HWANG CHI KONG ALBERT v. HONG KONG SOLICITORS INDEMNITY FUND LTD

HCCT 73 OF 2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION

PROCEEDINGS NO. HCCT 73 OF 2003

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REASONS FOR JUDGMENT

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1. At the outset of the hearing before me on 22 September 2003, Mr. Whitehead S.C., for the respondent, raised a preliminary issue that the Court had no jurisdiction to order the relief sought by the claimant under the Notice of Originating Motion. He asked for the preliminary issue to be decided first as in his view it was determinative of the application. I acceded to Mr. Whitehead's suggestion and heard arguments on the preliminary issue. I then gave judgment in favour of the respondent and dismissed the claimant's application with costs to the respondent. I indicated at the time that I would give my reasons in writing. This I now do.

2. The claimant is a solicitor practising in Hong Kong. He sues on behalf of himself and the former firm of Albert Hwang, David Chung & Co. ("the firm") under O.15, r.12. His former partner was David Chung.

3. The claimants claim against the respondent is for an indemnity out of the Solicitors (Professional Indemnity) Fund in accordance with rule 10 of the Solicitors (Professional Indemnity ) Rules ("the rules"). That this is the claimant's claim is made abundantly clear in the points of claim filed in the arbitration proceedings. By High Court Action No. 1114 of 1999, the National Commercial Bank Ltd. which subsequently merged with the Bank of China (Hong Kong ) Ltd. ("the BOC") brought proceedings against the firm for professional negligence in respect of a number of conveyancing transactions in or about 1998. Those proceedings were tried by Deputy High Court Judge Lam (as he then was). By a judgment given on 6 June 2002 the judge gave judgment to the BOC against the firm for damages in the sum of HK$4,614,739.78 and the sum of HK$784,967.34 with interest on the said sums and he also made an order nisi as to costs of the action to be paid by the firm to the BOC .

4. As there was this judgment against the firm the claimant lodged a claim for indemnity against the respondent by the claims form dated 6 November 1998. Indemnity was refused by the respondent under schedule 3 to the rules which deals with exclusions and conditions. Paragraph 1(2)(c)(iiia) of schedule 3 provides that the respondent will not provide indemnity in respect of losses arising out of any claim :

“ brought about by the dishonesty, fraudulent act or fraudulent omission of an employee of the Practice unless the indemnified can prove or show to the satisfaction of the [respondent] that such dishonesty, fraudulent act or fraudulent omission of the employee did not occur as a result of recklessness or dishonesty or a fraudulent act or fraudulent omission on the part of a principal in the conduct or management of the Practice."

5. As set out in the letter from Messrs. Wilkinson & Grist dated 21 October 1999, the former solicitors for the respondent, addressed to the firm, it was asserted that the claim was brought about by the "dishonest or fraudulent acts of your former clerk, Mr. Paul Chiang, and you have not been able to show to the satisfaction of the [respondent] that these fraudulent or dishonest acts did not occur as a result of recklessness on the part of a principal in the conduct or management of your practice". Hence indemnity was refused.

6. The claimant referred the matter to arbitration under the Rules. It was agreed between the parties that Mr. Russell Coleman would be the arbitrator and the matter proceeded to arbitration.

7. By the Originating Motion issued on 4 August 2003, however, the claimant seeks, inter alia, an order that the arbitration agreement shall cease to have effect pursuant to section 26(2) of the Arbitration Ordinance (Cap. 341). This provides as follows :

“ Where an agreement between any parties provides that disputes which may arise in the future between them shall be referred to arbitration, and a dispute which so arises involves the question whether any such party has been guilty of fraud, the Court shall, so far as may be necessary to enable that question to be determined by the Court, have power to order that the agreement shall cease to have effect and power to give leave to revoke the authority of any arbitrator or umpire appointed by or virtue of the agreement."

8. On the same day that it issued the Originating Motion the claimant obtained an interim stay of the arbitration proceedings from Hartmann J. who also adjourned the matter to the Summons Judge on 8 August 2003 for directions. At the hearing on 8 August 2003, Hartmann J. gave directions and ordered an expedited hearing of the Notice of Motion which was then fixed before me on 22 September 2003.

9. The preliminary point raised by Mr. Whitehead is that the Court has no jurisdiction to grant the relief sought by the claimant in the Notice of Motion.

10. It was his submission that the arbitration proceedings before Mr. Russell Coleman, the arbitrator, was a statutory arbitration. Section 2AB of the Arbitration Ordinance provides as follows :

“ This Ordinance (other than the provisions specified in subsection (3) applies to arbitrations under every other Ordinance, whether passed before or after the commencement of this section, as if -

(a)	the arbitration were under a domestic arbitration agreement;
	and
(b)	the other enactment were such an agreement."

Subsection (3) provides as follows :

“ The provisions referred to in subsection(1) are sections 2GD, 2GJ (3), 4(1) 5, 7, 26 and 27."

11. It was Mr. Whitehead's contention that the arbitration before Mr. Coleman as the arbitrator was a statutory arbitration under the Legal Practioners Ordinance and its subsidiary legislation. Section 2AB of the Arbitration Ordinance makes it plain that section 26 of the Arbitration Ordinance does not apply to statutory arbitrations. Hence the Court has no jurisdiction to grant the relief sought under section 26 of the Ordinance.

12. Section 73A of the Legal Practitioners Ordinance (Cap. 159) provides for the making of the indemnity rules. Section 73A provides that :

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

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

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

(a)	may authorize or require the Society to establish and maintain a fund or funds;
(b)	may authorize or require the Society to take out and maintain insurance with authorized insurers;
(c)	may require solicitors or any specified class of solicitors to take out and maintain insurance with authorized insurers.

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

(a)	may specify the terms and conditions on which indemnity is to be available, and any circumstances in which the right to it is to be excluded or modified;
(b)	may provide for the management, administration and protection of any fund maintained by virtue of subsection (2)(a) and require solicitors or any class of solicitors to make payments to any such fund;
(c)	may require solicitors or any class of solicitors to make payments by way of premium on any insurance policy maintained by the Society by virtue of subsection (2)(b);
(d)	may prescribe the conditions which an insurance policy must satisfy for the purposes of subsection (2)(c);
(e)	may authorize the Society to determine the amount of any payments required by the rules, subject to such limits, or in accordance with such provisions, as may be prescribed by the rules;
(f)	may specify circumstances in which, where a solicitor (not being a solicitor who is exempt from complying with the rules) for whom indemnity is provided has failed to comply with the rules, the Society or insurers may take proceedings against him in respect of sums paid by way of indemnity in connection with a matter in relation to which he has failed to comply;
(g)	may specify circumstances in which solicitors are exempt from the rules;
(h)	may empower the Council to take such steps as they consider necessary or expedient to ascertain whether or not the rules are being complied with; and
(i)	may contain incidental, procedural or supplementary provisions. "

13. It is clear that the rules were made pursuant to the provisions of section 73A. Sections 73 and 73A of the Ordinance are specifically referred to under the title to the rules.

14. By section 3 of the Interpretation and General Clauses Ordinance (Cap. 1) , "Ordinance" means

“	(a)	any Ordinance enacted by the Legislative Council;
		.....................................................................
	(c)	any subsidiary legislation made under any such Ordinance except any such subsidiary legislation which has pursuant to Article 160 of the Basic Law has been declared to be in contravention of the Basic Law;
	(d)	any provision or provisions of any such Ordinance or subsidiary legislation."

And "subsidiary legislation" means "any proclamation, rule, regulation, order, resolution, notice, rule of court, bylaw or other instrument made under or by virtue of any ordinance and having legislative effect.

15. The word "Ordinance" includes any provision of the subsidiary legislation namely, the rules. It is abundantly clear that the rules are subsidiary legislation made under the Legal Practioners Ordinance having legislative effect.

16. Mr. Whitehead referred me to Court of Appeal's decision in English Schools Foundation & Another v. Bird [1997] 3 HKC 434. The court was there concerned with the conditions of employment of a teacher the relevant parts of which were specified in the English Schools Foundation Ordinance (Cap. 1117). It was held, inter alia, that the proceedings before the Arbitration Board constituted a statutory arbitration within section 2J of the Arbitration Ordinance. Section 2J has now been replaced by section 2AB. The two sections are almost identical and, in my view, to the same effect. It was held in that case that section 10 of the English Schools Foundation Ordinance provided for direct and specific powers to make regulations and that regulations made pursuant to that section were subsidiary legislation having legislative effect.

17. Le Pichon J (as she then was ) said at page 438 :

“ For my part, I would also hold that the Arbitration Ordinance applied to the proceedings before the Arbitration Board on the further ground that they constituted a statutory arbitration within section 2J of that Ordinance. I will state my reasons briefly.

Mr. Dykes, S.C. submitted that those proceedings were not within section 2J. His argument, both novel and interesting, stems from the definition of 'subsidiary legislation' to be found in section 3 of the Interpretation and General Clauses Ordinance (Cap. 1).

Under section 2J, the Arbitration Ordinance applies to 'every arbitration under any other enactment'. Definitions of 'enactment' and 'subsidiary legislation' are to be found in section 3 of Cap. 1 :

'Ordinance' and 'enactment' mean -

(a)	any Ordinance enacted by the Governor by and with the advice and consent of the Legislative Council;
(b)	any proclamation made by the British Military Administration on or between 1 September 1945 and 1 May 1946; and
(c)	any subsidiary legislation made under any such Ordinance or proclamation;

...

'subsidiary legislation' and 'regulations' mean any proclamation, rule, regulation, order, resolution, notice, rule of court, bylaw or other instrument made under or by virtue of any Ordinance and having legislative effect. (emphasis added)"

Apart from delegating extensive powers to the Foundation to make regulations relating to its affairs including the composition, internal management, operation, administration and control of the Foundation and its schools and generally to carry Cap. 1117 into effect, section 10 of Cap. 1117 expressly provided that such regulations need neither be published nor laid on the table of the Legislative Council. In essence, Mr. Dykes S.C.'s submission is that the phrase 'having legislative effect' is to be interpreted as meaning and limited to delegated legislation that is subject to the negative vetting procedure laid out in section 34 of Cap. 1. Thus, it was submitted, regulations of the Foundation though made in exercise of delegated powers do not have 'legislative effect' because of the exemption. Reliance was also placed on the fact that the regulations are not published in the revised edition of the Laws of Hong Kong. As the commissioner is under an obligation to cause the revised edition of every Ordinance (which term embraces 'subsidiary legislation') to be published and in the Revised Edition of the Laws Ordinance 1965 (53 of 1965), the definition of 'subsidiary legislation' is identical to that in Cap. 1, the fact that the regulations have not been published point to their not being 'subsidiary legislation'.

I can see the force of Mr. Dykes S.C.'s submission. Nevertheless, I am not persuaded that it is correct. 'Having legislative effect' is nowhere defined. Section 34 itself makes no reference to it. Under that section, regulations made in exercise of delegated powers have to be published and tabled in the absence of any express exemption. Such an exemption may serve to accelerate the process of subsidiary legislation taking effect, but whether delegated legislation needs be laid before the legislative body is a matter of procedure only : see generally Wade and Bradley on Constitutional and Administrative Law, 11th Ed. 631.

Section 10(1) of Cap. 1117 unquestionably delegated extensive powers to the Foundation to 'legislate' on all matters pertaining to its functions and operations. In my judgment, the fact that there is an express provision which exempts the regulations from having to be published and from the negative vetting procedure of section 34 of Cap. 1 does not affect the nature of that power or the character of regulations made pursuant to it. The exemption cannot, on any rational basis, operate by implication to strip regulations made in exercise of delegated powers of 'legislative effect' if they would otherwise have that attribute."

18. Nazareth V.P. agreed with Le Pichon J.

19. It seems to me that the above decision of the Court of Appeal does provide support for Mr. Whitehead's contention that in this case the arbitration was a statutory arbitration.

20. Rule 10 of the Rules deals with entitlement to indemnity. Rule 10(1) provides that:

“ Upon issue of the receipt referred to in rule 9, the indemnified shall be entitled to be provided severally with Indemnity out of the fund in the manner set out in rule 11 and to the extent, and subject to conditions and exclusions, set out in Schedule 3 against all losses to the indemnified whensoever occurring arising from any claim first made against the indemnified during the period of indemnity in respect of any description of civil liability whatsoever incurred in connection with the Practice or from any such claim made during or subsequent to the period of indemnity arising out of circumstances notified to the Company during the period of indemnity as circumstances which may give rise to a claim."

21. The rules provide for the resolution of disputes by a single arbitrator. Rule 13 provides that :

“ Any dispute or difference concerning the existence in quantum of any liability for any contribution to be made or caused to be made by any solicitor in accordance with rule 4 or concerning any claim or the quantum of any claim to be provided with Indemnity in accordance with rules 10, 11 and 12 shall be referred to a single arbitrator to be appointed in default of agreement by the President of the Society for the time being. Any such arbitration shall take place and be conducted between the indemnified who is a party to the dispute or difference and the Company representing the fund, and the arbitrator's decision shall be final and binding."

22. Indemnity was refused by the respondent under the provisions of paragraph 1(2)(c)(iiia) of schedule 3 to the rules. There was therefore a dispute concerning a claim to be provided with indemnity in accordance with rule 10. By rule 13 this dispute had to be referred to a single arbitrator.

23. It was Mr. Chow's submission that rule 13 was not applicable as the parties did not invoke the provisions of rule 13 in appointing Mr. Coleman as the sole arbitrator. The evidence shows that there was agreement between the parties as to the person to be appointed as the sole arbitrator. This was agreed to be Mr. Coleman. Mr. Chow contended that the proper construction of rule 13 was that if there was an agreement between the parties as to the identity of the arbitrator then rule 13 was not applicable. He further submitted that the arbitration before Mr. Coleman was a private agreement to arbitrate and not a statutory arbitration. He relied on the words in rule 13 "shall be referred to a single arbitrator to be appointed in default of agreement by the President of the Society for the time being". As there was agreement between the parties as to the person to be appointed as the arbitrator it was contended that rule 13 was not applicable. Rule 13, it was argued, only applied to the situation where the arbitrator was appointed by the President of the Society in default of agreement.

24. I am unable to accept Mr. Chow's submissions. As a matter of proper construction of rule 13 it is, in my judgment, plain that any dispute concerning a claim to be provided with indemnity under rule 10 has to be referred to a single arbitrator. That is the statutory scheme for resolving such disputes. The statutory scheme is, in my view, clear. The dispute has to be referred to a single arbitrator. The arbitrator is to be appointed "in default of agreement by the President of the Society". These words mean that if there is agreement as to which person should be appointed as the arbitrator then the President of the Law Society does not have to appoint any one and if there is no agreement, then the President of the Society will appoint an arbitrator. That is the proper construction of rule 13 and I see no difficulty in this construction.

25. There was also no merit in the arguments advanced by Mr. Chow. It was brought to my attention by Mr. Whitehead in the course of the hearing that both the claimant and the respondent had appointed Mr. Coleman as the sole arbitrator on the basis of rule 13. I was informed that Mr. Coleman had specifically asked both parties to give him the basis of his appointment as arbitrator and that rule 13 was the basis of his appointment as given to him by both parties. Also, at a preliminary meeting of the parties before the arbitrator, both parties had told the arbitrator that the basis of his appointment was under rule 13. This was not challenged by Mr. Chow.

26. The claimant relied on rule 10 of the Rules to claim indemnity. This is beyond dispute. By para. 4 of the points of claim in the arbitration proceedings counsel for the claimant pleaded that :

“ In the premises, the Firm are entitled to the indemnity out of the Solicitors (Professional Indemnity) Fund (hereinafter referred to as "the Fund") at all material times in accordance with Rule 10 of the Rules."

27. I would observe also that in the correspondence that I was shown in particular, the letter dated 8 November 2002 from Essar Insurance Services Ltd., the managers of the Fund addressed to the claimant, the managers specifically referred to rule 13 in the reference to arbitration. In the 1st affirmation of Albert Hwang Chi Kong in these proceedings the claimant himself relied on rule 10 in the claim for indemnity and referred also to rule 13 when dealing with the arbitration.

28. Mr. Chow also referred to the receipt issued by the respondent to the claimant for payment of contribution in support of his submission that rule 13 was inapplicable. The receipt dated 7 November 1997, however, only evidences payment of contribution made by the claimant. As is stated in the said receipt, it was a receipt from the claimant for the sum paid "being payment of contribution pursuant to paragraph 2 of Schedule 1 to the above Rules". This refers specifically to the rules. It is also stated in the receipt that "Indemnity is hereby provided to the abovenamed indemnified in accordance with the above rules". It is clear that indemnity was provided in accordance with the rules. The receipt that was issued was the receipt referred to in rule 9 of the rules and upon issue of the same there was the entitlement to indemnity under rule 10. The receipt does not, in my view, provide any assistance to the claimant in seeking to show that rule 13 was inapplicable.

29. There can be no doubt that the parties have all along proceeded with the arbitration on the basis of rule 13 and nothing else. That being so, there is no merit in the submissions made by Mr. Chow that rule 13 did not apply and that the arbitration was not a statutory arbitration but a private agreement to arbitrate.

30. I accept Mr. Whitehead's submissions and reject Mr. Chow's submissions. I am satisfied that the arbitration was a statutory arbitration. The provisions of the Arbitration Ordinance apply to statutory arbitrations save for the exceptions provided in section 2AB(1) and (3). This includes section 26 of the Arbitration Ordinance and the Court has no jurisdiction to make an order under section 26.

31. I therefore gave judgment in favour of the respondent and dismissed the claimant's application with costs to the respondent.