Shiu Yeuk Yuen v. Hong Kong Solicitors Indmenity Fund Ltd

HCA2721/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2721 OF 2008

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Before : Hon Chu J in chambers

Date of Hearing : 28 October 2009

Date of Judgment : 23 July 2010

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J U D G M E N T

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1.By summons dated 17 March 2009, the defendant applies under Order 14A of Rules of the High Court, Cap.4A for the determination of a question of law, and if the determination is its favour, for an order dismissing the plaintiff’s claim.

2.The question of law is framed in the following terms:

Whether the Solicitor’s (Professional Indemnity) Rules enacted by the Council of the Law Society pursuant to its delegated powers under section 73A of the Legal Practitioners Ordinance, Cap. 159 gave rise to any contract of insurance between Mr Desmund Leung Man Wai and the defendant (or the Solicitors Indemnity Fund administered by the defendant).

The facts

3.The plaintiff’s claim against the defendant arises out of earlier proceedings between him and Mr Desmund Leung Man Wai (“Mr Leung”) in High Court Action No. 716 of 2007 (“the Underlying Proceedings”).  The facts leading to and surrounding the present claim have been summarised in paragraph 6 of the Affidavit of Robert George Clarke filed on behalf of the defendant, and are not disputed.  They are:

“(1)    Mr Leung was admitted as a solicitor in Hong Kong in around 1981 and was the sole proprietor of Messrs Chong, Leung & Co (“the Firm”) between about 2001 and 22 March 2004.

(2)             On about 11 November 2003 the plaintiff deposited with the Firm the sum of HK$8,700,000 (“the Deposit”). The plaintiff’s case is that Mr Leung had previously orally agreed to hold this sum as a stakeholder pending the execution of a proposed investment agreement between the plaintiff and a Chinese company whose name can be translated as International Syndicate Trading Company (“ISTC”).

(3)             On 13 November 2003 Mr Leung released the Deposit to a Mr Lee Chi Wing (“Mr Lee”). The plaintiff’s case is that Mr Leung was tricked into doing this by Mr Lee who pretended to represent ISTC and by an unknown associate of Mr Lee who pretended to be the plaintiff himself.  The plaintiff contends that Mr Leung acted in breach of the stakeholder agreement referred to above and/or negligently in releasing the Deposit to Mr Lee.

(4)             On 17 May 2004 Mr Lee was found guilty of the offence of obtaining property (i.e. the Deposit) by deception (DCC No. 66 of 2004).  An appeal by Mr Lee against his conviction was dismissed on 29 March 2006 (CACC No. 248 of 2004).

(5)             On 19 May 2004 Mr Leung was adjudged bankrupt (HCB case No. 2607 of 2004).

(6)             On 14 March 2007 the plaintiff obtained permission to commence proceedings against Mr Leung.  

(7)             On 12 April 2007 the Writ of Summons in the Underlying Proceedings was issued.

(8)             On 29 June 2007 judgment in default was entered against Mr Leung in the Underlying Proceedings.

(9)             On 9 August 2007 the default judgment referred to above was set aside by consent.

(10)        On 11 September 2007 Mr Leung filed his Defence in the Underlying Proceedings.  In his Defence, Mr Leung did not seek to dispute the facts set out above but did dispute he had been negligent or acted in breach of duty.

(11)        On 11 January 2008 the Solicitors Disciplinary Tribunal found that Mr Leung had acted without due care and had fallen below the standard to be expected of a competent solicitor in releasing the Deposit.

(12)        On 8 January 2008 the plaintiff issued an application for summary judgment in the Underlying Proceedings.  This was listed for hearing on 5 June 2008.[1]

(13)        On 22 April 208 the plaintiff applied to vacate the hearing date of 5 June 2008.  My understanding is that the reason for this application was that the plaintiff’s legal advisers considered it advisable that the application be heard before 19 May 2008, this being the date when Mr Leung’s bankruptcy would automatically be discharged pursuant to the provisions of the Bankruptcy Ordinance (Cap.6).

(14)        On 29 April 2008 the plaintiff’s above application to vacate was dismissed.

(15)        On 19 May 2008 Mr Leung’s bankruptcy was automatically discharged.

(16)        On 5 June 2008 the plaintiff’s application for summary judgment in the Underlying Proceedings was heard.  Mr Leung did not oppose the application.  This was on the basis that any judgment would be unenforceable against him having regard to the fact that his bankruptcy had previously been discharged.  The plaintiff also gave an undertaking to the Court that he would not seek to enforce any judgment against Mr Leung personally. The Court then granted the plaintiff summary judgment against Mr Leung in the sum of $8,700,000 together with interest and costs.”

4.Additionally, it is also the plaintiff’s case that the defendant was served with the documents in the Underlying Proceedings in its capacity as Mr Leung’s insurer and the defendant was aware of the existence of and progress in the Underlying Proceedings.     

The pleadings

5.It is the plaintiff’s case that the defendant is liable to pay him the sum of $8,700,000 together with interest pursuant to the Third Parties (Rights Against Insurers) Ordinance, Cap.273.  The plaintiff’s claim is encapsulated in paragraphs 17 to 20 of the Statement of Claim, which read:

“17. At all material times when he practised as a solicitor, Mr Leung participated in the Scheme established under the [Solicitors (Professional Indemnity) Rules] and was entitled to be indemnified by the Scheme in respect of his liability under the Judgment.

18. On the proper interpretation of the sections 7 and 73A of the Legal Practitioners Ordinance (Cap.159) and/or the S(PI)R and/or as a matter of law, the arrangement between the Scheme and Mr Leung constituted a “contract of insurance” within the meaning of the Third Party (Rights Against Insurers) Ordinance (Cap.273) (“TP(RAI)O”).

19.(1) By reason of the matters pleaded above and upon Mr Leung becoming bankrupt, Mr Leung’s right against the Scheme in respect of the liability incurred by him as a result of his aforesaid wrongful release of the Sum was transferred to and vested in the Plaintiff pursuant to section 2(1) of the TP(RAI)O.

(2) Further by reason of section 2(4) of the TP(RAI)O, the Defendant was and still is under the same liability to the Plaintiff as it would have been under to Mr Leung.

20.    In the premises, the Defendant is liable to satisfy the Judgment and pay the said sum of HK$8,700,000 together with interest to the Plaintiff.”   

6.The defendant, while accepting Mr Leung had participated in the professional indemnity scheme and was entitled to be indemnified in accordance with the Solicitors (Professional Indemnity) Rules, Cap.159M (“the Rules”), disputes that as a bankrupt he was entitled as of right to be indemnified in respect of any liability.   The defendant also disputes that the statutory scheme of indemnification contained in the Rules gives rise to a contract of insurance between the defendant and Mr Leung and that TP(RAI)O is of any application, effect or relevance.  The defendant further denies that Mr Leung was or is liable under the Judgment and that even if TP(RAI)O applies, the Judgment could be enforced against him, having regard to his discharge from bankruptcy, or against the defendant.

Section 2 of Third Parties (Rights Against Insurers) Ordinance (TP(RAI)O)

7.The primary dispute between the parties is whether section 2(1) of TP(RAI)O applies.  Under section 2(1), if an insured incurs liability before or after bankruptcy, his rights against the insurer under a contract of insurance will be transferred to and vest in the third party to whom liability was so incurred.  The key question underlying the parties’ dispute and which calls for determination in this application, is whether the statutory scheme of indemnification under the Rules gives rise to a “contract of insurance” between the defendant and Mr Leung within the meaning of section 2(1).  If it does not, then the plaintiff’s claim fails.

8.The material part of section 2 of TP(RAI)O provides:

“2. Rights of third parties against insurers on bankruptcy, etc. of the insured

(1) Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then-

(a) in the event of the insured becoming bankrupt or making a composition or arrangement with his creditors; or

(b) …; or

(c) …,

if, either before or after that event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any enactment or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred.

(2) …

(3) …

(4) Upon a transfer under subsection (1) or (2), the insurer shall, subject to the provisions of section 4, be under the same liability to the third party as he would have been under to the insured, but-

(a) if the liability of the insurer to the insured exceeds the liability of the insured to the third party, nothing in this Ordinance shall affect the rights of the insured against the insurer in respect of the excess; and

(b) if the liability of the insurer to the insured is less than the liability of the insured to the third party, nothing in this Ordinance shall affect the rights of the third party against the insured in respect of the balance.

(5) For the purposes of this Ordinance, the expression "liabilities to third parties", in relation to a person insured under any contract of insurance, shall not include any liability of that person in the capacity of insurer under some other contract of insurance.

(6)                …”

9.These provisions mirror those of the English Third Parties (Rights against Insurers) Act 1930.  The historical origin of the 1930 Act  is to remedy the injustice that flows from the decisions in Re Harrington Motor Co Ltd, ex parte Chaplin [1928] 1 Ch 105 and Hood’s Trustees v. Southern Union General Insurance Co of Australasia Ltd [1928] 1 Ch 793: see Bradley v. Eagle Star Insurance Co Ltd [1989] 1 AC 957, 967F-968E.  These decisions are to the effect that where an injured person who had obtained judgment for damages against a wrongdoer, if the wrongdoer went into bankruptcy or liquidation and if the judgment had not been executed, the money payable by way of indemnity under any insurance policy by which the wrongdoer was insured against liability to third parties, would not go directly to the injured person but would be paid to the trustee in bankruptcy or liquidator for distribution among all unsecured creditors.   This is because of the problem of no privity of contract between the injured person and the insurer.  

10.Counsel for the defendant had referred to several authorities in which the effects of the 1930 Act (and also our section 2(1)) had been considered.  They do not appear to be controversial.  For the present purpose, it suffices to summarize them as follows:

(1) The section provides a limited form of statutory subrogation thereby addressing the problem of no privity of contract between the third party and insurer.  The assured’s rights under a contract of insurance providing liability cover in respect of a claim by a third party will automatically be transferred to and vest in that third party upon the assured being adjudged bankrupt: Re OI Computers (In Administration) [2004] Lloyds’ Report IR 669. 

(2) The third party will acquire no greater rights in relation to the contract of insurance than the assured: Post Office v. Norwich Union [1967]2 QB 363.

(3) The assured only becomes entitled to an indemnity from the insurer under the relevant liability to the third party has been ascertained in a particular sum by means of a judgment or award or agreement: Post Office v. Norwich Union (supra) and Bradley v. Eagle (supra).

(4) It follows that the third party will acquire no right to an indemnity from the insurer until the assured’s liability to it has been ascertained in a particular sum by means of a judgment or award or by agreement: Post Office v. Norwich Union (supra) and Bradley v. Eagle (supra).

11.For the present purpose, the key question is whether there is a contract of insurance between Mr Leung and the defendant within the meaning of section 2(1).  The application of the principles under (3) and (4) is also an issue between the parties, but it does not call for determination in this application.

Section 73A of Legal Practitioners Ordinance (LPO)

12.Before considering the key question, it is necessary to look at section 73A of LPO and the Rules, under which the defendant and the indemnity fund administered by it are established.  The material part of section 73A provides: 

“73A Indemnity rules

(1) The Council may make rules (in this Ordinance referred to as "indemnity rules") concerning indemnity against loss arising from claims in respect of any description of civil liability incurred-

(a) by a solicitor or former solicitor in connection with his practice or with any trust or of which he is or formerly was a trustee;

(b) by an employee of a solicitor or former solicitor in connection with that solicitor's practice or with any trust of which that solicitor or the employee is or formerly was a trustee.

(2) For the purpose of providing such indemnity, indemnity rules-

(a) may authorize or require the Society, by itself or jointly with the Society of Notaries, to establish and maintain a fund or funds;

(b) may authorize or require the Society, by itself or jointly with the Society of Notaries, to take out and maintain insurance with authorized insurers;

(c) may require solicitors or any specified class of solicitors to take out and maintain insurance with authorized insurers.

(3) Without prejudice to the generality of subsections (1) and (2), indemnity rules-

(a) may specify the terms and conditions on which indemnity is to be available, and any circumstances in which the right to it is to be excluded or modified;

(b) may provide for the management, administration and protection of any fund maintained by virtue of subsection (2)(a) and require solicitors or any class of solicitors to make payments to any such fund;

(c) may require solicitors or any class of solicitors to make payments by way of premium on any insurance policy maintained by the Society by virtue of subsection (2)(b);

(d) may prescribe the conditions which an insurance policy must satisfy for the purposes of subsection (2)(c);

(e) may authorize the Society to determine the amount of any payments required by the rules, subject to such limits, or in accordance with such provisions, as may be prescribed by the rules;

(f) may specify circumstances in which, where a solicitor (not being a solicitor who is exempt from complying with the rules) for whom indemnity is provided has failed to comply with the rules, the Society or insurers may take proceedings against him in respect of sums paid by way of indemnity in connection with a matter in relation to which he has failed to comply;

(g) may specify circumstances in which solicitors are exempt from the rules;

(h) may empower the Council to take such steps as they consider necessary or expedient to ascertain whether or not the rules are being complied with; and

(i) may contain incidental, procedural or supplementary provisions.

(4) If any solicitor (not being a solicitor who is exempt from complying with indemnity rules) fails to comply with the rules any person may make a complaint in respect of that failure to the Tribunal Convenor of the Solicitors Disciplinary Tribunal Panel.

(5) The Society shall have power, without prejudice to any of its other powers, to carry into effect any arrangements which it considers necessary or expedient for the purpose of indemnity under this section.

(6) Every rule made by the Council under this section shall be subject to the prior approval of the Chief Justice.

(7) …

(8) …”

13.Section 73A is in almost identical terms as section 37 of the Solicitors Act 1937.  The section provides for compulsory cover of solicitors against liability to third parties arising out of the conduct by them of their private practices.  As pointed out by the House of Lords in Swain v. The Law Society [1983] AC 598, 610D-F, section 73A(2) provides for  three methods whereby solicitors may be required by indemnity rules to obtain insurance cover against professional liability referred to in subsection (1).  These are: (A) mutual insurance financed by contributions by solicitors to a fund established and maintained by the Law Society – a method provided for by subsections (2)(a) and (3)(a), (b) and (f); (B) a form of group insurance – a method provided for by subsections (2)(b) and (3)(c) and (f); and (C) policies insurance with insurers of their own choice taken our directly by individual solicitors – a method provided for by subsections (2)(c) and (3)(d).

14.Until the setting up of the Solicitors Professional Indemnity Scheme and the enactment of the Rules in 1989, the Law Society of Hong Kong, as agent of its members, would enter into a master policy with the authorized insurers, in which the terms of the cover and the premium applicable for the whole of the profession was agreed.  Individual solicitors would when enter into direct contract of insurance with the authorized insurers on the terms of the master policy.   This is method (B), which was also the method adopted by the English Law Society when Swain v. The Law Society (supra) was decided.  Subsequently, however, the English Law Society had changed to a scheme based on a fund, similar in nature to that now in place in Hong Kong.

The Solicitors (Professional Indemnity) Rules (“the Rules”)

15.The Rules, which were made pursuant to section 73A of LPO, were introduced in October 1989.  Rule 3 establishes and maintains a fund (‘the Fund”) to provide indemnity against such loss as is mentioned in section 73A(1).   The defendant was established to hold, manage and administer the Fund with the powers as set out in schedule 2 to the Rules.

16.Rule 4 provides that the fund is to be established and maintained by contributions made by solicitors.  Every solicitor in practice in Hong Kong (unless exempted) is required under rule 6 to have and maintain indemnity.   Upon payment of contribution, a solicitor shall be entitled to indemnity out of the Fund in accordance with rule 11.  The amount of contribution is assessed in accordance with schedule 1 to the Rules.  The extent of the defendant’s indemnity and the conditions on which the indemnity is provided are set out in schedule 3 to the Rules.   

17.The provision of indemnity is dealt with by rule 11.  Subrule (1) sets out three ways of providing indemnity. They are: (i) payment to the third party claimant; (ii) payment to the indemnified solicitor; and (iii) payment to the legal advisers, adjusters or other persons who have incurred costs and expenses or who have provided services.  Importantly, subrule 2) provides: “Notwithstanding any insolvency or bankruptcy of any indemnified, the Company may, for the purposes of subrule (1), decide in which or which combination of the above ways any Indemnity shall be provided.”   The Rules have therefore envisaged that the Fund, if so desires, may make payment directly to third parties in cases of insolvency or bankruptcy of the indemnified solicitors.

Discussions

18.The question of law to be determined turns primarily on the proper construction to be given to the words “contract of insurance” in section 2(1) of TP(RAI)O.  For the defendant, it is argued that a contract of insurance requires a mutual agreement and there must be an unqualified acceptance by one party of an offer made by the other and agreement between the parties on the material term of the contract.   The plaintiff, on the other hand, contends that the words should be given a fair, liberal and expansive meaning and a purposive approach should be adopted.  Accordingly, it is said that the term “contract of insurance” should be wide enough to include a binding arrangement for the provision of insurance which carries all the substantive characteristics and incidents of a mutual agreement for insurance.

19.On the matter of statutory construction, it is apt to take note of the judgment of Bokhary PJ in Medical Council of Hong Kong v. Chow Siu Shek (2000) 3 HKCFAR 144, 153B, namely,

“…historically the most significant rules of statutory interpretation appear to have been:

(i) the "literal rule" which accorded primacy to the literal meaning of the language used in the legislation unless and until some other factor or factors demonstrated that some other meaning represented the true intention of the legislature;

(ii) the "golden rule" which was that, whatever the literal meaning of the language which the legislature used, there was a presumption that it did not truly intend to bring about an absurd result; and

(iii) the "mischief rule" which presumed that the legislature has targetted a particular mischief and provided a remedy for it.

These old rules are of a complementary nature or at least have the potential for complementing each other. Elements of each of them can still be found in how the courts interpret statutes nowadays. And the modern tendency to give statutes a purposive construction may, I think, be viewed as being to an appreciable extent a development from the mischief rule in particular.”

20.In Chan Tin Shi & Ors v. Li Tin Sung & Ors (2006) 9 HKCFAR 29, 35 at para.10, it was pointed out by Litton NPJ that:

“The starting point in statutory interpretation must always be the ordinary linguistic meaning of the words used: Were it otherwise the relationship between the two branches of government, the legislature and the judiciary, would be a very difficult one. Great mischief could result in the courts reading words into statutes which are not there, simply to achieve a purpose which the courts claim to be desirable:”

21.In my view, the words in section 2(1) TP(RAI)O are clear and unambiguous.  They should be given their literal meaning.  The section refers to “contract of insurance”.  Whether there is a contract of insurance, this is to be ascertained by the general law of contract: Chitty on Contracts (30th Ed) vol.2 para.41-049.   For there to be a contract, there has to be an agreement, which is either express or where the circumstances are such as to admit of a reasonable inference that the parties were tacitly agreed.  Hence a contract of insurance, like any other contract, is created where there has been an unqualified acceptance by one party of an offer made by the other and there is between the parties agreement on the material terms: see MacGillivray on Insurance Law (11^th Ed) para.2-002 and Halsbury’s Laws of Hong Kong (2007 Re-Issue) vol. 15(1) para.220.061. 

22.The scheme of indemnification provided by the Rules is statutory and mandatory in nature.  There is no room for bargaining between the solicitors and the defendant.  The defendant is also not permitted to refuse an indemnity or to avoid a solicitor’s right to indemnification.  The solicitors, on the other hand, are required to pay the amount of contribution assessed in accordance with the Rules.  Under section 7 of LPO, no person is qualified to practise as a solicitor unless he complies with the Rules.  Non-compliance with the Rules is a professional misconduct.  Although an arrangement of indemnity is provided by the indemnity scheme, no consensual agreement between the solicitor and the defendant is involved.  All that is involved is that the solicitor is required to make a contribution assessed in accordance with the Rules and the defendant is required to provide an indemnity also in accordance with the Rules.  Their rights and obligations are statutory in nature; they are created and enforced by statute. 

23.In The Hongkong and Shanghai Banking Corporation Limited v. Hong Kong Solicitors Indemnity Fund Limited (unreported) HCMP411 of 1994, 12 September 1994, similar question arose as to whether the Rules gave rise to a contract of insurance for the purpose of TP(RAI)O.  In that case, the plaintiff had obtained judgment against a solicitor who was subsequently made bankrupt.  The plaintiff’s claim against the defendant was dismissed by Mayo J (as he then was) on the basis that there was no contract of insurance between the defendant and the solicitor.  The reasoning appears as follows:

“8. Mr. Michael Thomas Q.C. for the Defendant contended that for Cap. 273 to have any application it was imperative to establish that there was indeed a contract of insurance in existence.

9. On any reasonable analysis of the situation, this was not the case. Mr. Yeung had not entered into a contract of insurance with anyone for liability to third parties. All that he had done was to comply with the requirements of the Professional Indemnity Rules.

10. He had certainly not entered into a contract of insurance with the Defendant. This could not be the case as the Defendant clearly was not an insurance company and had no rights or power to itself issue insurance policies.

11. It was manifest from the whole of the scheme that there was no scope for solicitors to negotiate mutually acceptable terms. What a solicitor had to do was to comply with the terms of the statutory scheme.

12. I also derived some assistance from the observations made by Lord Reid at p. 535 of Pfizer Corporation v. Ministry of Health [1965] A.C. 512. When he was considering the operation of the National Health Service and, whether or not, drugs supplied on prescription were sold under a contract to a patient. He had this to say:

‘The second question for your Lordships’ decision arises out of the provision of the drug for out-patients of hospitals. We have little information about the use of this particular drug but in general it appears that, when out-patients are advised to use a drug after they have gone home, they are given a prescription which they take either to the hospital dispensary or to an outside chemist. Under existing arrangements they must then pay a small charge, at present 2s. There was considerable argument whether they can be required to pay that charge before they can demand the prescribed medicine, but I do not find it necessary to decide that question. I shall consider the case on the footing that a patient is not entitled to demand the drug unless he tenders 2s. The appellants’ argument is that when the patient pays 2s. and gets the drug there is a sale of the drug to him by the hospital or the chemist and that 2s. is the price. If that were right, the appellants say that section 46 does not authorise the department or its servants or agents to sell or vend, it only authorises them to make, use or exercise the invention.

But in my opinion there is no sale in this case. Sale is a consensual contract requiring agreement, express or implied. In the present case there appears to me to be no need for any agreement. The patient has a statutory right to demand the drug on payment of 2s. The hospital has a statutory obligation to supply it on such payment. And if the prescription is presented to a chemist he appears to be bound by his contract with the appropriate authority to supply the drug on receipt of such payment. There is no need for any agreement between the patient and either the hospital or the chemist, and there is certainly no room for bargaining. Moreover the 2s. is not in any true sense the price: the drug may cost much more and the chemist has a right under his contract with the authority to receive the balance from them. It appears to me that any resemblance between this transaction and a true sale is only superficial. I would therefore decide against the appellants on this point.’

13.  I have no doubt that the provisions contained in Section 2 of Cap. 273 do have to be strictly complied with.  Here there is no contract of insurance - only Mr. Yeung’s compliance with the statutory requirements.”

24.The judgment gives a succinct summary of the problems facing the plaintiff in this claim.  In order for section 2(1) of TP(RAI)O to apply, there has to be a contract of insurance.  Statutory obligation to indemnify is not a contract of insurance, even though the arrangement may contain the features of insurance. 

25.A core argument of the plaintiff in saying that an expansive meaning should be given to the words “contract of insurance” is that there is no valid reason in law or in policy as to why the defendant should be exempted from the provisions of TP(RA)O.  Three points need to be made on this.  First, the purpose of TP(RAI)O, as noted above, is to address the problem of privity of contract between the third party and the insurer under the insurance policy taken out by an insured who is bankrupt or insolvent.  It is directed at a contractual situation.  It is within the purpose of the legislation to require that there is a contract of insurance between the insurer and the insured before section 2(1) can be applied.  Second, TP(RAI)O was enacted in 1951, long before the introduction of section 73A in1980.  It could not have anticipated section 73A.  It is therefore not a matter of the defendant being allowed to get away from the effects of section 2(1) of TP(RAI)O.   Third, under rule 11(2) of the Rules, where a solicitor becomes bankrupt, the Fund may pay out direct to the third party.   The Rules have therefore separately and independent from TP(RAI)O made provision for the situation of bankruptcy.         

26.In further support of the argument that the court should give a fair and liberal interpretation of section 2(1) and to hold that the arrangement between the solicitor and the defendant under the Rules is capable of coming within the section, the plaintiff refers to the cases of Prudential Insurance Co v. IRC [1904] 2KB 658 and Medical Defence Union Ltd v. Department of Trade [1980] 1 Ch 82 in which it was held that a contract of insurance must satisfy three requirements.  The three requirements are: (i) the contract must provide that the assured will become entitled to something on the occurrence of some event; (ii) the event must be one which involves some element of u certainty; and (iii) the assured must have an insurable interest in the subject matter of the contract.  Relying on this, it is argued that the scheme of indemnification under the Rules has met all these requirements and should come within the meaning of “contract of insurance” under section 2(1) of TP(RAI)O.  

27.It is however important to note that in both Prudential Insurance Co and Medical Defence Union Ltd, the issue before the court did not turn on whether a contract existed.  In Prudential Insurance Co, there was no issue that there was a contract under seal, the issue was whether the instrument was a policy of life insurance within the definition in section 98 of the Stamp Act 1891.  It was in this context that Channell J looked at the nature of a contract of insurance and held that a contract of insurance must satisfy the three requirements mentioned above.   In Medical Defence Union Ltd, the issue before the court was whether the contract between the union and its members was a contract of insurance for the purpose of the Insurance Companies Act 1974.  The three requirements in Prudential Insurance C were referred to in the context of ascertaining  the nature of the contract between the parties, but not for the purpose of determining whether a contract existed.

28.The plaintiff further seeks to draw assistance from Wooding v. Monmouthshire & South Wales Mutual Indemnity Society Limited [1939] 4 All ER 570 and R v. Cohen & Ors; ex parte Motor Accidents Insurance Board (1979) 27 ALR 263.  It is argued that a contract may be formed by a  member subscribing to or joining a scheme of indemnity and that what is essential is the relationship of indemnity that exists between the insured and the insurer, rather than the source of that relationship.

29.The case of Wooding concerns a mutual indemnity society that gave protection to its members against liabilities under the English Workmen Compensation Act.  One of its members went into receivership.  The plaintiffs, who were the member’s employees, claimed the rights of the member against the society under the Act.  The society denied liability arguing.  One of the issues was whether the society was an insurer, with whom the employer had entered into a contract of insurance.  The court proceeded on the basis that the contract between the society and the employer was constituted by the fact of the employer becoming a member of the society and that a contract of insurance existed between the employer and the society as evidenced by the memorandum and articles and association of the society.  The case does not assist the plaintiff because of an important difference between that case and the present.  In Wooding, the employer had a choice whether to join the society whereas under the present scheme of indemnification, the solicitors must subscribe to the Rules.  The act of the employer becoming a member of the society is therefore a consensual and voluntary arrangement, which is not present here. 

30.As for the case of Cohen, it is in the context of deciding whether the Motors Accidents Insurance Board was engaged in a business of insurance by virtue of its statutory functions and obligations that Mason J (as he then was) discussed the concept of insurance and said (at 270-271):

“I very much doubt whether the existence of a contract is of itself essential to the legal concept of “insurance”. There is much to be said for the view that it is the relationship of indemnity that exists between insurer and insured, rather than the source of that relationship, that is the essence of the concept of insurance, so that it matters not whether the relationship arises by statute or by contract.”

31.In our case, the existence of a contract is essential.  Section 2(1) of TP(RAI)O talks expressly of a contract of insurance.  The existence of a contractual relationship is necessary.  It remains of importance to decide, by reference to ordinary principles of contract law, whether the scheme of indemnification under the Rules gives rise to a contract between Mr Leung and the defendant.        

32.The plaintiff has commented that the defendant’s stance in contending TP(RAI)O does not apply would seriously undermine the protections given to third parties against risk of loss caused to them by negligent solicitors.  The plaintiff also seeks to compare the stance taken by the defendant with that taken by the Law Society in England in cases such as Abbey National plc v. Frost (Solicitors Indemnity Fund Ltd intervening) [1999] 1 WLR 1080 and The Mortgage Corporation v. The Solicitors Indemnity Fund [1998] PNLR 73.  In The Mortgage Corporation, Sir Vinelott had made the observation that (at 80F-G):

“It is plainly important for the protection of the public and to ensure that the public continues to have confidence in the integrity and standing of solicitors that claims founded on the negligence of a solicitor should be met, and if he solicitor is unable to meet his liabilities following the bankruptcy order met by the SIF.”

33.While I am in agreement with this observation, a principled approach must be adopted.  The fact is the Law Society of Hong Kong has opted for the creation of a fund under section 73A(2)(a) of LPO.  The court is duty bound to give effect to the legal consequences of the decision.  The position is as said by Lord Brightman in Swain v. The Law Society (at 618E-F).  Under section 73A of LPO, the Law Society performs a public duty.  Any challenge to the exercise of its duty and power is a matter for judicial review.        

Conclusion

34.For the above reasons, the question of law framed in the summons is answered in the negative.  Consequently, the plaintiff’s claim is liable to be struck out and the action dismissed.  And I so order.  I also make an order nisi that the plaintiff pays the defendant the costs of the action, including the costs of this application, to be taxed if not agreed.  

Mr John Bleach SC and Mr Jin Pao instructed by Messrs Szwina Pang, Edward Li & Co for the plaintiff.

Mr Joseph Fok SC instructed by Messrs Deacons for the defendant.