NISHIMATSU-COSTAIN-CHINA HARBOUR JOINT VENTURE v. IP KWAN & CO (a firm)

CACV 21/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 21 OF 2000

(ON APPEAL FROM HCA 19448/1999)

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J U D G M E N T

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Hon Rogers JA :

Introduction

1. This is an appeal from a decision of Deputy Judge Gill given on 12 January 2000. As a result of his judgment, the judge made orders restraining the defendant firm in the following terms :-

"(a) from acting as the solicitors representing or advising the Ming An Insurance Co (HK) Ltd in an arbitration between the Plaintiff and the Ming An Insurance Co (HK) Ltd which was commenced by the Plaintiff pursuant to a Notice to concur in the appointment of an arbitrator dated 19 June 1999;

(b) from acting as the solicitors representing or advising the Ming An Insurance Co (HK) Ltd in the Miscellaneous Proceedings Action commenced by Ming An Insurance (HK) Ltd against the current Plaintiff under Action No. HCMP 6294 of 1999;

(c) from acting as the solicitors representing or advising the Ming An Insurance Co (HK) Ltd and the current Plaintiff in the personal injury action commenced by Mang Mang Shing against, inter alia, the current Plaintiff under Action No. HCPI 471 of 1999;

(d) from acting as the solicitors representing or advising the Ming An Insurance Co (HK) Ltd in respect of any legal advice (including without limitation on any other legal or arbitral proceedings) arising out of or otherwise connected with the accident that occurred on 7 May 1996 at the Chek Lap Kok project site which caused injury to Mr Mang Mang Shing."

Background

2. For convenience, in order to avoid confusion, I shall refer to the plaintiff in these proceedings as the joint venture. The joint venture was engaged in construction work for the Chek Lap Kok Airport. It was named in an employee's compensation policy with the Ming An Insurance Co (HK) Ltd. That policy covered the liability of the Provisional Airport Authority and/or the plaintiff, as the principal contractor for the land side infrastructure works for the Airport, and/or sub-contractors of any tier including nominated and/or specialist sub-contractors employed by the joint venture and/or any of the joint venture's sub-contractors. The period of insurance was 25 September 1995 to 24 August 1997.

3. On 7 May 1996 a pick-up truck which was driven by a Mr Gurung, who was an employee of the joint venture, was in collusion with a van driven by an employee of a sub-contractor of the joint venture. A passenger in the van, Mr. Mang, who was an employee of a sub-sub-contractor of the joint venture, was injured. His hand was crushed by the door of the van which slid shut from the force of the collusion.

4. On 24 July 1997 the injured employee instituted employee's compensation proceedings against the joint venture and the sub-contractor and sub-sub-contractor. Those proceedings were eventually settled in July 1998. All relevant information and documents had apparently been passed by the joint venture to the defendant's solicitors to enable them to conduct the employee compensation proceedings on behalf of the joint venture and its sub and sub-sub-contractors.

5. It was not until 5 May 1999 that the injured employee commenced a personal injury action in the High Court against Mr Gurung and the joint venture. The case against Mr Gurung was that he had reversed negligently. The case against the joint venture was that it was vicariously liable for the damage caused by Mr Gurung's driving. On the same day, notice of the issue of the writ was given by the injured employee's solicitors to the Ming An Insurance Co as insurers of Mr Gurung and the joint venture.

6. A week later, the defendant in this action wrote to the joint venture on behalf of Ming An stating that the cause of action covered by the personal injury proceedings was outside the scope of the insurance policy.

7. Five days later, on 17 May 1999, another firm of solicitors, Deacons, Graham and James, filed a Notice to Act in the personal injury proceedings on behalf of Mr Gurung and the joint venture. That firm was appointed to act by representatives of insurers under a third party liability policy taken out by the Provisional Airport Authority to cover the liabilities of, inter alia, the Provisional Airport Authority, all contractors and/or sub-contractors of any tier in relation to the Airport Project.

8. On 8 June the joint venture's own solicitors, Masons, wrote to the defendant advising that the personal injury claim was covered by the Ming An policy. They also pointed out that the acknowledgement of service was due to be filed by 11 June and requested confirmation from the defendant that Ming An would take over conduct of the defence failing which they, Masons, would file the acknowledgement of service and refer the matter to arbitration, as provided in the policy.

9. On 10 June the defendant wrote to Masons requesting documents in relation to :

"... the insurance coverage for third party risk of the vehicle involved ..." stating that "The documents requested are of relevance to the issue of liability to our client and your client's attention is drawn to Condition 6 of the policy."

10. On 11 June Masons filed a notice of change of solicitors in the personal injury action and an acknowledgement of service on behalf of both Mr Gurung and the joint venture.

11. The following day, the defendant wrote to Masons asking for a copy of the third party insurance under which Deacons, Graham and James had purported to operate when they filed a Notice to Act. The defendant reiterated that Ming An was entitled to sight of this policy and indicated that failure to disclose it was a ground upon which Ming An could "repudiate" their policy.

12. On 19 June, Masons, apparently, wrote to Ming An asking them to concur in the appointment of an arbitrator and hence commenced an arbitration. Masons' letter recited that "disputes and differences" had arisen as to the entitlement of the joint venture to be indemnified in the personal injury action under the Ming An policy and asked Ming An to concur in the appointment of Ms Teresa Cheng as single arbitrator.

13. Three days later, on 22 June 1999, the defendant filed a notice of change of solicitors in the personal injury action stating that they had been appointed to act as solicitors for Mr Gurung and the joint venture. A defence was filed on behalf of Mr Gurung and the joint venture on 7 July. Further correspondence ensued between the defendant and Masons. This could hardly be categorised as friendly correspondence. The implication could be said to be derived from that correspondence, if not direct accusations, that the joint venture was acting in breach of the conditions of the policy in failing to give such information as the defendant requested, primarily in relation to the other insurance policy. Apart from the fact that Mr Gurung might have been difficult to contact, there was no accusation made in relation to any failure to give any information relating to the defence of the personal injury action; indeed, if anything, the accusation came the other way round that the defence might have been drafted without any direct assistance or input from the joint venture.

14. On 23 September the defendant wrote to Ms Teresa Cheng indicating that they wished to have an additional arbitrator appointed and in default to apply to court to set aside her appointment as an arbitrator.

15. On 2 October Masons wrote to the defendant seeking confirmation that Ming An would indemnify the joint venture and indicating that reimbursement of legal fees was also required. The letter then went on that unless the confirmation was forthcoming, it was the joint venture's intention to proceed with the arbitration in respect of the insurance policy. The letter concludes with the paragraph :-

"Whilst writing we would point out that your firm now has a hopeless conflict of interest. You cannot continue to act for both our clients and Ming An in defending the above action and at the same time act for Ming An against our clients in the arbitration. Accordingly, if the matter cannot be settled on the above terms, we consider your firm should withdraw from acting for any of the parties."

16. On 12 October the defendant wrote to Masons denying that there was any conflict of interest but stating that the firm would be writing to the Law Society for directions. On the same day, Ming An commenced a Miscellaneous Proceedings action against the joint venture by originating summons to set aside Ms Cheng's appointment to act as the sole arbitrator in the arbitration in respect of the insurance policy. In that action, as well as in the arbitration, the defendant was and is acting as solicitors for Ming An.

17. Following a complaint from Masons about the drafting of the defence in the letter of 16 October, on 21 October the defendant wrote back to Masons enclosing a copy of the defence which was filed in the personal injury action. Masons had indicated in their letter that because the defendant was acting for both the insurer and the insured, it was, as a solicitor, under a duty towards both clients, as such, Masons considered that the joint venture was entitled to demand copies of all correspondence and telephone attendance notes between the defendant and Ming An and anyone else relating to the claim and liability under the policy.

18. The defendant's response to that request was :-

"We do not agree that the decisions referred to in your letter of 16 October entitle your client to have such extensive discovery of the documents from us. As a matter of fact, our understanding of the decision tells us that the decision can be of no assistance to you in your request for documents. We are not retained by your client, nor are we presently paid for by your client."

19. I will revert later in this judgment to the statement that the defendant was not retained by the joint venture but it is of significance to note that if there were any question of divided loyalties, clearly in the defendant's mind, it was the paying party to whom were owed the duties arising from being retained as a solicitor.

20. On the same day, the Law Society replied refusing to give directions and stating that where there was any question of conflict of interest, it was for the defendant itself, or the court, to determine the matter. The contents of that letter were not communicated to Masons until after they had made an inquiry of the defendant by a letter of 15 November whereupon on the following day, they were informed of the nature of the contents. A copy of that letter was eventually provided on 13 December.

21. On 10 December 1999 Masons wrote to the defendant indicating that they had instructions to proceed with an application for an injunction to restrain the defendant from acting either for Ming An or the joint venture.

22. In Points of Defence, dated the 8 November 1999, which were served by the defendant in the arbitration proceedings, the position is taken first that the joint venture has been in breach of its obligations under Condition 6 of the policy and secondly that because of the other insurance policy, the insured is not liable to pay any sum or is entitled to be fully or partially indemnified as to any liability.

23. The writ in these proceedings was filed on 22 December and a summons for an interlocutory injunction was issued on the same day. Following directions on 30 December, the matter came on for hearing before Deputy Judge Gill on 7 January 2000. We were informed by the parties that the hearing of the summons was, in effect, treated as the trial of the action and both parties are agreeable that that should have been so.

24. The defendant challenges the imposition of all four injunctions. As a matter of reality, the defendant has ceased to act as the joint venture's solicitor in the personal injury action and Mr Bleach SC, appearing on behalf of the defendant, indicated that it is the defendant's intention not to so act in the future. Nevertheless, the defendant still challenges the decision of the Deputy Judge granting an injunction in that respect. We are told that this is not simply a matter of academic interest, because there are questions not only of costs but of professional conduct. Furthermore, we are told that the issues arising in the case are of importance to the insurance community. In this respect, the policy contains, amongst other provisions, the following the effect of which is undoubtedly standard, namely Condition 6 :-

"No admission offer promise or payment shall be made by or on behalf of the Insured without the written consent of the Company which shall be entitled if it so desires to take over and conduct in his name the defence or settlement of any claim or to prosecute in his name for its own benefit any claim for indemnity or damages or otherwise and shall have full discretion in the conduct of any proceedings and in the settlement of any claim and the insured shall give all such information and assistance as the Company may require."

The Jurisdiction of the Court

25. As regards the present proceedings, I apprehend that the jurisdiction of the court to remove from the record solicitors who have a conflict of interest stems from the fact that solicitors are officers of the court and their conduct in legal proceedings which may affect the administration of justice is subject to this supervisory jurisdiction. Normally, of course, there would be no difficulty in a litigant choosing the solicitor who was to act on his behalf. The present difficulty arises from the situation where the insurer takes over the conduct of the proceedings under a condition such as Condition 6 of the terms of the policy. That in itself gives no specific right to the insurer to impose a particular solicitor in the sense that there is nothing in the conditions in the policy, which dictate that the insurance company's ability to take over the conduct of the defence and to have full discretion in the conduct of the proceedings, extends to imposing upon an insured a solicitor who has a conflict of interest with the insured.

The Nature of the objection

26. The objection in the present case is that, arising out of the defendant's representation of Ming An in the arbitration proceedings, if not the Miscellaneous Proceedings, the defendant has a conflict of interest with the joint venture's interests. That is said to be objectionable. It is not alleged that the defendant is in possession of confidential information which the joint venture objects to being passed to the insurer. The objection is based on there being a conflict of interest and not because of the possession of confidential information, breach of contract or otherwise. The distinction between an objection arising on the footing of a conflict of interest by reason of a solicitor currently acting for two clients and an objection based upon confidential information was emphasised in the case of Prince Jefri Bolkiah v. KPMG (a firm) [1999] 2 AC 222. At p.234G, Lord Millett said :-

"My Lords, I would affirm this as the basis of the court's jurisdiction to intervene on behalf of a former client. It is otherwise where the court's intervention is sought by an existing client, for a fiduciary cannot act at the same time both for and against the same client, and his firm is in no better position. A man cannot without the consent of both clients act for one client while his partner is acting for another in the opposite interest. His disqualification has nothing to do with the confidentiality of client information. It is based on the inescapable conflict of interest which is inherent in the situation.

This is not to say that such consent is not sometimes forthcoming, or that in some situations it may not be inferred. There is a clear distinction between the position of a solicitor and an auditor. The large accountancy firms commonly carry out the audit of clients who are in competition with one another. The identity of their audit clients is publicly acknowledged. Their clients are taken to consent to their auditors acting for competing clients, though they must of course keep confidential the information obtained from their respective clients. This was the basis on which the Privy Council decided Kelly v Cooper [1993] AC 205 in relation to estate agents.

Where the court's intervention is sought by a former client, however, the position is entirely different. The court's jurisdiction cannot be based on any conflict of interest, real or perceived, for there is none. The fiduciary relationship which subsists between solicitor and client comes to an end with the termination of the retainer. Thereafter the solicitor has no obligation to defend and advance the interests of his former client. The only duty to the former client which survives the termination of the client relationship is a continuing duty to preserve the confidentiality of information imparted during its subsistence."

27. Lord Millett was thus drawing a clear distinction between the position of a fiduciary, in particular a solicitor, who acts for more than one client at the same time and a case where a person, who was previously in the position of a fiduciary, has in that capacity acquired information, whilst acting for a client in the matter which has been concluded, but the information is relevant to another matter on which he is currently engaged. The former involves questions of fiduciary duty. The latter may be best considered under the law of confidential information as well as the law of breach of contract or, perhaps, negligence.

Informed Consent

28. The decision in Clark Boyce v. Mouat [1994] 1 AC 428 concerned a case where a solicitor had acted both for a son who was borrowing money and his mother who was providing the security for the loan by means of a mortgage on her house. In referring to the inability of a solicitor to act when there was a conflict of interest, Lord Jauncey said at p.435 :-

"There is no general rule of law to the effect that a solicitor should never act for both parties in a transaction where their interests may conflict. Rather is the position that he may act provided that he has obtained the informed consent of both to his acting. Informed consent means consent given in the knowledge that there is a conflict between the parties and that as a result the solicitor may be disabled from disclosing to each party the full knowledge which he possesses as to the transaction or may be disabled from giving advice to one party which conflicts with the interests of the other."

29. The question of informed consent was also referred to by Millett LJ, as he then was, in Bristol and West Building Society v. Mothew [1998] Ch 1 at 18-19, Millett LJ said :-

"A fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty; he puts himself in a position where his duty to one principal may conflict with his duty to the other : see Clark Boyce v Mouat [1994] 1 AC 428 and the cases there cited. This is sometimes described as 'the double employment rule'. Breach of the rule automatically constitutes a breach of fiduciary duty. But this is not something of which the society can complain. It knew that the defendant was acting for the purchasers when it instructed him. Indeed, that was the very reason why it chose the defendant to act for it. The potential conflict was of the society's own making : see Finn, Fiduciary Obligations, p254 and Kelly v. Cooper [1993] AC 205."

The issues in this Appeal

30. There appear to me to be two issues which arise in this case.

(1) On the footing that the defendant is acting as a solicitor in the arbitration proceedings on behalf of the insurer, in the miscellaneous proceedings to remove the arbitrator on behalf of the insurer and in the personal injury action on behalf of the insurer and the insured was there a conflict of interest?

(2) If the answer to question (1) is in the affirmative, how should the court act, if the insured does not wish a solicitor with whom there is a conflict of interest to act for him?

Fiduciary duty

31. There can, it seems to me, be no doubt that in acting as a solicitor on record for the defendants in the personal injury action, the defendant had become the joint venture's solicitor. That such is obvious from the Notice to Act is possibly sufficient. I would, however, refer to the case of Groom v. Crocker [1939] 1 KB 194. At first instance, Clauson J had held that the solicitors nominated by the insurance company under a similar condition of the policy to Condition 6 in the present case, had become the solicitors of the defendant in the running down action. In his judgment, Sir Wilfred Greene MR, said at p.201 :-

"It is not disputed that the relationship of the appellants to the respondent was that of solicitor and client. Indeed, no question could have been raised as to this, since, when the appellants refused the respondent's request to have inspection of documents in their possession with a view to the institution of the present proceedings, Clauson J. held, upon an originating application by the respondent, that the relationship was that of solicitor and client, and ordered inspection to be given."

32. If there were any doubt about the matter, the position of a solicitor appointed by an insurance company to act on behalf of an insured was extensively examined by Penlington J, in the High Court in Hamilton, New Zealand in the case of Nicholson .v Icepak Coolstores Ltd [1999] 3 NZLR 475. Because the judge found no relevant New Zealand authorities, he referred to a number of judgments in various common law countries, including the United States which were referred to in an article entitled "Conflicts of interest faced by solicitors instructed by insurers to conduct litigation on behalf of insureds", by Chapman and Mallon which appeared in 26 VUWLR 679. The conclusion reached by the judge was :-

"Summary of overseas jurisdictions

The authorities which I have so far cited are persuasive only. As I have said earlier, I am not bound by any authority in New Zealand.

Standing back and reviewing the cases to which I have referred, the preponderance of judicial opinion, apart from the USA, tends to favour the view that the insurer-appointed solicitor becomes the solicitor for the insured - at least from the time when issue is joined and the insurer-appointed solicitor unequivocally states in a pleading filed on behalf of the insured that he/she is the solicitor for the insured. The professional opinion, including the USA, without exception points in the same direction."

33. In determining the scope of fiduciary duty, I would adopt the approach of Justice La Forest that the matter depends on the particular facts of the case. In Hodgkinson v. Simms (1994) 117 DLR (4th) 161 at 179 to 180, the judge said :-

"In summary, the precise legal or equitable duties the law will enforce in any given relationship are tailored to the legal and practical incidents of a particular relationship. To repeat a phrase used by Lord Scarman, 'there is no substitute in this branch of the law for a meticulous examination of the facts' : see National Westminster Bank plc v. Morgan, [1985] 1 All ER 821 (HL) at page 831."

34. Mr Bleach SC, in his opening, defined the circumstances in which a solicitor could not act in the following terms :-

"The solicitor cannot act when there is a significant risk in the interests of his clients being incompatible."

In his reply speech, he defined a conflict of interest as being one where the interests of one party are incompatible with the interests of the other party so that a solicitor cannot properly promote the interests of one because in so doing, he will be acting against the interests of the other. In analysing the present case, it was the defendant's contention that there was no conflict of interest between the insurer and the insured. It was said that both had an identical interest in avoiding or at least reducing any liability for damages in the personal injury action. On that footing, it was said that there could be no conflict.

35. In considering the question of whether a solicitor acting for a party has a conflict of interest, it is important to examine what are the duties of the solicitor. Words such as "loyalty" can have different meanings and implications depending on the context in which they are used. In this respect, there are of course at least two aspects of duty in relation to the defendant's duty as a solicitor to the parties.

36. In the first place, there is the question of the defendant's duty as a solicitor to Ming An. Insofar as the defendant was acting in the arbitration proceedings, it had a duty to Ming An not only to represent it and put forward legitimate arguments which were raised by Ming An but to advise Ming An in relation to any legitimate ground for avoiding liability under the policy. This is not simply a theoretical responsibility, it is a practical one. It is now trite law that it is the obligation of each party to bring forward in litigation any grounds and facts which may, with reasonable diligence, be advanced in support of that party's case; subsequent proceedings to put forward further grounds or arguments may constitute an abuse of process.

37. It is clear that Ming An is seeking to avoid liability under the policy in this case and is alleging, amongst other things, default by the joint venture. In fulfilling its obligation to advance Ming An's position to avoid liability, whether it be on the grounds that the joint venture has acted in breach of the conditions of the insurance policy or otherwise, the defendant would clearly be acting contrary to the financial and other interests of the joint venture.

38. As explained previously, despite the fact, as stated in the defendant's letter of 21 October, that the joint venture was not paying for the defendant to act as the joint venture's solicitor in the personal injury action, the defendant had nevertheless, by accepting instructions, put itself under a duty to act as the joint venture's solicitor. In the similar circumstances of an insurer appointing a solicitor to act on behalf of the insured, Sir Wilfred Greene MR said in Groom v. Crocker at p.205 :-

"The duty of the appellants (solicitors) was to conduct the case properly on behalf of the respondent as their client, subject to any proper exercise by the insurers of the right of control conferred upon them by the policy. The relationship of solicitor and client is a contractual one : Davies v. Lock 3 L.T.(O.S.); 125 Bean v. Wade 2 Times L.R. 157. It was by virtue of that relationship that the duty arose, and it had no existence apart from that relationship."

In the same case, at p.222, Scott LJ said :-

"The relationship is normally started by a retainer, but the retainer will be presumed if the conduct of the two parties shows that the relationship of solicitor and client has in fact been established between them. The retainer when given puts into operation the normal terms of the contractual relationship, including in particular the duty of the solicitor to protect the client's interest and to carry out his instructions in the matters in which the retainer relates, by all proper means."

The judge then went on to deal with the solicitor's obligation to consult the insured on matters which are relevant to him.

The conflict of interest

39. In acting as solicitor for the insurer in the arbitration proceedings, the defendant is under an obligation to assist and advise the insurer to the detriment of the financial interests of the insured.

40. As such, there would clearly be a conflict of interest between the insured and the insurer. Both have similar objectives in avoiding any liability but if liability exists, each wishes that to fall on the other, at least in the case of the insurer, if no other insurer bears that liability.

41. Indeed, had the circumstances been that the insurer, whilst refusing to accept liability under the insurance policy in respect of the claim in the personal injury action and whilst instructing the defendant in the arbitration proceedings, had not instructed the defendant to represent the joint venture and left the joint venture to its own devices, then it would have been perhaps a remarkable thing if the joint venture would have approached the defendant to act on its behalf in the personal injury action. The natural expectation would be that the defendant would, if so approached, have refused to act because of a conflict of interest. Mr Bleach submitted, without any prompting, that the natural reaction of anyone being told of the circumstances of the present case would have been that there was a conflict of interest and the defendant could not act for the joint venture in the personal injury action at the same time as acting in the arbitration proceedings for the insurer.

The Hong Kong Solicitors' Guide to Professional Conduct

42. Mr Carolan, who appeared on behalf of the joint venture, went so far as to say that a solicitor could not act in any case on behalf of a party if there was any litigation no matter, whether connected or not, in which that solicitor acted for an opposing party. He supported his submission by reference to the "The Hong Kong Solicitors' Guide to Professional Conduct", which was referred to in the judgment below.

Regulation 9.01 states: -

"9.01 When instructions must be refused

A solicitor or firm of solicitors must not accept instructions to act for two or more clients where there is a conflict or a significant risk of conflict between the interests of those clients."

Commentary 2 to this regulation states: -

"2. Where a solicitor already acts for one client and is asked to act for another client whose interests conflict or appear likely to conflict with those of the first client, he must refuse to act for the second client."

Regulation 9.03 states: -

"9.03 Present clients and conflict

A solicitor or firm of solicitors must not continue to act for two or more clients where a conflict of interest arises between those clients."

Commentary 4 states: -

"If a solicitor has already accepted instructions from two clients in a matter or related matters and a conflict subsequently arises between the interests of those clients, the solicitor must cease to act for both clients, unless he can without embarrassment (see principle 9.02, commentary 1) and with propriety, continue to represent one client with the other's consent. A solicitor may only continue to represent one client where he is not in possession of relevant confidential knowledge concerning the other obtained whilst acting for the other. Even in such a case he should seek the consent of the other client (usually through his new solicitor) and should proceed in the absence of such consent only if there is no good cause for its refusal."

43. Although the Solicitors' Regulations are not directly enforceable at the suit of a litigant, they do illustrate appropriate professional conduct such as may assist the court in deciding whether and how it may enforce its supervisory power. In my view, an expression of a professional standard in a code of ethics relating to a matter before the court should be considered an important statement of public policy.

44. No doubt, the application of a strict test relating to conflicts of interest is a counsel of prudence. Furthermore, large firms of solicitors are, no doubt, wary of having to conduct a meticulous examination of possible conflicts and having to anticipate the various changes which may occur in the issues that arise in relation to any particular piece of work that the simple rule of exclusion is the easiest and safest to apply. Nevertheless, any departure from the approach laid down in the rules of a professional body should, in my view, be scrutinised with care. It is, perhaps, trite that in the administration of justice, any appearance of impropriety should be avoided.

Other matters relating to conflict of interest

45. The arguments ranged against the view that there was a conflict of interest involve in the first place, as noted above, the point that the interests of the insurer and the insured in the litigation are co-terminous.

46. In this context, it is said that both insurer and insured wish to avoid or reduce any liability for damages as a result of the accident. It was conceded that, in theory at least, because the insurer may dictate a course of conduct of the litigation that may result in the insurer being able to repudiate liability, it is a matter which the insured has to tolerate because of the terms of the policy. The case of Savaglia v Maclennan and Brigss [24 S.A.S.R. 1980] 314, was referred to in this context. That was a case in which the insurance authority was held to have the right to conduct the defence of a driver who was allegedly under the influence of drugs or alcohol. The defence of volenti non fit injuria was sought to be put forward, but the defendant was concerned that if that defence failed and judgment were given for the plaintiff passenger, his own admitted intoxication might be grounds for denying recoverability under the policy. It was said that was an incidence of the insurer's rights.

47. It was also pointed out, on the authority of Brown v Guardian Royal Exchange Assurance plc. [1994] 2 Ll. L Rep 325, that the insurer was in any event entitled to call for all reports of everything which the solicitors, that they had appointed to represent an insured, had learned about the claim. Hence, there would be, in effect, no secrets kept from the insurer no matter who was appointed to act as a solicitor for the insured.

48. Underlying the submissions on behalf of the defendant was the submission that there was nothing which was confidential to the joint venture which could prevent the defendant acting as solicitor in the personal injury action.

49. In my view, the argument that the interests of the insurer and insured in the personal injury action are co-terminous ignores the fact that this is only looking at one aspect of the interests. The insured has an overall interest in making sure that it does not have to bear the financial liability for the damage which has been caused. Any liability in that regard is something which has been insured against. It has to be accepted that the cold reality is that because of that insurance, the insured may have to seek to avoid liability on a technicality or otherwise unsatisfactory ground, something perhaps which it may feel does not merit the overall justice of the situation as regards the injured party. Nevertheless, avoiding or reducing any damages which are payable is only part of the ultimate objective which, in reality, is simply that the insured itself should not have to pay. In that wider aspect, clearly the interests of the insured are that if there were to be any payment, it should be the insurer that pays.

50. The question of possible conflict where a solicitor is instructed by insurers in a case when the investigation of the claim also impinges upon questions relevant to whether the insurers are liable, was touched upon by Hoffmann L.J. in Brown v. Guardian Royal Exchange Assurance plc. That was not a case where the insured objected to the solicitor acting but he objected to the solicitor passing over information which had been acquired as a result of acting in the case. The position was resolved on the basis of contractual provisions, namely that the conditions in the policy entitled the insurer to reports. That, in my view, does not assist in determining whether it is right that there is no conflict where the solicitor is acting for the insurer in the equivalent of hostile litigation against the insured where the insurer is seeking to avoid liability under the policy.

51. It was said that the insured would only be in a position to object to the insurer's choice of solicitor if there were legislation equivalent to that introduced, for example, in South Australia. In this context, attention was drawn to the case State Government Insurance Commission v. Paneros [(1988) 48 SASR] 349. In that respect, it is of interest to note that White J, in giving his judgment in the Supreme Court, said at page 220 :-

"It had been plain to the courts and to the legal profession for more than half a century before s.125a was enacted that an almost insoluble conflict of interest existed between the insurer and the insured in circumstances such as this, a conflict which placed the solicitor (and counsel) acting for both parties in an intolerable position. The present case is a good example of that conflict. The insured wanted his wife to get the damages which she claims against him in the first action because he knew that he had been guilty of negligent driving when he ran off the road and injured her. However, the insured did not wish to reveal the history of his own drinking. He knew that a blood/alcohol test had been taken 2 hours 30 minutes after the accident with a reading of .24. He knew that this was evidence showing a breach of the policy on his part. He would naturally be reluctant to reveal the timing of his drinking, some of which could have occurred after the accident and rendered the reading quite innocuous. It was in the interests of SGIC to establish by admissions from his own mouth that he did all of his drinking before the accident. It was contrary to his interest to furnish this evidence."

52. In my view, there can be no doubt that there is a conflict of interest between the insurer and the insured. That conflict unfortunately extends to the solicitor.

53. As has already been noted, the insured may, with full knowledge, agree to the solicitor acting notwithstanding that conflict. In circumstances where the insured makes a claim under the policy and allows the insurance company to appoint a solicitor to represent him that consent will almost certainly be implied. The extent of the conflict will, in the first instance, be a matter which the insured is more aware of than the insurer.

54. As noted before, Condition 6 of the policy in question in this action does not state that the insurer is entitled to appoint a solicitor to act on behalf of the insured who has a conflict of interest with the insured by reason of current litigation. As, MacKinnon LJ said in Groom v Crocker at p 226 :-

"I think that the second condition in the policy, which provides that 'The society shall have absolute conduct and control of all or any proceedings against the assured,' is subject to an implied term that the solicitor who is selected by the society shall act reasonably in the interests of both the insured and the society. As the insured is the litigant, the solicitor is his solicitor on the record, and owes him the duty of a solicitor to his client."

It would be irrational if the insured were unable to object to a solicitor acting on his behalf if that solicitor has a conflict of interest with him. If the insured does so object to an appointed solicitor acting for him, any consent in that regard will be expressly negatived. The question will then, of course, arise as to whether the insurer can avoid liability under the policy by reason of the insured not permitting the insurer to take over the conduct of the litigation on its behalf. That is not a matter which is before this court, there may be force in that argument, but it may also be open to the insurer to appoint another solicitor. The fact that any other solicitor appointed by the insurer may be under any obligation to make reports to the paying insurer is another matter. The important point is that the question which arises because of current litigation is one of conflict of interest on the solicitor's part and not one of confidentiality or contract.

Should the court intervene

55. In my view, the court should intervene at the instance of a party who objects to a solicitor acting on the grounds of conflict of interest, provided the objection is not frivolous. It is easy to lapse into a consideration along the lines of an enquiry as to what harm is likely to be occasioned if the solicitor continues to act. But that comes dangerously close to examining the matter in terms of confidential information. That, as Lord Millett pointed out, is something which is relevant to former solicitors but not relevant where the solicitor is currently acting. In cases of conflict of interest, the enquiry has to be more circumspect and the litigant is entitled to require caution. It is noteworthy that in the passage cited from the Bristol and West Building Society case, Lord Millett, when in the Court of Appeal, used the word may, in italics in the report, when referring to the possibility of a conflict of interest.

56. This accords with what was apparently the approach of the Honourable Judge German in her decision in Szebelledy v. Constitution Insurance Co. of Canada (1985) 11 C.C.C.I. 140, 3 C.P.C. (2d) 170, which is referred to in The Professional Conduct of Lawyers in Hong Kong by Sandor and Wilkinson. It has not been possible to obtain a full report of her decision despite extensive search in Hong Kong. Reference is made with approval to that decision in a number of Canadian authorities. One citation of her judgment by Hoilett J in 781332 Ontario Inc. v. The Mortgage Insurance Company of Canada 1991 Ont. C.J. Lexis 921 quotes the Judge as saying at p.182:-

"that while the 'probability of real mischief' test survives, the trend in Ontario is to apply the less stringent 'possibility of real mischief or prejudice' test or the 'appearance of impropriety' test."

57. The "probability of mischief" test was derived from the case of Rakusen v. Ellis, Munday & Clarke, [1912] 1 Ch. 831 where the Master of the Rolls Cozens-Hardy said at p. 835 :-

"In my view, however, we must treat each of these cases not as a matter of form, not as a matter to be decided upon the mere proof of a former acting for a client, but as a matter of substance. We must come to a conclusion before we allow any special jurisdiction over solicitors to be invoked, and we must be satisfied that real mischief and real prejudice will in all human probability result if the solicitor is allowed to act."

58. As is obvious from the citation, that was a case based on confidential information said to have been acquired previously by a partner of the solicitor in question who was no longer acting for the party aggrieved. It was thus not a case of conflict of interest of the type referred to by Lord Millett when he drew the distinction between the two types of case. The Court in the Rakusen case refused to grant an injunction restraining the defendant's solicitor from acting as it found that there was no reasonable probability of the solicitor knowing or using any confidential information.

59. It is interesting however, that Judge German is reported to have continued at page 147 of the report of her judgment in 11 HCCL :-

"A second approach, however, has been adopted in many Ontario cases. These cases reflect the increasing focus on the ethics of the profession by the public, the Courts and the Bar. These decisions take a stricter view towards conflict of interest and require only that the applicant show 'a probability of mischief' or 'the appearance of impropriety'. Goodman J. first stated this less stringent approach in Steed & Evans Ltd. v. McTavish (1976), 12 O.R. (2d) 236, 68 D.L.R. (3d) 420 (Ont. H.C.), where the plaintiffs solicitors had previously acted for the defendants and continued representing individual defendants in other proceedings. Goodman J. stated at p. 238 O.R.:

'I wish to make it abundantly clear that I am not suggesting nor has counsel for the defendants suggested, that the solicitors for the plaintiff in these proceedings [*6] have in any way misused or abused any information which has come to their attention in the past as a result of any solicitor-client relationship, nor am I suggesting that they have acted improperly in any way during the course of these proceedings. It simply seems to me that in the interest of all parties concerned, it is important that justice be seen to be done and in my view that can only take place if the solicitors who in the past were common to both parties, or at least some of the parties, in these proceedings be not the solicitors for the plaintiff.'"

60. Judge German and Goodman J did not have the benefit of Lord Millett's observations which pinpoint the nub of the distinction between conflict of interest and confidential information cases. Their approach of being liberal in permitting objection to be taken where there is a conflict interest is highly understandable and, in my view, accords with the correct approach in conflict situations but it seems from another quotation from Judge German's judgment, this time in a judgment of Granger J in Saul Messenger v. Bramalea Limited 1989 Ont. C.J. Lexis 276 that Judge German understood the Rakusen case to be a conflict of interest, when in fact it was a confidential information case. For my part, I would not consider that confidential information cases in relation to solicitors were any different from any other type of confidential information case.

The Insurer's right

61. Reliance was also placed by Mr Bleach on the proposition that there was nothing to prevent an insurer from both defending an action for negligence in the name of the insured and at the same time relying upon breaches of the insurance contract to avoid liability. In this context, reliance was placed on the decision in the Oriental Fire & General Insurance Co. Ltd. v. Cheuk Ma-yee [1981] HKLR 41. That case is authority for that proposition in the context that the insurer's liability under the policy has not been finally determined. Once it has been established that the insurer has no liability, it seems to me that there can be no grounds for an insurer to intervene. As Scott LJ put it at page 223 in Groom v. Crocker, the insurer's right to control the defence is given in consideration of the indemnity. Absent the indemnity, the insurer can have no interest in or right to control of the defence.

62. Be that as it may, there is nothing in the decision in the Oriental Fire case which touches upon the question of the conflict of interest of a solicitor. The decision in that case was that an insurance company which had taken over the defence of an action brought against the insured could still reserve the right to repudiate liability in respect of the claim. The decision turned upon the question of whether there had been waiver or estoppel when the insurance company did that.

63. In my view, the correct approach in a case where there is a conflict of interest or one arises is that outlined by MacKinnon LJ in Groom v Crocker at page 227, where he said :-

"This means that the solicitor, nominated by the society, is the solicitor for the assured, who is his client. But he is also appointed by the society to protect its interests. If in regard to any question of tactics in conducting the litigation the solicitor has reason to discern a conflict, or possible conflict, of interest between the society and the assured, it is the duty of the solicitor to inform the assured of the matter. If the assured then insists on a course that the society disapproves, it can refuse to conduct or control the proceedings any longer, and leave the assured to do so at his own costs, and at the risk, if the society are right in their view, of not being able to recover that cost under his policy. If people act reasonably, it is obvious that the business method contemplated by the policy can be carried out with perfect smoothness. And when I recall that for at least a century almost every case about a ship, both in the Admiralty and in the Commercial Court, has been conducted by solicitors nominated by underwriters or protection clubs I am the more convinced that that is so."

64. By parity of reasoning, if a solicitor on the instructions of the insurer is acting for an insured and finds there is a conflict of interest, he should advise the insured. This may arise, if for example, the solicitor becomes aware that there are grounds upon which the insurer may repudiate liability. Indeed, in many of the reported cases, that is what happened: the solicitor notified the insured that he had to advise the insurer in relation to the insurer's liability, or lack of it, under the policy. If the insured wishes to carry on being represented by the solicitor notwithstanding that he knows that the solicitor may be advising the insurer as to whether it may avoid liability, then that is done with informed consent. Depending on the situation it may be that the solicitor should advise the insured to seek separate legal advice, at least for the purposes of deciding whether to continue to be represented. In many instances, as MacKinnon LJ indicated, the insured will probably be content to let the insurer nominated solicitors continue to act, the insured taking his chances on the eventual outcome.

65. If the insured decides that he should raise or maintain objection to the solicitor acting, then whether or not he is still able to maintain a claim under the policy is a matter which may fall to be decided later. The insurer may be content to appoint another solicitor. But the insurer may also take the view that the insured's consent, implied because of clause 6 of the policy, to the insurer taking over the conduct of the action and thus appointing the solicitor of the insurer's choice has been withdrawn. If that withdrawal of consent renders the insured unable to claim an indemnity under the policy, then so be it. The proceedings are against the insured. The primary liability if it is held to exist will be against the insured, in any event. In the conduct of Court proceedings, the party who is before the Court is entitled to chose not to be represented by a solicitor who has a conflict of interest with him. In the final analysis, it seems to me that the choice is that of the insured defendant. As Scott L.J. said in Groom v Crocker the consideration for the right to take over the conduct of the action is the indemnity. That consideration naturally works both ways. If the insured fails to provide the insurer with the consideration for his side of the bargain, naturally he puts in jeopardy the consideration moving from the insurer.

66. In my judgment, the plaintiff is entitled to an injunction to restrain the defendant acting as its solicitor in the personal injury litigation during such time as the arbitration proceedings in relation to liability under the policy are continuing. It would be wrong for the court to compel a party to be represented in proceedings before it by a solicitor to whom the party involved can point as acting against it in other connected proceedings and the party involved objects to the solicitor acting because of its involvement in those proceedings. To require the party involved to go further and explain precisely the damage that conflict is likely to inflict is to cross the border into an inquiry in respect of confidential information.

67. However, the judge below went on to grant three other and more wide ranging injunctions as I have already set out. He came to the conclusion that he should do so on the following basis, he said :-

"It is apparent that this rule contemplates a situation where the solicitor acts for two clients whose relationship at the outset is harmonious but later a dispute develops. It does not envisage the position, as here, where the solicitor is appointed and agrees to act for parties already at loggerheads. This surely is because his obligation to decline to take instructions from the client who comes second is too obvious to require spelling out and in any event is caught by regulation 9.01. But as it stands Ip Kwan are presently representing two clients in a matter or matters where there is a material dispute between them. Now that it is in that position it cannot, pursuant to regulation 9.03, continue to act for even one without the consent of the other. To protect its entitlement to represent Ming An it should forthwith upon invitation have declined to represent Nishimatsu. As it did not it must now be restrained from acting for Ming An also, in all matters from which the conflict with Nishimatsu has derived, and that means the arbitration and related High Court proceedings."

68. In my view, by granting injunctions further than preventing the defendant from acting as the joint venture's solicitor, the judge went further than was necessary to protect the plaintiff. The objection to the defendant acting as solicitor was not taken until some months after the defendant had taken over conduct of the personal injury proceedings. During the intervening time, the joint venture was also being advised by its own solicitors. There is no allegation that the defendant is in possession of confidential information which the joint venture objects to being passed to the insurers. In those circumstances, the joint venture's right to prevent itself being represented by solicitors who have a conflict of interest is fully protected by the injunction I have outlined. Once that injunction is in place, the relationship of solicitor and client will have come to an end and the only basis for preventing the defendant from acting for the insurer would be in respect of confidential information and contract. Neither of those would be applicable.

69. In my judgment, therefore, this appeal should be allowed to the extent that injunctions (a), (b) and (d) should be discharged and the injunction (c) should be varied to restrict the defendant from acting for the insured whilst also acting for the insurer in relation to the other matters.

Hon Ribeiro JA :

70. The defendants are solicitors who were nominated by an insurer to conduct the defence in a personal injury action on behalf of the insured. At the same time, they acted as solicitors for the insurers and against the insured in an arbitration in which the insurer's liability to indemnify the insured in respect of the claim was in dispute. The defendants also acted as the insurer's solicitors in proceedings relating to the arbitrator's appointment.

71. Deputy High Court Judge Gill granted the plaintiff ("the joint venture") an injunction restraining the defendant solicitors ("IKC") from acting for either the joint venture or the insurers, The Ming An Insurance Company (HK) Limited ("Ming An"), in connection with any of the abovementioned matters, holding that they were prevented from so acting by a conflict of interest. The defendants appeal to this court from that order.

The facts

72. Gurung Nan Raaj ("Gurung") was an employee of the joint venture. On 7 May 1996, the vehicle which he was driving collided with a vehicle in which Mang Mang Shing ("Mang"), an employee of a sub-sub-contractor to the joint venture, was a passenger, injuring the latter. The accident occurred on site at Chek Lap Kok, the joint venture then being the Main Contractor to the Provisional Airport Authority ("the PAA") under a contract for the construction and maintenance of the airport's landside infrastructure works.

73. On 30 May 1996, the joint venture reported the accident to Ming An, with whom it had an Employees' Compensation policy. Clause 6 of that policy provided that Ming An :-

"...... shall be entitled if it so desires to take over and conduct in his name the defence or settlement of any claim or to prosecute in his name for its own benefit any claim for indemnity or damages or otherwise and shall have full discretion in the conduct of any proceedings and in the settlement of any claim and the Insured shall give all information and assistance as the Company may require."

74. On 8 August 1997, IKC wrote to the joint venture stating that Ming An had appointed them to act in connection with Mang's claim "to investigate further into the circumstances of the above accident and if appropriate, to defend you in proceedings which have been or may be instituted against you arising from the accident." However, they made it clear that this was without prejudice to Ming An's "rights to subsequently deny liability" on the grounds "that either they were not at risk at the time of the accident or on any lawful ground on which they may avoid liability under the ....... policy." They added that if instructed to do so by Ming An, they would discontinue their representation of the joint venture and reserved the right to withdraw on seven days' notice.

75. On 17 September 1998, Gurung pleaded guilty to and was convicted of careless driving and, on 5 May 1999, Mang instituted personal injury proceedings (in HCPI 471/1999) against Gurung and the joint venture alleging that the joint venture was vicariously liable for the negligence of Gurung.

76. A week later, on 12 May 1999, IKC disclaimed liability under the policy on Ming An's behalf. They contended that the claim fell outside the scope of the Employees' Compensation policy and recommended that the joint venture forward the proceedings to its vehicle insurer.

77. When, on 17 May 1996, another firm of solicitors, Messrs Deacons, Graham and James, acknowledged service of Mang's writ on behalf of the joint venture, Ming An became aware that another insurer was potentially liable in respect of the accident by virtue of a third party liability policy taken out by the PAA. This was material since the Ming An policy provided (by its clause 7) as follows :-

"If at the time any claim arises under this Policy there be any other insurance covering the same liability the Company shall not be liable to pay or contribute more than its rateable proportion of any such claim and costs and expenses in connection therewith."

Ming An complained that the joint venture had been in breach of its obligation to provide full information under clause 6 because of its original and continuing failure to provide Ming An with a complete copy of the PAA policy. Such failure was relied on as a further ground for disclaiming liability to indemnify the joint venture in respect of the accident claim.

78. The joint venture did not accept Ming An's contentions. On 19 June 1999, its solicitors, Messrs Masons, wrote to IKC asking Ming An to concur in the appointment of an arbitrator pursuant to Condition 10 of the policy to determine whether the joint venture was entitled to an indemnity. An arbitrator was appointed and pleadings were exchanged in the arbitration.

79. Notwithstanding Ming An's decision to repudiate liability on the claim, on 21 June 1999, IKC filed a Notice of Change of Solicitors in the personal injury proceedings, stating that they had been appointed to act as solicitors for Gurung and the joint venture in place of Masons. It is common ground that Ming An, through IKC, thereby took over the joint venture's defence of the personal injury proceedings.

80. On 2 October 1999, Masons wrote to IKC alleging that IKC were faced with a hopeless conflict of interest and could not possibly act for both the joint venture and Ming An in defending the personal injury action while at the same time purporting to act for Ming An against the joint venture in the arbitration. This was rejected by IKC who argued that the issues in the action and the arbitration were totally unrelated. On the same day, Ming An applied to set aside the arbitrator's appointment with IKC acting in such proceedings for Ming An against the joint venture.

81. On 12 October 1999, Ming An issued an Originating Summons (in HCMP 694/99) seeking to set aside the appointment of the arbitrator and naming the joint venture as defendant in that matter. IKC act for Ming An in those proceedings.

Confidential information

82. A solicitor will often be precluded from accepting instructions from a new client with interests adverse to those of a former or present client because he has been entrusted by the original client with material confidential information.

83. In Prince Jefri Bolkiah v KPMG (A Firm) [1999] 2 WLR 215, Lord Hope of Craighead put the solicitor's duty in relation to confidential information as follows (at p 217) :-

"A solicitor is under a duty not to communicate to others any information in his possession which is confidential to the former client. But the duty extends well beyond that of refraining from deliberate disclosure. It is the solicitor's duty to ensure that the former client is not put at risk that confidential information which the solicitor has obtained from that relationship may be used against him in any circumstances. ....... Particular care is needed if the solicitor agrees to act for a new client who has, or who may have, an interest which is in conflict with that of the former client. In that situation the former client is entitled to the protection of the court if he can show that his solicitor was in receipt of confidential information which is relevant to a matter for which the solicitor is acting, against the former client's interest, for a new client."

However, in the present case, the protection of confidential information is not relied on as a basis for restraining IKC from acting. Mr Paul Carolan, who appeared for the joint venture did not suggest that IKC had received any material confidential information from the joint venture and so made no suggestion that IKC's continuing to act would give rise to any risk of misuse.

84. As indicated above, one bone of contention between the parties involved Ming An's complaint that the joint venture had failed to provide it with a complete copy of the PAA insurance policy. If, as contended, Ming An was contractually entitled to see that policy, then even if it was confidential as against other persons, it would not be confidential as between Ming An and the joint venture and, if IKC had come to know its contents while conducting the joint venture's defence in the personal injury proceedings, disclosure by IKC of its contents to Ming An would not be objectionable and would not constitute a ground for restraining IKC from acting : Brown v Guardian Royal Exchange Assurance plc [1994] 2 Lloyds Rep 325; cf Nicolson v Icepak Coolstores [1999] 3 NZLR 475, where the terms of the policy were held not to confer an entitlement to disclose relevant confidential information.

An inherent conflict

85. Mr Carolan based his case on the submission that IKC were subject to a conflict of interest which was inherent in their purporting to act both for the joint venture and for Ming An. He relied on the Prince Jefri Bolkiah case (at p 224-5) where, after affirming that in cases involving former clients the jurisdiction exercised by the court was based on the principles for protecting confidential information, Lord Millett stated as follows :-

"It is otherwise where the court's intervention is sought by an existing client, for a fiduciary cannot act at the same time both for and against the same client, and his firm is in no better position. A man cannot without the consent of both clients act for one client while his partner is acting for another in the opposite interest. His disqualification has nothing to do with the confidentiality of client information. It is based on the inescapable conflict of interest which is inherent in the situation."

Before considering more closely whether IKC were faced with an inescapable conflict of interest, it is important to note that Lord Millett continued his speech by stressing that the situation was different where a client had expressly or impliedly given his consent to the solicitor continuing to act, notwithstanding the conflict, as follows (at p 225):-

"This is not to say that such consent is not sometimes forthcoming, or that in some situations it may not be inferred. There is a clear distinction between the position of a solicitor and an auditor. The large accountancy firms commonly carry out the audit of clients who are in competition with one another. The identity of their audit clients is publicly acknowledged. Their clients are taken to consent to their auditors acting for competing clients, though they must of course keep confidential the information obtained from their respective clients. This was the basis on which the Privy Council decided Kelly v. Cooper [1993] A.C. 205 in relation to estate agents."

It is well established that the restriction against acting in a conflict of interest situation is relaxed where there is informed consent by the beneficiary to the fiduciary so acting. Thus, in Clark Boyce v Monat [1994] 1 AC 428 at 435, Lord Jauncey stated :-

"There is no general rule of law to the effect that a solicitor should never act for both parties in a transaction where their interests may conflict. Rather is the position that he may act provided that he has obtained the informed consent of both to his acting. Informed consent means consent given in the knowledge that there is a conflict between the parties and that as a result the solicitor may be disabled from disclosing to each party the full knowledge which he possesses as to the transaction or may be disabled from giving advice to one party which conflicts with the interests of the other. If the parties are content to proceed upon this basis the solicitor may properly act."

In so holding, Lord Jauncey (at p 431) approved the passage in Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 Q.B. 606 at p 636, where Upjohn LJ stated as follows :-

"The rule, however, is one essentially for the protection of the person to whom the duty is owed. Thus the company is entitled to the undivided loyalty of its directors; beneficiaries are entitled to the unpaid services of their trustees; the client is entitled to the services of his solicitor who may not charge more than he is legally entitled to, and must not put himself into a position where he may owe conflicting duties to different clients (see, for example, In re Haslam and Hier-Evans [1902] 1 Ch. 765). But the person entitled to the benefit of the rule may relax it, provided he is of full age and sui juris and fully understands not only what he is doing but also what his legal rights are, and that he is in part surrendering them."

Inherent conflict and informed consent in insurance cases

86. In my view, the principle of informed consent plays an important part in making workable the arrangements commonly entered into by the insurer, the insured and the solicitor nominated to act in defence of the insured.

87. Where a solicitor is nominated to conduct the insured's defence pursuant to a policy giving the insurer the conduct and control of such proceedings, that solicitor will not infrequently find himself in a conflict of interest situation.

88. A solicitor who accepts such nomination clearly assumes the role of solicitor vis-a-vis the insured, particularly where he (as happened in the present case) places himself on the record in proceedings on behalf of the insured : Re Crocker [1936] Ch 696. It is equally clear that he continues to occupy the role of solicitor vis-a-vis the insurer who nominated him. As Mackinnon LJ stated in Groom v Crocker [1939] 1 KB 194 at 226-7:-

"As the assured is the litigant, the solicitor is his solicitor on the record and owes him the duty of a solicitor to his client. But, having regard to the circumstances, the solicitor also owes a duty to the society. I do not think the assured can regard the solicitor as entirely his solicitor, to be instructed only by himself. .......

This means that the solicitor, nominated by the society, is the solicitor for the assured, who is his client. But he is also appointed by the society to protect its interests."

As with anyone who seeks to serve two masters, the nominated solicitor may find himself in a situation where his clients' respective interests conflict. Which master is he then to serve? In insurance cases, the authorities show that such conflicts are resolved, in so far as possible, by construing the terms of the policy and that, to the extent that such terms govern the position, the parties cannot complain if the solicitor acts in accordance with the provisions that they have contractually agreed to, even if this involves the solicitor favouring one client at the expense of the other. Thus, in Groom v Crocker [1939] 1 KB 194, Sir Wilfrid Greene MR (at p 203) stated :-

"The duty of the solicitor so nominated to the assured for whom he is to act cannot of course be the same as that which arises in the ordinary case of solicitor and client, where the client is entitled to require the solicitor to act according to his own instructions. The assured in my opinion is not entitled to complain of anything done by the solicitor upon the instructions, express or implied, of the insurers, provided it falls within the class of things which the insurers are, as between themselves and the assured, entitled to do under the terms of the policy when properly construed."

On this approach (which is essentially the same as that adopted in Brown v Guardian Royal Exchange Assurance plc, supra), what has contractually been agreed between insurer and insured is treated as providing the informed consent of the insured and the insurer needed to enable the solicitor to act for both parties notwithstanding the existence of an actual or potential conflict of interest between them.

89. Thus, it is common place for the solicitor to inform the insured (as occurred in the present case by the letter dated 8 August 1997) that while he has been appointed by the insurer to take up the insured's defence, the insurer reserves the right to withdraw such representation and to refuse an indemnity if it should transpire that there are grounds for doing so. It is therefore generally understood that the solicitor will report back to the insurer and may do so in adverse terms which could lead to the insured losing his insurance cover.

90. As a matter of law, it is clear that the insurer may properly take this stance. The fact that the insurer agrees to conduct the insured's defence does not estop him from later withdrawing and disclaiming liability (usually after receiving an adverse report from the solicitor he nominated to act): Etchells v Eagle Star (1928) 72 SJ 242; McCormick v National Motor and Accident Insurance Union Limited (1934) 50 TLR 528; and Soole v Royal Insurance Co [1971] 2 Lloyd's Rep 332. In such cases, the insured must be taken to have consented (by virtue of the insurance contract) to the nominated solicitor taking up his defence subject to such qualifications. It is what the insured has agreed to as part of the price for securing an indemnity against the third party claim.

91. Conversely, if a solicitor, following the insurer's instructions, acts in a manner adverse to the interests of the insured, but not authorised by the policy, he can rely on no such consent and is liable to find himself in breach of his duties as solicitor to the insured. Sir Wilfred Greene MR put it as follows in Groom v Crocker (supra at p 203) :-

"A solicitor who, acting on instructions express or implied from the insurer, does something to which the insurers, as between themselves and the assured, are not entitled to require the assured to submit, would in my view be acting beyond his competence, and, if what he does is something which in the ordinary way would be a breach of duty to his client, he will be liable to the client accordingly."

The abovementioned approach of treating fiduciary duties as subject to adjustment in the light of the parties' express agreement, accords with general principle. Thus, in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at p 97, Mason J in the High Court of Australia stated :-

"That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction."

Similarly, Lord Browne-Wilkinson in Kelley v Cooper [1993] AC 205 at 215, stated (in relation to the duties owed by estate agents to their competing customers) as follows :-

"Thus, in the present case, the scope of the fiduciary duties owed by the defendants to the plaintiff (and in particular the alleged duty not to put themselves in a position where their duty and their interest conflicted) are to be defined by the terms of the contract of agency."

The ambit of consent in the present case

92. In the present case, one encounters the unusual situation of Ming An asserting the right to conduct the joint venture's defence in the personal injury proceedings notwithstanding its firm decision, conveyed on more than one occasion to the insured, to repudiate liability in respect of that claim. One must therefore ask: can the joint venture be said to have agreed to Ming An taking this course and consequently, to have agreed to its instructing IKC to continue to represent the joint venture in such circumstances?

93. It has been held in Hong Kong that where an insurer disclaims liability under its policy in respect of a particular claim but has not repudiated the policy altogether, it retains the power given by the policy to take over and control the insured's defence even though it has denied liability to indemnify him if that defence fails.

94. This is what the Court of Appeal held in Oriental Fire & General Insurance Co Ltd v Cheuk Ma-yee [1981] HKLR 41, which may be thought to be a somewhat unexpected decision since the consideration for allowing an insurer to take over an insured's defence has generally been regarded to be the insurer's undertaking to indemnify the insured against the claim, giving both insurer and insured an identity of interest in resisting the claim: see, eg, Groom v Crocker, per Scott LJ, at p 223.

95. However, in the Oriental Fire case, the Court supported the insurer's right to take over the defence despite the prior repudiation of liability on the ground that the insurer remained under a contingent liability to pay the claim if its repudiation should later be shown to have been erroneous, such contingent liability giving the parties a sufficient identity of interest to justify the insurer's continued control of the defence. McMullin VP put the point (at p 49) as follows: -

"The insurer is surely entitled to say 'We affirm the policy but repudiate liability for this particular claim. However in the event that we may be held liable, we take over the defence and will conduct it with due regard to the insured's interest'."

Sir Alan Huggins VP (at p 55), put it in similar terms (although with some hesitation) :-

"No case has been cited to us giving reasons why insurers with a contractual right to defend proceedings in the name of their insured should not do so for their own protection despite an express repudiation of liability to him, lest a court should subsequently hold the repudiation to be ineffective."

The Oriental Fire case has since been distinguished but not questioned by the Court of Appeal in Chu Yuen Wah v Lee Kwok Kee [1995] 3 HKC 629.

96. Accordingly, the position as a matter of insurance law in Hong Kong is that an insurer's power under the policy to take over a defence may be construed as entitling him to exercise that power even where he has disclaimed liability in respect of the claim in question. The normal way in which that power is exercised is by the insurer appointing a solicitor to conduct the defence. An insured may therefore in principle be taken, on the basis of the insurance contract, to have consented to solicitors implementing such a decision on behalf of the insurer.

97. It important to note that in the present case, the joint venture has sued only IKC and has not made Ming An a party to the action. It is clear from the pleadings in the arbitration that the joint venture is not objecting to Ming An continuing to conduct its defence in the personal injury proceedings even though Ming An has refused an indemnity on that claim. On the contrary, it is the desire of the joint venture that Ming An should continue to conduct its defence. What the joint venture wishes to establish by the arbitration is that Ming An must also indemnify it against liability in the event that such defence fails. The joint venture is therefore entirely content that Ming An should both continue to conduct its defence and engage in the arbitration with a view to the arbitrator determining whether the joint venture has a right to an indemnity. It is therefore clear that notwithstanding the adverse position taken by Ming An on the policy and in the arbitration, the joint venture continues to give its informed consent, supported by separate legal advice, to Ming An conducting its defence against Mang's claim. It must follow that the joint venture is precluded by its consent from relying on any "inherent conflict of interest" arising out of Ming An's decision to reject liability while at the same time asserting the right to conduct the joint venture's defence.

98. If the joint venture cannot (and does not) complain about Ming An's position, is it open to it to complain about IKC acting to carry out Ming An's instructions in both sets of proceedings? In my view, the answer is "No".

99. As indicated above, the duties and powers of a solicitor in relation to the insured are determined by construing the policy to see what the contract entitles the insurer to as against the insured. The solicitor exercises the rights conferred by the policy as the insurer's proxy. Since, as determined in the Oriental Fire case, Ming An is contractually entitled to adopt the stance of defending the action having disputed liability to indemnify, and since the joint venture has in fact given its informed consent to Ming An proceeding in this way, IKC in my view cannot be criticised for implementing Ming An's decision as its solicitors.

100. It should be noted that no difference in principle would arise if Ming An were to appoint two separate firms to act (one representing the joint venture in the personal injury proceedings and one representing Ming An in the arbitration and in HCMP 694/99). Both firms would be duty bound to report fully to Ming An and Ming An would still be able to give instructions, if necessary, for the solicitors to act in a manner adverse to the interests of the insured provided that such instructions fell within the scope of the rights and powers conferred on it by the policy. It is therefore my view that the joint venture has no legitimate ground for criticising IKC for continuing to act in the circumstances. The joint venture had given its informed consent to any conflict of interest that may be regarded as inherent in the general relationship existing among Ming An, the joint venture and IKC.

Specific conflicts of interest

101. I have held that no valid objection to IKC acting arises either on the basis of a need to protect the joint venture's confidential information or by virtue of any conflict of interest inherent in the fact of IKC's representation of both parties. It is also my view that on the particular facts of this case, no specific conflicts of interest exist.

102. An examination of the issues which arise in the personal injury proceedings, the arbitration and in HCMP 694/99 shows that they are quite separate and unrelated. In the personal injury action, the joint venture puts the plaintiff Mang to proof of liability and quantum and also alleges that Mang was guilty of contributory negligence involving certain allegedly unsafe arrangements for the carriage of passengers in the vehicle in which he was travelling. The arbitration raises questions of construction of the policy to determine its scope, requires an investigation of the circumstances relating to the alleged failure by the joint venture to provide information (in the form of the PAA policy) requested and possibly involves some arguments of insurance law. In HCMP 694/99, issues relating to the suitability of the particular arbitrator have been raised.

103. Nothing that I have seen in the respective sets of pleadings suggests that IKC would find themselves in any way incapable of discharging their duties as solicitors in each case without placing themselves in breach of duty vis-a-vis their other client. Mr Carolan made no submissions to the contrary.

The Australian cases

104. Some emphasis was laid on certain Australian authorities in submissions. However, in my view, they do not advance the position in relation to the present appeal.

105. The South Australian case of Savaglia v Maclennan and Briggs [24 SASR 1980] 314 was a decision pre-dating certain changes made to the Motor Vehicles Act 1959 in Australia, mentioned below. In that case, a passenger plaintiff sued the driver after being injured in a motor accident. The driver did not enter an appearance. The insurer wished to defend the action and to allege that the plaintiff knew that the driver was under the influence of drugs and alcohol and so had consented to the risk of the accident or was guilty of contributory negligence. However, a conflict of interest was perceived to arise since developing this line of defence would tend to establish that the driver was in breach of one of the conditions of cover, making him liable to repay any monies paid by the insurer to plaintiff and might estop the driver from denying the breach. The insurer applied to the court to be joined as a party in its own name. That application was refused on the ground that it was inappropriate for the insurer to be named as a party since it was affected by none of the issues and also on the ground that it could in any event take over the proceedings. The Savaglia case is therefore entirely in line with the cases discussed above, recognising the insurer's contractual right to continue to take over the insured's defence (by its nominated solicitor) notwithstanding the perceived conflict.

106. The abovementioned position was evidently considered unsatisfactory and to require legislative intervention. This resulted in an amendment to the Motor Vehicles Act 1959 in 1983. As explained by the South Australian Court of Appeal in State Government Insurance Commission v Paneros (1989) 51 SASR 213, the new section 125a introduced a special procedure allowing the insurer to be joined in an action against the insured whenever :-

"(a) there is an actual or potential conflict of interest between the insurer and the insured in relation to the presentation of the defence; and (b) the defence proposed by the insurer in relation to which the actual or potential conflict of interest arises is, in the circumstances of the case, not merely speculative."

If, under such procedure, an insurer is joined, the insured drops out as a party but is given rights of audience and representation to contest any issue the resolution of which might adversely affect him. He can also be called as a witness and subjected to cross-examination by the insurer, but a judgment or finding in the main proceedings is not binding in any subsequent proceedings against the insured for breach of the conditions of the insurance to recover damages paid out by the insurer.

107. This provides an interesting example of a statutory approach to resolving conflicts of interest in insurance litigation. However, it is an approach which obviously has no application in our jurisdiction.

Conclusion

108. In my judgment on the somewhat unusual facts of the present case, no basis has been made out for restraining IKC from acting in any of the matters referred to above. Accordingly, I would allow the appeal and discharge the orders made by the Judge. I have had the benefit of reading in draft the judgment of Rogers JA and, as will be evident from the foregoing, I have, with respect, arrived at a different conclusion.

109. I wish however to stress that this judgment should not in any way be taken to be diluting the strict principles which regulate the conduct of fiduciaries in general and solicitors in particular. Policy considerations which preclude them from acting in situations where a conflict of interest has arisen or is likely to arise remain powerful and compelling.

110. As Lord Millett stated in the context of confidential information in the Bolkiah case (at p 226) :-

"It is of overriding importance for the proper administration of justice that a client should be able to have complete confidence that what he tells his lawyer will remain secret. This is a matter of perception as well as substance. It is of the highest importance to the administration of justice that a solicitor or other person in possession of confidential and privileged information should not act in any way that might appear to put that information at risk of coming into the hands of someone with an adverse interest."

These considerations apply with equal force to the need for solicitors and other fiduciaries to abstain from "changing sides" or being seen to change sides in the absence of the client's genuine informed consent. Although, as noted above, statutory measures have been taken to deal with conflicts of interest in the insurance field in Australia, the cautionary words in some Australian judgments provide apt guidance in our jurisdiction.

111. In The Uncle Toby's Co Pty Ltd v Trevor Jones Steel Fabrications Pty Ltd (In Liq) 5921 of 1993; Supreme Court of Victoria, Causes, Batt J stated :-

"....... a court should take a cautious approach to any proposal that a solicitor be allowed to act against a former client in litigation in which the former client is involved, because the appearance that a lawyer can readily change sides is very subversive of the appearance that justice is being done: D and J Constructions Pty Ltd v Head (1987) 9 NSWLR 118 at 123; Australian Commercial Research and Development Ltd v Hampson [1991] 1 Qd R 508 at 516; and Mallesons Stephen Jaques v KPMG Peat Marwick (1991) 4 WAR 357 at 373."

The court should a fortiori take a cautious approach where the solicitor seeks to act simultaneously for and against a particular client.

112. Similarly, in CI Industries Pty Ltd v Keeling, Supreme Court of New South Wales, Common Law Division; 10343 of 1997; 26 March 1997, Abadee J stated (at pp 34-35):-

"In the instant case to the reasonable observer, the appearance of the solicitors now acting for the insurer in defending Industries' cross claim for indemnity, could subvert the appearance of justice being done. ....... There is an underlying principle that a person should be entitled to seek and obtain legal advice in the conduct of his affairs without the apprehension of his/her being thereby prejudiced. The concern is with the general preservation of confidentiality and encouragement of full and frank disclosure between solicitor and client."

Hon Leong JA :

113. In this case, an employee of the plaintiff, the joint venture, reversed a vehicle in the course of work. The vehicle collided with a van and an employee of a sub-contractor of the joint venture was injured. The injured party brought a personal injury action against the joint venture and its employee claiming damages for negligence.

114. Ming An Insurance Co. (HK) Ltd was the insurer of the joint venture. Ming An disputed that the personal injury claim was covered by the insurance policy and denied the joint venture's entitlement to indemnity in respect of liability in the personal injury action. The dispute was referred to arbitration. Ming An did not agree to the appointment of Ms Teresa Cheng as the sole arbitrator in the arbitration proceedings and sought to set aside Ms Cheng's appointment. The defendant acted for Ming An both in the arbitration proceedings and the setting aside proceedings.

115. Pursuant to Clause 6 of the insurance policy, Ming An appointed the defendant to act for the joint venture in defence of the personal injury action. The joint venture objected to the defendant acting for it in the personal injury action and at the same time for Ming An in the arbitration and allied proceedings on the ground that the defendant was acting at the same time for two clients with conflicting interests. The joint venture sought to restrain the defendant from so acting and obtained a number of injunctions to that effect.

116. The question is whether there was a conflict of interest in the defendant so acting for two clients at the same time that the court should intervene.

117. This question has been considered in details in the draft judgments of Rogers JA and Ribeiro JA which I have the benefit of reading and with respect, I agree with the conclusions reached and the reasons given therefor by Rogers JA.

118. I only wish to add this: In acting for Ming An in the arbitration proceedings, the defendant was obliged to seek to avoid Ming An's liability to indemnify the joint venture in the personal injury action. This was against the joint venture's interest in its entitlement to be indemnified under the insurance policy. In acting for the joint venture in defence of the personal injury claim, the defendant was obliged to act in the interest of the joint venture to avoid liability or to reduce damages. In such a case, there was bound to be a conflict between the interests of Ming An and the interests of the joint venture. A solicitor who acts at the same time for both Ming An and the joint venture in such a situation is departing from the guideline in regulation 9 of the Hong Kong Solicitors' Guide to Professional Conduct which requires in effect that a solicitor must not act or two or more clients whose interests conflict or appear likely to be in conflict. The fact that Ming An was entitled under the policy to dictate the choice of solicitors acting for the joint venture in defence of the personal injury action and in the absence of legislation, no objection to such appointment may be taken by the joint venture, does not mean that the solicitor appointed may act at the same time for two clients whose interests are in conflict. Also, the fact that an insurer may take over the defence of an action against the insured and at the same time seek to avoid liability under the insurance policy, as in the case of Oriental Fire and General Insurance Co. Ltd v. Cheuk Ma-yee [1981] HKLR 41 does not mean that the same solicitor may act in both proceedings at the same time for the insurer as well as the insured whose interests are in conflict.

119. The appeal is allowed to the extent that except an order to restrain the defendant from acting for the joint venture at the same time also acting for Ming An in other matters, the other injunctions should be discharged. There will be an order nisi that the appellant should have 50% of costs of this appeal.