DRAGAGES ET TRAVAUX PUBLICS (HK) LTD AND ANOTHER v. R J WALLACE AND OTHERS

HCMP 6577/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 6577 OF 2001

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J U D G M E N T

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Facts

1. This is an insurance claim. The underlying facts giving rise to the claim for indemnity are straightforward yet tragic. On 6 June 1996, six workmen taking part in the construction of a bridge which crossed the Rambler Channel fell to their death, when a temporary platform on which they were standing collapsed and fell to the ground. The construction work in question was part of a project of which the Plaintiffs, a joint venture, were the principal contractor under a main contract with the Mass Transit Railway Corporation ("MTRC"), known as the MTRC Lantau and Airport Railway Contract No. 510 - Rambler Channel Bridge. Part of the works under Contract 510 comprised the construction of a rail link to Chak Lap Kok Airport as part of the Lantau and Airport Railway project.

2. The contract required MTRC to take out a contractors' all risks and third party liability insurance policy for the benefit of itself, the Government, and all contractors engaged by it to provide goods and services in connection with the contract project, including the Plaintiffs. The contract also provided that the Plaintiffs would take out and maintain an employees' compensation policy in respect of their employees and those of their sub-contractors.

3. Pursuant to the requirements of the contract, MTRC took out a policy of insurance entitled "Third Party Liability Insurance Policy" issued by the Defendants as insurers, dated 9 June 1995, with a policy no. 576/T75387W ("the policy"). For their part, the Plaintiffs took out an employees' compensation policy ("the EC policy") with the National Union Fire Insurance Company ("National"), issued on its behalf by its general agent and authorised representative, American International Underwriters Limited ("AIU").

4. The deceased workmen were not the direct employees of the Plaintiffs. They were respectively the employees of two sub-contractors of the Plaintiffs.

5. Arising out of the fatal accident, the Plaintiffs were prosecuted under summonses issued by the Labour Department in the magistrate's court in December 1996. The Plaintiffs pleaded guilty to the charges.

6. Furthermore, in 1997, employees' compensation proceedings were commenced against the employers of the deceased workmen as well as the Plaintiffs as the principal contractor (pursuant to section 24 of the Employees' Compensation Ordinance, Cap. 282). In late 1997 and early 1998, judgments by consent were entered against the Plaintiffs in favour of the dependants of the deceased workmen in the employees' compensation proceedings. The total amount of the employees' compensation awards was around $7.7 million.

7. Furthermore, in 1999, common law actions were commenced against the Plaintiffs, as the contractor whose wrongful acts and omissions caused or contributed to the happening of the fatal accident. Interlocutory judgments with damages to be assessed were entered on 21 December 1999, and the assessments eventually took place in September 2000. The judgment sums in respect of the common law claims (net of the employees' compensation awards) amounted to over $11.4 million in total.

8. AIU has, pursuant to the EC policy, shouldered 50% of the employees' compensation awards and the judgment sums in the High Court actions. AIU has also foot the entire legal bills in respect of the defence of the High Court actions.

9. It is the Plaintiffs' case that apart from the EC policy, they are also covered under the policy, and are therefore entitled to be indemnified by the Defendants. In essence, they claim for a 50% contribution towards the employees' compensation awards, the High Court judgment sums as well as the related legal costs from the Defendants.

10. I should mention here that the 4th and 5th Defendants have since become insolvent and are in provisional liquidation. The total share of liability under the policy, if any, of the 1st, 2nd and 3rd Defendants is only 68.1818%.

11. Since the liquidation proceedings are proceedings in the United Kingdom, there is no automatic stay of proceedings in the present action. The 4th and 5th Defendants have not taken any part in the present proceedings, which are only defended by counsel and solicitors acting for the 1st, 2nd and 3rd Defendants. Nonetheless, the Plaintiffs seek declaratory relief against all Defendants.

12. There are 3 issues between the parties, namely, policy coverage, waiver and apportionment/quantum. I will deal with them in turn. (Despite some earlier references, at the end of the day, no point is taken that the policy only provides a secondary cover - see general condition 9, and I need not deal with it.)

Policy coverage

13. Liability is denied by the insurers. On behalf of the 1st, 2nd and 3rd Defendants, Mr Shieh SC, argues that as the deceased workmen were employed by sub-contractors who were themselves "the insured" under the policy, by virtue of exclusion 1 in the policy, liability does not attach.

14. I will first set out the more relevant parts of the policy:

"THIRD PARTY LIABILITY INSURANCE POLICY

THE SCHEDULE

The Insured:

MASS TRANSIT RAILWAY CORPORATION and/or Hong Kong Government and/or all contractors and/or subcontractors of any tier and/or consultants and engineers and/or all others engaged to provide goods and services in [connection] with the Insured Project.

...

LIABILITY TO THIRD PARTIES

The Insurers will indemnify the Insured subject to the Limit of Indemnity stated in the Schedule and except as hereinafter provided in respect of all sums which the Insured shall become legally liable to pay arising out of the performance of the Insureds projects described in the Schedule for :-
i)	death, bodily injury, personal injury (including illness) to or disease contracted by any person
ii)	loss of and/or damage to property and/or loss of use thereof
iii)	obstruction loss of amenities trespass nuisance or any like cause
occurring during the Period of Insurance and arising out of or in connection with the Insured Project as shown in the Schedule.
...
Cross Liability Clause
Where more than one party comprises "The Insured" each of the parties comprising the Insured shall for the purpose of this Policy be considered as a separate and distinct party and the words "The Insured" shall be considered as applying to each party in the same manner as if a separate Policy had been issued to each of the parties and the Insurers hereby agree to waive all rights of subrogation against each of the aforesaid parties arising out of any occurrence in respect of which any claim is made hereunder provided nevertheless that nothing in this Clause shall be deemed to increase the Limit of Indemnity in respect of any one occurrence or series of occurrences as stated in the Schedule.
...

EXCLUSIONS

Provided always that the indemnity granted by this Policy shall not apply to nor include :-
1.	Liability in respect of death of or bodily injury (including illness) to any person under a contract of employment or apprenticeship with the Insured Party and arising out of and in the course of such person's employment or service with such Insured party.
...
6.	Liability in respect of loss of or damage to :-
	a)	property belonging to or in the care, custody or control of the Insured (provided that in respect of any property being repaired, altered or maintained, this exclusion shall be limited to that part of the property being worked upon);
	b)	property which is insurable under the Contractors All Risks Policy in respect of this Project or any consequential loss of the Insured therefrom.
	but these exclusions shall not apply to any such property after being taken into use by the owner.
...

GENERAL MEMORANDA

JOINT INSUREDS

It is noted and agreed that the Insured hereunder comprises more than one party, each operating as separate and distinct entities and that cover hereunder shall apply in the same manner and to the same extent as if individual insurances had been issued to each such party.

The rights and indemnity of any of the parties who are not guilty of any fraud, misrepresentation, non disclosure or breach of condition shall not be prejudiced or affected by any fraud, misrepresentation, non-disclosure or breach of condition by any of the other parties comprising the Insured.

Insurers hereby agree to waive all rights of subrogation which they may have or acquire against any of the parties comprising the Insured except when such rights of subrogation are acquired in consequence of any fraud, misrepresentation, non-disclosure or breach of condition by that Insured.

...

For the purposes of the indemnity granted by this policy claims made by any of the parties defined as the Insured against any other party so described shall be treated as though the party claiming was not named as the Insured in this Policy. Provided always that nothing herein shall increase the limit of liability under this policy."

15. The issue raised is essentially a question of construction of the policy, which must be construed as a whole. Case law is helpful, but ultimately, the policy must be construed according to its own wording and its factual matrix. Arguments of counsel focus on the proper construction of the indemnity provisions at the beginning of the policy, the cross-liability clause, exclusions 1 and 6 and the general memoranda relating to "joint insureds".

16. Mr Shieh, in exemplary fairness, has drawn the Court's attention to a number of Australian cases, which in turn refer to some Canadian cases, concerning construction of similar clauses and provisions, most of which are against the contention of Mr Shieh. To these authorities I will now turn.

17. In Stolberg v Pearl Assurance Co. Ltd (1971) 19 DLR (3d) 343, the Canadian Supreme Court had the occasion of considering a similar claim under a policy for indemnity against liability of an insured toward the death of a workman of a co-insured. The Supreme Court, in reversing the decision below, was able to conclude, on the construction of the indemnity provisions as well as the exclusion provisions in the policy, that the exclusion only applied to the situation where the insured making the claim for indemnity was himself the employer of the deceased workman. It is not clear whether the policy in that case contained a cross-liability clause, such as in our case. Be that as it may, without making any reference to such a clause (if there was one), the Supreme Court was able to come to the above conclusion. Hall J, giving the judgment of the court, said on pp. 346 to 347 as follows:

" I agree with the learned Chief Justice of the Court of Appeal for British Columbia. To deny recovery by appellant [the insured] it would, in my opinion, be necessary to read the phrase "sustained by any employee of the Insured" as if it read "sustained by any employee of any of the Insured". The "Insured" under the terms of the policy, as amended by the endorsement, is any one or more of four persons named in the endorsement. The policy insures the insured against liability imposed by law upon "the Insured", i.e., any one or more of the four persons.

In the present case "the Insured" upon whom liability had been imposed by law was the appellant, and the appellant alone. No liability had been imposed by law upon any of the other three persons by reason of the death of King [the deceased workman].

The exception, in respect of any claim under the policy, must be construed in the same manner as the clause defining the coverage in respect of that claim, as it is an exception from that coverage. The "Insured" for the purpose of that exception must, in respect of such claim, be the same "Insured" as the one or the ones who rely upon the coverage. In respect of the present claim only the appellant is the "Insured" who has coverage under the policy. Consequently, in respect of this claim, he must be the "Insured" who is referred to under the exception clause, and, that being so, the exception only applies if indemnity is sought by a person covered by the policy in respect of liability imposed upon him as a result of a claim made by his employee in respect of injuries sustained while engaged in his duties as such employee. That was not the situation in this case."

18. In Speno Rail Maintenances Australia Pty Ltd v Hamersley Iron Pty Ltd (2000) 23 WAR 291, the Supreme Court of Western Australia had to grapple with, amongst other things, a claim for indemnity by a principal contractor in respect of liability toward an injured workman employed by its sub-contractor. Both the principal contractor and the sub-contractor were named as the insured under the policy in question. There was a similar exclusion clause as in our case. Furthermore, like the present case, there was also a cross-liability clause. Understandably, the Australian court, in upholding the claim for indemnity, placed considerable reliance on the cross-liability clause. Ipp J said on pp. 310-311:

" I agree with the view expressed by Wheeler J that "the cross-liability clause should be given its natural meaning in relation to each of the clauses of the contract of insurance, except to the extent that the express words or context otherwise require". This is consistent with the views expressed by Ambrose J in Weightman v Noosa Shire Council [1999] QSC 368. I further agree with her Honour that the facts of the present case differ from those in Fletcher Organisation Pty Ltd v CML Fire & General Insurance Co Ltd (1987) 4 ANZ Ins Cas 60-805. As there was no cross-liability clause in the Fletcher Organisation case, the reasoning in that case is not presently applicable.

Further, I would point out that, whereas the exclusion clause was intended to apply to "employer's liability", the claim by Hamersley [the principal contractor] against Zurich [the insurer] for indemnity against the claim by Nolan [the injured workman] is not a claim "in respect of employer's liability". Nolan's claim against Hamersley is not a claim by an employee of Hamersley and Hamersley is not liable by reason of it being an employer of Nolan. In my view, the employer's liability exclusion clause is inapposite to exclude Zurich's obligation to indemnify Hamersley against the claim by Nolan.

I would construe the exclusion clause, in the light of the cross-liability clause, as meaning, relevantly, that Zurich is not liable to indemnify Hamersley in respect of claims for personal injury to any person, arising out of or in the course of the employment of such person in the service of Hamersley."

19. The other judges also delivered concurrent judgments on this point: see p. 300 (Malcolm CJ), and pp. 323-324 (Wheeler J).

20. More recently, McClellan J, sitting in the New South Wales Supreme Court, considered the relevant authorities in some detail in Transfield Pty Limited v National Vulcan Engineering Insurance Group Limited [2002] NSWSC 830 (17 September 2002). Unlike the previous two cases, Transfield was concerned with an indemnity for liability arising out of damage to property owned by sub-contractors who were themselves also "the insured", like the principal contractor making the claim for indemnity. Very similarly worded provisions regarding indemnity, exclusion and cross-liability were found in the relevant policy. The learned judge referred to the relevant authorities, including Stolberg, Speno and another earlier Australian decision (see below), and continued as follows (paras 56-61):

"56.	In my opinion, the plaintiffs' [principal contractor] approach to the matter should be preferred. The policy provides insurance to relevant parties "for their respective rights, interests and liabilities." Informed by the cross-liability clause, each party is to be considered as a separate entity "in the same manner as if a separate policy had been issued to each of them."
57.	Section C of the policy provides that the insurer will pay all sums which the Insured shall become legally obligated to pay in the relevant circumstances. The Insured in this context must be a reference to the party which has the obligation to make the payment and will be the party which makes the claim. The exclusion clause can only operate in relation to that claim and it follows that the Insured referred to in cl 3 must be the party making the claim.
58.	The Insurer submits that this construction leaves cl 3(b) with no work to do - one cannot be liable for damage to your own property. However, there are circumstances where obligations to others may arise in relation to property which you own. The property may be leased or mortgaged, giving rise to rights in third parties. Furthermore, as the plaintiff points out damage to the property of one of the plaintiffs may be the occasion for damage to others who use that property.
59.	No doubt the insurer when drafting the policy was eager to ensure that a claim, not otherwise sustainable under Section A of the policy, could not be made under Section C, where damage was sustained to the insured's own property and accordingly, being cautious, the exclusion was included to provide against that possibility, however remote. If there be any doubt, it must be resolved in favour of the insured (see C E Heath Underwriting & Insurance (Aust) Pty Ltd v Edwards Dunlop & Co Ltd (1992-1993) 176 CLR 535 at 541-542.
60.	In my opinion, for the exclusion to have the operation suggested by the insurer, it would have to read either "any Insured" or "an Insured" rather than "the Insured".
61.	The purpose of the policy of insurance was plainly to provide insurance to Transfield and other parties involved with relevant Transfield projects. Although separate policies could have been issued this had obvious practical difficulties. By issuing one policy, which contained a cross-liability clause, the relevant parties could each be insured by a policy which responds to any particular claim made by a party. The commercial objective has been described elsewhere in these terms.

'... On any construction site ... there is ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole. Should this possibility become reality, the question of negligence in the absence of complete property coverage would have to be debated in Court. By recognising in all tradesmen an insurable interest based on that very real possibility, which itself has its source in the contractual arrangements, opening the doors of the job site to the tradesmen, the Courts would apply to the construction field the principle expressed so long ago in the area of bailment. Thus all the parties whose joint efforts have one common goal, eg the completion of the construction, would be spared the necessity of fighting between themselves should an accident occur involving the possible responsibility of one of them." Commonwealth Construction Co Ltd v Imperial Oil Limited (1977) 69 DLR (3d) 558 at 562-63.'"

21. The Australian decision which the learned judge in Transfield referred to and refused to follow was WorkCover Queensland v Royal & Sun Alliance Insurance [2001] QSC 66 (13 March 2001), a judgment of Wilson J sitting in the Supreme Court of Queensland. In that case, a claim for indemnity was made under a policy in respect of liability arising from the injury of a workman employed by a sub-contractor, who was also named as the insured. There were the usual exclusion provisions as well as the cross-liability provisions. The learned judge, who did not refer to any of the authorities mentioned above, came to a construction of the policy to the effect that the exclusion would apply if the injured person was employed by "any one of the insured" (although the exclusion provisions only referred to the injured or deceased workman as being employed "by the insured").

22. As I said, the present policy must be construed according to its own wording. But the above cases, dealing with policies containing very similar wordings, are indeed of assistance. Needless to say, none of these decisions are binding on this Court.

23. In my judgment, a proper construction of exclusion 1 in the present policy cannot be done without putting it in context. It is by definition an "exclusion". As a matter of logic and common sense, the exclusion must be read together with the indemnity provisions at the beginning of the policy. That was the approach of the Supreme Court of Canada in Stolberg and McClellan J in Transfield (see paragraph 57).

24. The indemnity provisions in the policy say that the insurers will indemnify "the insured" in respect of all sums "which the insured shall become legally liable to pay" for "death, bodily injury, personal injury ... by any person". The exclusion then says that the indemnity granted by the policy shall not apply to nor include "liability in respect of death of ... any person under a contract of employment ... with the insured party and arising out of and in the course of such person's employment or service with such insured party".

25. It is true that "the insured" covers a number of parties. However, when one reads the indemnity provisions together with exclusion 1, it is clear, in my judgment, even without resorting to the cross-liability clause and the general memoranda, that the words "the insured" and "insured party" should be read as referring to the insured who is making a claim for indemnity under the policy. It is this particular insured entity who has incurred a liability, in respect of which it is seeking indemnity under the policy. It makes its claim under the indemnity provisions in the policy. The exclusion provisions in the policy are then looked at to see whether the claim is excluded. Viewed in that way, as a matter of construction, it would seem to me that the insured party in exclusion 1 must be a reference to the insured entity who has incurred a liability and who is seeking indemnity under the policy.

26. This is, in essence, the same reasoning that appealed to the Supreme Court of Canada in Stolberg, and McCellan J in Transfield, with which decisions I respectfully agree.

27. Of course, as noted above, the present case is stronger than Stolberg, from the point of view of the Plaintiffs, because we do have the cross-liability provisions and the general memoranda in the policy. Quite plainly, the construction contended for by the Plaintiffs is a legitimate one that accords well with the natural and ordinary meaning of the cross-liability provisions and the provisions in the general memoranda. I will not repeat here what has been said by the Australian courts in Speno and Transfield, with which I would simply express my respectful agreement. In my judgment, the same reasoning and construction apply in the present case.

28. With respect, I prefer the decisions in those two cases to the decision of Wilson J in WorkCover, who apparently did not have the benefit of arguments based on Speno or Stolberg, unlike the court in the subsequent case of Transfield.

29. In my judgment, the construction favoured by the Plaintiffs accords much better with the commercial reality or the factual matrix of the policy in question. Put another way, the construction argued by Mr Shieh on behalf of the Defendants would lead to undesirable results: for instance, the Plaintiffs would not be indemnified, according to Mr Shieh's argument, against liability toward any injured workmen in the employ of either the Government or MTRC, even though those workmen would not be covered by the EC policy of the Plaintiffs (which would only cover employees of the Plaintiffs and that of their sub-contractors). Likewise, according to the Defendants' argument, MTRC, which took out the policy in the first place, would not be covered in respect of liability towards an injured workman employed by the Plaintiffs or any of their sub-contractors. This would leave MTRC uninsured because it would not be covered by the employees' compensation policy that it may have taken out in respect of its employees or the employees of MTRC's sub-contractors, because in the present context, MTRC was the employer, rather than the principal contractor, in relation to the project in question. Here, it must not be assumed that the possible liability of MTRC in the project as the employer/owner is a far-fetched one: cases like Ferguson v Welsh [1987] 1 WLR 1553 have pointed out the potential liability of an owner/employer/occupier regarding injury suffered by a workman in the employ of a contractor retained by the former to carry out work on land owned/controlled/occupied by the former.

30. On the other hand, the Plaintiffs' contention would only mean that in respect of those workmen not in the direct employ of the Plaintiffs, but in the employ of the Plaintiffs' sub-contractors, there was double insurance. Double insurance is not a vice, undesirable result or absurdity that a court in construing a policy should strive to avoid. Instead as Sir Anthony Mason NPJ said in another context, "double insurance is a common event which results in contribution between the relevant insurers": B + B Construction Co. Ltd v Sun Alliance & London Insurance Plc (2001) 4 HKCFAR 201, 210F (in that case, a situation of double insurance would have arisen if the main contractor had taken out a contractors' all risks policy which it was obliged to (but did not) take out under the sub-contract in question).

31. Mr Shieh argues that the Plaintiffs' construction would render exclusion 6(a) otiose. He argues that exclusion 6(a) must be referring to exclusion of liability regarding loss of or damage to another insured's property, rather than the property of the insured making the claim loss of or damage to one's own property can never give rise a liability on the part of oneself (the owner), thereby necessitating the making of a claim for indemnity under the policy in the first place. A similar argument has been run and rejected by McClellan J in Transfield (the exclusion clause there was clause 3(b)): see para. 58 of the judgment extracted above. I agree with the learned judge's reasoning.

32. Mr Shieh relies on the Canadian case of Hartford Fire Insurance Co. v Saskatchewan Mutual Insurance Co. (1967) 59 DLR (2d) 649, a decision turning on the construction of a Canadian road traffic statute, to support his argument here. In that case, the legislation said that the insurer was not liable under an owner's policy or driver's policy for loss or damage resulting from bodily injury to or the death of "the insured". The question arose as to whether "the insured" meant the person claiming indemnity under the policy in a particular event, in that case the driver. The Canadian court was of the view that a person could not in any event be liable for loss or damage resulting from bodily injury to or death of himself, so he could have no claim for indemnity that would require to be excluded from the coverage (see p. 651). In those circumstances, "the insured" in the statutory exclusion could not be a reference to the person claiming indemnity.

33. I can see the good sense of the above decision in relation to a motor traffic claim. However, in a construction project situation, the loss of or damage to one's own property may conceivably give rise to liability on one's part. McClellan J has already cited the example of a lease or mortgage of one's property to another, as a possible cause for giving rise to liability on the owner's part in case the mortgaged or leased property is damaged. In that situation, if there was no exclusion 6(a), liability would attach. More generally, in my view, in a construction project context, a principal contractor may be obliged under sub-contracts to make available for use by its sub-contractors its own equipment. Liability could arise against the principal contractor if the equipment was lost or damaged, thereby causing loss to the sub-contractors. Exclusion 6(a) would deny coverage in such a situation, without which liability would attach under the indemnity provisions in the policy.

34. In any event, even if I was wrong, Mr Shieh's argument based on exclusion 6(a) would only be one of the many considerations and factors that I must take into account in considering the policy as a whole. In Transfield, which concerned a claim for indemnity regarding liability arising out of some property damage, the proper construction of clause 3(b) there (the equivalent of exclusion 6(a) here) was crucial. However, in the present case concerning indemnity against liability arising out of a fatal accident, the crucial question of construction relates to exclusion 1 rather than exclusion 6(a). In our case, where necessary, it would be permissible, as a matter of construction, for "the Insured" in exclusion 6(a) to bear a different meaning from "the Insured Party" in exclusion 1.

35. Having considered and balanced all relevant matters and considerations, I have come to the firm view that the construction put forward by the Plaintiffs is the correct one. In other words, exclusion 1 only applies to liability in respect of the claim of an injured or deceased workman in the direct employ of the insured who is claiming indemnity under the policy, but not a workman in the employ of some other entity also insured under the policy.

Waiver

36. The Defendants rely on general conditions 3 and 4 of the policy, which read as follows:

"3.	All the terms, exceptions and conditions contained herein or endorsed hereon a) are incorporated in and form part of this Policy b) are to be deemed conditions precedent to any liability on the part of the Insurers so far as they relate to anything to be done by the Insured.
4.	The Insured shall upon the discovery of any event likely to give rise to a claim under this Policy
	a)	give notice in writing thereof as soon as possible to the Insurers and at his own expense as soon as practicable supply full particulars in the form required by the Insurers,
	b)	send to the Insurers on receipt any writ, summons or other proceedings which may be commenced against the Insured,
	c)	give to the Insurers all information and assistance to enable the Insurers to settle or resist any claim or institute proceedings.
The insured shall take all practical steps, including in the case of goods lost or stolen, or of wilful damage thereto, to give notice to the police as soon as possible for the purpose of recovering any property lost and in the case of theft or wilful damage to discover the guilty person or persons and to have him, her or them prosecuted at the expense of the Insurers.
The Insured shall not negotiate, pay, settle, admit or repudiate any claim under this Policy without the written consent of the Insurers.
The Insured shall not in any case be entitled to abandon any property to the Insurers whether taken possession of by the Insurers or not."

37. Mr Shieh argues, with essentially no resistance from Mr Scott SC, appearing for the Plaintiffs, that condition 4 is a condition precedent for liability under the policy, and in those circumstances, a breach of condition 4, though unaccompanied by any resulting prejudice to the insurers, would defeat the Plaintiffs' claim for indemnity: Pioneer Concrete (UK) Ltd v National Employers Mutual General Insurance Association Ltd [1985] 2 All ER 395; Motor and General Insurance Co. Ltd v John Pavy [1994] 1 Lloyd's Rep 607 (PC).

38. Mr Shieh argues that the Plaintiffs have breached the procedural conditions in that they failed to send to the insurers, "on receipt", the summonses issued against them in the magistrate's court; the Plaintiffs pleaded guilty to the summonses without the insurers' written consent; the Plaintiffs failed to notify the insurers of the commencement of the employees' compensation proceedings; the Plaintiffs consented to judgment in the employees' compensation proceedings without the written consent of the insurers; and the Plaintiffs generally failed to give to the insurers all information and assistance to enable the insurers to settle or resist any claim, both in relation to the employees' compensation proceedings as well as the common law actions.

39. Mr Shieh does not suggest in his argument that his clients have suffered any resulting prejudice from the procedural non-compliance, although he does reserve his position on some of the items of legal costs incurred by or on behalf of the Plaintiffs in defending the claims that have been made against them. There is, for instance, no suggestion that the amounts of the employees' compensations or common law damages that the Plaintiffs were eventually ordered to pay were excessive. According to Mr Shieh, all this is quite irrelevant to his argument based on the procedural conditions.

40. Mr Scott's answer to all this is waiver. It is common ground that by August 1996, well before the criminal prosecution, the employees' compensation proceedings and the common law actions, but after the notification of the happening of the fatal accident, the Defendants had through their loss adjusters (McLarens Hong Kong Limited) repudiated liability. (McLarens' authority to represent the Defendants at the material times is not in issue.) Relying on Clarke, The Law of Insurance Contract (4th ed.) para. 26-4D (p. 873), Mr Scott argues that there has been a waiver of the crucial condition 4 in the policy. The relevant passage in Clarke reads:

"(c)

Inferences from Rejection. If the insurer rejects the claim altogether on another ground, such as lack of cover, the insurer does not thereby waive the possibility of pleading a breach of condition at a later stage, if that breach occurred prior to the rejection of the claim; the rejection did not prompt the breach. By contrast, if the insurer repudiates liability under the policy before performance of a procedural condition is due, it is generally held that the claimant is dispensed from the duty to perform the condition. In a liability case [Stephens v State Farm Mutual Automobile Ins. Co., 508 F 2d 1363, 1366 (5 Cir, 1975 - motor)] the court said that

"a claimant should not be required to approach his insurer, hat in hand, and request consent to settle ... when he has already been told, in essence, that the insurer is not concerned, and he is to go his way. It is difficult to see why an insurer should be allowed to, on the one hand, deny liability and thus, in the eyes of the insured breach his contract and, at the same time, on the other hand, be allowed to insist that the insured honor all his contractual commitments."

The insurer may reserve his position by making an offer of settlement without prejudice to any right to reject the claim altogether. If the insurer reserves his position as regards specified defences, his failure to include other potential defences may be seen as waiver of those defences."

41. Mr Shieh argues in reply that there is no rule of law that every time an insurer rejects a claim on one ground, he must be taken to have waived all requirements for future compliance with procedural conditions by the insured. Everything turns on the facts. Moreover, if the insurer had made an express reservation of right regarding future compliance with the procedural conditions, before any non-compliance with the procedural conditions took place (which was subsequently relied on to deny liability in litigation), that would suffice.

42. On the facts, Mr Shieh points out that notwithstanding the general rejection of the Plaintiffs' claim by August 1996, McLarens asked for the provision of copies of all relevant claims correspondence against the Plaintiffs from the sub-contractors involved and any such future correspondence which the Plaintiffs might receive in their letter dated 16 December 1996. More importantly, in their letter dated 5 February 1997, i.e. before the commencement of the employees' compensation proceedings and well before the commencement of the common law actions, McLarens wrote to the Plaintiffs as follows:

"In view of the above, Insurers are unable to accept liability to pay any of your legal costs incurred to date. If you intend to pursue claims under the Public Liability policy, please ensure that you comply with its terms and provide us with necessary information and copies of documents promptly. In particular, we look forward to receiving a detailed explanation of the claims against you and, before legal fees are actually incurred, a detailed request for Insurers' consent explaining each element of legal advice/representation to be obtained."

43. Mr Shieh therefore argues that there was a more than sufficient reservation of the insurers' right regarding strict compliance with condition 4 prior to the happening of the non-compliance that is being relied on in defence of the present claim.

44. I make no secret of the fact that in my view, the lack of any resulting prejudice from the alleged non-compliance with the procedural conditions (Mr Shieh's reservation on some of the legal costs aside) renders the Defendants' present argument quite unattractive meritoriously. Yet I do respect and follow, as fully as I should, the decided cases to the effect that prejudice is wholly irrelevant when one is concerned with a true condition precedent in a policy. Nonetheless it seems to me that like any other provisions in a policy, provisions setting out a condition precedent must be construed and understood in the light of the policy's factual matrix, and any alleged waiver of such a condition precedent must be considered in a like manner.

45. Condition 4 in the general conditions is, in my judgment, clearly meant to afford the insurers a good opportunity to closely monitor the progress and defence of a threatened or actual claim potentially giving rise to liability and thus a need for indemnity under the policy, from the earliest moment until its final conclusion. It seeks to ensure that the insurers are fully informed from the outset, and no decision of any importance is made without their prior informed consent and agreement. Amongst other things, the insurers must be given all necessary information and material in order to enable the insurers to decide whether to defend the claim or whether to settle it, and how best to do so.

46. General condition 4 makes much sense when the insurers accept a claim under the policy. It also makes sense even if the insurers do not accept the claim under policy but at the same time, as a fall-back position, decide to take a general part in respect of the claim on a "without prejudice" basis (which may include resisting the claim, negotiating for a settlement, or keeping a close watch of the claim).

47. Condition 4 would, however, by way of contrast, serve little if any useful purpose if the insurers should deny liability, and take no interest in the defence or disposal of the claim.

48. Thus depending on the stance taken by the insurers, the context in which an argument of waiver should be considered may vary. It is true that generally speaking, the act or conduct relied on to constitute a waiver must be unequivocal. However, when the insurers repudiate liability, they are in effect saying that they are not liable to provide indemnity in respect of the claim or event in question. In those circumstances, prima facie, they are asserting that what has happened does not give rise to a claim under the policy. Since the greater includes the less, they must be taken as saying that the same is not "an event likely to give rise to a claim under [the policy]" - the opening phrase in condition 4, the discovery of which would trigger the operation of condition 4 in the first place. In that case, according to the insurers' own assertion, condition 4 is simply not engaged and there is, on the part of the insured, nothing to perform (in the context of condition 4).

49. Thus analysed, it can be easily seen why both on principle and on authority, when an insurer repudiated liability, it would require very little extra material or evidence, if any at all, for the court to be able to conclude (if it is of the opinion that the repudiation is unjustified) that the insurer has waived future compliance with the procedural conditions. The unequivocal act or conduct required to found a waiver is very often contained in the repudiation of liability itself. Labelling this as a rule of law or a conclusion based on an objective analysis of the facts would not really alter the substance of the matter.

50. That said, I am not for a moment suggesting that the insurer in the above situation must in all circumstances be stuck with a waiver if it should decide to repudiate liability. Again both on principle and authority, the insurer may by act or conduct reserve its right in terms of the full compliance with the procedural conditions, whilst repudiating liability at the same time. However, my point here is that any such reservation must be unambiguous, clear and specific. For after all, the insurer in my present example is seeking to do two things that are mutually contradictory in nature at the same time - repudiating liability and insisting on compliance with procedural conditions that only have relevance if the claim is valid. Not that this cannot be done - all I am saying is that the reservation must be done specifically and clearly.

51. If the insurer's repudiation of liability is accompanied by its contemporaneous willingness to entertain the claim for indemnity on a "without prejudice" basis, which does happen from time to time, the reservation is quite obvious, and I would have thought nothing else is really required to be done by the insurer to reserve its right in terms of compliance with the procedural conditions.

52. However, when this is not the case, and there is simply a repudiation of liability, in my view, it is really incumbent upon the insurer to establish a clear, specific and unambiguous reservation, failing which it will be taken to have waived all future compliance with the procedural conditions.

53. Whilst I am not suggesting that the reservation of right and repudiation of liability must be done at the same time, yet in line with general principles on waiver, any such reservation of right, in order to be effective, must be made quite contemporaneously with the repudiation of liability. For after all, generally speaking, a waiver, once effected, is irrevocable and final; allowing a belated reservation of right would be equivalent in effect to permitting the re-opening of the subject matter that has been waived, which would go against the very nature of a waiver (in terms of its irrevocability and finality).

54. Another aspect of the policy to note here is this: one is here concerned with a third party liability policy taken out in relation to a construction project, and a fatal accident involving the demise of six workmen in the employ of sub-contractors. To experienced insurers like the Defendants and loss adjusters like McLarens, the potential liabilities under the policy would have been obvious - i.e. (apart from criminal prosecution under the labour legislation) liability under the employees' compensation legislation and liability under common law. When these insurers and loss adjusters spoke of repudiating liability or rejection of a claim or potential claim, they must be presumed to know what exactly or actually they were speaking about, i.e. potential liabilities for payment of employees' compensations and common law damages.

55. Furthermore, in relation to waiver, there can be a general waiver of the procedural conditions prior to the happening of the so-called non-compliance with those conditions later, and there can be a waiver of non-compliance with the procedural conditions after the non-compliance has taken place. In the passage from Clarke extracted above, the learned editors were focusing their attention on future non-compliance after the waiver in question. But in an earlier passage, the learned editors referred to waiver of previous non-compliance (at para. 26-4D, pp. 872-873):

"(b)

Silence. Generally, silence cannot constitute waiver; "it is difficult to imagine how silence and inaction can be anything but equivocal." "A renunciation of a right is never to be presumed." Total silence and inactivity, even with knowledge that a claim is pending, cannot be waiver. However, silence in context, such as failure to reply to the claimant's letter asking what information he should supply, or failure to respond to requests for claim forms, may be construed as waiver of the relevant information. Again, delay by the insurer will give rise to waiver "if thereby there was prejudice to [the claimant] or if in some other way rights of third parties intervened or if their delay was so long that the court felt able to say that the delay in itself was of such a length as to be evidence that they had in truth decided to accept liability".

Failure to object to non-performance of a procedural condition, while handling the claim as if it were in all other respects correctly presented, may amount to waiver. In Barratt Bros (Taxis) Ltd v Davies, the insurers wrote to the claimant asking why he had not sent them documents, as required by the policy, but the tenor of the letter was that they were not rejecting the claim on that ground. Lord Denning MR observed: "By not asking for the documents, they as good as said they did not want them ... I think they waived the condition." In such a case, the insurer must expressly reserve his position on the breach of condition, if he is not to lose the option of pleading the breach. By contrast, it has been accepted that insurers may deal with all aspects of a claim concurrently; so, to ask for an appraisal of the property damaged or to investigate the facts supporting a claim does not necessarily waive a limitation period or notice condition: see (a), above.

Failure to object has been seen in the USA as an aspect of the insurer's duty of good faith. Thus it was held in one case that, if the claimant's notice was defective, the insurer could not simply stay silent and then say later that (good) notice had not been given in time, because good faith required the insurers to alert the claimant to the defect. In England, the parties owe a mutual duty of good faith when claims are made; below, 27-1. If the duty is no more than to give the other the information needed for the other to make a decision, an English court might decide differently about defective notice. If, however, as in the USA, the insurer's duty of good faith has the same broader base as the general contractual duty of good faith, which is found in the USA and is beginning to emerge in English law, the decision may be the same: see below, 27-1A."

56. I have been referred, during the argument, to a substantial part of the relevant correspondence between the parties and their representatives, pertaining to this question of waiver. I do not intend to lengthen this judgment by reciting from the letters that have been written, and there are quite a few of them. The parties are content to ask the Court to decide on this question of waiver solely on the basis of the written material.

57. Bearing in mind the above general principles and analysis, and based solely on the written material, I reject the Defendants' argument for two main reasons.

58. First, I agree with Mr Scott that given the general rejection of claim by August 1996 without any reservation of right under condition 4, the Defendants must be taken to have, there and then, waived any requirement for future compliance with condition 4. Plainly the general rejection, in the context, must have been in relation to all possible future employees' compensation claims and common law claims arising out of the fatal accident.

59. Furthermore, it was not open to the Defendants to seek unilaterally to "resurrect" (as Mr Shieh has put it) condition 4 in December 1996 or February 1997. In my judgment, the time lapse between August 1996 and December 1996 or February 1997 was too great to allow any belated reservation of right to be made.

60. Secondly (and if I was wrong with my first reason given above), in my judgment, when read as a whole, the correspondence clearly shows that on the part of the insurers, 1) they have repudiated liability on the ground of non-coverage; 2) they were not interested in having any meaningful participation in the defence or settlement of the employees' compensation claims or common law claims (whether before or after their actual commencement). Thus for instance, when they were told in mid-2000 that interlocutory judgments with damages to be assessed had been entered against the Plaintiffs in the common law actions and dates had been set for the assessment of the individual claims, and when they were asked for proposals as to how the assessment of damages should be conducted, they gave (through McLarens) a rather terse reply (see McLarens' letter dated 25 May 2000):

"In light of the fact that we have disclaimed policy liability on behalf of our Principals, we see no purpose in making any proposals concerning the conduct of the hearings for the assessment of damages in the six actions referred to above."

61. In my view, at least by the time McLarens wrote their letter dated 25 May 2000, the Defendants must have through McLarens waived all previous non-compliance regarding the proceedings that had taken place thus far in the High Court actions, and waived any need for compliance with condition 4 in the future conduct of the actions. I do not see how the so-called "reservations of right", relied on by Mr Shieh, in December 1996 and February 1997 could be of any assistance to the Defendants in relation to what happened in May 2000. Certainly, in relation to the future conduct of the common law actions as from May 2000, there was no or no sufficient reservation of right (that was clear, unambiguous and specific) regarding future compliance with the procedural conditions.

62. As regards the employees' compensation proceedings and the consent judgments, the position is less straightforward: I note that McLarens did in their letter dated 24 March 1998 to the Plaintiffs' then solicitors in those proceedings complain about the lack of notification and information about those proceedings and mention the need for the Plaintiffs to comply with "policy terms and conditions". Yet when they denied liability under the policy in respect of the employees' compensation claims in the letter, they did so "for reasons which [had] previously been discussed" - i.e. non-coverage. At least one possible and reasonable way to read the letter is that breach of procedural conditions (which must have happened by then) was not relied on as such to deny liability in the letter.

63. What happened subsequently in the correspondence up to the commencement of the present action in December 2001 is helpful to find out the true position of the Defendants (after all, the correspondence should be read as a whole): despite the Plaintiffs' present solicitors' detailed letter of demand dated 22 May 2001 claiming for an indemnity under the policy for a total amount in excess of $19 million (which was, even on the material then available to McLarens, clearly a reference to both the employees' compensations and High Court judgment sums - although the first paragraph of the letter only referred to "damages awarded against [the Plaintiffs]"), the reply McLarens in their letter dated 19 June 2001 gave in denying liability only relied on one and the same old ground, namely, "[the Plaintiffs did] not have a valid claim under the policy" (i.e. non-coverage). No procedural non-compliance whatsoever was mentioned, let alone relied on to deny liability. This remained the position up to the commencement of the present action.

64. In my judgment, when read as a whole, the correspondence does evidence that there was a waiver of all previous non-compliance regarding the employees' compensation proceedings (as well as the criminal prosecution and the common law claims).

65. In those circumstances, not only would it be quite wrong to allow the Defendants to say in defence of the present proceedings that there has been fatal non-compliance with the condition precedent embodied in condition 4, the Defendants must also be taken to have waived the requirement for compliance with condition 4 (prior to the so-called non-compliance) and/or the non-compliance with condition 4 (after the alleged non-compliance had taken place). The commercial reality of the situation, in my judgment, was such that any attempts by the Plaintiffs to strictly comply with the requirements under condition 4, in the light of the attitude of the Defendants (through McLarens), would have been quite meaningless and nonsensical. Put another way, the Defendants must be taken to have waived the requirements under condition 4.

66. Mr Shieh further argues that there can be no waiver without reliance on the part of the Plaintiffs, and that in the affidavit evidence filed on behalf of the Plaintiffs, there was no reference to any reliance on the alleged waiver by the Plaintiffs resulting in their (subsequent) non-compliance with the procedural conditions.

67. I reject this argument.

68. First, I do not accept that in the present context there can be no waiver without reliance: Chitty on Contracts (28th ed.) Vol. 2 para. 41-053; Compagnia Tirrena Di Assicuranzione SpA v Grand Union Insurance Co. Ltd [1991] 2 Lloyd's Rep. 143 (which decided that the state of mind of the contract-breaker - a fortiori any reliance on his part - is irrelevant to the innocent party's affirmation of the contract).

69. Secondly, even if reliance is required, reliance need not be restricted to resulting non-compliance with the procedural conditions. In my judgment, reliance simply means a change of position which may or may not have anything to do with subsequent non-compliance with the procedural conditions.

70. In the present case, the Plaintiffs certainly relied on the Defendants' waiver by continuing to deal with the common law actions by themselves in accordance with the legal advice they could by themselves obtain (through the assistance of AIU).

71. Furthermore, although there is no express and specific reference to reliance in the affidavit evidence filed on behalf of the Plaintiffs, it must be open to the Court, on the material before it and given the general circumstances of the case, to draw the inference that the Defendants' waiver contributed to the Plaintiffs' subsequent "non-compliance" with condition 4. I am prepared to draw that inference, if necessary. That is only common sense.

72. Finally, reliance may also be found in the very fact of the commencement of the present action. The attitude demonstrated by the Defendants in the correspondence must have affected, as a matter of common sense, the decision of the Plaintiffs on whether to commence the present action in the first place.

73. For all these reasons, I reject the Defendants' argument on condition 4.

Apportionment and quantum

74. As mentioned above, AIU has on behalf of its principal taken the stance that they are partially liable to indemnify the Plaintiffs in respect of the employees' compensation awards, the High Court judgment sums and the resulting legal costs. The Plaintiffs' case is that the Defendants are also partially liable. Indeed, their position is that the Defendants are 50% liable in respect of the indemnity in question.

75. This raises a question of apportionment.

76. The matter is complicated further by the fact that the employees' compensation awards as well as the legal costs in the High Court actions have been fully paid by AIU. Mr Shieh argues that in that situation it is open to the Defendants to argue that AIU has overpaid its due portion under the EC policy as a "volunteer" (see Bovis Construction Ltd v Commercial Union Assurance Co. Plc [2001] 1 Lloyd's Rep. 416).

77. In any event, Mr Shieh argues that for those amounts that have been settled by AIU, it is for AIU to seek contribution from the Defendants.

78. I am not prepared to make any decision on apportionment or quantification for the simple reason that AIU or its principal, National, is not before the Court. Any declaration that this Court might make in these proceedings in the absence of AIU/National would be quite meaningless as the latter would not be bound by it.

79. Any quantification of the indemnity amount based on such an apportionment would likewise suffer from the same drawback. Moreover, quite obviously Mr Shieh's argument relating to quantification would affect not only the Plaintiffs, but also AIU/National.

80. For those reasons, I decline to deal with the question of apportionment and quantification and would make no order in relation to it. As I have not dealt with the question of apportionment and quantum, they remain matters at large, which the relevant parties, including AIU/National, are free to argue amongst themselves on some other occasion (if no agreement or compromise can be reached). No issue estoppel (or anything of that sort) should arise from my refusal to make any order in relation to this part of the Plaintiffs' claim.

Order

81. In the circumstances, I am only prepared to make the following limited declarations, which are without prejudice to the parties' contentions on apportionment and quantum,

(1) that on a true construction of the policy, exclusion 1 only applies to liability in respect of death of or bodily injury (including illness) to a person under a contract of employment or apprenticeship with the insured party claiming indemnity under the policy and arising out of and in the course of such a person's employment or service with such an insured party claiming indemnity; and

(2) that in the events that have happened, the Defendants are not entitled to rely on general condition 4 to deny liability under the policy in respect of the Plaintiffs' claim for indemnity in respect of the employees' compensation awards, the High Court judgment sums, and the related legal costs.

82. I would make a costs order nisi that the costs of the present action by originating summons be paid by the Defendants to the Plaintiffs; such costs are to be taxed if not agreed. Unless either party applies to vary the costs order nisi within 14 days after this judgment is handed down, the same shall become absolute upon the expiry of the 14-day period.

83. Lastly, I would like to thank counsel for their helpful assistance.