SIU YIN KWAN AND OTHERS v. EASTERN INSURANCE CO LTD

1988 No. CL-6

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMMERCIAL LIST

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BETWEEN

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J U D G M E N T

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1. The typhoon "Ellen" hit Hong Kong in September 1983. One of its victims was the "Barquentine Osprey". She was dragged from her moorings in Repulse Bay, where she had been a familiar sight throughout the summer. She sank some hours later, with the loss of all but one of her crew. Now, eight and a half years later, the dependents and the estates of two of her crew seek compensation. They have already been awarded statutory employees' compensation and common law damages against the company which employed the crew, but that company is now in liquidation They are therefore seeking the compensation and damages from the insurers who indemnified the employers of the crew against their liability for statutory employees' compensation and common law damages. The twist in the story is that the policy did not name the employers as the insured. Instead, it named the shipping agents as the insured. For that and other reasons, the insurers deny liability under the policy.

THE FACTS

(i) Axelson, Parkwood and Richstone

2. At all material times, the "Osprey" was owned by Axelson Co. Ltd. ("Axelson"). Axelson's general agents were Parkwood Ltd. ("Parkwood"). In November 1980, Parkwood engaged Richstone Industries Co. Ltd. ("Richstone") to look after the "Osprey" in Hong Kong for a period of six months. Richstone were shipping agents, not ship owners. It had not been in business for very long: it had been formed earlier in 1980 after Pak Chung-King ("Mr. Pak") left his previous employment.. Mr. Pak became its Managing Director, and Luk Kwong Fat ("Mr. Luk") its Manager. Richstone acted, in particular, for Japanese ship owners. It was incorporated in Hong Kong.

3. Axelson also was incorporated in Hong Kong. I do not know who its shareholders were or who was responsible for its management, but the evidence points to a Japanese connection. Parkwood was incorporated in Japan, the agency agreement between Parkwood and Richstone, was signed on behalf of Parkwood by a Mr. Makoto Yamanaki (for whom an address in Tokyo was given in another document), Mr. Pak described Mr. Yamanaki as the owner of the "Osprey", and the services which Richstone provided to the "Osprey" were supervised on Axelson's behalf by a Mr. Kiyotsugu Kitagawa, whose card referred to him as having a Tokyo office and gave his cable address as Parkwoodtrade.

(ii) Richstone's dealings with Eastern

4. Mr. Pak had known Tung Kie Wei ("Mr. Tung"), the Managing Director of Eastern Insurance Co. Ltd. ("Eastern"), for many years. When Richstone started to trade in 1980, Mr. Tung introduced Mr. Pak to Chu Yu Tung ("Mr. Chu"). Mr. Chu was described by Mr. Tung in a reference written for Mr. Chu on 28th July 1983 as Manager of Eastern. As a result of that introduction, Mr. Pak placed all his clients' insurance business with Eastern. Mr. Pak's evidence (which I accept) was that both Mr. Tung and Mr. Chu knew from what Mr. Pak told them that Richstone were not ship owners, and that Richstone's business was that of shipping agents. Moreover, Mr. Chu met Mr. Kitagawa once or twice in Richstone's offices, and Mr. Pak had asked Mr. Chu to explain the requirements of insurance in Hong Kong to Mr. Kitagawa.

5. Mr. Tung was not called to give evidence, despite the fact that he attended the trial. However, in a statement prepared by Eastern's solicitors based on a conversation with Mr. Chu in May 1990 which lasted only about half an hour, Mr. Chu claimed that he did not know whether Mr. Pak owned any ships or not and did not recall ever having met Mr. Kitagawa. I regard that as extremely unlikely, and I accept Mr. Pak's evidence on the issue.

(iii) The hull policy

6. There is an incontrovertible piece of evidence which shows that Eastern, through Mr. Chu, knew that Richstone was acting as agents for the owners of the "Osprey". Towards the end of 1981, the owners of the "Osprey" instructed Richstone to insure the "Osprey" against ordinary marine and hull risks. The Premiums payable on the current hull policy with a Japanese company were very high, so Mr. Pak was told, and his instructions were to obtain a policy at a better premium in Hong Kong. Mr. Pak sought Mr. Chu's advice. I am satisfied that he told Mr. Chu what his instructions from the owners of the "Osprey" had been, and he showed Mr. Chu a copy of the current hull policy. After a while, Mr. Chu told Mr. Pak that Eastern could not issue the policy itself, but he agreed to approach another company on Mr. Pak's behalf. As a result of Mr. Chu's intervention, Richstone received an offer of hull insurance from Asia Security Re-Insurance Agency Ltd. ("ASRA"), and Richstone's acceptance by telex of that offer was actually drafted by Mr. Chu. The telex drafted by him shows that he was aware that Richstone was only acting as shipping agents, because he referred in the draft telex to Parkwood, whom he described as Richstone's "principle" [sic]. It was as a result of the telex which Mr. Pak sent - in identical terms to Mr. Chu's draft - that ASRA's principal, Pioneer Insurance & Surety Corporation, issued the new hull policy in the name of Parkwood. Indeed, ASRA became aware that Richstone's principal was Axelson because debit notes and receipts for various instalments of the premiums were issued in September 1982, January 1983 and May 1983 to Axelson.

7. In the statement prepared by Eastern's solicitors, Mr. Chu claims that in helping Mr. Pak to arrange the insurance, "I did so personally as his friend and not in any capacity relative to Eastern ... Mr. Pak knew that I was doing him a personal favour quite apart from my work. Eastern ... therefore had no record [of] the transaction, and of course obtained no financial benefit." I am very sceptical about that. Eastern would have wanted to keep Richstone's business, and it would have been perfectly natural for Mr. Chu, as an employee of Eastern, to give such help as Mr. Pak sought. But even if Mr. Chu was acting in his personal capacity when he gave Mr. Pak the help which Mr. Pak sought, the fact remains that Mr. Chu must have known that Richstone was only acting as agent for whoever were the owners of the "Osprey".

(iv) The visit to the "Osprey"

8. An incident occurred in the summer of 1982 which again showed that Eastern knew that Richstone was acting as agent for the owners of the "Osprey". Mr. Tung asked Mr. Pak whether the vessel would be suitable for a party for alumni of the Massachusetts Institute of Technology. Accordingly, Mr. Pak asked Axelson what the price of such a charter would be. Mr. Pak subsequently told Mr. Tung what the price would be, and I find that he told Mr. Tung that that was the price which the owners of the "Osprey" had wanted. Moreover, in a statement signed by Mr. Luk on 15th December 1987, Mr. Luk stated that when he was showing Mr. Tung and Mr. Chu around the "Osprey", Mr. Chu asked him how often the owner of the "Osprey" came to Hong Kong. Mr. Chu told him that the owner's representative, Mr. Kitagawa, was in Hong Kong at the time.

(v) Richstone's appointment as Axelson's general agents world-wide

9. In March 1982, Axelson appointed Richstone to act as its agents for the "Osprey" (and any other vessels of Axelson) throughout the world in place of Parkwood. The agreement, which was dated 23rd March 1982, was expressed to last for five years and thereafter until terminated by notice. By clause 2, Richstone was expressly given the following powers:

"(c) To engage such persons as [Richstone] shall think fit from time to time as masters officers crew of the said vessels and to (dismiss] any or all of them.

(d) To insure the said vessels their apparel fittings freight earnings and disbursements against the usual risks either with Lloyd's or with insurance associations and to enter the said vessels in protection or indemnity or kindred associations and to make such claims as become necessary thereunder."

I make two comments about those provisions. First, the power to hire and fire in clause 2( c) was a power which Richstone could exercise as agents. Any crew members recruited by Richstone for the "Osprey" could be employed by Axelson. But equally, clause 2(c) gave Richstone the power to engage crew members as principal, in which event, no doubt, Richstone would look to Axelson for reimbursement of its expenditure. Secondly, clause 2(d) gave Richstone the power to effect insurance on behalf of Axelson against claims by members of the crew. That is because such cover is one of the standard heads of cover which a ship owner obtains when he becomes a member of a P. & I. Club.

(vi) The hiring of the crew

10. The Master of the "Osprey" was engaged by Mr. Pak. In doing so, Mr. Pak was acting as Axelson's agent. Thus, his letters of 5th November 1982 and 6th June 1983 to Captain Scott, and his letter of 10th June 1983 to Captain Gary (who replaced Captain Scott), were written by Mr. Pak on note paper with Axelson's name either typed or printed at the top of it, and were signed by Mr. Pak for and on behalf of Axelson. It is true that in the letters of 5th November 1982 and 6th June 1983, Mr. Pak was described as a director of Axelson, but I am satisfied that that was carelessness on Mr.. Pak's part (as indeed was his description of himself as a director of Axelson in the letter he wrote on Axelson's behalf dated 16th May 1983 relating to Axelson's application for a vessel licence).

11. The crew of the "Osprey" were engaged by the Master as agent for Axelson. That is plain from the individual contracts of employment of the members of the crew. Some of them, like Captain Gary, had been recruited prior to the 21st June 1983 (the date of the proposal), but a number of them were recruited afterwards.

12. The fact that, following their engagement, the Master and the crew of the "Osprey" were employed by Axelson is confirmed by the fact that it was Axelson who ultimately paid their wages and paid for their food. That is apparent from the monthly accounts which Richstone sent to Axelson, seeking reimbursement of "crew salaries" and "food money" expended on Axelson's behalf.

(vii) The events leading up to the issue of the policy

13. The crew of the "Osprey" had been covered by an earlier policy of marine insurance, but some of the clauses in that policy had been amended, and it became necessary to take out a further policy to make up for the deficiency. Mr. Pak discussed how that was to be done with Mr. Chu. Moreover, Mr. Chu had sent Mr. Luk a printed circular, dated May 1983, which informed Eastern's clients that

(a) the Employees' Compensation (Amendment) Ordinance 1982 had passed into law and would become effective on 1st July 1983,

(b) from 1st January 1984, all employers would be required to insure themselves against claims from their employees.

Mr. Pak did not see that circular until he returned to Hong Kong in the middle of June 1983. He then discussed it with Mr. Kitagawa, who instructed him "to find out the best way to deal with it". Because Mr. Pak thought that the "Osprey" operated only in the territorial waters of Hong Kong, he took the view that it was unnecessary to take out what he described in his evidence as "expensive" insurance. He discussed the insurance that he could take out with Mr. Chu.

(viii) The signing of the proposal

14. The proposal form, which was headed "Workmen's Compensation Insurance", was completed in Mr. Pak's own handwriting. He signed it for Richstone who was named in it as the proposer. Richstone's trade was described as shipping, and the "Osprey" was named as the place of employment. Mr. Pak thought that he was completing the proposal form for Richstone in Richstone's capacity as agent for Axelson who was the true employer of the crew.

15. In the proposal, Mr. Pak gave the total wages paid to the employees in the 1980, 1981 and 1982 calendar years, and in the 12 months prior to 21st June 1983, as $150,000.00, $180,000.00, $200,000.00 and $200,000.00 respectively. He estimated the number of employees as 10, and he estimated their annual wages, salaries and other earnings, presumably for the first year of the proposed cover, as $200,000.00. He recorded the number of employees as 10 because the Master and Axelson had agreed, having regard to the budget, that the crew should not exceed 10 in number. The wages in the past, and the estimated wages in the future, were based on what Mr. Pak was told by Mr. Kitagawa. Mr. Pak had telephoned Mr. Kitagawa to obtain his instructions, and Mr. Kitagawa had told Mr. Pak that he hoped that the annual wages bill could be kept below $200,000.00. Mr. Pak was not troubled by the fact that he was only estimating the annual wages bill, because when he raised the point with Mr. Chu, Mr. Chu told him that the premium would be adjusted at the end of the year to reflect the actual wages paid.

(ix) The issue of the policy

16. The policy which was issued by Eastern as a result of the proposal contained a schedule dated 27th June 1983 and signed by Mr. Tung as the authorized signatory of Eastern. The schedule named Richstone as the insured. It identified the legislation to which the policy related as the Employees' Compensation Ordinance and the Workmen's Compensation (Amendment) Ordinance 1980. It referred to the employees to whom the policy related as the ship's crew whilst on board the "Osprey", and it referred to their estimated number, and their estimated total salaries, wages and other earnings on which the premium was based as being 10 and $200,000.00 respectively. It defined the Geographical Area as Hong Kong.

17. Two endorsements were attached to the policy. The first (EME-0270) provided as follows:

"This policy does not indemnify the Insured in respect of any claim arising in connexion with the Crews of Vessel used outside the Territorial waters of the Colony of Hong Kong."

18. The second (EME-0271) was clearly issued to reflect the repeal of the Workmen's Compensation (Amendment) Ordinance 1980 and its replacement by the Employees' Compensation (Amendment) Ordinance 1982. It provided for an additional premium for cover for liability under the new statutory regime.

19. The policy provided that "if any employee in the Insured's immediate service shall sustain bodily injury by accident or disease caused during the Period of Insurance and arising out of and in the course of his employment by the Insured", Eastern would "indemnify the Insured against liability at law ... to pay compensation and claimant's costs and expenses in respect of such injury". Under the heading "EXCEPTIONS", the policy provided that Eastern would not "be liable in respect of ... (d) any injury by accident or disease sustained outside the Geographical Area".

(x) Mr. Pak's subsequent conversation with Mr. Chu

20. Mr. Pak's evidence was that when the policy documents arrived at his office, he noticed that Richstone was named as the insured. He telephoned Mr. Chu to ask him why. Mr. Chu told him that because the insurance was intended to cover the crew of the "Osprey", it made little or no difference as to who was named as the insured. Mr. Chu added that since Richstone were to be responsible for paying the premium, Eastern wanted Richstone's name on the policy. Mr. Pak accepted that explanation. He trusted Mr. Chu's experience. He thought that if any of the crew were injured, they would be compensated by Axelson, and that the policy, albeit naming Richstone as the insured, entitled Axelson to an indemnity from Eastern, though in cross-examination, he said that he thought that the compensation would be paid directly by Eastern to the crew. In the event, Richstone paid the premium to Eastern in due course, and collected it from Axelson.

21. Mr. Pak was cross-examined at length on that part of his evidence. He agreed that he had a financial interest to see to it that the Plaintiffs succeeded in this action, because he was being personally sued by the Plaintiffs for what was alleged to be his negligent completion of the proposal form. He admitted that before giving evidence in chief, he had not mentioned this conversation to anyone, despite having been in touch with the Plaintiffs' solicitors and having given them a number of statements. He claimed that the point had never been raised with him, but in my view it is unlikely that he had never been asked a question which would naturally have elicited the evidence about the conversation, if the conversation had indeed taken place. Towards the end of his cross-examination on the point, he had become so confused that he was uncertain who should had been named as the insured on the policy - the "Osprey" itself, the crew or the crew's employers - though by the time his cross-examination on the topic ended, he had once again said that he thought that it was Axelson who should have been named as the insured on the policy.

22. I do notaccept Mr. Pak's evidence about this conversation, but my reason for not accepting his evidence is not based on his answers in cross-examination. In my view, if Mr. Pak had asked Mr. Chu why the policy documents named Richstone as the insured, Mr.Chu would have said that he had assumed that Richstone was the employer of the crew of the "Osprey", but if that was incorrect, the name of the true employer would have to be substituted for the name of Richstone as the insured. I can conceive of no reason why Mr. Chu would have replied to Mr. Pak's question in the way in which Mr. Pak claims. I have no reason to doubt that Mr. Chu understood the nature of employer's indemnity insurance, and that he would have appreciated that the insured should be the employer of the employees to be covered. Mr. Chu would have had no reason to say that it did not matter who was to be named as the insured.

23. Nor would there have been any need for Mr. Chu to want Richstone to be named in the policy on the footing that Richstone was to be responsible for the payment of the premium. If the true employers of the crew were to be named as the insured, it was they who would have had to pay the premium to Eastern, and if they did not, the policy would lapse.

(xi) The loss of the "Osprey"

24. The "Osprey" was dragged from her moorings in Repulse Bay on the evening of 8th September 1983. She capsized sometime during the morning of 9th September 1983. All but one of her crew (save for Masaki Yoshijima who was on shore leave), including Chan Ying Lung, the cook, and Sae heng Hai, a seaman, were lost. The Plaintiffs in this action are the mothers and administraces of their estates.

(xii) The claims for employees' compensation

25. Following the loss of the "Osprey", Axelson granted Mr. Pak power of attorney, inter alia, to make claims under what Axelson described as its policy of insurance with Eastern. The first step which Mr. Pak took was to lodge the statutory notices of the employees' deaths. Although he gave Richstone's name as the name of the employer, he described Richstone, on two of the three forms placed before me, as agents of Axelson.

26. In September 1984, the present Plaintiffs, as Applicants, commenced proceedings in the District Court for employees' compensation. Richstone was named as the Respondent to the claims, though it was described as the authorized agents of Axelson. Mr. Pak instructed Mr. Stephen Bond, of Messrs Masons & Mariott, solicitors, to act on behalf of both Richstone and Axelson in those proceedings. In due course, he instructed Mr. Bond to admit liability on behalf of Richstone and Axelson. In accordance with his instructions, Mr. Bond, at a hearing before Judge Li on 22nd May 1985, purported to admit liability on behalf of the party then named as the Respondent, namely Richstone as Axelson's authorized agents. Whatever the effect which that admission was intended to have, it was made on the basis that Axelson had been the employer of the employees. However, the admission was not given effect to, because Eastern objected to Judge Li entering judgment against Richstone on the basis of the admission. The judgment against Richstone would have amounted to a finding that Richstone was the employer of the employees. If Richstone was the employees' employer, Eastern was concerned that it would have no answer to a claim against it under the policy because the policy had named Richstone as the insured. If Axelson was found to be the employees' employer, Eastern could rely, as it has sought to do in the present case, on the fact that the policy did not name Axelson as the insured. In the event, Judge Li did not enter judgment on 22nd May 1985. Instead, he gave Eastern leave to participate at the trial on the issue as to who the employees' employer was at the date of the accident, and ordered that in place of the original Respondent, there should be substituted Richstone as the 1st Respondent, Axelson as the 2nd Respondent and Eastern as the 3rd Respondent.

27. The trial took place on 29th November 1985 before Judge Wong. He gave judgment for the Applicants against both Richstone and Axelson. Not surprisingly, Eastern, as 3rd Respondent, appealed to the Court of Appeal against the finding implicit in Judge Wong's judgment - namely, that the crew of the "Osprey" were employed jointly by Richstone and Axelson. On 26th February 1986, the Court of Appeal allowed Eastern's appeal, and held that the crew of the "Osprey" had been employed by Axelson alone.

28. It is common ground that the 1st Plaintiff, for herself and the other dependents of Chan Ying Lung, was awarded against Axelson statutory compensation of $242,000.00, together with costs which were taxed at $48,812.50, and interest which has been calculated up to 18th January 1988 as amounting to $36,336.47. It is also common ground that the 2nd Plaintiff, for herself and the other dependents of Sae Heng Hai, was awarded against Axelson statutory compensation of $242,000.00, together with costs which were taxed at $48,255.50, and interest which has been calculated up to 18th January 1988 as amounting to $36,336.47.

(xiii) The claims for damages at common law

29. In May 1986, the present Plaintiffs commenced proceedings in the High Court for damages at common law under the Law Amendment & Reform (Consolidation) Ordinance and the Fatal Accidents Ordinance. The Defendants were Captain Gary's personal representatives and Axelson. Interlocutory judgment was entered for the Plaintiffs against Axelson on 22nd April 1987. It is common ground that the damages of the 1st Plaintiff, as administratrix of the estate of Chan Ying Lung, were assessed at $589,081.00, together with costs which were taxed at $125,906.50, and interest which has been calculated up to 18th January 1988 as amounting to $47,958.93. It is also common ground that the damages of the 2nd Plaintiff, as administratrix of the estate of Sae Heng Hai, were assessed at $443,000.00, together with costs which were taxed at $125,906.50, and interest which has been calculated up to 18th January 1988 as amounting to $47,958.93. Neither Axelson nor Eastern have paid the sums awarded either by the High Court or by the District Court to the Plaintiffs. Axelson was wound up by order of the High Court on 21st July 1986.

(xiv) The correspondence between Richstone and Eastern

30. Mr. Pak instructed Masons & Mariott to act for Richstone in its dealings with Eastern. By a letter dated 6th November 1984 to Masons & Mariott in their capacity as Richstone's solicitors, Eastern's solicitors gave formal notice that Eastern disclaimed liability under the policy. Amongst the grounds relied upon was the following:

"The policy covered bodily injury sustained by employees in the immediate service of the insured and arising out of and in the course of their employment with the insured. The insured was Richstone. The persons now claiming were not in the immediate service of Richstone and any injuries sustained by them were not sustained arising out of and in the course of their employment with Richstone."

That amounted to an assertion that the policy of insurance was between Eastern and Richstone. I have no doubt that it was that assertion which was the reason for Mr. Pak instructing Mr. Bond to admit liability on behalf of Richstone as well as Axelson.

THE PLAINTIFFS' CAUSE OF ACTION FOR AN INDEMNITY

31. There are two routes by which the Plaintiffs' cause of action against Eastern arises. First, section 2(1) of the Third Parties (Rights Against Insurers) Ordinance (Cap. 273), so far as is material, provides:

"Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then ... in the case of the insured being a company, in the event of a winding-up order being made, ... if ... any such liability ... is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall ... be transferred to and vest in the third party to whom the liability was so incurred."

Secondly, section 28(1) of the Employees' Compensation Ordinance (Cap. 282), so far as is material, provides:

"Where any employer has entered into a contract with any insurers in respect of any liability under this Ordinance to any employee, then ... if the employer is a company, in the event of the company having commenced to be wound up ... the rights of the employer against the insurers as respects that liability shall ... be transferred to and vest in the employee."

Thus, since Axelson was the employer of the deceased, the Plaintiffs have, by statutory sub-rogation, a cause of action against Eastern directly - provided, of course, that it was Axelson who was the insured under the policy.

THE IDENTITY OF THE INSURED

32. In view of my findings of fact, I have no doubt that Richstone entered into the contract of insurance with Eastern as agents on behalf of Axelson. The relevant findings of fact are (the numbers in brackets are the references to the relevant sub-paragraph in the section of this judgment headed "THE FACTS"):

(a) Axelson was the owner of the "Osprey" (i).

(b) Richstone were shipping agents, not ship owners (i).

(c) Axelson's general agents engaged Richstone in November 1980 to look after the "Osprey" in Hong Kong (i).

(d) Axelson appointed Richstone in March 1982 to act as its agents throughout the world, and gave Richstone the power to engage the crew of the "Osprey" on behalf of Axelson and to obtain cover on behalf of Axelson against claims by members of the crew against Axelson (v).

(e) Axelson was the employer of the crew (vi).

(f) The policy of insurance was obtained following Mr. Kitagawa's express instructions (vii).

(g) Mr. Pak intended, despite the formal language of the proposal form, to complete it for Richstone in Richstone's capacity as Axelson's agents (viii).

33. I equally have no doubt (in view of my findings in sub-paragraphs (i), (iii) and (iv) in the section of this judgment headed "THE FACTS") that Eastern, through Mr. Tung and Mr. Chu, knew that Richstone had in the past been acting as agents on behalf of the true owners of the "Osprey". However, even though Eastern knew that Richstone did not own the "Osprey", I am not satisfied that Eastern knew that Richstone was not the employer of the crew. There is no evidence that prior to the issue of the policy either Mr. Tung or Mr. Chu knew that. It has not been suggested (and if it has been suggested, no evidence has been called) that shipping agents do not,. as a matter of practice, employ the crew of a vessel as principal, being reimbursed their expenditure by the ship owners. I do not overlook the evidence of Mr. Luk in his statement that Richstone's office employees were covered by a separate employers' indemnity insurance policy with Eastern. But that does not mean that they could not have taken out another policy for their employees' offshore if they had any. Given the assumption on which the proposal form was based - namely, that the proposer was the employer of the employees to be covered (and which I refer to shortly) - the Plaintiffs have not proved to my satisfaction that Eastern knew that Richstone were not the employers of the crew.

34. For these reasons, I find that the contract of insurance was made by Richstone on behalf of Axelson which was its undisclosed principal, and it is to the legal effect of that finding that I now turn. The governing principle is set out in Bowstead on Agency, 15th ed., Art. 79:

"An undisclosed principal may sue ... on any contract made on his behalf ... by his agent acting within the scope of his actual authority ... But [that right] ... may be excluded if inconsistent with the terms of the contract, express or implied."

Mr. Thomas Q.C. for the Plaintiffs submitted that Richstone never warranted that it was the employer of the crew of the "Osprey". The proposal form did not ask the person who signed it who the employer was, and it had been drafted by Eastern for use by agents and insurance brokers on behalf of their principals. Accordingly, he submitted that permitting Axelson to sue on the contract made in Richstone's name would not be inconsistent with the terms of the contract.

35. I cannot accept this submission. The proposal form contemplated that it would be completed by the proposer: the form ended with a space for the "signature of proposer". Moreover, although the proposal form did not, as Mr. Thomas correctly points out, ask the proposer to state who the employer of the employees was, it plainly assumed that the proposer was the employer: in box 8, the proposer was required to give particulars of "your" employees; in schedules A, B and C, the proposer was required to give details of wages "paid by me/us"; and the declaration at the end of the proposal was consistent only with that assumption: the proposer sought to insure himself against "my/our Statutory and Common Law Liability", and the proposer declared that "my/our total wages salaries or other earnings" had been fairly estimated. I find that Mr. Pak did not write anything in the proposal form to correct that assumption, because he was not at the time alive to the assumption which the proposal was making. But since (a) the proposal form must be treated as naming Richstone as the employer of the crew of the "Osprey", and (b) since the policy was issued on the basis of the statements in the proposal form, it is just not possible for Axelson's right to sue on the contract to be regarded as anything other than wholly inconsistent with the terms of the contract.

36. Moreover, it is not, in my view, possible for the Plaintiffs to escape the consequences of Richstone being named in the policy as the insured by invoking the doctrine of rectification. The Plaintiffs have not established the factual basis for rectifying the policy. There was neither a prior oral agreement, nor a common intention, that Eastern was to insure someone other than the person named in the policy as the insured. The only evidence which might have supported such a common intention, namely Mr. Pak's telephone conversation with Mr. Chu, is evidence which I have not felt able to accept.

37. In those circumstances,

(i) I do not propose to deal with two other arguments deployed by Mr. Ching Q.C. for Eastern, namely that (a) the remedy of rectification is only available to a party to the contract sought to be rectified, and the Plaintiffs were not a party to the contract of insurance, and (b) by analogy with the reasoning in Murray v. Legal and General Assurance Society Ltd. [1970] 2 QB 495, neither section 2(1) of the Third Parties (Rights Against Insurers) Ordinance nor section 28(1) of the Employees' Compensation Ordinance permit third parties such as the Plaintiffs who are not the insured claiming rectification of the policy so as to enable a fourth party, Axelson, to be substituted as the insured;

(ii) an alternative argument deployed by Mr. Thomas - that the Plaintiffs are entitled, under Part IV of the Employees' Compensation Ordinance, to be paid . by Eastern the sums claimed in this action - must fail, because that argument proceeded on the factual premise that Axelson was the insured. Since I have rejected all routes by which it has been argued that Axelson was the insured, it follows that this argument fails as well.

THE PLAINTIFFS' CAUSE OF ACTION IN TORT FOR DAMAGES

38. When Eastern drafted the proposal form and subsequently issued the policy to Richstone, Eastern knew that it was intended to bring about a contract which would (a) insure the employers of the crew of the "Osprey" against liability, and (b) have the effect of conferring on the crew enforceable rights of indemnity against Eastern in the event of their employers being wound up. However, the fact that the members of the crew have lost their enforceable rights of indemnity against Eastern, despite the fact that Axelson has been wound up, cannot in my view be said to be due to Eastern's negligence. With the benefit of hindsight, it might have been better for the proposal form to ask in terms who the employer of the employees to be covered was. In that event, the proposer could have had no one to blame but himself if he named himself in the proposal form when the employer was someone else. However, I have already referred to the fact that the proposal form plainly assumed that the proposer was the employer. Moreover, I have already said that the Plaintiffs have not satisfied me that Eastern knew that the crew were employed by Axelson, not Richstone. In those circumstances, I do not think that Eastern's failure, in the proposal form, to ask whether the proposer is the employer, or to warn the proposer that, unless he says otherwise, he will be assumed to be the employer, amounts to anything approaching a breach of the duty of care which it is arguable (see Ross v. Caunters [1970] 1 Ch. 297) Eastern owed to the members of the crew.

THE OTHER ISSUES

39. In case it should be held on appeal that Axelson would have been entitled to sue on the contract made in Richstone's name, I should deal, in brief, with the other issues argued before me, save for those which go only to quantum.

(i)Section 2 of the Life Assurance Act 1774

40. Section 2 of the Life Assurance Act 1774 did not enable Eastern to avoid the policy. First, the 1774 Act "was not intended to apply, and does not apply, to indemnity insurance, but only to insurances which provide for the payment of a specified sum upon the happening of an insured event" : Kerr L.J. in Mark Rowlands Ltd. v. Berni Inns Ltd. [1986] 1 QB 211 at p. 277E-F. Secondly, the section has a modified application in Hong Kong by virtue of section 58A of the Insurance Companies Ordinance (Cap. 41). Although Axelson was not named in the policy, it fell within a clearly identifiable description namely the employer of the crew of the "Osprey".

(ii) Non-disclosure/misrepresentation of identity of employer

41. Richstone failed to disclose that Axelson was the employer of the crew, and misrepresented that it was the employer of the crew, by completing the proposal form (which assumed that the proposer was the employer) without asserting that it was not the employer. In my view, that non-disclosure and misrepresentation entitled Eastern to avoid the policy. I do not think that the actual identity of the employer was material to the risk. Eastern would have been content to insure the employer of the crew of the "Osprey", whoever it was, provided that it was satisfied with the answers given in boxes 6 and 7 of the proposal form. But in the declaration in the proposal form, Richstone agreed that the declaration (which included a declaration that all statements in the proposal form were true) should be the basis of the contract with Eastern. Moreover, the policy recited that the proposal and declaration should be the basis of the contract and be deemed to be incorporated in the policy. I see no answer to Mr. Ching's submission, based on Dawsons Ltd. v. Bonnin (1922] 2 AC 413, that those statements made the truth of Richstone's assertion that it was the employer of the crew of the "Osprey" (implicit in its failure to assert that it was not the employer) a condition of the liability of Eastern, whether that assertion was material or not.

(iii) Non-disclosure/misrepresentation of wages bill

42. Eastern's pleaded case is that the estimated annual wages, salaries and other earnings of the crew was in excess of $315,720.00. That figure is the annual salary of the ten members of the crew at the date of the casualty according to their contracts of employment. During the trial, it was alleged that the estimate should have been increased by a further $75,600.00 to reflect the meal allowances which the crew were also entitled to receive, based on the amount of the daily meal allowance referred in the statutory notices of death. Moreover, Eastern points to the fact that in the five months prior to June 1983 (i.e. the month in which Mr. Pak completed the proposal form) Richstone had sought reimbursement for crew's salaries amounting to $154,080.65 and for food amounting to $94,398.00 (though some of that food was for the crew but for visitors to the "Osprey"). Accordingly, Eastern contended that Richstone misrepresented the estimated annual wages bill by estimating it at $200,000.00 only, and tha Richstone failed to disclose an accurate estimate.

43. Mr. Thomas points out that on the date when Mr. Pak completed the proposal form, Axelson only employed four of the ten crew members who were employed at the date of the casualty, and that Mr. Pak did not have copies of any of the contracts of employment. Moreover, in giving his estimate, Mr. Pak was relying on what he was told by Mr. Kitagawa. However, Mr. Pak had the accounts, and if they were anything to go by, they suggested that the annual cost of employing ten crew members was likely to be very substantially in excess of $200,000.00. Moreover, what Mr. Pak was told by Mr. Kitagawa was merely a budget, not an estimate. Because there was, in my view, no investigation into what an accurate estimate would be, I find that the estimate was an inaccurate and reckless one. A genuine estimate can only be one to which some thought has been given. A reckless estimate, by definition, is not genuine.

44. I do not think that the Plaintiffs can overcome this hurdle by relying on condition 8 of the policy or on the fact that Mr. Chu told Mr. Pak that the premium would be adjusted at the end of the year to reflect the actual wages paid., That remark of Mr. Chu was merely a repetition of condition 8, and on its proper construction the provision in condition_.8 for the adjustment of the premium payable up or down if the wages bill should differ from the original estimate only applied if the estimate in the proposal form was a genuine one. It is noteworthy that when Jones J. had to consider a similar clause in Chan Chi-Kuen v. Grand Union Insurance Co. Ltd. [1985] HKLR 99, he said at p. 102F:

"If it is established that the estimate made by the plaintiff is wrong this does not entitle the defendant to treat the policy as void."

45. In its context, by "wrong", Jones J. clearly meant "inaccurate", not "knowingly or recklessly inaccurate". An inaccurate estimate, which was knowingly or recklessly inaccurate, would, in my view, have entitled Eastern to avoid liability under the policy.

(iv) Exception (d)

46. Three issues of construction arise on exception

(d):

(i) The exception deals with "injury by accident" and "disease", not "injury by accident" and "injury by ... disease". Injuries are the consequence of accidents, not of diseases.

(ii) The word "accident" is ambiguous. It could equally refer to the proximate cause of the injury, i.e. the capsizing of the "Osprey", or the ultimate cause of the injury, i.e. the impact of the typhoon causing the "Osprey" to be dragged from her moorings. The benefit of ambiguities have, as a matter of construction, to be given to the insured (because the policy was drafted by or for Eastern): MacGillivrav & Parkington, "Insurance Law", 8th ed., para. 1103. Accordingly, I hold that the accident occurred in Repulse Bay, i.e. within Hong Kong.

(iii) However, it is the injury, not the accident, which has to be sustained outside Hong Kong for Eastern to be exempted from liability. That is because the word "sustained" can only apply to the word "injury". Whereas an injury can be sustained, an accident cannot: an accident occurs. The injuries in the case of the deceased were the loss of their lives.

47. However, the burden of proving the facts which bring the claim within exception (d) lies upon Eastern: MacGillivray & Parkington, op. cit., para. 1557. It is true that on 16th November 1984, the wreck of the "Osprey" was discovered on the sea bed at 21º48.7'N and 113º47.5'E, approximately 8 nautical miles due west of Wenwei Zhou. I do not regard that as a reliable guide as to where the "Osprey" capsized: after all, she may have floated for many miles before sinking. The report of the Marine Court (whatever its findings) is inadmissible: The European Gateway [1987] 1 QB 207. I have read carefully the evidence which the sole survivor, Hiroaki Ogura, gave to the Marine Court, but that does not help on where the "Osprey" was when she capsized. Accordingly, I find that Eastern has not proved to my satisfaction either that the "Osprey" capsized outside Hong Kong or that the deceased lost their lives outside Hong Kong.

(v) Endorsement EME - 0270

48. Mr. Ching submitted that this endorsement was not an exception, but a limitation as to the extent of the cover. I disagree. Although the language of the endorsement gives some support to this submission, the endorsement seeks to exclude Eastern's liability in the event of the peril insured against occurring outside Hong Kong. Since a geographical limitation on the extent of the cover is expressly classified as an exception in Exception (d), the endorsement should be classified in the same way.

49. The words "the Crews of Vessel used" do not make grammatical sense. I construe them as meaning "the use of of the vessel by the crew". Accordingly, the question is: has Eastern proved that the deceased died in connection with the use of the vessel by the crew outside Hong Kong's territorial waters? For two reasons, the answer to that question is No. First, I do not think that the "Osprey" was being used at all at the time. She was moored at Repulse Bay, and the current orders to her crew were to maintain her safe moorings there. There is some evidence that the Master telephoned Mr. Pak and sought permission to sail to Yaumatei typhoon shelter, though there is no admissible evidence that Mr. Pak gave such permission. Secondly, even if the "Osprey" was being used at the time, I do not think that she was being used outside Hong Kong's territorial waters. The evidence is that whilst still moored in Repulse Bay the anchor began to drag because of the effect of the typhoon, and that eventually the "Osprey" escaped from her moorings. A vessel is not being used outside territorial waters if either it has been driven there by the effect of a typhoon, or it has unwittingly deviated there in trying to save itself from destruction.

(vi) Arbitration

50. Eastern deny liability under the policy on the ground that, contrary to condition 10 of the policy, the clause was not referred to arbitration within 12 months of Eastern's disclaimer of liability. I reject that defence. One of the grounds on which Eastern disclaimed liability by its solicitors' letter of 6th November 1984 was that there was no policy of insurance between Eastern and Axelson. That amounted to an assertion that there was no binding agreement between them that their differences were to be referred to arbitration, because an arbitrator cannot make a binding award as to the initial existence of the contract: Mustill and Boyd, "The Law and Practice of Commercial Arbitration in England", 2th ed., pp. 108-109, and Permtek Ltd. v. China Resources Machinery & Equipment Co. Ltd. (HCA No. 5350 of 1987).

51. Mr. Ching correctly submits that this argument pre-supposes that it would be Axelson who would be making the claim. But if Richstone made the claim, Axelson would have intervened and claimed that Richstone was a party to the contract. In any event, I am making the assumption that Axelson would have been entitled to sue on the contract made in Richstone's name: otherwise, the current exercise is irrelevant.

(vii) Admission

52. Eastern deny liability under the policy on the ground that, contrary to condition 6 of the policy, an admission was made on behalf of Axelson and Richstone, without Eastern's written consent, by Mr. Bond at the hearing before Judge Li on 22nd May 1985. However, Eastern did not object to the admission being made on Axelson's behalf. What it objected to was the admission being made on Richstone's behalf, because a judgment against Richstone would have amounted to a finding that Richstone was the employer of the crew. Condition 6 prohibits an admission being made by or on behalf of "the Insured". Since the assumption I am making for the current exercise is that Axelson would have been entitled to sue on the contract made in Richstone's name, the admission on behalf of Richstone would not have been a breach of condition 6.

CONCLUSION

53. For these reasons, and with considerable sympathy for the Plaintiffs who have the benefit of judgments in the District Court and the High Court which they cannot enforce, this action must be dismissed, and I give judgment for the Defendant. I make an order nisi that the Plaintiffs pay to Eastern its legal costs of the action, to be taxed if not agreed, save that

(i) the costs of Monday 24th February 1992 be paid by Eastern to the Plaintiffs on an indemnity tarsis to be taxed if not agreed, because the hearing would have finished on the previous Friday had I not been requested to rise at lunch time on 20th February to enable Mr. Ching to prepare his closing submissions (Mr. Ching did not at the time object to this course being the consequence of the indulgence of the court for what he sought),

(ii) because the Plaintiffs are legally aided, these orders for costs should not be enforced without the leave of the court, and

(iii) the Plaintiffs' own costs must be taxed according to the Legal Aid Regulations.