CHINA TAIPING INSURANCE (HK) CO LTD v. TANG TZE WAI AND ANOTHER

CACV 277/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 277 OF 2011

(ON APPEAL FROM HCMP NO 149 OF 2010)

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BETWEEN

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J U D G M E N T

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Hon Chu JA:

1.  I agree with Au J’s judgment.

Hon Lam JA:

2.  I agree with Au J’s judgment, and have nothing to add. 

Hon Au J:

A. INTRODUCTION

3.  The plaintiff issued to the 1^st defendant a private motor car insurance policy (“the Policy”) on 21 August 2006, covering a vehicle (“the 1^st defendant’s vehicle”) with the registration mark number MF8551, which was owned by the 1^st defendant.  The 1^st defendant’s vehicle, while driven by the 1^st defendant, was involved in an accident (“the Accident”) in November 2006.  A Madam Pang (who was a passenger in the vehicle) was killed.  Madam Pang’s administratrix issued HCPI 685/2009 (“the HCPI Action”) in October 2009 against the 1^st defendant for damages.  Notice to the plaintiff as the insurer of the HCPI Action was also given.

4.  The plaintiff then took out this action (under HCMP 149/2010) in January 2010 against the 1^st defendant seeking various declarations effectively to avoid liability under the Policy. With leave of the court, the Motor Insurers’ Bureau of Hong Kong (“MIB”) was then joined as the 2^nd defendant therein.

5.  After trial, by his judgment dated 24 November 2011, Deputy High Court Judge L Chan (as the learned Judge then was) made an Order (“the Order”) in favour of the plaintiff declaring that:

(1)   The 1^st defendant vehicle was not the vehicle intended to be covered under the Policy at the time of the Accident (“the subject matter declaration”).

(2)   The plaintiff is not liable to indemnify the 1^st defendant under the Policy in respect of any liability which the Policy purports to cover or satisfy any judgment which the Administratrix of the estate of Madam Pang may have against the 1^st defendant in the HCPI Action (“the no liability declaration”).

(3)   The Policy was void ab initio by reason of the fact that the vehicle the use of which it was intended to cover did not exist at the time the Policy was issued (“the void ab initio declaration”).

6.  This is MIB’s appeal against the Order, seeking to set aside the above declarations. 

B.  THE RELEVANT FACTS

7.  The following facts are not disputed in the proceedings below.

8.  The 1^st defendant purchased the 1^st defendant’s vehicle as a used car.  He gave the plaintiff through an insurance broker a proposal (“the Proposal”) dated 1 August 2006 for the purpose of subscribing for a third party risk private motor car insurance policy. 

9.  As required in the Proposal, the 1^st defendant provided in it the particulars (“the Vehicle Particulars”) of the vehicle to be insured as follows:

(1)  Registration Mark: MF8551;

(2)  Make: Toyota;

(3)  Model: Corolla;

(4)  Chassis No: JT753AEB005236961;

(5)  Engine No: 5A-H057696;

(6)  Capacity: 1,498cc;

(7)  Type of body: saloon;

(8)  Year of manufacture: 1998;

10.  The information of these particulars was the same as those contained in the vehicle registration document (“the VRD”) issued by the Transport Department.

11.  The Proposal further contains a clause (“the Declaration and Basis Clause”) which reads:

“I declare that to the best of my knowledge and belief the information given on this form is true and complete in every respect. I agree that this proposal and declaration will be the basis of the contract between me and [the Plaintiff]. I agree that the insurance will not be in force until the proposal has been accepted by the Company.” (emphasis added)

12.  The plaintiff subsequently issued the Policy. 

13.  After the Accident, the 1^st defendant’s vehicle was examined by a Dr Chim (a forensic scientist) and a Mr Chow (a motor vehicle examiner) for the police.  It was their findings that:

(1)  The engine number of that vehicle had been tempered with and the original engine number could not be restored.

(2)  The cylinder capacity of this engine was in fact 1,587cc instead of 1,498cc.

(3)  Thus, the engine in that vehicle was not the engine numbered 5A-H057696 and registered in the VRD.

14.  In light of these findings, the plaintiff issued the proceedings below seeking to avoid the Policy essentially on the bases (a) of material non-disclosure or misrepresentation pursuant to s 10(3) of the Motor Vehicles Insurance (Third Party Risks) Ordinance (Cap 272) (“the Ordinance”), or (b) that the Policy was void as the vehicle intended to be insured did not in fact exist at the time of the Policy.

C.  THE JUDGMENT

15.  Based on the undisputed and unchallenged evidence before him, the learned Judge made the following essential findings of fact in the Judgment:

(1)  The engine of the 1^st defendant’s vehicle was not the engine (a) as registered in the VRD of a vehicle with the registration mark MF8551; and not the engine referred to in (b) the Proposal, (c) the provisional cover note issued by the plaintiff’s agent Hanson, and (d) the Policy (paragraph 22).

(2)  Since the engine is an essential part of a vehicle, the 1^st defendant’s vehicle, which had an engine different from the vehicle registered in the VRD, was a different vehicle from the one so registered in the VRD (paragraph 23).

(3)  The plaintiff would not have issued the Policy if it had been advised that the engine in the vehicle proposed to be insured was not the same engine as registered in the VRD (paragraph 24).

(4)  There was a change of the engine in the Vehicle before the 1^st defendant purchased it.  The 1^st defendant’s vehicle was not the vehicle so registered by the VRD or the vehicle referred to in the Policy (paragraphs 25 and 26).

(5)  The vehicle as registered in the VRD was therefore not in existence when the 1^st defendant purchased the 1^st defendant’s vehicle, since it had already been changed to a different one by the replacement of its engine (paragraph 26).

16.  Based on these findings, the learned Judge concluded that:

(1)  As the vehicle intended to be insured under the Policy was the one registered in the VRD, which did not exist when the Proposal was made by the plaintiff, the Policy was void ab initio as it was issued on the common mistake that the said vehicle did exist (paragraph 28).

(2)  Thus, no policy was issued under s 6(1)(b) of the Ordinance to cover the 1^st defendant’s vehicle, it was therefore uninsured.  The plaintiff had no liability under s 10(1) of the Ordinance in respect of the claim under the HCPI Action (paragraphs 29, 30)

(3)  The plaintiff is therefore entitled to the subject matter declaration, the no liability declaration and the void ab initio declaration as sought under the OS (paragraph 30). 

(4)  Given the finding that the Policy was void ab initio, the alternative declaration sought under the OS for declaring that the plaintiff was entitled to avoid the Policy under s 10(3) of the Ordinance on the ground of non-disclosure or misrepresentation by the 1^st defendant has to be disallowed (paragraph 31).

D.  THIS APPEAL

17.  In this appeal, MIB appeals against the Judge’s decision on all three declarations. 

18.  However, Mr McLeish for MIB accepts (rightly so I think) that the substantive success of his appeal principally hinges on his successful appeal against the subject matter declaration. 

19.  I will therefore deal with the appeal against the subject matter declaration first.

D1.  The subject matter declaration

20.  Mr McLeish’s submissions in support of the appeal against the subject matter declaration can be summarised as follows:

(1)  Whether a vehicle involved in an accident is the same subject vehicle intended to be insured under the relevant insurance policy should be determined by this test: if the accident vehicle conforms in all outward respects to answers in the proposal, and the answers in the proposal as to hidden respects conform with what are stated in the VRD, then it is the insured vehicle.

(2)  Thus, in the present case, although the evidence (which is not challenged in this appeal or in the court below) is that the engine in the 1^st defendant’s vehicle is in fact a different one from the one stated in the Proposal and VRD, the learned Judge made an error in relying on this to say that the accident vehicle was a different one from the insured vehicle. 

(3)  This is so as the differences in the cubic capacity and the engine number of the relevant engine are only mistakes in some attributes of the vehicle (albeit even important attributes), these mistakes in attributes (given the above test) do not amount to a mistake as to the existence of the subject matter itself: It is the same vehicle bearing those attributes (enough though mistaken ones) as stated in the Proposal and VRD.

21.  With respect to Mr McLeish, I disagree.

22.  In my view, whether a vehicle is the same subject matter vehicle as intended to be covered by the Policy is a matter of fact. 

23.  The identity of a vehicle is to be ascertained by reference to the various features or attributes attached to it.  Some of these features or attributes can of course be said to be minor ones, such as the colour of the vehicle.  Some of these are more fundamental and important features of the vehicle, such as the actual engine itself, the wheelbase, and the chassis.  The relative relevance of these features to the factual identification of a vehicle is a matter of degree and extent, and is a matter of evidence depending on the circumstances of each case, including the nature of the contract involved.

24.  In the present case, in determining whether the accident vehicle was the same one as intended to be covered by the Policy, the learned Judge had found that (a) the engine is a vital part of a car, and (b) the engine in the accident vehicle is a different one as identified by the Proposal and the VRD.  These findings are not challenged (and in my view not challengeable in any event) in this appeal.

25.  Given these findings by the learned Judge, I cannot see how MIB could challenge his further finding of fact that the accident vehicle is not the same one as identified by the Policy.

26.  It is trite that the appellate court would not interfere with the trial judge’s finding of facts unless such finding is obviously wrong, or that in coming to that finding, the judge had failed to take into account of relevant materials or had taken into account of irrelevant materials.

27.  I see none of these in the learned Judge’s finding and conclusion.

28.  Further, in my view, the learned Judge’s conclusion is also correct in light of the following:

(1)  For a motor vehicle insurance policy, in setting the premium, it must be important for the insurer to assess the risks, among others, carried by a particular vehicle intended to be insured.

(2)  The year, make, history and various features and attributes of that intended vehicle must all be relevant to the insurer’s said risk assessment. In other words, the actual identity of that vehicle bearing factually these features and attributes must be a relevant and an important factor in this risk assessment exercise.

(3)  In the Proposal, the plaintiff as the insurer has chosen what it regards as the important features of the intended insured vehicle (see the Vehicle Particulars) for the purpose of, among others, identifying that vehicle to assess the risks.

(4)  The plaintiff’s assessment of the risks of that intended vehicle to be covered by the Policy must therefore be based on the assumption that the Vehicle Particulars were true and correct for identifying that vehicle, as it was only that particular vehicle the plaintiff was intending to provide the insurance at certain premium.

(5)  Thus, I reject Mr McLeish’s above formulation of the test as to whether the accident vehicle was the same as the insured vehicle.  The test as formulated by him is premised on practically a pure mechanical comparison of the “paper information” identified in the Proposal and the VRD.  It bears no relevance as to whether the vehicle covered by the Policy is the very vehicle actually and factually bearing all those Vehicle Particulars.  This cannot be right.  It also renders the risks assessment exercise futile and not an accurate one[1].

(6)  Further, Mr McLeish’s formulation of the general test is not supported by any authorities.  The cases[2] referred to by him do not support such a general proposition.  They only show that in the respective circumstances and the evidence advanced in those cases, the mistake of the attributes of the subject matter did or did not in fact amount to the existence of the subject matter covered under the relevant contract.  Quite to the contrary, these cases show that this question is a matter of fact to be found by the trial judge based on the evidence and the nature of the contract involved.

29.  For the above reasons, it was clearly open to the learned Judge to make the subject matter declaration, and I see no basis for disturbing it.

30.  The appeal against the subject matter declaration must therefore fail.

D2.  The no liability declaration

31.  Given that the subject matter declaration was based on the finding that the 1^st defendant’s vehicle was not the vehicle intended to be covered under the Policy, it is also clear that the no liability declaration must also be properly made. 

32.  I think Mr McLeish accepts this.  His main submissions on the no liability declaration relates in fact to another point, which arises under what has been described as the “domestic agreement”.

33.  In 1981, the MIB entered into the domestic agreement with each of those insurance companies authorised to carry on motor vehicle insurance business.  Broadly speaking, the domestic agreement governs the relationship between MIB and the insurance companies providing motor vehicle insurances in meeting claims by persons involved in motor accidents. 

34.  Clauses 3 and 4 of the domestic agreement deal with the liability of an “Insurer Concerned” to satisfy a judgment creditor under a claim arising from a motor traffic accident, and the then discharge of MIB’s liability in respect of the same.

35.  An “Insurer Concerned” is defined in the domestic agreement as follows:

“ ‘Insurer Concerned’ means the Insurer who at the time of the accident which gave rise to a Bodily Injury Liability was providing Insurance against such liability in respect of the vehicle the use of which gave rise to the liability in respect of which the Judgment was given. An Insurer is concerned within the meaning of this Agreement notwithstanding that:-

(a) the Insurance was arranged after the accident but purported to be effective at the time of the accident; or

(b) the Insurance has been obtained by fraud, misrepresentation, non-disclosure of material facts or mistake; or

(c) some term, description, limitation, exception or condition (whether express or implied) of the Insurance or of the proposal form on which it is based expressly or by implication excludes the Insurer’s liability whether generally or in the particular circumstances which gave rise to the liability in respect of which the Judgment was given; or

(d) the Judgment Debtor was in unauthorised possession of the vehicle the use of which gave rise to the liability in respect of which the Judgment was give,

and only ceases so to be concerned:-

(i) when the Insurance has been cancelled before the date on which the Bodily Injury Liability was incurred by agreement of the parties to the Insurance or under a power of cancellation contained therein; or

(ii) when the Insurance has ceased to operate by reason of a transfer of interest in the vehicle which the Insurance purports to cover, or

(iii) when before the date on which the Bodily Injury Liability was incurred the Insurer has obtained a declaration from a court of competent jurisdiction that the Insurance is void or unenforceable; or

(iv) in any other case, from the date on which the Insurance by its term lapsed.

Provided always that for the purpose of this Agreement an Insurer being an Insurer Concerned in respect of a Moter Trade Road Risk Insurance covering unspecified vehicles shall in relation to such vehicles and irrespective of the basis of the Insurance be the Insurer Concerned

(1) in respect of vehicles not the property of the Insured, if and only if the vehicle in respect of which the claim arises was in the custody or control of the Insured or was only removed from that custody or control without the authority of the Insured; and

(2) in respect of vehicles which are the property of the Insured, at all times, except that such Insurer shall not be the Insurer Concerned in respect of any vehicle specifically excluded from the cover of the Insurance by reference to its registration mark and number or specifically insured in the name of the motor trader with another Insurer.

Where an Insurer Concerned under such a Motor Trade Road Risk Insurance and an Insurer Concerned under a specified vehicle Insurance are both involved in circumstances in which neither Insurer is liable under its Insurance, any claim in respect of a Bodily Injury Liability shall be handled by agreement between the Insurers Concerned, each being liable for one half of the damages and costs.”

36.  Mr McLeish is concerned that, by reason of the no liability declaration, MIB would be estopped from contending that the plaintiff can still be regarded as an “Insurer Concerned” under the domestic agreement.

37.  This of course is not a good ground itself in support of an appeal against the no liability declaration.

38.  But in any event, it is common ground that no issue concerning the domestic agreement was raised before the trial judge.  No argument was advanced at the trial relating to the domestic agreement.  In fact, Ms Lau for the plaintiff confirms to this court that it was a conscious decision of the plaintiff (after discussing with counsel for MIB at the trial) not to argue or raise any issues concerning the domestic agreement before the trial judge.

39.  Thus, the question of whether the plaintiff is an “Insurer Concerned” under the domestic agreement was never before the learned Judge.

40.  When asked, Ms Lau on behalf of the plaintiff further confirms to this court that, if MIB were to raise in a separate arbitration proceedings[3] the question of whether the plaintiff is an “Insurer Concerned” under the domestic agreement, the plaintiff would not contend that MIB is estopped from arguing that by reason of the no liability declaration.  But Ms Lau also makes it clear that, equally that would not prevent the plaintiff from contending, among others, at the arbitration (if there is one) that, because of the judge’s finding that the accident vehicle was not the insured vehicle, MIB’s “Insured Concerned” arguments could not succeed.  However, that determination (if it arises) is a matter for the arbitrator.

41.  In light of the plaintiff’s above express position and confirmation of the effect of the no liability declaration vis-à-vis MIB’s potential “Insured Concerned” arguments under the domestic agreement, I do not think it is necessary to qualify or vary the no liability declaration as made by the trial judge.

42.  The appeal against the no liability declaration must therefore also fail.

D3.  The void ab initio declaration

43.  The learned Judge’s basis of granting the void ab initio declaration is that there was a common mistake between the parties as to the existence of the insured vehicle.

44.  Mr McLeish submits that the learned Judge has committed an error of law in his finding of a common mistake.  Counsel’s submissions run as follows:

(1)  As a matter of legal principle, once a party to a contract warrants that the subject matter of the contract exists, the contract cannot be held to be void for common mistake as to the existence of that subject.  This is explained by Lord Philip MR in Great Peace at paragraphs 75 and 76 as follows:

“75. Just as the doctrine of frustration only applies if the contract contains no provision that covers the situation, the same should be true of common mistake. If, on true construction of the contract, a party warrants that the subject matter of the contract exists, or that it will be possible to perform the contract, there will be no scope to hold the contact void on the ground of common mistake.

76.  If one applies the passage from the judgment of Lord Alverstone CJ in Blakeley v Muller & Co 19 TLR 186, which we quote above to a case of common mistake, it suggests that the following elements must be present if common mistake is to avoid a contract: (i) there must be a common assumption as to the existence of a state of affairs; (ii) there must be no warranty by either party that that state of affairs exists; (iii) the non-existence of the state of affairs must not be attributable to the fault of either party; (iv) the non-existence of the state of affairs must render performance of the contract impossible; (v) the state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible.”

(2)  At the same time, the effect of a basis clause in a proposal for insurance is to convert the answers or statements given in the proposal into contractual warranties as to their truth.  As stated at paragraph 20-2B2 in Malcolm Clarke, The Law of Insurance Contracts (5^th ed):

“A contractual warranty is a term of the contract in the form of an undertaking by the insured which, if broken, entitles to insurer to end the insurance or ends it automatically, whether or not breach is material to risk … or to loss. It is not necessary that the word ‘warranty’ be used, as any form of words expressing the existence of a particular state of facts as a condition of enforceability of the contract may be enough to constitute a warranty.

An established example is the basis clause, designed to relieve the insurer of the burden of proving the materiality (to either risk or loss) of statements made by the proposer in the proposal. When answers are declared to be the basis of the contract this can only mean that their truth is made a condition exact fulfilment of which is rendered by stipulation foundational to its enforceability.” (Mr McLeish’s emphasis)

(3) The basis clause element of the Declaration and Basis Clause in the Proposal gave the effect that the 1^st defendant warranted the existence of the insured vehicle bearing those Vehicle Particulars.

(4) As such, as a matter of law, there cannot be a finding of common mistake in the present case.

45.  The learned Judge did not accept that the declaration contained in the Declaration and Basis Clause amounted to a warranty by the 1^st defendant as to the existence of the subject matter vehicle.  He explained this at paragraphs 8 and 9 of the Judgment as follows:

“8. The proposal contains a declaration which reads:

‘I declare that to the best of my knowledge and belief the information given on this form is true and complete in every respect. I agree that this proposal and declaration will be the basis of the contract between me and THE MING AN INSURANCE COMPANY (HK) LIMITED. I agree that the insurance will not be in force until the proposal has been accepted by the Company.’

9. There is a Chinese declaration of the same meaning right above the English declaration. The 1^st defendant’s signature is within the box of and right underneath the declarations making it clear that he has, in making this proposal to the Insurer, adopted the declarations as his. I however note that the 1^st defendant did not warrant the truthfulness of the information, he merely declared to the best of his knowledge and belief.” (emphasis added)

46.  Thus, the learned Judge was of the view that the undertaking was only a qualified one, and did not provide an outright warranty as to the existence of the subject vehicle in the Proposal.  In this explanation, the learned Judge focused only on the declaration part of the Declaration and Basis Clause without any reference to the basis clause element of it. 

47.  It is here where Mr McLeish’s arguments on the effect of a basis clause come in.  Effectively, counsel submits that given the basis clause part of this clause, the 1^st defendant should still be taken to have warranted the existence of the vehicle as specified in the Proposal, notwithstanding the qualification of the undertaking.

48.  With respect, I am not fully convinced.

49.  It is correct that the Undertaking and Basis clause has two parts.  The first is the declaration, which incorporates the qualification of knowledge and belief.  This is where the learned Judge had focused on.  There is also a second part, which is the basis clause.  Under this basis clause part, it further provides two separate elements which are regarded to form the basis of the issue of the Policy: (a) the Proposal itself, and (b) the declaration.  The Proposal itself and the declaration are thus treated separately and independently for the purpose of the basis clause.

50.  Although element (a) of the basis clause refers to only the Proposal (and presumably the information stated therein), I think it is at least arguable that it begs the question (as a matter of construction) as to whether such information is still subject to the knowledge qualification as declared by the 1^st defendant.

51.  But given the development in the hearing (in particular the accepted position that the substantive outcome of the appeal rests upon the appeal against the subject matter declaration but not the void ad initio declaration), this point on construction has not been fully addressed before us.  I therefore do not find it now appropriate or comfortable to express a definite view one way or the other.  Suffice to say that it has not been demonstrated to me that the learned Judge was clearly wrong in his analysis above.    

52.  On this basis, I also would not disturb the void ab initio declaration.

E.  CONCLUSION

53.  For the above reasons, I will uphold the Order and dismiss the appeal.

54.  I further propose to make an order nisi that costs of the appeal be to the plaintiff, to be taxed if not agreed.

Hon Chu JA:

55.  The appeal is dismissed.  There is an order nisi that the 2^nd defendant pays the plaintiff the costs of the appeal, to be taxed if not agreed.