PACIFIC DUNLOP (ASIA) LTD. AND ANOTHER v. INCHCAPE INSURANCE BROKERS (HK) LTD.

HCCL247/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL LIST NO.247 OF 1998

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J U D G M E N T

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THE FACTUAL BACKROUND

1. On 25 November 1992, a fire occurred in Henggang, PRC, at the factory premises of the 2nd plaintiff, Grosby (China) Limited ("Grosby"). These premises, together with machinery therein and materials and stock in trade, were insured by the Peoples' Insurance Company of China ("PICC') pursuant to Property Insurance Policy No. SZA101920115 ("the policy") issued on its behalf on 6 November 1992 by the defendant herein, Inchcape Insurance Brokers (HK) Limited ("Inchcape").

2. The consequence of these events remain at large almost a decade later, and have formed the subject matter of this trial. In broad outline, what happened was this. The insurer, PICC, declined to indemnify the insured, Grosby, to the full value of the policy, which on its face underwrote the property in question to a cumulative value of US$9.3 million. Instead PICC asserted, inter alia, that if it was liable to indemnify Grosby (and apparently suggestions were made that it may have been off-risk entirely), its liability was limited to the lower values, totalling US$6.5 million, specified in the prior expiring policy (likewise issued by Inchcape on its behalf) covering the Henggang factory and its contents, and that PICC had neither had notification of nor had it confirmed the increased values in the policy against which indemnification was now sought.

3. PICC, the insurance company, is not a party to the present action. So far as PICC was concerned, resolution of the dispute between itself and Grosby was settled at the end of December 1993 at the conclusion of protracted negotiations to which Inchcape, the broker, ultimately was not privy. The sum of money paid by PICC to Grosby in settlement of its insurance claim amounted to some US$3,590,835. This figure was based upon the lower insured values under the property policy issued and in force for the year ending September 1992, and further was subject to general average. The 'Form of Acceptance' dated 30 December 1993 signed by Grosby consequent upon this settlement recited that the sum accepted (which was net of a US$1 million interim payment) was accepted "in full satisfaction and discharge of all claims for loss of or damage to property insured by [Policy No. SZA101920115] consequent upon the fire damage which occurred on 25 November 1992", and further stated the express agreement and understanding that such settlement was "without admission of liability on the part of the People's Insurance Company of Hong Kong, Shenzhen Branch".

4. This Form of Acceptance of 30 December 1993 also specifically declared that "there are no other insurance effected by us or by any other parties upon the said property". Factually this was incorrect. By virtue of a global Industrial All Risks - Property Damage and Business Interruption Policy, No.299014/93 issued by Pacific Dunlop Insurances Pte Limited, in force at the time of the fire, the 1st plaintiff Pacific Dunlop (Asia) Limited and "all its Subsidiary and Associated Companies" (of which Grosby was one) were insured for loss or damage to "property belonging to the insured situated anywhere in Hong Kong and the People's Republic of China".

5. In effect this latter policy was a "top-up" policy to be resorted to only after initial recourse had been made to local insurance. An Endorsement to this global policy (which in the course of these proceedings has been shortly and generally described as the "DIC policy") provided that as a pre-condition to payment thereunder the insured was to pursue any valid claim under local insurance prior to payment being generated under this DIC policy, although it was open to the insurer "in consultation with its Reinsurers" to insist upon pursuit of local insurance notwithstanding that local insurers may have declined to indemnify.

6. In fact in the present case Grosby's claim against PICC was settled, albeit, as I have indicated, on the basis of the earlier lower valued policy. Accordingly a claim for the unrecovered differential was also made under this global DIC policy, and by letter dated 28 December 1994 from Commercial Union, "as lead Co-Reinsurer", such outstanding claim was paid in respect of the Grosby fire loss of 25 November 1992. This letter concluded by requesting that releases be drawn up to provide for Co-Reinsurers to be subrogated to the insured's action against Inchcape Insurance Brokers in relation to the shortfall in the sum insured in terms of that which had been the subject of the PICC insurance.

7. It follows, therefore, that whilst the action has been brought in the name of the present plaintiffs, in reality it is an action commenced and maintained at the instance of reinsurers pursuant to an asserted right of subrogation. At this stage it is fair to observe also that this is not an action which has attracted any degree of expedition. Notwithstanding the settlement by Grosby with PICC at the end of December 1993, that which amounts to a letter before action to Mr Andrew Young of Inchcape from Mr Robin Patchett of Richard Oliver dated 4 January 1994, and settlement by reinsurers under the DIC policy in December 1984, the writ in these proceedings was not issued until 12 October 1998 and, I am told, was not served on the defendant until 16 September 1999, almost a full six years after the events which have been the subject of examination in this trial.

THE PLAINTIFFS' CLAIM

8. The plaintiffs' case against the defendant, Inchcape Insurance Brokers (HK) Limited, is thus. In the Re-Re-Amended Statement of Claim, it is alleged that in breach of the brokerage contract and/or negligently, Inchcape did not comply with the instructions received on behalf of Pacific Dunlop and/or Grosby to effect renewal of the property insurance upon the basis of "the new sums insured either with reasonable promptness or with expedition or at all".

9. The result of this breach, it is said, was that Grosby's insurance cover with PICC was restricted to that which resulted from PICC's renewal of the prior expiring policy on a "held covered" basis, and further that, but for Inchcape's breach, Grosby would have been insured on the basis of the "new and increased sums" in the renewed policy, and thus that PICC would have been liable to pay Grosby upon this, and not upon the old, basis.

10. This case is all about liability. Quantum is not an issue which has occupied counsel or the court, and there is no necessity to set out in this judgment the manner in which the present claim has been calculated. Suffice it to say that if liability were to be established - an issue which is hotly contested - there is no dispute that the plaintiffs' claim is as pleaded, namely US$1,922,272,41, which is the amount, together with interest, now claimed from the defendant.

THE EVIDENCE

11. In terms of viva voce evidence, four witnesses were called for the plaintiffs. Three of these witnesses - Mr Robin Patchett, Mr Kenneth Brown and Mr Gary Lai - were at the material time executives within the Richard Oliver Risk Management Group, which group had provided the Pacific Dunlop Group, a multinational consumer products company headquartered in Australia, with risk management advisory services. Pacific Dunlop (Asia) Limited, the 1st plaintiff herein, was and is a subsidiary of the group based in Hong Kong, and it had been through the medium of Richard Oliver that the then Gilman Insurance Company Limited (subsequently renamed Inchcape) had been appointed to act on behalf of Pacific Dunlop (Asia) in the arrangement of insurance cover for the operations of Pacific Dunlop in Hong Kong and the People's Republic of China - of which, of course, Grosby's factory in Henggang was one such operation. The plaintiffs' 4th witness, Mr Clarence Lo, was at the material time employed by Pacific Dunlop (Asia) at its Hong Kong office with responsibility, inter alia, for insurance matters.

12. For the defendant also four witnesses were called. Mr Andrew Young and Mr Peter Lo were directors within Gilman/ Inchcape in the early 1990's, while Mr Robert Tsang - who in the circumstances of this case was the principal witness for the defendant - was then at general management level, whilst the 4th witness, Miss Alice Leung, was at the relevant time Mr Tsang's secretary.

13. I deal with various aspects of the evidence later in this judgment. For present purposes, however, it is probably fair to say that this is not a case which primarily is dependent upon resolution of direct evidential conflicts between the two sets of witnesses, albeit specific sub-issues do occur which require to be addressed. Nevertheless, upon the central issue which arises in this case, direct evidence comes from one side only, and, whilst subject to criticism, is not subject to contrary evidential assertion. I turn now to consider this central issue.

THE CENTRAL ISSUE : THE DEFENDANT'S AUTHORITY

14. It is accepted by leading counsel on each side that central to this case is whether the defendant had full authority to cause policies of insurance to issue on behalf of PICC. It is common ground that Property Insurance Policy No.SZA101920115 - the "higher values" policy against which PICC declined to indemnify Grosby - is genuine in the sense that it bears an authorized signature and an authorized PICC chop, that it was issued by the defendant on behalf of PICC, and that it covers the peril insured against.

15. Against these undisputed facts, the issue of the defendant's authority to do as it did looms large. As Mr Reyes SC, for the plaintiffs, expressed the position, the real question is whether this higher values policy was effective, the answer to this question in turn depending upon the scope of the defendant broker's actual authority to issue policies on behalf of PICC, Shenzhen.

16. In this context, there has been much debate as to the burden of proof. Whilst Mr Reyes necessarily accepts that the legal burden is on his clients to prove their case as pleaded, nevertheless he says that the evidential or persuasive burden upon the authority issue lies upon the defendant, which specifically has pleaded that it had actual authority to issue policies without the need for confirmation by PICC, Shenzhen. Moreover, he asserts, on general principles the broker is the agent of the insured, not the insurer, so that the mere issue of a policy by a broker such as the defendant, without reference to the insurer, would not be enough to validate that policy. To the contrary, Mr Bleach SC, who appears for the defendant, maintains that the undoubted existence of a prima facie valid policy - as in this case - is decisive on the point, and that in fact it is for Mr Reyes to prove, on the balance of probabilities, that this "higher values" policy was issued by the defendant absent such actual authority.

17. Whilst the issue is an interesting one, on the facts of this case I do not think it much matters in terms of the outcome of this litigation. I recognize, of course, that were the plaintiffs to bear the persuasive burden and be required to establish the absence of authority, effectively that would be that so far as this claim is concerned, given that none of the plaintiff's witnesses were able to offer any evidence as to the relationship existing between the defendant and PICC, Shenzhen. As Mr Bleach observed, the plaintiffs simply do not know whether Inchcape did or did not possess the authority that is pleaded by Inchcape, and indeed it is perfectly clear that in this regard the plaintiffs know no better than that which they have been told by PICC.

18. For my part, however, given the manner in which this case has been pleaded and particularized by the defendant, I consider that the appropriate way to proceed in these particular circumstances is to assume the evidential burden on the authority issue as falling upon the defendant. I would, however, add that had matters developed differently, this might well not represent the correct approach, and that a simple stand on the validity of the duly signed and chopped policy, without more, might well have been sufficient from the defendant's standpoint. The matter may, perhaps, be tested in this way. Had, for example, the plaintiffs chosen to litigate PICC on the policy rather than to settle, PICC's defence would (I assume) have been Inchcape's lack of authority to act as it did, so that the burden on this issue would have been squarely upon PICC. Accordingly, having settled with PICC, and in effect, having now adopted PICC's stance in terms of the authority issue, it is difficult to see why the plaintiffs now should be in any better position than the insurer itself would have been had this matter been litigated or arbitrated with all three parties, that is, insurer, insured and broker, before the court. On this analysis, therefore, the burden should fall on the plaintiffs (a burden which plainly in this case it cannot discharge) of establishing want of authority. However, as I have indicated, in light of the manner in which this case has been framed, I am content to approach the point from the standpoint of the defendant having to establish that it had authority so to issue the policy in question.

19. Even on this basis, on the evidence before this court I am more than satisfied that the defendant has made out its case in this regard, and that it has established, on the balance of probabilities, that it had authority to issue the policy in question so as to bind PICC to coverage at the higher values, absent the requirement of prior notification and/or confirmation from PICC that it would indemnify at such higher values. I use the phrase 'notification and/or confirmation' because it seems to me, on the face of the papers and upon the evidence, that PICC's own stance fluctuated considerably in the course of the extended negotiations, and that, quite apart from the spectre of repudiating liability altogether, at times PICC took the view that it would indemnify if it had been notified of the higher values, and on other occasions apparently expressed the view that confirmation on its part of such acceptance of risk was a specific requirement.

20. It seems clear on the facts of this case, and I so find, that the insertion in the policy of the "higher values" - which, it will be recalled, totalled US$9.3 million in terms of cumulative cover, as against the previous lower value policy (then about to expire) of US$6.5 million - was effected by and at the initiative of Robert Tsang (as he testified) against the background of uncertain asset values at the Grosby plant, and with the expiry date of the initial property policy preceding confirmation of those asset values. In this regard, there is no doubt that the plaintiffs' case was based, in substantial part, upon the allegation that Mr Tsang of Inchcape had failed to comply with instructions given to him at a 19 October 1992 meeting organized by Richard Oliver at the offices of Pacific Dunlop to notify PICC of the higher values in place of those upon which PICC then was holding Grosby covered, and to effect renewal of the insurance with PICC on the basis of these higher figures as from 30 September 1992.

21. The question of what did or did not transpire at this meeting on 19 October 1992 represented one of the key factual issues for determination by the court, notwithstanding that the fact of the issue of the higher values policy dated 6 November 1992, if established to have been done with authority, effectively rendered otiose this factual dispute. That said, however, I decide this point in favour of the defendant, and in this context I have no difficulty in preferring the evidence of Mr Robert Tsang to that of Mr Gary Lai, who gave evidence for the plaintiffs by video link from Singapore. I am in no doubt that the clear uncertainty over Grosby asset values, arising from sharply disparate figures emanating from different questionnaires, rendered it far more probable that the consensus at this meeting of 19 October 1992 simply had been to hold Grosby covered at the levels of the expiring policy. I note that the Minutes of this meeting were prepared by Mr Gary Lai well after the event, in fact after the occurrence of the Grosby factory fire on 25 November 1992, and that Mr Tsang responded to Mr Lai as to the accuracy of the draft of such Minutes, with Mr Lai in correspondence thereafter suggesting a revised formulation. In the context of what then was agreed, I am quite unable to accept Mr Lai's suggestion that the form of words eventually adopted via his memo of 26 January 1993, viz : "... however we agreed to let this pending for CL further clarification" meant, as he now asserted, that "we should use the higher local figures pending the outcome of the clarification of the position by Clarence Lo".

22. So that in this connection I reject the plaintiffs' suggested finding that at this meeting Mr Robert Tsang had been instructed to renew Grosby's property damage insurance at the higher values, pending subsequent clarification by Mr Lo. The short point is that the words used do not say that, the circumstantial (and logical) context suggests to the contrary, and, whilst I do not wish to be unkind, I am bound to say that in cross- examination Mr Lai's somewhat embarrassed efforts to square the circle on this point were unimpressive to say the least.

23. In any event, I agree with Mr Reyes that a finding adverse to his clients on this sub-issue is not decisive of the plaintiffs' case. What is undoubtedly decisive, as counsel recognized, was whether the higher value policy which Mr Tsang had taken it upon himself to issue in a desire to protect Grosby's position pro tem was or was not issued with the authority so to do.

24. Inchcape's case was that it was not in doubt that it did have such authority from PICC to issue policies on its behalf without any requirement to notify or to obtain specific approval or confirmation prior to such issuance, and indeed that it had been acting pursuant to such authority since the mid 1980's. Mr Robert Tsang's wide ranging evidence recounted the provenance of this scheme, whereby in the 1980's Gilman was doing business with PICC, Shenzhen, and that logistical and communications difficulties existing at that time between Hong Kong and the Mainland led to a system whereby Gilman was authorized to issue policies on behalf of PICC at its discretion absent restriction on risk or the amount of coverage. As Mr Tsang explained, the "huge capacity" and commercial influence of PICC as the nationalized PRC insurer served to remove difficulties which otherwise may have arisen, and that over the years literally thousands of policies were issued by Gilman/Inchcape pursuant to such authorization from PICC. The way this worked was that Gilman, the broker, was provided with quantities of blank PICC policies which were pre-signed and chopped, thereby permitting the insertion of the relevant insurance particulars on the face of each policy and its subsequent issuance. The policy in question in this case had been processed in precisely this manner, said Mr Tsang, absent any necessity for notification or confirmation by PICC.

25. Mr Tsang further stated that so far as he was aware, out of the thousands of policies so issued in this manner by Gilman/Inchcape, until the occurrence of the present instance there had to his knowledge never been an objection by PICC as to the validity of a single policy, and that claims made under such policies had been processed and paid in normal course. This was, said Mr Tsang, the reality of how business was done in the PRC in those days, and in this context the absence of any written agreement between PICC and Gilman/Inchcape was unsurprising and a reflection of that reality.

26. Mr Tsang, who was pressed hard in cross-examination, struck me as an eminently credible witness, and as just the type of energetic executive who in his younger days had recognized the potential for and had fostered the cross border relationship he described. It was suggested by Mr Reyes that Mr Tsang was "hazy" as to details, and whilst it is true that Mr Tsang understandably could not recall details of all the PICC officials that had been involved in this practice, he was crystal clear as to the inception of this system and as to how it worked. In addition, he specifically recollected that in those early days the then head of PICC's Foreign Insurance Department was one Mr Li Guang Sheng, the same Mr Li who became Deputy General Manager of PICC, and a man who, said Mr Tsang, he trusted as a gentleman of the old school, as a person of "high integrity", so that he had had no concern that PICC would not honour its commitments even though nothing was in writing. I note here that apparently it was Mr Li alone among his fellow officials at PICC who, at the material time, was in favour of honouring Grosby's claim under the higher values policy. Taking his evidence in the round, Mr Tsang left me with the firm impression that over the years this had been a mutually satisfactory and lucrative way of conducting business both for Gilman/ Inchcape (which took 10% commission from the premiums collected) and for PICC, to whom Gilman accounted, in terms both of money and policies issued, on a regular basis, and that, always subject to the exercise of his judgment, there was, as he put it, "absolutely no doubt at all" that he had the authority to conduct business on behalf of PICC in the manner he had described without objection from anyone in PICC, and indeed that this situation had prevailed until the occurrence of this incident.

27. Mr Andrew Young and Mr Peter Lo, senior executives in the defendant at the material time, gave evidence which fully supported that of Mr Tsang. Mr Lo, as one of Mr Tsang's superiors, was perhaps a rather late entrant upon the scene, although I accept his evidence as far as it goes. Mr Young, who in effect was responsible for the activities and operations of the defendant at the material time, was an impressive and authoritative witness. He was in no doubt as to the existence of the practice described by Mr Tsang in the later 1980's and early 1990's, albeit he had not, he said, set out to ascertain the detailed "mechanics" of the system being operated. Mr Young expressed the view that there was "no foundation whatsoever" in the allegation that Inchcape did not have the authority to issue the policy in question. He stated that his company had issued this policy "in the same way as all other PICC policies it/Gilman issued over the previous 12 years for and on behalf of PICC", and that the policy thereby covered Grosby for the higher amounts specified on its face.

28. I accept the evidence of Mr Young as I have accepted that of Mr Tsang. I further have no difficulty in accepting that of Miss Alice Leung, who at the time of these events was working as secretary to Mr Robert Tsang. As with the other witnesses for the defendant, I regard Miss Leung as a witness of truth. In her secretarial capacity, Miss Leung, who worked with Mr Tsang for 13 years, gave evidence as the actual process of the issuance of PICC policies. Her task essentially was to complete the relevant details on the face of the pre-signed PICC policy, and to obtain by telephone from a PICC staff number in Shenzhen the necessary policy number to be assigned to the policy to be issued. This was the inevitable routine, she said, her company always having in stock a bundle of PICC general and marine policies all pre-signed and pre-chopped by PICC and ready, subject to completion, for issue. Miss Leung, therefore, effectively was the person at the coal face, and she confirmed that the process of issuing policies in this manner went on "for many years". Her task, also, was to collect in batches the PICC policies as so issued by Gilman/Inchcape, and either to post them to PICC in Shenzhen or to assemble them for Mr Tsang to deliver himself on his regular trips to Shenzhen. Miss Leung continued that she had never been privy to any question or query by PICC personnel as to the issue of any policy, nor had PICC ever refused issuance of a policy; to the contrary, her impression was that PICC was pleased to get as much business written through her company as was possible, given that Gilman/Inchcape had many contacts with important clients doing business in China.

29. So far as the policies in this case were concerned, Miss Leung believed that she would have been the person who issued both the initial property policy, expiring on 30 September 1992, and that she also would have been the person arranging the increased cover on the renewed policy the subject of this case. In this connection, she confirmed that she followed the same procedures as she always had, obtaining the relevant policy number from PICC personnel on the telephone. She was, she said, also in charge of the office fax machine, and on some occasions after issuance of a policy Mr Tsang would ask her to fax details of policy changes to PICC as a matter of courtesy, and to the best of her recollection on no occasion was any response received back from PICC. In terms of fax communications, Miss Leung described how she chopped a fax after its sending, and she confirmed, and I accept, that she must have sent the fax dated 29 October 1992 at 6:30 p.m. on that day, as per the details on the chop. This is the so-called 'disputed fax', originally claimed by PICC not to have been received, notifying PICC of the updated sums on the PICC policy for the renewal period 1 October 1992 to 30 September 1993. I find as a fact that this fax was sent (it is common ground that it was re-sent on 8 December 1992) notwithstanding PICC's reported disavowal as to its receipt, which, as I understand it, formed one of the planks of PICC's rejection of liability to indemnify at the higher values. As with the dispute as to what had transpired at the meeting on 19 October 1992, the issue of this disputed fax was a factual subplot which was, in effect, subsumed within the general authority issue, although since it has been flagged as a significant element in this case I specifically decide the point.

30. In accepting the evidence of the defendant's witnesses, and in deciding the authority issue in the defendant's favour, I have not overlooked the criticisms which Mr Reyes SC, who conducted a difficult brief with ability, put forward on behalf of the plaintiffs. In the particular circumstances of this case, and of China trade in the late 1980's and early 1990's, his general proposition as to the inherent lack of probability of a broker possessing this type of unrestricted authority did not possess the resonance that might otherwise have been the case; indeed, in this case the history of this particular broker/insurer relationship speaks otherwise. Nor do I accept his ingenious collateral attack to the effect that the defendant had failed to establish that Mr Li Guang Sheng of PICC himself had authority so to authorize Mr Robert Tsang and Gilman/Inchcape to act as it did. This aspect of the matter has not been canvassed on the pleadings, and in any event, having accepted the truth of the evidence as to the evolution and history of this insurance arrangement between Gilman/Inchcape and PICC, Shenzhen, and in particular the past issuance of a very large number of policies in this manner absent any objection from PICC, I am disinclined to draw any inference from the facts other than that such authorization was validly given by PICC to Gilman/Inchcape. There is no evidence as to why in this case PICC chose to act as it did, and I am disinclined to speculate as to the reason. And I am equally disinclined to impugn a long-standing (and by all accounts mutually successful commercial arrangement) as constituting no more than an individual frolic on the part of any particular PICC official, Mr Li or otherwise.

31. So I reject what might be characterized as Mr Reyes' conceptual attack on the authority issue. I have also reflected upon the detailed arguments set out in his submissions regarding alleged documentary inconsistencies which, it is said, raise difficulties when placed against the defendant's assertion as to the unrestricted ambit of its authority. For example, much is made of Mr Tsang's fax dated 28 September 1992 to PICC requesting that the Grosby expiring policies, of which the property policy was but one, should be held covered from expiry, and requesting confirmation thereof by counter-signature. However, in his evidence, which I have accepted, Mr Tsang explained that he had specifically been asked to issue the renewed policy (for "customs purposes") by Mr Clarence Lo, and thereafter that he had been pressed for confirmation, and that was why this fax had been thus drawn. In so far as there is a factual dispute between Mr Tsang and Mr Lo, having seen and heard both witnesses, I am inclined to prefer the evidence of Mr Tsang. So I do not think that this fax serves to make the plaintiffs' case that the validity of policies issued by Inchcape was subject to confirmation and acceptance by PICC, Shenzhen. Nor do I consider that the other faxes relied upon establish the necessity for confirmation. It is clear that the PICC fax of 6 November 1992 - which specifically does not request confirmation - stimulated the resending, on 8 December 1992, of the so-called "missing" fax of 29 October 1992, nor do I regard Mr Tsang's fax of 4 December 1992 as necessarily detracting from the defendant's case in light of Mr Tsang's evidence that he had sought confirmation in this manner because he had been asked, and in any event because Inchcape's arrangement was with PICC, Shenzehn only, whilst Pacific Dunlop (Asia) had subsidiaries insured with PICC, Beijing and Tianjin as well. To some extent, perhaps, this latter explanation begs a number of questions, but in the framework of the broad debate as to authority it does not, I think, amount to very much.

32. Notwithstanding Mr Reyes' efforts, therefore, at the end of the day the plaintiffs had little ammunition to fire on the central issue in this case, even on the assumed basis that the defendant bore the persuasive burden in this regard. In light of all the evidence, and looking at the matter in the round, I am therefore quite unable to accede to Mr Reyes' submission, albeit persuasively put, that the court should find that the validity of policies issued by the defendant on behalf of PICC, Shenzhen was at all times subject to confirmation and acceptance by PICC. To the contrary. The preponderance of evidence is quite the other way, and I find, on the balance of probabilities, that the defendant did have authority to act as it did in issuing PICC policies in the manner in which Mr Tsang and his colleagues have described.

33. Resolution of the central issue in the defendant's favour is, in my view, determinative of this case, given that it necessarily follows that the second higher values policy, as issued on 6 November 1992, constituted a valid and effective policy, and thus that the defendant was not in breach of an obligation to provide such a policy to its clients as the plaintiffs have alleged. Nevertheless other issues arose in the course of this case and, in the event that that this matter goes further, I should perhaps make brief reference to them.

OTHER ISSUES

Illegality

34. The plaintiffs take this point on the hypothesis that the court were to find (as it now has) that the arrangement with PICC claimed by the defendant in fact existed. The point itself was but lately introduced by re-re-amendments to the Statement of Claim in March 2001 by the addition of paragraph 16A. The burden of this plea is that PICC was not authorized under the Insurance Companies Ordinance, Cap.41, to conduct insurance business in Hong Kong, that by reason of section 6 of that Ordinance it was illegal for the defendant to issue the PICC policy in Hong Kong, and that by issuing the PICC policy in question the defendant failed to act with due care and skill or in the best interests of the plaintiffs, in that issuance of the policy absent PICC's approval "gave rise to a substantial risk that PICC would (as it in fact did) deny having authorized the defendant to issue the PICC policy in Hong Kong" and to illegally conduct insurance business in Hong Kong, contrary to section 6 of the Ordinance.

35. In my view there is nothing in this argument, which seems to me to represent a prime example of an afterthought developed to bolster a difficult case. If and in so far as the Ordinance has any application to the present situation - and Mr Bleach observed that it would be odd if Hong Kong legislation is intended to relate to insurance policies covering non-Hong Kong risks that are issued by non-Hong Kong insurance companies - the defendant says that in any event the point goes nowhere because section 6 of the Ordinance gives the plaintiffs as policy holder the option, as against the insurer, to treat the policy as valid or void, and that, as was the situation here, the plaintiffs clearly did seek to treat the policy as valid and enforceable. In addition, submitted Mr Bleach, the notion that the plaintiffs might be put at a disadvantage because the insurer, PICC, might seek to avoid liability on the basis that its insurance business was conducted illegally in Hong Kong conveniently overlooks the fact that it is absolutely clear from the evidence that PICC neither sought to rely on any such contention, nor for that matter that such had ever been raised.

36. Nor do I accept Mr Reyes' further argument (which seems to me to represent a departure from the original illegality point as pleaded) that Inchcape's failure to obtain written confirmation from PICC as to the validity of the second policy thereby afforded PICC every incentive to deny the validity of this policy, and to bargain for acceptance by the insured of the lower expiring values. With respect, this approach seems to me to be essentially speculative and, in the particular circumstances of this case and on the facts as found, borders on special pleading. I have accepted the evidence that this was an established system operating in the manner described, and I do not see why a broker in Inchcape's situation could or should reasonably have anticipated PICC's reaction in this particular instance to the higher values policy as issued. To the contrary, the unchallenged evidence is that there had never been a reaction of this nature in all the years that the Gilman/Inchcape - PICC arrangement had been in operation. So I reject this element of the argument, as I reject the illegality point generally.

Subrogation

37. This represents an additional line of defence taken by the defendant, the submission being that the claim now pursued by re-insurers in the name of the plaintiffs is not a claim that falls within the doctrine of subrogation, wherein an insurer is entitled to take advantage of every right of the insured (whether legal or equitable) which would lead to a diminution of the insured loss.

38. Mr Reyes thought there was nothing in the point. Nor it appeared, did Mr Bleach, who evidently put it up for consideration in separate written form solely to preserve the point were the case to go further. In the circumstances there seems little to be gained in attempting to wrestle with the subtleties of this argument, which appears to rest on the twin planks of the ambit of subrogation under the DIC policy, and the fact that the plaintiffs had not suffered any loss as a result of Inchcape's alleged breach of its contractual duties qua broker because there had been full indemnification by a combination of payments in the form of the PICC's settlement and the DIC 'top-up' payment.

39. For my part I see little scope in this point, which I suspect may in reality be a causation point seeking to get out, although it has not been developed as such. Be that as it may. I fail to see why the DIC insurer or reinsurer in principle cannot be subrogated to a claim by the present plaintiffs against Inchcape on the conceptual basis that effective insurance of Grosby in terms of higher values would have resulted in a greater recovery from PICC, Shenzhen, and thus that the 'top-up' loss against which the DIC insurer was required to indemnify Grosby would have been correspondingly reduced. That seems to me to be the analytical position, and I do not discern anything in the normal principles of subrogation to weigh against that - indeed, Mr Bleach was constrained, entirely properly, to draw my attention to passages in Castellain v. Preston and Others (1883) 11 QBD 380 which were adverse to the written arguments the defendant had placed before the court. In my view, therefore, there is nothing in the 'subrogation point', and if it be necessary so to do, I reject it.

FINALLY

40. This was an ambitious case at best. The picture which emerges is tolerably clear. Having jettisoned Inchcape from the settlement negotiations and settled with PICC in December 1993 in the defendant's absence, and having compromised the Grosby property damage claim on the basis of a variety of commercial considerations - a "pragmatic decision" was how Mr Patchett frankly put it - the plaintiffs, and in their stead subrogated insurers, now seek to visit the consequences of that decision upon the defendant broker, and in so doing adopt what is said to have been PICC's position at the December 1993 meetings as to the ambit of Inchcape's restricted authority. And this against the backdrop of Inchcape's consistent position throughout as to its "broker binding authority" - I note in particular Mr Young's detailed letter of 11 January 1994 in answer to Mr Patchett's exploratory letter of claim of a few days earlier - and a trial in which no evidence from PICC has been available. In the circumstances it is perhaps unsurprising that argument as to the evidential burden assumed such profile. In my judgment, on the evidence before this court, this claim fails, and fails signally.

ORDER

41. The plaintiffs' claim is dismissed. Naturally costs must follow the event. Subject to anything that counsel now wish to say, I order that the costs of this action will be to the defendant, to be taxed if not agreed.

[Submission from counsel]

42. The only matter which Mr Bleach on behalf of the defendant wishes to raise is the issue of a certificate for two counsel. He does so, I apprehend, out of an abundance of caution. I do not think one is required, but if it is, then I grant it.

43. It remains only to thank both leading counsel for their very considerable assistance.