PARKLANE FLORAL & BALLOONS DESIGN v. ALLIANZ INSURANCE (HONG KONG) LTD

CACV376/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL No. 376 OF 2004

(ON APPEAL FROM DCCJ18282 /2001)

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JUDGMENT

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Hon. Cheung JA:

1. I agree with the judgment of Yuen JA and the orders proposed.

Hon. Yeung JA:

2. I agree with the judgment of Yuen JA.

Hon. Yuen JA:

3. This is the Plaintiff’s appeal from an order of Deputy District Judge Michael Y.M. Wong dismissing the Plaintiff’s claim after a trial which took 24 days.  Although the proceedings and the judgment below were in Chinese, this judgment is written in English as the terms of the insurance policy in question (which will be examined in detail in this judgment) were in English.

Background

4. The Plaintiff operated a gift shop at the basement of the Ginza Shopping Arcade in Causeway Bay.  It was insured by the Defendant under a Business Insurance Policy ("the Policy") for accidental loss of or damage to contents and stock.

5. At about 3:30 a.m. on 21 December 2000, two masked men entered the Arcade, tied up security personnel and flooded the Arcade with water from the toilet taps and fire hoses.  They also cut the power to the Arcade.  After half an hour, the security personnel released themselves and turned off the taps and hoses.  By then, the Arcade was already flooded with 2 inches of water.  A few hours later, power was restored and pumps were used to pump the water out (para. 5, Judgment).

Plaintiff’s stock

6. Inside the Plaintiff’s premises were stock consisting of a number of paper articles - giftwrap paper, paper ribbons, paper bags, notebooks and puzzles.

7. The Plaintiff claimed that the articles had been put in paper boxes, stacked up in layers, with 10-20 boxes (of different dimensions) per layer.  The Plaintiff was unable to say how many layers there were, or what were the dimensions of the various boxes, but the judge found, after considering the evidence, that there were 63 boxes (probably 64 boxes - see para. 11 below) stacked up on a base area of about 4 sq.m. (para. 15, Judgment).

8. The judge found that as the Arcade was flooded with only 2 inches of water, given the small base area occupied by the boxes, the upper layers of boxes would not have been water-damaged.  Further, since some of the articles were wrapped in plastic or other packaging, even if the packaging were wet, the articles inside would not necessarily have been damaged (para. 16, Judgment).

Placing articles in plastic bags

9. However (the judge found) the Plaintiff did not thoroughly inspect each article in each box, and once water droplets were found inside a box, simply put the contents into a black plastic bag - one plastic bag for the contents of each box.  The result of doing this was that even though some articles were originally not wet or not very wet, they might have got wet by coming into contact with articles which were wet (para. 19 judgment).

Checklist ("D4")

10. The contents of each black plastic bag were then checked by Mr Yeung To Ching and Mr To Kam Ming, employees of Miller International Loss Adjusters ("Miller").  Mr Yeung and Mr To compiled a checklist (the original of which was exhibited at trial as "D4").

11. This checklist is entitled "Damage Items Check List of Parklane (53A)" and apparently dated "22/12-23/12".  It listed:

-	"Bag #" (ending with No.63, but there were two No.46),
-	"Description"
-	"Quantity", and
-	"Deduction".

Asterisks (*) had been put next to some items of "Bag #". 

12. The asterisks were explained in Mr Yeung’s witness statement made on 22 March 2002.  He exhibited as "YTC-1" a document which was similar to "D4".  In para. 15 of the statement, he said that asterisks were put next to some bag numbers (which he identified as Bag Nos.10-17, 21-24, 27-28, and 43-47) to denote, as these were paper products or dried flowers, that they had been seriously damaged in the flooding, with little or even no residual value. 

13. Pausing here, there are 3 points which have to be noted:

(1)	"YTC-1" was not a complete photocopy of "D4" - parts of the left side of "D4" had been cut off during the photocopying process.  Looking at the original of "D4", it is clear that asterisks had also been put next to Bags Nos.29 and 40-41. Therefore it can be reasonably assumed that these 3 additional bags should be treated in the same way as those set out in Mr Yeung’s para. 15.
(2)	There were two No. 46, and an asterisk was put against the first No.46 only and not the second, so presumably Mr Yeung’s statement should be read as if he referred to only the first No.46.
(3)	At trial, there was a dispute as to the time when the asterisks had been put on "D4".  This might or might not be a point of significance.  If the asterisks had not been put on contemporaneously with the making of the checklist but only later, that might assist the Plaintiff in challenging Mr Yeung’s evidence - (a) in terms of veracity, whether in fact the articles in  all the bags were damaged to the same serious degree, or (b) in terms of accuracy, whether when he put on the asterisks later, he could really recall which bags contained more seriously damaged articles.  This may be relevant to quantum of damages, because the articles in each bag were of different value.  However, the judge did not make a finding of fact on this dispute as to when the asterisks were put on "D4" (para. 44 judgment), nor was there a finding of Mr Yeung’s reliability as a witness.  I shall revert to this point later in this judgment.

14. In his witness statement of 22 March 2002, Mr Yeung also said he recalled that the contents of Bags No.48-62 were also seriously damaged, although not as badly as those in the asterisked bags.  He said the contents of Bags No.48-62 (paper bags made of various materials) were seriously soaked, but he thought their residual value was higher than those in the asterisked bags.

Disposal of articles

15. Returning to the time of the incident, after Mr Yeung and Mr To had checked the contents of the bags and made the checklist, the Plaintiff disposed of the articles on 25 December 2000.  The judge rejected the Plaintiff’s allegation that Mr Yau Yuen Keung of Miller allowed that to be done. 

Claim

16. The Plaintiff made a claim under the Policy for the total sum of $279,911.40.  According to the Plaintiff, it had calculated this sum by taking the quantities of articles in "D4", and applying to each, the cost of the article according to invoices from its supplier.

Defence

17. The Defendant pleaded in its defence (amongst other things) that the Plaintiff was in breach of three clauses in the Policy which (the Defendant claimed) were conditions precedent to its liability.  The clauses were A2, A5 and B1.

18. The Defendant relied on the following relevant parts of the Policy:

-	"General Conditions (which apply to the whole Policy)
		The conditions which appear in the Policy or in any Endorsement are part of the contract and must be complied with.  They are where their nature permits conditions precedent to the right to recover from us". (Emphasis added).
-	"Claims Conditions (which apply to the whole Policy)
	We will act in good faith in all our dealings with you.  Equally, the payment of claims is dependent on:
	A.	You observing the following:
		2.	... taking all reasonable action to minimise any loss or damage ...
		5.	[Irrelevant to this appeal].
	B.	You recognising our rights to:
		1.	At our own option to ... reinstate any ... damaged item or part thereof, or pay the amount of the loss or damage in money".

19.      The Defendant alleged that when the Plaintiff put all the contents of each box into a plastic bag, articles that were originally not wet (or not very wet) might have become wet through contact with wet articles.  The Defendant alleged that by doing so, the Plaintiff had failed to take “all reasonable action to minimise any loss or damage” as required under Clause A2, and that condition precedent debarred the Plaintiff from claiming anything under the Policy, even for articles that were clearly water-damaged.

20.      The Defendant further alleged that when the Plaintiff disposed of all      the articles, the Defendant was unable to reinstate them because the         Plaintiff’s sole supplier "Chiu Yee" could no longer be found, and by           reason of the disposal, there were no samples with which the      Defendant could go into the market to acquire reinstatements.  The      Defendant therefore alleged that when the Plaintiff disposed of the      articles, it had failed to recognise the Defendant’s right “at [its] own     option  to ... reinstateany ... damaged item ...” under Clause B1.  The  Defendant alleged that that condition precedent debarred the Plaintiff   from claiming anything under the Policy. 

Judgment

21. After trial, at which the Plaintiff was not legally represented, the judge found that all three clauses were conditions precedent and that the Plaintiff had breached two of them, viz. A2 and B1.  He therefore dismissed the Plaintiff’s claim. 

22. Despite the fact that he had already heard all the evidence on damages during this trial which took more than 20 days, the judge did not decide the quantum of damages in the event that on appeal, the Plaintiff succeeded in overturning his decision on liability.  I shall revert to this omission later in this judgment.  

Appeal

23. The Plaintiff appealed.  The Defendant did not file any Respondent’s Notice. 

24. The first issue on appeal is whether the wording of A2 or B1 (read in the context of the Policy as a whole) demonstrated a clear intention to give that clause the status of a condition precedent (MacGillivray on Insurance Law 10^th ed., para. 10-36).

25. The General Conditions provide that the conditions in the Policy (including the clauses in the Claims Conditions) “are where their nature permits conditions precedent to the right to recover.. ".  Accordingly, one must look not only at the wording of the clause itself, but also at its nature, to see if it qualifies as a condition precedent.

Clause A2

26. In respect of A2, the Claims Conditions in the Policy state that “the payment of claims is dependent on ... [the assured] taking all reasonable action to minimize any loss or damage”. 

27. As a matter of language, I do not think that wording is sufficient to render A2 a condition precedent to liability.  Clause A2 does not say clearly that the insurer will not be liable to make any payment at all if the assured failed to minimise loss.  In the context of the clause (i.e. a situation where loss has been suffered for which a claim for payment is made), the words “the payment of claims” can be interpreted to mean that the amount to be paid under the claim depended on the assured’s actions in minimising the loss.  So long as that is a possible alternative interpretation (and in my view it is), any ambiguities must be construed in favour of the assured (MacGillivray, para. 10-36).

28. Indeed, it is interesting to note that the Chinese translation of A2 provided by the Defendant indicates that the words “the payment of claims” means the quantum of payment:

“支付索償的款項”.

29. Further, the nature of A2 is such that the assured’s breach of this clause can simply result in the insurer instituting a cross-action for damages for breach (which could be set-off against the loss claimed by the assured).  As such, A2 can be read as a collateral promise and not necessarily as a condition precedent.  The editors of MacGillivray encapsulated the law in the following passage:

“	10.06	Collateral promise
	A stipulation in a policy may be merely a collateral promise by the assured to do some act without making his right to recover dependent on his fulfilment of the promise.  Here the only remedy of the insurer in the event of breach is a counterclaim for damages.  If insurers desire to create a condition precedent then sufficiently clear wording should be used to demonstrate that intention, and a clause which is not clearly expressed as a condition is likely to be read as a collateral stipulation unless a cross action for damages would be an inadequate redress in the event of breach”. (Emphasis added).

30. Applying that principle to A2, any breach by the assured in failing to minimise loss could be redressed by the insurer deducting from the claim the difference between the actual loss and loss assessed on the basis that mitigating steps had been taken.  Miss Julia Lau counsel for the Defendant was not able to refer this court to any case that threw any doubt on this conclusion.

31. Accordingly, both the ambiguity of the wording and the nature of A2 do not permit it to be a condition precedent.  

Interpretation of Clause B1

32. In respect of B1, the Claims Conditions in the Policy state that “the payment of claims is dependent on ... [the assured] recognising [the insurer’s] rights ... at [the insurer’s ] own option to ... reinstate ...”.

33. In my view, the Defendant’s defence of condition precedent is even weaker in respect of this clause.  As a matter of wording, the intention of this clause is clear - it confirms that the insurer has the right to choose between alternative modes of compensation.  In other words, it is not for the assured who has suffered loss of an article to insist on its repair, or replacement, or reinstatement, or payment in cash; it is the insurer’s right to choose.  B1 merely requires the assured to “recognise” this right on the part of the insurer.  It is an impermissible quantum leap to translate this right of the insurer into a condition precedent, the breach of which by the assured would bar his right to recover anything.

34. Even if any act done by the assured had adversely affected the insurer’s options, that breach by the assured could be redressed by means of monetary compensation.  If, for instance, repair would have cost less than reinstatement, but the assured had through his actions excluded repair from the insurer’s options, then the insurer would be entitled to set-off from the assured’s claim the difference between reinstatement cost and repair cost.

35. So, again, both the wording and the nature of B1 do not permit it to be a condition precedent.

Quantum of compensation

36. The finding that neither A2 nor B1 is a condition precedent leads to the following difficulty - clearly the Plaintiff has suffered loss, but what loss has it suffered?  Is it entitled to recover the cost of the articles in all 64 bags?  Or only the asterisked ones?  Or the asterisked ones together with Bag Nos. 48-62?  And what is to be made of the findings of fact that the Plaintiff had been in breach of A5 (by putting articles which were not wet, or not very wet, with wet articles) and of B1(by disposing of the articles without leaving any samples for the Defendant)?

37. With respect to the judge, I have to say it is most regrettable that after a lengthy (and consequently, costly) trial, he did not make any findings on quantum.  

38. This court is very reluctant to remit the matter back to the District Court for an assessment of damages.  The claim is for a total sum of less than $280,000, and substantial time and costs have already been expended in the trial and for this appeal.  However we are conscious that we do not have in the appeal bundles all the materials that were before the judge and we do not even have the transcript of the witnesses’ testimony at trial.  However, doing the best we can with what we have, the following observations can be made. 

Damaged articles

39. Even on the Defendant’s case, Mr Yeung’s evidence was that the articles in a number of bags (the asterisked bags and Bag Nos. 48-62) were “seriously damaged”.  Although he said that some articles in those bags which were originally not wet (or not very wet) might have got wet by coming into contact with wet articles, it seems as a matter of common sense unlikely that they would have got “seriously damaged” from such contact.  So it seems that even on the Defendant’s own case, the articles in the asterisked bags and Bag Nos. 48-62 were seriously damaged.

Value

40. The Plaintiff has calculated the value of the articles in the asterisked bags and Bag Nos. 48-62 by applying to each article the cost shown in the supplier’s invoice.  The judge has accepted the veracity of the invoices (paras. 29-31 judgment).  On that basis, the loss to the Plaintiff of the articles in the asterisked bags and Bag Nos. 48-62 would amount to $191,172.20.

Reinstatement 

41. Of course the Defendant could opt to compensate the Plaintiff by payment of money or by reinstatement.  The Defendant has said that when the Plaintiff disposed of the articles, that left the Defendant with no samples with which it could get reinstatements.  That seems to have ignored the fact that photographs had been taken of the articles by the loss adjusters at the time the checklist was made. 

42. If, on the other hand, it were to be said that the photographs were not sufficient to show the detailed designs on the various paper articles, then it might follow that even with samples available, there would be difficulties finding articles of identical or closely similar design on the market.  The more detailed the design and the more varied, the greater would have been the cost of sourcing identical or closely similar reinstatements.  Realistically therefore, the option of reinstatement would seem to have been an unlikely choice in the circumstances of this claim. 

Residual value

43. Then there is the issue of loss of the residual value of the articles as a result of the Plaintiff’s disposal.  It would appear from Mr Yeung’s statement that the articles in the asterisked bags were seriously water-damaged with little or no residual value, and those in Bag Nos.48-62 (paper bags made of various materials) were seriously soaked, but he thought their residual value was higher than those in the asterisked bags. 

44. On the materials before us, it is not apparent that the Defendant had any evidence to establish that there was a market for soaked (and then dried) paper bags.  Even if there was evidence of such a market, a residual value could only be established after taking into account the cost of drying the articles.  One would be very surprised if the evidence would show anything other than a de minimis residual value.

Excess

45. Therefore if one were to disregard the reinstatement option and the loss of residual value, the loss to the Plaintiff would appear to be the sum set out in para. 40 above.  From this would have to be deducted the excess of $5,000 stipulated in the Policy for water-damage, giving a sum of $186,172.20.

46. I have to emphasize that the sum set out in the preceding paragraph is not this court’s quantification of the claim.  As I have mentioned above, the entirety of the materials necessary for a proper quantification are not before this court, and findings of fact on disputes which may be relevant to a proper quantification (such as when the asterisks were added to “D4") have to be made by a trial judge and cannot be dealt with by this court.  It is up to the parties to apply their commercial and common sense to see if a less time-consuming and less expensive conclusion to this dispute - other than a re-trial- can be achieved. 

Order

47. With that word of advice, I would allow the appeal, set aside the judge’s order and remit the case to the District Court for the quantum of damages to be assessed by another judge.  I would make an order nisi that the costs of the appeal be paid by the Defendant to the Plaintiff; as for the costs of the trial, I would set off the costs that should be paid by the Defendant to the Plaintiff against the costs that the judge ordered the Plaintiff to pay the Defendant by reason of the unjustified absence of the Plaintiff’s representative, with the result that there should be no order as to the costs of the trial.