After much anticipation, the Law Society of Hong Kong announced earlier this month that the new and increased solicitors’ hourly rates (SHR) for party and party taxations in civil proceedings has been approved by the Hong Kong judiciary (the judiciary), and will apply to all work carried out by solicitors from 1 January 2018 onwards. The existing SHR will continue to apply for work completed prior to 1 January 2018. This is the first increase of SHR in over 20 years and represents a welcomed but long-overdue update.

Recovery of costs from an unsuccessful party

After the conclusion of a civil trial in Hong Kong, an unsuccessful party to an action will usually be ordered by the court to pay the majority of the legal costs incurred by the successful party. If parties to the action cannot agree on the quantum of costs payable, there will be a ‘taxation of costs’, whereby a taxing master will review the amount of costs incurred by the successful party to determine how much of those costs are to be paid by the unsuccessful party. Costs which are ‘necessary or proper for the attainment of justice or for enforcing or defending the rights of the party whose costs are being taxed’ would be allowed to be recovered by the successful party. In practice, a successful litigant can usually expect to recover between 60% to 85% of his/her actual costs from the unsuccessful opponent.

While the SHR only serve as guidance in taxation and are not binding on the taxing master, in practice they remain influential and taxing masters rarely depart from them excluding exceptional cases. As the SHR were last revised in July 1997, this means that the recovery of legal costs from the unsuccessful party was in effect based on hourly rates which were set in the last century and far removed from the actual market rates that litigants have to pay for legal services in Hong Kong in 2017.

SHR represent in general the rates which taxing masters consider to be appropriate and reasonable for engaging solicitors of comparable experience in proceedings, although they do not necessarily reflect the actual rates charged by solicitors, which remains a matter to be agreed between clients and their solicitors. As such, there will always be a ‘recovery gap’ between the actual costs incurred by the successful party and the taxed costs such party recovers from the unsuccessful party. However, with the SHR remaining at the July 1997 level, the recovery gap becomes wider and wider as time goes by and this effectively penalises successful litigants in Hong Kong, as they are left to settle the (often significant) difference between their actual costs and their recoverable costs out of their own pocket.

Review of SHR

The Law Society has long advocated for an update of the SHR and in light of the widening ‘recovery gap’ in Hong Kong, it engaged professional services company KPMG to undergo a review of SHR in 2013 to assess whether they should be adjusted to better reflect the ‘real life’ legal market hourly rates. KPMG made the following recommendations which were submitted to the judiciary by the Law Society in May 2013:

  1. The existing SHR should be increased on average by 55% to better reflect the normal average hourly rates charged by law firms in Hong Kong today.
  2. There should be additional bands for solicitors having 9-14 years of post-qualification experience (PQE) and over 14 years of PQE to address the historical anomaly of there being no rate designated for solicitors of 9 years PQE and to recognise the seniority of solicitors being in practice for more than 14 years respectively.
  3. Annual adjustments should be made to the revised SHR in accordance with an inflation-linked index and the SHR be subject to more substantial reviews on a periodic basis.

In response, the judiciary appointed a working party which commenced work in January 2014. The working party considered that issues such as recoverability gap, access to justice, impact on law firms and legal aid and competiveness of Hong Kong in dispute resolution were relevant, and engaged its own independent consultants to conduct a review of the SHR. A consultancy study was done through a two-stage approach – firstly by an independent consultant on the methodology to be used for the review and secondly by another independent consultant on the calculation of the SHR based on the approved methodology.

In its report, the working party recommended, amongst others, that the SHR should be updated regularly every four years by an internal group of the judiciary based on the composite consumer price index, and a major review on the approach and methodology should be conducted every three rounds of such regular update.

The new SHR

The judiciary advised the Law Society in December 2017 that the review of SHR had been concluded and the chief justice had approved the following set of SHR, increasing the rates across solicitors of each level of seniority by more than 40% and introducing two additional bands of seniority of solicitors:

Commentary

The artificially low rate of the existing SHR has long been a problem for court users in Hong Kong. It impacts on the decision and strategy on whether to litigate even with a meritorious claim, and is becoming an issue of access to justice, especially for impecunious litigants who are disproportionally affected by the recovery gap.

The new SHR do not necessarily reflect the commercial charge-out rates of top-tier international law firms, as interests of law firms of different sizes have to be balanced. Nevertheless, it still represents a very significant improvement from the previous SHR which have been in use for more than two decades. Successful litigants (whether these be deep pocket corporates or individuals with limited financial means) in the future can expect to recover a much-increased amount of costs from the unsuccessful party with a significantly lower ‘recovery gap’.

The new SHR will also give added protection to a defendant of an action commenced by a foreign party outside Hong Kong, who does not have any choice but to participate in the action. While such defendant can often apply for security for costs to be provided by the foreign party ‘as of right’, given that the security is calculated based on the SHR, it is often insufficient to fully cover the defendant’s cost. The successful defendant is then either forced to face the daunting prospect of enforcing the cost order overseas or to reluctantly take the financial hit, which is a bitter pill to swallow. The increase in SHR means that such a defendant would be able to require the foreign party to provide an increased amount as security for his/her costs in the event that he/she successfully defends the claim.

In addition, following the revision of the SHR, the lump sum assessment reference figures for certain types of cases (such as charging orders, garnishee orders and three-minute chamber hearings) in both the High Court and the District Court of Hong Kong have been increased with effect from 1 January 2018. A party entitled to costs for these cases will be entitled to recover increased fixed costs from the paying party to reflect the increased SHR.

Going forward, it remains to be seen whether (and how) KPMG and the working party’s recommendation for periodical adjustments to be made based on an inflation-linked index will be implemented. There is a growing trend of dispute resolution funding throughout the common law jurisdictions, as indicated by the recent approvals of third-party arbitration funding in Hong Kong and Singapore through the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance and Civil Law (Amendment) Act 2017 respectively. Should Hong Kong decide to go one step further and follow the English approach in allowing third-party litigation funding (which is presently not allowed as a result of the ancient law of champerty and maintenance), an inflation-linked periodic adjustment will no doubt be welcomed by professional litigation funders and would further strengthen Hong Kong’s leading position as an international dispute resolution forum.