B.C. ENTERPRISE SDN. BHD. AND OTHERS v. BANK OF CHINA GROUP INSURANCE CO LTD

HCCL 49/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.49 OF 2001

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J U D G M E N T

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Introduction

1. On 26 November 2000 the general cargo vessel "Rui Xiang" sank with all her cargo whilst on a voyage from Labuan, Malaysia to Nansha, China. The cargo which sank with her included various consignments of Indonesian round logs which had been shipped at Labuan under four bills of lading.

2. These consignments of logs were insured with the defendant underwriters under three marine cargo policies. These were valued policies. The first policy, covering the first consignment of 116 logs, was issued in the sum of US$176,130.57, the second policy, covering the second consignment of 244 logs, was issued in the sum of US$181,323.95, and the third policy, covering the third and fourth consignments comprising 447 logs, was issued in the sum of US$557,666.78.

3. These three marine cargo policies were expressly subject to the ICC(C), which provides that the risks covered shall cover "loss or damage to the subject matter insured reasonably attributable to ... vessel or craft being stranded grounded sunk or capsized."

4. There is no dispute that loss of these consignments of logs was attributable to the sinking of the "Rui Xiang". However, the defendant has declined to make payment under these policies consequent on the loss on the basis that there has been a breach of warranty appearing on the face of all three policies, which reads :

"Warranted the carrying vessels must be ISM Code compliance"

5. This litigation is the result of the defendant's refusal so to indemnify, and the question for this court is whether such refusal is justified.

6. More precisely, however, this question requires resolution of another issue, which is this: whether these three marine cargo policies issued by the defendant on 20 November 2000 ought to be regarded as having been issued in performance of, or pursuant to, the defendant's contractual obligations issued under an Open Cover for the year 2000, as the plaintiffs contend, or whether, as the defendant maintains, these policies ought to be considered as free-standing policies issued independently from such 2000 Open Cover?

7. The substance of this judgment is concerned with this issue, the answer to which is determinative of this case.

The background

8. This dispute cannot properly be understood without brief reference to its background facts.

9. The 2nd plaintiff ('Nagasaki') and another company named Borion Enterprise Limited ('Borion') are Hong Kong companies engaged in log and timber trading. Until 1999 Borion's cargoes had been insured through another company, Tai Ping Insurance Company Limited, such insurance having been obtained by Mr Teh, a broker, of Top Asia Insurance Agency Limited.

10. However, in 1999 the General Manager of Nagasaki, a Mr Ngui Ing Chuang, asked Mr Teh to find new insurers for marine cargoes, and this he did.

11. On 13 August 1999 a 1999 Open Cover policy was issued by the defendant, naming the sole assured as Borion, and containing the following term :

"Warranted the carrying vessels must be ISM Code compliance"

12. On 19 August 1999 this 1999 Open Cover was reissued, so that the ISM Code warranty now was amended to read :

"Warranted the carrying vessels must be ISM Code compliance (exclude general cargo vessel)."

13. The ISM Code to give it its full title 'The International Management Code for the Safe Operation of Ships and for Pollution Prevention' has international effect by virtue of amendments adopted in 1994 to the International Convention for the Safety of Life at Sea 1974, and comes under the auspices of the International Maritime Organisation. The Code requires shipowners and managers of vessels to which the Code applies to maintain management systems to ensure safety of life at sea, and avoidance of damage to the environment and to property, and makes provision for a document of compliance to be issued by the Government of the State whose flag the particular vessel flies. Important in the context of this case are the compliance dates: on 1 July 1998 compliance with the ISM Code became mandatory for tankers, bulk carriers, gas carriers, passenger ships and cargo high-speed craft of 500 gross tonnes and above, but in November 2000 compliance was not mandatory for general cargo vessels such as the "Rui Xiang", only becoming mandatory for general cargo vessels of 500 gross tonnes or more on 1 July 2002.

14. The 1999 Open Cover, as issued by the defendant, related to various types of timber, including logs, shipped from Malaysia or Indonesia to China, and expressly provided that it was a condition of the contract that the Assured was bound to declare every consignment without exception, which in turn Underwriters were bound to accept, subject to a maximum limit to the value of cargo to be shipped on any one vessel, which in this instance was US$1.5 million per vessel (or 'bottom').

15. The evidence is that following the issuance of the 1999 Open Cover, which was valid from 6 August 1999 to 5 August 2000, some 43 cargoes were insured for Borion by the defendant, and that in the majority of cases the policies issued contained a warranty as to ISM Code compliance absent any qualification.

16. Upon expiry of the 1999 Open Cover there were negotiations for its renewal. Suffice to say that a 2000 Open Cover was issued on August 2000, albeit dated a day earlier. Like the 1999 version, the insurance related to timber in various manifestations, including logs, which were being shipped from Malaysia or Indonesia to China, although additionally now such coverage also included voyages from the Solomon Islands to China, and again there was an express condition that the Assured was bound to declare every consignment and that in turn Underwriters were bound to accept such coverage, subject to the 'per bottom' financial limit.

17. There were, however, certain differences between the 2000 Open Cover and that of a year earlier. The named assured were now not only Borion but also Nagasaki or Roundtree Co. Ltd, but most important the 2000 Cover contained the following :

"For bulk carrier only :

Warranted the carrying vessels must be ISM Code compliance"

18. I am told, and I do not think that this is disputed, that following the issuance of this open cover, some 26 cargoes were insured for Borion and Nagasaki by the defendant (which figure includes the three consignments the subject of this action), and that instead of including an ISM Code warranty in terms of that appearing in the 2000 Open Cover, the 23 policies which did contain such a warranty contained a warranty in the same unqualified terms as now relied upon by the defendant by way of defence in this action.

19. On 18 November 2000 Nagasaki, via Top Asia, notified the defendant by fax of an intended shipment of Indonesian round logs to the value of "About US$1,056,000.00" on board the vessel "Rui Xiang" for carriage from Labuan Port, Malaysia to Nansha, China. The carriage of this notification of the details of this shipment bore the legend :

"Kindly issue cover note as follows :"

20. On or before 21 November 2000 the four consignments of logs the subject of this case commenced their transit. Shortly thereafter Nagasaki, via Top Asia, by fax dated 23 November 2000 made reference to the Cover Note and requested issuance of "3 sets policies as follows :", thereafter providing the precise details of the shipments of logs to be covered under these policies.

21. These policies were issued in the terms requested. It is clear on the evidence, also, that both Borion and Nagasaki were shipping these logs pursuant to trading contracts, and that separate policies were required for each shipment in order to satisfy the documentary requirements of letters of credit opened by buyers, so that, by indorsement, benefit of the insurance cover could be passed on to the buyers.

22. Immediately consequent upon the casualty, notice was given by Top Asia on 27 November 2000, and claims were made on the defendant under these three policies. However it was not until 5 July 2001 that Nagasaki was informed, by letter of that date, that these claims were declined on the basis of the alleged breach of the ISM Code warranty in the policies, the defendant noting that the "Rui Xiang" was a general cargo vessel, and that documents had not been provided showing that the vessel complied with the ISM Code.

23. Although the claims ultimately were declined in July 2001, in fact, following the loss of the cargo on the "Rui Xiang", on 12 January 2001 the defendant had given notice of termination of the 2000 Open Cover with effect from 11 February 2001.

The evidence

24. Viva voce evidence was given in this case, in particular as to what had transpired prior to the issuance of the 1999 and 2000 Open Covers, and of conversations that were said to have taken place arising from, and regarding, the inclusion of the ISM warranty. Given that in my view resolution of this case ultimately depends on legal argument in face of undisputed facts, I do not consider that this evidence is of overwhelming significance, although I would add that in instances in which there is a conflict upon any issue, I prefer, and fully accept, the evidence given on behalf of the plaintiffs.

25. In the event, the plaintiff called three witnesses, namely Mr Ngui Ing Chuang, General Manager of Nagasaki, Mr Teh BooYim, General Manager of Top Asia, and Mr Chan Kwok Wah, Company Secretary of Nagasaki. They were but barely cross-examined.

26. For the defendant, two witnesses were called, namely Mr Lo Kwan Lok, Deputy Manager of the Cargo and Hull department of the defendant underwriter, and Madam Chu Lai Na, an underwriter employed by the defendant responsible for handling matters relating to marine insurance. I was unimpressed by this evidence. I do not wish to be unkind, but it appeared to me that in giving evidence Mr Lo's primary consideration was to ensure that the plaintiffs did not succeed in their claims, whilst Madam Chu failed to demonstrate any noticeable expertise in the area of marine insurance. In passing I suggest that those who are charged with drafting witness statements, which more often than not are represented to constitute evidence in chief, should endeavour to avoid the obvious pitfalls inherent in repeating passages verbatim within the statements of different witnesses. Witness statements are a useful part of our civil procedure, particularly in the Commercial List, but only if they do indeed represent what is understood to be the witness's factual evidence, as opposed, for example, to chunks of thinly-disguised arguendo placed into the mouth of a witness. The irritation factor aside, such practice generally is counter-productive, as cross-examination frequently reveals.

Nature of the 'Open Cover'

27. As the editors of Arnould, Volume 1 (16th Ed.), at 108, point out, merchants regularly engaged in overseas trade make use of the open cover system for protection of their shipments. Usually the cover is written for twelve months (as in the instant case), and the crux of the cover lies in the mutual obligations inherent within it, namely, an obligation on the part of the assured to declare all shipments falling within the terms of the open cover, and a corresponding obligation on the underwriter to accept and issue policies for all these shipments. In short, therefore, the situation is that the assured knows that he has cover, and its terms and conditions, and the underwriter knows that he has a binding commitment to an income stream in the form of premiums accruing upon coverage of each shipment.

28. Clause 2 within the 2000 Open Cover as issued in this case makes this plain :

"It is a condition of this contract that the Assured are bound to declare hereunder every consignment without exception, Underwriters being bound to accept up to but not exceeding the amount specified in clause 3 below."

In turn Clause 3 of the cover specified that the amount declarable may not exceed the sum of US$1.5 million "in respect of any one vessel, aircraft or conveyance. A 'Note' appearing at the bottom of the abstract of the Cover (which adopted the form of the Institute Standard Conditions for Cargo Contracts) also reads :

"The Assured are required to give the earliest provisional notice of intended shipments advising in each case the name of the vessel and approximate value of the shipments."

29. As to the issue of attachment of risk under the terms of this 2000 Open Cover, it was submitted on behalf of the plaintiffs, a submission which I accept, that the true analysis of the situation is that the defendant underwriter came on risk for any given consignment of timber as soon as the relevant shipment left the warehouse or place of storage in Malaysia or Indonesia for the commencement of its transit to China. At that moment the risk attached, and at the same moment there vested in the defendant a potential cause of action in debt for a premium calculated in accordance with the pre-agreed formula, which varied the premium in categories depending on the age of the carrying vessel in this instance, for example, a ship in the 16-20 year bracket attracted a premium calculated at 0.13% of the insured value for ICC(A) cover, and 0.10% for ICC(C) cover, subject to a minimum charge of HK$300 per voyage. I further accept the contention in this case that upon attachment of risk there vested in the underwriter a cause of action in debt irrespective of whether the Assured in fact made a declaration: see The "Beursgracht" [2001] 2 Lloyd's Rep.602, approved on appeal at [2001] 1 Lloyd's Rep.574 (CA).

30. Like the situation in The "Beursgracht", it seems to me in this case that a declaration served would not in itself be or have been creative of rights and obligations given that the insurance had incepted immediately on shipment but would represent part of the contractual machinery whereby the position under the cover was subsequently declared, thereby enabling underwriters, for example, to make their own arrangements for reinsurance.

31. It follows, therefore, that I am unable to agree with the defendant's submission that the language of the 2000 Open Cover contemplated that liability was conditional upon the making of a declaration thereunder, and that a declaration was required before the underwriter was bound. To the contrary. I see merit in Mr Sussex's suggestion that if indeed the risk did not attach until a declaration is made, it is not easy to see why it was considered necessary to include within the Open Cover a '14 day declaration' warranty, the purpose of which was to ensure that the underwriter is apprised of the existence of the risk within that period, and thus is placed in the position to take such action as it deems appropriate in the circumstances; in short, therefore, if such risk did not attach until declaration, as now is alleged, where is the warrant for such urgency?

The core issue

32. Against this background, therefore, I revert to that which clearly represents the core issue in this case, namely, were these three marine cargo policies under which claims have been made issued independently of the Open Cover, or should these policies properly be regarded as having been issued pursuant to the defendant's obligations under this cover?

33. The defendant's case is that these are free-standing policies which, as Mr Shieh expressed the position, fell "outwith" the umbrella of the Open Cover. He submitted that whilst in these circumstances it would have been open to the insurer to insist that the insured should adhere to the existing Open Cover and make a declaration thereunder, the insurer was not bound so to insist, and could "go along" with the insured's request for a Cover Note, which, in terms of legal analysis, can be regarded as an offer to enter into an insurance contract outside the existing Open Cover framework.

34. Such an offer, said Mr Shieh, is capable of being accepted by the insurer by the act of actually issuing a cover note, and that there was nothing to prevent the defendant, as happened in this case, from agreeing to enter into an insurance contract outwith the Open Cover. And, if this was correct, the defendant was free to impose terms in any Cover Note and ensuing policy that it saw fit to issue in this case containing an unqualified ISM Code warranty the terms of which were unconstrained by the content of the 2000 Open Cover. Moreover, he argued, Nagasaki had not objected to the terms of the cover note, nor the policies which were in fact issued as a result. And whilst suit now is brought upon these policies, the ISM Code warranty was breached, and the defendant was entitled to (and did) repudiate liability.

35. The assertion that in regard to these three policies the parties in some wise had chosen to act outside the terms of their existing contractual relationship, and further to arrogate to this particular warranty an unqualified meaning, notwithstanding that the terms of dealing with regard to the 1999 and 2000 Open Covers conversely had been precisely to qualify the ISM Code warranty, was regarded the plaintiffs to be an argument both disingenuous and fallacious.

36. Mr Sussex SC, in response, submitted that the fax of 18 November 2000 plainly satisfied the provisional notice requirements contained in the Note to the Institute Standard Conditions for Cargo Contracts forming part of the 2000 Open Cover, and the fact that this fax asked for the issue of a 'cover note' was not inconsistent with that interpretation. It was, he said, not unreasonable to request such a note of confirmation that cover existed for the particular shipment to which the notice related, and that to construe the fax as being a request for insurance "outwith" the 2000 Open Cover in effect would be to construe it as a request for double insurance with the same underwriter, which would be "commercial nonsense".

37. I agree. It strikes me as odd indeed should there have arisen a purely ad hoc arrangement which in relation to but one voyage the voyage the subject of the present claim served to remove the pre-existing insurance out of the ambit of the established 2000 Open Cover and to render the assured subject to a more onerous term than that which existed under that Cover. Accordingly, on this factual matrix I have no difficulty in regarding this fax in the manner in which the plaintiffs suggest. The fact that this document makes reference to a 'cover note' does not, in my view, point to an attempt to take the whole transaction out of the scope of the 2000 Open Cover.

38. In my view, also, the fax of 23 November 2000, whereby Nagasaki, via Top Asia, requested issuance of three policies in terms of the details then given, clearly was a request for negotiable policies referable to the specific consignments detailed therein, and equally can be construed as constituting a declaration under the Open Cover. By this fax the defendant underwriter was told that it was on risk to the extent of the various sums specified, as a result of which the defendant would have been able to make such reinsurance arrangements as it considered prudent, whilst at the same time being informed that a premium was due, which in the event was charged and was paid at the rate in fact agreed under the 2000 Open Cover.

39. I note that the 2000 Open Cover makes no stipulation as to the form a declaration must take, and I see no reason whatever why this fax cannot be regarded as a relevant declaration. I firmly reject the thesis that because the faxes of 18 and 23 November made no reference to the 2000 Open Cover, and because the first fax made reference to a 'cover note', that these faxes thereby should be regarded as constituting an application for insurance wholly separate from the cover that was in place; in this connection Madam Chu's reference to a "proposal form" struck me as ambitious and wrong.

40. Mr Shieh fairly accepts that if the court holds as a matter of construction that the fax of 20 November was a declaration properly made under the 2000 Open Cover, the defendant's obligation thus was to insure the declared shipment in accordance with the terms of that existing insurance and, if called upon, to issue policies reflecting the terms of the 2000 Open Cover. It follows, as he again accepted, that in such a case the defendant ought not, and was not entitled, to have issued policies at variance with the provisions of the existing cover, such as (as is claimed in this instance) the imposition of an allegedly wider warranty than was in place under the 2000 Open Cover.

41. On the particular facts of this case, therefore, I find in favour of the plaintiffs' argument, and decline to accept the defendant's argument that in this instance the insurance issued on the cargo on the "Rui Xiang" was facultative and not obligatory. There was a contractual obligation on Nagasaki to insure cargo under the 2000 Open Cover, and in turn the defendant underwriter was obliged to insure upon the terms of that Cover. In my view Mr Sussex was correct when he suggested that one would need to see "something pretty stark" in order to construe the documents as a variation of that pre-existing arrangement, and in my view he was close to the mark, and indeed may well have been charitable, when he characterised this defence as "opportunistic". In my judgment the defence raised on the basis of the ISM Code is without merit.

42. In light of the conclusion that I have reached on the facts, there is no need to consider the various alternative arguments advanced on behalf of the plaintiffs, which extended to matters of interpretation of the words of the warranty, estoppel by convention (in light of the contractually agreed meaning that the words of the warranty apply only to bulk carriers), and rectification (on the ground of mutual/unilateral mistake), upon which arguments, I apprehend, reliance was to be placed in the event that the court came to the view that the plaintiffs were unable to place themselves within the ambit of the 2000 Open Cover.

43. Nevertheless, whilst there is no necessity to express a concluded view, suffice to say that should I be wrong in the approach that I have taken on the facts, I should have regarded favourably Mr Sussex's primary alternative submission to the effect that the terms of the warranty appearing on the face of these policies, with its emphasis upon 'compliance', lends itself to the commercially-sensible construction whereby this particular warranty is applicable to those vessels for which compliance with the ISM Code is mandatory, but not otherwise.

44. This point is not an easy one, but I see merit in the argument that the term 'compliance' (in grammatical terms the word used obviously should have been 'compliant') connotes obedience to applicable extrinsic rule, and that absent any such internationally-sanctioned requirement of obedience to this Code, a general cargo vessel such as the "Rui Xiang" should not, and is not, to be regarded as being in a state of 'non-compliance' with the ISM Code. I bear in mind also that this term is expressed as a warranty, which under section 33 of the Marine Insurance Act is a condition requiring exact compliance, whether or not material to the risk, and thus I accept that the court should be astute not to construe this warranty in a way which does damage to its clear commercial purport, and the manner in which it would be understood by commercial men; indeed this was the clear understanding between the commercial parties in the instant case, wherein the specific terms of the 1999 and 2000 Open Covers each made it clear, albeit in a slightly different manner, that the ISM Code warranty was to have no application to general cargo vessels, which at that time accurately represented the position in terms of the international applicability of the ISM Code.

Order

45. Mr Sussex has asked for judgment for the 3rd plaintiff, as assignee of Policy No MCG/00-0114201 (relating to the 3rd and 4th consignments of logs) and for judgment for the 1st plaintiff, the party actually suffering the loss, under policies MCG/00-M0114206 and MCG/00-0114209 (relating to the 1st and 2nd such consignments).

46. No issue ultimately has been raised in this case in terms of title to sue or insurable interest.

47. I make the following Order in this case :

(1)	Judgment for the 1st plaintiff against the defendant in the sum of US$357,454.52;
(2)	Judgment for the 3rd plaintiff against the defendant in the sum of US$557,666.78;
(3)	I make an order nisi that interest is to run on the sums aforesaid at the rate of 6.5% for the period from 27 November 2000 to 6 June 2000;
(4)	I further make an order nisi that the costs of this Action are to be paid to the plaintiffs by the defendant, such costs to be taxed if not agreed.
	I make a particular direction, if such be required, that such costs as have been incurred by the plaintiffs in terms of the shared provision of the 'Livenote' facility be recoverable upon taxation. Absent specific agreement to the contrary, an initial and entirely appropriate arrangement to share responsibility for the costs of the admirable (and in my view, in the Commercial List, wholly necessary) 'Livenote' service as used at trial is not to be taken as precluding subsequent recovery by the successful party of its share of those costs.