NGO TAI HONG v. JOHN DAVID ANDREW AND ANOTHER

HCA 7988/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7988 OF 2000

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AND

HCA 7929/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7929 OF 2000

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BETWEEN

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J U D G M E N T

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I.       Introduction

1.  Endenne was the developer of House Lot Nos. 36 and 37 Wing Ning Lei, DD No. 111, Yuen Long (the Property).  The Property is a small house development.  Fung and Chan (husband and wife) are the shareholders and directors of Endenne.  Fung is in charge of Endenne’s day-to-day activities.

2.  Ngo says that Endenne, Fung and Chan (the 3 Defendants) fraudulently caused him to buy the Property’s 2nd floor flat by falsely representing that the Property’s development had been authorised and approved by the District Lands Office Yuen Long (DLOYL).

3.  Ip and Willis (the Firm) acted for Ngo in the purchase of the Flat.  Ngo says that the Firm was negligent in its handling of his case.  The Firm (Ngo says) should have been suspicious of Endenne’s representations.  But, when Ngo purchased the Flat, Fung was employed as the Firm’s liaison clerk.  Ngo alleges that such employment relationship put the Firm in a position of conflict.  Fung’s closeness to the Firm (Ngo contends) clouded the Firm’s judgment, preventing it from noticing problems with Endenne’s title.

4.  I therefore have to decide 3 issues.  First, did the 3 Defendants fraudulently induce Ngo to buy the Flat?  Second, if there has been misrepresentation, is Ngo entitled to rescind the Assignment of the Flat and claim damages against the 3 Defendants?  Third, is Ngo entitled to claim damages against the Firm?

5.  I note that none of the 3 Defendants appeared or were represented at trial.

II.      Background

6.  On 7 April 1997 Ngo entered into a provisional agreement to buy the Flat from Endenne.  Chan signed the provisional agreement on Endenne’s behalf.  The provisional agreement stated that Ngo and Endenne would separately instruct the Firm to act in the sale of the Flat.

7.  Shortly after, Fung instructed the Firm to handle the conveyance of the Flat on Endenne’s behalf.  Willis, a experienced partner, handled the transaction on the Firm’s behalf.  Willis was assisted by Jimmy Chan, then a legal executive with the Firm.

8.  Fung handed Willis copies of the following documents relating to the Property (including the Flat):-

(1) An Approval Letter dated 18 March 1995 from DLOYL to Endenne authorising Endenne to redevelop House Lot Nos. 36 and 37.

(2) A Certificate of Exemption dated 18 March 1995 from DLOYL to Endenne, exempting the redevelopment from having to comply with the Buildings Ordinance (Cap.123) (BO) in relation to building works.

(3) A Certificate of Exemption dated 18 March 1995 from DLOYL to Endenne, exempting the redevelopment from having to comply with the BO in relation to site formation works.

(4) A Certificate of Exemption dated 18 March 1995 from DLOYL to Endenne, exempting the development from having to comply with the BO in relation to drainage works.

9.  Under the Buildings Ordinance (Application to the New Territories) Ordinance (Cap.121) (BOANTO), the Director of Lands or his delegate may exempt small house developments (such as that of the Property) from compliance with the BO.  The BOANTO provides for the Director of Lands or his delegate to issue an Approval Letter and Certificates of Exemption, similar to those which Fung handed to Willis, as evidence of the granting of exemption. 

10.  Typically, in small house sale transactions, a solicitor will insist on being shown an Approval Letter and 3 Certificates of Exemptions (relating to building, site formation and drainage works) before proceeding with a sale.

11.  Further, although not mentioned in the BOANTO, it is usual for the vendor of units in a small house development to obtain a "No Objection Letter" (NOL) from the District Lands Office.  The NOL signifies that the Government has no objection to the occupation of a completed small house development.  A prudent solicitor will insist on a small house developer providing a copy of an NOL, before the solicitor allows the sale to proceed.

12.  Willis noticed that Fung had not provided a copy NOL.  He asked Fung for one.  Fung replied that, although Endenne had applied to DLOYL for an NOL, he was unsure whether one had ever been received.  Fung said that the Property’s re-development had been completed 2 years previously, in 1995.  Given the lapse of time since then, Fung could not remember what the precise position was on the NOL.  However, he promised to search among Endenne’s papers and, if no NOL could be found, to apply to the DLOYL for one.

13.  Willis did not think that it was appropriate to purchase the Flat unless an NOL was provided.  Pending production of an NOL by Endenne, in order to protect Ngo, Willis inserted the following term in the formal Sale and Purchase Agreement (SPA) which he was then drafting:-

“3.	(a)	The Vendor hereby declares that the Vendor has applied for the issuance of a ‘No-Objection’ letter by the District Lands Officer, Yuen Long and that within 7 days after issue thereof the Vendor will notify the Purchaser thereof, and
	(b)	The purchase shall be completed at the offices of [the Firm] on or before 19th May 1997 or within 7 days of the Purchaser being notified in writing that a 'No Objection’ letter has been issued by the District Lands Officer, Yuen Long, which is the later....”

14.  On 14 April 1997 Ngo visited the Firm’s offices to pay the requisite stamp duty and registration fee.  Ngo met Jimmy Chan at that time and through Jimmy Chan retained the Firm to act on his behalf.

15.  On 19 April 1997 Ngo signed the SPA for the Flat.  Before signing, Jimmy Chan interpreted the SPA to Ngo. In particular, Jimmy Chan explained the effect of SPA cls. 3(a) and (b) drafted by Willis.

16.  During one or both of his visits to the Firm on 14 and 19 April 1997, Ngo saw Fung there.  At the time of their meeting, Fung informed Ngo that Chan was his wife and Chan would be signing the SPA on Endenne’s behalf.  Fung also gave Ngo a business card from which Ngo learned that Fung worked for the Firm.  Finally, Fung introduced Ngo to SPC Credit Ltd. (now AIG Finance (Hong Kong) Ltd.) for help in financing the Flat’s purchase.

17.  A few days after 19 April 1997 Fung gave a copy NOL to Willis.  The NOL was from DLOYL to Endenne and dated 13 December 1995.

18.  In early May 1997 SPC approved Ngo’s application for a mortgage of $875,000.  On 9 May 1997 SPC instructed the Firm to draw a legal mortgage on SPC’s behalf in respect of the Flat.

19.  On 24 May 1997 Ngo again visited the Firm’s offices, this time to sign the Assignment and Mortgage for the Flat.  By that time, Jimmy Chan (in response to Ngo’s query) had informed Ngo that the NOL had been received from Endenne and everything was in order for the Flat’s conveyance.

20.  Two days later Chan signed the Assignment on Endenne’s behalf.

21.  In late June or early July 1997 Ngo moved into the Flat.

22.  Unfortunately, everything was not in order with the Property.  In May 2000, having seen a letter dated 26 May 2000 from DLOYL to solicitors acting for purchasers of the 1st floor unit in the Property, Ngo learned that the DLOYL had not issued an Approval Letter, Certificates of Exemption or NOL for the Property.  The redevelopment in the Property (including the Flat) was in fact unauthorised and in breach of the Buildings Ordinance.

23.  On 23 January 2001 the DLOYL informed the 1st floor owner at the Property that, given the lack of authorisation for the Property’s redevelopment, the DLOYL was considering whether to take "appropriate steps and law enforcement action".  However, since then, the DLOYL has not proceeded on the matter.  In particular, the DLOYL has not registered any encumbrance or charge against the Property (including the Flat).

III.     Discussion

A.      Issue 1: Are the 3 Defendants liable for misrepresentation?

24.  In my judgment, the 3 Defendants are liable for fraudulent misrepresentation.

25.  It is fraud knowingly to state that something is the case, when it is not, for the purpose of inducing someone to enter into an agreement.

26.  By producing the Approval Letter, exemption certificates and NOL to Willis, Endenne was implicitly representing that it:-

(1) had requested the documents from DLOYL; and,

(2) was providing to the Firm what it had received. 

27.  But it is evident from the DLOYL’s 26 May 2000 and 23 January 2001 letters that at least the latter representation by Endenne was false.  Nothing had ever been issued by the DLOYL.  Most likely, this is because the former representation was also untrue.  Nothing had ever been applied for by Endenne.

28.  Endenne would have realised that its representations were untrue.  Endenne must have known whether or not it had applied to the DLOYL for any authorisation or exemption and whether or not it had received anything in response.  Contrary to what he told Willis, I do not believe that Fung had forgotten whether Endenne had ever received an NOL.

29.  Further, Endenne must have known that the Approval Letter, exemption certificates and NOL were necessary before the assignment of the Flat could proceed.  Willis made that much clear to Fung (as Endenne’s agent).  In particular, as far as Fung knew, Willis (in his capacity as Ngo’s solicitor) would not advise Ngo to go ahead without an NOL. 

30.  It is an inevitable inference that Endenne intended Ngo to act on the representation which was constituted by the production of the alleged Approval Letter, exemption certificates and NOL to Willis as Ngo’s solicitor.

31.  Ngo indeed acted upon Endenne’s representation.  I accept Ngo’s evidence that, before executing the Assignment, he sought assurance that the title documents for the Flat were in order. Jimmy Chan in turn informed Ngo that Endenne had provided the Approval Letter, requisite certificates and NOL.  Had any of the those documents been missing, Willis would not have advised Ngo to sign the Assignment and Ngo would certainly not have gone ahead with the transaction.

32.  Where there is fraud, a Court is entitled to pierce the corporate veil.  Here Endenne was the corporate vehicle or alter ego of Fung and Chan.  The Court is entitled to attribute Endenne’s actions to Fung and Chan.

33.  As directors, Fung and Chan would have known that no Approval Letter, exemption certificates or NOL had been obtained from the DLOYL.  In those circumstances, they must have colluded to forge the documents eventually provided to Willis, in order to make it seem as if permission to redevelop had been granted.  Fung and Chan must also have intended that Ngo should act on their misrepresentation by entering into the Assignment with Endenne.

34.  I find then that Ngo’s case against Fung and Chan for fraudulent misrepresentation is made out.

B.      Issue 2: Is Ngo entitled to rescind the Assignment and claim damages?

35.  An agreement which results from fraudulent misrepresentation is voidable by the wronged party.  But rescission will not be available where it is impossible to make restitution.  Thus, if a third party acquires an interest in property which is the subject of an agreement, the contract may not be avoided.

36.  Here, fortuitously, Ngo paid off SPC’s mortgage on 14 October 2005.  As at that date, he had repaid the principal loan, plus interest of $494,247.30 and a pre-payment charge of $4,524.51.  Thus, no third party currently has an interest in the Flat and restitution to Endenne is possible.

37.  Subject to certain considerations set out below, I think that Ngo should be entitled to rescind the Assignment.

38.  As far as damages are concerned, the objective is to put Ngo into a similar position as that he would have been in if the misrepresentation had not been made.  The various heads of damage claimed by Ngo have to be assessed in light of this principle.

39.  Ngo asks for re-payment of the purchase price.  Normally, one would be entitled upon rescission to a refund of consideration.  But here Ngo has already enjoyed the benefit of the Flat for some 8 years.  It would be unfair to the 3 Defendants if they received no credit for the time Ngo has occupied the Flat.

40.  Over the last 8 years, Ngo has paid $1,250,000 principal plus $494,247.30 interest for the Flat.  Justice among Ngo and the 3 Defendants can be achieved on a rough-and-ready basis by restricting Ngo’s damages to the return of the principal of $1,250,000.  The mortgage interest of $494,247.30 (plus any expenses incurred on early payment and discharge), together with any interest which Ngo might have earned on that part of the principal which he paid from his own resources in 1997, should roughly equal the total rental value of the Flat over the past 8 years.

41.  Ngo claims various fees: $37,500 commission to estate agents; $9,475 stamp duty; and $2,110 land registration fee.  He should be entitled to the restitution of those amounts.

42.  Ngo asks for reimbursement of the Firm’s fees of $25,817.50 for conveyance of the Flat.  I think that he is entitled to be repaid that sum.

43.  Ngo seeks decoration expenses of $80,000 and removal fees of $8,000.  I do not think that it would be fair to grant restitution of those amounts.  Over 8 years, Ngo has enjoyed the Flat as decorated by him.  Further, if he had simply rented the Flat over the 8 years, he would still have had to move there in the first place.

44.  Ngo asks for refund of 3 years’ fire insurance premium.  But, in the course of his 8 years’ occupation of the Flat, Ngo would have enjoyed the benefit of being insured against fire.  This item therefore does not represent a true out of pocket cost due to misrepresentation.

45.  Ngo finally asks for $2,400 as “legal and miscellaneous expenses of discharge of the mortgage of the subject property”.  I disallow this claim on the consideration stated in my discussion of rental value.

46.  Consequently, Ngo is entitled to damages of $1,324,902.50. Interest will run on that amount from the date of this Judgment until payment at the judgment rate.

47.  Mr. Hylas Chung (appearing for Ngo) points out that, in practice, it may be difficult to enforce a judgment for damages against the 3 Defendants.  If the Assignment were to be rescinded with immediate effect following this Judgment, Ngo would find himself in the unenviable position of having to vacate the Flat, despite non-payment by the 3 Defendants of Ngo’s damages.

48.  I therefore direct that the Assignment is to stand rescinded, only upon payment by the 3 Defendants of Ngo’s damages plus any interest. There will be liberty to apply to deal with any difficulties that may arise in the working out of this Judgment.

C.      Issue 3: Is the Firm liable?

49.  In my judgment, there is no basis for holding the Firm liable to Ngo.

50.  Mr. Chung argues that the Firm was negligent in the following respects:-

(1)     Although the NOL was provided to Willis in suspicious circumstances, Willis did not investigate the NOL’s genuineness.

(2)     Willis failed to notice that there were discrepancies in the Property’s description in the Approval Letter, Certificates of Exemption and NOL provided by Fung.

(3)     Willis failed to advise Ngo of a potential conflict of interest.

51.  Mr. Chung’s first complaint arises because the tenor of SPA cl.3(a) as drafted by Willis is that the NOL had yet to be issued by the DLOYL.  That (Mr. Chung says) must have reflected Willis’ understanding, presumably based on what Fung told him, that an NOL had yet to be issued in the future.  If that is the case, should not Willis have been suspicious when, days after the SPA was signed, Fung provided him with an NOL which had apparently been issued 2 years before on 13 December 1995?

52.  Here, I am satisfied by Willis’ explanation in Court.  I have summarised that evidence in Section II of this Judgment.  On reflection, I do not think that there is a real inconsistency between Willis’ evidence and the thrust of SPA cl.3(a).

53.  Mr. Chung’s second complaint is without merit.  It is obvious from a perusal of the relevant documents that they all refer to the same premises, namely, House Lot. Nos. 36 and 37, Wing Ning Lei, DD No.111, Yuen Long.  There is nothing in the alleged discrepancies identified by Mr. Chung that would have alerted even the most prudent of solicitors to the fact that the documents furnished by Fung were forgeries.  There was nothing on the face of the Approval Letter, Certificates of Exemption or NOL which ought to have prompted Willis to investigate further.

54.  Mr. Chung’s third complaint is likewise lacking in substance.  The Firm could act for both Ngo and Endenne (despite Fung’s employment in the Firm) by reason of Solicitors’ Practice Rules r.5C(4).  Further, Ngo’s own evidence shows that, before executing the Assignment, he was aware that Fung was employed by the Firm and Chan was Fung’s wife.  Finally, even if there were a conflict of interest, I do not see how the failure to advise on such conflict has led to the loss complained of here.

55.  It follows that Ngo’s claim against the Firm must fail.

IV.     Conclusion

56.  There will be judgment in Ngo’s favour against the 3 Defendants. 

57.  The 3 Defendants are jointly and severally liable to pay Ngo damages of $1,324,902.50.  Interest is to run on that sum at the judgment rate from the date of this Judgment until payment. 

58.  Upon satisfaction by the 3 Defendants of Ngo’s damages plus accrued interest, the Assignment dated 26 May 1997 between Endenne and Ngo shall stand rescinded. 

59.  There will be liberty to apply.

60.  Ngo’s claim against the Firm is dismissed.

61.  I shall now hear counsel on costs.

Mr Hylas Chung, instructed by Messrs KY Woo & Co., for the Plaintiff in both actions

Mr Anthony Ismail, instructed by Messrs John Ip & Co., for the Defendants in HCA 7929/2000

1^st Defendant in person (in HCA 7988/2000), absent

2^nd Defendant in person (in HCA 7988/2000), absent

3^rd Defendant in person (in HCA 7988/2000), absent

HCA7988&7929/2000(Consolidated),
HCA 7927/2000,HCA7928/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS. HCA 7988 & 7929 OF 2000 (Consolidated),
HCA 7927 OF 2000, HCA 7928 OF 2000

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J U D G M E N T

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1. This is an appeal from an order of Master Jack Wong made on 19 August this year whereby he gave the solicitors' firm Deacons leave to cease to act for the Defendants, who are also solicitors, in three related actions in which the Defendants are said to have acted negligently in the conduct of conveyancing instructions on behalf of the Plaintiffs in these actions.

2. This appeal raises an important and interesting point as to the true construction of Order 67, rule 6, Rules of the High Court. Mr Ismail, who appears for the Defendants, submits that the way the rule is designed to operate is that the solicitor first ceases to act and he then applies to the court to withdraw from the case by coming off the record. He gets support for this construction from a decision of the High Court of Australia in Plenty v Gladwin [1986] 67 ALR 26. This construction of the rule has been adopted in Hong Kong by Keith J, as he then was, in Aqua Leisure Industries Inc v Aqua Splash Limited No. 1 [1999] 3 HKC 338.

3. The rule, on its true construction, has no application to circumstances where a solicitor has not ceased to act but wishes to cease acting and so comes to court for leave to cease acting, as opposed to coming off the court record. To bring himself within the rule, a solicitor must demonstrate that he has in fact ceased to act by the time that he has issued his summons, and then appears before the court for leave to withdraw from the case.

4. The facts of Plenty v Gladwin do not matter, but the interpretation of Order 7 rule 7(1) of the High Court Rules in Australia, identical to Order 67 rule 6 in Hong Kong, is to be found at page 26, lines 20 to 50 of the report, which I should set out in full.

"In support of his appeal, which he argued in person, Mr Plenty emphasised that Order 7 rule 7(1) conferred a discretion on the court or a justice in determining whether or not to make the order sought and that the discretion must be exercised judicially. He submitted that the Acting Chief Justice ought to have declined to make the order because there had not been any good cause shown for the solicitor ceasing to act. He referred to the decision of the Court of Appeal in Underwood, Son, and Piper v Lewis [1894] 2 QB 306 as authority for the proposition that as a general rule, a solicitor should have good cause for withdrawing his services.

The fallacy in the above arguments flows from a misunderstanding by Mr Plenty of the operation of Order 7 rule 7(1). That misunderstanding would seem to have been caused by the citation of Underwood's case in the notes to the identical rule in England. See the Supreme Court Practice 1985 Volume 1, note 67/6/2 at 1025. In fact, although cited in the context of the relevant English rule, Underwood's case has nothing to do with the operation of the rule itself. It is concerned with discussing some of the incidents that generally pertain to the relationship of solicitor and client. The purpose of the rule is quite different. Its concern is with the record of the court and with the service of documents. It comes into play when, rightly or wrongly, a solicitor has ceased to act and the party has not given notice of change of solicitor or notice of intention to act in person. The solicitor may then take steps to have his name removed from the record. The first step is by applying to the court or a justice for an order declaring that the solicitor has ceased to be the solicitor acting for the party in the proceeding.

As we have noted, the court has a discretion whether or not to make the order, but unless there are special circumstances which render it expedient to retain the solicitor on the record, the order will generally be made as a matter of course upon proof that the solicitor has in fact ceased to act for the party and that no steps have been taken to take the solicitor's name off the record. Order 7 rule 7(4) makes it plain that an order made under the rule does not affect the rights or liabilities of a solicitor and a party as between themselves."

5. As I have already observed, Keith J agreed with this construction in Aqua Leisure 341B-F supra. Mr Ismail then seeks to underline the correctness of that interpretation by referring to the terms of the court forms in England, the Hong Kong rule being identical to that in England, in Atkins' Court Forms and in Chitty & Jacob's Queen's Bench Forms relating to the wording of a summons brought under Order 67 rule 6, which is predicated and drafted on the basis that the solicitor has ceased to act and now wishes to be removed from the record.

6. Mr Bowers, who appears for Deacons, has not really sought to argue for any other construction.

7. I am satisfied that the rule contemplates that the solicitor will have first ceased to act and that thereafter he will issue a summons under the rule and ask for leave to withdraw from the case. Mr Ismail is therefore correct in his submission.

8. From this, Mr Ismail has gone on to submit that when one considers the relevant correspondence, the summons and the affirmation in support, that Deacons had not ceased to act by the time that they had issued their summons, but what they in fact did was to apply to the court for leave to cease to act. That being the case, Mr Ismail then goes on to submit that they were not entitled to make such an application and the court did not therefore have jurisdiction to make the order that it did. Consequently, the Master was wrong to have entertained their summons, and his order should now be set aside.

9. It is therefore necessary for me to examine this material with a view to deciding whether Deacons had ceased to act before the date of the summons. If they had not, the Master's order cannot stand and the appeal must be allowed. If they had, I must then go on to decide whether I should, as a matter of discretion, allow them to withdraw, or whether "there are special circumstances which render it expedient to retain the solicitor on the record..." to quote from the note to Order 67 rule 6/4.

10. A brief history will suffice. Once the Defendants had been served with the writs in the three actions, they informed the Hong Kong Solicitors' Indemnity Fund, who took over the conduct of their defences in these matters. The Fund, putting it shortly, appointed Deacons one of the panel of solicitors who act on its behalf in such matters. This was on 14 August 2000. Deacons' instructions were twofold: firstly, to represent the Defendants in these actions on behalf of the Fund; and secondly, to investigate whether the Fund had grounds to repudiate liability under the terms of the indemnity fund, they having reserved their position as to that.

11. Although nothing turns on this dual instruction for the purposes of deciding this appeal, I am bound to say that it did create a rather unfortunate state of affairs for Deacons, because on the one hand they were busy defending the negligence actions on behalf of the Defendants, whilst at the same time investigating the Defendants' conduct to see whether the indemnity fund might have grounds to repudiate liability under the terms of the indemnity policy.

12. They did both; and by October 2001 they had completed their report to the Fund on the aspect of whether there might be grounds justifying repudiation. Mr Bowers has explained that their report disclosed enough of a case to justify the Fund appointing other solicitors, Messrs Stephenson, Harwood and Lo (SHL), to carry out further investigations, leaving Deacons to concentrate on defending the actions for the Defendants.

13. SHL carried out those investigations from October 2001 until May 2002. In the meantime, the three actions progressed to an advanced stage, two of which were consolidated by an order of Master Mary Yuen on 2 April 2002. I am told that they have reached the point of being ready for setting down.

14. Then, on 30 May 2002, based on SHL's investigations and recommendations made by the managers of the Fund, the managers wrote to Deacons on behalf of the Fund informing them that indemnity had been refused. This was followed up by a further letter from the managers on 7 June 2002, confirming that indemnity be refused and that Deacons should inform the Defendants of that decision. This was done by Deacons by a letter dated 11 June 2002. (See pages 40 to 41 of the bundle). This letter, and the ones that immediately followed it, are of crucial importance in deciding whether Deacons had in fact ceased to act. I should recite the material parts of this letter, which is as follows:

"Those investigations have now concluded and a decision made by the Solicitors' Indemnity Fund Limited to refuse indemnity with respect to this claim. In accordance with that decision, Insurers are no longer in a position to cover my firm's costs in the conduct of your firm's defence of the above three actions. As such, I will be grateful if you could let me have your firm's urgent instructions with regard to the further conduct of the above three actions. Presumably, your firm will be instructing replacement solicitors to act on its behalf in its continued defence of the above three actions. In the meantime, please be informed that my firm has been instructed by insurers to refrain from taking further steps in the conduct of your firm's defence in any of the above three actions.

Whilst writing, I would highlight the fact that Insurers reserve their position generally with regard to the indemnity issue pending the completion of investigations into that issue. In my firm's letter to your firm of 18 August 2000, as stated above, those investigations have now been completed. I look forward to receiving your further instructions on the further conduct of the above three actions as a matter of urgency."

15. The Defendants then replied on 14 June 2002 (pages 43 and 44) perhaps, not surprisingly, rather angrily, with a strong rebuttal of the Fund's right to repudiate its liability to indemnify them. The letter ended as follows:

"In these circumstances, we are at a loss as to our insurer's attitude and position. In relation to our firm and in the absence of any valid and cogent reasons, we are of the view that the said decision is wholly unjustified and unwarranted. We would therefore kindly request our insurer to enlighten us as to its reasons for its said decision urgently within five days hereof. Please note that if no satisfactory response is received within the time stated, we would be left with no alternative but to consider bringing an action against our insurer and/or third party proceedings against our insurer for appropriate relief for indemnity in respect of the said claims and all attendant costs in the actions and the further litigation without reference to you or our insurer. We reserve the right to produce this letter to the court on the issue of costs."

16. Nevertheless, the letter did not respond to Deacons' request to give them "further instructions on the further conduct" of the actions. This letter of 14 June had been copied to the managers, who replied directly to the Defendants on 19 June, (pages 78 and 79), saying that it was not their policy to provide reasons for repudiating the indemnity policy and drawing attention to the arbitration provisions in the event of a dispute on such matters contained in the Professional Indemnity Rules.

17. The next matter that occurred was that on 8 July 2002, Deacons then took out the summons in this matter which is now said to be a nullity. (See pages 1 and 2.) It seeks "an order that the said Deacons do cease to act on behalf of the Defendants in this action..." The affirmation in support (which starts at page 5) sets out the history of the matter. Paragraph 13 refers to Deacons' letter of 11 June 2002 which I have previous recited, and Mr Tsui, an associate of Deacons, who drafted the letter and made the affirmation, refers to the fact that in this letter that he was "seeking their (the Defendants') agreement for my firm to cease acting for them..."

18. Having set out the history of the matter, he then concludes his affirmation as follows:

"In light of the ongoing dispute on the issue of indemnity between the Fund and the Defendants which is now being dealt with directly between the parties, I reasonably believe that it would be improper for my firm to continue its representation of the Defendants in the action herein. In light of the potential conflict of interest and the irretrievable breakdown in solicitor/client relations between my firm and the Defendants, my firm cannot reasonably act in the interests of both the Fund and the Defendants.

In such circumstances, I humbly pray this Honourable Court to make an order declaring that Messrs Deacons do cease to act on behalf of the Defendants in this action."

19. What then followed, on 27 July, was an affidavit from Mr Willis, partner of the Defendants, setting out his firm's position (page 45). On 29 July 2002, Mr Bowers then wrote a letter to the Defendants which was very constructive (see pages 94 to 96). In the letter he very fairly set out the history of the matter. He says that he had been expecting the Defendants to have replied to his letter of 11 June and "its request for urgent instructions upon the further conduct of your firm's defence". The concluding parts of the letter are important and therefore bear repetition here:

"I have also reviewed Ernest Tsui's three affirmations filed and served in the above three actions on 8 July 2002. Notwithstanding the grounds upon which my firm relies in making this application for orders declaring that it cease to act on your firm's behalf in the above three actions as set out in Ernest Tsui's three affirmations, I an writing now to clarify my firm's position that notwithstanding the company's decision to refuse indemnity on this claim and the instructions subsequently given to my firm by managers to make the necessary application to come off the court record as acting on your firm's behalf in its defence of the above three actions, and despite my considerable concerns over the matters raised by Ernest Tsui in his three affirmations, my firm would be prepared to enter into a separate retainer with your firm to act on its behalf in its continued defence of the above three actions, but only upon the following conditions:

(i) that your firm provides my firm with costs on account of future fees (inclusive of counsel's fees) in the above three actions in the sum of $350,000; and that

(ii) payment on account of future fees referred to in paragraph (i) above be paid within 14 days from the date of this letter (i.e. by close of business on Monday, 12 August 2002).

In circumstances where the company has refused indemnity on this claim and where managers have confirmed that they will no longer be responsible for paying my firm's fees for acting on your firm's behalf in its defence of the above three actions, and in the light of your reaction to these latest developments, I am left with no alternative but to impose these conditions upon my firm's continued representation of your firm in the above three actions.

I trust you will understand my firm's position in circumstances where it has been instructed by managers not to act for the company in relation to this claim involving the above three actions, and where it has no instructions whatsoever from your firm in relation to the future conduct of the above three actions.

I believe my request for a payment on account by your firm in the sum of $350,000 to be entirely reasonable, bearing in mind that HCA7929/2000 has recently been consolidated with HCA7988/2000, and where a substantial amount of work will have to be carried out by my firm and counsel leading up to and during the trial of this consolidated action.

My firm has been waiting for your firm's further instructions upon the conduct of your firm's continued defence in the above three actions since 11 June 2002. My firm has no intention of being dragged into the dispute which has now arisen between your firm and the company over the refusal of indemnity on this claim, a dispute which will have to be resolved by way of arbitration proceedings between your firm and the company.

Please do not hesitate to call me if you have any questions. I look forward to hearing from you as soon as possible."

20. This was followed by a further letter the following day indicating the charge-out rates for himself and for Mr Tsui (page 97). Although these letters follow the issue of the summons, they indicate Deacons' view of how they saw their status vis-à-vis their representation of the Defendants when they issued the summons, and for this reason they are of much assistance in my decision as to whether Deacons had in fact ceased to act for the Defendants when the summons was issued.

21. Mr Bowers submits that on this evidence, once the managers had informed them of the decision to repudiate liability, his firm were bound to cease acting, which they did. Up to the time that liability was repudiated, their fees were being paid by the Fund. Once the Fund, who had appointed them to represent the Defendants, dropped out of the matter, Deacons' mandate came to an end.

22. The terms of Mr Tsui's letter which asked for further instructions as to the further conduct of the action was a professional and courteous way of dealing with the Defendants, for whom they had acted for the previous 22 months. The letter of 29 July is to be viewed as a constructive attempt to negotiate new instructions from the Defendants.

23. Once the Fund dropped out, rightly or wrongly, then Deacons must be taken to have ceased to act. What followed was an unsuccessful attempt by Deacons to get new instructions from the Defendants, who continued to insist that the Fund had no right to repudiate and that the Fund should continue to represent them.

24. That most attractive submission by Mr Bowers is countered by Mr Ismail, who points to a defective summons pleaded on the basis that Deacons are continuing to act and are applying to the court to cease to act. In an affidavit in support to the same effect, Mr Ismail submits that such an approach is not recognised by Order 67 rule 6, and that even if I were to allow Mr Bowers leave to amend his summons, that cannot avail him because I could hardly allow an amendment to Mr Tsui's affirmation in support of the summons.

25. What has happened, says Mr Ismail, is a mistake commonly made by solicitors who wish to come off the record when they are without fees or without instructions. They all too often fail to understand the nature of Order 67 rule 6, which requires a solicitor to cease to act first and then to apply to withdraw and come off the record.

26. I am bound to say that this has also been my experience hearing such applications. Practitioners erroneously hold the view that they need to come to court for leave to cease to act, and then, if successful, are given leave to cease to act and to withdraw from the record. That is not the process which is operated under the Order.

27. That having been said, a case should not stand or fall on mere semantics. I need to consider the substance of the matter, having regard to all the relevant circumstances, including, of course, the language used in the relevant correspondence which I have referred to, as well as the summons and the affirmations.

28. My view of this is that by the time that they had issued this summons, Deacons had come to the view that they had still not ceased to act. The matter remained in the air so far as they were concerned. They wanted to hear from the Defendants, which of course was fair enough, as they had represented them for very nearly two years; and Mr Bowers' letter of 29 July demonstrates, to my mind, that he would have been content to go on, provided agreement could be reached on fees.

29. I regret to say that the construction now put on the matter by Mr Bowers really amounts to an ex post facto rationalisation where, for the first time at this hearing, he has been confronted with a proper argument on how Order 67 rule 6 is intended to operate. This, I am told, was not the way the matter had been argued before the Master, who was only addressed on the discretion and as to whether proper reasons existed for Deacons to come off the record.

30. I find as a fact that they had not ceased to act at the time that they issued the summons because there had been a misunderstanding by them of their position. They considered that they required the court's leave to cease to act. They felt that they had good reasons to obtain such an order, but the appropriate mental process was not gone through.

31. The result, therefore, must be that where they had not ceased to act, they could not ask the court to make any order under Order 67 rule 6. Unfortunately, the Master was not addressed on this basis.

32. In these circumstances, this appeal must be allowed. What is regrettable about this is that, in my view, the Defendants have only succeeded in achieving a hollow victory. I say that because, had Deacons decided that they had in fact ceased to act, rather than coming to the court for that order as part of the process of the application to the court, I have no doubt that there were and are no special circumstances which require Deacons to remain on the record.

33. Whilst Mr Ismail has pointed to a number of features relating to the pivotal role of the Fund in this dispute, the fact is that the Defendants refused to pay Deacons' fees to continue representing them. They can hardly insist that the Fund should pay Deacons' fees where the Fund declines to do so.

34. I would have thought that all that Deacons need to do is to now make clear to the Defendants that they have ceased to act for them, and then take out a fresh summons which, in my view, must be unanswerable.

35. The Defendants must now, I fear, decide how best to deal with the Fund. There are mandatory arbitration provisions which they will need to invoke to have that dispute resolved and also decide how best to represent themselves in these actions.

36. I regret that this matter has turned on a technical point, but these rules are there to be observed. Non-observance has meant that the summons has failed in limine, the court not having jurisdiction to entertain it before a solicitor has ceased to act.

(Discussion re costs)

37. The usual order, of course, is that costs follow the event, but that is not an immutable rule. One has to look at the substance of the matter. It seems to me, as I indicated in the course of my judgment, that the Defendants have really had an arid or hollow victory, whichever way one wishes to characterise it. It is easy for the court perhaps to be wise after the event on behalf of the Defendants, but I really can see no useful purpose in mounting this appeal. They had got an order from the Master and it is something that they could easily have worked around and moved on with the matter in their own way, rather than bringing this appeal and, at the end of the day, achieve what I am afraid is an unproductive, technical victory.

38. I think that the real merits are reflected by my saying that there should be no orders for costs both here and below.

Representation:

31 October 2002:

Mr Anthony Ismail, instructed by Messrs Julia Wong & Partners, for Defendants (Appellant)

Mr Kevin Bowers, of Messrs Deacons, for Respondents

1 November 2002:

Mr John Ip, of Messrs Julia Wong & Partners, for Defendants (Appellant)

Mr Kevin Bowers, of Messrs Deacons, for Respondents