SINO FAVOUR DEVELOPMENT LTD AND ANOTHER v. KAN KAR FAI AND OTHERS

HCA1517-1521/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1517 OF 2005

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AND

ACTION NO. 1518 OF 2005

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BETWEEN

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AND

ACTION NO. 1519 OF 2005

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BETWEEN

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AND

ACTION NO. 1520 OF 2005

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BETWEEN

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AND

ACTION NO. 1521 OF 2005

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BETWEEN

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(Consolidated by Order of the Honourable Mr Justice Saunders
dated 12 August 2005)

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RULING ON COSTS

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1. On 12 February 2010 I dismissed the 1^st defendants’ application for specific discovery against the non-party and ordered that the costs of the application below be paid by the 1^st defendants to the non-party to be taxed on a common fund basis, if not agreed, and be paid by the 1^st defendants to the plaintiffs to be taxed on a party and party basis, if not agreed.

2. I also made a costs order nisi that the costs of the appeal before me be paid by the 1^st defendants to the non-party to be taxed on a common fund basis, if not agreed, and be paid by the 1^st defendants to the plaintiffs to be taxed on a party and party basis, if not agreed.

3. The 1^st defendants have applied to vary my costs order nisi, and, in his written submission dated 18 March 2010, Mr Simon Lam, counsel for the 1^st defendants, relied on the decision of the Court of Appeal in Thomas Vincent v. South China Morning Post Publishers Limited, CACV253/2002 and submitted that my costs order should reflect the parties’ respective failure and success in the appeal and that there ought to be an appropriate apportionment of the costs according to the time and expenses involved in the hearing of and preparation for the different issues.  He further submitted that it was wrong in principle for an appellant who is partly successful in the appeal to be ordered to pay the entire costs of the other party to the appeal.

4. I can deal with the position of the non-party very quickly.

5. At the hearing before Master de Souza, the non-party only asked for costs on a common fund basis but was awarded costs on an indemnity basis. 

6. On the appeal before me, Mr K.M. Chong, for the non-party, very sensibly did not press the point as to costs and said that he would be content with an order for costs on the common fund basis in favour of his clients.  Mr Lam, for the 1^st defendants, did not object to such an order being made if I dismissed his clients’ appeal.  In the event, I did dismiss the appeal and ordered that the costs of the application below be paid by the 1^st defendants to the non-party to be taxed on a common fund basis, if not agreed, and that the costs of the appeal be paid by the 1^st defendants to the non-party, also to be taxed on a common fund basis, if not agreed. 

7. Mr Lam submitted that the non-party should be made to pay part of the costs of the appeal because they had not expressed any intention to give up the benefit of the Master’s costs order made in their favour for taxation on an indemnity basis and only conceded the point in the course of the hearing of the appeal before me.

8. I am not impressed by this submission and I uphold the costs order nisi I had made with regard to the costs of the non-party.  On the appeal, the time spent on the issues of costs as between the 1^st defendants and the non-party was minimal.  Further, in reality, there is probably very little, if any, difference in the final figure that is obtained after taxation conducted on a common fund basis and after a taxation conducted on an indemnity basis.

9. Mr C.Y. Li, in his written submissions for the plaintiffs dated 25 March 2010, submitted that the question of costs was not a discrete or separate issue of the appeal but was being addressed as part and parcel of the appeal hearing and that, in any event, the matter of costs must be treated as an integral part of the substantive hearing unless the matter came before the court as a costs only appeal. 

10. The award of costs is discretionary.  It is not and should not become the practice of the court to engage upon a detailed analysis of the matter and give detailed reasons for its order on costs, and satellite litigation on the issue of costs is to be discouraged.

11. I am persuaded that I should vary my costs order nisi so far as the award of costs in favour of the plaintiffs is concerned.  The 1^st defendants was partially successful on the appeal against the order of the Master below.  I was persuaded to set aside the order for costs on an indemnity basis and to replace it with an order for costs on a party and party basis in favour of the plaintiffs.  Nevertheless, the substantial part of the costs incurred in the preparation of the appeal and during the hearing of the appeal was incurred on the merits of the substantive appeal.  In these circumstances, I conclude that 80% of the plaintiffs’ costs of the appeal be paid by the 1^st defendants to the plaintiffs, to be taxed on a party and party basis, if not agreed.

12. The costs of this application to vary my costs order nisi can be treated as part of the costs of the appeal.

HCA1517-1521/2005

   IN THE HIGH COURT OF THE

   HONG KONG SPECIAL ADMINISTRATIVE REGION

   COURT OF FIRST INSTANCE

   ACTION NO. 1517 OF 2005

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BETWEEN

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(Consolidated by Order of the Honourable Mr Justice Saunders dated 12 August 2005)

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DECISION

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1.  This is an appeal by the 1^st defendantsin the Consolidated Actions against the decision of Master de Souza on 24 September 2009 dismissing the 1^st defendants’ application for specific discovery against a non-party and ordering that the plaintiffs and the non-party shall have the costs of the application, including any costs reserved in respect thereof, with Certificate for Counsel, against the 1^st defendants to be taxed, if not agreed, on full or indemnity basis.

2.  At the eve of the hearing, the 1^st defendants’ solicitors filed and served a Summons to amend the Defence and Counterclaims in the Consolidated Actions substantially and they sought an abridgment of time for the hearing of the said Summons. At the hearing, Mr Simon Lam for the 1^st defendants urged me to deal with the Amendment Summons. However, I refused to do so for the reasons advanced to me by Mr CY Li on behalf of the plaintiffs. Mr CY Li stated that the plaintiffs needed an opportunity to consider and to respond to these substantial amendments and that it was likely that the plaintiffs would take the point, in the light of the decision of Reyes J made on 1 September 2009, that the amendments should be disallowed on the ground that the issue of illegality was res judicata.

3.  Mr Lam then made a further application to me to adjourn the hearing of this appeal until such time as the Amendment Summons was disposed of. He made the point that the hearing before me was a hearing de novo and that I ought to have the benefit of the amended pleadings when considering whether or not to allow the appeal. Whilst the High Court Judge hearing an appeal from a Master sometimes takes into account additional evidence that was not placed before the Master, this case does not fall into that category of cases. Here, the application for specific discovery must be supported by an affidavit, and I quote from O. 24, r. 7A(3) :

“… which must –

(b)  in any case, specify or describe the documents in respect of which the order is sought and show, if practicable by reference to any pleading served or intended to be served in the proceedings, that the documents are relevant to an issue arising or likely to arise in the proceedings and that the person against whom the order is sought is likely to have or have had them in his possession, custody or power.”

4.  An application for specific discovery can be made under sub-paragraph (1) of r. 7A before the commencement of proceedings or, under sub-paragraph (2), after the commencement of proceedings against a non-party. In the case of proceedings which have already been commenced, it is incumbent on the applicant to demonstrate that the documents are relevant to an issue arising in those proceedings. In determining this appeal, I must have regard to the state of the pleadings as they were before Master de Souza. I must disregard any subsequent amendments that may be made to those pleadings. For these reasons, I refused the application to adjourn the appeal from Master de Souza’s decision and I proceeded to hear the appeal.

5.  The background to these proceedings can be found in the 5^th Affirmation of Mr Timmy Yeung. These proceedings have arisen as a result of agreements to develop and build small houses in the New Territories. Under the Small House Policy of the Hong Kong Government, indigenous villagers (colloquially called “tings”) of the New Territories are allowed to build small houses on agricultural land. In 1994, the 1^st plaintiff entered into development agreements with 21 indigenous villagers (including the 1^st defendants herein) with a view to making use of their rights to develop small houses. It is the plaintiffs’ case that the 1^st defendants had been fully paid their entitlements under the relevant development agreements. In mid July 2005, the plaintiffs discovered that the 1^st defendants had entered into agreements, or were about to enter into agreements, to sell their respective small houses to the 2^nd defendant. On 2 August 2005, the plaintiffs applied and obtained an ex parte injunction restraining the 1^st defendants from selling the small houses to the 2^nd defendant. The 1^st defendants, who had been properly served, were absent on the return date on 12 August 2005 when Deputy High Court Judge Saunders (as he then was) made an Order, in their absence, that the plaintiffs be at liberty to sell and/or complete the sale of the properties listed in that Order, including the 5 small houses belonging to the 1^st defendants herein, and that the 1^st defendants were just the bare trustees of the plaintiffs holding the legal title in the said properties on trust for the plaintiffs. The Order also recorded the undertaking by the plaintiffs to pay to Messrs Hau, Lau, Li & Yeung the sum of HK$2,500,000 as stakeholders and which was only to be released by order of court.

6.  On 1 September 2009, Reyes J ordered the release of the said sum of HK$2,500,000 to the plaintiffs on the ground that none of the defendants could claim a proprietary interest in the said sum; in particular, the 1^st defendants only counterclaimed for the payment of money and damages, which were purely personal claims and did not give rise to any viable issue of a proprietary interest traceable into the monies held by the stakeholders.

7.  It is against that background that the 1^st defendants took out the Summons for specific discovery against Messrs Hau, Lau, Li & Yeung for “copies of files, papers and documents in the conveyancing transactions with Messrs Hau, Lau, Li & Yeung (a firm) purportedly acting as solicitors for the 1^st defendants respectively (as the Vendors respectively) in the sale of the suit premises (i.e. the subject matters in the above 5 Actions) under the name of the 1^st Defendants”. The application was heard and dismissed by Master de Souza on 24 September 2009.

8.  As required by O. 24, r. 7A, that application was supported by the 3^rd Affirmation of David Tang, the solicitor having the conduct of these proceedings on behalf of the 1^st defendants. The 1^st defendants’ solicitors had written to Messrs. Hau, Lau, Li & Yeung and had received the reply that the files and documents requested were the property of the plaintiffs who had directed them not to release the requested documents. In §15 of his Affirmation, Mr Tang asserted that discovery of the documents “will lead to a chain of enquiry on the validity of the sale of the suit premises, the legality and enforceability of the development by the Plaintiffs and the costs consequences on the litigation in the 5 Actions by Messrs Hau, Lau, Li & Yeung purportedly acting for the 1^st Defendants as Vendors in the sale of the suit premises and then taking out the 5 Actions for the Plaintiffs against the 1^st Defendants”.

9.  No issue has been joined on the pleadings on the validity, legality and enforceability of the development agreements. The Order of Deputy High Court Judge Saunders permitted the plaintiffs to sell the 5 small houses on the basis that the 1^st defendants were bare trustees. The 1^st defendants did not appeal against that Order. Although the proposed amendments to the 1^st defendants’ Defence and Counterclaims now seek to raise the issue of illegality, the issue is not raised on the pleadings as they now stand; on the contrary, by their Counterclaims, the 1^st defendants seek to claim sums of money allegedly due to them under the development agreements and/or damages for breach of the said agreements.

10.  It is also difficult to understand what cost consequences flow from Messrs Hau, Lau, Li & Yeung, first acting for the 1^st defendants as Vendors in the sale of the 5 small houses and then taking out the 5 Actions for the plaintiffs against the 1^st defendants. The plaintiffs, as beneficial owners of the 5 small houses, had retained the professional services of Messrs Hau, Lau, Li & Yeung and the plaintiffs were the only clients to whom they owed their duties as solicitors. The relationship of client and solicitor never existed between the 1^st defendants and Messrs Hau, Lau, Li & Yeung. It is common ground that the costs incurred in the name of the 1^st defendants in the course of the sale transactions have been paid by the plaintiffs and the 1^st defendants have no claim, and have made no counterclaim, to be indemnified by the plaintiffs in respect of any costs incurred by them in connection with the sales transactions.

11.  More importantly, even if an issue as to costs arises in these proceedings, the documents sought cannot be relevant to any such costs issue.

12.  If, indeed, the documents sought are relevant to the proceedings as presently framed, they could have been sought directly from the plaintiffs in the course of discovery in these proceedings after the plaintiffs asserted that the documents were their property and, therefore, within their possession, custody or control. No explanation has been offered for this omission. The power to order specific discovery either against non-parties or prior to the commencement of proceedings has been qualified by O. 24, r. 8(2) which provides that no such order shall be made unless the court is of the opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs. Where the same documents can be obtained from a party to the proceedings, a specific discovery application against the non-party cannot be said to be necessary either for disposing fairly of the cause or matter or for saving costs.

13.  In his written and oral submissions, Mr Lam for the 1^st defendants sought to argue that it was sufficient if the issues of illegality and malicious falsehood were raised on the affidavits and affirmations, even if not raised on the pleadings. I reject any such suggestion. It is the function of pleadings to raise issues and the function of affidavit evidence to speak to the facts.

14.  I also reject the argument that the documents sought are, somehow, relevant to the plaintiffs’ claim for damages from the 1^st defendants, and the extremely convoluted suggestion that the Order of Deputy High Court Judge Saunders, which was not appealed against, could somehow be set aside more than 5 years later, so that the 1^st defendants could enforce the usual undertakings to be found in such orders which, being absent from the Order of Deputy High Court Judge Saunders, could somehow be reintroduced into it for the benefit of the 1^st defendants.

15.  Mr Lam tried to argue that the application for specific discovery was also being made under sub-paragraph 1 of r. 7A. It is clear that any application for disclosure of documents before the commencement of proceedings against the non-party, whether by way of separate or third party proceedings, must be made by originating summons and the person against whom the order sought to be made has to be made the defendant to such summons. To get around that obstacle, Mr Lam sought to argue that, as the present pleadings were already afoot, and it was intended to issue third party proceedings and not separate proceedings, it was “convenient” to issue a summons in the present proceedings and to serve the same on the intended third party. Again, I have no difficulty rejecting this suggestion outright. The clear and mandatory requirements of the rules are not to be ignored or disobeyed just because it is “convenient” for the parties to do so. I also note that no proper explanation has been offered to me to explain why leave has not been obtained, up to now, to serve the Third Party Notice dated 26 February 2009.

16.  It is clear to me that the 1^st defendants’ application for specific discovery was misconceived and hopeless. I have no hesitation dismissing the appeal against the decision of Master de Souza. But was he right to award indemnity costs against the 1^st defendants in favour of the non-party and the plaintiffs?

17.  In the normal case, although an application for specific discovery against a non-party must also be served on all other parties to the proceedings, it is not incumbent for such other parties to appear and be heard on the application. A party who does so without good reason cannot expect any order for costs in his favour. Here, however, the plaintiffs were justified in appearing and contesting the application as they claimed a proprietary interest in the documents sought.

18.  It has been well established since the decision of the Court of Appeal in Choy Yee Chun v Bond Star Development Ltd [1997] HKLRD 1327 that a taxation of the successful party’s costs on an indemnity basis could properly be ordered where the proceedings were scandalous or vexatious, or had been initiated or prosecuted maliciously, or for an ulterior motive, or in an oppressive manner. Any proceedings instituted or prosecuted in such circumstances as to constitute an affront to the court could properly be the subject of a direction for the taxation of the successful party’s costs on the indemnity basis. However, the circumstances in which an indemnity award might properly be made were not restricted to these circumstances. The discretion was not to be fettered or circumscribed beyond the requirement that taxation on an indemnity basis must be “appropriate”.

19.  Although I must say that I leaned towards making an order for costs on an indemnity basis in the course of Mr CY Li’s submissions on the point, at the end of the day, I am not persuaded that the 1^st defendants’ application for specific discovery, hopeless and misconceived as it was, fell into the category of case where it would be appropriate to make such an order.

20.  Mr KM Chong for the non-party very sensibly did not press the point and said that he would be content with an order for costs on the common fund basis in favour of his clients, and Mr Lam for the 1^st defendants did not object to such an order being made if I dismissed his clients’ appeal.

21.  In the circumstances, I set aside the costs order made below and order that the costs of the application below be paid by the 1^st defendants to the non-party to be taxed on a common fund basis, if not agreed, and be paid by the 1^st defendants to the plaintiffs to be taxed on a party to party basis, if not agreed.

22.  I also make a costs order nisi that the costs of the appeal before me be paid by the 1^st defendants to the non-party to be taxed on a common fund basis, if not agreed, and be paid by the 1^st defendants to the plaintiffs to be taxed on a party to party basis, if not agreed. The substantial part of the costs incurred in the preparation of the appeal and during the hearing of the appeal were incurred on the merits of the application and it is right that the plaintiffs, who succeeded in persuading me to dismiss the appeal, should be awarded costs, notwithstanding that they were not able to persuade me to grant costs on an indemnity basis.

HCA 1517/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1517 OF 2005

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BETWEEN

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(Consolidated by Order of the Honourable
Mr Justice Saunders dated 12 August 2005)

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D E C I S I O N

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1.  The question before the Court today is the disposition of $2.5 million paid to solicitors as stakeholders.

2.  The essential issue is whether any of the 1^st Defendants, 2^nd Defendant, or 3^rd Defendant can arguably claim a proprietary interest in the $2.5 million. If they can, then to the extent of such interest the money should not be paid out to the Plaintiffs.

3.  In my view, none of the Defendants can claim a proprietary interest.

4.  The 1^st Defendants’ pleadings at best counterclaim for the payment of money and damages. The counterclaims are purely personal. The 1^st Defendant’s defences and counterclaims do not raise any or any viable issue of a proprietary interest traceable into the monies held by the stakeholder.

5.  The 3^rd Defendant as a shareholder in the 2^nd Defendant can claim no interest in the money.

6.  That leaves the 2^nd Defendant. It claims a 50% interest in the monies. But the legal and factual basis of that claim is unclear and unparticularised in the 2^nd Defendant’s pleadings. The 2^nd Defendant signed a document waiving all interest in the 1^st Plaintiff. In light of that, it is hard to see how the 2^nd Defendant can claim an interest in the relevant monies (which arise from properties sold by the 1^st Plaintiff). Mr Lo, appearing for the 2^nd Defendant, when pressed by the Court on the matter, was unable to give particulars as to how precisely the 2^nd Defendant put its proprietary claim in light of the document just mentioned.

7.  The Defendants say that I cannot decide this case because of allegations of illegality by the Defendants and of fraud by the Plaintiff.

8.  In relation to illegality, I do not think that the question is relevant here. The monies were paid to the stakeholder pursuant to the Order of Deputy Judge Saunders. The Order was made on the footing that it was perfectly legal and proper for the properties to be sold to the parties. The only question then, today, is the proper destination of the proceeds of sale, namely, the monies held by the stakeholder.

9.  As for fraud, even if the Plaintiffs raise issues of fraud, I do not have to make any determination on those issues for the purpose of today. Those issues are irrelevant to the determination of the proper destination of the monies held by the stakeholder.

10.  The case has been put forward on the basis of the liberty to apply granted by Deputy Judge Saunders and on the basis of Order 14. I would accept that in essence this is a case seeking partial judgment. The fraud issues are not relevant to the determination of the entitlement of the Plaintiffs to a partial judgment. The trial, in the future, of course may have to deal with those issues.

11.  For those reasons, I allow the Plaintiffs’ application.