1. What is taxation of legal costs?

Taxation is the process whereby the court assesses the reasonable amount of costs payable under the costs order. It generally involves an item-by-item examination of a bill of costs, though the standard of review depends on the basis of taxation ordered by the court.

Commencement and time limits

To begin the process, the Receiving Party (the party entitled to costs) must file a Notice of Commencement of Taxation and a detailed bill of costs. A bill of costs is one prepared by the Receiving Party to list in detail all items of the costs claimed. Samples of the said documents can be found at Appendices D and B to Practice Direction 14.3 respectively.

Generally, the contents of a bill of costs include:

the title of the action;
the relevant costs order, setting out the date and by whom it was made;
the fee earner and the hourly rate claimed;
the items of work done, by whom and on what dates they were done. The items should be numbered and in chronological order;
the costs charged on each item of work.
the disbursements such as counsel's fees, expert fees and court fees;
costs of taxation; and
the total amount of all costs claimed.

For inter partes costs, proceedings must generally be commenced within 2 years of the “completion date” (usually the date of the judgment or the date a costs order becomes absolute) unless the taxing master grants an extension of time.

For solicitor-and-client costs, under section 67 of the Legal Practitioners Ordinance (Cap. 159), a client must apply within 1 month of receiving a bill for an automatic taxation order. After one month, the order is at the court's discretion. If 12 months have passed or the bill has been paid, the client must demonstrate "special circumstances" (such as fraud or gross overcharging). If both 12 months have expired and the bill has been paid, taxation is generally barred by law.

Officials and thresholds

For bills in the amount of $200,000 or below, Chief Judicial Clerks are empowered to conduct provisional taxation (on paper, without a hearing).

For those above $200,000, the taxation is conducted by a taxing master.

While Chief Judicial Clerks may dispose of smaller bills on paper, they are expressly not empowered to conduct any taxation hearings. All oral hearings are handled by a taxing master where a party objects to a provisional award.

Neither the taxing master nor the Chief Judicial Clerk of the Registry can vary the costs order (i.e. they cannot change the previous decision of a court concerning which party would have to bear the legal costs). They can only decide the amount of costs to be paid. Hence, if a party is not satisfied with the costs order, he should consider lodging an appeal instead of raising objections to the amount of costs before the taxing master.

Bases of taxation

The court applies different standards to quantify legal costs depending on the order made:

Party and party basis: The standard basis, allowing costs necessary or proper for the attainment of justice. It usually leaves the successful party 30-40% out of pocket.
Common fund basis: A more generous basis, allowing a reasonable amount for all costs reasonably incurred. Any doubt as to the reasonableness of an item is resolved in favour of the paying party.
Indemnity basis: All costs are allowed except those that are of an unreasonable amount or were unreasonably incurred. Unlike the common fund basis, any doubts the taxing master has regarding reasonableness are resolved in favour of the Receiving Party.
Trustee basis: This applies when costs are payable to a trustee or personal representative out of a fund. No costs are disallowed unless they should not have been incurred in accordance with the person’s fiduciary duty and should therefore be borne personally.
Solicitor and own client basis: Used primarily to assess the amount a client owes his own solicitor, this is often the most generous scale. All costs are allowed unless they are unreasonable in amount or incurred unreasonably.

Taxation of costs is a technical process and you are recommended to consult a lawyer before making the relevant application. For further details of the taxation procedure, please read Order 62 of the Rules of the High Court (Cap. 4A) or the Rules of the District Court (Cap. 336H).

You can also refer to the webpage of the Resource Centre for Unrepresented Litigants to get a summary of the taxation procedure.