THE HONGKONG AND SHANGHAI BANKING CORPORATION LTD v. HONG KONG SOLICITORS INDEMNITY FUND LTD

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS NO. 411 OF 1994

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J U D G M E N T

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1. This is an originating summons which has been issued by agreement between the parties to determine an issue which has arisen.  The issue is :

“Whether the fund established and maintained by the Law Society of Hong Kong pursuant to the Professional Indemnity Scheme as set out in the Solicitors (Professional Indemnity) Rules, Cap. 159, and the Defendant herein, as corporate manager and administrator thereof, is and/or are subject to the provisions of the Third Parties (Rights Against Insurers) Ordinance, Cap. 273.”

2. The factual background has succinctly been summarised by Mr. Stone in his outline argument :

“3.     Factual Background

(i) The Plaintiff, HKSB, has obtained two

judgments against one Clifford Yeung Ming

Jum, who was a solicitor in practice as a sole

proprietor in Hong Kong, under the name of

Clifford Yeung & Co.

(ii) These judgments are as follows:

(a)  H.C.A. No. A7875 of 1990

Judgment dated 8th March 1991,

pursuant to O.14 r.3, in the sum of HK$3,935,000 plus interest and costs

(b)  H.C.A. No. A8176 of 1992

Judgment dated 20th January 1993 in default of defence in the sum of HK$6,002,800 plus interest and costs.

(iii)     After judgment in the 1st Action was given in March 1991, Mr. Yeung was adjudicated bankrupt in February 1992 by Order of Master Woolley in Bankruptcy Action No. 302 of 1991.  The 2nd Action was brought against the O.R. as Trustee in Bankruptcy of Mr. Yeung.  Mr. Yeung remains an undischarged bankrupt.

(iv)    On July 30th 1992 Mr. Yeung was found guilty of professional misconduct by the Disciplinary Committee of the Hong Kong Law Society and he was struck off the Roll.  He has disappeared from Hong Kong, and the Plaintiff has no other means of enforcing the judgments except by suing the SIF, invoking the provisions of the Third Parties (Rights Against Insurers) Ordinance, Cap. 279.

(v)     SIF has already rejected a claim by the Plaintiff against the fund.

(vi)    Contrary opinions of Leading Counsel have been obtained by each side on the issue whether, as a matter of law, the TPRO applies in the instant circumstances, and the parties have agreed to place the issue before this Honourable Court for determination.  There is no dispute between the parties as to the factual background giving rise to this issue.”

3. Section 2(1) of the Third Parties (Rights Against Insurers) Ordinance, Cap. 273 provides :

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

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

(b)     in the case of the insured being a company, in the event of a winding-up order being made, or a resolution for a voluntary winding-up being passed, with respect to the company, or of a receiver or manager of the company’s business or undertaking being duly appointed, or of possession being taken, by or on behalf of the holders of any debentures secured by a floating charge, of any property comprised in or subject to the charge; or

(c)     in the case of the insured being a co-operative society in the event of an order for cancellation of registration of such co-operative society being made under the Co-operative Societies Ordinance,

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

4. Mr. Stone took me through the statutory scheme under which the Fund is constituted.  In particular he emphasised Rule 6 of the Solicitors (Professional Indemnity) Rules which require solicitors to maintain the indemnity referred to and Rule 10 which states that they are entitled to the benefit of the indemnity on due compliance with the Rules and that this entitlement was not discretionary.

5. He submitted that the fact that the contractual rights were spelt out in a statutory scheme in no way affected the position.  He placed reliance upon the definition of a contract of insurance in para. 4204 of Vol. II of Chitty on Contracts, 26th Edition, Sweet & Maxwell 1989 :

“  Definition.  A contract of insurance is one whereby one party (the insurer) undertakes for a consideration to pay money or provide a corresponding benefit to or for the benefit of the other party (the assured) upon the happening of an event which is uncertain, either as to whether it has or will occur at all, or as to the time of its occurrence, where the object of the assured is to provide against loss or to compensate for prejudice caused by the event, or for his old age (where the event is the reaching of a certain age by the assured) or (where the event is the death of the assured) for the benefit of others upon his death.  It is these objectives which distinguish insurance from gaming or wagering.  When embodied in a document the contract is usually called a policy, but save in the case of marine insurance, an oral contract of insurance, though rare, is perfectly valid and may indeed also be described as a policy.”

6. He also called in aid Swain v. The Law Society [1983] A.C. 598 in support of the proposition he was advancing.  I do not think that this case assists him.  The scheme under consideration bore much closer resemblance to the old Hong Kong Law Society scheme than the present one.  It is also clear from the observations made by Lord Diplock at p. 611 that the administration of a statutory scheme was a matter of public law and was not the same situation as arose between contracting parties.

7. The success or otherwise of Mr. Stone’s submission is, in my view, central to the way in which the question posed is to be answered.

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

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

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

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

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

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

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

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

14. There has to be a contract of insurance before the provisions take effect.  Having regard to the material which was before me, I am satisfied that this requirement has not been met.  The result of this is that I have no alternative but to answer the question posed in the originating summons in the negative, which is the answer that I give.  I will hear the parties on costs.