For Services Rendered? How to Avoid a Pyrrhic Victory in Court Taxation in Hong Kong | Perspectives & Events

According to John Grisham, in the olden days lawyers would issue one-sided bills to their clients. A hefty but reasonable sum would be preceded by three lonely words: “For services rendered“, with the expectation that the customer will gladly and gratefully pay the requested amount in a hurry.

Those times are long gone, if they ever existed at all.

In real life, billing disputes often arise between lawyers and their clients. With good reason: lawyers have a duty to act in the best interests of clients, which may or may not be the cheapest option available; Customers, on the other hand, want to maximize the cost-effectiveness of the services they receive.

Most of these disputes are settled in a commercial, confidential and amicable manner, primarily because both sides have an interest in maintaining a mutually beneficial business relationship; and also because the official decision-making process about clients’ accounts – judicial taxation – is costly, cumbersome and fraught with uncertainty and risk for both client and attorney.

The taxation itself appears to be weighted in favor of the lawyer, since it is based on a “Lawyer and own client” basis, meaning that the court will allow all costs unless they are unreasonable or unreasonably incurred – with the important proviso that all costs incurred with the express or implied consent of the client are ultimately deemed reasonable .

Against this background, too, it is all too easy for parties to get into a “lose-lose” situation – which in retrospect could easily have been avoided.

On February 22, 2023, two judgments were published in Hong Kong, stating “contested” Billing disputes between Oldham, Li & Nie (OLN), a law firm, and their former client, Andrew Kao (Mr. Kao).¹ One concerned OLN representing Mr. Kao in marriage proceedings and the other concerned OLN representing Mr. Kao’s companies. In both cases, Mr. Kao challenged OLN’s accounts.

The controversy over court taxation

Both parties to the proceedings used successful legal taxation gambits against each other, which initially led to mutually contradictory results.

• Mr. Kao relied on Section 67(5)(b) of the Legal Practitioners’ Ordinance (Cap 159)(LPO), which provides that if the taxation procedure reduces the amount claimed by more than one-sixth (16.66%). , all the costs of taxation would be borne by the lawyers. OLN had asked for almost HK$1.3 million, but in the end the tax master reduced it by well over 20% to around HK$1 million.
• OLN had submitted a sanctioned bid of around HK$800,000. If the paying party, i.e. Mr Kao, does not consent to payment of the Offer and taxation results in a sum greater than the Offer, he would be subject to cost penalties under Order 62A, rule 20 of the High Court Rules, beginning on the expiry date of the Offer .

Resolving the inconsistency was easy. The tax master ruled that the wording of the LPO gave the court unlimited discretion. Of greater interest, however, was the focus on the parties’ actions – highlighted by the tax master – which resulted in neither party getting what it wanted.

On the client side, Mr. Kao’s new attorneys argued that he should be awarded all costs up to the expiry date of the sanctioned offer; which the court saw as a presumption that Mr. Kao should not have made given the court’s discretion as to costs.

Furthermore, the approved offer was exceptionally low even compared to the claimed costs, and Mr. Kao’s failure to consider it had resulted in a lot of wasted costs and time. The court also found that he had alleged a “exorbitant” Amount of cost before the date of the sanctioned bid, an impression that did his position a disservice.

On OLN’s side, the court noted that their approved offer was at a level much lower than the trigger value of one sixth of the LPO and commented that OLN “had practically admitted to having significantly inflated his cost accounting for tax purposes‘ – and had only done so shortly before the tax hearing itself, after many expenses had been wasted.

The court also criticized OLN’s decision to apply on-account costs paid in one proceeding to their invoices in another proceeding. Ultimately, the court found that Mr. Kao’s judgment resulted in his “exorbitant” Amount of costs while OLN was not to be further awarded and contested the remedy asserted by the company.

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These types of cases are, by and large, small disputes limited in scope. However, both clients and practitioners should be aware that matters can easily get out of control and try to structure their service provider relationships with a view to resolving the matter. After all, clients hire lawyers to solve problems, not create new ones.

The key takeaway is that prior to engagement, both client and attorney should have detailed agreements on how fees will be calculated and paid – and keep the client regularly updated on the work being done to set their expectations in relation to meet the applicable fees.

This is particularly the case when, as in the case of Mr. Kao, multiple proceedings and/or multiple clients are involved.

Clients should consider reviewing their legal expenses regularly – and the solicitor should warn the client of any anticipated increase in legal expenses, such as:

It is clear from the judgments here, and also from our experience, that taxation is not comfortable for any of the parties involved, including the court, which can and will publicly criticize the behavior of the parties.

For example, based on the amount of its sanctioned offer to Mr. Kao, the court rightly or wrongly concluded that OLN had significantly overstated its bills. Both sides’ taxation gambits failed and neither side was able to recover the resulting costs.

When taxation is unavoidable, both clients and lawyers should exercise great care in their actions in court, otherwise they risk losing even without the relief of the other side: a true Pyrrhic victory.

¹ Andrew Ko Kao vs. Oldham, Li & Nie, Solicitors (A Firm) HCMP 2129 of 2021; Sinostat Enterprises & Anor v Oldham, Li & Nie, Solicitors (A Firm) HCMP 2178 by 2021.