For those insurers looking to participate in QIS, an examination of the negligence cases involving solicitors that have made it to Court in the past two years may provide a flavour of the types of claims the legal profession is particularly vulnerable to.
As a profession, solicitors have long been vulnerable to negligence claims, and insurers who decide to join the Qualifying Insurers Scheme proposed by the Law Society can probably expect to experience a decent level of claims activity. Quite why solicitors have been targeted above other professions is a matter which has been the subject of much debate, although one suspects the twin aspects of joint and several liability coupled with the fact that solicitors are required by the Law Society to hold adequate professional indemnity insurance probably have a lot to do with it.
Joint and several liability arises where a plaintiff has been injured by a common enterprise by a number of defendants. The joint and several liability of the defendants to the plaintiff arising out of such common enterprise means that the plaintiff only has to establish its case against one of the defendants in order to be able to recover 100% of its loss from that defendant. The result of this legal dynamic is that an injured party is likely to go after the defendant that is most likely to have sufficient assets to recover his loss; and since solicitors are required to hold professional indemnity insurance, they (along with accountants) have been particularly vulnerable targets.
The types of claims that have been made against Hong Kong solicitors down the years have been numerous. One only has to examine the decisions made by the Hong Kong Courts since the beginning of 2004 in order to get a flavour of what particular claims Hong Kong solicitors are particularly vulnerable to. These cases also illustrate some important recent developments in the law which effect the extent of exposure that solicitors and their insurers now face.
Conveyancing problems still a fashion
The biggest source of claims against solicitors still arises from the field of conveyancing. This was as true of the judgments in 2004/5 as it ever has been. Indeed it is suggested that Hong King solicitors are probably more vulnerable to claims than their colleagues in other jurisdictions, precisely because of the volatile nature of the Hong Kong property market where price peaks and troughs are steeper and the time between them shorter.
Consider, if you will, the position of a purchaser of a property in a falling Hong Kong market. The value of the property he has purchased between the time he enters into a provisional agreement and the time scheduled for completion could plummet. Naturally, therefore, the purchaser may search for a way out of the purchase by suggesting that the vendor is unable to provide good title by the time of completion. If he is successful, the sale will fall through. In these circumstances, the vendor's solicitor should watch out as his conduct will be examined by the vendor to see if there is any means by which the vendor could make up his loss, being the difference between the sale price and the value of the property he is stuck with now the market has collapsed.
A classic example of this was shown in the case of Well Billion Development Ltd. V Chiu & Lau [2004] HKEC 311, in which the plaintiff had in 1992 instructed the defendant firm to represent it on the purchase of a property. When it came to examining the title of the property, the defendant firm failed to take proper steps to ensure that an assignment in the chain of title had been properly executed or to warn the plaintiff that to proceed could mean that a subsequent sale might be prejudiced by it not being able to show good title. And that is exactly what happened when the plaintiff tried to sell the property in March 2000. The plaintiff was unable to show good title and accordingly lost a sale at HK$3,240,000. When it finally sold the property, the market had dropped considerably as had the sale price to HK$2,110,000. Consequently, the defendant solicitors were found liable for the plaintiff's loss of HK$1,130,000 (being the difference between the two prices).
In a falling market, therefore, solicitors for vendors are particularly vulnerable. In a rising market, however, solicitors aren't safe either. Two problems can arise in such a situation. Primarily, the vendor may seek to get out of the sale so he can then sell the property on for a greater price. If he is able to do so, then natural compunction for the purchaser in an increasingly blame motivated society may be to look to his solicitor for recompense. Secondly, in a rising market there is the added problem of purchasers buying a property one day and then looking to sell it on the next day so as to make a quick profit; the speed at which such transactions take place can put a particular strain on solicitors acting in
this situation.
An example of former was the case
Chua Ming Yuen & Another v Hentron Investments Ltd [2004] HKEC 1561. Here the plaintiff was the purchaser of a property and the second Defendant was its solicitor. The intended mechanics for completion of the purchase were for the Defendant solicitor to receive the purchaser's banker's bank draft for a HK$2 million mortgage and then draw a cheque for this amount on its client account in favour of the Vendor, the first defendant. Unfortunately, there was a delay in the transfer of funds from the purchaser to its solicitor. The solicitor nevertheless drew a cheque on its client account which was subsequently dishonoured. A few days later when the money arrived, the solicitor then transferred the HK$2 million to the Vendor. The Vendor, however, refused to go ahead with the sale on the basis that completion had not having taken place by the appointed time (the cheque having been dishonoured). Further, the Vendor refused to return the HK$2 million.
Consequently, the plaintiff sued both the Vendor for specific performance and its solicitor for negligently issuing a cheque that had subsequently been dishonoured (thereby allowing the Vendor a way out of the sale and not making necessary alternative arrangements). The Court held that the Vendor, by retaining the money, had waived its right to deny the transfer of property to the plaintiff and as such an order for specific performance was made in the plaintiff's favour. The Court also held, however, that the solicitor was negligent in not having recognised that there was a grave risk of his cheque being dishonoured without the requisite funds in his client account. As such, by issuing a cheque likely to be dishonoured the solicitor had given the Vendor the perfect excuse for not going ahead with the transaction. As it turned out, the Vendor although liable itself had already divested itself of all its assets. This left the solicitor having to meet the plaintiff's entire loss itself.
An example of where a solicitor might come unstuck where instructed by someone looking to buy property and then sell it on quickly for a profit was the High Court case of Benefit Charter Limited v Kevin LH Kwong & Co Solicitors and another [2004] HKEC 1202. Here the Plaintiff instructed the Defendant solicitor in the purchase of a house for HK$18.4 million. Prior to the purchase, however, unauthorized building work had been undertaken at the house prompting the Buildings Authority to issue an Order requiring the illegal structures to be demolished. The Vendor was required to provide documentary evidence that the Order had been discharged prior to completion and thereby provided the Defendant with a letter from the Buildings Authority which indicated that enforcement of the Order would be withheld, although the authority did reserve the right to issue a new order going forward should circumstances change. The Defendant advised the Plaintiff that this letter had the effect of discharging the Order and the purchase was then completed.
Almost immediately on completion, in order to take advantage of a rising market, the Plaintiff entered into a contract selling the property for HK$21,100,000. Again he instructed the Defendant to act for him. The new purchaser, however, raised a requisition on the Order issued by the Building Authority, which the Defendant sought to answer by reference to the Building Authority's subsequent letter. This did not satisfy the purchaser's solicitors who asserted that the continued presence of illegal structures on the property vitiated title. Consequently the purchase did not take place and the Plaintiff sued the Defendant for the loss of the sale.
In this particular case, the Defendants were not found negligent, as the Court considered the advice they had given the Plaintiff in respect of the letter had been reasonable, although it had turned out to be wrong in retrospect. But the case does illustrate how solicitors can become targeted when things go wrong in a sale and purchase involving a quick turnaround.
After being in the doldrums for some years, the Hong Kong property market rose significantly following the SARS crisis. Residential property prices rose by 60% between August 2003 and February 2005, a sharp move upwards by the standards of any jurisdiction. Now, in November 2005, fears are being expressed in some quarters that, following increases in the prime interest rate, purchasers will be seeking to back out of their purchase contracts following a rapid downward adjustment in the house prices1. If this happens, you can bet litigation won't be far off. The past two years only go to show that the Hong Kong property market still has considerable juice in it and consequently, solicitors involved in conveyancing transactions going forward are still likely to be susceptible claims.
Litigation advice claims – occasional but still around
Although not as common as conveyancing related negligence, there continue to be examples of claims against solicitors alleging negligent errors or omissions in the bringing and prosecution of litigation.
In Li Fook Chu v HH Lau & Co. [2005] HKEC 1041 the Plaintiff sued his former solicitors for failing to advise him at the outset that a claim he wanted to make was time-barred. The failure to give such advice meant that the Plaintiff subsequently incurred substantial costs in trying to pursue a claim which, as it turned out, was doomed to failure. Consequently, the negligent solicitors were found liable to pay the Plaintiff HK$2,937,545.90 being the costs incurred by him in pursuing the abortive action.
By contrast in Delhaise v Ng & Co. and Another [2004] HKEC 1289, the solicitors against whom the case was brought were exonerated. In this case the plaintiff instructed the Defendant solicitors to represent him in a claim he wished to bring against another firm of solicitors for malicious prosecution. On the second day of trial, when it appeared the action was doomed, the Plaintiff on the advice of counsel dropped the claim. The Plaintiff subsequently sued the defendant firm for not having advised him at the outset that his action stood very little chance of success. The Court dismissed the Plaintiff's claim finding that he had from the outset been apprised of the difficulties he faced in bringing this claim.
Although the above cases had very different outcomes, they both serve to illustrate the importance of proper risk management procedures being put in place by a firm of solicitors. Check lists of standard issues to be considered on being instructed (such as the issue of time-bar) are valuable, as is the requirement for solicitors to keep attendance notes of the nature of all advice they have given to their clients.
Rogue lawyers and their effect
Two cases reported in 2005 illustrate the difficulties that can arise for solicitors firms when one of their number breaks the rules. Claims which fall into this category always seem to start with a lawyer, after helping himself to clients money, either ending up behind prison bars or disappearing altogether: in either case clearly in no position to make recompense which leaves the other partners facing the music.
In Ronia Ltd v Clarke [2005] HKEC 326, the Defendant partner was sued by a former client of his firm. It turned out that the Plaintiff client had instructed a clerk in the firm to commence proceedings for breach of contract by a German company. The clerk ostensibly did so and conducted the claim thereby incurring HK$660,000 in legal fees. It turned out, however, that
the clerk had not in fact commenced proceedings at all. Rather he had forged all the necessary court documents to make it look as though he had commenced proceedings and then disappeared with the fees. Accordingly, the Defendant was found vicariously liable for the clerk's misdeeds. Further a direct finding of negligence was made against the Defendant on the basis that the standard of supervision he had provided his clerk fell well below what could be expected of a reasonable solicitor.
In All Link International Ltd v Ha Kai Cheong & Another [2005] HKEC 881, the defendant wasn't even a partner in the firm. In fact the only partner in the firm had already pleaded guilty to embezzling HK$3 million of the Plaintiff's money. The Plaintiff subsequently sued the Defendant solicitor (the sole partner's assistant) as having been held out to him as a partner and/or in his personal capacity as a solicitor. The solicitor was found liable in having been held out as a partner. More interestingly, though, the solicitor was also found liable in his personal capacity as, on the facts, he had entered into a special relationship with the client having assumed personal responsibility for the professional services performed for that client and the client had reasonably relied on that personal responsibility.
What these cases show, therefore, is that where fraud is involved there is more than one way for a wronged client to get compensation. A partner can be held vicariously liable or personally negligent for lack of supervision. Alternatively, where a partner of a sole trader has been found liable, his employee can be targeted for personal liability if, on the facts, that employee has assumed a personal responsibility to the client. Both of these may be sufficient to circumvent a fraud exclusion in an insurance policy, if that exclusion operates only against those who have partaken or connived in the fraud itself.
These cases also illustrate the risks involved where an individual in the firm has singular access to a client account. As a matter of good risk management it seems sensible for insurers to require that there be either a limit on amounts that can be withdrawn by one signatory or for there to be two signatories on every occasion.
Farewell contributory negligence
When solicitors enter into a retainer with their clients, they owe their clients concurrent duties in both contract and tort. If the solicitor is sued by the client, therefore, the question arises as to whether he can try to meet or reduce the claim by suggesting that the client was contributorily negligent. Such a defence is available in tort, though not in contract. But what is the position where the solicitor is sued both in tort (for negligence) and contract (for breach of retainer). Is the defence of contributory negligence available then?
Different common law jurisdictions have disagreed on this issue. In Vesta v Butcher [1989] AC 852 the English Court of Appeal held that the defence of contributory negligence was available to meet allegations of breaches of concurrent duties in tort and contract. By contrast, the High Court of Australia in Astley v Austrust [1999] Lloyd's Rep PN 758, decided that the defence of contributory negligence was not available in this situation.
The Hong Kong Court of First Instance got to decide the issue in International Trading Co Ltd v Lai Kam Man & Others [2004] 2 HKLRD 937. It decided to side with the Australian position. Accordingly, the current state of the law in Hong Kong is that in claims against solicitors, the defence of contributory negligence is not available. And so, in one fell swoop, the Courts have deprived insurers of a defence which in the past has certainly been useful in reducing their insured's exposure.
That may not be the end of the matter, however, as it is always open to the Hong Kong Court of Appeal to consider the matter anew. Indeed, in the subsequent solicitors' negligence case of Hondon Development Ltd & Anr v Powerrise Investments and Anr & Centaline Property Agency Ltd & Anr (Third Parties) [2005] HKEC 182 the Court of Appeal has deliberately left the question open.
The question of how much
Another important aspect of law relating to solicitors' negligence which the Hong Kong Courts have considered in recent years is the extent to which a solicitor is exposed to reimburse a lender if he provides negligent advice on the security for the loan.
The line of case law from which this issue has stemmed involved valuers rather than solicitors whose task it is to advise a bank on the value of a property before the bank provides funds for a mortgage on that property. Against the background of the property crash in the United Kingdom in the early 1990s, a number of borrowers defaulted on loans and banks set about assessing whether the valuations provided to them had been negligent. Banks who found they had advanced money in reliance on negligently inflated valuations discovered that they had been under-secured from the start, a problem which the subsequent property crash had compounded. As a result, banks sought to recover from valuers compensation not only for the difference between the valuation provided and the valuation that should have been provided, but also for the further loss created by the subsequent fall in house prices, on the basis that had the valuation not been negligent in the first place, the loans would not have been made and hence the banks would not have been exposed to the market price tumbling.
This issue was considered by the English House of Lords in the landmark case of South Australia Asset Management v York Montague Ltd [1997] AC 191 (SAAMCO). In his leading judgment, Lord Hoffman drew a distinction between a professional who is under a duty to take reasonable care to provide information on which someone else will decide upon a course of action and a professional who advises on the appropriate course of action to take. In the latter case, the professional would be responsible for the entire loss caused by the course of action. In the former, the professional would only be liable for the loss caused as a consequence of his advice being wrong. Lord Hoffman indicated that valuers stood in the position of professionals who provided information to enable the bank decide whether to make a loan or not. As such, they were only responsible for the amount by which their valuation was negligent, rather than the full extent of the property crash.
But what of solicitors who also act for lenders advancing money for the purchase of property? If a solicitor fails to advise the lender of a problem with the title which could render the property less valuable, is that solicitor liable for the full amount of the loan, or some lesser amount as was the case with the valuers in SAAMCO?
This important issue was considered by the Hong Kong Court of First Instance in Industrial and Commercial Bank of China (Asia) Limited v BC Chow & Co. [2004] HKEC 105. Here the Plaintiff bank instructed the Defendant solicitors to advise it on a loan to be secured by mortgage on a property. In accordance with the title deeds, in order for a mortgage to have been effected on the property the prior consent of the Director of Housing had to be obtained. It was not. The borrowers subsequently defaulted, and only at that point was it discovered that the bank had no effective charge over the property. The bank subsequently sued the solicitors and contended that they were entitled to recover the full amount of their loan on the basis that had the bank been informed it did not have an effective charge it would never had advanced the loan in the first place.
The Court, in applying SAAMCO, held that in this instance the solicitor was more akin to the position of a professional advising on a particular course of action rather than one providing information to enable the bank to decide on a suitable course of action. Had the bank been advised properly, it would not have proceeded with the loan. Therefore the solicitors were found liable to pay the full amount of the loan.
Accordingly, the judgment does not make happy reading for solicitors' insurers as
the Court appears to have imposed on them a wider exposure than that of a valuer who might advise in the same property transaction.
Looking to the future
It is, of course, never easy to predict where claims against solicitors might come from in the future, although it is possible to make certain educated guesses in this regard.
Certainly, despite all the problems that have gone before, conveyancing is likely to continue to be a source of claims. This has as much to do with the nature of the Hong Kong property market as with anything else. Land law in Hong Kong is complex. It is the reason why solicitors coming in from other jurisdictions to practise in Hong Kong have to take a land law exam. The complexity stems from the fact that litigation on conveyancing issues in Hong Kong is substantial and has thereby created significant, well-developed case precedent. This itself stems from the fact that the construction of buildings in Hong Kong is heavily regulated (and has to be from a public safety perspective given the unique standards of population density found in Hong Kong), the speed at which property transactions take place, the fact that property is commonly used as a source of investment for individuals in Hong Kong seeking a quick profit, the fact that it is not purchasers' practice to obtain a survey before buying a property and the fact that prices can rise and fall in the market sharply and swiftly. None of this has changed and consequently, in our view, neither will conveyancing as a potential source of negligence claims against solicitors.
The other big potential area of claims may stem from a solicitor's involvement in advising firms seeking to raise money through IPOs on the Hong Kong exchanges. IPO activity has increased in recent years, particularly from Mainland companies. Further, the Securities and Futures Ordinance has led to an increase in a Company Director's exposure to being sued for misrepresentation made prior to listings. It is only a small jump from this to casting blame on the solicitors involved in the listing for not advising the company or its directors adequately. Of course, this raises the spectre of future battles between D&O and solicitors' insurers, a situation which (although reliant to an extent on crystal-ball gazing) is not altogether too far-fetched.
All in all, therefore, the insurance of solicitors through QIS does appear to provide an immediate opportunity for insurers seeking to write business in Hong Kong with a means of extending their books. Those that do, however, should be wary that claims activity should not be unexpected.
For more information on the featured article, please contact peter.gregoire@cms-cmck.com
