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Cite as: [1999] IEHC 230

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Rafter v. Solicitors Mutual Defence Fund Ltd. [1999] IEHC 230 (10th May, 1999)

High Court

Rafter v Solicitors Mutual Defence Fund Limited

1996/6170 P

10 May 1999


1. This is a very unfortunate case in which the Plaintiff has for many years sought to recover damages for substantial personal injuries suffered in a road traffic accident and has through no fault of her own failed to do so. The traffic accident in which she was injured took place as long ago as 21 February 1981 and she subsequently instructed a Solicitor named Michael Collier to act for her, and to institute proceedings against the driver of the other vehicle involved. Regrettably Michael Collier failed to issue the proceedings within the statutory period of three years and on 17 May 1988 following the trial of a preliminary issue in those proceedings it was held that the Plaintiff's claim was statute barred.

In the meantime, the Plaintiff had made a formal complaint to the Law Society on 15 October 1985 regarding the handling of the case by Michael Collier and subsequently the disciplinary committee of the Law Society found that there was misconduct on his part in relation to the matter.

The Plaintiff then issued proceedings against Michael Collier for damages for professional negligence, and on 6 December 1990 she obtained a decree on foot of those proceedings for the sum of £31,000 and costs. However, she was unable to recover the sum from Michael Collier, and eventually petitioned to have him declared a bankrupt. By Order of Mr Justice Murphy dated the 21 June 1993 Michael Collier was duly adjudicated bankrupt and the unfortunate Plaintiff has been unable to obtain any redress and is highly unlikely to do so in the future unless she can recover against the Defendant in these proceedings.

To understand the claim being made against the Defendant, it is necessary to set out the background to the formation of the Defendant. It appears that a problem arose in 1985 in relation to professional indemnity insurance for solicitors, in that very large increases in premiums were being charged. As a result, the Law Society investigated the possibility of setting up a professional indemnity mutual insurance scheme, and proposals to that effect were presented to the Annual General Meeting of the Law Society in November 1986, and were accepted in principle. The proposal was that the precedent of the Medical Defence Union Scheme be followed through the establishment of a guarantee company to be entitled "Solicitors Mutual Defence Fund Limited", that the scheme would provide cover for £200,000 in respect of each and every claim and that top-up cover above that sum should be sought from the insurance market. It should be added that, at this time, professional indemnity insurance for solicitors was not compulsory. Following on these considerations, the Defendant company was registered as a company limited by guarantee. It is quite clear that while in one sense it is an instrument of the Law Society, and one of its functions is to report to the Council of the Law Society in respect of the management and administration of the fund, nevertheless it was quite deliberately set up as a separate legal entity. Furthermore, it was set up as a company limited by guarantee which operated for the benefit of its members, and any Solicitor who wished to join in the scheme operated by the Defendant was obliged to become a member of the company.

Like every other company, the Defendant is only empowered to have such functions and objects as are authorised by its Memorandum of Association. In the present case, certain of the object clauses are of particular importance, and I would quote them in full.

They are:-

(A) To act as the company recognised by the Incorporated Law Society of Ireland hereinafter also referred to as "The Law Society" to create, hold, manage and administer a Mutual Defence and Indemnity Fund ("the Fund") in relation to civil liability claims affecting the professional character or professional interests of solicitors practising in the State with a view to mitigating or preventing losses sustained or likely to be sustained by virtue of such claims and in particular and without prejudice to the generality to the foregoing to do all or any of the following things:-

(i) To arrange by way of mutual benefit for those entitled to seek benefit for the giving of advice and legal assistance to any member or former member of the company, or any contributor or former contributor to the fund, or the personal representatives of any deceased member or former member or of any deceased contributor or former contributor, on any question or matter which affects directly or indirectly the professional character or interests of the member or former member, or the contributor or former contributor, or deceased member or former member, or deceased contributor or former contributor.

(iv) To indemnity, to such extent and on such terms and conditions as may from time to time seem expedient and be within available resources and at the absolute and unfettered discretion of the company, any member or former member or any contributor or former contributor to the fund, or the personal representatives of any deceased member or of any deceased contributor or former contributor, against liability, loss or expense arising from actions, proceedings, claims and demands by or against him or them involving a professional principle or affecting the professional character or interests of the member or former member or deceased member or of the contributor or former contributor or the deceased contributor or former contributor, whether directly or indirectly including all incidental or consequential losses, damages, costs, charges and expenses or fines or penalties."

The object clause in the memorandum ends with a proviso:-

"PROVIDED ALWAYS that morning herein contained shall empower the company the carry on the business of insurance within the meaning of the Insurance Act 1909 to 1985."'

The Defendant produced a document for the guidance of its members which is also of considerable importance in this case. It was headed:-

"Conditions of Membership and Principles on which the discretion of the company to grant indemnity will be exercised subject to the provisions of the memorandum and articles or association."

Section 2 of that document is headed "INDEMNITY CLAUSES". The relevant paragraphs are as follows:-

"Subject always to the provision of the memorandum and articles of association of the company and to the terms and conditions herein contained:-

(a) the company will arrange for the provision of advice and the granting of appropriate indemnity to the beneficiary against all loss to the beneficiary whatsoever occurring arising from any claim or claims first made or intimated against the beneficiary during the period of protection in respect of any description of civil liability whatsoever incurred by the beneficiary in connection with the practice or from any such claim made during or subsequent to the period of protection arising out f circumstances notified to the company during the period of protection as circumstances which might give rise to such a claim.

(d) No claim will be considered or approved and approval may be withdrawn of the beneficiary fraudulently or deliberately misrepresents any matter whether or fact amount or otherwise or frequently or deliberately fails to disclose any material fact."

Clause 3(a)(ii) of this document reads:-

"If the company exercises its discretion to admit a claim in principle neither the beneficiary nor the company shall be required to contest any legal proceedings unless a member of the Irish Bar . . . shall advise that such proceedings should be contested."

On 23 March 1987 Michael Collier filled in a form which was headed "Application for membership and proposal for 'top-up' cover for solicitors professional indemnity under the Incorporated Law Society of Ireland mutual defence fund scheme". As stated in this title, the document had a dual purpose, serving both as an application or membership of the Defendant company and as an application for top-up insurance where it was desired to have cover exceeding £200,000. The form itself was similar to a standard proposal form for a person seeking insurance, but it does expressly state that it forms the basis for the Applicant's membership of the defence fund scheme and the contract with the underwriters. Michael Collier's application was duly accepted and he became a member of the Defendant company and eligible for indemnity under its scheme for the year commencing 1 September 1987. It is accepted by both parties that the Plaintiff's claim against him is one which falls within the terms of the scheme.

The Plaintiffs claim against the Defendant is that the benefits provided to Michael Collier by the Defendant either constitute a policy of insurance or a contract to provide indemnity. In either case, she claims that the Defendant holds monies in the amount of £31,000 subject to an excess of £2,500 provided for in the scheme and the costs awarded to her in the proceedings against Michael Collier for her benefit and is bound to pay such monies to her.

If a policy of insurance exists, then the Plaintiff claims to be entitled pursuant to Section 62 of the Civil Liability Act 1961, the relevant portion of which provides:-

"Where a person (hereinafter referred as the insured) who has effected a policy of insurance in respect of liability for a wrong, if an individual becomes a bankrupt . . . monies payable to the insured under the policy shall be applicable only to discharging in full all valid claims against the insured in respect of which those monies are payable and no part of those monies shall be assets of the insured or applicable to the payment of the debts (other than those claims) of the insured in the bankruptcy . . ."

The Plaintiff further claims that, even if section 62 does not apply, the contractual arrangements between Michael Collier and the Defendant were such that the obligations of the Defendant to Michael Collier were held by him in trust for the Plaintiff, and are enforceable by the Plaintiff as beneficiary of such trust as if she had direct privity of contract with the Defendant.

The Defendant has declined to indemnify Michael Collier citing as the reason that he failed to disclose all relevant information to it. It says that the payment of any benefit or indemnity to Michael Collier is a matter for the Defendant's discretion, and there is no obligation to provide an indemnity. Its case is that, as the scheme is a discretionary scheme, there could be no question of a trust arising, nor could it constitute a policy of insurance under Section 62 of the Civil Liability Act 1961. The Plaintiff also seeks to argue that the Defendant did in fact have ample information, and did not need the co-operation of Michael Collier, because there had been a disciplinary hearing before the Disciplinary Committee of the Law Society, and the information gleaned at this hearing ought to have been available to the Defendant. In so far as it is relevant to these proceedings. I am quite satisfied that it would have been improper of the Law Society or its Disciplinary Committee to impart information relating to Michael Collier to the Defendant without his consent and the Defendant was quite correct in not seeking such information. However, the real point in this case is whether there was an obligation on the Defendant to indemnify Michael Collier as if there was no such obligation, then no question of a trust could arise and Section 62 would not apply.

The nature of a mutual defence company such as the Defendant was considered in Medical Defence Union Limited v Department of Trade [1979] 2 WLR 686. The articles of association of the Medical Defence Union Limited were very similar to those of the Defendant and of course the Law Society had used the Medical Defence Union scheme as a model when setting up the Defendant. They included a provision that the provision of an indemnity could be granted, restricted or declined at its absolute discretion. In the judgment Sir Robert Megarry VC adopted the judgment of Channell J in Prudential Insurance Company v Inland Revenue Commissioners [1904] 2 KB 658 as categorising the essential elements of a contract of insurance as being, firstly that the contract must provide that the insured will become entitled to something on the occurrence of some event, secondly that the event must be one which involves an element of uncertainty and thirdly that the insured must have an insurable interest in the subject matter. Clearly the second and third elements were present in relation to the first element, he said at page 693:-

"I therefore return to the main point on the footing that the right of a member in relation both to proceedings and to indemnities is merely a right to have his request fairly considered by the Council or one of its committees. Only if the request is granted is the member entitled to have the proceedings conducted by the Union and to have an indemnity subject to the provisions of the Articles and not least Article 44(3). For the purposes of this case I do not think that it matters whether the right is a right to have the request heard and determined 'fairly' or 'in good faith'. It is common ground that it must not be dealt with by whim or caprice and it is not contended that such a right is valueless. As I have indicated the short point is whether in the first of three elements of insurance it suffices that on the occurrence of the event the insured becomes entitled to 'some benefit' or whether this does not suffice unless it amounts to 'money or monies worth'. The right to have a request relating to proceedings or an indemnity properly considered by the Union is plainly a benefit but equally plainly is not money or monies worth."

He then went on to consider the matter further and said at page 696:

"I am quite unable to see any justification for replacing 'money' or its equivalent by 'benefit' as a constituent part of the definition of a contract of insurance. I can see nothing in the authorities which gives any real support for so wide and extensive a generalisation especially as the term 'money' or 'monies worth' seem to be adequate for all normal circumstances. It may be that in view of the St Christopher case [1974] 1 WLR 99 some further addition should be made so as to cover explicitly the provision of services but I shall defer the consideration of this until I turn to the services provided by the Union in this case.

In rejecting the term 'benefit' I may say that I think that one is in a different world from the world of insurance when the only contractual right is a right to have the claim fairly considered. No doubt one must not attach too much importance to the basic meaning of words, but in terms such as 'insured' and 'assured' like 'insure' seem to me to convey the sense of making something certain and not merely of giving a hope or expectation no matter how well-founded. When a person insures I think that the is contracting for the certainty of payment in specified events and not merely for the certainty of proper consideration being given to his claim that a discretion to make a payment in those events should be exercised in his favour. The certainty must be direct and not at one remove."

I would entirely agree with this reasoning. Of course it is perfectly possible to have mutual benefit societies or companies which do provide policies of insurance to their members and indeed many life insurance companies operated on this basis but in all such cases there was a binding obligation on the insurance company to indemnify its member or in the case of life insurance to make the relevant payments on the happening of the event. An obligation to pay on the happening of a specified event is essential to the existence of a contract of insurance.

The Plaintiff has sought to argue that there is in fact an absolute obligation rather than a discretion in the present case. I do not think that such an argument can possibly be maintained. The conditions of membership are specifically stated to be subject to the provisions of the memorandum and articles of association of the Defendant and in particular the indemnity clause is so stated. The whole heading of the conditions of membership refers to the principles on which the discretion of the company to grant indemnity will be exercised. The object clause in the memorandum of association expressly empowers the Defendant to indemnify a member "at the absolute and unfettered discretion of the company" and expressly provides that the company may not carry on the business of insurance. Michael Collier was a member of the Defendant company and as such was bound by the memorandum and articles of association, and indeed there is no evidence that he believed that indemnity by the Defendant was anything other than discretionary. I am quite satisfied that on the wording of both the condition and the memorandum of association no policy of insurance existed in respect of which Section 62 of the Civil Liability Act 1961 could apply.

A number of authorities have been opened on the basis of the general argument that there is a contract of indemnity, even if it does not amount to a policy of insurance, and that the benefit of that contract was held by Michael Collier in trust for the Plaintiff. I find these cases of little or no assistance in that, even if Michael Collier was a trustee of whatever benefit accrued to him under his contract with the Defendant and the Plaintiff was a beneficiary of such trust. Michael Collier could only hold in trust for the Plaintiff such benefit as he had under the contract. As any right he had to an indemnity was discretionary, the arguments in the Medical Defence Union case apply equally to this general claim, in that the most that could be held in trust for the Plaintiff was the right to have the claim considered by the Defendant. This claim was considered by the Defendant which decided in its discretion that it would not indemnify Michael Collier. Even if such a trust existed, therefore, the Defendant has had the benefit of it by having the claim considered. To put it another way, even if a trust existed whereby the Defendant was bound to pay the Plaintiff any monies due to Michael Collier there is still no payment due to the Plaintiff as there was no payment due to Michael Collier.

It is with considerable regret that I must dismiss this action. I regret it in the sense that the Plaintiff appears to be left with no remedy due to a most unfortunate series of events which were beyond her control. I do note that the Defendants would appear to have power to make ex gratia payments, but of course that is something which I can only commend to them for their consideration.

© 1999 Irish High Court

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