J v. C AND ANOTHER

bjbj& HEADNOTE Order 62 r.8 - Disallowance of Solicitors' costs and order for reimbursement of costs ordered to be paid - Anton Piller Order discharged - Solicitors' responsibility for accuracy of affidavit drafted on the basis of Client's written instructions - Solicitors' responsibility for costs of discharge application. H C A 2949/93 IN THE SUPREME COURT OF HONG KONG HIGH COURT -------------------- BETWEEN Plaintiff 1st Defendant 2nd Defendant --------------------- Coram: The Hon. Mr. Justice Rogers in Chambers Date of Hearing: 27th April 1994 Date of Delivery of Decision: 27th May 1994 --------------------- D E C I S I O N --------------------- This was a hearing for solicitors to show cause as to why costsbetween themselves and the Plaintiff, their former client in the action, should not be disallowed and as to why the solicitors should not indemnify the Plaintiff against costs payable and ordered to be paid under an order I made dated the 4th January 1994. The action in which this matter arises was commenced by the Plaintiff, a United States resident, on the 8th April 1993. By his writ the Plaintiff sought, as a minority shareholder and director of the 2nd Defendant, various reliefs against the 1st Defendant, who was the director controlling the 2nd Defendant. Included in the writ were claims to injunctions to prevent dealing with the 2nd Defendant's assets, including specifically sums in various bank accounts. The Plaintiff also sought access to all the books, accounts and business records of the 2nd Defendant and damages for conversion and breach of fiduciary duties. On the 13th April, the Plaintiff sought and was granted certain ex-parte relief by Mortimer J. which included a Mareva Injunction and an injunction to allow access to the books, accounts, business records and documents of the 2nd Defendant. By a further order, again made ex-parte, this time by the Hon. Chief Justice on the 21st April 1993 relief of an Anton Piller nature was granted. On the 30th December of last year, the matter came before me on an application to discharge made by the 1st Defendant and a renewed inter-partes application for relief sought by the Plaintiff. The matter was not concluded that day but by the date of the resumed hearing on the 4th January of this year, the Plaintiff had dismissed his solicitors and was acting in person. I gave judgment on that day in which I discharged both the injunctions made in April 1993 to which I have just referred. In doing so, I ordered that the costs of the 1st Defendant be paid by the Plaintiff forthwith on a full indemnity basis. However, when the Plaintiff argued his case on the 4th January, it became clear that certain matters as between himself and his former solicitors required investigation hence I ordered that the solicitors should appear before me on the 13th January to show cause. At that hearing, 1. indicated six areas in respect of which I required explanation from the solicitors. They were as follows: 1. What instructions were given to the Plaintiff as to the requirement of full and frank disclosure on an ex-parte application? 2. What information did the Plaintiff give his solicitors as to the accounts and records which had been supplied: referring to the period leading up to the ex-parte application? 3. What information was given to the solicitors relating to the fact that the Plaintiff had received US$170,000 again referring to the period leading up to the ex-parte application? 4. What information did the Plaintiff give to his solicitors as to the setting up of the 2nd Defendant and in particular, was the founding agreement revealed to them? 5. What advice was given to the Plaintiff on continuing to defend the application to discharge the injunction, particularly after the revelation that accounts had been supplied? 6. Why was the allegation of the 1st Defendant that he had given the name of his solicitor to the solicitors for the Plaintiff, not answered and what is the answer to that allegation? Evidence was duly by the partner of the Plaintiff's former solicitors responsible for the case. There was also a short affirmation from the trainee solicitor in respect of the sixth matter. The Plaintiff himself filed an affirmation in answer with lengthy exhibits and there was a short affirmation in reply by the partner. Before dealing with the facts of the case, I wish to set out what I see as the important points of public interest which must be kept in mind in proceedings such as this. In the first place, the Anton Piller and Mareva injunction jurisdictions are important and highly useful tools in the administration of justice. Secondly, as has been pointed out by the Court of Appeal, in Tamco, Electrical and Electronics (Hong Kong) Limited v. Stephen Ng Chun Fai, Civil Appeal No. 174 of 1992 ex-parte orders are serious matters. The Court's normal procedure of hearing both parties is forsaken and as a consequence the court demands of the Applicant that it puts everything fairly and clearly before the court. This applies a fortiori in cases of Mareva injunctions and Anton Piller orders, which have elsewhere been referred to more graphically as the Court's nuclear weapons. They should, as was said in Tamco, be regarded as exceptional. Nothing I say in this judgment should be taken as derogating from the first point where the orders are properly applied for in the appropriate circumstances. Thirdly, the arrival on the legal scene of the Anton Piller and Mareva injunction orders has unfortunately generated a considerable amount of litigation directed to discharging those orders for material non-disclosure which, without careful check, becomes a matter of litigation in its own right, almost divorced from the original proceedings. Again, nothing in this decision should be regarded as an encouragement to others to seek remedies and further litigation which will end up being worse and more damaging than the fault which it is designed to cure. Fourthly, litigants should not be financially prejudiced by unjustifiable conduct by their own lawyers. Fifthly, the court cannot demand higher standards from a litigant than it does from the litigant's lawyers. Sixthly, lawyers should not be deterred from pursuing their client's interest in applying for ex-parte orders and in particular Anton Piller and Mareva injunction orders by fear of incurring personal liability for costs either to their clients or to Defendants. The jurisdiction over lawyers in respect of costs, stems from Order 62 rule 8 of the Rules of the Supreme Court which provides that :- "...where in any proceedings, costs are incurred improperly or without reasonable cause or are wasted by undue delay or by any other misconduct or default, the Court may make against any solicitor whom it considers to be responsible whether personally or through a servant or agent, an order - (a) disallowing the costs as between the solicitor and its client; and (b) directing the solicitor to repay to its client costs which the client has been ordered to pay to other parties to the proceedings." It is clear that the object of the Rule is compensatory and not punitive. Before passing to the authorities in which that provision and the provision which was in similar terms in the previous Order 62 rule 11 in England, has been applied it is pertinent to point out that the words used are "improperly", "without reasonable cause", "other misconduct or default". There can be no doubt that these words, as is said in the cases, indicate a serious degree of fault on the part of the lawyer concerned. In the case of Myers v. Elman 1940 A.C. 282 Viscount Maughan said at p.289, that cases in the past have shown that the misconduct has been constituted by negligence or mistake on the solicitor's part. Lord Denning in language which I could not hope to emulate at p.1286 of the report of R & T Thew Limited v. Reeves (No. 2) 1 Q.B. 1283 summarises the law that mistake, error of judgment and mere negligence did not suffice but the conduct of the solicitor must be inexcusable and such as to merit reproof. There must be a serious dereliction of duty and at the very least a failure on the part of the solicitor to realise his duty to aid in promoting in his own sphere, the cause of justice. He was quoting from the speech of Lord Wright in Myers v. Elman in which Lord Wright pointed out that gross neglect or inaccuracy in a matter which it is the solicitor's duty to ascertain with accuracy may suffice and Lord Wright went on to point out a specific instance may be the accuracy of an affidavit which the client swears. Before going on to deal with the facts of the present case, I should mention also the well-known principles on which the court acts in ex-parte matters. The rule applied by the court in respect of ex parte applications that there must be full and frank disclosure of every material fact is so well known that in my judgment on the 4th January of this year I found it unnecessary to refer to the well-known case of R. v. Kensington Income Tax Commissioners ex parte Polignac [1917] 2 KB 486, nor to the legion of cases which went before or have come since. The rule which the courts apply in this respect is, in my view, probably the severest of the rules of court. If there is a breach of that rule, any ex parte order obtained is liable to be set aside irrespective of the merits. The rule applies whether the non-disclosure or mis-statement was made intentionally or unintentionally. If the original order is discharged, whether a court would be prepared to grant a further order is, at least in part, dependant upon whether the party at fault has acted deliberately and whether it has made full disclosure by the time of the inter partes hearing. That rule which the court applies in ex-parte proceedings is clearly a form of penalty. The court would not impose such a penalty on the litigant if it did not require equaly high standards from the lawyers involved. In my view, it is therefore, incumbent upon those preparing and presenting affidavits for use in ex parte proceedings, and in particular for use in applications for orders of the Mareva and Anton Piller types, that they should be as careful as possible to present the material facts as accurately as they can. I turn now to consider the course of events which led up to the making of the two orders which were discharged. The Plaintiff was introduced to his former solicitors through a Canadian lawyer working in Hong Kong. The first written communication from the Plaintiff to the solicitors was a handwritten fax running to some 9 pages, dated the 1st January 1993. As the solicitor correctly points out in his affirmation, the Plaintiff was clearly concerned that the 1st Defendant was mismanaging the 2nd Defendant's affairs and that there was a misusing of the company's funds. It is clear from this fax alone that the Plaintiff did indeed have, for example, weekly reports and also copies of books of the company, since he referred to the weekly reports having been faxed to him and to what the books of the company showed. The fax also instructs the solicitor to contact the Canadian lawyer to have him pass all contracts and pertinent documents. It seems that this instruction, which the Plaintiff labelled "Action No. 1" beside the instruction, was not followed up. The solicitor says he then engaged in some correspondence and he goes on to say he had every reason to suppose that there might be an amicable settlement and from a litigation point of view the action went to sleep. However, the threat of proceedings revived by the end of March. Paragraph 13 of the solicitor's affidavit sets out the advice which he gave the Plaintiff at length over the telephone which included the possibility of making an ex parte application for injunctive relief to freeze the 2nd Defendant's bank accounts. Although it is accepted on both sides that the solicitor did explain the necessity for full and frank disclosure of all matters material and relevant to the application, unfortunately, as Counsel for the solicitors, who was not the Counsel who had appeared previously very properly acknowledged when I put it to him, the explanation as to the court's approach which was contained in paragraph 13 might be appropriate for the purposes of an inter partes interlocutory injunction application, but was clearly inappropriate particularly for Anton Piller orders. This may in part have been the start of some of the difficulties, but I say no more about it than that. The solicitor then explains that the Plaintiff did not supply his firm with any accounts or records which he had received from the Defendants. That is correct, but in my view, the facts set out in the 1st January fax clearly called out for further enquiry in this respect and there was plenty of time from then until the end of March for the documents to have been requested and sent by post if not by courier. In the letter dated 27th March, the Plaintiff informed the solicitor of a number of matters in particular: First, that he had not had physical access to the books and records of the 2nd Defendant which were maintained in Fo Tan. Secondly, that the 2nd Defendant had not prepared audited statements and that the Plaintiff had never seen an audited statement from the 2nd Defendant. Thirdly, that the 2nd Defendant had not prepared or submitted returns to the Inland Revenue Department. There was a conference with Counsel on 29th March following which the solicitors sent two fax messages of 30th March to the Plaintiff, requesting details and further instructions. Item No. 4 in the 2nd request related specifically to books and records of the 2nd Defendant and it asked "When, where and how did you ask for access to the books and records" of the 2nd Defendant and to whom where the requests made; it asked for details. Dated the 30th March was a fax addressed to the solicitor, again in the Plaintiff's handwriting. It was apparently a draft letter to be addressed to the Hong Kong & Shanghai Banking Corporation Limited, but importantly it states in the 2nd paragraph "To the best of my knowledge, based on unaudited financial statements of the 2nd Defendant, the 1st Defendant has misappropriated about US$290,000 to JLT Company, a PRC affiliate". I have to assume that that letter came to the attention of solicitor as it was part of the documents he exhibited to his affirmation and as I have said it had his name on the top left hand corner. The Plaintiff replied to the solicitor's specific enquiries with a lengthy type written fax dated the 30th March which has a number of references which have been drawn to my attention by the Plaintiff and are referred to in his own affidavit. Specifically I would mention under the category numbered 4 reference is made to the fact that the Plaintiff had sought both orally and by fax the books and records from the 2nd Defendant and he goes on to say 'the records were consistently late and incomplete'. On page 6 of that fax, there are no less than three references to unaudited books, two being to those of the 2nd Defendant and the other being to those of a subsidiary. This clearly implied that the Plaintiff had been given something of that nature, albeit he was dissatisfied with what he did get. There is reference on page 5 which refers to the Plaintiff never having seen books, but those are of yet another company, namely Embrace Huizhou. There was a conference with counsel on the 7th April. Counsel apparently produced the first draft of the affidavit which unfortunately in paragraph 6 is in terms thus:- "Since the company started business in early 1991 I have repeatedly asked the 1st Defendant to give me copies of the books and accounts of the company. I have made such demands to Mr. JS, former manager of the company, Miss AW, former accountant of the company, Miss WN, former communications manager of the company and to the 1st Defendant himself. However the 1st Defendant has failed to provide me with any such records or even tax returns with the company." I have considered the papers which I understand from the solicitor's affidavit were with solicitor and counsel when the affidavit was drafted. Three things are clear to me. The first is the papers were not voluminous and could be read relatively quickly, even given a careful reading an hour should have sufficed. Secondly, it was clear that what the Plaintiff was complaining about was that there were no verifiable records and that the records that were provided showed misappropriation and mishandling of money. Thirdly, it was quite clear that the Plaintiff must have had books and records. Indeed I would say that the papers that were supplied to the solicitor and by him to Counsel were so far as I can tell simply statements from the Plaintiff supported by no other documentation and I am surprised that no further documentation of any sort was called for, not even, it would seem, by making inquiries of the Canadian lawyer. Counsel as it seems did request a copy of the founding agreement and that was provided. I have to say that given the information that was available, this affidavit was clearly not drafted in the manner it should have been and was neither drafted nor checked with due care, particularly given the fact that it was to be used in ex parte proceedings. The effect of the draft affidavit was wrong. It gave the impression that no documentation was received whereas the burden of the Plaintiff's complaint was that inaccurate and misleading documentation had been provided which revealed, if anything, misappropriation by the 1st Defendant. The affidavit was then sent by fax to the Plaintiff for his comments and he was requested to comment on it ovemight since the solicitor was to depart on holiday. The Plaintiff did as was requested. Unfortunately he put against point 6 simply the word correct but three lines below in reference to point 8, namely paragraph 8 of the affidavit he says: "The overpayment of about US$290,000 based on the financial records provided by Chan was confirmed by AW the 2nd Defendant's head accountant." That can only be a reference back to the receipt of unaudited financial records to which I have previously referred and must, it seems to me, have impinged upon those who received it that that is that is what the Plaintiff was referring to and indeed that the Plaintiff did have copies of some books and records. The last page of the reply fax again refers to "the company generated financials which had been submitted to PMI", which is the Plaintiff's company. Again if those receiving the fax had considered it properly they would have seen at once that paragraph 6 of the Affidavit was wrong. I consider that those who prepare affidavits for an application which they are to make, are of course, very conscious of what is in those affidavits. They understand not only the meaning but the import of what is stated. Those responsible for the Plaintiff's affidavit in this case should have seen that the statement in paragraph 6 was clearly wrong and should have changed it. I acquit them, of course, of any intent to deceive the court but their error in not amending the affidavit both before the first draft was sent out and after the Plaintiff's comments were received, in my view, falls within the category of a culpable error of the type envisaged by Lord Wright and has caused costs to be incurred improperly and without reasonable cause and, in the context of the standard required for ex parte applications particularly of the nature applied for, constitutes misconduct and default. This is not simply a matter of the omission of reference to the passages in the lay client's instructions, I would point out that the Plaintiff has enumerated no less than 23 instances in his instructions that were before both solicitor and counsel, which make reference to his having copies of books or records. I have referred to some of those and although I do not consider that some references were as strong as others, Counsel today very properly conceded that he could not argue that the lawyers should not have been aware of the Plaintiff's possession of the documents. But the matter goes further than that. The Plaintiff's complaint lay in the misappropriation of funds. I find it altogether surprising that some relevant documentation was not called for which would support the Plaintiff's claim. If proper consideration had been given to the true nature of the Plaintiff's complaint, the wrong statements in the Plaintiff's affidavit would never have survived a casual check. In my view, although the Plaintiff must accept some responsibility for having signed the affidavit, the primary cause of the mistake was in the drafting and checking of the affidavit. The persons who should have picked up the mistake were the persons responsible for drafting, checking and presenting the affidavit and in large measure I consider that the Plaintiff was entitled to feel that he had explained and put in writing the nature of his complaints and that he could leave it to his lawyers to express that better than he. I propose to make an order therefore that 15% of the costs of the affidavit must be borne by the Plaintiff but the remainder must be borne by the solicitor. Turning to the subsequent conduct of the action, it is clear from paragraph 33 of the solicitor's affirmation that it was appreciated that paragraph 6 of the Plaintiff's first affirmation was incorrect. The statement that Counsel and solicitors had not previously been aware that the Plaintiff had accounting documents from the Defendants in my view highlights the inadequacy of the consideration given to the papers by the lawyers. In paragraph 34 of the solicitor's affirmation, he acknowledges that it was the Plaintiff's wish to clarify paragraph 6 in his first affirmation. That is indeed borne out by two documents. The first is a short note of a telephone conversation on the 25th June 1993 in which that is one of the two points which apparently the Plaintiff made to his solicitor. On the 20th July 1993, the Plaintiff gave instructions by fax to his solicitor that "Point 6 original affirmation should be amended to state 'no verifiable financial records on tax returns'". It is apparent that this was not done. To a large extent whether it was done or not was a matter clearly in the hands of the Plaintiff's lawyers. If they did not prepare the appropriate affidavits, there was little that the Plaintiff could do about it. More importantly it seems to me that paragraph 34 of the solicitor's affirmation acknowledges the fact that the lawyers were aware that there was a possibility, to say the least, of a discharge of the ex parte injunction. As Counsel submitted they thought that they could succeed on the merits in maintaining an injunction. They failed to appreciate, however, that to do so they had to put before the court a proper explanation of any failure to make proper disclosure. I say no more than further considerations would have additionally come into play on the discharge application had a clean breast been made of matters, particularly by the lawyers. What is more, given the options that were available, it seems to me that they failed to communicate properly with their client. The matters which I have in mind are in particular that the Plaintiff should have been advised that a discharge was a distinct possibility and of the options that were open to the Plaintiff to deal with it, so that he would be fully aware of what risks as to costs he was likely to run. In the end it appears that despite the fact that the 1st Defendant's evidence was filed many months earlier and the application to discharge was then lodged subsequently in October, nothing effectively was done until the end of December when there was a spate of trans-Pacific telephone calls and faxes culminating in the Plaintiff being required to leave home on Christmas Day to arrive here for a conference on the 27th December which was then adjourned to the following day. As a result an affidavit was prepared. Due to matters which were raised by the 1st Defendant in respect of some of the contents of the affidavit, the affidavit itself was never subsequently filed as the Plaintiff's Counsel reconsidered his application to do so at the hearing. In my view, the costs involved in the 1st Defendant's application and hearing for the discharge should be borne by the Plaintiff's lawyers. The predicament which the Plaintiff was put in was almost entirely of the lawyers' making. When it came to extricating themselves from the situation, the Plaintiff was not apparently given proper advice as to the alternatives that were open to him. He was given wrong advice as to the filing of a corrective affidavit and the preparation for the hearing was left far too late with the result that whereas some of the matters might have been corrected that was in the end not possible. There is only one other matter which I find it necessary to comment on and that is on the application before the Chief Justice, the trainee solicitor of the Plaintiff's solicitors firm filed an affirmation which referred to the fact that the 1st Defendant informed the solicitors that he had been seeking legal advice. The affirmation merely said at the end that the Plaintiff's solicitors had not been contacted by any solicitors firm acting for the 1st Defendant, neither had there been any indication from the 1st Defendant nor any lawyer representing him that an application to vary or discharge Mr. Justice Mortimer's order would be made. The trainee solicitor failed to inform the court that that very morning he had been given the name and telephone number of the lawyer whom the 1st Defendant had contacted. In my view, that should have been disclosed to the court. That affirmation was to be used on the ex parte application. The Hon. Chief Justice may well have taken an adverse view of the facts as presented to him feeling that the 1st Defendant was merely delaying matters and had not really contacted the solicitors. The trainee solicitor says he was sceptical as to whether the 1st Defendant had really instructed a lawyer or whether he was merely trying to delay matters. Whilst the trainee solicitor might have been entitled to express his scepticism he should nonetheless have stated the facts. Had the Chief Justice been informed that there was indeed a solicitor who had been consulted by the 1st Defendant he may have adjourned the matter for a few minutes whilst the 1st Defendant's solicitor was contacted and asked to attend. This of course only affects a part of the trainee solicitor's affirmation. Nevertheless, that part of the affirmation is tainted. If I were applying a penalty I would disallow all costs of the affirmation because it seems to me it is like the parsons egg, the whole is tainted. But in my view, having given this matter the best consideration I can, I consider that it would be wrong for the Plaintiff's solicitor to be allowed to recover more than 2/3 of the costs in relation to the preparation of that affirmation. This reflects the proportion of the affirmation which I see as tainted. It is true that I did not make this aspect part of my reasons for discharge, I did not do so because I felt I needed to hear what the trainee solicitor had to say. If the decision to discharge had turned on this aspect I would have made clear that I required further information. As it was I came to the conclusion that the order of 21st April had to go in any event and hence I did not to have go into this part any further. When I made the order on the 4th January of this year, I ordered that the Plaintiff should be entitled to keep the documents which should have been disclosed, because it seemed that he had a case particularly as a director of the company for access to those documents. In those circumstances, it is clearly appropriate that the solicitor should be able to recover such costs from the Plaintiff in relation to the recovery of copies of those documents as would have been incurred in any event. I propose to make an order nisi accordingly, that the Plaintiff's former solicitors should indemnify the Plaintiff in respect of costs ordered to be paid to the 1st Defendant under paragraph 2 of the order of the 4th January 1994; that the Plaintiff's former solicitors should only be entitled to recover from the Plaintiff 15% of the costs of the preparation of the Plaintiff's affirmation filed on the 30th April 1993 and 2/3rds of the costs of the trainee solicitor's affirmation of 21st April and that in aggreagate, the maximum costs which the Plaintiff's former solicitors should be able to recover from the Plaintiff in respect of preliminary advice and the obtaining of the orders of the 13th and 21st April 1993 and the execution thereof, should be that amount which they would have been entitled to on taxation if they had applied for and obtained an unopposed inter partes order requiring the 1st Defendant to deliver copies of the relevant books and records of the 2nd Defendant and the copying charges in respect thereof. No costs should be recoverable in respect of the 1st Defendant's application to discharge the ex-parte orders of Mortimer J. of the 13th April 1993 and of The Hon. Chief Justice of 21st April 1993 and no costs should be recoverable in respect of the hearing on the 30th December 1993. (Anthony G. Rogers) Judge of the High Court PAGE PAGE &`#$ W[SO @& (j$&(j$& " & 6" HEADNOTE Normal luoman Microsoft Word 8.0 love HEADNOTE Title _PID_GUID y_html hc-245 HC-245 #C:\ y_html Y_HTML 1994 HC-245 HCSA000061_1993.doc HCSA00~1.DOC Y_HTML 1994 #C:\ Microsoft Word MSWordDoc Word.Document.8