant has to bear the pressure brought about by the trial. The point is therefore irrelevant. However, the medical reports, notably the one dated 29 November 2007, had given an account of the spine injury and an explanation on the advice against travelling.  In the absence of contrary expert evidence, it is not open to the court to reject or place no weight on the diagnoses and opinions expressed in the reports.

The importance of the 1^st defendant’s evidence

17.  Another main plank in the defendants’ application is that the 1^st defendant is their prime and only witness. The plaintiffs do not accept this proposition.

18.  Simply put, the consolidated actions concern two land development projects in Dongguan and Beijing respectively, in which the 4^th defendant was retained as the solicitors. The plaintiffs’ claims are for the return of the sale proceeds of these projects held by the 4^th defendant. It is the plaintiffs’ case that the 4^th defendant was a partnership carried on by the 1^st to 3^rd defendants. By way of defence, the defendants seek to set-off their legal fees and disbursements against the sale proceeds received by the 4^th defendant for the projects. The defendants further seek to counterclaim for their legal fees and disbursements.   

19.  The basis of the defendants’ case is an agreement said to be made between the 1^st defendant and a Mr Peter Cheng of the 2^nd defendant by Counterclaim. The agreement is said to be made orally after a number of oral discussions between the 1^st defendant and Mr Cheng and evidenced in writing. This is denied by the plaintiffs.

20.  On an analysis of the claims and defence and counterclaim and reading of the witness statements, there can be little doubt that the 1^st defendant is a key witness and his evidence is of critical importance to the defence case.  Mr Li had sought to argue that the defence and counterclaim is shown by contemporaneous documents to be tenuous and devoid of merits. I do not consider it is appropriate at this interlocutory stage and in the context of an application to use VCF to embark upon an assessment of the strengths and weaknesses of the claims and defence and counterclaim. Among other matters, the plaintiffs have not moved to strike out the defence and counterclaim. The court should therefore proceed on the basis that the defence and counterclaim, hence the assertion of an oral agreement, is a relevant and arguable issue.

21.   The plaintiffs also argued that the 2^nd and/or the 3^rd defendant would have been involved in the projects and had knowledge of the terms of the retainer.  Even then, it is quite clear from the 1^st defendant’s witness statements that neither the 2^nd nor 3^rd defendant is privy to the discussions and agreement on which the defence case rests.  It is also a fact that neither the 2^nd nor the 3^rd defendant had made witness statements and that they are not scheduled as witnesses. The witness statements of the 1^st defendant also show that his evidence cover a wide spectrum of matters, including the background facts and the dealings with the former solicitors, Messrs Baker & McKenzie, of which the 1^st defendant was a partner, as well as the practice in the legal profession relating to charging of fees for land development projects in Hong Kong and the Mainland at the relevant time. 

22.  The long and short of it is that the 1^st defendant’s evidence is both relevant and crucial. I accept there will be serious prejudice to the defence case if it were excluded from the trial. As argued by Mr Szeto, the court must also have regard to the interests of the other defendants and their entitlement to a fair trial. When considering the fair and efficient disposal of the proceedings, the need to ensure a fair trial between the parties is a factor that weighs heavily in favour of the application.

Prejudice to the plaintiffs

23.  By contrast, the plaintiffs have not been able to point out any substantial prejudice if the 1^st defendant were permitted to testify by means of VCF. While I acknowledge that the conventional manner of giving oral evidence in court carries with it the benefit of solemnity of court atmosphere, which is important to the administration of justice, the point cannot be over emphasized, given the developments in technology and the increasing use of VCF in judicial proceedings.

24.  As to the suggestion that it is more desirable for witnesses whose evidence and credibility is heavily in issue to testify in court so that their demeanour can be observed, it is apt to note that it is nowadays not unusual for vulnerable witnesses in criminal proceedings to testify by means of the VCF.  In the majority of these cases, the evidence of the vulnerable witnesses and their credibility is critical to the prosecution case and is hotly disputed by the accused. Yet, the court has not recognized this as a compelling reason against the use of VCF. On the other hand, in the context of civil litigation, it is rare that the demeanour of a witness is determinative of the outcome. In this case, Mr Li had submitted, in connection with the merits of the defence case, that there are many contemporaneous documents and objective circumstances that will cast doubt on the veracity of the 1^st defendant’s assertions. That being the case, there should be little need to resort to assessing the demeanour of the 1^st defendant when he gave evidence.  

25.  Further with appropriate directions, the concerns over the control of  the proceedings and the monitoring of the 1^st defendant during the period when he is testifying can be taken care of.  In short, as between the parties and in the interest of fairness and justice, the discretion should be exercised in favour of allowing the 1^st defendant to give testify by means of the VCF.

Other matters

26.  The application for the 1^st defendant to observe and participate in the entire trial through the VCF, however, stands in a different light. The defendants have not identified any compelling reason why the 1^st defendant should be permitted to observe the proceedings by means of the VCF.  Given the competing demands for the use of the Technology Court and the costs involved, convenience or the desire of the party cannot by itself be sufficient reason for allowing an entire trial to be conducted through the use of VCF.  There are other alternatives, such as live notes, if the 1^st defendant wishes to follow the proceedings while he is not present in court.

27.  Having regard to the fact that the trial of the consolidated action is estimated to last 14 days, and that directions have to be given in connection with the use of VCF, it is beneficial to assign a trial judge to the case for effective case management.  Finally, as the time for setting down the consolidated action for trial had already lapsed, I will grant a further extension of 42 days.

Conclusion

28.  Accordingly, on the defendants’ summons, I make the following orders:

(1)     The evidence of the 1^st defendant by Original Action be received by means of video conferencing facilities. For this purpose, the Technology Court shall be used for part of the trial.

(2)     The time for setting down the consolidated action for trial is extended for 42 days from the date of the handing down of this Decision.

(3)     A trial judge is to be assigned to the consolidated action for effective case management. The listing officer is to notify the parties of the judge so assigned.

29.  As to the costs of the application, Mr Szeto asked that costs be in the cause, but that the costs of the hearing be paid by the plaintiffs to the defendants. Although the application is essentially seeking pre-trial direction, given that the plaintiffs have made a substantial challenge to the application but failed in their opposition, the normal rule of costs follow event should apply to the costs of the hearing. I therefore order that the costs of the application be in the cause, save that the costs of the hearing on 8 April 2008 be paid by the plaintiffs by Original Action to the defendants by Original Action in any event, to be taxed if not agreed.