The Chinese University of Hong Kong v. Kow Lee Building Construction Co (A Firm)

HCA001782/1974

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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Coram: Li, J.

Date of Judgment:

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JUDGMENT

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1. On the 1st April 1970 The Chinese University of Hong Kong (hereinafter referred to as 'the plaintiff') signed a contract (hereinafter referred to as 'the building contract') with the firm, Messrs. Kow Lee Building Construction Co. (hereinafter referred to as 'the defendant') for the construction of an administration building within the University Campus for the sum of $1,907,154.06. This written contract is exhibited and marked 'M' part of which is reproduced in Document 3 of the agreed bundle of documents. From these documents it is apparent that the sum of $1,097,154.06 would cover the whole cost of labour and material for a complete building and that the project architect was W. Szeto and Partners (hereinafter referred to as 'the Architect'). Express provisions were made in the building contract with regard to insurance for the protection of the interests of both the plaintiff and the defendant. Such provisions were set out in Clauses 18, 19 and 20A of the building contract. Pursuant to these provisions the defendant took out a Public Liability Insurance Policy in its own name to cover third party risks as from the 1st April 1970. This policy was exhibited in Document 2 of the agreed bundle (hereinafter referred to as the 'Public Liability Policy"). It also took out another policy as from the 1st April 1970 in the joint names of the plaintiff and the defendant to cover any damage to the building and materials on the site caused by fire and typhone etc. This 2nd policy was exhibited in Document 1 of the agreed bundle (hereinafter referred to as 'the Fire Policy').

2. On the 11th June 1970 the plaintiff signed another contract with the American Engineering Corporation for air conditioning installations for the purposes of air conditioning the said administration building then under construction. This was an entirely separate contract which provided that "All materials, plant and equipment supplied for the Contract shall become the property of the Employer as soon as delivered to the Site, or as soon as any payment has been made in respect thereof, in accordance with clause 1.49. whichever is the earlier time." and that "All work executed and all unfixed materials and goods intended for, delivered to and placed on or adjacent to the Works (except temporary buildings, plant, etc. tools and equipment owned or hired by the Contractor or any sub-contractor) shall be at the sole risk of the Employer as regards loss or damage by fire, storm, tempest, typhoon, lightening, flood, earthquake, aircraft or anything dropped therefrom, aerial objects, riot and civil commotion". This contract was exhibited and marked C. Installation work of air conditioning plants and equipment then commenced and continued at the same time while the building work under the building contract was in progress.

3. Under the building contract the defendant was given possession of the building site but it was obliged to permit execution of work not forming part of the building contract by others engaged by the plaintiff. Accordingly a portion of the lower ground floor of the partly constructed administration building which was intended to be a carport was allocated to the American Engineering Corporation for storage and a workship. The defendant retained an adjacent section of the same floor as its carpentry workshop.

4. On the 17th March 1971 a fire broke out in the early hours of the morning in that lower ground floor where the said workshops were located.

5. As a result part of the building, building materials, air conditioning equipments already incorporated into the partially finished buildings and air conditioning materials in the workshop were severely damaged.

6. According to the report of the Fire Services Department the supposed cause of the fire was "sparks from electric short circuit ignited nearby sawdust which in turn set fire to surrounding combustible materials.

7. The damage to air conditioning equipments materials and installations which were the plaintiff's property and for which the plaintiff was responsible amounted to $167,791.50 which sum was reduced to $137,180.50 after taking into consideration of equipments which could be salvaged and repaired. The Architect wrote to the defendant on the 22nd March 1971 in the following terms:-

8. A list of damages to the air conditioning equipments etc. was attached setting out an initial claim of $167,791.50. To this claim there appeared to have been no reply apart from the defendant's letter dated the 25th March 1971 which was as follows:

9. However, on the 23rd March 1971 the defendant submitted its claim for $790,626.15, which sum included the claim of $167,791.50 by the plaintiff, in respect of the loss suffered as result of the fire together with a list of its own damages in the following terms:

10. On the 27th March 1971 the Architect wrote to Gilman & Co. Ltd., agents for the Insurance Co., as follows:

11. On the 31st March 1971 Gilman & Co. Ltd. replied to the Architect in the following terms:

We thank you for your letter dated the 27th March and in reply would advise you that we are attending to this particular fire loss sustained by our clients Messrs. Kow Lee Building Construction Co. We have appointed an independant firm of assessors to handle this particular claim on our behalf and we expect to receive their preliminary report in the very near future."

12. In the month of April 1971 there were correspondence between the Architect, the defendant and the Insurance Co. on the subject as to when remedial work could commence. The Insurance Co. insisted that such work should not commence until the bill of quantities for damaged work could be measured and agreed upon. However the Insurance Co. was prepared to release an interim payment of $100,000. The defendant was informed by letter dated 27th April 1971. This led to a letter dated the 29th April 1971 addressed to the defendant by the Architect as follows:

13. On the 3rd May 1971 interim payment of $100,000 was made to the defendant by the Insurance Co. On the 7th June 1971 Graham Miller & Co. (Far East), the Loss Adjuster acting for Gilman & Co. Ltd. wrote to the defendant indicating that several item of the defendant's claim, including damage to air conditioning was not covered by the Fire Policy. The defendant was informed that subject to the completion of the form of acceptance attached to that letter Graham Miller & Co. was prepared to recommend to the Insurance Co. for settlement of the defendant's claim in the total sum of $244,653.08. (See Document 28 of the agreed bundle). The defendant accepted the offer and signed the form of acceptance. On the 9th July 1971 the defendant wrote to the Architect as follows:

"We forward herewith copies of correspondence between this office and Messrs. Gilman & Co., Ltd. and Graham Miller & Co. (Far East) in respect of the fire loss which are self-explanatory for your information."

14. From then on and up to 1973 the claim for damage to the air-conditioning was pursued under the Public Liability Policy by the defendant and the Architect on behalf of the plaintiff without success. The Insurance Co. maintained that the claim would not be entertained under the Public Liability Policy unless there was proof that the defendant had been negligent.

15. The aforesaid facts are not seriously disputed and are the background of this action. I find them as proved.

16. The plaintiff's case is that the fire was caused by the negligence of the defendant. Alternatively the plaintiff claim that since the Fire Policy was taken out in joint names of the plaintiff and the defendant and the defendant had accepted from the insurers the sum of $244,653.08 in full and final settlement of all claims of the plaintiff and the defendant on behalf of both insured the defendant should, but failed to, account for the sum of $137,180.50 to the use of the plaintiff to compensate for damages to the air-conditioning installations. The plaintiff also claims that the defendant wrongfully, in bad faith or without having exercised reasonable care skill and judgment and without knowledge or consent of the plaintiff made the compromise with the insurers so as to prejudice any claim the plaintiff might have had under the Fire Policy and as a result the plaintiff suffered a loss of $137,180.50.

17. In its Defence the defendant denies negligence and relies on Section 86 of the Fires Prevention (Metropolis) Act 1774. As to the alternative claims the defendant alleges that after the fire the Architect directed Mr. Szeto Kau, a representative of the defendant to make the necessary report of the damage to the insurer for the purpose of the claim which was done. At all material times the plaintiff well knew that the Fire Policy covered only the items of work stipulated in the building contract into which the air conditioning was not included and the plaintiff through the Architect authorized and directed the defendant to negotiate and to effect a settlement of all claims under the Fires Policy on its behalf. It is contended that the plaintiff at no time prior to the settlement objected to the insurer's refusal to compensate for damage to the air conditioning installations or dissuaded the defendant from effecting a compromise and in accepting the $244,653.08 in final settlement under the Fire Policy. The defendant accepted the settlement in good faith and the plaintiff is estopped from asserting that the defendant had no authority to settle. The defendant denies that there were any implied terms requiring the defendant to pursue the claim on behalf of the plaintiff in good faith and with reasonable care skill and judgment. Alternatively the defendant had acted in good faith and with reasonable care, skill and judgment in the interest of the plaintiff.

18. In his closing address counsel for the plaintiff concedes that the plaintiff will not found its claim on the defendant's negligence as the cause of fire. Indeed there is no evidence to establish that the fire was caused by the defendant's negligence. There is evidence that the defendant had committed minor breach of contract such as failure to provide a proper night watchman. But there is no sufficient evidence to connect the minor breach of contract with the cause of fire. Had counsel persisted in relying on negligence I would have found for the defendant on this point.

19. The remaining issues are whether:

20. In the letter addressed to the defendant by the Loss Adjuster of the Insurance Co. on the 7th June 1971 it was clearly indicated that the item of damage to air conditioning was not covered by the Fire Policy (See Document 28 of agreed bundle). A list attached to the said letter clearly set out the various items of losses or damage for which the $244,653.08 was paid. It could hardly be said that the defendant received any part of the sum of $244,653.08 for and on behalf of the plaintiff as compensation for damage to the air conditioning installations or equipments. Counsel for the plaintiff found his claim on unjust enrichment on the basis that if the defendant accepted the settlement in a smaller sum the defendant was deemed to be content to give the plaintiff the latter's claim in full and to take the balance. In support of his contention he relied on the evidence that the defendant had no authority to compromise the claim but usurped such authority.

21. The plaintiff's evidence on this point was that immediately after the fire the Architect caused the American Engineering Corporation to prepare a list of damaged items of the air conditioning installation and equipments and sent it to the defendant for the purpose of making a claim on the Insurance Co. The claim was made by the defendant. The plaintiff also wrote to the Insurance Co. to the effect that the list had been submitted by the defendant. In so doing the Architect was acting as agent for the plaintiff. The Architect was informed of the interim payment of $100,000 to the defendant on or about the 3rd May 1971. However, between the 3rd May 1971 and the 30th June 1971 the Architect heard nothing of the proposed settlement and certainly did not authorised the defendant to settle the claim. Mr. P.C. Wu of the Architect said about one week before the 9th July 1971 he telephoned Mr. Hso of the defendant inquiring of the position of the claim. Mr. Hso told him the claim had been settled and told him the terms and the amount. Mr. Wu learned for the first time that there would be no compensation for the air conditioning installations and equipments. He was shocked. In the circumstances he asked Mr. Hso to forward to him copies of all the correspondence between the Insurance Co. and the defendant. This was done by the defendant with a covering letter dated 9th July 1971 in Document 34 of the agreed bundle which I have already recited. Mr. Wu said he had never seen the correspondence before the 9th July 1971. Nor was he consulted by the defendant as to the terms of the settlement. Had the defendant done so he would have consulted the plaintiff. Mr. Szeto Wai, principal partner of the Architect, also gave evidence corroborating Mr. Wu. He was away on leave between the end of June and early September 1971. He too had no knowledge of the proposed settlement prior to his going on leave. He also said that had he been consulted on the terms of settlement he would have advised against them or at least referred the matter to the plaintiff.

22. The defendant's evidence on this point was that soon after the claim was submitted the Architect knew that the Insurance Co. regarded the air conditioning installation as not covered by the Fire Policy. Mr. Szeto Wai of the Architect was anxious that repair work should commence as soon as possible so that the Administration Building would be completed and ready for occupation by September 1971. The Insurance Co., however, would not agree to this until the bill of quantities of the damaged work had been measured. Such measure was not possible unless some of the damaged concrete surface had been cut open. It became a vicious circle. For this reason the Architect was agreeable that the defendant accepted a settlement so as to enable the defendant to proceed with remedial and building work. Mr. Hso of the defendant said that prior to the end of June he had been in constant touch with Mr. P.C. Wu of the Architect and informed the latter of the progress of the negotiation with the Insurance Co.'s assessors. He said even after the letter of the 9th July 1971 had been sent to Mr. P.C. Wu together with all the papers Mr. Wu said: "Compensation payable in respect of all had been made, you better hurry up. After all the Chinese University had appointed its personnel. They must be in occupation by September. Even without air conditioning persons can sit in to work and no one can work in open space. You must complete in September. You can proceed under the Public Liability Policy in respect of the air conditioning plant damage". The defendant also relied on the Architect's letter of the 29th April 1971 as its authority to effect a settlement with the Insurance Co. Mr. Szeto Kau of the defendant said that he personally told Mr. Szeto Wai that the sum of $244,653.08 would not cover the air conditioning installations and about the offer by the Insurance Co. He said that Mr. Szeto Wai told him to accept the offer and proceed with the building work and pursue the claim for the air conditioning installations under the Public Liability Policy.

23. The fact that the plaintiff, through the Architect, was pursuing the claim under the Public Liability Policy since July 1971 did lend some support to the allegation that the plaintiff and the Architect knew that the Fire Policy did not cover the air conditioning installations. Another fact is that the total costs for labour and material for the administration building amounted to $1,907,154.06 and the sum insured under the Fire Policy was the same could indicate that both the plaintiff and the defendant intended to insure against risks to the building work only and not the air conditioning to the value of another $1.2 million. On the other hand the original claim submitted by the Architect mentioned the Fire Policy - see letter in Document 23 of the agreed bundle. The acceptance signed by the defendant was in the following form:

"Subject to The Ocean Accident & Guarantee Corp................................Ltd. per Gilman & Co. Ltd................................ admitting liability, I/we hereby confirm willingness to accept the sum of HK$244,653.08 ................................ in full and final settlement of all claims maintainable under Policy No. 5A3575 ................................ following ................................ Fire ................................ which occurred on 17th March, ................................ 1971 at University Site, Shatin. I/we declare that ................ there is no other insurance on the concerned property.

24. After the settlement the plaintiff could do nothing but to persue its claim under the Public Liability Policy and hoped for the best. The Architect's explanation as to the under insurance was given by Mr. Szeto Wai that when the first stage of building work had completed part of the risk to the building would be negligible e.g. damage to foundation and under-ground drainage. As such there was no under insurance.

25. In the face of such conflict in evidence I am satisfied that the Architect's evidence was true. There was no necessity for the Architect to rush into a settlement to enable commencement of remedial work. In cross-examination Mr. Hso's evidence was as follows:

26. As to what was alleged to have been said by Mr. P.C. Wu to Mr. Hso about hurrying the work such was never put to Mr. Wu in cross-examination. Mr. Szeto Wai's explanation of the letter dated the 29th April 1971 (See Document 23 of the agreed bundle) was that he merely urged the defendant to obtain an agreement with the Insurance Co. on the necessity of first cutting out the damaged part of the structural work to enable closer examination. That was not an instruction to settle the claim. His evidence that had he known that the Insurance Co. refused to compensate for loss of the air conditioning installations and the terms of settlement he would have queried Mr. P.C. Wu and referred the matter to the plaintiff made good sense. He was at all times an agent of the plaintiff in this matter. In important matters concerning a settlement he must refer the decision to his principal, the plaintiff. Finally, when Mr. P.C. Wu spoke to Mr. Hso of the defendant about one week prior to the letter of the 9th July 1971 there was no evidence that Mr. Hso saying on the telephone that Mr. Wu knew of the existence of the correspondence between the defendant and the Insurance Co. at all. Indeed the letter dated the 9th July 1971 (See Document 34 of the agreed bundle) indicated that the said correspondence were sent to Mr. Wu for information. On the balance of probability I am satisfied that neither the architect nor the plaintiff knew beforehand of the terms of settlement or authorised such settlement. For reasons best known to itself the defendant took upon itself to settle the claim under the Fire Policy in joint names of both the defendant and the plaintiff or the architect.

27. The defendant took the list of the plaintiff's claim under the Fire Policy and passed it on the Insurance Co. together with its own claim for a total sum of $790,626.15. It proceeded to negotiate with the Insurance Co. for their claims under the Fire Policy. The defendant thereby assumed the capacity of an agent for the plaintiff in pursuing the plaintiff's claim. As such the defendant must act in good faith and with reasonable care, skill and judgment. On the evidence before me I find that the defendant simply accepted the decision by the assessor appointed by the Insurance Co. that both the air conditioning installations already incorporated into the Administration Building and the air conditioning materials delivered on site were not covered by the Fire Policy. No reason had been given in writing as to the reason why it was not so covered by the Insurance Co. or its assessor. The subject matter of the Fire Policy was described as follows:

28. Prima facie, the property insured included the whole building and the materials on site owned by the insured of whom the plaintiff was one. Air conditioning installations built in were part of the building in the course of construction and air conditioning materials delivered were property of the plaintiff.

29. Mr. Hso said in evidence that the Fire Policy merely covered the building work and nothing else because the sum insured was $1,907,154.06 which was the building cost. Mr. P.C. Wu, a witness for the plaintiff, agreed repeatedly with counsel for the defendant that the Fire Policy did not cover the air conditioning installations for the same reason. However, the evidence of both witnesses was an opinion of a layman. No doubt Mr. Hso's evidence might go some way to explain why the defendant accept the compromise. But his opinion was formed without first obtaining legal or expert advide on the law of insurance. Mr. Wu's evidence would not reflect the intention of the Architect or the plaintiff neither of whom had been consulted before the settlement.

30. Whether the Fire Policy covered the particular type of risks to a particular property is a matter depending on construction of document viz: the Fire Policy itself. The subject matter of insurance had been described in the schedule of the Fire Policy. The normal rule of construction is that the true meanings of the words in a document are to be found within the four corners of the document. Only when ambiguous terms are found in the document that extrinsic evidence may be called in aid of the interpretation. In this instance the words in the Fire Policy are clear and unambiguous. There is no reason to use the building contract in aid of the interpretation of the said Policy or of the schedule attached thereto. There is even less justification to call in aid the opinion of witnesses for the interpretation.

31. By virtue of Clause 20A of the building contract the defendant was obliged to insure in joint names against risks to the "works" which under Clause I must be referrable to the Contract Bills. There was nothing in the Contract Bills to include air conditioning installations which became part of the building after their installation. Thus vis-a-vis the plaintiff and the defendant the latter was not obliged to insure for the plaintiff in respect of air conditioning. The passage in Chitty on Contracts Vo1.II 23rd edition para.998 at page 482 to the effect that:

"If an assured voluntarily insures the interests of others as well as his own he is only obliged to hand over the balance, if any, of the insurance money after meeting the loss for which he insured himself, but if there was any obligation on the assured to cover the other interests, then it would seem that the latter have first call on the insurance money."

had no application. The plaintiff must fail in its claim for money had and received - particularly where the $244,653.08 were paid and accepted by the defendant for damages for the "works" only.

32. However, the defendant, rightly or wrongly had taken out the Fire Policy in joint names of itself and the plaintiff which prima facie covered the plaintiff's property as well. The plaintiff had put in a claim.

33. I find as facts that the defendant was an agent of the plaintiff for the purpose of putting the plaintiff's claim for damages to the air conditioning installations and materials under the Fire Policy. As such the defendant was under a duty to the plaintiff to act in good faith and with reasonable care, skill or judgment. The defendant effected a compromise with the Insurance Co. excluding the plaintiff's claim under the Fire Policy without reference to or authority of the plaintiff. In so doing the defendant had not acted in good faith or with reasonable care, skill or judgment. As a result the plaintiff's claim under the Fire Policy was prejudiced.

34. The plaintiff suffered damages as a result of the defendant's unauthorised compromise. This case is distinguishable from that of Maurice v. Goldsborough Mort & Co. Ltd. (1939) A.C.452 in that the Fire Policy in the present instance did cover the building and materials on site which were the plaintiff's property. I also find that the plaintiff's damage to be the amount the plaintiff would have a good chance to recover viz: $137,180.50 but for the defendant's settlement with the Insurance Co.

35. I shall find for the plaintiff in the sum of $137,180.50 with costs.

Representation: