B + B CONSTRUCTION LTD. v. SUN ALLIANCE AND LONDON INSURANCE plc

CACV 18/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 18 OF 2000

(ON APPEAL FROM HCA 11977/1999)

----------------------

J U D G M E N T

----------------------

Hon Godfrey VP :

Introduction

1. This is an appeal from Yam J, who on 4 January 2000 gave judgment under Order 14 of the Rules of the High Court in favour of the plaintiff B + B Construction Limited ("the contractor") against the defendant Sun Alliance and London Insurance plc ("the insurer") for $759,797.05 together with interest and costs. The contractor claims to be entitled to be indemnified by the insurer in respect of the sums the contractor has had to pay (1) to an employee of a sub-contractor, Pak Kee Transportation Company Ltd ("the sub-contractor") who had been injured by the negligence of an employee of the contractor; (2) to the sub-contractor, in re-imbursement of the sum the sub-contractor had had to pay to its own injured employee by way of employee's compensation; and (3) in settlement of everybody else's costs. The contractor's claim for this indemnity against the insurer is not made under an insurance policy effected by the contractor itself; it is made under an insurance policy effected by the sub-contractor, in the Schedule to which policy "the Insured" is described as "Pak Kee Transportation Company Limited and his contractors" (emphasis added). The judge, holding that the words I have emphasised were apt to confer on the contractor a right to claim against the insurer for the indemnity it wanted, gave judgment against the insurer accordingly. The insurer now appeals.

Background

2. The policy in question is dated 3 January 1994 and is described as an "Employee's Compensation Insurance" policy. It was effected by the sub-contractor with the insurer, as I have said. It recites as follows :-

"Whereas the Insured carrying on the Business described in the Schedule and no other for the purpose of this insurance by a proposal and declaration which shall be the basis of this contract and is deemed to be incorporated herein has applied to the Company for the insurance hereinafter contained and has paid or agreed to pay the Premium as consideration for such insurance"

3. The operative part of the policy reads as follows :-

"Now this Policy Witnesseth that if any employee in the Insured's immediate service shall sustain bodily injury by accident or disease caused during the Period of Insurance and arising out of and in the course of his employment by the Insured in the Business

The Company will subject to the Jurisdiction Clause and the other terms exceptions and conditions contained herein or endorsed hereon (all of which are hereinafter collectively referred to as the Terms of this Policy) indemnify the Insured against liability at law (including liability under the Legislation set out in the Schedule) to pay compensation and claimant's costs and expenses in respect of such injury and will in addition pay all costs and expenses incurred with its written consent"

4. The policy contains a number of Exceptions; the introductory words, and the first exception, read as follows :-

"Exceptions

The Company shall not be liable in respect of

1 the Insured's liability to employees of contractors to the Insured"

5. The policy also contains a number of Conditions, of which 1 and 8 are relevant; these read as follows :-

"Conditions

1. This Policy and the Schedule shall be read together as one contract and any word or expression to which a specific meaning has been attached in any part of this Policy or of the Schedule shall bear such specific meaning wherever it may appear

.....

8. The first premium and all renewal premiums that may be accepted are to be regulated by the amount of salaries and wages and other earnings paid by the Insured to employees during each Period of Insurance The name of every employee together with the amount of salary wages and other earnings shall be properly recorded and the Insured shall at all times allow the Company to inspect such records and shall supply the Company with a correct account of all such salaries wages and other earnings paid during any Period of Insurance within one month from the expiry date of such Period of Insurance. If the amount so paid shall differ from the amount on which premium has been paid the difference in premium shall be met by a further proportionate payment to the Company or by a refund by the Company as the case may be"

6. In the Schedule to the policy, "the Company" is described as the insurer; the "class of insurance" is described as employee compensation; "the Insured" is described as I have already indicated; the business is described as "Transp./Forwarding Agent/Site Contractor"; and the geographical area is described as "HK". I reproduce below the references in the Schedule to staff :-

"S/NO	CATEGORY OF STAFF	NO-OF-EMPL	EST. ANNUAL WAGE
1	CLERICAL STAFF	4	418000.00HK$
2	DRIVER/DELIVERY/ MOTORCRANE OPR	5	700000.00
3	DELIVERY/TALLYMAN/ FOREMAN/SITE WORKER W51	2	300000.00
4	DELIVERY/STEVEDORE/ SITE WORKER W51	6	499200.00
5	CASUAL DELIVERY/ WELDER/SITE WORKER W51	6	624000.00
	TOTAL:		2541200.00"

7. On 5 October 1994, the contractor engaged the sub-contractor to provide labour for the carrying out of H-piles driven works under a sub-contract which (by clause 13(1) and the Fifth Schedule) obliged the sub-contractor to provide employee's compensation insurance "for his labour and for those his own sub-contractors [sic.]". It stipulates that "The workmen's compensation insurance policy shall be taken out in joint name of the sub-contractor and [the contractor]"; but this was not done.

8. On 8 October 1994, one Cheung Ping ("the employee"), an employee of the sub-contractor, was injured at the site of the contractor's works in an accident which was wholly the fault of an employee of the contractor. As I have already indicated, it is the sums which the contractor has had to pay out as a result of this accident which the contractor now seeks to recover from the insurer.

The issue

9. The parties accepted below that the central question to be decided was whether, on the true construction of the policy, in particular, those words in the policy which described "The Insured" as "[the Sub-contractor] and his contractors", the contractor was or was not entitled to the benefit of the cover provided by the policy, and that the decision of the court upon that question would be dispositive of the action.

The insurer's case

10. The insurer says that the words "and his contractors" are apt to include only sub-contractors of the sub-contractor, and that on the true construction of the policy, the contractor has no valid claim on the insurer.

The contractor's case

11. The contractor says that the words are apt to include the contractor as well as the sub-contractors of the sub-contractor, and that on the true construction of the policy, its claim is covered by the policy.

The judgment below

12. The judge agreed with the contractor.

A preliminary question

13. Before I proceed to consider whether the judge was right to accept the construction of the policy, in particular of the words "and his contractors", suggested by the contractor, the question immediately suggests itself as to how the contractor, which did not effect the policy; is not named as a party to it; and gave no consideration for it, can claim any benefit under the policy at all.

14. Even assuming, in favour of the contractor, that the policy was intended to enure for the benefit of the contractor as well as for the benefit of the sub-contractor, the contractor's claim would fall foul of the well-settled (although much criticised) rule that, on the face of it, a contract between two parties for the benefit of a third party is not enforceable by the third party, who is, as it is sometimes put, "a stranger to the consideration". I am aware, of course, that there are some statutory exceptions to the rule, but none of these would apply to the present case. I am also aware of the proposals before the legislature in England and Wales for the reform of the rule; and of the judicial abrogation of the rule effected in Australia by the decision of the High Court (split 4 to 3) in Trident General Insurance Co. Ltd v. McNiece Bros. Pty Ltd (1988) 80 ALR 574, a case the facts of which bear many similarities to our own. In that case, Mason CJ and Wilson J held that the rules that only a party to a contract can sue on it, and that consideration must move from the promisee, do not apply to a policy of insurance; Toohey J held that :-

"When an insurer issues a liability insurance policy, identifying the assured in terms that evidence an intention on the part of both insurer and assured that the policy will indemnify as well those with whom the assured contracts for the purpose of the venture covered by the policy, and it is reasonable to expect that such a contractor may order its affairs by reference to the existence of the policy, the contractor may sue the insurer on the policy, notwithstanding that the contractor is not a party to the contract between the insurer and assured;"

and Gaudron J held that a promisor who has accepted an agreed consideration for a promise to benefit a third party comes under an obligation to the third party to fulfil that promise and the third party acquires a right to bring an action to secure the benefit of that promise.

15. But here, in Hong Kong, the law remains as magisterially stated by Viscount Haldane LC in Dunlop Pneumatic Tyre Company Ltd v. Selfridge and Co. Ltd [1915] AC 847 at p.853 :-

"My Lords, in the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property, as, for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam. A second principle is that if a person with whom a contract not under seal has been made is to be able to enforce it consideration must have been given by him to the promisor or to some other person at the promisor's request. These two principles are not recognized in the same fashion by the jurisprudence of certain Continental countries or of Scotland, but here they are well established. A third proposition is that a principal not named in the contract may sue upon it if the promisee really contracted as his agent. But again, in order to entitle him so to sue, he must have given consideration either personally or through the promisee, acting as his agent in giving it."

16. However, the insurer in our case raised no point below upon these principles. In these circumstances, I think the insurer must be treated as having agreed to accept liability to the contractor if the policy is to be construed as the contractor contends. A similar situation arose in Albert v. Motor Insurers' Bureau [1972] AC 301. In that case, the House of Lords upheld the plaintiff Mrs Albert's claim against the defendant, which declined to take the point that its agreement, made with the Minister of Transport, was not enforceable by the plaintiff (who, of course, was not a party to that agreement). Lord Donovan said (at p.320) :-

"Mrs. Albert is not a party to that agreement. Breach of it by the bureau does not under English law give her any right of action. A number of cases have been brought against the bureau by persons in a similar position to hers but the bureau has never, and says it never will, take the point that such a plaintiff has no cause of action.

The courts deal with the determination of legal rights and the Minister and his successors are the only persons entitled to sue the bureau for breach of the agreement. I do not regard the present practice as satisfactory. This House is asked to say that judgment should be given in favour of Mrs. Albert when it is clear that she has no cause of action."

17. But, however "unsatisfactory" it is, if a defendant does not take the point, in answer to the plaintiff's claim on a contract, that the plaintiff was not a party to the contract, the court must, I think, proceed on the footing that the plaintiff's claim, if otherwise good, is enforceable in the usual way.

The question of construction

18. It will be recalled that the policy is expressed to cover claims in respect of injury to "any employee in the Insured's immediate service" (emphasis added) and that it excludes liability to "employees of contractors to the Insured". In these circumstances, it seems to me, with respect, to be impossible to construe the words "and his contractors" as imposing any liability on the insurer in relation to injuries to an employee of a sub-contractor of the sub-contractor. If those words do not include any liability in respect of such employees, then, if they are to be given any meaning at all, they must refer to any contractor with whom the sub-contractor enters into contracts (and so may be read as including a reference to the contractor in the present case). But what is the point of the reference to such contractors? The answer is not immediately obvious; but it lies, in my opinion, in the provisions of section 24 of the Employees' Compensation Ordinance, Cap. 282.

19. Section 24 provides, in sub-sections (1) and (2), as follows :-

"(1) Where any person (in this section referred to as the principal contractor), in the course of or for the purposes of his trade or business, contracts with a sub-contractor for the execution by or under the sub-contractor of the whole or any part of any work undertaken by the principal contractor, the principal contractor shall be liable to pay to any employee employed by that sub-contractor or by any other sub-contractor in the execution of the work any compensation under this Ordinance which the principal contractor would have been liable to pay if that employee had been immediately employed by him; and where compensation is claimed from or proceedings are taken against the principal contractor, then, in the application of this Ordinance, references to the principal contractor shall be substituted for references to the employer, except that the amount of any compensation calculated by reference to earnings shall be calculated by reference to the earnings of the employee under the employer by whom he is immediately employed.

(2) Where the principal contractor is liable to pay compensation under this section, he shall be entitled to be indemnified by any person who would have been liable to pay compensation to the employee independently of this section."

20. The effect, in a case like this, is to impose liability to pay compensation to an injured employee not only upon the sub-contractor employing him but also upon the contractor who has sub-contracted the work or part of it to the sub-contractor. So, not only does the sub-contractor need to insure himself against the risk of having to pay compensation to an injured employee of the sub-contractor; the contractor, too, needs to insure himself against that same risk. That is why, of course, the sub-contract of 5 October 1994 provided not only for the sub-contractor to provide employee's compensation insurance for his labour, but also for the policy to "be taken out in joint name of the sub-contractor and [the contractor]." If that had been done (in fact, it was not done) the contractor would have protected itself against its liability to pay compensation to an employee in the sub-contractor's immediate service if the sub-contractor failed to do so. Against this consideration, the words "and his contractors" used here make sense; they are apt to cover, as a matter of construction, the liability to pay compensation to such an employee of both the sub-contractor and the contractor.

Conclusion

21. But the claims against which the contractor seeks to be indemnified in these proceedings are claims made against it in consequence of the negligence of its own employee. Against such claims it must, in my judgment, look to its own employer's liability insurance. Its claim is wholly outside the scope of the sub-contractor's employees' compensation policy. Even if it had been named in and had become a party to that policy, it would have now no claim on the insurer except for whatever compensation it had been held liable to pay, through no fault of its own, to the employee of a sub-contractor who was unable to get paid by his immediate employer. That is not the case here at all.

Result

22. For these reasons, I differ from the judge's conclusion as to the true construction of the policy. I would allow this appeal accordingly, and subject to the provisions of Order 42 rule 5B(6) of the Rules of the High Court, I would order that the insurers' costs, here and below, be taxed and paid by the contractor to the insurers.

Hon Woo JA :

23. Mr CHEUNG Ping was an employee of Pak Kee Transportation Company Limited ("Pak Kee") and Pak Kee was a subcontractor of the plaintiff. While, as assigned by Pak Kee, Mr Cheung was effecting the removal of a stack of H-piles for the plaintiff, he met with an accident and was seriously injured. The injury gave rise to two actions, one in the District Court under the Employees' Compensation Ordinance against Pak Kee, and another in the High Court under the common law against both Pak Kee and the plaintiff. Mr Cheung succeeded in obtaining judgment against Pak Kee for employees' compensation in the District Court action. In the High Court action, in which Pak Kee joined the plaintiff as a third party, it was held that the accident was caused by the negligence of an employee of the plaintiff. As a result, the plaintiff was liable alone to pay Mr Cheung damages for negligence and liable to reimburse Pak Kee for the employees' compensation and costs that it had paid to Mr Cheung in the District Court action.

24. In the subcontract awarded by the plaintiff to Pak Kee, Pak Kee was obliged to provide employees' compensation insurance to cover damages payable to its workers and workers of its subcontractors with which the subcontract works were concerned, as provided by clause 13(1) of the subcontract and the Fifth Schedule thereto. However, the insurance policy with which this Court is concerned had already been taken out by Pak Kee with the defendant.

25. The action from which the appeal is now brought was instituted by the plaintiff against the defendant as the insurer of the insurance policy for an indemnity for what it had been adjudged to pay Mr Cheung and Pak Kee in the High Court action.

26. The plaintiff made an application for summary judgment against the defendant and the defendant took out a summons to strike out the plaintiff's claim. The summonses went before Yam J, who dismissed the defendant's summons and granted judgment to the plaintiff against the defendant.

27. This appeal turns on the proper construction of the terms of the insurance policy. The relevant terms are set out below for closer examination.

28. The policy begins with a recital:

"Whereas the Insured carrying on the Business described in the Schedule and no other for the purpose of this insurance ..."

It continues:

"Now this Policy Witnesseth that if any employee in the Insured's immediate service shall sustain bodily injury by accident ... and arising out of and in the course of his employment by the Insured in the Business

The Company (ie, the defendant insurer) will subject to ... the ... terms exceptions and conditions contained herein or endorsed hereon ... indemnify the Insured against liability at law ..."

29. The only relevant exception is Exception 1, set out below:

"The Company shall not be liable in respect of

1 the Insured's liability to employees of contractors to the Insured".

30. In the Schedule to the policy, against the item "Insured", there appears "PAK KEE TRANSPORTATION COMPANY LIMITED AND HIS CONTRACTORS". Under the Schedule, the types of employees and their numbers (but not names) are also set out, with a column of their estimated annual wages.

31. The Judge held that the plaintiff, as a contractor of Pak Kee, was encompassed by the "Insured" in the Schedule. The plaintiff must therefore be considered as one of the insured. The defendant's argument against that ruling is that the words "HIS CONTRACTORS" in the Schedule clearly and unequivocally mean Pak Kee's subcontractors performing the business or part of it for Pak Kee, and cannot be construed as including the plaintiff who was not Pak Kee's subcontractor but Pak Kee's principal contractor. As the word "CONTRACTORS" is unqualified as to show clearly whether it is to include subcontractors alone, I am of the view that the rule of construction that in case of an ambiguity, the interpretation that is against the party who relies on the provision should be adopted, or in other words, the rule of contra proferentum, militates against the defendant's argument. The Judge was right in adopting the construction as he did.

32. However, this meaning of the Insured being inclusive of the plaintiff as a contractor of Pak Kee should be adopted throughout regarding the interpretation of other provisions of the policy, for Condition 1 of the policy expressly provides:

"This Policy and the Schedule shall be read together as one contract and any word or expression to which a specific meaning has been attached in any part of this Policy or of the Schedule shall bear such specific meaning wherever it may appear".

33. With this in mind, the provision in the body of the policy to cover the contingency that "if any employee in the Insured's immediate service shall sustain bodily injury by accident ... arising out of and in the course of his employment by the Insured in the Business" ("the main provision") and Exception 1 that the defendant shall not be liable in respect of "the Insured's liability to employees of contractors to the Insured" must now be examined.

34. As said before, the "Insured" in the Schedule includes Pak Kee and the plaintiff, each one of Pak Kee and the plaintiff is an insured under the policy. The main provision therefore covers Pak Kee for its liability for the bodily injuries suffered by any employee in its immediate service, and similarly covers the plaintiff's liability for the bodily injuries of any employee in the plaintiff's immediate service. By the same token, Exception 1 excludes liability of the defendant in respect of Pak Kee's liability towards the employees of Pak Kee's contractors, and also excludes the plaintiff's liability towards the employees of the plaintiff's contractors. Pak Kee is the plaintiff's contractor, because the word "contractors" should, pursuant to Condition 1, similarly be construed as to cover principal contractor and subcontractor. Exception 1 therefore excludes liability of the defendant towards the plaintiff in respect of Mr Cheung who was the employee of the plaintiff's subcontractor, Pak Kee, and not in the plaintiff's immediate service.

35. The Judge held otherwise. He construed the main provision and Exception 1 in such a way that the "Insured" therein was meant to refer exclusively to Pak Kee and not the plaintiff. Mr Warren Chan, SC on behalf of the plaintiff, seeks to support the Judge's interpretation with some interesting arguments. He contends that the word "CONTRACTORS" which was typed onto the Schedule should bear the same meaning as the "contractors" in Exception 1 which appears in the printed form of the policy, ie, both should mean Pak Kee's contractors. In such a way, the word "contractors" in Exception 1 only means Pak Kee's contractors and does not mean to include, in the facts of the present case means, the plaintiff. On the other hand, Mr Chan contends that the word "Insured" in the Schedule and in Exception 1 should bear different meanings because the word "CONTRACTORS" was typed in the Schedule whereas the main provision and Exception 1 in their entirety were in printed standard form. He refers to McGillivray on Insurance Law, 9th Ed, at p 277 for assistance, which reads:

"Written and printed clauses. Where a policy contains clauses in print and type the court will endeavour to give effect to both equally, but, if it is plain that a written clause manifestly cannot be reconciled with one or more printed conditions, the former overrides the latter, inasmuch as the written words are the immediate language and terms selected by the parties themselves for the expression of their meaning with relation to the particular risk and the printed words are a general formula applied equally to all insurances in the same class of risk."

36. The contended construction of the word "CONTRACTORS" is to ignore the word "HIS" that precedes "CONTRACTORS" in the Schedule which differs from "contractors to the Insured" in Exception 1, and also disregards the proper interpretation of the repeated printed word "Insured" to include the plaintiff that appears in the main provision and the Schedule, and also in Exception 1, without which proper interpretation the plaintiff's liability towards any employee, be he in the plaintiff's immediate service or otherwise, would not be covered by the policy. Where the word "Insured" in the Schedule is given the meaning of Pak Kee and Pak Kee's contractors, it will include the plaintiff as one of the "Insured" for being one of Pak Kee's contractors. As the plaintiff is an "Insured", its liability towards employees in its immediate service is a risk covered by the main provision and not excluded by Exception 1. There is nothing irreconcilable in attaching the same meaning to the word "Insured" in the various provisions of the policy. By the same token, where the word "CONTRACTORS" in the Schedule is construed as including both principal contractors and subcontractors, the same word in Exception 1 should properly be given the same meaning. Again there is nothing irreconcilable, and this approach will give effect to Condition 1 by which all parties to the contract of insurance are bound.

37. Mr Chan, however, prays in aid the type-written table of the types, numbers and estimated annual wages of employees in the Schedule to support his argument that the printed words would be in conflict with the type-written words if the word "Insured" in the main provision and Exception 1 were not construed as meaning Pak Kee to the exclusion of the plaintiff. He stresses that the employees set out in the Schedule were the employees of Pak Kee, that the premium for the insurance was calculated with reference to the estimated total annual wages, and that the object of the typed words "AND HIS CONTRACTORS", which must be given some meaning, was to protect the plaintiff from any potential liability that it might face, towards injuries suffered by Pak Kee's employees. Bearing in mind such object, so the argument continues, the policy can only be reasonably construed as covering the plaintiff's liability towards Pak Kee's employees and not the plaintiff's own employees. If the word "Insured" in the main provision and Exception 1 is not construed as exclusively referring to Pak Kee alone, the object could not have been achieved.

38. In my opinion, the arguments of Mr Chan must be rejected. There is no indication in the policy itself that the employees enumerated in the Schedule were those of Pak Kee's and not the plaintiff's or, for that matter, not those in the immediate service of Pak Kee's subcontractors. Even if Mr Chan is right in saying, as he seeks support from Mr Bharwaney's agreement before Yam J, that the employees in the Schedule were Pak Kee's own employees, it does not follow that the construction of the word "Insured" in the main provision and Exception 1 to mean Pak Kee or the plaintiff is necessarily contrary to or inevitably defeats the alleged object for adding the words "AND HIS CONTRACTORS" after Pak Kee's name in the Schedule. The object, as postulated, is to protect the plaintiff from any potential liability that it might have towards Pak Kee's employees. Insofar as the policy covers Pak Kee's liability towards such employees as required by the Employees' Compensation Ordinance, the plaintiff's liability under the Ordinance towards the same employees as the main contractor would have been covered. The words "AND HIS CONTRACTORS" purport to give the plaintiff a separate right to seek coverage by the policy in the event that the defendant could justifiably repudiate any claim brought by Pak Kee pursuant to the terms of the policy. These type-written words in the Schedule do not require the construction of the word "Insured" where it is printed in different parts of the policy in the schizophrenic way as suggested by Mr Chan.

39. Moreover, the alleged object cannot properly be considered as relevant to affect the construction of the policy, because the policy had been taken out by Pak Kee as early as January 1994 before it was awarded the subcontract by the plaintiff in October 1994. The policy should properly be looked at to see if its terms cover the risks for which the plaintiff seeks to be reimbursed without reference to the alleged object. Although Pak Kee and the plaintiff might have examined the policy to consider whether it was sufficient to achieve the alleged object, their understanding of the policy's coverage cannot legitimately have any bearing on the defendant's rights and obligations under it.

40. I am of the view that the Judge's interpretation and Mr Chan's contentions strain the language of the relevant terms of the policy and in particular, fail to take into account Condition 1. There is no justifiable reason to differentiate the term "Insured" used in the Schedule, in Exception 1 and in the main provision or the word "contractors" used in both the Schedule and Exception 1. Attaching a different meaning to these words in different parts of the policy flies in the face of Condition 1 and widens the ambit of the coverage of the policy, which was after all expressly entitled and classified as an Employees' Compensation Policy. It would enlarge the insurer's coverage in two respects: first, to include the insured's liability for damages for personal injuries suffered by not only his own employees but also employees of its contractors; and second, to include the insured's liability not only under the Employees' Compensation Ordinance and as an employer, but also to include his own liability and his vicarious liability for his employees under the common law towards third parties not in his employ. Looking at the whole scheme of the policy and its various provisions, the approaches of the Judge and Mr Chan cannot be justified.

41. In the circumstances, I too would allow the appeal with costs here and below.

Hon Ribeiro JA :

42. I agree entirely with Hon Godfrey VP's judgment and have nothing to add.