CHU YUEN WAH v. LEE KWOK KEE and Another

Civil Appeal No. 8 of 1995

Headnote

Action by wife (passenger) against husband (driver) which is likely to be collusive. If insurer takes over husband's defence, will it approbate the policy which it seeks to avoid in proceedings under s.10(3) of the Motor Vehicles Insurance (Third Party Risks) Ordinance, Cap. 272? If it avoids the policy, will it avoid it "ab initio"?

Insurer given leave to join action as 2nd defendant under O15 r16(2)(b)(i). Gurtner v Circuit and another [1968] 2 QB 587 and The Oriental Fire and General Insurance Co Ltd v Cheuk Ma-yee [1981] HKLR 41 considered.

IN THE COURT OF APPEAL

1995, No. 8
(Civil)

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J U D G M E N T

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Mortimer, J.A.:

In this case the appellant (the "insurer") is the defendant in a road accident claim in which the plaintiff wife claims damages for her very serious injuries against her husband, the defendant. The insurer appeals against the refusal of Keith J on 6 December 1994 to grant its application to be joined as a second defendant in the action under O15 r6(2)(b)(i) of the RSC.

The action

2. On 8th June 1990, the wife sustained serious injuries in a road accident. She was a passenger in a car driven by her husband. She did not commence the action until 8 March 1994. She claims damages against her husband for his negligent driving. The writ was issued out of time so unless the wife obtains a declaration under the Limitation Ordinance, Cap. 347, to disapply the limitation period, her action will fail.

3. At the date of the writ, a notice was given to the insurer under s. 10(1) of the Motor Vehicles Insurance (Third Party Risks) Ordinance, Cap. 272.

4. The husband was covered by a policy issued by the insurer but soon after the accident the insurer alleged that the policy was obtained by misrepresentations and later also non-disclosures, relating to the husband's driving experience and his accident record. Consequently, on 18 July 1990 the insurer gave notice to the husband informing him that it would avoid the policy. Consistent with this, the insurer launched proceedings under s. 10(3) of Cap. 272 for a declaration that the policy was avoided.

Keith J's judgment

5. The judge rightly held that he had jurisdiction to allow the insurer to be added as a party under O15 r6(2)(b)(i). He did so on the basis that the insurer was a person whose presence before the court is "necessary to ensure that all the matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon" in accordance with the rule. He thought also that the insurer's proceedings under s.10(3) to avoid direct enforcement by the wife could be an obstacle but that the difficulty could be overcome by requiring the insurer to discontinue the s.10(3) proceedings. He recognised that the husband had none of the usual incentives to defend the action.

6. Indeed, it is clear that if the husband conducted his own defence, he will concede liability for negligence. He will not raise the limitation defence nor, probably, will he challenge any of the wife's claim on quantum. There is a serious danger that the action will be a sham. There will be a real risk that because of collusion the issues would not be effectively determined and adjudicated upon. Therefore, when turning to the exercise of his discretion, the judge concluded that:

"At first blush, therefore, it appears that, in order to prevent Madam Chu's action being allowed to go undefended by default at the expense of the insurers, it would be proper for the insurers to be added as 2nd Defendant."

However, he rejected the insurer's applications to be joined on the basis that:

(a) it was open to the insurer to take over the husband's defence under the terms of the policy without prejudice to its contention that the policy had been avoided; or put another way, that having rescinded the policy for misrepresentation and non-disclosure, it was not an approbation to exercise the right under clause 6 of the policy to take over the husband's defence;

(b) in the light of the husband's undertaking through counsel given at the hearing below, not to give evidence at the trial, the insurer's interest would be protected; and

(c) finally - for what it is worth - that the possibility that the insurer would be denied the opportunity to cross-examine the husband on the limitation issue did not justify joinder.

He found therefore that the insurer's interest would be fully protected by taking over the husband's defence. He concluded in this way:

"But I do not see why the insurers could not take over Mr Lee's defence ... without prejudice to their contention that they have avoided the policy. ... Had I thought, however, that they should be added as a defendant, I would have required them to pay a modest price for the privilege of intervention. If they were to be added as the 2nd Defendant, they would have had to have undertaken to the court that they would satisfy any judgment which Madam Chu might obtain against Mr Lee. In my view, it would have been unfair for the insurers to be permitted to join in the action (on the basis that they would be liable under section 10(1) of the Ordinance to pay Madam Chu such damages as are awarded against Mr Lee), while at the same time continuing to deny their liability to pay her damages (even if she obtains an award of damages against Mr Lee) on the basis of section 10(3) of the Ordinance. That would not, of course, have prevented the insurers from arguing that the policy had been avoided."

This is in some respects an unusual case. If the insurer fails in its contention that it had rescinded the policy, it will be bound to pay to the wife such damages as are awarded against the husband. If left to their own devices, the action between the wife and husband is likely to be collusive.

The insurer's case

7. Miss Audrey Eu QC, on behalf of the insurer, contends that the insurer's contingent interest in the outcome of the wife's claim is such that if the s. 10(3) proceedings fail, its interest can only be protected by participation either as 2nd defendant or by taking over the husband's defence in the accident. The insurer's interest to participate in some capacity in the action is perhaps too obvious to permit a serious argument to the contrary. The judge also accepted it. Miss Eu contends that the judge was wrong not to permit the insurer to be joined as 2nd defendant. In particular she contends that his conclusion that the insurer could take over Mr Lee's defence without prejudice to their contention that they had avoided policy was wrong in law. I turn to that matter.

Is the policy avoided ab initio?

8. The point made by Miss Eu is that rescission on the grounds of misrepresentation and non-disclosure restores the parties to the position in which they stood before the contract was entered into. The discharge, if it be valid, takes place not at the moment of avoidance but ab initio. Even if, as in this case, it is necessary for the insurer to enforce the right through action, the contract is avoided ab initio and not from the moment of the declaration or the time when the action is commenced or the time when rescission was contended for. She supports this proposition by citing Abram Steamship Co Ltd v Westville Shipping Co Ltd [1923] AC 773 at 781 where Lord Atkinson said:

"Where one party to a contract expresses by word or act in an unequivocal manner that by reason of fraud or essential error of a material kind inducing him to enter into the contract he has resolved to rescind it, and refuses to be bound by it, the expression of his election, if justified by the facts, terminates the contract, puts the parties in status quo ante and restores things, as between them, to the position in which they stood before the contract was entered into. It may be that the facts impose upon the party desiring to rescind the duty of making restitutio in integrum. If so, he must discharge that duty before rescission is, in effect, accomplished; but if the other party to the contract questions the right of the first to rescind, thus obliging the latter to bring an action at law to enforce the right he has secured for himself by his election, and the latter gets a verdict, it is an entire mistake to suppose that it is this verdict which by itself terminates the contract and restores the antecedent status."

9. Mr Sarony QC, for the husband, and Mr Bharwaney for the wife, accept the proposition that the contract is avoided ab initio in these circumstances but contend that if there are proceedings to decide whether the facts justify the rescission, the contract is kept alive in the meantime so that the insurer may rely upon it pending the determination.

10. In support of this proposition, Mr Sarony relies upon the words "if justified by the facts" in the passage cited. Mr Bharwaney points to the analogy in cases where a contract is rescinded, a party may rely upon an arbitration clause or a foreign jurisdiction clause, and the power, in some circumstances, for an arbitration to unscramble the monetary consequences of the contract. But with the greatest respect these cases do not in any way affect the statement of principle by Lord Atkinson in the case to which I have referred. These are instances of contracts in which there are severable agreements but that is not this case. For my part, I am unable to accept Mr Sarony's argument that the words "if justified by the facts" alter the principle.

11. Mr Bharwaney also prays in aid the decisions in The Oriental Fire & General Insurance Co Ltd v Cheuk Ma-yee [1981] HKLR 41 and Cheung For Kuen v Tang Wai Kwong, unreported A2350 of 1975, which were relied upon by the judge. But these cases do not support either Mr Bharwaney's submission nor the judge's decision on this point. Those cases demonstrate clearly that each party was relying upon a breach of the contract of insurance to avoid payment - not upon a rescission of the contract itself. In doing so, such a party affirms the contract by relying upon it and contending for a breach. This case is quite different.

12. I have no doubt that Lord Atkinson's statement in the case cited is a correct enunciation of the principle. If the contract is rescinded and the facts later found justify that rescission, the contract is rescinded ab initio and not from the time of the decision or any other time.

If the insurer takes over the husband's defence, will it approbate the policy?

13. Miss Eu contends that once established, this proposition has the further consequence that the insurer cannot protect its rights by taking over the husband's defence in the action for two reasons:

(a) That the only right which the insurer has to take over the defence is under clause 6 of the policy itself. Whereas on its contention, the policy has already been avoided and has gone; and

(b) Alternatively, if it contends otherwise and seeks to enforce the contract and take over the defence, it will be approbating the contract and subsequently cannot then say that the contract has been rescinded and succeed in the application under s. 10(3).

14. As I see the situation, there can be little doubt that were the insurer to seek to exercise its right to take over the defendant's case in the action, that must be an approbation of the contract. Such action is not explicable in any other way. If authority is required for this trite proposition, it can be found in George Urquhart v Duncan Macpherson [1878] 3 AC 831 and more recently in West v National Motor & Accident Insurance Union Ltd [1955] 1 Lloyds LR 207. There is also a succinct expression of the principle in Clough v The London and North Western Railway Co [1871] Exchequer 7 LR 26 at 34 where Mellor J said:

"... And, consequently, we agree with what seems to be the opinion of all the judges below, that if it can be shewn that the London Pianoforte Company have at any time after knowledge of the fraud, either by express words or by unequivocal acts, affirmed the contract, their election has been determined for ever."

Quite apart from that, the point would be well made for the insurer - subject to the submissions with which I will deal - if it can be shown that there is a real risk that taking over the defence is itself an approbation of the policy. I cannot see any reason why an insurer should take such a risk contrary to its main contention.

15. Finally, the point is eloquently made by an exchange of correspondence which has taken place since Keith J's decision. The insurer asked for consent of the husband that if it took over the conduct of the defence, the husband would agree that it could do so without prejudice to its rights to pursue its declaration under s. 10(3). The answer from the husband's solicitors was clear:

"Your client cannot take inconsistent steps by taking over the conduct of the defence in the above action on behalf of our client while at the same time continuing to deny their liability to play the plaintiff's her damages and pursue their section 10(3) declaration."

16. For those reasons, I would hold that the judge was wrong when he decided the insurer could take over the husband's defence without prejudice to their contention under s. 10(3). Further, for the reasons which I have already given, the two cases Oriental Fire and Cheung For Kuen are not authorities for his proposition.

Jurisdiction to join an insurer under a contingent liability

17. However, that is not the end of the matter. Mr Bharwaney submits that there is no jurisdiction under O15 r6(b)(i) for the judge to allow the insurer to become a party to the action. He contends that only an insurer who is bound to foot the bill may be joined as a necessary party whereas here, the insurer is only under a contingent liability to pay any damages that the wife may recover depending upon the outcome of s. 10(3) proceedings. For this proposition, he relies upon several authorities, first, the well-known case of Gurtner v Circuit & another [1968] 2 QB 587 and in particular the passage of Diplock LJ (as he then was) at 602G-603D:

"... the rules of natural justice require a person who is to be bound by a judgment in an action brought against another party and directly liable to the plaintiff upon the judgment should be entitled to be heard in the proceedings in which the judgment is sought to be obtained. A matter in dispute is not, in my view, effectively 'adjudicated upon' unless the rules of natural justice are observed and all those who will be liable to satisfy the judgment are given an opportunity to be heard."

Secondly, he relies upon a passage in Lord Diplock's speech at p. 55H-56B in Pegang Mining Co Ltd v Choong Sam & others [1969] 2 MLJ 52. In that case, at p. 55 Lord Diplock said:

"In their Lordships' view one of the principal objects of the rule is to enable the court to prevent injustice being done to a person whose rights will be affected by its judgment by proceeding to adjudicate upon the matter in dispute ... A better way of expressing the test is: will his rights against or liabilities to any party to the action in respect of the subject matter of the action be directly affected by any order which may be made in the action?"

Finally, he cites Woo Kin Wah v Somec (HK) Ltd [1993] 1 HKLR 300 at 305 where Kempster JA said:

"Had Tugu demonstrated that they were liable to the plaintiff under 'a policy of insurance for the purposes of this Part' they would have been entitled to apply to be added as a party having 'the same right to defend the proceedings as if such insurer were the employer'. This right to apply is surely a quid pro quo for contingent and direct liability to the employee."

18. So, Mr Bharwaney submits that the judge was right in saying that he had jurisdiction to allow joinder only if there was an undertaking from the insurer to abandon its claim under s. 10(3) proceedings and accept liability to pay the wife's damages. In other words, to make an election between its contentions. With the greatest respect to a very carefully structured argument by Mr Bharwaney, this point is not sound. It seeks to construe the words used in those judgments as if they were statutory provisions. In none of those cases was the judge concerned to address the very point, raised in this case, whether there is jurisdiction under O15. In my view, jurisdiction under that provision is wide enough to permit the joinder of a party whose liability to pay is contingent not only upon the outcome of the proceedings which it seeks to join but also upon any other event or proceedings. Indeed, to rule in accordance with Mr Bharwaney's submission would, in my judgment, not only be contrary to principle but often would be capricious and unjust in its effect. For example, it would depend upon the order in which proceedings take place or upon the time when the contingency was resolved. One only has to take this instant case. The contingency depends upon the outcome of the s. 10(3) proceedings. If resolved against the insurer before the action, the court would have jurisdiction to order joinder. If not resolved until after and the insurer chooses not to elect - the very circumstance in which joinder may be necessary - there would be no jurisdiction and the insurer's interests would go by default. How can it be said, I ask, that such a rule would accord with natural justice? For the whole basis of the rule (as can be seen from the cases) is to enable a person not a party to protect his rights when necessary so that natural justice can be done to him. There is nothing unjust or contrary to principle in permitting a party to raise alternative defences in the same case. This resolves the point that jurisdiction depends upon the courts seeking an undertaking from the insurer to be bound in the action as a condition of being let in.

In any event, is election required before joinder?

19. However, Mr Bharwaney further suggests that in any event the insurer must be required to elect before being allowed to join in the action. Undoubtedly an undertaking to enforce an election is required from time to time by judges who give leave for persons to join following the undertaking required of the Motor Insurance Bureau in the leading case, Gurtner v Circuit. However, it seems to me that there is much misunderstanding on this point. The undertaking in that case was required in very unusual circumstances. The Motor Insurance Bureau was allowed to join in the proceedings but in fact and in law the Bureau had no legal liability to pay the plaintiff. It had a moral obligation which could only be enforced if it became necessary by an action for specific performance of the agreement by the Minister of Transport. So, in that case, the undertaking was required for obvious and good reason. Nor was the Motor Insurance Bureau required to abandon any other defence which it may have had.

Conclusion

20. I would decide, therefore, that the judge's discretion in allowing a party to join is very wide and not to be artificially limited by any decision of this Court. The judge may impose conditions but he is under no particular constraint to do so. If conditions are imposed, they should be just to all parties and should seek to maintain their rights to a proper resolution of the issues.

21. In the result, I conclude that there is no basis for Mr Bharwaney's contentions either that there is no jurisdiction in the court to join a party whose rights are contingent or, that in the circumstances of this case, the insurer should only be allowed to join if it elects to abandon its claim under s. 10(3).

Discretion exercised afresh

22. It then falls to this Court to exercise its discretion afresh and to determine whether or not to grant the application. On this, I find myself in no doubt that the discretion should be exercised in the insurer's favour for these reasons:

(1) That if the action is allowed to proceed without the intervention of the insurer in some capacity the husband and wife will collude. The husband will admit liability, concede the limitation point and take no issue on the quantum of damages. On this basis, the real issues in the trial will not be 'effectively and completely determined and adjudicated upon'.

(2) The insurer has repudiated the policy and seeks its declaration under s. 10(3). If it fails to obtain such a declaration, it will be liable to pay any damages which the wife may recover. Natural justice requires that it should be able to protect is interests in the action.

(3) That unless the insurer takes part, it is likely that judgment will be signed in default in this action before the s. 10(3) proceedings have been determined.

(4) Normally, the insurer would protect itself against collusion by taking over the defence under clause 6 of the policy. But for reasons given, this is not open to the insurer in this case without abandoning its other rights. (I would add that I have some serious doubts whether taking over the action is in fact a full protection against collusion in the circumstances of this case but the point has not been taken and I say no more about it.)

(5) In these circumstances the only way in which the insurer can protect its legitimate interests is by being allowed to join as a second defendant.

(6) I cannot accept that this will cause any improper delay or complication of the action. The only issues likely to be tried are those relating to liability, limitation and quantum. The husband is not likely to take an very active part although it is open to him to do so.

23. For these reason, for my part, I would allow the appeal and give the insurer leave to join in the action as second defendant.

Liu JA: In entertaining an application for joinder and exercise of discretion, each case has to be judged on its own facts. The insurers in this case did not gratuitously deprive themselves of their policy right to stand in the shoes of the husband in the conduct of his defence. That policy right was incidentally put an end to in the prompt action taken by the insurers to avoid the policy. There does not seem to be anyway in which the insurers in an avoided policy can ensure that justice is done and rules of nature justice obeyed except for them to be joined as another defendant under Order 15 Rule 6(2)(b)(i) Rules of Supreme Court.

24. Order 15 Rule 6(2)(b)(i) envisages the joinder of a party directly affected either in his legal right or in his pocket. Persons other than those irretrievably bound by a judgment may also be said to be persons so affected within the letter and the spirit of Order 15 Rule 6(2)(b)(i).

25. For the reasons my Lord, Mortimer JA, gives, I, too, would allow the appeal and make the order he proposes.

Ching JA: I, too, agree with the judgment pronounced by Mortimer JA. I would uphold the appeal.

Mortimer JA: In those circumstances the appeal is allowed and leave is granted for the appellant to join in the proceedings as second defendant.