HARBOURFIELD ENGINEERING CO LTD v. FALCON INSURANCE COMPANY (HONG KONG) LTD

cacv 229/2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 229 of 2005

(on appeal from HCMP NO. 245 of 2003)

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J U D G M E N T

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This is an appeal from a decision of Master J Wong dated 2 June 2005 on the assessment of damages following the finding by Suffiad J, affirmed on appeal, that the defendant had wrongfully repudiated a contract of insurance.  The master held that the plaintiff was not entitled to recover the costs of defending High Court Personal Injuries Action No. 71 of 2002 (“the PI action”).

Background

3.  The plaintiff’s business is “in decoration or building engineering works”.  It took out a public liability policy of insurance with the defendant in April 1998.  It entered into a maintenance agreement with the Incorporated Owners of Cosmopolitan Centre to maintain and service the water systems for drinking and flushing water at 700 Nathan Rd, Mongkok (“the building”) for the period from 1 April 1998 to 31 March 1999.  That agreement specifically provided that “the above maintenance service areas do not include the fire services systems, fire services pumps and backup dynamo of the building”.

4.  On 28 January 1999, a case of arson took place in Allied Plaza which was the ground floor shopping area of the building causing the death of a person by the name of Rudy Hung (“the deceased”).

5.  The plaintiff was prosecuted for maintaining the fire service installation of equipment Fire Service rising main between the second and third floors on for 8 January 1999 in breach of the regulations made under the Fire Services Ordinance which prohibited persons other than a registered contractor from doing that work.  The summons was issued on 27 April 1999.  (It was probably amended at the hearing)  The charge was evidently amended because the offence for which the plaintiff was convicted was “non-registered contractor repairing fire service installation contrary to Regs. 7 and 12 Cap. 95, Laws of Hong Kong”.  The plaintiff pleaded guilty to the charge “as a matter of convenience”. 

6.  Some 3½ years later, on 26 September 2002, the estate of the deceased served the writ in the PI action on the plaintiff as the sixth defendant claiming damages as a result of the deceased’s death by the arson attack.  On the following day, the writ as well as copies of the maintenance agreement, the certificate of trial and the summons before the magistrate were sent to the defendant.

7.  By their letter of 19 November 2002, the defendant’s solicitors wrote to the plaintiff to the effect that the defendant was entitled to “repudiate liability” under the policy, alleging that conditions 2, 3, 5 and 9 of the policy had been breached.  Those conditions read:

“2. On the happening of any event which may give rise to a claim under this Policy the Insured shall give immediate notice to the Company and shall retain anything connected with such event for such time as the Company may reasonably require Every letter claim writ summons or process shall be forwarded to the Company immediately it is received.

3. No admission offer promise payment or indemnity shall be made or given by or on behalf of the Insured without the written consent of the Company which shall be entitled if it so desires to take over and conduct in the name of the Insured the defence or settlement of any claim or to prosecute in the name of the Insured for its own benefit any claim for indemnity or damages or otherwise and shall have full discretion in the conduct of any proceedings and in the settlement of any claim and the Insured shall give all such information and assistance as the Company may require.

5. The Insured shall take all reasonable care in the selection and employment of competent employees and shall take reasonable precautions to prevent accidents and to comply with statutory requirements The Insured shall give immediate notice of any alterations which materially affect the risk covered by this Policy.

9. The due observance and fulfilment of the Terms Limitations and Conditions of this Policy so far as they relate to anything to be done or complied with by the Insured and the truth of the statements and answers in the said Proposal shall be conditions precedent to any liability of the Company to make any payment under this Policy.”

The letter went on to say this:

“On the information available, clearly, your company is in breach of the above conditions by failing to report the above incident to our client until 27^th September 2002, ie. over 3.5 years after its occurrence.  Further, your company being a non-registered contractor has failed to take reasonable care to comply with statutory requirements and failed to give accurate information to our client when required to do so.”

8.  Faced with the defendant’s repudiation, the plaintiff issued proceedings for declaratory relief which, inter alia, involved determining the question whether the defendant was entitled to repudiate the policy.  It also defended the PI action which was eventually settled with no order as to costs.  The plaintiff’s own costs in defending the action came to $1,012,260 and it is that sum that it sought to recover from the defendant by way of damages.

9.  The main issue before Suffiad J was whether the defendant was entitled to repudiate liability under the policy.  Suffiad J rejected the grounds put forward by the defendant and found in the plaintiff’s favour.  He granted a declaration to the effect that the defendant had wrongfully repudiated the contract of insurance but refused to grant the further declarations sought by the plaintiff, specifically, a declaration that the defendant was liable to indemnify the plaintiff against all costs, expenses and damages caused by an incidental claim against the plaintiff arising out of the PI action.  The defendant was ordered to pay to the plaintiff damages to be assessed.  This appeal is from the master’s assessment holding that the plaintiff was not entitled to the costs of defending the PI action.

10.  On appeal from Suffiad J’s judgment to this court, the argument centred on the two  issues identified in the letter of 19 November referred to earlier.  Suffiad J’s judgment was upheld and the appeal was dismissed.  As to the argument based on a breach of condition 5 of the policy, it was disposed of by this court in the following terms:

“12. Furthermore, if the provisions of clause 5 are to be relied upon by the defendant as a ground for avoiding liability under the contract of insurance, the breach of the statutory regulations which are relied upon must have relevance to matters which give rise to a claim under the insurance policy.  There are, no doubt, numerous statutory requirements, whether they be in relation to the Fire Services Regulations or some completely different regulations.  It cannot be that a breach of any statutory regulation, whether culpable or otherwise, would give rise to a right to hold that the policy holder had repudiated a policy of insurance.  In this instance all that can be said is that, on 8 January 1999, the plaintiff carried out some repair work on the rising main between the 2^nd and 3^rd floors of the Cosmopolitan Centre.  Those facts alone cannot give rise to the inference that in some respect the plaintiff has been guilty of negligence that has caused or contributed to the death of the deceased as a result of an arson attack on the ground floor of the same building.  There is nothing to connect the repair of the rising main between the 2^nd and 3^rd floors of the building with the consequences of an arson attack on the ground floor some 3 weeks later.

13.   Hence, whilst the ground upon which the defendant’s solicitors sought to reject liability was, on the face of it, erroneous, the attempt to do that on the basis that some repair work had been carried out also fails because, seemingly, it had no relevance to the matter in respect of which the claim arises.”

This appeal

11.  The issue before the master was whether the plaintiff was entitled to recover the costs incurred in defending the PI action.  There was no issue as to the reasonableness of those costs.  Originally the claim had included the costs of the hearing before Suffiad J, the costs of the appeal to this court and the costs of the defendant’s application for leave to appeal to the Court of Final Appeal.  But at the hearing before the master, the plaintiff only sought to recover the costs incurred in defending the PI action as damages on the basis that they reasonably flowed from the defendant’s repudiation of the policy.

12.  The policy provided that

“the Company shall indemnify the Insured … against all sums which the Insured shall become liable at law to pay as compensation for

(i) bodily injury to or disease contracted by any person

(ii) loss of or damage to material property

caused by accidents in connection with the Business …”

That was followed by several provisos including the following:

“3. The Company will also pay:

…

(ii)  all costs and expenses incurred with the written consent of the Company

in respect of any claim to which the indemnity expressed in this Policy applies.”

13.  Mr Smith SC who appeared for the plaintiff considered that the issue raised in the skeleton arguments came to this: whether the word “claim” in clause 3 is to be read as a claim which would result in an actual liability to indemnify under the main insurance, as appeared to be the defendant’s stance or whether it is sufficient that the “claim” is alleged to fall within the policy even if ultimately it is proved that the insured was not negligent.  Although paragraph 3 (ii) of the proviso referred to the written consent of the defendant, it was common ground that, as a matter of law, that consent cannot be unreasonably withheld.  Mr Smith SC submitted that it would be absurd if the insurer would only be liable for the costs of defending the claim if the insured were ultimately held liable to the third-party but not otherwise.  It would mean that the insurer would only pay the costs of defending a claim if the plaintiff were to lose in the action brought by the third-party but not if it were successful in defending it.  I agree.  The policy not only provided primary cover which was for compensation payable to a third-party but also additional cover in respect of costs incurred in defending a claim. Plainly, the liability to provide the additional cover cannot be contingent on the eventual outcome of the claim.

14.  Mr Bleach SC who appeared for the defendant put his case a little differently.  He first drew attention to the fact that Suffiad J had refused to make a declaration to the effect that the defendant was liable to indemnify the plaintiff in respect of costs incurred by the plaintiff in the PI action and had left open the further point raised by the defendant that the policy did not cover the incident in that it did not form part of the business of the insured which, Mr Bleach submitted, was open to the defendant to raise by way of defence.

15.  He submitted that the “business” carried on by the plaintiff did not extend to fire installations which were subject to statutory requirements.  The work carried out by the plaintiff on 8 January was thus unlicensed work and did not form part of the risk that was covered by the policy.  It was said that the basis of the claim against the plaintiff in the PI action was nothing more than breach of statutory duty and although the writ referred to both “breach of statutory duties and negligence”, there appeared to be no evidence of negligence other than the breach of statutory duty.  However, it would appear from the defence filed by the plaintiff that the claim against it in the PI action was also based on negligence and the statement of claim did contain particulars of negligence.

16.  In short, Mr Bleach sought to resuscitate a ‘dead’ argument based on condition 5 which had been rejected by this court in the earlier appeal.  See paragraphs 12 and 13 of the judgment of Rogers VP set out in paragraph 10 above.  It cannot be given a new lease of life in the guise of delimiting the parameters of the “business” covered by the policy.  For the reasons given in the earlier judgment of this court, the alleged failure to comply with the statutory requirements has no relevance to the matter in respect of which to the claim arose under the policy.

17.  In my view, the repair work undertaken by the plaintiff was plainly part of its “business” which was defined in the policy as “decoration/building engineering works”.  The claim against the plaintiff in the PI action was made in connection with that repair work which was part of the business.  The policy provided cover for defending claims brought against the plaintiff in relation to accidents in connection with the business.  The cover under the policy extended to the costs of defending claims such as the PI action.  Those costs (accepted by the defendant as reasonable) are thus recoverable.  Accordingly, I would allow the appeal. 

18.  At the conclusion of the appeal hearing, Mr Bleach made some submissions on costs in the event of the appeal being allowed.  He invited attention to the fact that the original claim before the master was more extensive and it was only at the commencement of the hearing that the additional claims were abandoned.  It was submitted that some discount ought to be made in respect of the costs incurred below attributable to the abandoned items.  It was not suggested that the other items of costs raised different issues and principles.  It is thus difficult to see in a meaningful way what part of the costs below could properly be attributable to the abandoned items.  Having regard to all the circumstances, I would make an order nisi of costs here and below in favour of the plaintiff.

Hon Cheung JA:

19.  I also agree with the judgment of Le Pichon JA.