WONG KAM FAI v. YU SAI WAN trading as WONG FAI CONSTRUCTION MATERIAL CO. AND OTHERS

H E A D N O T E

Industrial Law - Liability of insurer under Section 43(1) of the Employees' Compensation Ordinance - Joinder of insurer pursuant to Section 43(3) - Default judgment against employer on liability - Insurer challenging the employment relationship - Role of insurer in the proceedings.

IN THE DISTRICT COURT OF HONG KONG

CIVIL JURISDICTION

EMPLOYEES' COMPENSATION CASE NO. 91 OF 1992

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D E C I S I O N

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Background

1. I am asked to decide on a preliminary issue concerning the role of the 3rd Respondent, Pearl Assurance Public Limited Company ("Pearl") in this proceedings.

2. The Applicant is claiming employee's compensation against the 1st and 2nd Respondents who were his employer and the principal contractor of his employer respectively. The 1st Respondent is the wife of the Applicant. Notice of proceeding was served by the Applicant's solicitor on Pearl and the Notice was received by Pearl on 24th February 1992. The 1st and 2nd Respondents did not file any answer and on the call-over on 13th May 1992, judgement on liability was entered against them with compensation to be assessed. Thereafter Pearl on 3rd June 1992 issued a summons applying to be joined as a party to this proceedings pursuant to Section 43(3) of the Employees' Compensation Ordinance ("the Ordinance"). The application was allowed on 26th June 1992. Pearl duly filed an Answer to the Applicant's claim. In the Answer, it denied, inter alia, that the Applicant was an employee of the 1st Respondent.

Counsel's submission

3. Mr. Bharwaney, Counsel for the Applicant, argued that Pearl could not challenge the employment relationship of the Applicant and the 1st Resplendent after it had joined as a party under Section 43(3). He based his argument on the construction of Section 43. He argued that the common thread in the section is an insurer who issued a policy of insurance to a employer in relation to an employee and the section provide a "statutory conclusive presumption" of an employment relationship.

4. He argued that the insurer shall have the same right but only "the right as if it was the employer". He argued that if an insurer wished to challenge the employment relationship, it should not be joined as a party under Section 43(3). It could make the challenge either by exercising its right under the insurance policy and taking over the proceedings in the name of the employer or when the employee seeks to recover the compensation from it under Section 43(1).

5. Alternatively, he argued that the insurer could only defend the proceedings to the extent as available to the employer. In the present case, since a regular judgment has been obtained against the employer on liability, the insurer could only take part in the assessment of compensation.

6. He further argued that an inconsistent decision might be reached in the same case if the insurer was allowed to challenge the employment relationship when judgment on liability had already been entered against the employer. By the judgment, the employment relationship is no longer in issue.

7. Miss Mok, counsel for Pearl, argued that Section 43 did not contain any qualifying words which would preclude the insurer from challenging the employment relationship. She argued that since the employee was given the right of recovering the compensation from the insurer, a right which he was not otherwise entitled to apart from the Ordinance, it was only fair that the insurer should be given a parallel right to take part in the proceedings and deal with those matters which would directly affect its liability to the employee. She argued that must be the rationale behind Section 43(3).

8. She further submitted that the alternative proposition of Mr. Bharwaney was contrary to the rationale and the wording of the section did not provide such a qualification. She asked rhetorically whether the insurer would be precluded from challenging the quantum of compensation if the employer conceded on the quantum as well.

9. Miss Mok further argued that the Applicant was precluded from raising this preliminary point because at the application to be joined, Pearl had argued that it intended to challenge the employment relationship and the decision was not appealed against.

Construction of Section 43

Section 43 is as follows :

  "(1) Subject to this section, where in relation to an employee there is in force a policy of insurance for the purposes of this Part and the employer of the employee becomes liable to pay any sum under this Ordinance or independently of this Ordinance in respect of an injury to the employee arising out of and in the course of his employment, such sum shall forthwith become due and payable by the insurer, including any sum payable in respect of interest and costs, notwithstanding anything to the contrary in the policy of insurance.

(2) No sum shall be payable by an insurer under this section -

(a) unless, in the case of compensation agreed upon between the employer and an employee, such insurer has consented to pay the sum agreed upon as compensation to the employee;

(b) unless, in the case of compensation or damages determined or adjudged by a court or tribunal to be payable to the employee or any other person, the insurer had sufficient notice of the institution in the court or tribunal of proceedings for compensation or damages, as the case may be, to enable such insurer to be added as a party to the proceedings;

(c) in respect of any judgment to pay compensation or damages, while execution thereon is stayed by the court or pending appeal; or (d) if before the happening of the accident which was the cause of the injury giving rise to the liability, the policy of insurance was cancelled by mutual consent or by virtue of any provision contained therein.

(3) If sufficient notice of the institution of proceedings for the recovery of compensation or damages is given to an insurer to enable such insurer to apply to be added as a party to the proceedings, the court or tribunal, as the case may be, shall, on such application being made, add the insurer as a party and the insurer shall have the same right to defend the proceedings as if such insurer were the employer.

(4) Where any sum is paid by the insurer which would, were it not for the provisions of this section, not be payable under the policy of insurance, such sum shall be recoverable by the insurer from the employer."

For the sake of completeness, I shall also set out the other relevant sections under Part IV of the Ordinance which deal with matters of insurance. Section 40 requires compulsory insurance for employees. It provides that,

"No employer shall employ any employee in any employment unless there is in force in relation to such employee a policy of insurance issued by an insurer for the full amount of the liability of the employer under this Ordinance and independently of this Ordinance for any injury to such employee by accident arising out of and in the course of his employment."

Section 42 provides that any condition in such a policy excluding the liability of the insurer in the event of any act or omission "after the happening of the accident giving rise to a claim under the policy, shall be of no effect upon the claim made by an employee under section 44. Provided that nothing in this section shall be taken to render void any provision in a policy requiring the insured employer to repay to the insurer any sums, which the latter may have paid under the policy in satisfaction of any such claim."

Section 44 provides that,

"Every policy of insurance issued for the purposes of this Part shall be deemed to provide that any employee or other person having a claim against the person insured in respect of the liability in regard to which such policy was issued shall be entitled to recover in his own name, as though he were a party to the policy, directly from the insurer any amount which he would have been entitled to recover from the person insured."

10. Mr. Bharwaney relied on a number of authorities on Section 43 which he said supported his proposition that Pearl is now precluded from raising the issue of the employment. In Leung Chack v. Asia Insurance Co. Ltd. [1991] 2 H.K.L.R. 4961, ("Leung Chack"), the Hon. Yang C.J. held that,

"Section 43(1) deals with an insurance policy in relation to an employee, and the liability of the employer towards the employee. In this case we deal with a different relationship, that between a principal contractor and his subcontractor's employee."

11. Leung Chack is a case where the employee of a subcontractor, having obtained judgment in Employees' Compensation proceedings against his employer and the principal contractor, sought satisfaction of the judgment against the insurer of the principal contractor under Section 44 of the Ordinance. The employee's claim was rejected by the Court of Appeal.

12. In Siu Yin Kwan v. Wang Chang Seu Ying and Another, Civil Appeal No. 90 of 1992. (Judgement delivered on 21st October 1992), the personal representatives of the deceased crew members of the vessel "Osprey" having awarded both employees compensation and common law damage against Axelson Co. Ltd. ("Axelson") who was the owner of the vessel and the employer, sought to recover such awards from an insurance company, pursuant to, inter alia, Sections 43(1) and 44 of the Ordinance. The insurance company had in June 1983 issued a policy of insurance to Richstone Industries Co. Ltd. ("Richstone") against statutory and other claims arising from injury by accident or disease substained by members of the crew of the "Osprey", and, by indorsement, from prospective liability under the as yet inoperative Part IV of the Ordinance. Richstone was not the employer of the deceased crew members.

Kempster J.A. held at page 17 that,

"Section 40, it seems to me requires only an employer to insure against liabilities to employees. Thus only a policy covering his liability is in force "for the purpose of this Part" and in S.43 "insurer" can only mean "the employer's insurer." (emphasis added). Sections 43 and 44 must, I think, be read together. Again it would be strange if S.44 gave an employee a right against an insurer other than the insurer of his employer. The employee would not have been entitled to recover anything from a person insured who was neither his employer nor a principal contractor and, again, only the employer's policy would have been issued "for the purposes of this Part".

13. In Woo Kin Wah v. Somec (HK) Limited and Others Civil Appeal No. 18 of 1991 (Judgment delivered on 26th April 1991) ("Somec"), the Plaintiff claimed damages for personal injury against his employer and the principal contractor. The insurance company of the principal contractor applied under Section 43(3) to be joined as a party. The application was refused and the Court of Appeal turned down the insurer's appeal. Kempster J.A. at page 6 held that

"Had Tugu (the insurer) demonstrated that they were liable to the Plaintiff under a "policy of insurance for the purposes of this Part" they would have been entitled to apply to be added as a party having "the same right to defend the proceedings as if such insurer were the employer". This right to apply is surely a quid pro quo for contingent and direct liability to the employee. In my opinion, however, the court cannot be bound to accede to the application despite the wording of Section 43(3)..... The Court must therefore be assumed to have been given the same discretion to grant or refuse leave to an insurer "to defend the action, inter alia or jointly with any defendant" as it has in relation to a third party under RSC Order 16 Rule 4(4). In context "shall" can be no more than directory and permissive as found in the circumstances of R. v. Spring Hill Prison Governor [1988] 1 All ER 424 amd Re Salcombe Hotel Development Co. Ltd. (1989) 5 BCC 807."

Penlington J. A. at page 11 held that

"In particular I have no doubt that it was not the intention of section 43(3), and it does not allow the joinder of an insurer as a defendant employer. In my opinion the words hall have the same right to defendant the proceedings as if such insurer were the employer" make that clear."

14. Although these cases referred to the liability of the employer towards the employee and that the relevant party was the employer insurer in the context of section 43, they did not specifically decide the issue before this Court which is whether "the insurer of an employer can challenge that the applicant was not an employee of the employer. In my view, subject to the default judgement which I shall deal with, once an insurance company is joined as a party in the proceedings, it is entitled to raise any issues concerning the applicant's case including whether the applicant is an employee or not. I reached my conclusion on a construction of the Section.

15. Under section 43(1) any sum recoverable by the employee from the employer under the Ordinance or other wise shall forthwith become due and payable by the insurer of the employer. The wording is clear. It imposes an absolute liability on the insurer to pay the amount to the employee. The payment is imperative and immediate I disagree with Mr. Bharwaney's submission that the insurer could raise the issue of employment when the employee seeks to recover the amount from it under sections 43(1) or section 44. By virtue of section 43(1) the insurer would be precluded from re-opening the issue of employment in a recovery proceeding. To allow it to do so will defeat the intention and the clear wording of section 43(1). How could the amount be forthwith become due and payable if the insurer is entitled to litigate the question of employment. Although Kempster J.A. in Somec construed the word 'shall' in sections 43(3) as merely directive and permissive, such a construction could not apply to section 43(1). The effect of section 43(1) had been commented upon by Clough J.A. in King Tak On v. Lau Chun Yin and others trading as Kar Bun Metal Manufactory and Another [1987] H.K.L.R. 126 ("King Tak On") in which he held that -

"It also follows that in the present case where there was a policy issued for the purposes of Part IV by the insurer in relation to the applicant employee which had not been cancelled on or before the 5th November 1984 when the accident occurred to the applicant, and the first respondent, his employer, became liable under sections 5, 9, and 10 to pay a sum of compensation, to be agreed or assessed, to the applicant, section 43(1) operated to provide that the same sum should forthwith become due and payable by the second respondent as the insurer together with any sum payable in respect, of interest and costs under section 21 of the Ordinance."

"Further this obligation is imposed upon the insurer "notwithstanding anything to the contrary in the policy of insurance". In the context of the present case none of the provisions of section 43(2) are available to enable the second respondent to avoid his obligation to make the relevant payment. The second respondent has been joined as a party to the proceedings pursuant to section 43(3) and rule 24 and has elected not to defend the applicant's claim against the first respondent."

"Accordingly the effect of section 43 has been, in the events which have happened, to impose an absolute liability upon the second respondent to pay to the applicant the sum awarded against the first respondent as compensation and costs under the Ordinance (emphasis added). The purported repudiation of its liability under the policy by the second respondent in reliance on any condition under the policy or upon non disclosure or misrepresentation arising outside the terms of the policy cannot be effective. Such purported repudiation took place after the date of the accident at which time section 43 imposed liability without any words of qualification upon the second respondent to pay the relevant sums yet to be assessed, together with the costs which subsequently became payable."

16. The safeguard to the insurer's absolute liability, apart from section 43(2) which listed the four situations where such sum would not be payable by the insurer (none of which has any application to the present proceedings), is provided by Section 43(3) which enables the insurer to become a party to the proceedings. While the insurer may take over the proceedings on behalf of the employer under the insurance policy, Section 43(3) provides it with a separate and distinct right. The insurer may choose not to take over the proceedings when, for example, the taking over of the proceedings may affect its right to repudiate liability under the policy. If the insurer is precluded from raising the issue of employment after it has been joined as a party, then Section 43(3) will in effect be meaningless because it clearly provides that "the insurer shall have the same right to defend the proceedings as if such insurer were the employer." It is the right of the employer to challenge the employment relationship if it so wishes. The most appropriate and the only time to challenge the employment relationship is at the employee's compensation proceedings. There is no qualifying words that the insurer is precluded from raising this issue.

17. Section 43(4) enables the insurer to recover from the employer the amount paid to the employee which otherwise would not be payable but for the section. In my view, this subsection does not in any way restrict the rights of the insurer, after it has become a party, of challenging the employment relationship. This subsection deals with the recovery of the payment from the employer based, for example, on repudiation of liability under the insurance policy. The employee is not a party to the insurer's claim against the employer. Whether he is an employee or not should not be litigated at this stage. Clough J.A. in King Tak On held that,

"If, but for section 43, there would have been grounds for repudiation or disclaimer of liability under the policy, whether such repudiation were based on matters arising under the terms of the policy or outside those terms, the second respondent (the insurer) is left to claim repayment, under the proviso to section 42 or under section 43(4), of any sum it is now required to pay to the applicant under section 44."

Effect of the default judgment on liability

18. While under section 43(3) the insurer has the right to challenge the employment relationship, this right must be affected by the default judgment entered against the 1st and 2nd Respondents on liability. The only outstanding issue in this case is the assessment of compensation. While the judgment is in the nature of a default judgment, it remains, until and unless it is being set aside, a valid judgment which is enforceable against the employer, the principal contractor and also against the insurance company by virtue of section 43(1). Miss Mok's submission that if I find that the Applicant was not an employee of the 1st Respondent the default judgment could not be used against Pearl presupposes Pearl could raise the issue of employment notwithstanding the default judgment on liability. What is more objectionable is that in the same proceedings, even if I eventually find the Applicant was not an employee, nonetheless I am bound by the default judgment to assess the compensation in favour of the Applicant. This could not be right, particularly when after the joinder, Pearl is in the shoes of the employer.

19. Without deciding on the point, it seems that a third party could set aside a default judgment entered against another defendant (see Note 13/9/3 of the Supreme Court Practice 1993). The fact is that no application was made to set aside the judgment in this case.

20. I do not consider that Mr. Bharwaney is precluded from raising this preliminary point at this stage. Although it was argued at the application for joinder that Pearl intended to challenge the employment relationship, different consideration must apply to the question whether Pearl should be joined as a party and the actual role of Pearl in the proceedings after it has been joined. Furthermore the right of Pearl to raise matters on the compensation is not in any way affected by any concession of the employer. This is clear from Section 43(3).

21. I rule that Pearl is only entitled to deal with the assessment of compensation. The matter is to be restored to a date to be fixed by the Registrar. I direct that an early date be arranged for the assessment.