Improving the practice environment for solicitors has always been a priority task for the Law Society. We are very pleased that the legislation introducing limited liability partnerships (“LLPs”) for law firms in Hong Kong finally came into operation on 1 March 2016. I would like to take this opportunity to thank the Law Society’s Working Party chaired by our fellow Council member, Mr. Joseph Li, for their hard work over the past decade to make the LLP legislation a reality.
As the legal services market develops, law firms may wish to expand into different practice areas to meet the diverse demands of their clients. One of the reasons operating as an LLP is attractive is because it protects innocent partners of a law firm from being held personally liable for partnership obligations arising from the negligence and misconduct of other members of their firm. Hopefully, the availability of LLPs will facilitate the growth of bigger sized firms through mergers of smaller partnerships, as innocent partners will no longer be on the hook for partnership liabilities that result from their partners’ negligent actions or misconduct.
Associated with the concept of protecting innocent partners is the extent of the professional indemnity cover for innocent partners in a solicitors’ firm.
The professional indemnity provided under the Solicitors (Professional Indemnity) Rules (“Indemnity Rules”) to which Hong Kong solicitors in practice are subject does not extend to innocent partners.
Paragraph 1(2)(c)(iii) of Schedule 3 of the Indemnity Rules provides that indemnity will not be provided to the indemnified or a former solicitor in respect of losses arising out of any claim “brought about by the dishonesty, fraudulent act or fraudulent omission of any person who was a principal at the relevant time”.
Pursuant to this provision, if any partner of a law firm acted dishonestly or fraudulently, there will be no indemnity cover for all individual partners of the firm under the Indemnity Rules, even though some of them might be innocent.
The Law Society is considering a preliminary proposal to extend the professional indemnity cover to innocent partners of a law firm so that a partner who has not acted dishonestly or fraudulently can be indemnified even though his partners in the same firm have been dishonest or fraudulent. This is consistent with our effort to ensure innocent partners be treated fairly.
When considering the desirability of this extension, it is important to ensure that it will not be redundant for those law firms that operate as LLPs because LLPs already provide liability protection to innocent partners subject to the conditions and limitations provided in the Legal Practitioners Ordinance and its subsidiary legislation. For any extension of indemnity cover for innocent partners to be useful to law firms including LLPs, it should protect the innocent partners even in situations where they fall outside LLP protection; for example, when the prescribed conditions, like informing clients of an overall supervising partner within the specified period, are not fulfilled.
The Law Society will continue to work on improving the practice environment in different ways. If members have any suggestions, you are most welcome to send them to me.