Lam Chi Tat, Anthony and Another v. Kam Yee Wai, Andrew

DCCJ 1545/2009

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1545 OF 2009

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BETWEEN

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Before: Her Honour Judge HC Wong in Court

Dates of Hearing: 16-18 May 2011, 5 August 2011, 14 September 2011and 22 November 2011

Date of Judgment: 13 March 2012

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JUDGMENT

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1.The plaintiffs and the defendant were partners of the solicitor firm of Messrs MK Lam & Co (“the Partnership”). Under a settlement agreement of 25 February 2005 (“the Deed”), the defendant agreed to retire on 15 March 2005 (“the retirement date”) from the Partnership in accordance with the terms and conditions set out in the Deed and the plaintiffs agreed to make certain payments to the defendant and to continue practising in the name of MK Lam & Co (“the new Partnership”) upon the retirement of the defendant from the Partnership.

2.In the present action, the plaintiffs claim against the defendant for outstanding profits tax that the Partnership had paid to the Inland Revenue Department for the year 2004/2005 based on the assessable profits of the Partnership of which the sum of $1,130,226 was earned by the defendant in the financial year 1 April 2004 to 31 March 2005.  The plaintiffs claimed that the defendant ought to have paid tax at $180,836 in respect of the tax year 2004/2005.  It is the plaintiffs’ case that they paid a total of $366,114 pursuant to the Inland Revenue Department’s notice of advance assessment and demand for profits tax on the Partnership issued on 23 September 2005 based on the combined assessable profits of the Partnership in 2004/2005.

3.The plaintiffs further claim against the defendant the contribution to the Compulsory Professional Indemnity Scheme for the year 2005/2006 out of the total partnership contribution paid by the plaintiffs of $256,000, the sum of $126,577.76, attributed to the defendant for the period 1 January 2004 to 31 December 2004.  Furthermore, for the period of indemnity year 2006/2007, the apportionment up to the defendant’s retirement on 15 March 2005, the plaintiffs claim against the defendant for his share of contribution from 1 January 2005 to the date of retirement in the sum of $35,056.50.

4.In addition, the plaintiffs claim that the Partnership is liable to an additional payment of contribution on the shortfall of the Compulsory Professional Indemnity Scheme for the indemnity year 2002/2003 in the total sum of $44,010, of which the defendant is liable to pay $11,002.50.  As the plaintiffs have settled the total sum of the additional payment, the defendant is liable to reimburse the plaintiffs the sum of $11,002.50.

5.The plaintiffs admitted that the defendant is entitled to the profits tax refund by the Inland Revenue Department for the period 1 January 2002 to 31 December 2004 in the sum of $48,694.  Therefore, under the claim of profits tax paid by the plaintiffs on behalf of the defendant, the sum outstanding is $132,142.

6.As to the Professional Indemnity Scheme contribution, the plaintiffs admitted that the defendant is entitled to a refund or contribution adjustment/set off from the Hong Kong Solicitors Indemnity Fund Limited (‘HKSIFL’) in the sum of $27,518 for the year 2003/04 refunded in 2005/2006, and for the year 2006/2007, the sum of $41,794.54.  For the year 2007/2008, the Professional Indemnity Scheme had made a refund of $3,491.83.

7.So far as the profits tax of $132,142 is concerned, the defendant agreed he is liable to pay the sum and had already made payment into court of the claim, it was accepted by the plaintiffs.  As to the second item of claim of the sum of $11,002.50 being the defendant’s share of additional contribution to the Professional Indemnity Fund (“PIF”) for the indemnity period 2002/2003 paid by the plaintiffs on behalf of the defendant, the defendant also admitted liability of this claim. 

8.The remaining issue of the plaintiffs’ claim is whether the defendant is liable to pay to the plaintiffs contributions to the Hong Kong Solicitors Indemnity Fund Limited the defendant’s share of contribution to the PIF for the year 2004/2005 and 2005/ 2006. And if the defendant is liable, the quantum.

9.The plaintiffs’ case is based on clause 7 of the Deed where the parties agreed to discharge each other from all liabilities in respect of the Partnership other than those expressly set out in the Deed and the parties’ agreement to give each other an indemnity for such third party claims or causes of action arising from their respective professional practice while acting as a partner of the Partnership.  The plaintiffs also rely on clause 17(ii) of the Deed which provided that the audited accounts of the Partnership for the period covering 1 January 2004 to 15 March 2005 would be prepared for the sole purpose of compliance with applicable professional rules and tax returns.  Consequently, the plaintiffs claim the defendant is liable to reimburse the plaintiffs the portion of payment to PIF representing the defendant’s share from 1 January 2004 to 31 December 2004 paid in the indemnity year 2005/2006 and for the indemnity year 2006/2007 for the period 1 January 2005 to 15 March 2005.

10.The defendant denies he is liable to make any contributions to the plaintiffs’ payment to the Professional Indemnity Scheme (“PIS”) after he ceased to be a partner of the Partnership.

The plaintiff’s case

11.It is the evidence of Mr Anthony Lam Chi Tat (“Mr Lam”) of the plaintiffs that the Deed was drafted in settlement of High Court Action No 2984 of 2004 by the partners of MK Lam & Co.  The action was taken out against the defendant for specific performance of an agreement dated 18 October 2004 signed between the partners of MK Lam & Co and the defendant.  On the date of hearing before a High Court judge on 25 February 2005, the parties signed the Deed in settlement of the claim.  It was Mr Lam’s evidence that the parties had discussed the issue of tax liability of the defendant for the period he was a partner of the Partnership and the issue of professional indemnity during negotiations resulting in the final version of the Deed’s inclusion of clauses 7 and 17 in its present form.

12.The relevant part of clause 7 stated:

“The retired partner, the retiring partner and the continuing partners discharge each other from all liabilities in respect of the Partnership, save those expressly set out in this Deed, provided that in respect of third party claims and causes of action against the Partnership, each of the retired, retiring and continuing partners, for the period up to 30 September 2004 in respect of the retired partner and up to the retirement date in respect of the retiring and continuing partners, gives to the other an indemnity for such third party claims or causes of action arising from their respective professional practice while acting as a partner of the Partnership. ……”

13.Clause 17 stated:

“The parties hereto shall co-operate and use their best endeavours to procure:

(i) The publication of the notice under Section 38(2) of the Partnership Ordinance pursuant to the terms of this Deed.

(ii) The preparation by Messrs KC Oh, Certified Public Accountants, of the audited accounts of the Partnership for the period covering 1 January 2004 to 15 March 2005, the costs thereof to be equally borne by the retiring partner on the one part and the continuing partners on the other.  It is expressed agreed that the foregoing audited accounts are to be prepared for the sole purposes of compliance with applicable professional rules and tax returns and shall not affect the rights and obligations set out in this Deed.”

14.Mr Lam claimed that the plaintiffs and the defendant had both agreed to the financial statements and approved the reports and financial statements of MK Lam & Co for the year ended 31 December 2002, 2003, 2004 and 2005 and from 1 January 2005 up to 15 March 2005 prepared by Messrs KC Oh &Co. 

15.The new Partnership of MK Lam & Co settled the demand for contribution to the Compulsory Professional Indemnity Scheme (“PIS”) from the HKSIFL for the year 2005/2006 in the sum of $256,000 on 20 September 2005.  Under the Rules, the calculation for contribution to PIS is based on the gross fee income of the firm in the previous financial year.  In the case of the Partnership, the contribution for the year ending 31 December 2004 was based on the gross fee income of $9,991,614 set out in the financial statement approved by the partners and in the financial report prepared by KC Oh & Co.  The defendant’s share of gross fee income for that year was $5,965,642 out of the total gross fee income of the Partnership of $9,991,614.  Consequently, the plaintiffs claimed the defendant is liable to contribute his portion of $105,680.49 out of the total contribution sum of $256,000.  There was an adjustment to the shortfall contribution for the year 2002/2003 demanded by HKSIFL under a debit note dated 19 December 2005 for the sum of $44,010.  The plaintiffs settled the payment demanded on 6 January 2006.  They claimed the defendant is liable for his share in the sum of $11,002.50.

16.The plaintiffs received a further debit note from HKSIFL dated 23 August 2006 demanding a contribution of $126,300 for the indemnity year 2006/2007, it was calculated based on the Partnership’s gross fee income for the year ended 31 December 2005 at $5,192,663.  Between 1 January 2005 and 15 March 2005, the defendant’s gross fee income was $1,281,948, it was included as part of MK Lam & Co 2005’s gross fee income of $5,192,663.  The defendant’s share of contribution is therefore $14,886.67.  

17.The plaintiffs admitted that for the indemnity year 2005/2006, the defendant’s contribution should be $126,577.76 less the refund from HKSIFL in the sum of $41,794.54, therefore, the contribution payable by the defendant is $84,783.22.

18.The plaintiffs admitted that for the indemnity year 2006/2007, the contribution from the defendant for the $1,281,948 gross fee income he earned out of the total of $5,192,663, the defendant’s contribution was $35,056.50 apportioned from the $142,000 paid by the new Partnership under the Rules.  The refund for the year from HKSIFL was $14,144, the defendant’s portion of refund came to $3,491.83. Consequently, the contribution from the defendant for the indemnity year 2006/2007 is $31,564.67.

19.Together with the shortfall contribution to PIS for the year 2002/2003 at $11,002.50, and the counterclaim from the defendant for the refund from HKSIFL as a result of staff movement at $41,500 (which the plaintiffs do not dispute) deducted from the total sum claimed by the plaintiffs of $127,350.39, the total claim of the plaintiffs is $85,850.39.

The defence case

20.The defendant Mr Andrew Kam Yee Wai (“Mr Kam”) admitted that on 25 February 2005 he signed a deed of settlement with the retired partner Lawrence Lam and the two plaintiffs (“the continuing partners”) agreeing that he would retire from the Partnership of MK Lam & Company on 15 March 2005 and the plaintiffs would continue to practice as solicitors under the name of Messrs MK Lam & Company.  He said, under clause 6 of the Deed, the parties agreed not to require partnership accounts to be taken.  That under clause 7, the parties further agreed to discharge each other from all liabilities in respect of the Partnership.  Furthermore, each of the contracting party agreed to give to the other an indemnity for such third party claims or causes of action arising from their respective professional practice while acting as a partner of the Partnership up to 30 September 2004 in respect of Lawrence Lam (“the retired partner”) and up to the date of Mr Kam’s retirement from the Partnership in respect of the plaintiffs and Mr Kam.  He pointed out that under clause 12(2), the plaintiffs agreed to refund the professional insurance premium that the Solicitors Indemnity Fund may return due to the retirement of Lawrence Lam, the defendant and the termination of the employment of Clement Fan and Peter Tung on 30 September 2004.  He further argued clause 17(ii) was inserted to cover the compliance with the professional rules and tax returns, but the parties’ rights and obligations set out in the Deed would not be affected.

21.He agreed that under the Rules, every practising solicitor in Hong Kong is required to have and maintain indemnity for claims made against him on liability incurred during his practice.  That indemnity is provided by the Law Society under the Compulsory Professional Indemnity Scheme to which all practising solicitors are required to contribute.  And that the HKSIFL was set up to hold, manage and administer the fund with Essar Insurance Service Limited as the manager (‘Essar’).

22.The Rules set out the formula contributions for each solicitor or firm of solicitors. The formula is:

C = (N x $20,000) + (M x $13,000) + S

C is the amount of contribution, N is the number of principal, M is the number of assistant solicitors and consultants and S is the amount established from the table under rule 2 of Schedule 1 (see Solicitors (Professional Indemnity) Rules Cap 159 subsidiary legislation M Schedule 1).

23.The defendant admitted that the sum of $145,788 was paid on 30 September 2004 as his share of contribution to the Compulsory Professional Indemnity Scheme for the 2004/2005 indemnity year covering the period from 1 October 2004 to 30 September 2005.  As he retired on 15 March 2005, he and the retired partner Mr Lawrence Lam and the two assistant solicitors Mr Clement Fan and Mr Peter Tung who left the employment of the Partnership on 30 September 2004 were all entitled to a refund of the contributions made for the year 2004/2005.  The refund amounted to $41,518.  He admitted that there was a shortfall to the Compulsory Professional Indemnity Scheme for the year 2002/2003 of $11,002.50 which he is seeking to set off from his counterclaim against the plaintiffs.

24.The defendant denied he is liable to pay further contributions for the indemnity period 2005/2006 and 2006/2007 under the Partnership from which he retired on 15 March 2005.  He had since his retirement from the Partnership incorporated a new firm in the name of Kam & Fan, solicitors, and had under the name of Messrs Kam & Fan been contributing to the Solicitors Indemnity Scheme.

25.The defendant agreed the Deed is intended to settle everything save for third party claims and negligence for which each partner gave to the other a mutual undertaking of indemnity.  He, however, asserted the indemnity was not intended to deal with the Professional Indemnity Fund contributions.

26.The defendant’s contention is that the plaintiffs chose to continue practising under the firm name of MK Lam & Co, as a result, the plaintiffs are required to comply with the Rules and to continue paying contributions under the firm name of MK Lam & Co.  So far as he is concerned, he had retired from the Partnership and his relationship with the Partnership had ended and the present MK Lam & Co, ie the new Partnership, was not the Partnership of which he was a partner.  He claimed he is therefore not liable to the contributions paid by the new Partnership of MK Lam & Co.  That whatever arrangement there was between him and the plaintiffs before his retirement, it had ended after the parties signed the Deed.  He claimed clause 7 of the Deed does not cover contributions to PIF.

27.As to HCA 16 of 2007, the defendant said he did not make any claim against the PIS for it had never occurred to him he should apply for indemnity from PIF.  Though the plaintiffs claimed it was an obligation to pay contributions to PIF, it was solely because they were practising under the name of MK Lam & Co, such contributions were not intended to offer protection to the defendant.  It is the defence case that after the dissolution of the partnership, had the plaintiffs continued to practice under a different firm name, the gross fee earnings of the Partnership and the defendant’s gross fee earnings from 1 January to 15 March 2005 would not be relevant in the assessment of contributions. 

28.Mr Lau, counsel for the defence, argued that clause 7 should be construed by itself and not to be confused with clause 12(2) which referred to the Professional Insurance contributions paid in advance for 2004/02005 on behalf of the retiring partner, the defendant and the assistant solicitors Clement Fan and Peter Tung who terminated their employment on 30 September 2004.

29.He further argued that the Deed had completely resolved the partnership dispute between the partners, construction of the deed of settlement should be confined to the Deed itself.  As clause 7 did not specify the retiring partner would be required to continue paying a proportion of the contributions to PIF after his retirement, the plaintiffs are not entitled to demand such reimbursement from the defendant. 

30.On the plaintiffs’ submission that the defendant had promised to indemnify the other partners and obtaining the protection of the PIS as a result of the plaintiffs’ contribution based on the Partnership’s earnings therefore has an obligation to pay the contributions, the defendant argued that his receiving the benefit as an ‘indemnified’ was not his free choice, the benefit to him was a windfall as a result of statutory provisions.  Further, he was not told he was offered an indemnity when the plaintiffs paid the contribution to PIF and he had not done anything in return for the benefit.  He argued that the plaintiffs paid the contribution only because it would enable them to continue to practise in the name of MK Lam & Co and the plaintiffs’ claim of implied request is not valid.

31.The defendant’s counterclaim is based on clause 12(2) of the Deed which provided a refund of the balance of indemnity insurance to the defendant on the retirement of Lawrence Lam, the defendant and the termination of employment of Clement Fan and Peter Tung from the Partnership.  The defendant admitted the plaintiff’s claim for the sum of $11,002.50 should be set off from $41,500, leaving a balance of $30,497.50.

Findings

32.Every practising solicitor in Hong Kong is required to comply with the indemnity rules and contribute to the Law Society’s Professional Indemnity Fund which would provide insurance coverage against civil claims arising from his/her practice under the Legal Practitioners Ordinance Cap.159.  Paragraph 1 of the Schedule to the Solicitors (Professional Indemnity) Rules, Cap. 159M, provides:

“every principal in the business of practising as a solicitor shall in respect of himself and of all assistant solicitors and consultants in his firm, make or cause to be made the contributions to the fund in respect of that practice as established by the Law Society (“the Rules”).”

33.Clauses 7 and 17(ii) of the Deed stated:

“7. The Retired Partner, the Retiring Partner and the Continuing Partners discharge each other from all liabilities in respect of the Partnership, save those expressly set out in this Deed, provided that in respect of third party claims and causes of action against the Partnership, each of the Retired, Retiring and Continuing Partners, for the period up to 30 September 2004 in respect of the Retired Partner and up to the Retirement Date in respect of the Retiring and Continuing Partners, gives to the other an indemnity for such third party claims or causes of action arising from their respective professional parties while acting as a partner of the Partnership. For the avoidance of doubt, it is agreed that the Retiring Partner shall be solely responsible for all liabilities and shall be solely entitled to enjoy the benefits of the lease of Room 505 Melbourne Plaza and the Continuing Partners shall jointly and severally be solely responsible for the all liabilities and shall be entitled to the benefit of the lease of Room 501-504A Melbourne Plaza.

17. The parties hereto shall co-operate and use their best endeavours to procure: …..

(ii) The preparation by Messrs KC Oh, Certified Public accountants, of the audited accounts of the Partnership for the period covering 1 January 2004 to 15 March 2005, the costs thereof to be equally borne by the Retiring Partner on the one part and the Continuing Partners on the other.  It is expressly agreed that the foregoing audited accounts are to be prepared for the sole purposes of compliance with applicable professional rules and tax returns and shall not affect the rights and obligations set out in this Deed.”

34.Clause 7 specified that the retired, retiring and continuing partners gave to each other an indemnity for all third party claims or causes of action arising from their respective professional practice while acting as a partner of the Partnership.  The plaintiffs claimed that as the retiring partner, the defendant is liable to reimburse the plaintiffs contributions to PIF paid by them on the defendant’s behalf for the insurance coverage on claims made against the Partnership.  It is not disputed that such contributions were calculated and demanded by Essar based on the audited accounts of the Partnership prepared by Messrs KC Oh in compliance with the Rules under clause 17(ii) of the Deed.

35.The defendant, on the other hand, relied on clause 6 of the Deed which provided that except as agreed under the Deed “the retired partner, the retiring partner, and the continuing partner shall not require the taking of partnership accounts” (pages 2-5 of Bundle B).  In particular, the defendant referred to clause 6(vi) and (vii) (pages 3-4 of Bundle B). 

“(vi)   All fees and other payments received or receivable from the files referenced under the Retiring Partner’s name, and those handled by the Retiring Partner under the initials “LL” (as set out in the Schedule hereto) shall belong to the Retiring Partner, and where the fees cannot be collected prior to the Retirement Date, the Retiring Partner shall have the right to use the Partnership’s name (ie MK Lam & Co) to collect the same on the condition that he bears all the costs for so doing.

(vii)   In consideration of the agreements set out in this clause 6 of this Deed, and the payment of the sum of Hong Kong Dollars Six Hundred and Ninety Thousand (HK$690,000) by the continuing partners to the retiring partner as provided for in (viii) below, the parties to this Deed waive all right vested in them in the tangible and intangible assets of the Partnership, and the goodwill of the Partnership, shall subject to the terms of this Deed, be absolutely vested in the Continuing Partners from the Retirement Date onwards.”

36.Based on clause 6(vi) of the Deed, the defendant had carried on a claim in the name of MK Lam & Co after his retirement from the Partnership against a former client for unpaid fees under High Court Action No 285 of 2005, the writ of summons of which was issued one month before his retirement on 15 March 2005 (pages 1 to 23 of Bundle C).

37.On 4 January 2007, the same former client, the Incorporated Owners of Kwai Wan Industrial Building (“the IOC”), took out a writ of summons against the Partnership, namely, Lawrence Lam, Andrew Kam, Anthony Lam and Cheng Shui Yee, formerly trading as MK Lam & Co (“the Firm”) as the first defendant and the defendant Andrew Kam as the second defendant under High Court Action No. 16 of 2007 for breach of duty when the Partnership and the defendant acted for the IOC (pages 24 to 41 of Bundle C).

38.Mr Anthony Lam of the plaintiffs received a letter on 8 January 2007 from the Law Society inquiring if he was one of the defendants in High Court Action No 16 of 2007 (“the High Court Action”).  On 9 January 2007, the plaintiffs wrote to the defendant bringing notice to the defendant the High Court Action against the Partnership reminding the defendant of the indemnity under the Deed he had agreed to in respect of claims against the firm for work done during the Partnership.  On 16 January 2007, Messrs Kam & Fan wrote to the plaintiffs informing them that Messrs Kam & Fan would be acting for the defendant and stating the IOC’s High Court Action was without merits.  Messrs Kam & Fan further offered to act for the plaintiffs to defend the IOC’s claim against the Partnership in the High Court Action.  On 10 January 2007, the plaintiffs wrote to the Law Society informing the Law Society that they have no knowledge of the claim against the Partnership in the High Court Action because the IOC’s case was handled by the defendant when he was a partner of the Partnership and that they have requested the defendant to deal with the matter.  The Law Society replied on 6 February 2007 enclosing a letter of complaint from the IOC against the Partnership dated 15 December 2006.  On 16 February 2007, Messrs Kam & Fan filed a defence in the High Court Action on behalf of the first and second defendants in those proceedings.  Messrs Kam & Fan eventually handled all the litigation aspects of the High Court Action.

39.The defendant relied on clause 18 of the Deed which stated:

“18. This Deed shall constitute the whole agreement between the parties and a full and final settlement of all issues and disputes between the parties hereto in relation to the Partnership.”

40.The defence claimed that as the Deed had already settled all the liabilities of the parties to the Deed, the defendant should not be liable for payments which were not specified in the Deed.  The defendant’s counterclaim is based on clause 12(2) of the Deed (page 8 of Bundle B) which stated:

“12. The Continuing Partners shall on or before the Retirement Date make the following refund to the Retiring Partner:

(2) Such amounts of professional insurance premium as may be refunded to the Partnership by the Solicitors’ Indemnity Fund arising from the retirement of Retired Partner and Retiring Partner and the termination of employment of Messrs Clement Fan and Peter Tung with the Partnership on 30 September 2004.”

Clause 7 of the Deed

41.On the plain and natural meaning of clause 7, the indemnity covers all third party claims or causes of action arising from the practice of either the plaintiffs or the defendant and the retired partner while they were partners of the original Partnership.

42.It is undisputed that protection against third party claims on the Partnership is provided under the Professional Indemnity Scheme (section 73A of the Legal Practitioners Ordinance Cap 159) and rule 11 of the Solicitors (Professional Indemnity) Rules Cap 159M.  It is a mandatory and compulsory scheme under the Ordinance which applies to all practising solicitors in Hong Kong and the contribution of each firm of solicitors is based on the rules set out in the schedule of Cap 159M. In the present case, the calculations and demand by Essar for contribution to the Hong Kong Solicitors Indemnity Fund is not challenged.  As non-compliance with the Rules is a professional misconduct, the plaintiffs as partners in the new Partnership was required by law to pay the contributions demanded to the Scheme. 

43.Ms Wong argued that the defendant had consented to the plaintiffs’ practising in the name of MK Lam & Co after the defendant’s retirement for he had transferred under clause 6(vii) of the Deed his share of the goodwill of the Partnership to the plaintiffs for a consideration of $690,000.  Ms Wong further submitted, the Deed was settled by senior counsel on both sides and the parties were solicitors who must be aware of the importance of the words used in the Deed.  The defendant conceded at the beginning of the trial his liability for profits tax on the gross fee income he earned in 2004/2005; by the same token, he should be liable to pay his portion of contributions under the Professional Indemnity Scheme arising from his practice in the Partnership.

The Law

44.Rule 2 of the Solicitors (Professional Indemnity) Rules Cap 159M defines ‘indemnified’ as:

“indemnified (獲彌償保障者) means the firm named in the receipt referred to in rule 9, or any principal in the firm, any person employed in or in connection with the Practice (including any assistant solicitor, any solicitor who is a consultant in the firm, and any trainee solicitor), any solicitor who has ceased by reason of death, retirement or otherwise to practice as principal in the firm, any former employee employed in or in connection with the Practice (including any assistant solicitor, any consultant and any trainee solicitor as aforesaid) and the estate and the legal representatives of any of the foregoing, and also includes any service, administrative or nominee company or trust insofar as its activities are carried out in connection with the Practice.”

45.The meaning of ‘indemnified’ includes a solicitor who had retired as a principal in the firm or a former employee, the word ‘practice’ is defined under rule 2 as:

“Practice (執業業務) means the business of practicing as a solicitor, including the acceptance of obligations connected with and incidental to such practice as …... undertaken by the indemnified or his predecessor in business alone or with others, provided always that wherever any fees or other income accrue therefrom they inure to the benefit of that business.”

46.In the case of Marble Holdings Ltd v Yatin Development Ltd, Mortimer NP J, at paragraphs 19 to 20 of the judgment explained the approach to the interpretation of the meaning and effect of an agreement:

“19. There is much authority and little dispute in this appeal as to how the court must approach the interpretation of the meaning and effect of this commercial agreement. Having considered the complete document the whole matrix of circumstances within which the contract was made is relevant. These principles are set out by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1) [1998] 1 WLR 896 at pp 912F-913F and in Bank of Credit and Commerce International SA v Ali & Others [2002] 1 AC 251 where at para 8 Lord Bingham succinctly summarised them:

To ascertain the intention of the parties the court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties’ relationship and all the relevant facts surrounding the transaction so far as known to the parties. To ascertain the parties’ intentions the court does not of course inquire into the parties’ subjective states of mind but makes an objective judgment based on the materials already identified.

20. If the words used are free of ambiguity and devoid of commercial absurdity their natural and ordinary meaning will apply unless the relevant surrounding circumstances demonstrate otherwise. Of course, parties often fail to express themselves well or clearly in which case the surrounding circumstances are of particular value. See Lord Hoffmann NPJ giving the judgment of this Court in Jumbo King Ltd v Faithful Properties Ltd & Others (1999) 2 HKCFAR 279 at p 296:

The construction of a document is not a game with words.  It is an attempt to discover what a reasonable person would have understood the parties to mean.  And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve.  Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well.  Their language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended.”

47.The court’s approach therefore is to read the terms of the contract as a whole and give to the words used their natural and ordinary meaning in the context of the agreement, taking into consideration the parties’ relationship and all the relevant facts surrounding the transaction.

48.Adopting this approach, on the plain and natural meaning of clause 7, the indemnity given by the retiring and continuing partners to each other covered all third party claims or causes of action arising out of the practice of the plaintiffs and the defendant while acting as a partner of the Partnership.  In order for the indemnity to continue protecting the parties, including the retiring partner, the gross fee income of the Partnership covering the indemnity period of 2004/2005 was taken into account when the continuing partners continued to practice in the partnership name of MK Lam & Co.  And in order to continue practising in the name of MK Lam & Co, the plaintiffs had paid a consideration to the defendant for his share of the goodwill in the Partnership.

49.While the defendant’s practice under the name of Messrs Kam & Fan made contributions to the Solicitors Indemnity Fund as a new practice, his contributions to the Indemnity Fund would not cover causes of action or claims by third party against the defendant for work done prior to his retirement from the Partnership on 15 March 2005.  The indemnity referred to in clause 7 against third party claims or causes of action against the partners could only be for the period of practice before the defendant’s retirement from the Partnership.

50.Under rule 1 of Schedule I to the Rules and under the Scheme, the contribution from each firm of solicitors is based on the income of the partnership for the year prior to the year of contribution with an adjustment in the next year’s contribution based on the audited accounts of the relevant year.  The Rules aim to protect not only the general public who had engaged the services of solicitors in Hong Kong but also practising solicitors from claims lodged against them by their former clients or third parties.  That is why contributions to the PIS are mandatory under the law for all practising solicitors in Hong Kong.

51.In my view, clause 7 of the Deed covers the PIS contributions that would confer coverage for liabilities arising from third party claims or causes of action against partners of the Partnership for the period prior to the dissolution of the Partnership.  Clause 12(1) of the Deed specified the sum the continuing partners shall pay the retiring partner.  Clause 12(2) referred to the insurance premium to be refunded by the Solicitors Indemnity Fund arising from the retirement of the retired partner, the retiring partner and the two assistant solicitors.  It is a specified anticipated refund of contributions calculated on a pro rata basis.  It is a different case with the contributions for the year 2005/2006 which involved the calculation of the total gross fee income of the continuing partners for the year of indemnity 2004/2005 including the income of the defendant for the period prior to his retirement.  Consequently, it is not surprising if the Deed made no specific reference to the calculation of contributions to PIS in 2005/2006 when the gross fee earnings of the plaintiffs for the remainder of the year had not been ascertained.  Clause 6 dealt with the Partnership’s office bank account, fees and other payments received or receivable and Partnership assets and files only.  There was no reference to Partnership liabilities in clause 6, they were dealt with in clause 7.  The inference is, clause 7 was intended to cover liabilities including the indemnity contributions under the PIS scheme which conferred a complete protection to all the partners in the Partnership including the defendant for the period while they were partners.

52.The letter from the Law Society to Mr Anthony Lam Chi Tat referred to the High Court Action which cited the plaintiffs, the defendant and the retired partner Mr Lawrence Lam, who were partners of MK Lam & Co as the first defendant in the action.  Because the writ named all the partners in the Partnership, Mr Lam was required to report to the Law Society the nature of the cause of action against the firm (see page 42 of Bundle C).  It is important to note that the IOC’s action was taken against both the Partnership and the defendant for breach of fiduciary duties, though it was clear that the defendant was the solicitor advising the IOC between 1998 and 2004. 

53.The defendant claimed he had informed the plaintiffs and requested their approval for his firm to represent them in the High Court Action and that he would not involve the Solicitors Indemnity Scheme.  However, so far as the Law Society is concerned and so far as any party who may be claiming against a firm of solicitors is concerned, the Scheme is expected to settle the judgment sum should the claimant be successful. The High Court Action taken out against the partners of the Partnership would fall into the same category.  Coverage by the Scheme would only be extended to all the partners if the Partnership had contributed to the Solicitors Indemnity Fund and had continued to pay contributions under the Rules when the continuing partners carried on practising in the name of MK Lam & Co.

54.Mr Lau argued that it was solely because the plaintiffs had chosen to continue to practice under the name of Messrs MK Lam & Co, resulting in the basis of PIS contribution to include the defendant’s earnings in 2005 while the defendant had been paying his own contributions to the Scheme under the new firm Kam & Fan.

55.I am not persuaded by Mr Lau’s argument.  The plaintiffs as the ‘continuing partners’ under the terms of the Deed had paid a consideration of $690,000 to the defendant for his share of goodwill in the Partnership.  It may also be argued that the Deed did not require the plaintiffs to make contributions to PIS on the defendant’s behalf after the termination of the partnership, yet the plaintiffs chose to pay them; on the other hand, all parties to the Deed knew it was a statutory requirement to pay the assessed contribution under the Rules.  Clause 17(ii) of the Deed referred to the audited accounts to be prepared by a certified public accountant for the period 1 January 2004 to 15 March 2005 in compliance with professional rules and tax returns.  Thus, it was clearly within the anticipation of the defendant that there would be tax payable and professional indemnity contributions under the Rules to be paid based on the 2004/2005 audited accounts of the Partnership which would take into account his gross fee earnings between 1 January 2004 and 15 March 2005.  It is not opened to the defendant who admitted the tax liability, to argue the Deed had settled all liabilities of the parties.

56.It was argued that if the plaintiffs continued their practice under a different firm name, the gross fee earnings of the Partnership for the accounting year ending December 2004 and the defendant’s gross fee earnings from 1 January 2005 to 15 March 2005 would not have been relevant in assessing the contributions to PIF. On the basis that the parties had entered into a deed of settlement which allowed the plaintiffs to continue under the firm name of MK Lam & Co, for which they had paid a consideration to the defendant, it must be within the defendant’s anticipation and knowledge that the plaintiffs in continuing to practise in the name of MK Lam & Co, the new partnership’s PIF contribution would also include his gross fee earnings in 2004/2005 before the dissolution of the Partnership.

The restitution claim

57.The plaintiffs further argued that the defendant is liable because he had received protection as a result of their payment of contributions, therefore has an obligation to reimburse the plaintiffs.  Mr Lau submitted the plaintiff’s claim is a restitutional claim on contract, and to succeed, the Plaintiffs have to prove the defendant had accepted the benefit.  He relied on paragraphs 1-019 to 020 of Goff & Jones the Laws of Restitution, 7^th edition, the remark of Pollock C.B, “One cleans another’s shoes.  What can the other do but put them on?”  The learned authors said:

“For that reason the common law originally concluded that a defendant could be said to have benefited from the receipt of services only if he had requested them. A true request will normally lead to the conclusion that the defendant who requested the services has contractually bound himself to pay for them. But a defendant, who is not contractually bound, may have benefited from services rendered in circumstances in which the court holds him liable to pay for them. Such will be the case if he freely accepts the services. In our view, he will be held to have benefited from the services rendered if he, as a reasonable man, should have known that the claimant who rendered the services expected to be paid for them, and yet he did not take a reasonable opportunity open to him to reject the proffered services. Moreover, in such a case, he cannot deny that he has been unjustly enriched.”

58.Mr Lau argued that the contribution by the plaintiffs to the PIF was voluntary on the plaintiff’s part because the plaintiffs have no choice under the Rules but to make the contribution assessed by Essar based on the total income of the Partnership for the year 2004/2005 and for the year 2005/2006 which also included earnings of the defendant and his team for the year 2004/2005.  The defendant described the protection extended to him as a double protection or double indemnity and a windfall.

59.I do not agree with the argument.  There can be no double indemnity or protection. Essar will provide one single indemnity for each claim made against the Partnership or its partners because the coverage was to all the partners in the Partnership for the period of indemnity.  There could not be any double indemnity to the defendant because the contributions he made in the name of Messrs Kam and Kan after he left the Partnership would not cover the period he was a partner of the Partnership, even though it may be true that had the plaintiffs practiced under a different firm name instead of the Partnership name, the basis of assessment of contributions may be worked out differently. However, since the plaintiffs paid a consideration for the transfer of the defendant’s goodwill in the Partnership, it was within the defendant’s knowledge and anticipation at the time when he signed the settlement deed.

60.The authors of the Laws of Restitution 7^th ed said at paragraph 1-079 at pages 69-70:

“Claims for contribution and recoupment may arise from payments made out of self-interest. In Exall v Partridge the claimant, who met the landlord’s demand for rent, did so because he wanted to recover his goods seized under distress, but he recovered his payment from the lessees. Again, a person who has rendered services in an emergency obtained restitution even though he intended to charge for them. And in Canada a person who rendered services to another, in the expectation that she would be paid for them in some form or another, recovered on a quantum meruit, despite her evidence that she stayed with the defendant because she wanted a roof over her head. In all these cases there is present an element of self-interest. But it is subservient to other more compelling factors, such as compulsion, necessity and request …..

In principle, a defendant who has unjustly gained an undoubted benefit should make restitution if it has been gained at the claimant’s expense, whether the benefit was directly or indirectly conferred …..”

61.The plaintiffs may have made the contributions demanded to comply with the Rules so that they may continue to practice in the name of MK Lam & Co, therefore, they may have acted out of self-interest; on the other hand, the defendant had definitely obtained a benefit at the same time.  It is not as if the plaintiffs acted as a mere volunteer in conferring the benefit.  I refer to paragraph 1-081 of the Laws of  Restitution 7^th ed at page 71:

“In contrast, the case law suggests that a claimant who acts mistakenly or under compulsion will not generally be said to be a mere volunteer or as officious, even though the defendant did not ask him to act; similarly if he confers a benefit on the defendant, at the defendant’s request, in the course of a transaction which proves to be ineffective. In particular, a restitutionary claim will not be defeated solely on the grounds of officiousness in the following cases, which are not exhaustive: …..

(5) if benefits have been conferred under duress, undue influence or compulsion of law.”

62.The fact that the plaintiffs in compliance with the Rules paid the assessed contributions, the computation of which had included the defendant’s gross fee earnings in 2004/2005, does not mean the plaintiffs willingly conferred the coverage free of charge.  In the High Court Action, all partners of the Partnership were sued in the Partnership’s (the firm’s) name as the first defendant, the defendant was also personally joined as the second defendant in that action.  Had the defendant requested it, the the Solicitors Indemnity Scheme would have taken over the defence for both the first and second defendants in the action.  For the aforesaid reason, I do not think the principle of free acceptance is applicable in this case.

The defendant’s counterclaim

63.The plaintiffs do not dispute the defendant’s claim of $41,500 refund under clause 12 of the Deed.  The defendant also admitted he is liable for $11,002.50 and seeks to set off this sum against the defendant’s counterclaim.

Quantum

64.The plaintiff Mr Lam prepared a table on the calculation of contributions under the Compulsory Professional Indemnity Scheme.  It is attached at p 208 of bundle B.

65.The plaintiffs’ calculation is set out below:

For indemnity year 2005/06

GFI of the firm for the accounting year ended 31.12.04 = $9,991,614.

GFI earned by D’s group = $5,965,642

S Factor (Amount payable by the firm under the Rules) = $212,000

Contribution payable by D = $212,000/9,991,614 x 5,965,642 = $126,577.76 (A)

Less

Refund from Essar = $70,000

Refund to be receivable by D = $70,000/9,991,614 x 5,965,642 = $41,794.54 (B)

For indemnity year 2006/07

GFI of the firm for the accounting year ended 31.12.05 = $5,192,663

GFI earned by D’s group = $1,281,948

Amount payable by the firm under the Rules = $142,000

Contribution by D = $142,000/5,192,663 x 1,281,948 = $35,056.50 (C)

Less

Refund from Essar = $14,144

Refund to be receivable by D = $14,144/5,192,663 x 1,281,948 = $3,491.83 (D)

Therefore, the defendant is liable for: $(A-B) + (C-D) + (11,002.5 – 41,500).  The plaintiffs’ total claim comes to: $84,783.22 + $31,564.67 + $11,002.50 - $41,500 = $85,850.39.

66.I accept the aforesaid calculations and give judgment to the plaintiffs in the sum of $85,850.39 with interests at half judgment rate from the date of writ to date of judgment and thereafter at full judgment rate.

Costs

67.Costs should follow the event.  I make a cost nisi order for costs to the plaintiffs, to be taxed if not agreed with certificate for counsel.  Should there be no application on costs within 14 days hereof, the order will be made absolute.

Miss Maggie Wong, instructed by Lo & Lo, for the plaintiffs

Mr Walter Lau, instructed by Kam & Fan, for the defendant

Please refer to CACV139/2012 for the relevant appeal(s) to the Court of Appeal.