DREAM MAKER GAME SHOP v. CHINA MERCHANTS INSURANCE CO LTD

[English Translation – 英譯本]

DCCJ 14166/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 14166 OF 2001

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Time: 3.47 pm

Representation:

The Plaintiff in person and represented by Ms Liu Tsz Wah

Miss Julia Lau, instructed by T S Tong & Co, for the Defendant

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JUDGMENT

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Background

1. The Plaintiff is a cosmetics wholesale business solely owned by one Ms Cheung King Sing.  The Plaintiff’s business address is Shop No. 6, Basement, Ginza Plaza, Causeway Bay.

2. On 24 October 2000, the Plaintiff took out a fire insurance policy (hereinafter “Policy”) through CMS Insurance Agency (Hong Kong) Limited.  The company was at that time represented by Mr Cheung Yun Fai, a business manager at the company.  The Plaintiff did not deal with Mr Cheung direct and took out the Policy through a middleperson Ms Liu Tsz Wah.  Apart from fire insurance, the Policy also provided additional coverage on events specified in the Schedule to the Policy, including damage to the insured assets (including a burst of the water pipe or leakage from the water tank) arising from malicious acts of any person, but such coverage was subject to a deductible of $3,000.

3. Ms Liu did not merely act as the Plaintiff’s intermediary.  Several business units at Ginza Plaza had been referred to Mr Cheung by Ms Liu and then, through Mr Cheung’s agency company, had taken out insurance policies with the insurance company.  The present action, however, only concerns Shop No. 6 and does not involve the other shops.

4. Shop No. 6 at Ginza Plaza is a small shop, occupying only an area of  about than 50 square feet.  Ms Cheung rented Shop No. 6 in July 1999 as a storeroom for her stock in trade.  In August 2000, Ms Cheung commenced business as a dealer in cosmetics.  Apart from this shop, she had since 1996 also run a business of selling  game machines at Shop No. 35A on the Basement of Ginza Plaza.  Further, she also ran a business of providing photocopying services on the same Basement.

5. Ms Cheung of the Plaintiff in the present case has not adduced any evidence; instead, Ms Liu has given evidence on behalf of the Plaintiff.  Neither has the Plaintiff called any witness apart from Ms Liu.

6. At about 3.30 a.m. on 21 December 2000, two masked men carrying knives intruded into the Basement of Ginza Plaza.  They tied up the watchman and, using fire hoses, sprayed the floor with water.  The watchman freed himself after approximately one hour.  He found that three water pipes in the men’s lavatory were damaged, causing the floor to be flooded with water to a height of 2 to 3 inches.

7. In a letter dated 22 December 2000, the management company in charge of Ginza Plaza stated that they had restored the electricity supply to the Plaza at 8.30 a.m. of the same day (21 December) and had pumped the water from the Plaza by means of an electric pump.

8. Prior to this incident, Ms Cheung had stored 50 cartons of cosmetics in Shop No. 6.  They were placed in 10 stacks, with 5 cartons in each stack.  Each carton contained a number of paper boxes, each of which in turn contained a small glass bottle or a small plastic bottle filled with cosmetics.  The Plaintiff purchased these cosmetics on 11, 13 and 18 October 2000 from one Wing Ha European Trading Co (transliteration) (永霞歐洲貿易公司) (hereinafter “Wing Ha”) at a total price of HK$555,000.  Apart from this purchase, the Plaintiff had never purchased any cosmetics from Wing Ha or any other supplier whether before or after the said incident.  The Plaintiff sold part of the said lot of cosmetics on 14 November, 27 November and 13 December 2002 for a total price of HK$115,955.

9. Wing Ha, which commenced business on 2 February 2000, was solely owned by one Ms Cheng Lai Ha.  Ms Liu became a shareholder of Wing Ha on 3 February.  Ms Cheng withdrew from Wing Ha on 4 February, following which Ms Liu became the sole owner of Wing Ha.  On 15 March 2000, one Ms Ho Chiu Kwan joined Wing Ha as a shareholder; on 12 June 2000, Ms Liu withdrew from Wing Ha.  Ms Cheng, Ms Liu and Ms Ho reported the same address.

The claim

10. Following the incident in the morning of 21 December 2000, the Plaintiff claimed that the cosmetics owned by her had been damaged and, accordingly, sought recovery of HK$469,777 from the Defendant pursuant to the Policy.  She also claimed a sum of HK$19,750 being compensation in respect of renovation, but the Defendant denied liability therefor.

11. The claim for renovation cost of HK$19,750 can be disposed of easily.  The Schedule to the Policy expressly states that insured property only covers general stock being stored, including cosmetics and perfumes, to the value of HK$600,000.  Such insured property does not include the cost needed for renovation or re-renovation.  As I am unable to hold that the said $19,750 falls within the insurance coverage, I have to dismiss this item of claim.

12. The remaining claim to be considered is the one for $469,777 in respect of the cosmetics.  The Policy qualifies the liability of the insurance company (the Defendant) in the following terms:

Subject to the terms exceptions and conditions contained herein or endorsed or otherwise expressed hereon which shall so far as the nature of them respectively will permit be deemed to be conditions precedent to the rights of the insured to recover hereunder.

13. The Chinese version of the Policy has translated the above passage as: 「本公司同意依照保險單所載條件、除外責任、基本條款及各種性質之批改書作為受保人根據保險索償的先決條件。」This translation, however, has omitted the phrase “so far as the nature of them respectively will permit”.  This passage means that the conditions precedents to the right of recovery do not include each and every written condition, but only encompass those specific conditions the nature of which permits.  I am pointing this out as I have to determine whether the provisions relied on by the Plaintiff are conditions precedents to the right of recovery, and in order to make it clear that not each and every condition will automatically become a condition precedent.

The provisions in the Policy relied on by the Defendant

14. The Defendant relies on Clauses 7(a)(i), 7(c), 9(a)(ii) and 10, which provide as follows:

7. Claims (Action by the Insured)

If any event giving rise to or likely to give rise to a claim under this Policy comes to his knowledge the Insured shall:

(a) immediately

(i) take steps to minimise the Damage and recover any missing property

(c) at all times at his own expense provide to the Company all such information and available documents or proofs regarding:

(i)      the origin and cause of the Damage and the circumstances under which the Damage occurred;

(ii)     any matter touching the liability or the amount of liability of the Company;

as may be reasonably required by the Company together with a declaration on oath or in other legal form of the truth of the claim and any matters connected therewith.

9. Possession Rights

On the happening of the Damage in respect of which a claim is made:

(a) The Company and any person authorised by the Company may without hereby incurring any liability or diminishing any of the Company’s rights under this Policy:

(ii) take possession of or require to be delivered to the Company any Property insured and deal with such Property for all reasonable purposes and in any reasonable manner.

10. Option to Reinstate

The Company may at its option, repair or replace the Property Damaged, or any part thereof, instead of paying the amount of the Damage, or may join with any other persons companies or insurers in so doing, but the Company shall not be bound to repair exactly or completely, but only as circumstances permit and in reasonably sufficient manner, and in no case shall the Company be bound to expend more in repair than it would have cost to repair such Property as it was at the time of the occurrence of such Damage, nor more than the Sum Insured thereon.

15. The Defendant also relies on Clause 8(d) of the Policy, which provides as follows:

8. Forfeiture of Benefits

All benefits under this Policy shall be forfeited:

(d) If the Insured or any person acting on his behalf shall hinder or obstruct the Company in the exercise of its rights.

The Defendant’s grounds of defence

16. The Defendant’s case is that the Plaintiff disposed of all the goods in the absence of the Defendant’s consent and therefore did not take any step to minimise the Defendant’s loss and damage.  The Defendant asserts that the Plaintiff has accordingly been in breach of Clause 7(a)(i) which, the Defendant says, is a condition precedent to the Plaintiff’s right of recovery.

17. The Defendant further alleges that the Plaintiff, by disposing of the goods in the absence of the Defendant’s consent, has also deprived the Defendant of its right of possession under Clause 9(a)(ii) or the right of electing reinstatement in lieu of damages under Clause 10.  The Defendant argues that, by depriving it of the said rights, the Plaintiff has been in breach of Clause 8(d) of the Policy.

18. The Defendant also alleges that the Plaintiff failed to provide such information and document as were reasonably required to assist the Defendant in investigating the present claim, and such failure constituted a breach of Clause 7(c) which, the Defendant says, is another condition precedent to the Plaintiff’s right of recovery.

Conditions precedent

19. The first issue before me is whether Clauses 7(a)(i) and 7(c)(ii) are conditions precedent to the Plaintiff’s right of recovery.  As stated above, not all the conditions in the Policy are conditions precedent; rather, it is only those conditions that nature of which so permits that can qualify as conditions precedent.

20. On this matter, I have referred to MacGillivray on Insurance Law, 20^th Edition, paragraphs 10.06, 10.10 and 10.11.  These three paragraphs read as follows:

10.06      Collateral promise

A stipulation in a policy must be merely a collateral promise by the assured to do some act without making his right to recover dependent on his fulfilment of the promise.  Here the only remedy of the insurer in the event of breach is a counterclaim for damages.  If insurers desire to create a condition precedent then sufficiently clear wording should be used to demonstrate that intention, and a clause which is not clearly expressed as a condition is likely to be read as a collateral stipulation unless a cross action for damages would be an inadequate redress in the event of breach.  In Re Bradley & Essex and Suffolk Accident a stipulation in an employer’s liability policy that the assured should keep a proper wages book was held to be merely a collateral promise relating to the adjustment of premiums, and a breach did not discharge the insurers from liability.  Although described on its face as a ‘condition precedent’, the clause in question formed part of a larger provision which could not take effect as a condition precedent and created an ambiguity which had to be resolved against the insurers.

In Stoneham v. Ocean Railway General Accident, it was held that the condition that ‘in case of fatal accident notice must be given to the company within seven days’, was not a condition precedent to recovery, but was merely a contractual term the breach of which imposed an obligation upon the assured’s representatives to reimburse the company for any extra expense which they might incur from having to investigate the circumstances of an accident at a long interval after its occurrence.  Since the ‘condition’ was not expressed to be a condition precedent to recovery on the policy, whereas others were, and since the result of holding it to be done would in that case have produced an unreasonable result, the decision is not surprising.

10.10      Duties to be performed by the assured

There are terms in every policy which impose certain obligations on the assured.  For example there are clauses which require the assured to do certain things in the event of a loss, such as give notice of loss within a specified time, notify the insurer of claims brought against the assured, deliver particulars of loss in a limited time, initiate a reference to arbitration, or prosecute a dishonest employee.  Other clauses impose duties on the assured during the currency of the risk, such as the common condition in a motor policy requiring the assured to take all reasonable steps to safeguard the insured vehicle from loss or damage and to maintain it in efficient condition.

10.11      The effect of the assured’s breach of such a term depends upon an interpretation of the clause in question in the context of the whole policy.  Clauses requiring delivery of particulars of loss within a specified time have been construed as conditions precedent to recovery even when not expressed to be either a warranty or condition precedent, but it is unlikely that a court would take the same view today.  The modern drafting technique is to include a general clause which declares that the due observance and fulfilment by the assured of all the obligations cast upon him by the policy terms shall be conditions precedent to any liability of the insurers to make any payment under the policy.  Breach by the assured of a term of the kind described above then provides the insurer with a defence to payment, regardless of whether it was either remedied before or causally connected with the loss.  A literal interpretation of a general condition precedent clause suggests that the insurer is altogether discharged from liability under the policy for the future, and not merely from liability to meet the particular claim, but it is submitted that the courts will endeavour to interpret it as not barring recovery for future claims if at all possible as, for example in a case where the assured’s breach consisted of a failure to intimate a claim within the time limit.  Where the assured’s compliance with a policy term is expressed to be a ‘condition precedent to recovery’, the insurer may have a defence to payment only so long as the breach remains un-remedied.

21. In considering whether Clause 7(c)(ii) of the Policy is a condition precedent to recovery, I have also taken into account the following three decided cases.

22. The first case is Worsley v. Wood & Others 6 T.R. 710.  The headnote to that case reads as follows:

If a policy of insurance refers to certain printed proposals, the proposals will be considered as part of the policy.  – By the proposals of the Phoenix Company it is stipulated that ‘persons insured shall give notice of the loss forthwith, deliver in an account, and procure a certificate of the minister churchwardens and some reputable householders of the parish, importing that they knew the character, &c. of the assured, and believe that he really sustained the loss and without fraud’: held that the procuring of such a certificate was a condition precedent to the right of the assured to recover, and that it was immaterial that the minister, & c. wrongfully refused to sign the certificate.

23. In that case, Ashhurst J had the following to say (at page 790):

The question is whether the certificate required be or be not a condition precedent; if it be, the plaintiffs below cannot maintain their action.  It is perfectly immaterial whether they have entered into an improvident contract; if they choose to take the burden upon themselves, they cannot call on the insurance office until they have complied with the condition.  I think that it is a condition precedent, and that the assured engaged at all events to procure the certificate before they applied to the office for an indemnity.  Nor is there any thing unreasonable in these terms.  It is well known that great frauds are sometimes practised on the insurance offices, and therefore it behoves them to take all care to prevent frauds.  In order to guard more effectually to protect the Phoenix Company, they insist on having a certificate from the minister and churchwardens, from persons who are not likely, from their situations in life, to assist in such frauds.  But as the plaintiffs below have not procured that certificate they cannot maintain this action.

24. The second case is Hiddle and Another v. National Fire and Marine Insurance Company of New Zealand [1986] A.C. 372.  The headnote to that case reads as follows:

Where, in an action on a fire policy, the plaintiffs’ evidence showed that they could have complied with the condition as to giving within fifteen days a detailed account of their loss ‘as the nature and circumstances of the case will admit’ much more fully and completely than they had done:-

Held, that they were rightly non-suited, since even if the question of compliance were for the jury, a verdict could not have been reasonably given in their favour.

25. That case concerned a clause in a policy expressed in the following terms:

6.         Statement and settlement of claims:  The insured sustaining any loss or damage by fire shall forthwith give notice to the company in Dunedin, or to the recognized agent thereof, at or near the locality in which such loss or damage shall occur, and shall within fifteen days after such fire deliver to the same an account in detail of such loss or damage as the nature and circumstances of the case will admit; and shall verify the same by solemn declaration or affirmation before a magistrate, and shall produce books, vouchers, and such other information and evidence as the directors or agents of the company may reasonably require, and unless such account, verified as aforesaid, shall be delivered within the time aforesaid, and such other information and evidence, if required, shall be produced in manner aforesaid, no part of such loss shall be payable.

In his judgment, Lord Davey stated the following:

The fire took place on January 10, 1894, when the whole stock of the appellants, with a trifling exception, was destroyed.  Some of their books, including the cashbook and customers ledger were in a safe and were saved from the fire.  The stock-book, however, and the stock-sheets of the end of 1893 were destroyed.

On January 24, 1894, the appellants, in assumed compliance with the sixth condition, forwarded to the respondents a statutory declaration that by the fire they had sustained loss amounting to 22501. as per detailed statement marked B.  This statement was in the following terms:-

(In Statement referred to, there were only set out the ‘Particulars of Items burnt’, and ‘Value at time of fire” and ‘Amount claimed’.)

At the trial before Stephen J. it appeared from the evidence of the appellant Hiddle that the goods in the store at the time of the fire were the goods they bought back plus the invoice goods purchased since minus the goods sold.  There were in addition 401. worth bought from one Paassvanti.  The witness stated that the invoices of the goods purchased by them in Melbourne and Sydney were destroyed in the fire – that they had written to the vendors for copies of those invoices, but did not get them until after fifteen days from the fire.  The appellants put in evidence (amongst other documents) a detailed inventory and valuation of the stock bought back by them from their trustees in July, 1893, and estimates prepared by their accountant from the materials in their possession after the fire, shewing how the amount of the loss was arrived at.

It was contended on behalf of the appellants that they were only bound to give such an account as the nature and circumstances of the case would admit of, or (in other words) the best account they could, and that whether they had done so was a question of fact which ought to have been submitted to the jury.  Their Lordships, however, accept the rule laid down by Willes J. in the case of Ryder v. Wombwell⁽²⁾, and they think that the non-suit was proper, although there may have been some evidence to go to the jury, if the proof was such that the jury could not reasonably give a verdict for the plaintiffs.  In the present case their Lordships doubt whether the statement forwarded by the appellants was an account at all within the meaning of the sixth condition, and they consider it proved by the evidence of the plaintiffs themselves that at the time of forwarding their statement they had in their possession materials which enabled them to give a much fuller, more detailed, and better account for the purpose of enabling the insurance company to test the reality and extent of the loss.

26. The third case is Welch v. Royal Exchange Assurance [1939] 1 K.B. 294, the headnote to which reads as follows:

By the terms of a policy of fire insurance the conditions thereof were, ‘so far as the nature of them respectively will permit’ to ‘be deemed to be conditions precedent to the right of the ‘insured to recover’.  Condition 4 provided that on making a claim the insured should ‘give to the corporation all such proofs and information with respect to the claim as may reasonably be required,’ and that ‘No claim under this policy shall be payable unless the terms of this condition shall have been complied with.’  A fire occurred on the insured’s premises and he claimed to be indemnified under the policy.  The insurance corporation repudiated liability, and the dispute was referred to arbitration.  The insured used and controlled for the purposes of his business certain bank accounts standing in the name of his mother.  The insurance corporation repeatedly, both before and during the arbitration, requested the insured to furnish them with information as to these accounts; but the insured failed to disclose them until he was under cross-examination during the arbitration proceedings:-

Held, by the Court of Appeal that the insured was not entitled to recover any sum in respect of his claim: by Slesser L.J. on the ground that, even if on the true construction of the policy the requirement of information in condition 4 was not a condition precedent, but merely a condition that the insurance corporation need not pay until the information there required was produced, the insured could not say that such information was in fact given before his claim was made; by MacKinnon and Finlay L.JJ. on the ground that on the true construction of the policy that requirement was a condition precedent with which in the circumstances the insured had not complied.

27. In that case, Slesser L.J. had this to say (at page 305):

During the hearing before the arbitrator it was for the first time relied upon by the insurance company that the claimant had failed to give the respondents any information which was reasonably required with respect to two banking accounts of his mother which had been used and controlled by the claimant for the purpose of his business and that large sums of money accruing to the claimant had been paid by him into the accounts and large sums drawn out of the accounts by him for the purpose of his business.

At the arbitration, in the course of the cross-examination of the claimant, the claimant, for the first time, offered to give, and did give, full information as to these two banking accounts, but the learned arbitrator finds that until the accounts were so produced the respondents were not in possession of sufficient information to enable them to allege that the claimant’s failure to give information in respect of the said accounts was a breach of condition 4 of the policy.

And at page 307:

In these circumstances, even if the requirement of information in condition 4 be not a condition precedent, but merely a condition that the insurance company need not pay until the information required in condition 4 is provided, the appellant fails because he cannot say that such information was in fact given before the claim was made, and therefore it becomes to my mind unnecessary in this case to determine whether the failure to comply with condition 4 as to information was a failure to satisfy a condition precedent.  For myself, I would wish to keep open that question.  Had the phrase at the end of condition 4 been ‘no claim under this policy shall be payable “until” the terms of the condition have been complied with’ instead of the word ‘unless,’ the case would have resembled that of Weir v. Northern Counties of England Insurance Co. (I), where it was held that such words did not constitute a condition precedent but only a requirement to be satisfied before a liability to pay arose, but it may well be said that here the word ‘unless’ has no such temporal limitation.

In the result I think this appeal should fail, not upon the ground that condition 4 is a condition precedent, but upon the ground of the claimant’s failure to give necessary information before a claim was made by him, which failure the appellant through his own act in the circumstances of this case is unable to excuse.

28. MacKinnon L.J. had this to say (at pages 312 and 313):

But in truth the more formidable argument for the respondents does not depend on the last sentence of condition 4.  They say that the promise in the body of the policy is ‘subject to the conditions which, so far as the nature of them permits shall be deemed to be conditions precedent to the right of the insured to recover.’  In condition 4 there is the provision that ‘the insured shall give all such information as shall reasonably be required.’  The nature of this requirement does permit compliance with it to be a condition precedent to the right of the insured to recover.  It is found by the arbitrator that it has not been complied with.  There has therefore been a breach of a condition precedent to the right of recovery.

None the less I am driven to the conclusion that the stipulation that the insured shall give all such information as may be reasonably required is one whose nature permits it to be a condition precedent to the right of the assured to recover, and that the presence of the last sentence in condition 4 does not by any ambiguity alter that nature or invalidate that conclusion.

29. On the basis of the principles enunciated in the three cases cited above, I take the view that Clause 7(c)(ii) is a condition precedent to recovery, on the ground that it is a very important duty of the insured to provide, upon reasonable request of the insurance company, to the company the information and documents relating to the company’s liability and the extent of the claim, in order to enable the company to handle the claim in an appropriate manner.  There is nothing in the nature of Clause of 7(c)(ii) that renders the clause unsuitable for being a condition precedent to recovery, and I consider it reasonable to designate that clause as a condition precedent.

30. As for Clause 7(a)(i), I do not think it should be regarded as a condition precedent to recovery.  This is because if the insured has been in breach of Clause 7(a)(i), the insurance company may at any time seek compensation from the insured; even if the insured has not taken any step to minimize the loss sustained by the insurance company, this does not mean that the insured items are rendered completely useless.  Using the present case as an example, if the Plaintiff had not disposed of the cosmetics but had merely failed to separate the damaged cosmetics from cosmetics that remained intact, it would still have certainly been possible to calculate the extent of the loss sustained by the insurance company.  Even though some of the insured goods were lost and the insured had not attempted to locate them, this loss could also have been calculated, and hence the insurance company would not have faced immense difficulties in dealing with the present claim.

Clause 7(c)(ii)

31. On the question whether the insured (the Plaintiff) has been in breach of Clause 7(c)(ii), Mr Tsang King Hung, the representative of a surveying company engaged by the insurance company called Oriental (hereinafter “Oriental”), confirmed in the course of cross-examination that the only documents that the Plaintiff has failed to provide are the monthly statements of the bank account under its business name.

32. By two letters dated 21 February and 28 February 2001, Oriental requested the Plaintiff to provide monthly statements issued by the bank, but on each occasion the Plaintiff refused to do so for the reasons that those statements were irrelevant to its claim and that the request infringed the Plaintiff’s right of privacy.  However, when they sought assistance from the office of Legislative Councillor Mr Yeung Sum (hereinafter the “Office”), the Office wrote to Oriental on behalf of the Plaintiff, and the letter expressly stated that “Your company is welcome to make an appointment to inspect [the statements] at Ms Cheung’s company or at this office.  For reasons relating to privacy and confidentiality of business information, please do not take away or photocopy [the statements].”  Oriental did not make any response to this suggestion.

33. In the second interim report of Oriental (11 April 2001), Mr Tsang did refer to the correspondence with the Office but made no mention that on 4 April the Office indicated it was prepared to allow them to inspect the monthly statements of this particular bank account.  If Oriental still wished or considered it necessary to inspect the monthly statements of this bank account, he would have replied to the Office; and if he considered that an inspection was insufficient and that it was necessary to obtain a photocopy of the statements, he would also have no reason for not responding to the Office.  Furthermore, with the involvement of the Office in the matter, the Plaintiff’s attitude had obviously softened.

34. Moreover, the letter issued by the Defendant’s solicitors on 3 May 2001, by which the Defendant denied liability, made no mention whatsoever of the Plaintiff’s failure to provide the requisite documents or information.  If the Defendant still needed those monthly statements, this would, in my view, have been relied on as a ground of denying liability.  Therefore, my conclusion on this matter is that the Defendant no longer needed those monthly statements, and the requests made through Oriental were no longer valid.  In the absence of such requests, the Plaintiff would not have been in breach of the relevant clause.  Accordingly, I hold that the Plaintiff has not been in breach of Clause 7(c)(ii) being a condition precedent to recovery.  I also notice that it was only in its Amended Defence that the Defendant relied on Clause 7(c)(ii).

Clause 7(a)(i)

35. I now consider whether the Plaintiff has been in breach of Clause 7(a)(i), which requires it to take steps to minimise the damage and recover any missing property.  It is apparent from the evidence of DW2, Mr Hon Lit Wah, that some of the goods were seriously damaged whereas the damage to some of the goods was not so serious, and that some of the goods could still be sold as new goods, but no one had taken any step to salvage those goods which were not seriously damaged or were only slightly damaged and which could still be sold as new goods.

36. Mr Hon inspected these goods together with Ms Liu, the Plaintiff, Ms Li of Shop No. 36 and a male friend of hers.  Mr Hon himself did not find it necessary to separate the goods which were more intact or which could be sold as new goods from the damaged goods.  He only put the goods back into the black plastic bags that were originally used for storing the goods or allowed other people present to do the same.  It follows that, even if the Plaintiff was in breach of Clause 7(a)(ii), Mr Hon, as an employee of Oriental which was engaged by the insurance company, had participated in the breach.  As someone in the employ of the surveying company (being the representative of the insurance company) participated in the breach of the said clause, this cannot be regarded as a breach of contract.  Therefore, I hold that the Defendant cannot rely on this as a reason for refusing to compensate the Plaintiff.

Clause 9(a)(ii)

37. The meaning of Clause 9(a)(ii) of the Policy is very clear and obvious.  The damaged goods could not be disposed of because the insurance company was entitled to take them away, and in fact the Plaintiff knew that those goods could not be disposed of.  It is not in dispute that, on the afternoon of 22 December, when the loss incurred by Ms Li’s fashion business at Shop No. 36 was being calculated, the parties had an argument as to whether the damaged goods could be disposed of.  Ms Li wanted to remove the goods immediately but Mr Tsang did not allow her to do so.  Both Mr Tsang and Mr Cheung Yun Fai explained to those present that the damaged goods could not be disposed of by reason of their residual value.  Ms Liu also knew about this as she used to work in the insurance industry and understood that the goods had a residual value.  In the end, the argument between Ms Li and Mr Tsang was resolved when Ms Liu suggested that some space be set aside as a temporary storage for the goods.  Therefore, Ms Li and Ms Liu very well knew that the damaged goods could not be disposed of.

38. Although Ms Cheung of the Plaintiff was not present when the aforesaid argument took place, she was fully aware of the incident because that night (i.e. between the night of 22 December and the early hours of 23 December), in the presence of Ms Cheung, Ms Liu and Ms Li discussed the argument with Mr Tsang on the afternoon of 22 December and derided Mr Tsang’s attitude.  The Plaintiff, however, claims that Mr Hon allowed her to dispose of the goods.  Ms Liu said that, between 4.30 a.m. to 5 a.m. on 23 December, she asked Mr Hon whether he wanted to take the damaged goods back to the insurance company, and Mr Hon answered in the negative and said that the goods were useless and could therefore be disposed of.  Mr Hon of course denied this.  He insisted that, between the night of 22 December and the morning of 23 December, no one ever discussed whether those goods could be disposed of, and he did not know that Ms Cheung would dispose of those goods.

39. Between March and April 2002, Ms Liu made a phone call to Mr Hon and she had recorded the telephone conversation.  Over the phone, Ms Liu repeatedly told Mr Hon that on the night of the incident he had consented to their dealing with the goods, but Mr Hon insisted that he never knew Ms Cheung would deal with the goods in the way she did.

40. I do not have hesitation in accepting Mr Hon’s evidence.  At the material time, he was merely an employee of the surveying firm, and by the time of the hearing he was no longer employed by that firm.   On the afternoon of 22 December, he witnessed an argument between his supervisor Mr Tsang and one of the insured persons.  He knew that damaged goods had to be preserved, and in this respect he saw no reason for making a distinction between Ms Li’s fashion at Shop No. 36 and Ms Cheung’s cosmetics at Shop No. 6.  Therefore, there is no reason for alleging that Mr Hon allowed Ms Cheung to dispose of the cosmetics.  If Mr Hon harboured any doubt, he could ask Mr Tsang after a few hours, and there was no reason why he could not wait for Mr Tsang’s answer.  Mr Hon’s evidence is also supported by what he said over the phone, as he admitted over the phone that his supervisor had never asked him to obtain any sample and therefore he had never done so and no sample was available.  He also admitted when giving evidence in the court that, on the night following the stocktaking that he did for Shop No. 6 (i.e. 22 to 23 December), he took part in the derision of Mr Tsang by Ms Liu and Ms Li.  In my view, Mr Hon is a forthright and veracious witness.

41. On the other hand, I do not accept Ms Liu’s evidence in relation to the disposal of the cosmetics.  Ms Liu did not deny that the parties were not in perfect harmony on the afternoon of 22 December, with several episodes of the insured persons arguing with the surveying firm’s representatives and being insistent on their approach to the inspection of goods.  Their relationship with Mr Tsang of the surveying firm was decidedly discordant, and it was therefore perfectly possible that the Plaintiff did not want to keep those goods and insisted on dealing with them in its own way, without appreciating the serious consequence that followed.  For these reasons, I hold that the Plaintiff has, by disposing of the goods, been in breach of Clause 9(a)(ii) of the Policy.

Clause 8(2)(d)

42. I further take the view that the Plaintiff had knowledge of the argument between Mr Tsang and Ms Li on the afternoon of 22 December over the question whether the damaged goods were to be preserved.  As I do not believe Ms Liu’s evidence that the Plaintiff had obtained prior consent of Mr Hon when she dealt with those goods, the Plaintiff was not entitled to deal with the goods as she did even if at that time she did not have knowledge of the argument on the afternoon of 22 December.  By disposing of those goods, the Plaintiff deprived the Defendant of its right to take possession of the goods, and accordingly the Plaintiff has also been in breach of Clause 8(2)(d) of the Policy.

Clause 10

43. As regards the right of reinstatement under Clause 10 on which the Defendant also relies, I notice that this was pleaded only when the Defendant amended its Defence.  I also notice that the Defendant has not adduced any evidence to show that the damaged cosmetics which cannot be sold as new items can be repaired.  As for replacement, the fact that the cosmetics have been disposed of will not make it difficult for the Defendant to consider whether replacements are needed.

Waiver of the right of recovery

44. At the hearing, I pointed out that Mr Tsang had, in his letter to the Plaintiff company on 29 December 2001, stated that the Plaintiff had disposed of the goods, and I requested Counsel for the Defendant to consider whether that letter constituted a waiver by the Defendant of its right of recovery.  However, the surveying firm had not lost sight of or disregarded the disposal of the goods by the Plaintiff because, in its reply to the Office (dated 29 March 2001), the firm reiterated that such disposal was made without the Defendant’s prior consent and would prejudice the Defendant’s economic interests.

45. On this question of waiver of the right of recovery, I have referred to paragraphs 10.101, 10.102, 10.103 and 10.104 of the above-cited MacGillivray.  Those paragraphs read as follows:

10.101

We have seen that the breach of a term of the policy by the assured gives the insurer a remedy which varies according to the status of the term which is broken.  Circumstances may arise in which the insurer is held to have waived the right to exercise that remedy as a result of his conduct either before or (more frequently) after the breach by the assured.  In order to appreciate how the doctrine of waiver applies to breaches of policy terms it is first necessary to consider its juristic basis.

10.102

‘Waiver’ is not a term of art and has been criticised as vague.  In the present context it means the abandonment or relinquishment of a right or a defence which may occur as the result either of an election by the insurer or of the creation of an estoppel precluding him from relying upon his contractual rights against the assured.  Election arises where the insurer becomes entitled to exercise a right on the commission of the assured’s breach of contract, and he must decide whether to do so.  An example would be the right to void the policy in reliance of a forfeiture clause.  If the insurer is aware of the facts which create the right in question, and (though this is not completely clear) is also aware of his legal right, and he acts in such a way as clearly to evince a decision to relinquish it, he will be held to have elected not to exercised it against the assured, and that election is irrevocable.  The time may come when the law will deem him to have elected to exercise or to forego his right, as the case may be, when he takes no action to communicate a decision.

10.103

‘Election’ is to be contrasted with equitable, or ‘promissory’ estoppel.  Where a person who possesses a legal right or defence against another unequivocally represents by words or conduct that he does not intend to rely upon it, and the other party acts, or desists from acting, in reliance on that representation, the representor will be estopped from enforcing his legal rights inconsistently with his representation to the extent that it would be inequitable for him to do so.  Whereas election requires a party to have knowledge of the facts which create a right exercisable by him (and, at least possibly, knowledge of the legal right) before he can be held to have made an election in respect of it, the principle of equitable estoppel does not require any particular state of knowledge on its part, although it is submitted that in practice it will be difficult for an assured to make out the elements of an equitable estoppel against an insurer unless the latter is known to be aware of the assured’s breach of contract.  Another point of distinction is that an election, once communicated or deemed to be made, is irrevocable, whereas an equitable estoppel may in certain cases only suspend the exercise of a right temporarily.  As applied to breaches of contract the concept of equitable estoppel means that when one party represents to the other that the latter’s breach of contract will be overlooked, he will not be allowed later to rely upon it where to do so would be unjust to that other party.

10.104             Waiver of breach of warranty

The effect of the assured’s breach of warranty is automatically to discharge the insurer from liability as from the date of the breach.  Consequently, the insurer possesses an immediate defence to a claim by the assured and is not required to elect or exercise a remedy, such as rescission of the contract, in order to acquire a defence.  In the last edition of this work, it was submitted that waiver by election is therefore inapplicable to breach of warranty, not because the contract of insurance has terminated, which is not the case, but because the insurer is not put to any election by the occurrence of the breach, and cases decided before Bank of Nova Scotia v. Hellenic Mutual War Risks Association in which an insurer was said to have elected not to avoid liability for breach of warranty must be regarded as wrongly applying the law.  The view that the election is inapplicable to a case of breach of warranty has now been accepted by a number of first instance judges and, more recently, the Court of Appeal.  An assured who wishes to contend that an insurer has waived a breach of warranty must therefore establish waiver by estoppel, which invariably means equitable estoppel.  The same analysis must be true of waiver of a breach of a condition precedent to liability which affords a defence to all claims originating after the breach.

46. There is nothing in the present case which shows that the Defendant has, whether by itself or through Oriental, notified the Plaintiff that the Defendant would abandon any of its rights or any right which might arise from the Plaintiff’s breach of the terms of the Policy.  Nor has the Defendant indicated to the Plaintiff that its conduct in breach of the Policy would be overlooked.  In my view, therefore, the Defendant has not waived the exercise of any of its rights.  Furthermore, the first letter issued by the Defendant’s solicitors on 3 May 2001 clearly stated that the Defendant was entitled to deny liability because the Plaintiff was in breach of Clauses 9(a)(ii) and 8(d).

Inconsistencies in evidence

47. I also notice certain slight inconsistencies among the evidence of Mr Cheung Yun Fai, Mr Hon and Mr Tsang.  That said, I appreciate that the incident in question occurred in late December 2000, which was more than 2½ years ago, and given in particular the passage of time, it is natural to have slight differences in various people’s recollections of the incident.  However, I have to take into account that neither Mr Cheung nor Mr Tsang took part in the inspection of goods at Shop No. 6.  Their evidence mainly related to the events that occurred at Shop No. 36 on the afternoon of 22 December, and the particulars of those events are not in dispute.

Ms Liu: the Plaintiff’s agent

48. Another issue in the present case that has been disputed is whether Ms Liu was the sole representative of the Plaintiff that afternoon at the time of the argument between the parties over the disposal of the goods.  It is in fact not necessary for me to determine this issue as I have already held that Ms Cheung knew that the goods were not to be disposed of.  If, however, I were to determine the issue, I would accept what Mr Cheung and Mr Tsang said.  They said that, on the afternoon of 22 December, when they met Ms Cheung at Shop No. 6, Ms Liu approached them, pushed Ms Cheung aside and claimed that she (Ms Liu) was the sole representative of Ms Cheung who was able to answer any question and that Mr Cheung and Mr Tsang did not have to ask Ms Cheung any question.

49. On this matter, I see no need for Mr Cheung and Mr Tsang to tell lies, and I find them to be honest witnesses.  In fact, Mr Cheung was at the scene at the material time in order to assist the parties concerned.  And after the incident in question occurred, Mr Cheung, being an industrious and responsible insurance agent, dealt with Ms Liu’s enquiries and complaints in the same conscientious manner.  As for Mr Tsang, I also do not see why he has to tell lies on this matter.  I hold that Ms Liu was the sole representative of Ms Cheung.  There is other evidence to support this finding.  Several business units at the Basement of Ginza Plaza had been referred to Mr Cheung by Ms Liu and then, through the insurance company recommended by Mr Cheung, had taken out insurance policies with that company.  Although Mr Cheung’s phone number was printed on all the policies so that insured persons could contact him direct for enquiries, in practice all the insured persons chose to make all enquiries through Ms Liu and none of them (including Ms Cheung) enquired of Mr Cheung direct.  This indicates the significant trust that the insured persons placed upon Ms Liu.  Throughout the argument on the afternoon of 22 December, Ms Liu stood by the insured persons and fought for what they wanted.

50. Even if I should be incorrect in finding that Ms Liu was Ms Cheung’s agent, the Plaintiff did know that the relevant goods were not to be disposed of.  Even though she might not have heard Mr Tsang say that those goods should not be disposed of, she should not have disposed of the goods.

Judgment

51. For the above reasons, I hold that the Plaintiff acted in breach of Clauses 9(a)(ii) and 8(d) of the Policy by disposing of the goods.  The Plaintiff’s claim is accordingly dismissed.

Costs

52. Subject to any objection raised by the parties, I take the view that the Plaintiff should pay only 50% of the Defendant’s costs.  The Defendant relied on a number of defences, some of which were added at a subsequent stage; in the end, however, the Defendant obtained judgment on only one of the grounds that it originally pleaded, and all the other grounds have failed and the evidence and submissions in relation thereto have not been accepted.  In my view, therefore, even if the Defendant had narrowed down its defence, it would still have obtained judgment on the ground that the Plaintiff had disposed of the goods.  Had the Defendant not introduced the other grounds and arguments, time would have been saved in the preparation and conduct of the hearing.  The above is my judgment.

(Discussion between the Judge and the parties on costs)

53. Ms Liu has, on behalf of the Plaintiff, raised objections to my costs order.  However, for the reasons set out above, I remain of the view that the said order is justified, and therefore I confirm my order that the Defendant can recover only 50% of its costs from the Plaintiff.  As the present case involves a number of points of law, it is reasonable for the Defendant to instruct Counsel, and therefore I order that the Defendant can also recover Counsel’s fees from the Plaintiff, but of course this is also on the “50%” basis as aforesaid.