DEBIS FINANCIAL SERVICES CHINA LTD. v. HARBOUR UNION INVESTMENTS LTD. AND ANOTHER

HCA 1320/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1320 OF 2001

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REASONS FOR DECISION

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1. The Plaintiff sues the Defendants for repayment of a loan. The loan was secured by a mortgage of a 83 ft. pleasure vessel, a San Lorenzo ("The Vessel"), owned by the 1st Defendant. The 1st Defendant now seeks to join the Third Party on the basis that it has a valid claim under a contract of marine insurance ("the Policy") effected with the Third Party.

2. The 1st Defendant's claim arose out of the theft of the Vessel which it says was a risk covered by the Policy. The Third Party, on the other hand, argues strongly that the risk was not covered because the Vessel was not licensed at the time of theft and that the assured was thus in breach of the Merchant Shipping (Pleasure Vessels) (Amendment) Regulations 1981. These regulations appear to have been incorporated into the Policy by a warranty which reads:

"warranted that all the requirements and regulations of the Merchant Shipping (Pleasure Vessels) (Amendment) Regulations 1981 must be complied with during the period of insurance."

3. Both counsel for the 1st Defendant and the Third Party have raised a number of very interesting points. But in view of my ruling today I think the less said about these points the better since I do not wish to appear to seek to influence the decision of any trial judge who will eventually try this matter. I therefore hope that counsel would forgive me if I shall only deal with the one point which I think is decisive as to the outcome of today's hearing.

4. The Policy contained what I am told a standard mortgagee clause. The material part of that clause reads:

"loss, if any under this policy shall be payable to [the Plaintiff] as mortgagees or assignees of mortgage interest to the extent of their interest.

It is hereby agreed that in the event of loss or damage, the company will pay the mortgagees or said assignees to the extent of their interest and that this insurance in so far a (sic) concerns the interest therein of the mortgagees or said assignees only shall not be invalidated by any act or neglect of the mortgagor or owner of the Property insured nor by anything whereby the risk is increased being done to upon or in any building hereby insured without the knowledge of the mortgagees or said assignees......."

5. In essence, this is a promise by the insurer to pay the mortgagee proceeds under the Policy even if the assured had acted in breach of any warranty. Mr Colin Wright, appearing on behalf of the Third Party, accepted that he would have difficulty in resisting a claim based on this clause by the mortgagee. The mortgagee, of course, did not sue on the Policy. He was content to sue the Defendants on the loan. That was hardly surprising since the mortgagee was not privy to the Policy and I think it would have difficulty in suing on the Policy without the assistance of the assured.

6. The 1st Defendant, on the other hand, has a legitimate interest in seeing the fulfilment of the insurer's obligations under the mortgagee clause since any payment under the clause will diminish any liability it may owe to the Plaintiff. In the normal course of event, if there is no litigation between the Plaintiff and the Defendants, the 1st Defendant will be able to join in the Plaintiff either as a co-plaintiff or as a co-defendant to ensure that there would be payment under the mortgagee clause in favour of the Plaintiff. It does not need to join the Plaintiff in the present case as it is already a party to the litigation.

7. I am persuaded that the 1st Defendant has an arguable right to ensure that the Third Party would act on the mortgagee clause and this right is not affected by any argument based on breach of warranty.

8. Mr Wright relies on the right of subrogation under the mortgagee clause. This arises out of a provision in the mortgagee clause which reads:

"And it is further agreed whenever [the Third Party] shall pay the mortgagees or said assignees any sum for loss or damage under this Policy and shall claim that as to the mortgagor or owner no liability therefore existed. [The Third Party] shall at once be legally subrogated to all rights of the mortgagees or the said assignees to extent of such payment ... "

He very forcefully argues that to allow the Third Party proceedings to proceed will only produce a circuity of action whereby the Third Party will eventually have a valid claim against the 1st Defendant for the same sum.

9. The difficulty of that argument, however, is that the Plaintiff's claim against the Defendants is by no means an assured success. The Defendants, so I am told, have an arguable defence and since upon payment the Third Party will only be subrogated to the Plaintiff's rights, those rights will not necessarily ensure that the Third Party will recover the same sum from the 1st Defendant.

10. For this reason, I am of the view that it would be wrong to stop the Third Party proceedings in limine and I think the learned Master was right in refusing to strike out the Third Party Notice. I shall, therefore, dismiss the appeal with costs.