RYODEN ENGINEERING CO LTD v. THE NEW INDIA ASSURANCE CO LTD

DCCJ 3476 / 2006

 IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3476 OF 2006

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JUDGMENT

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1.  The Plaintiff (“Ryoden”) seeks summary judgment against the Defendant (“New India”) for the sums of HK$846,375.53 and HJK$18,377.00.  The claim is based on s. 2 of the Third Parties (Rights Against Insurers) Ordinance (Cap 273) (“the Ordinance”).  New India however asks for a stay of the proceedings for arbitration, as the subject matter insurance policy contains an arbitration clause.  New India also contends as an alternative argument that it has a meritorious and triable defence in any event.

2.  The applications thus raise an interesting question as to whether a third party claiming under the rights conferred by the Ordinance is still subject to the arbitration clause contained in the subject matter insurance policy. 

3.  It is not disputed that if I rule in favour of New India for a stay for arbitration, there is no question of any determination on the summary judgment application, as I will have to refer the matter to arbitration, irrespective as to the substantive merits of the defence:  Guangdong Agricultural Co Ltd v Conagra International (Far East) Ltd [1993] 1 HKLR 113, at 124 line 10-15 per Barnett J; Arbitration in Hong Kong: A Practical Guide (2003), paras 11-52 – 11-53.

4.  As such, I will therefore deal with this issue first.

Background

5.  To understand how the contentions arise, it is necessary for me to put things in context by setting out in brief the background leading to the present claim.  This is largely undisputed with the evidence before me.

6.  In about April 1998, a Mr Zheng suffered a personal injury at a construction site, caused by a lorry driven by an unknown driver.  The lorry was owned by one Mr Kwok, who held a third party insurance policy (“the policy”) with New India^[1]. 

7.  In 2001, Mr Zheng issued a claim in the High Court (“the Action”) claiming damages against Ryoden (as his employer), Mr Kwok (vicariously as the owner of the lorry) and Maeda-Kumagai Joint Venture (as the occupier of the construction site).

8.  Mr Kwok initially filed a defence through is solicitors, Krishnan & Tsang.  Krishan & Tsang also attended on Mr Kwok’s behalf various interlocutory hearings.

9.  In March 2002, New India through Krishnan & Tsang made an application to be joined as the 4th defendant on the ground that they were unable to deal with Mr Zheng’s interrogatories application as they could not find Mr Kwok.  In April 2002, New India was granted leave to be joined as the 4th defendant as an interested party.  Krishnan & Tsang also ceased to act for Mr Kwok.

10.  The Action came to trial in June 2004, where the trial judge gave judgment against Ryoden, Mr Kwok and Maeda for the sum of HK$947,627.72 as damages.  The trial judge also found that 85% of the liability should lie with the negligent driver (of which Mr Kwok was variously liable), while 15% with Ryoden and Maeda.

11.  The learned judge also ruled that New India was liable under the policy to indemnify Mr Kowk’s liability. The learned judge rejected New India’s arguments that (a) there was no statutory requirement for a third party risk to cover for a vehicle on a construction site road, and (b) the policy on a proper construction did not extend to cover the subject matter accident.  See:  Deputy Judge Saunders’ judgment at paras 20-28.

12.  New India appealed the decision, which appeal was later dismissed by the Court of Appeal.

13.  Ryoden eventually paid Mr Zheng the judgment sum of HK$947,627.72 with interest of HK$48,108.20 and HK$21,620.00 as costs of Mr Zheng’s ECC proceedings.

14.  Given Mr Kwok has since April 2006 been adjudicated a bankrupt, Ryoden now claims against New India for the 85% contribution of the sums it has paid, as New India, by reason of the policy, is liable to indemnify Mr Kwok.  Ryoden relies on section 2 of the Ordinance, which effectively vests in Ryoden (as a third party) all of Mr Kwok’s rights in the policy upon his bankruptcy. 

The arguments

15.  It is not disputed that the policy contains an arbitration clause.  As such, the central debate between the parties under this issue can be summarized in gist as follows.

16.  The relevant part of section 2(1) of the Ordinance provides:

“	(1)	Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then –
		(a)	in the event of the insured becoming bankrupt …
			…
			if, either before or after that event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any enactment or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred.”  (emphasis added)

17.  Mr Lin, counsel for Ryoden, contends that the arbitration clause does not bite, since Ryoden is never a party to the policy, and its right to claim against New India comes under s.2 of the Ordinance, which does not “transfer” the arbitration clause to bind Ryoden.

18.  Alternatively, as a fall back argument, Mr Lin submits that even if the arbitration clause applies in the present case, New India is estopped from raising it by reason of its failure to raise the same when it took part in the Action.  Mr Lin relies on the wider doctrine of res judicata laid down in Yat Tung Investment Co Ltd v Dao Heng Bank Ltd [1975] AC 581.

19.  Mr Bharwaney, appearing together with Mr Sadhwani, for New India submits however that the Ordinance transfers all Mr Kwok’s right under the policy to Ryoden as the third party, together with and subject to the arbitration clause.  He also says that there could not be any question of estoppel since the arbitration clause issue could not have been raised by New India in the Action.

Discussion

The issue on the transfer of rights under the Ordinance

20.  This issue turns upon what is, on a proper construction, the effect of s. 2 of the Ordinance.

21.  Mr Bharwaney relies on the case of The “Padre Island” [1984] 1 LLR 408 to support his submissions.  This case deals with the question of whether a third party suing an insurer under section 1(1) of the Third Parties (Rights against Insurers) Act 1930 in England is bound by the arbitration clause (which contains a Scott v Avery provision) of the relevant P & I club rules.  It is not disputed that section 2(1) of the Ordinance is in identical terms with section 1(1) of the 1930 Act

22.  In The “Padre Island”, the plaintiffs’ cargoes carried on board the vessel “Padre Island” were damaged during the voyage.  The plaintiffs had successfully claimed against the shipowners for damages in the United States.  The shipowners however did not satisfy the judgment, and was later wound up in England by the court.  The plaintiffs then claimed against the shipowners’ P & I club (as the shipowners’ insurer) for such damages under the 1930 Act. 

23.  The P & I club however contended, inter alia, that the plaintiffs had no cause of action against them, since there was an arbitration clause (which further contained a Scott v Avery provision) in their rules.  They argued that, by way of the 1930 Act, the plaintiffs assumed the shipowners’ rights under the insurance cover, but subject to and together with the arbitration clause.  As such, given that the plaintiffs had not made the requisite reference to the committee and thereafter to arbitration as required by the rule, no action could be brought by them in the court against the P & I club. 

24.  After reviewing a line of authorities, Mr Justice Leggatt (as he then was) accepted the P & I Club’s arguments and decided that the Act transferred to the plaintiffs the contractual rights of the insured shipowners, which were subject to the arbitration rule.   His Lordship therefore came to the conclusion that the plaintiffs had no proper cause of action, and he explained at page 414 as follows:

“

In my judgment, the plaintiffs have no cause of action against the defendants except by virtue of the 1930 Act.  The 1930 Act transfers to the plaintiffs not the claim but the contractual rights of the insured.  Those contractual rights are subject to the arbitration clause, including its Scott v Avery provision.  The question, therefore, is whether there is anything in the contract between the original parties, or in the 1930 Act, which prevents the arbitration clause or the Scott v Avery provision from applying to the plaintiff’s claim against the defendants.  In the case of Post Office v Norwich Union there are to be found, as I have remarked, both reference to the third party stepping into the shoes of the insured and reference to the third part not being entitled to have the plums without the duff.  Mr Rix [counsel for the plaintiff] deprecates these two expressions on the footing that, though picturesque, they are imprecise.  It seems to me, however, that they conveniently denote two points of principle.  First, there can be transferred to the third party no more than the rights formerly vested in the insured. Secondly (and this may be regarded as no more than a logical application of the first principle), the rights which are transferred to the third party are subject to the same incidents as when vested in the insured, as Mr Rix accepts that if the member had not been wound-up, the arbitration clause would have been applicable and the Scott v Avery provision would have precluded recourse to action before the prescribed submission had been made to the committee and before the prescribed transcribed reference had been made to arbitration.  The consequences of that are that the effect of the transfer to the plaintiffs of the insured’s contractual right is determined by the Act and not by the agreement and that none of the cases cited by Mr Rix under this head have any application.

In my judgment, the arbitration clause must be read, for present purposes, as though for references to the member there were substituted references to the plaintiffs. Although the clause contemplated a disputed claim made by a member, such a claim having arisen, it is vested in the plaintiffs following the winding-up of the member…”

25.  When the matter came before Mr Justice Saville on the second occasion ([1987] 2 LLR 529), His Lordship again confirmed at pages 533-534 that the third party as transferees under the 1930 Act were in the same position as the insured, and their claim was subject to the arbitration clause:

“

This was the right of the owners to pursue a claim against the Club in respect of their liability to the plaintiffs under the arbitration provisions in the Club Rules; a right transferred to and vested in the plaintiffs under s. 1(1) of the 1930 Act …  The owners had a right to arbitrate but (in effect) not to litigate a claim against the Club; accordingly, the plaintiffs as transferees under the 1930 Act were in the same position, no more and no less.”

26.  The decision in The “Padre Island” has also been accepted and adopted as correct in the leading texts in insurance law:  MacGillivray on Insurance Law (10^th ed), para 28-17; Colinvaux’s Law of Insurance (8th ed), paras 20-92 – 20-93; The Law on Insurance Contracts (4th ed), para 5-8E1.

27.  The “Padre Island” is therefore clear authority to show that Ryoden’s claim against New India should similarly be subject to the arbitration clause.

28.  However, in reliance of Mr Justice Phillips’ decision in The “Felicie” [1990] 2 LLR 21, Mr Lin for Ryoden submits that the reasoning in Mr Justice Leggatt’s decision is unsound and should not be followed by this Court.  He further submits that this Court should adopt Mr Justice Phillips’ doubts expressed on the reasoning in The “Padre Island”, and conclude that an arbitration clause in an insurance policy is not “transferred” to the third party together with the other rights of the insured under s. 2(1) of the Ordinance.  Given Mr Lin’s submissions and the clear authority of The “Island Padre”, I therefore have to look at the decision in The “Felicie” more closely.

29.  In The “Felicie”, Chantal Shipping Company wrongly failed to carry Bombay Trading Co Ltd’s cargoes.  Bombay obtained judgment for damages against Chantal. At the material times, Chantal was insured by the plaintiffs insurer club, and Chantal thus claimed indemnity from the club for its liability for Bombay. 

30.  The club denied liability, and the dispute had to be referred to arbitration under the rules of the club.   Chantal (through its provisional liquidators) appointed its own arbitrator for the purpose of the intended arbitration.  After this appointment, Chantal was ordered to be wound up by the court.  Bombay then sought to claim against the club under the 1930 Act and to carry on with the arbitration proceedings already commenced by Chantal before its winding up.  The club objected on the ground that under the 1930 Act, Bombay’s rights to claim only commenced after the winding up of Chantal and could not “inherit” the proceedings from Chantal.   The matter came before Mr Justice Phillips for determination.

31.  It can therefore be seen that the real issue in The “Felicie” is whether a third party claiming under the 1930 Act could carry on with the arbitration proceedings which had already been commenced by the insured before its winding up.  This issue is quite different from the question as to whether an arbitration clause in the subject matter policy (or the relevant rules of an insurance association) is transferred together with the other rights of the policy under the 1930 Act (or the Ordinance for the present purpose).  The real issue in The “Felicie” arises only on the footing that such an arbitration clause is transferred to the third party, but the question is how it should be exercised.

32.  It is under this context that Mr Justice Phillips in The “Felicie” considered the first question as to whether an arbitration clause was transferred to the third party under the 1930 Act.  Although he expressed doubts on the reasoning in The “Padre Island”, His Lordship in fact agreed with the result reached in that case, and came to the clear conclusion that the 1930 Act did transfer an arbitration clause to the third party together with the other rights under the subject matter insurance policy.  Thus he said at page 26 as follows:

“

Having considered these authorities, I am driven to the conclusion that there is no wholly satisfactory explanation for the basis upon which, whether by assignment inter partes or by transfer under the 1930 Act, the transferee acquires the right and obligation to arbitrate in his own name.  That under the 1930 Act the right to commence and pursue an arbitration does vest in the third party, together with the substantive rights under the contract of insurance is, however, beyond dispute.” (emphasis added)

33.  Mr Justice Phillips went on to further conclude that, notwithstanding this, the third party could not “inherit” the arbitration proceedings already commenced by the insured before the winding up, but must start afresh its own arbitration, because its rights did not accrue until after the winding up and to suggest otherwise was not supported by any authority or precedent.   He continued to explain at pages 26 and 27 as follows:

“	The right to commence an arbitration cannot be equated with the right to replace a party to a reference that has already commenced.  Where a third party commences an arbitration, all the rights and obligations that flow from the reference will arise directly between him and the insurer.  If, however, the third party replaces the insured in a pre-existing arbitration, he will become subject to accrued rights and obligations.  A novation will occur.
	…
	Mr Brenton [counsel for Bombay] submitted that the substitution of Bombay for Chantal occurred automatically by virtue of s. 1 of the 1930 Act… [The learned judge then went on to explain why the submissions were incorrect].
	In my judgment, Mr Brenton’s submissions that Bombay has been automatically substituted for Chantal in the arbitration commenced by Chantal is unsound in law and impossible in practice… Bombay are entitled to pursue their own arbitration, which they commenced on [the date of the winding up of Chantal].”

34.  Given Mr Justice Phillips’ clear conclusion that, for whatever reason, an arbitration clause is transferred to the third party under the 1930 Act, I do not accept Mr Lin’s submissions that The “Felicie” is an authority which supports the proposition that a third party claiming under s. 2 of the Ordinance is not subject to an arbitration clause contained in the subject matter insurance policy.

35.  Moreover, in light of Mr Justice Phillips’ above conclusion and the real issue in The “Felicie”, in my view, the doubts expressed by him on Mr Justice Leggatt’s reasoning are simply obiter comments, since they are not relevant to and necessary for the determination of the real issue.  As such they must be treated with caution.  However, given Mr Lin’s submissions, I will still examine these doubts more carefully to see if they are fully justified.

36.  Insofar as Mr Justice Phillips’ doubts expressed on Mr Justice Leggatt’s reasoning are concerned, the learned judge premised his query on two principal grounds:

(1)	An arbitration clause was a personal covenant and was therefore not subject to an inter partes or statutory assignment.
(2)	Given the House of Lords’ decisions in Heyman v Darwins Ltd [1942] AC 356 at 392 and Bremer Vulkan v South India Shipping [1981] AC 909 at 980 that the right to arbitrate arises independently as a parallel contractual right to the substantive rights under the contract, Mr Justice Leggatt’s observation that the substantive rights transferred to the third party under the 1930 Act were subject to the qualification and limitation of the arbitration clause was unsound.
	See:  The “Felicie”, pp 23-26.

37.  In relation to the non assignability of an arbitration clause, Mr Justice Phillips based his observation on Mr Justice Wright’s decision in Cottage Club Estates Ltd v Woodside Estates Co Ltd [1928] 2 KB 463, which is to the effect that arbitration agreements are incapable of assignment.  However, as observed by Mr Justice Hobhouse (as he then was) in The “Jordan Nicolov” [1990] 2 LLR 11 at 17, Mr Justice Wright’s actual decision was that the procedural right of the assignor to arbitrate had not been lost, and insofar if Mr Justice Wright was seeking to state his reasoning in wider terms, that has not been followed in subsequent cases and was specifically disapproved by the Court of Appeal in Shayler v Woolf [1946] Ch 320. 

38.  Although Mr Justice Phillips in The “Felicie” at pp 25-26 expressed his dissatisfaction on the Court of Appeal’s rejection, the learned judge himself did not provide any convincing reasons to say why the appellate court was incorrect. 

39.  Furthermore, although Mr Justice Phillips queried the effect of the staying provision in the Arbitration Act 1889 in transferring an arbitration clause as found by the Court of Appeal, the learned judge had also not explained why the 1930 Act itself could not effect such a transfer.

40.  As such, in light of the decisions of the English Court of Appeal and The “Jordan Nicolov”, Mr Justice Phillips’ doubt based on the purported non assignability of an arbitration clause is in my judgment not fully justified.  

41.  The second basis of Mr Justice Phillips’ doubt is in my view similarly not fully justified:

(1)	The House of Lords’ decisions in treating an arbitration clause as a parallel contractual obligation are to deal with the conceptual arguments that upon the termination of a contract, although the substantive rights and obligations cease, the right and obligation to arbitrate the dispute must still survive to deal with precisely the situation of a breach.  In other words, the arbitration clause deals with how the remedies could and should be exercised and advanced in case of a dispute, whether before or after the termination of the contract.
(2)	Remedies are of course attached to and linked with the enforcement of substantive rights. If there are no rights, there is no question of any remedies.
(3)	As such, it is difficult to see why the substantive rights of an insured under a policy, when transferred by way of the 1930 Act (or the Ordinance) would be changed.  They are still subject to and qualified by the need to enforce it by way of arbitration in case of a dispute.  This is not, in my judgment, in any way inconsistent with the established principle that the right to arbitrate is jurisprudentially a parallel contract to the main contract.  This parallel obligation is attached to the substantive rights and needs to be invoked and observed by the parties whether before or after the contract is terminated.

42.  In the premises, for the reasons given in paragraphs 34 to 41 above, I do not find the doubts expressed in The “Felicie” on the reasoning in The “Padre Island” provide me with justified grounds not to follow the decision in The “Padre Island”.   I therefore refuse to accede to Mr Lin’s submissions that I should adopt Mr Justice Phillips’ doubts expressed on the correctness of Mr Justice Leggatt’s reasoning (but not decision) in The “Padre Island”, and to conclude that the Ordinance does not transfer a relevant arbitration  clause to the third party.

43.  I therefore hold that Ryoden is bound by the arbitration clause in the policy.  Ryoden should therefore bring the present claim against New India by way of arbitration instead of the action herein.

The issue of estoppel or res judicata

44.  By way of alternative argument, Mr Lin appears also to submit that given that New India had participated in the Action on its own right, it is now estopped from relying on the arbitration clause by the doctrine of res judicata under the Yat Tung principle, as it had failed to raise the defence of an arbitration clause in the Action.

45.  However, in the Action, it was a claim made by Mr Zheng against various parties, including New India after it is joined as a defendant.   As such, I cannot see how New India could and should have raised the issue of an arbitration clause in the Action, which is purely a matter between Mr Kwok and New India.  It should be noted that New India did not participate in the Action by reason of a third party proceedings. 

46.  In the premises, I do not accept that there is any estoppel or room for the application of Yat Tung principle in the circumstances of the present case.  I therefore hold that New India is not estopped from raising the issue of the arbitration clause in the present proceedings.  Whether New India is however estopped by reason of the doctrine of res judicata or waiver from raising any substantive defences on liability which were not raised in Action, these are matter that should be decided by the arbitrator.

Conclusion

47.  For the reasons set out above:

(1)	I will allow New India’s application and stay the present proceedings for arbitration.
(2)	I will not make any order in Ryoden’s summary judgment application.

48.  I will also grant an order nisi that:

(1)	Costs of New India’s stay application be to New India to be taxed if not agreed, with certificate for one counsel.
(2)	Costs of Ryoden’s summary judgment application be in the cause with certificate for counsel.
These costs orders would be made absolute 14 days from the date of this judgment.

49.  I will also like to take this opportunity to thank counsel for their assistance in their helpful submissions.