RICHFINE DEVELOPMENT LTD t/a KENG FAI JEWELLERY v. HUGH RUPERT RIVINGTON

CACV 257/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 257 OF 2008

(ON APPEAL FROM HCCL NO. 18 OF 2006)

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J U D G M E N T

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Hon Tang VP:

1.  The plaintiff, Richfine Development Limited, was in the wholesale jewellery business. 

2.  It was covered by a Lloyd’s jewellers block policy for the period 18 October 1999 to 17 October 2000 (“the policy”) which had been arranged through a Hong Kong agent, Anglo East Surety Limited.  The policy was for HK$7 million.  Claims were required to be settled in relation to its own stock at cost as entered into stock record, for memo goods at memo price, and precious metal at replacement cost. 

3.  On 28 March 2000, the plaintiff was robbed. 

4.  The plaintiff’s claim against the defendant was for HK$5,958,098 after concessions made at trial.  As the trial judge, Stone J said:

“204. This is broken down into 11 items in the following groupings:

Items 1 – 3: 18K gold and diamond rings, gold and diamond pendants and gold and diamond earrings – subtotalling HK$427,193.00

Items 4 – 10: 18K jade and diamond rings, 18K jade and diamond pendants, 18K diamond bracelets with A jade, 18K diamond earrings with A jade – subtotalling HK$942,730.00

Item 11: Loose diamonds (819.34 carats) – subtotalling HK$4,641,175 (in substitution of the original figure of HK$4,653,553)

Total: HK$6,011,098, as revised

To this total a further concession of HK$53,000 which Madam Li volunteered with regard to Items 1-3, which on its face thus further reduces the plaintiff’s claim to:

HK$5,958,098”

5.  Stone J found in favour of the plaintiff and ordered the defendant to pay the plaintiff HK$4,738,051:

“206.  Having reflected on the situation, in my judgment there should be a deduction of 15% from Items 1-3, a deduction of 25% from Items 4-10, and a 20% deduction from Item 11.  There is no magic in these percentages as chosen; they simply reflect this court’s best efforts after considering all the evidence before it.”

6.  At trial, the fact of robbery was in issue.  Stone J was satisfied that a robbery had taken place and there is no appeal from that.

The appeal

7.  The principal issue on appeal is: Was the plaintiff in breach of warranty, arising by reason of a “basis” clause in the proposal form and the first policy recital.  There is no cross-appeal by the plaintiff that Stone J was wrong to award the discounted sum.

8.  The written proposal and declaration by the plaintiff dated 6 October 1999 was made “the basis of the contract”.  As explained by Viscount Haldane in Dawsons Ltd v Bonnin [1922] 2 AC 413 at 424 and 425:

“… when answers, including that in question, 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, …”

“… What is important … is that the insured cannot recover unless he can show that he has performed his part, for his performance has been made the condition of performance by the other party.”

9.  The relevant warranty is the answer “YES” to the unnumbered question (but described at trial as question 17(b)):

“(b)  Do you keep proper records of all sales purchased (sic) and transactions?

10.  It was also made the basis of the policy that claims were required to be settled as follows:

“Own Stock:     Cost as entered into stock record.

 Memo Goods:    Memo price.

 Precious Metal:   Replacement cost.”

11.  Mr Coleman, SC, appearing for the defendant also relied on the following conditions in the policy as conditions precedent:

Condition 1:

“It is understood and agreed that the Assured shall keep detailed records of all sales, purchases and other transactions and that such records shall be available for inspection by the Underwriters or their representatives in case of a claim being made under this certificate.”

Condition 5:

“The Assured shall, in case of loss or damage as a condition precedent to any right of indemnification, give to the Underwriters all information as to the property lost or damaged as well as circumstances of such loss or damage as the Underwriters may require and as may be in the Assured’s power.”

12.  The defendant complained that the plaintiff was in breach of the warranty that they would keep proper records of all sales, purchases and other transactions, and as a result the policy was never incepted.  Alternatively the plaintiff had failed to keep detailed records of all sales, purchases and other transactions under Condition 1, or it was unable to give “all information as to the property lost … as the Underwriters may require” under Condition 5.

Proper records

13.  There were expert evidence at trial on the question.  For the plaintiff, Mr Bernard Ng and for the defendant, Mr Simon Blade. 

14.  On the requirement of proper records, Stone J said:

“153.  Having reflected on the issue of the ‘properness’ of the records, I do not conclude that any breach of warranty has been established by the defendant.  In this context I accept Mr Acton-Bond’s argument disputing that this is a warranty properly so-called, and if and in so far as this is incorrect, in the event I do not consider that a case of breach has been made out by the insurers.

154.  It strikes me that the approach adopted by underwriters represents a post facto counsel of perfection, and that in determining a question such as this that the court can and should take into account the circumstances and relative size and operation of the business in question.

155.  I accept the evidence of Mr Bernard Ng on the point, and I also agree with Mr Acton-Bonds’ submissions that the word ‘proper’, as contained with the reply to Question 17(b) of the Proposal Form, imports a meaning of ‘appropriate to the prevailing circumstances’, particularly considering the fragmentary nature of much of the stock involved, such as the jade slivers and diamond chips.

156.  True it is that difficulties have been identified within the record-keeping system adopted by this small family business, but in my view this element of the matter has been considerably exaggerated, and that, within the context of the plaintiff’s business, the record keeping cannot be castigated as constituting a breach of warranty, thereby justifying avoidance of the policy.

157.  In this regard, therefore, not only have I have accepted the conclusion on this issue of Mr Bernard Ng, who has opined that the records kept by this small business indeed were appropriate and ‘proper’ in these circumstances, but also the evidence of Madam Lee, who did her best to explain the system adopted within this firm. 

158.  It also seems to me that in so far as deficiencies within the record-keeping system existed – and the system certainly was far from perfect – such deficiencies are more properly reflected in terms of the appropriate assessment of quantum.

159.  A like conclusion informs the argument that claims should be made on a ‘cost basis’.  I fail to see how, if there is any difficulty with an amount claimed, or the basis therefore, that this gives a right to claim that an insurance policy is void from inception.  Any problem in this regard must sound to quantum, and not to any breach of warranty argument.”

15.  It appears from the foregoing that the learned judge accepted that “deficiencies within the record-system existed” but that “such deficiencies are more properly reflected in terms of the appropriate assessment of quantum”.  The learned judge applied the same approach to “the argument that claims should be made on a ‘cost basis’” and said that “any problem in this regard must sound to quantum, and not to any breach of warranty argument”.

16.  Mr Whitehead for the plaintiff submitted that the expression “proper records” is not a legal term of art and these words have to be construed in the context of the surrounding circumstances and the object of the contract.  He further submitted that the Court may consider the commercial purpose of any particular contract and rely upon its own experience of contracts of a similar character.  The learned judge said:

“154.  … in determining a question such as this that the court can and should take into account the circumstances and relative size and operation of the business in question.”

17.  I have no difficulty with such approach.  But the requirement of proper records has to be viewed in the context of a proposal for insurance, the commercial purpose of which was the obtaining of insurance.  With respect, Stone J mistook what might be regarded as proper records for a small family business as proper records for insurance purpose.

18.  In Shoot v Hill [1936] Lloyd’s LLR 29, where:

“(T)he undertaking was to keep proper stock and account books in which all sales and purchases are recorded.”

Branson J said at 38:

“… I quite agree that it is not necessary for the fulfilment of that clause that the sheets of paper upon which his stock is kept should be bound up into a volume. In my view, it would be quite sufficient that he should keep ordinary books or even books which were not usually kept, provided that they contained the entries which he had agreed to make. According to the evidence, it is not possible to adjust his accounts unless you assume that he paid out of his cash sums of money for the purchasing of goods which were not entered in any purchase book and were not directly entered into the stock books. He says that the way that he went about it was to buy, let us say, a watch over the counter for 10s. and then to ticket it and put it aside until he had time, either by his own man or by sending it out to somebody else, to put the watch again into going order, with a polished case, ready for another sale, and then it was put into the stock book direct; so that there is nothing to show from whom it was bought, what was paid for it, how much was spent upon it in labour or the payment for labour to another firm; but there is only a sort of sudden appearance of a new watch in the stock book, priced at such a figure as Mr. Shoot thought right. That is not the kind of book which answers the description in this policy. It seems to me that it is the essence of the matter that the underwriters should, if a claim arises, be able to look at the book and see whether the man who is claiming so much for his stock has got the stock and what he paid for the stock. It is of the essence of the matter in order to enable them to check the accuracy of the value which he chooses to put on the stock. Therefore, on this ground, again, I think the plaintiff fails.”

19.  With respect, I agree:

“… it is the essence of the matter that the underwriters should, if a claim arises, be able to look at the book and see whether the man who is claiming so much for his stock has got the stock and what he paid for the stock. …”

20.  The flaws in the plaintiff’s record system identified by Mr Coleman and which could be gathered from the judgment included:

(1)  the lack of any system for recording the stock taken from the Plaintiff’s premises on a daily basis by its sales persons doing the rounds of outside customers;

(2)  the flawed system for tracking consignment stock in and out;

(3)  missing purchase and sales invoices; and

(4)  the lack of any system to trace the jade component of jewellery back to the original purchase invoice, even on a batch basis.

21.  Mr Coleman submitted the effect of these flaws in the record system is that it was practically impossible for the defendant to ascertain or verify:

(1)  whether the Plaintiff insured had the own stock and consignment stock it claimed to have on its premises; or

(2)  the actual cost of the Plaintiff’s claimed own stock.

22.  Mr Whitehead reminded us that the learned judge had concluded:

“152.At the end of the day the court has to take a view, and to come to a conclusion upon all the evidence before it, which upon this aspect is effectively the evidence of the two experts, Mr Ng and Mr Blade, together with the evidence of Mr Chiang and that of the plaintiff’s bookkeeper, Madam Lee …”

23.  The learned judge preferred the evidence of Mr Ng to Mr Blade and described Mr Blade’s evidence as “considerably exaggerated”.  Mr Whitehead submitted these matters were pre-eminently matters for the trial judge who had the benefit of the oral evidence, and that it is not for the appellant court to second guess the factual conclusions and evidence accepted by the trial judge. 

24.  But as the judgment clearly shows, when it came to quantum, the learned judge allowed deductions ranging from 15% to 25% which:

“206.  …simply reflect this court’s best efforts after considering all the evidence before it.”

25.  Earlier the learned judge had said:

“197.  …there is no doubt but that Mr McLeish’s (counsel for the defendant below) detailed criticisms of various aspects of quantum claim as now advanced have some resonance, and cannot simply be brushed aside.”

26.  Stone J also said:

“205.  In light of the criticisms of the deficiencies of underlying documentation and the methodology in compilation of these base figures, albeit having rejected the defendant’s contention that the claim must be dismissed in toto as being unproved, in my view the only way in which broad quantum justice can be done is to take each of these subtotals, and to make as estimated percentage deduction therefrom to take account of the criticisms to which the defendants have drawn attention.

206.  Having reflected on the situation, in my judgment there should be a deduction of 15% from Items 1-3, a deduction of 25% from Items 4-10, and a 20% deduction from Item 11.  There is no magic in these percentages as chosen; they simply reflect this court’s best efforts after considering all the evidence before it.

207.    This then provides the following figures (rounded to the nearest dollar):

Items 1-3: HK$427,193 – HK$53,000 (as conceded) times 85% = HK$318,064

Items 4-10: HK$942,730 times 75% = HK$707,047.00

Item 11:  HK$4,641,175 times 80% = HK$3,712,940

Total: HK$4,738,051

208.  The foregoing represents the best estimate the court is able to make in the circumstances of a case which cannot be characterised as straightforward.  In my judgment, however, this estimate provides substantial justice in this dispute between insurer and insured.”

27.  With respect, substantial justice is not a sufficient answer to a breach of warranty or condition precedent.

28.  If I am right in the view I take of the requirement of proper records for insurance purpose, in the words of Branson J quoted above, one should be:

“… able to look at the books and see whether the man who is claiming so much for his stock has got the stock and what he paid for the stock”.

29.  Obviously, the learned judge was unable to do so on the evidence available to him.  He was obliged to adopt a broad-brush approach.  It is true, as the learned judge has rightly pointed out, the plaintiff has suffered substantial loss.  But with respect, that was not the basis upon which the insurance cover was provided to the plaintiff.  With respect, his findings of fact were marred by his view that the warranty only required proper records for the plaintiff’s business as opposed to proper records for the purpose of insurance.

30.  The number of missing invoices, 495 in total, is significant. Mr Ng accepted that the Defendant was being invited to take it on trust that the missing invoices had been used in the way that was claimed. Indeed Mr Ng agreed in cross-examination that:

“A  From the third party view point, (the record) is not proper,”  T333 L-N.

31.  So I am of the view that the plaintiff had failed to keep proper records, in other words, the plaintiff was in breach of warranty.

32.  Mr Robert Whitehead, SC, submitted that the answer to question 17(b) is no more than a statement that as at the date the proposal was signed, namely, 6 October 1999, the plaintiff (in its view) kept proper records.  He submitted:

“This could not be regarded as a warranty that it would continue to keep proper records in consideration of it being granted insurance covered by the defendant.”

33.  He relied on Woodfall & Rimmer Ltd v Moyle [1942] 1 KB 66 where the question was:

“‘Are your machinery, plant and ways properly fenced and guarded and otherwise in good order and condition?’ (and answered) ‘Yes’.”

34.  There, the English Court of Appeal held that the answer did not amount to a promise that this state of affairs would continue to be true throughout the currency of the risk. Lord Greene MR said that there was:

“… not a particle of justification for reading into that perfectly simple question any element of futurity whatsoever”.

35.  I believe “keep proper records” in the context means proper records would be maintained.  Also, I do not agree with Mr Whitehead that the statement is simply one of opinion or belief so that the answer could only be untrue if dishonest.  I cannot accept that keeping proper records is satisfied if the assured honestly believed the records to be proper.  Proper records must have the attributes described by Branson J in Shoot v Hill.

Condition Precedent

36.  The defendant also relies upon Conditions 1 and 5 in the policy.  The learned judge did not deal with them in his judgment.

37.  Condition 5 is clearly a condition precedent.

38.  I believe “all information … as the underwriter may require …” require information which have the attributes described by Branson J.  Moreover, as Mr Coleman submitted, Condition 5 should be read together with Condition 1 such that “all information” would include “detailed records of all sales, purchases and other transactions …” which the assured was by Condition 1 required to keep and make available for inspection.  Moreover, such “detailed records” must also have the attributes as “proper records” under the warranty.  That is so whether or not Condition 1 is itself a condition precedent.  I add that I am inclined to the view that Condition 1 is also a condition precedent.

39.  I am of the view that the plaintiff’s was also in breach of the conditions precedent.

Waiver

40.  The learned judge dealt with waiver quite briefly since he has found that there was no breach of warranty.  Since the learned judge had not dealt with the conditions precedent, it is not clear whether his decision on waiver extended to them.

41.  Mr Denis Chan was the insurance agent and an employee of Anglo East.  The learned judge:

“[173]  …was wholly, unimpressed with this witness …

[174]  …did not believe a word that he said upon any material issue.

[175]  …in terms of the account of Mr Chiang on his dealings with Mr Chan, I find that Mr Chiang’s version of events is true and correct, and I disbelieve any evidence of Mr Chan to the contrary.”

42.  The learned judge concluded:

“176.  In particular, I find that Mr Chan inspected the accounting papers, invoices and other documents of the plaintiffs before the first policy of insurance was taken out, and I also find that that he had indicated to Mr Chiang that this was a satisfactory system for the insurance cover proposed, thus stimulating the plaintiff to take out the initial policy.

177.  I further find that prior to the second (and relevant) policy being taken out, there was a conversation between Mr Chiang and Mr Chan in which, having learned that the same system was in operation as was the situation at the time of entering into the first policy the previous year, that Mr Chan had said that this was satisfactory.

178.  Although the line taken by Mr Chan in evidence was that he could not remember his conversations with Mr Chiang, but that in any event he would not have advised or reassured his potential customers as to the adequacy of their records, having seen and heard this gentleman I have no doubt whatever that this person would have said whatever it took to persuade potential policy holders to obtain their business, and thus afford him the chance to increase his commission income; indeed, the evidence was that whilst he was at it he also had persuaded Mr Chiang to put in a security alarm of another manufacturer for whom Mr Chan also acted.

179.  Accordingly, if it had been necessary so to find, I should have found that any flaw/defect in the records/recording system of the plaintiff thus had been waived by Mr Chan on behalf of the defendant at the time of entering into the relevant insurance contract.”

43.  The critical finding appeared to be Mr Chan’s assurance that:

“… this was a satisfactory system for the insurance covet proposed (para. 176)”.

44.  On that basis Stone  held:

“That any flaw/defect in the records/recording-system of the Plaintiff had been waived …”.

45.  But what does satisfactory system mean?  It does not mean that it did not matter whether the plaintiff had proper records.  Was it a representation that the records were proper when they were not?  If so, would not the proper remedy be rescission of the contract,

“… procured by misrepresentation, and not to alter the written contract and claim the benefit of it as altered”.  per Scrutton LJ in Newsholme Brothers v Road Transport & General Insurance Co Ltd. [1929] 2 KB 356 at 369.

46.  The waiver plea was made in November 2007 in the Amended Reply and Defence to Counterclaim shortly before the trial.  It is perhaps revealing that the plaintiff also relied on:

“… a collateral contract between the parties that, in consideration of the plaintiff entering into contracts of insurance with the defendant, his existing record system would be deemed to be acceptable to the defendant”.

However, there was no reference to collateral contract in the judgment.

47.  At the trial the principal issues were the fact of robbery and whether there were proper records. As noted, the learned judge dealt with the issue of waiver very briefly because it was not essential to his decision.  There was no proper analysis of the evidence.  Nor was the effect of the waiver explained. 

48.  There was no evidence that Mr Chan had actual authority from the defendant or Anglo East to waive the warranty (the answer to question 17(b)) or any of the conditions precedent.  Nor was there evidence that Mr Chan had been told that there was any flaw/ deficit in the plaintiff’s records.  In any event, Mr Chan would not have been aware of missing invoices in the absence of such information from the plaintiff.  The plaintiff’s witness did not know about the missing invoices until after the commencement of proceedings and the involvement of experts.

49.  Mr Whitehead relied on the fact that Mr Chan was authorized to fill in the proposal form on behalf of the assured.  But that would not clothe him with actual or ostensible authority to waive any flaw / defect in the plaintiff’s accounting system.  Even if somehow the fact that Mr Chan had authority to fill in the proposal form could amount to authority to waive the warranty (answer to question 17(b)), its impact on the Conditions 1 or 5 was left unexplored.

50.  Mr Whitehead submitted that all decisions regarding the policy was made in Hong Kong with the authority of Anglo East and were not referred to London and that Anglo East were authorized to decide whether additional terms and conditions should be written into the policy and that the decision whether to accept coverage of insurance was made by Anglo East.  The learned judge has made no relevant finding.  But even if Mr Whitehead is correct, they say nothing about the authority of Mr Chan to bind Anglo East.  It is not alleged that he had authority to make or vary the contract of insurance.  The evidence showed that he had to report to his employer at the office.

51.  Mr Whitehead relied on Woolcott v. Excess Insurance Co. Ltd. [1979J 2 Lloyds Rep. 210.  There, the broker was authorized to bind insurance for the insurer's account in accordance with the policy. The Court held that the broker was the agent of the Insured for effecting the insurance. The broker came into possession of information relevant to the policy which it did not disclose to the insurer. The insurer attempted to avoid the policy based on non-disclosure of this information by the Assured. The Court held that as the broker had acquired that knowledge in its ordinary course of business as brokers, that knowledge was imputed to the Insurer.

52.  But Woolcott was not concerned with the question whether an employee of the broker had ostensible authority to bind the broker.  Unless Mr Chan had authority to “waive” the warranty or the conditions precedent it would not avail the plaintiff. 

53.  As for imputation of knowledge, there was no finding that Mr Chan was aware that no proper records were kept.  There is no evidence that Mr Chiang had told Mr Chan that there were flaws/defects or that on the records kept by the plaintiff if a claim arises the underwriters would not be able to look at the books and see whether the plaintiff had got the stock and what it paid for the stock.  Unless that was what Mr Chiang had told Mr Chan, it is difficult to see how Mr Chan could be said to have waived either the warranty or the condition precedent. 

Disposition

54.  For the above reasons, I would allow the appeal, and dismiss the plaintiff’s claim.  I also make an order nisi that the defendant is to have the costs of the appeal and the proceedings, such costs to be taxed, unless agreed.

Hon Cheung JA:

55.  I agree.

Hon Yuen JA:

56.  I agree.