FIRST LASER LTD v. FUJIAN ENTERPRISES (HOLDINGS) CO LTD AND ANOTHER

HCA 4414/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 4414 OF 2001

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CACV 126/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIAL APPEAL NO 126 OF 2008

(ON APPEAL FROM HCA NO 4414 OF 2001) 

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BETWEEN

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TAXATION REVIEWS

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Introduction

1.  There are two reviews of taxation before this Court, both on fees of Counsel.

Background

2.  The facts of the parties’ disputes are complicated.

3.  For the present purpose, very briefly, the Plaintiff (the Respondent and paying Party) is a Macau Company and the Defendants (the Respondents and Receiving Parties) are window companies of Fujian Provincial People’s Government.

4.  In 1996, the Plaintiff entered into agreements with the 1^st Defendant to purchase, inter alia, 51% of shares in Fujian Casix Laser Inc. (福建華科光電有限公司).  It was said that the Plaintiff paid (or was deemed to have paid) the price in March 1998 but the 1^st Defendant failed to transfer the shares.  Approval was not obtained from the relevant PRC government authorities for the transfer. The 1^st Defendant further sold the shares to a third party for US$60 million, of which was received by the 2^nd Defendant.  

5.  Two pieces of litigation arose.

(a)    The Plaintiff commenced the present proceedings in Hong Kong against the Defendants for, among others, damages or account of profits.

(b)    The 1^st Defendant sued the Plaintiff and others in PRC for declaration that the agreements were of no effect. 

6.  The two set of proceedings went on simultaneously and the PRC proceedings concluded first in December 2004.  The 1^st Defendant won.

7.  Under the proceedings herein, parties raised a number of difficult issues of law, including whether HK or PRC law should apply, the legal effect of the PRC judgment on the HK proceedings, and so forth.

8.  After a trial for 10 days in February 2008, the trial judge entered judgment for the Plaintiff with costs.

9.  The Defendants took up the matter to the Court of Appeal.  

10.  In the meantime, the Plaintiff proceeded to have its costs taxed.  After taxation before a master for 3 days in January 2010, the sums of about $1.4 million and $3.2 million were taxed for the profit costs and disbursements respectively.

11.  However, the Defendants won their appeal in January 2011.  The judgment below was set aside and an issue of restitution under PRC law was remitted to the trial judge for determination.

12.  Although the Plaintiff further brought an appeal to CFA but the same was later dismissed.

13.  In the circumstances, the Plaintiff not only cannot recover any costs from the Defendants, but also has to pay for them in all three levels of the Court.  I dealt with both the bills of the Defendants in the Court of First Instance and in the Court of Appeal for 10 days.

14.  The Defendants thereafter brought review of 4 items of counsel fees under the two bills, particulars of which are as follows.

HCA 4414/2001

Item No.	Description	Fees Claimed	Fees Allowed
78	Counsel Brief	SC - $2,500,000 JC - $730,000	$1,575,000 $378,000
80	Preparation of Closing Submissions	SC - $900,000 JC - $168,000	No No

CACV 126/2008

Item No.	Description	Fees Claimed	Fees Allowed
20	Counsel Brief	SC - $2,500,000 JC - $730,000	$850,000 $297,500
80	Supplemental Brief	SC - 720,000 JC - $240,000	$170,000 $59,500

At the review, Mr. MC Law of Counsel acted for the Defendants and Mr. P Chu of LCD acted for the Plaintiff.  Upon hearing from them, I reserved my decisions to be handed down.  I now do so.

15.  In assessing counsel fee, as in the original taxation as well as in the present review, I asked myself to bear in mind of the relevant principles from the White Book 2014 at pages 1190 - 1194, in particular the followings general principles.

“

Part III – FEES TO COUNSEL
General

(5) Since the Civil Justice Reform amended the wording of paragraph 2 (5) of Part II of the First Schedule to Order 62, counsel’s fees under party and party taxation is no different from taxation of other costs and expenses – the test of “necessary or proper” is applicable… In applying that test the taxing master shall exercise his discretion having regard to all the relevant circumstances and in particular to the matters set out in paragraph 1 (2). They are:

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

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

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

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

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

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

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

     …

Specific Fees

 Brief fee – A proper measure for counsel’s fees was to estimate what fee a hypothetical counsel, capable of conducting the case effectively, but unable or unwilling to insist on the high fees sometimes demanded by counsel of pre-eminent reputation, would be content to take on the brief; but there was no precise standard of measurement, and the taxing master or the judge must, using their knowledge and experience, determine what was the proper figure…

 It is not a sound principle on party and party taxation to treat the fee paid by the other party as a yardstick…

 In assessing counsel’s fee it is always relevant to take into account what work the fee, together with any refreshers, has to cover. The brief fee covers all the work done by way of preparation for representation at the trial and attendance on the first day of trial…

 Preparation by counsel of his examination-in-chief and cross-examination and of his final submissions is an ordinary part of his conduct of a trial on behalf of his client being all part of the work which counsel accepts an obligation to perform by accepting the brief and for which he is remunerated by the brief and refreshers. They also cover:

(a) Preparation work before the delivery of the brief on the faith of a solicitor’s statement that it will be delivered;

(b) Preparatory work in counsel satisfying himself that he should accept the brief;

(c) Evening preparation;

(d) Any consultations between members of the tem of counsel;

(e) Advising experts at weekends;

(f) Conferring with experts without separate instructions;

(g) Lost opportunities;

(h) Chronologies, etc.;

(i) Skeleton arguments;

(j) Dramatis personae;

(k) Opportunities to prepare further when the court is not sitting;

(l) Preparation of draft terms of collateral agreements…

 Counsel is not normally entitled to be remunerated separately for necessary work which is an incident of the proper representation of the client; …

What was necessary and incidental to the preparation for representation at trial, and hence not chargeable separately, depending on the circumstances of the case. Where counsel was duly instructed to perform other work, in other words, work which was quite separate from the preparation for representation at trial and which was “necessary or proper” within the meaning of O.62 r.28 (2), such work could be claimed as a separate and discrete item of counsels… ”  

16.  Mr. Law made a number of general observations. I agree with them and indeed they were accepted by me at the taxation.

(a) At the taxation, the LCD acting for the Plaintiff had on more than one occasion informed that the Defendants’ bill in HCA 4414/2001 was blatantly excessive, totaling over $15,000,000. i.e. 3 times of the costs taxed at the Plaintiff’s bill. However, I could only refer him and reiterate that it was not a sound principle on party and party taxation to treat the fee paid by the other party as a yardstick.

(b) The action contained complicated facts and law issues. In fact, when I dealt with the brief of counsel at the taxation, I informed parties that:

(i) This was a case touching on complicated facts and difficult law, including dispute on PRC law.

(ii) The subject matter involved claims of over US$ 60 million.

(iii) The consequences of the litigation had important impact on both parties.

   However, at the same time, I also noted:

(iv) The Defendants took the matter very seriously. Without any undue respect to the team of legal advisers for the Defendants, quite some costs spent had been taxed off by me on the ground that they did not fall within party and party costs. 

(v) Counsel, both Senior and Junior, was engaged throughout the whole proceedings.  From time to time, Counsel’s assistance was obtained to assist on pleadings, discovery, expert evidence, witness statements and advices.

(vi) Even I taxed off certain counsel’s fees, both Counsel had received quite some remuneration in the proceedings.

17.  With the above in mind, despite the diligence of Mr. Law, I am afraid that he has not been able to persuade me to change my views at the taxation.

Brief for Trial and Preparation of Closing Submissions

18.  Senior Counsel was called to HK bar in the year of 1978, and Junior Counsel, in 1997.  At the material times, their respective hourly rates were about $15,000 and $2,800.  I took the view that they fell within the usual ranges though the one with Senior Counsel was at the high end and that of his Junior, the low one.  By the time when the case went before the trial judge, SC and JC had been allowed fees by me for over $1,000,000 and $300,000 respectively (out of fees charged for over $2,000,000 and $1,000,000).

19.  The case was set down for hearing of 20 days.  12 trial bundles consisting pleadings, 8 witness statements (1 for the Plaintiff and 7 for the Defendants), documents and expert reports on PRC law and handwriting. Counsel on both sides prepared, inter alia, detailed skeletons with substantial authorities.

20.  The trial eventually only lasted for 10 days.  The Plaintiff’s counsel spent the first 3 days for opening submissions, followed by 5 days for 3 witnesses and then, 2 days for closing submissions of both parties.

21.  At the taxation, I adopted a hypothetical approach, i.e. under party and party taxation, Counsel should have spent the following hours and levied their brief fees accordingly.

Jobs undertaken	Senior Counsel (hours)	Junior Counsel (hours)
Reading/revising papers	15	15
Preparation of skeleton, etc.	25	30
Reading skeleton, etc. of the other side	10	15
Legal research	5	25
Discussion	10	10
Final Submissions	25	25
Conferences during trial	10	10
Day 1	5	5
Total	105	135
Brief	$15,000 x 105 hours = $1,575,000	$2,800 x 135 hours = $378,000

I further allowed both Counsel a refresher based on 7 hours of work each day (i.e. 5 hours of court hearing and 2 hours for preparation, discussion, and so forth).

22.  As I had allowed time for Counsel to prepare final skeleton submissions in the brief fees, I did not allow any extra fees for preparation of closing submissions.

Brief for Appeal and Supplemental Brief thereof

23.  When the Defendants took the matter to the Court of Appeal, the Senior Counsel at the trial below was about to retire.  It necessarily caused a change of leader. Two new Senior Counsel were brought into the picture, charging hourly rates of $6,000 and $10,000 respectively.  The Junior Counsel was retained. However, though they won the appeal, only certificate for two Counsel was allowed.

24.  The appeal was scheduled to be heard for 5 days in June 2010.  The Defendant’s Senior Counsel took up half of the time for his oral submissions.  Then, in the middle of submissions by the Plaintiff’s Senior Counsel, he sought to amend its Respondent’s Notice.  The Defendants also asked for leave to file Rejoinder.

25.  Upon consideration, the Count of Appeal eventually allowed the applications but the appeal was left part-heard and had to be re-fixed for another 3 extra days in August 2010.  Counsel for the Defendants then charged a supplemental brief for the resumed hearing.

26.  Again, I adopted the hypothetical approach in assessing Counsel’s brief.

Jobs undertaken	Senior Counsel (hours)	Junior Counsel (hours)
Reading/revising papers	25	25
Preparation of skeleton, etc.	25	25
Reading skeleton, etc. of the other side	20	20
Conferences/ Discussion	10	10
Day 1	5	5
Total	85	85
Brief	$10,000 x 85 hours = $850,000	$3,500 x 85 hours = $297,500

As to refreshers, I also allowed them on 7 hours of work each day and as such, the sums of $70,000 and $24,500 respectively for both Senior and Junior Counsel.

27.  In allowing the above brief fees and refreshers, I asked myself to bear in mind the fees having charged and allowed by me for Counsel at the trial.  And of course, further fees were spent by Counsel to take up the matter to the Court of Appeal, including perusal of papers, advising in conferences, preparing affirmations, joint note of advice and (supplemental) notice of appeal as well as attendance before the trial judge for one day.  Under the relevant CA bill, before it came to the brief, Senior Counsel claimed over $500,000 and Junior Counsel, about $450,000.  After taxation, I allowed them at about $400,000 and $100,000 respectively.

28.  Supplemental brief is unusual as applications to amend notice of appeal, respondent notice, etc. at the substantive hearing are probably not uncommon even though they are highly discouraged especially after CJR.  However, I was persuaded at the taxation that the “changes” in the middle of the appeal fell outside the original scope of work anticipated by Counsel when they agreed with their brief fees.  Upon going through the new skeletons as submitted by both sides, I allowed an extra 10 hours of work to be spent by both Counsel.  Hence, the supplemental Briefs were allowed at $170,000 ($10,000 x 10 + refresher at $70,000) and $59,500 ($3,500 x 10 + refresher at $24,500).

The Review

29.  At the Review, I had the assistance from the junior counsel who conducted the trial and appeal.  Mr. Law also prepared a short skeleton explaining to me how complex the issues were with highlights at the number of trial bundles and authorities having deposed at different stages of the proceedings.

30.  Mr. Law had an uphill battle.

31.  As pointed out by Mr. Chu, LCD for the Plaintiff, there was no new material before me at the review.  There was also no allegation that discretion of this Court was exercised wrongfully at the taxation.  Those matters mentioned by Mr. Law had been fully ventilated before the Court at the taxation for 10 days.

32.  It is undisputable that the facts and law involved is complex.

33.  Mr. Law specifically suggested that the trial was shortened by 10 days because of the reasonable stance taken by his clients and word done by Counsel.  However, the Court of Appeal apparently took quite a different view when they deprived the Defendants for 45% of the costs in the action below by their Decision on costs handed down on 14 June 2011.  Paragraph 5 thereof states that:

“5. However, we are of the view that the defendants should be deprived of part of their costs below by reason of two matters. First, it had unnecessarily prolonged the trial by relying (which was later abandoned) on the defence of the lack of authority of the persons who signed the contract on their behalf. The plaintiff had to open its case and called evidence with its main witness being cross-examined on this issue. The abandonment only came when counsel for the defendants opened the case. Counsel informed the court that the defendants would not be calling evidence. Witness statements were exchanged. Substantial costs had been incurred and wasted. Second, the defendants failed in their defence that they had not agreed to transfer 51% of FCL to the plaintiff. They also failed in their defence on the issue of the uncertainty of the subject matter of the contract…”

34.  It is also indisputable that the team of counsel acting for the Defendants did an excellent job.  However, when it comes to taxation on party and party basis, one has to bear in mind paragraph 62/App/6 at p.1186 of HKCP 2014:

“Party and party basis … On a taxation of such a basis there shall be allowed all such costs as were necessary or proper for the attainment of justice or for enforcing or defending the rights of the party whose costs are being taxed… the costs chargeable under a taxation between party and party are all that are necessary or proper to enable the adverse party to conduct the litigation, and no more. Any charges merely for conducting litigation more conveniently may be called luxuries, and must be paid by the party incurring them…”

At the end of both the taxation and the review, I remained of the same view that the team of counsel for the Defendants, in respond to the highly demanding clients, had provided luxurious services accordingly.  They therefore should be fully remunerated, but only on solicitor and own client scale, but not party and party scale.

35.  In the circumstances, the Reviews are dismissed. Parties agreed that costs of the review should follow the event and had no objection for a gross sum assessment by me in the form of order nisi.  To wrap up the matter, I therefore allow the sum of $12,900 to the Plaintiff.

Hearings:	5 March 2014 (15 minutes by LCD)	400
	7 July 2014 (2 hours by LCD)	3,200
Preparation:	LCD (3 hours)	4,800
	Solicitor (1 hour at $4,000)	4,000
Miscellaneous		500
		12,900
		=====

Such costs order nisi will become absolute within 14 days from the date hereof.

CACV 126/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 126 OF 2008

(ON APPEAL FROM HCA 4414 OF 2001)

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BETWEEN

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DECISION ON COSTS

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Hon Cheung JA (giving Decision on Costs of the Court) :

Orders made on 23 May 2011

1.  On 23 May 2011, this Court made the following orders :

(1)   We granted leave to the plaintiff to appeal against our judgment of 4 January 2011 to the Court of Final Appeal on the ‘as of right’ ground which was not objected to by the defendants.  We imposed the condition of payment into court of $400,000 within 21 days.  Costs of the application were ordered to be in the cause of the final appeal.

(2)   We ordered by consent that the money paid into Court is to remain in Court until the determination of the final appeal and that the costs relating to the application to be in the cause of the final appeal.

(3)   We refused with costs the plaintiff’s application for leave to appeal against our interlocutory judgment of 8 July 2010 to the Court of Final Appeal.  We did not consider that the plaintiff had satisfied the ‘or otherwise’ ground which was the sole basis advanced for its application.

Costs

2.  We now deal with the plaintiff’s application to vary the costs order of the appeal and below.

3.  We will address the costs below first.  In our judgment of 4 January 2011 we set aside the judgment of To J and ordered the issue of restitution to be remitted for determination.

4.  Although the plaintiff had pleaded an alternative claim for the restitution of the money paid under the contract, it did not receive by our judgment what it had asked for because the repayment of the contract sum is subject to possible restitution by the plaintiff to the defendants of the benefits it had received under the contract which have yet to be determined.  Hence this is not a case of the plaintiff succeeding at the trial below.  On the contrary it was the defendants who had succeeded below.

5.  However, we are of the view that the defendants should be deprived of part of their costs below by reason of two matters.  First, it had unnecessarily prolonged the trial by relying (which was later abandoned) on the defence of the lack of authority of the persons who signed the contract on their behalf.  The plaintiff had to open its case and called evidence with its main witness being cross-examined on this issue.  The abandonment only came when counsel for the defendants opened the case.  Counsel informed the court that the defendants would not be calling evidence.  Witness statements were exchanged.  Substantial costs had been incurred and wasted.  Second, the defendants failed in their defence that they had not agreed to transfer 51% of FCL to the plaintiff.  They also failed in their defence on the issue of the uncertainty of the subject matter of the contract.  While we do not consider that the defendants should be ordered to pay part of the costs of the trial to the plaintiff, we are of the view that the defendant should be deprived of 45% of the costs below.  Hence we will order that the defendants will only be entitled to 55% of the costs below.

6.  As for the costs of the appeal, we are of the view that the defendants should have their costs without any deduction.  The appeal was substantially argued on the conflict of law issues on which the defendants succeeded before us.

Certificate for counsel

7.  The defendants asked for certificate for three counsel for the appeal.  The plaintiff was represented by two counsel.  Two counsel were instructed below by both sides.  While we agree that the appeal raised difficult questions of law, we are of the view that it was sufficient for two counsel to be instructed to advance the defendants’ case.

Mr. Chan Chi Hung SC and Mr. Jeremy S K Chan, instructed by Messrs Mayer Brown JSM, for the Plaintiff

Mr. Paul Shieh SC and Mr. Law Man Chung, instructed by Messrs Paul, Hastings, Janofsky & Walker, for the 1^st and 2^nd Defendants

CACV 126/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 126 OF 2008

(ON APPEAL FROM HCA NO. 4414 OF 2001)

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BETWEEN

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JUDGMENT
on
(1)  Plaintiff's application to add
ground no.5 to Respondent's Notice
and
(2)  Defendants' application for
leave to file Rejoinder

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Hon Yuen JA (giving the judgment of the court):

Subject matter of this judgment

1.  On 21-25 June 2010, this court heard an appeal by the Defendants from the judgment of Deputy Judge To (now To, J).  The appeal was part heard and adjourned to 30-31 August 2010.  This judgment is concerned with two applications:

1.1 the Plaintiff’s application to amend its Respondent’s Notice by adding ground no. 5 (for convenience I shall refer to this as “the Fault Compensation Application”);

1.2 consequent to leave given by this court on 25 June 2010 for the Plaintiff to amend its Respondent’s Notice by adding ground no. 7 (“the Estoppel by Convention Application 1"), the Defendants’ application for leave to file a rejoinder as per a draft handed up to the court (“the Estoppel by Convention Application no. 2").

Relevant background

2.  The background - both factual and procedural - to the present applications is complex and it is necessary to recount it briefly. 

2.1 The Plaintiff is a Macau company controlled by Ngan In Leng     (“Ngan”).

2.2 The 1^st Defendant is a Hong Kong company which was a “window company” of the Fujian Provincial People’s Government. 

2.3 The 1^st Defendant owned a PRC company, Fujian Casix Laser Inc (“FCL”).  The 1^st Defendant through its subsidiaries Casix Ltd (“Casix”) a Hong Kong company, and Fujian Kexin Technology Development Company (“Kexin”) a PRC cpmpany, owned Fuzhou Casix Optronics Inc. (“FCO”).

2.4 Before 1996, the 1^st Defendant and Fujian Research Institute of Material Structures of the Academy of Science (“FRIMS”) jointly owned FCL but they fell out, with the 1^st Defendant buying out FRIMS’ shares but with FRIMS asserting that it retained intellectual property rights over certain technology relevant to FCL’s manufacturing operations.  There were ongoing disputes between the 1^st Defendant and FRIMS.

2.5 In December 1996, the Plaintiff and the 1^st Defendant entered into 3 agreements, the  agreement known as the First Laser Agreement (“the Agreement”) superceding 2 previous agreements (the Hang Wo Agreement and the COM Agreement),  for the sale by the 1^st Defendant to the Plaintiff of 51% of the shares in FCL and FCO.

2.6 By reason of their corporate status, the transfer of shares in FCL and FCO required approval (by which I include valuation, etc) of various PRC government authorities (“the authorities”).

2.7 In February 1997 FCO applied to the authorities for the transfer of all its shares to Casix Optronic Manufacturing Ltd (“COM”) pursuant to an agreement (“the FCO Agreement”) between Casix and Kexin and COM which bears a date prior to the Agreement; COM was a Macau company owned as by 51% of Hang Wo (a company owned by Ngan), and 49% by Jenwing (the ownership of which was the subject matter of dispute).

2.8 On 3 March 1997, the authorities approved the transfer of allFCO shares to COM.

2.9 There was no application for the transfer of any FCL shares, all of which remained in the name of the 1^st Defendant.

2.10       By 13 March 1998, the Plaintiff had paid (or was deemed to have paid) the entire purchase price under the Agreement.

2.11 The Plaintiff had also provided funds for a successful project of FCL (“the Project”).

2.12 In February 2000, the 1^st Defendant sold all the shares in FCL to a third party JDS Uniphase China Holdings Company (“JDS”) for US$60m.  The 2^nd Defendant received the proceeds of sale.

Litigation

3.  The sale of the FCL shares to JDS gave rise to two pieces of litigation.

3.1 The Plaintiff sued the Defendants in Hong Kong.  In the Statement of Claim, the Plaintiff pleaded the Agreement (para. 10); it also pleaded a “Trust” (para. 16) of 51% of the shares in FCL on the ground that it had paid the entire purchase price.  It also pleaded, on the alternative basis that the agreement was not valid, restitution of the purchase price and the funds paid for the Project as money had and received, and tracing for such restitution (para. 38).  There were also claims based on mistake (para. 39).

3.2 The 1^st Defendant sued the Plaintiff, Hang Wo and COM in the Fujian People’s Court for an order that the agreements were of no effect.

4.  The Plaintiff sought an anti-suit injunction against the 1^st Defendant.  The Defendants sought a stay of proceedings against the Plaintiff.  Neither was successful, so the parallel proceedings carried on in both Hong Kong and the PRC.

PRC proceedings

5.  The PRC proceedings concluded first. 

5.1 In April 2002 the Fujian Higher People’s Court held that none of the 3 agreements was valid for want of approval.  (It also dealt with the dispute over the authenticity of a memorandum.  That dispute is not material to this judgment).              

5.2 The Plaintiff (together with Hang Wo and COM) appealed to the Supreme People’s Court (“SPCt”), who on 3 December 2004 made an order that the COM Agreement and the First Laser Agreement were of no effect, and that the part of the Hang Wo Agreement concerning the transfer of shares in FCL and FCO was of no effect.  The SPCt did not deal with the consequences of its judgment. 

5.3 In the SPCt, the Plaintiff accepted that PRC law applied to the agreements.

Hong Kong proceedings

6.  In the Hong Kong proceedings, the Defendants ran a number of defences, both factual and legal (no distinction was made between the two defendants).  Amongst the legal defences were the following.

6.1 The Defendants pleaded that PRC law applied to the agreements, and that was the subject matter of issue estoppel by virtue of the SPCt’s judgment (para. 14A Re-Amended Defence and Counterclaim ).

6.2 The Defendants also pleaded that the agreements were invalid and of no effect for want of approval under PRC law, and that was also the subject matter of issue estoppel by virtue of the SPCt’s judgment (para. 14A).

6.3 The Defendants pleaded that in any event, the agreements were not binding on it for want of approval from the authorities (paras. 19-20).

6.4 The Defendants also pleaded that by reason of the approval of the transfer of all the shares of FCO to COM in March 1997, the First Laser Agreement has been “precluded” (排除) under PRC law from being submitted for approval (para. 21B).

6.5         The Defendants also pleaded that, even if the Agreement was binding, PRC law did not recognize beneficial ownership or constructive trust of shares, and that was contrary to the public policy of the PRC (para. 22(2)).

7.  The Plaintiff’s Re-amended Reply included the following. 

7.1 The Plaintiff pleaded that the proper law of the Agreement was Hong Kong law (para. 23)

7.2 The Plaintiff also pleaded that in any event, Hong Kong law was applicable to the “Trust” (para. 24)

7.3 The Plaintiff pleaded that the SPCt’s judgment only held that under PRC law, the agreements were of no effect to transfer the legal title to the shares; and in any event the SPCt’s judgment was not binding on other matters such as what were the consequences of the agreements being of no effect (para. 14).

7.4         The Plaintiff also pleaded that even if PRC law applied, the 1^st Defendant was obliged to procure approval.  The 1^st Defendant was “at fault” in failing to do so, and as such liable under PRC statutes to compensate the Plaintiff , including restitutionary remedies (para. 25A).  The Plaintiff pleaded certain articles in the PRC statutes which provide that when an agreement is of no effect, any property obtained by one party should be “returned” (返還) to the other party, and that if any party is at “fault” (有過錯) for the agreement being of no effect, then it must “compensate” (賠償) for the loss suffered by the other party so caused.                   

7.5 The Plaintiff also pleaded that there was no “preclusion” as the FCO Agreement was made only to facilitate transfer of the FCO shares under the Agreement (para.10).

7.6 The Plaintiff also pleaded that in any event, the Defendant was estopped by convention from denying the validity of the Agreement as both parties had acted as if the Plaintiff owned 51% of the FCL shares (paras. 17-19).

Notable matters concerning the pleadings

8.  The Reply gave rise to two fresh issues - (1) the concept of “fault” and “compensation” under PRC law and (2) estoppel by convention.  The following matters are notable. 

Relevant to the Fault Compensation Application

8.1 First, the Plaintiff had not pleaded an entitlement, founded on PRC statutes, to compensation for loss arising from fault (para. 7.4 above) as a cause of action, nor did it make a claim to such compensation, in the Statement of Claim.  All that the Plaintiff had pleaded in the Statement of Claim, on the basis that there was no agreement, were claims for restitution of the purchase price and funds for the Project as money had and received, and tracing for such restitution (see para. 3.1 above, referring to para. 38 of the Statement of Claim).

8.2 As a matter of procedural law,

“a plaintiff must not put forward in his reply a new cause of action which is not raised either in the writ or statement of claim. (If the plaintiff, after seeing the defence, finds it necessary to rely on a cause of action which has not been raised in the writ or statement of claim, normally the proper way is to amend the writ and the statement of claim).”

(Hong Kong Civil Procedure 2010 vol. 1 p.359 para. 18/3/2).

8.3 It was not until Day 5 of the Appeal that the Plaintiff’s leading counsel orally sought leave to amend the Statement of Claim.  This was followed on 28 June 2010 by the Plaintiff’s summons for leave to amend the Statement of Claim to plead in para. 39A

“further or as a fallback alternative, the Plaintiff refers to and relies upon paragraphs 25 and 25A of the Re-Amended Reply and Defence to Counterclaim”

and to add a claim in the relief for

“monetary award, or compensation”.

8.4 However it is important to note that the Defendants’ counsel at trial were alert to the fact that the Plaintiff was making an “alternative claim” for loss arising from “breach of ... statutory duties ... to obtain approval and registration” and made submissions on that alternative claim (see Defendants’ Closing Submissions pp.65 paras. 15.1-15.2).

Relevant to the Estoppel by Convention Application 2

8.5 Secondly, after the Plaintiff’s reply pleaded estoppel by convention, the Defendants did not seek leave to file a rejoinder to plead that that concept was not known to PRC law. 

8.6 Generally,

“leave to serve a rejoinder will not be granted unless it is really required, so as to raise matters which must be specifically pleaded”.

(Hong Kong Civil Procedure 2010 vol. 1 p.360 para. 18/4/1). 

Order 18 rule 8(1) sets out the principles governing matters which must be specifically pleaded. 

8.7 Applying those principles, I take the view that foreign law is a matter which should be specifically pleaded.  Accordingly the Defendants should have sought leave to plead in a rejoinder that estoppel by convention was not known to PRC law. 

8.8 However that was not done.  I shall deal later with the circumstances in which the Defendants’ application for leave to file a rejoinder (the Estoppel by Convention Application 2) was made on Day 5 of the Appeal.

Expert evidence

9.  It may be convenient at this stage to refer briefly to the expert evidence insofar as they are relevant to the two present applications.  The Plaintiff’s expert on PRC law was Prof. S Z Wang and the Defendants’ expert was Mr Bai Tao.  All their opinions were given after the SPCt’s judgment.

Relevant to the Fault Compensation Application

9.1     In Prof. Wang’s opinion dated 8 April 2005 (“Wang I”), he included his opinions on PRC law on what I have called “Fault Compensation”, including the issue of the agreement being of no effect (paras. 1-5), the issue of fault (paras. 6-9), the issue whether the Plaintiff was also at fault (paras. 10-11), the legal basis of compensation subsequent to the agreement being of no effect (paras. 12-16), the issue of return of property (paras. 17-23) and the issue of compensation for loss (paras. 24-33).

9.2     In Mr Bai’s supplemental opinion dated 11 October 2005 (“Bai II”), he dealt with Prof. Wang’s opinions above.  Mr Bai’s opinion was that the entity responsible for applying for approval was FCL (para. 5), that the 1^st Defendant was not at fault (para. 6), that the “return” of property did not extend to restitution for unjust enrichment (不當得利) (para. 7), and that compensation for fault was restricted to loss for reliance interest (信賴利益) which comprised only (1) expenses for making the agreement (訂約費用), (2) expenses for carrying it out (履行費用), and (3) reasonable indirect losses (合理的間接損失), which did not include loss of profit (para. 8).  

9.3     In Prof. Wang’s supplemental opinion dated 12 January 2006 (“Wang II”), he discussed and disputed Mr Bai’s opinions at para. 5 that the 1^st Defendant was not responsible for applying for approval (paras. 27-29), at para. 6 that the 1^st Defendant was not at fault (paras. 30-32), at para. 7 that the “return” of property did not extend to restitution (paras. 33-40) and at para. 8 that  compensation for fault was so restricted (paras. 41-53).

9.4     In turn, in Mr Bai’s 2^nd supplemental opinion dated 3 May 2006 (“Bai III”), he challenged Prof. Wang’s opinions above.

9.5     Both experts were cross-examined at the trial on their opinions regarding fault and compensation.

Relevant to the Estoppel by Convention Application 2  

9.6     In Wang II, Prof. Wang had referred to a “common understanding” (共識) between the parties that he said was shown in minutes of a meeting at Zhuhai on 5 October 2000 (para. 20). 

9.7     In Bai III, Mr Bai referred to this point and specifically asserted that the PRC did not have the concept of Estoppel as known to Hong Kong law (para.8.1). 

9.8     There was no further expert evidence from the Plaintiff challenging that assertion.  Nor was there cross-examination of Mr Bai on this assertion at the trial.

Trial and judgment

10.  At the trial, there were many more issues before the judge, both factual and legal, than have been set out above.  The judgment ran to 82 pages.  In a nutshell, the judge found that Hong Kong law applied to the Agreement, that there was an implied term in the Agreement that the 1^st Defendant should procure approval, that the 1^st Defendant had breached the Agreement by not transferring 51% of the FCL shares to the Plaintiff, and that on the contractual claim the Plaintiff was entitled to US$30.5m being 51% of the value of the FCL shares, as evidenced by the sale price to JDS.  The judge also found, on the proprietary claim, that since the Plaintiff had paid the entire purchase price under the Agreement, the 1^st Defendant held 51% of the FCL shares as trustee for the Plaintiff.  The judge then invited the Plaintiff to elect between the contractual and proprietary remedies.  As shown by the sealed order, the Plaintiff elected the proprietary remedy.

Judge’s approach to issue of fault and compensation under PRC statutes

11.  Coming back to the dispute between the experts on fault and compensation under the PRC statutes, it would appear that the judge, having held that Hong Kong law applied to the Agreement, did not consider it necessary to deal with PRC law except to the limited extent discussed below. 

12.  The Defendants had put forward a defence on the basis that a finding in favour of the Plaintiff under Hong Kong law would offend public policy and comity with the PRC.  In connection with this defence only, the judge found the following.

12.1       As far as the two different systems of law were concerned:

-  fault was “to some degree” synonymous with breach, the difference being “only one of degree” under two different systems of law,

-  compensation and damages were just a matter of terminology under two different systems of law, and

-  the assessment of compensation under PRC law or Hong Kong law was also “a matter of quantum” under the two different systems (para. 115).

12.2       As far as the party at fault was concerned, the judge:

-  rejected Prof. Wang’s opinion that the 1^st Defendant was under a PRC statutory obligation to procure approval, and

-  having found under Hong Kong law that there was an implied term in the Agreement that the 1^st Defendant had to procure approval, considered that “it is open to me to presume the same is true under PRC law as FCL was under a statutory obligation to procure the approval and the 1^st Defendant was the only shareholder and solely had control and management of FCL.  Thus, under PRC law, the 1^st Defendant was at fault in not procuring the approval and is liable to pay compensation” (para. 116, emphasis added).

12.3        It is clear from the context in which those passages appeared that the judge was dealing with the fault and compensation issue only insofar as it was necessary to deal with the public policy and comity defence.  Apart from rejecting Prof. Wang’s opinion that the 1^st Defendant was under a statutory obligation to procure approval, the judge did not determine the disputes on the many provisions in PRC law raised by the experts.  It is clear from that, and his reference to inexactitudes of degree and quantum, that he was not determining substantively the issues of fault and compensation under the PRC statutes and any remedies flowing from them.  The judgment was based solely on Hong Kong law.

Appeal

13.  The Defendants appealed.  The Plaintiff filed a Respondent’s Notice.  As I have said, the hearing of the appeal commenced on 21 June 2010. 

14.  In the course of the appeal, the Plaintiff sought leave to amend its Respondent’s Notice by the addition of three grounds, viz. no. (5) to (7).  The Defendants did not object to ground no. (6).

Fault Compensation Application

15.  Ground no.(5) (the present Fault Compensation Application) reads as follows:

“If and insofar as the learned trial judge did not so hold, which is not admitted, it is averred that the learned judge ought to have accepted the Plaintiff’s submissions in paragraphs 150 to 219 of its Closing Submissions, that the 1^st Defendant was at fault in making approval of the transfer of the FCL shares to the Plaintiff impossible by selling to JDS and obtaining or procuring transfer approval, and held that even if Mainland PRC Law applies, by reason of the ‘restitution’ and/or ‘compensation’ available for ‘fault’ even under Mainland PRC Law, under the statutory provisions pleaded in paragraph 25A of the Re-Amended Reply & Defence to Counterclaim, the Plaintiff is still entitled to remedies in constructive trust, equitable compensation, tracing or substitution, 51% of the proceeds of sale to JDS, breach of contract, damages, restitution or unjust enrichment, whether with or without reliance upon estoppel by convention”.

16.  The Defendants object to the application on the ground that fault compensation was never claimed in the writ or Statement of Claim.  However as I have noted (para. 8.4), the Defendants’ counsel at the trial understood that the Plaintiff was making an alternative claim for the statutory entitlement under PRC law and made closing submissions on that claim.  In those circumstances, the Defendants are not caught by surprise.

17.  Further the experts for both parties have already expressed their views on the issue in their respective opinions and a transcript of their oral evidence is available.  It would not be necessary (or desirable) to have further evidence on the issue. 

Order on the Fault Compensation Application

18.  Accordingly we take the view that leave should be given to the Plaintiff to amend its Respondent’s Notice to add ground no. (5).  We will hear counsel on any consequential orders.  

Estoppel by Convention Application no. 1

19.  The Plaintiff relied on estoppel by convention at trial (see Plaintiff’s Closing Section F and paras. 268-275).  The Defendants had put forward a number of defences to this issue (Defendants’ Closing paras. 8.1-11.4). 

20.  In  the course of the Appeal, the Plaintiff’s leading counsel sought to uphold the trial judge’s judgment on the basis that (1) the judge had rejected the Defendants’ defences on Estoppel by Convention even though he had not expressly found there was such estoppel and (2) the Defendants have not appealed against that. 

21.  In our judgment given on 25 June 2010, we held that this was an incorrect reading of the judgment, and that  even though the closing submissions at trial showed that both parties had thoroughly addressed the judge on this issue, the judge had not made any determination on the issue of estoppel by convention (presumably because he had found that the Plaintiff had valid contractual and proprietary claims).  In the circumstances, we gave leave to the Plaintiff to add ground no.(7) to its Respondent’s Notice which (as amended by the court) now reads:

“The learned judge ought to have found and held in favour of the Plaintiff that the Defendants are estopped from denying the validity and effect of the First Laser Agreement and/or the Plaintiff’s interest to and beneficial ownership of 51% of the shares of and in FCL”.

Estoppel by Convention Application no.2

22.  The Plaintiff’s success on the Estoppel by Convention Application no.1 gave rise to the Defendants’ application for leave to file a rejoinder as follows:

“In response to the plea of estoppel in paragraph 17 of the re-re-amended Reply and Defence to Counterclaim [see para. 7.6 above], insofar as the said plea is premised upon PRC law as being the proper law of the First Laser Agreement it is averred that:-

(1) any issue of estoppel by convention is likewise governed by the proper law, namely PRC law,

(2) Without prejudice to any argument as to the burden of pleading and proving PRC law (and whether the Plaintiff has properly pleaded a case of estoppel by convention under PRC law), the concept of estoppel by convention does not exist under PRC law”.

23.  The Plaintiff has objected to this application as it says that it is too late for a rejoinder to be filed after trial and it would need to file evidence of PRC law’s approach to estoppel.  However I have referred earlier (paras. 9.6 - 9.8) to the opinion of the Defendants’ expert on PRC law that there was no concept of estoppel in that system of law (Bai III para. 8.1).  Since the system of law governing the relationship between the parties was of fundamental importance in this case, the Plaintiff who was asserting its rights by way of estoppel by convention must have been alive to the significance of Mr Bai’s point (even in the absence of a rejoinder).  It was open to the Plaintiff to present a contradictory opinion from its own expert on PRC law, whether in a supplementary opinion or in Prof Wang’s oral evidence.  It was also open to the Plaintiff to cross-examine Mr Bai on this point.  As it did not do so at trial, we do not see why it should be entitled to seek to adduce evidence of PRC law now, and on that basis to oppose the Defendants’ application, especially when the Plaintiff has not suggested that its expert would challenge Mr Bai’s expert opinion on this matter.

Order on the Estoppel by Convention Application no. 2

24.  In the premises, we would give leave to the Plaintiff to file a rejoinder as per the draft handed up to the court on 25 June 2010.  We will hear the parties on any consequential orders.  

Mr Chan Chi Hung SC and Mr Jeremy SK Chan instructed by Mayer Brown JSM for the Plaintiff (Respondent)

Mr Benjamin Yu SC, Mr Paul Shieh SC and Mr MC Law instructed by Paul Hastings Janofsky & Walker for the Defendants (Appellants)

CACV 126/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 126 OF 2008

(ON APPEAL FROM HCA NO. 4414 OF 2001)

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R U L I N G

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Hon Yuen JA (giving the ruling of the court):

1.  We consider, having examined the Judgment,  that the Judge had not dealt with the issue of estoppel by convention.  We also consider, contrary to Mr Chan Chi Hung SC’s argument, that the Judge had not“rejected all the Defendants’ defences” to the estoppel by convention argument.   Therefore, the Plaintiff’s Ground (7) in its draft Amended Respondent’s Notice, as presently drafted, is predicated on a wrong premise.

2.  However, Mr Chan has also said that he would like to raise the estoppel by convention argument in any event.

3.  We are mindful of the lateness at which this argument has been raised before us.   However, we have to consider all circumstances of the case and we see no prejudice to the Defendants which cannot be compensated by costs. 

4.  We would therefore grant leave to the Plaintiff to proceed with Ground (7) of the draft Amended Respondent’s Notice as follows:-

“(7) the learned judge ought to have found and held in favour of the Plaintiff that the Defendants are estopped from denying the validity and effect of the First Laser Agreement and/or the Plaintiff’s interest to and beneficial ownership of 51% of the shares of and in FCL;”

After hearing submissions on costs, this court ordered that:

5.  Costs of and occasioned by the Plaintiff’s application for leave to amend Ground (7) of the Amended Respondent’s Notice to be paid forthwith to the Defendants.  A gross sum assessment skeleton bill of costs is to be provided.