Download Hong Kong Key - Summer 2009 (PDF, 256KB). - Kennedys

The HKey Summer
2009
Directors’ criminal liability
Directors may be criminally liable for a company’s attempted breach of the Securities and
Futures Ordinance.
The Court of Final Appeal has established
a key principle about directors’ criminal
liability in its recent decision in To Shu
Fai v Securities and Futures Commission
[2009] HKCU 423. The court ruled
that where a company is found guilty
of attempting to commit an offence
in breach of section 384(1) of the
Securities and Futures Ordinance (SFO)
by providing the Stock Exchange of Hong
Kong (SEHK) with false and misleading
information, a director of the company is
also criminally liable by virtue of section
390 of the SFO.
Factual background
The case arose out of a series of
events that led to the sale of a
large volume of shares in Daido
Group Ltd (Daido) by its chairman
and director, Mr To Shu Fai (Mr
To), and a subsequent public
announcement issued by Daido
in relation to share trading on the
day of the share sale.
Mr To had a controlling interest
in Top Search Synergy Associates
Ltd (Top Synergy), which was a
holding company that existed
for the sole purpose of
holding shares in Daido. In the
summer of 2003, Mr To (through
Top Synergy) obtained a loan of
HK$90m from TKR Finance, which
Inside this issue:
Page 3
Take Note!
New Appointments
Page 4
The Rotterdam rules
A new era for international trade
– probably
Page 6
The jeweller
Page 7
Reinsurers reassured
1

he used to acquire a controlling interest in Daido. As
transaction had taken place.
• Section 390 of the SFO imposed an accessory or
Mr To’s appeal was therefore dismissed. His conviction
security, TKR Finance held a charge over all the shares
concurrent liability on an officer of a company that
and fine of HK$50,000 were upheld. He was also
acquired.
The company secretary then told SEHK that none
was found guilty of an SFO offence. So because
ordered to pay the SFC’s investigation costs of
of the directors had traded shares that day. He was
Daido was liable, Mr To (as a director of Daido) was
HK$15,166.
In order to reduce Top Synergy’s exposure to the loan,
TKR Finance’s director Victor Chan requested that Mr
To reduce the debt by between HK$10m-HK$20m by
selling some of the shares in Daido. A discussion then
took place in July or August 2003 between Victor
Chan and Mr To regarding the sale of approximately
200 million shares. Mr To said that he could arrange
for some of his friends to buy the shares. During a
further discussion in early October 2003, Victor Chan
again pressed Mr To to sell the shares in order to
repay a portion of the loan and urged him to conclude
the sale quickly, and preferably by the end of October.
Share sale and non-disclosure
On 16 October 2003, TKR Finance sold the 200
million shares in Daido to three buyers. The proceeds
of the sale were paid to TKR Finance the following
day. However, Victor Chan did not immediately
inform Mr To of the transaction. The sale of the 200
million shares – as seen against the daily average of
about 350,000 shares over the previous 10 days –
attracted the attention of the SEHK.
During the afternoon of 16 October, the company
secretary was asked about the high turnover of
Daido’s shares that day. He was specifically requested
to ask all the directors whether any of them had
bought or sold shares that day, and whether they
knew of anything disclosable under the Listing Rules.
When the company secretary asked Mr To, he replied
that he did not trade any shares that day, and did not
refer to the proposed sale of the 200 million shares
he had previously discussed with Victor Chan. It did
not occur to him to ask TKR Finance whether the
asked to issue a public announcement to that effect.
The announcement dated 16 October 2003 was filed
with the SEHK, stating that Daido’s board of directors
noted the large volume of share trading that day but
did not know any reason for the increase in trading
volume. The announcement was published on the
website of the SEHK the same day.
Dual filing
Whenever a listed company files a copy of any
announcement, statement or circular with the SEHK,
it must make the same filing with the Securities and
Futures Commission (SFC). The company may, by
written authorisation, permit the SEHK to file any
announcement, statement or circular on its behalf
with the SFC. This is known as the “dual filing scheme”.
Earlier that year, Daido had given the SEHK a blanket
written authorisation to file any public announcement,
statement or circulars with the SFC. However, on
this occasion, the SEHK did not file the 16 October
announcement with the SFC.
Magistrates’ court ruling
The first hearing was in the magistrates’ court. Mr
Douglas TH Yau, the magistrate, came to the following
conclusions:
• Daido (via Mr To) knew – or should have known
– that the sudden increase in the trading volume
of its shares was the result of the sale of the 200
million shares. Consequently, Daido was guilty of
an offence under section 384(1) of the SFO for
providing false or misleading information to the
SFC.
also criminally liable for the same offence.
• Alternatively, even if the substantive offence under
section 384(1) was not completed – that is to
say, even if the 16 October announcement had
only been given to the SEHK and not to the SFC –
Daido would still be guilty of an attempt to commit
the offence. Consequently, Mr To would also incur
criminal liability by virtue of section 390.
The appeal
Daido and Mr To appealed to the Court of First
Instance on various grounds. However, Madam
Justice Beeson dismissed their appeal and upheld the
magistrate’s decision on both the substantive and
attempted offences. Mr To then appealed to the Court
of Final Appeal, which reaffirmed the decision of the
magistrate. The court made two important rulings:
(1) As it had behaved recklessly, Daido would have
been guilty of an attempt even if it had not
been convicted of the full offence under section
384(1).
(2) An attempt to commit an offence is itself an
offence under section 159H of the Crimes
Ordinance. Mr To would have been criminally
liable for Daido’s attempt to commit the section
384(1) offence. This was due to the combined
effect of sections 159H and 159G of the Crimes
Ordinance, which modified section 390 of the
SFO so as to impose an accessory or concurrent
liability on a corporate officer for the company’s
attempt to commit an offence under the SFO.
The lessons of the case
The criminal convictions of Daido and Mr To were the
first successful prosecutions for providing false and
misleading information under the dual filing scheme.
The SFC’s executive director of enforcement, Mr
Mark Steward, welcomed the decision and said: “The
case provides authoritative confirmation that criminal
prosecution is a real rather than theoretical risk. The
decision will pave the way for more enforcement
action, where appropriate, against listed companies
and their directors who provide false or misleading
information to the SFC or the SEHK”.
The lesson to be learnt from this case is that not only
can companies be convicted of attempting to commit
an offence under the SFO, but that directors may also
be found criminally liable for the same offence.
Chris Sharrock
Partner
c.sharrock@kennedys.com.hk
Jenny Zhuang
Solicitor
j.zhuang@kennedys.com.hk
2

Take Note!
In Hong Kong, Notaries are lawyers who
specialise in international transactions
and documentation for use outside
Hong Kong. Nearly all of them practice
as solicitors in addition to their Notarial
practice.
The office of Notary Public has a long and
distinguished history and its origins can be traced
back to ancient Rome. Most scribae, as they were
then called, began as mere copiers and transcribers,
before rising to prominent public office and advising
in private/public affairs. Some scribae had duties in
the Senate and Courts of Law in which they recorded
public proceedings, state papers and registered
decrees and judgments of the magistrates.
In Hong Kong, a Notary Public must be a qualified
solicitor, with at least 7 years’ experience and must
pass a rigorous examination set by the Hong Kong
Society of Notaries. In November 2005, of the
136 solicitors who sat the exam, only 29 passed!
Notaries are required to have a good knowledge of
international law, conflicts of law, Notarial theory and
practices; they must also have training as Notaries,
in addition to any training they may have had as
solicitors. After qualification, the Notary designs his
own seal which is registered with the High Court
in Hong Kong and the various Consulates. He is
also required to keep a log or ledger of the various
people who come before him to authenticate their
transactions or identities, etc.
When providing an affidavit, declaration or any
formally sworn document to an overseas Court, it is
In recent years, the need for Notaries has grown
significantly, due to the internationalisation of markets
generally and consequently for legal services. Banks
often insist on a Notary for loan signing and other
transactions where money is exchanged, especially in
the purchase of overseas properties.
We at Kennedys in Hong Kong have our own Notary
Public. Please direct all enquiries to Mr. Nigel Bacon,
Partner, who has been qualified as a Notary Public
since 1989.
Nigel Bacon
Partner
n.bacon@kennedys.com.hk
+852 2848 6300
New Appointments
Anthony Woo, Partner
John Yiu, Consultant
Vanessa Liu, Solicitor
Jenny Zhuang, Solicitor
I am delighted to welcome to back Anthony
to Kennedys to head up our Maritime and
International Trade practice. Anthony will
work with Vanessa, a shipping specialist,
who recently joined us. I would also like to
welcome John and Jenny to Kennedys and
wish them every success in the future.
The title notarius was adopted for this respected
position when a new form of shortand was invented,
called notae. Notarius was later applied exclusively
to those in the employ of high government officials,
including governors and secretaries to the Emperor.
In England, Notaries were originally appointed by the
Papal Legate and the majority of the members were
therefore clergymen. Later, the power to appoint
Notaries was vested in the King and devolved to the
Master of Faculties, giving rise to the modern Notary
Public.
generally necessary to procure a Notary’s signature
and seal to indicate that you are, in fact, who you
say you are on the document. Contracts often
require a Notary for the same reason. Wills, trusts,
and powers of attorney also in many countries
require a Notary’s signature and seal. Essentially,
trust is placed internationally on the Notary to
properly identify and authenticate the individuals
concerned. All fees charged by the Notary are laid
down by the Society of Notaries in a recommended
scale of charges.
Denise Pong
Trainee Solicitor
d.pong@kennedys.com.hk
Rupert Skrine
Senior Partner
r.skrine@kennedys.com.hk
3

The Rotterdam rules
A new era for international trade – probably
After six years of intergovernmental
negotiations, the United Nations General
Assembly has finally adopted the United
Nations Convention on Contracts for
the International Carriage of Goods
Wholly or Partly by Sea, also known as
the “Rotterdam rules” (the Rules). It has
scheduled a signing ceremony for the new
convention to take place on 23 September
2009 in Rotterdam. Before it can come
into force, however, the new convention
There are several significant changes. For certain
carriers, the Rules will apply door-to-door. The
Rules also attempt to strike a fair balance of risks
between carriers and cargo interests by removing
the “navigational fault” exception, increasing the
package/weight limitation and enhancing time
limitation for cargo claims. Other reforms are designed
to accommodate changing shipping practice. The
most significant reform is probably
the introduction of a “volume
contract” exception, which
permits the contracting
carrier to disregard the
what is known as “wet multimodal transportation”
in order to accommodate contracts of carriage
and insurance agreements that are nowadays
mainly concluded on a door-to-door basis. This is
a significant change from existing law, since most
current international regimes apply on a tackleto-tackle
or port-to-port basis. Although the Rules
would facilitate door-to-door transportation, the
parties will still be able to opt-out of the inland leg
of carriage (by truckers and railroads), so that the
Rules will only apply to the sea leg.
requires ratification by at least 20 nation
member states, and no reservations
Rules almost in their
entirety.
are permitted (except as regards the
provisions relating to jurisdiction and
arbitration, which are subject to express
affirmation). In addition, ratifying states
must discard earlier conventions.
The key
changes
This article highlights the
key changes made by
the Rules and compares
The Rules consist of 96 articles packaged in 18
chapters, and aim to replace the existing patchwork
of conventions and conflicting national laws that have
grown up in the absence of a multimodal transport
agreement. The new convention aims to offer the
possibility of a jurisprudential environment in which
international maritime trade can develop in such a
way as to allow traders to govern their transactions in
a more predictable and consistent manner.
them with the existing
international conventions.
• Door-to-door
transportation
coverage.
The Rules
were primarily
designed to
govern the liability
of carriers providing
4

• Volume contract. Current legal regimes such as
the Carriage of Goods by Sea Act 1971 (COGSA)/
Hague-Visby rules and the Hamburg rules give
the parties a degree of freedom of contract
– for example, the right to exempt expressly
contracts of affreightment. However, the Rules
extend this freedom to allow parties to conclude
a volume contract, enabling them (subject to
certain conditions) to opt-out of almost all the
responsibilities of carriers and shippers covered
in a contract of carriage, and to derogate from
the Rules. Put simply, contracting parties can
(with a few exceptions) essentially disregard the
Rules altogether. A “volume contract” is defined
in the Rules as a single contract of carriage that
specifies the quantity of goods carried in a series of
shipments during an agreed period of time.
This is a significant change because almost all
containerised cargo in the world is presently
transported under service contracts, which are
similar to volume contracts. But unlike service
contracts, volume contracts may (thanks to the
Rules) not have to comply with any international
maritime regimes. This could possibly result in
the transportation of the world’s cargo being
unregulated. In particular, if there are no restrictions
on the use of the volume contract so as to prevent
abuse, there is a risk that small and medium-sized
shippers will be at a serious disadvantage when
contracting with carriers.
• Shippers’ obligations. The Rules recognise that
shippers are in a better position than carriers to
identify risks associated with dangerous shipments.
Consequently, shippers are saddled with a number
of obligations under the new regime, including
the duty to provide information about cargo that
is of a hazardous nature. The Rules also expressly
impose liability on a shipper that breaches these
• Carriers’ liabilities. Carriers have increased
responsibilities under the Rules as a result of the
elimination of the navigational fault exception. This
exception allows a carrier to escape liability for
cargo damage if the loss stems from a navigational
fault or an error in navigation.
The Rules also expressly impose an obligation on
shipowners to ensure that their ships are seaworthy
throughout the voyage, and not just at the start
of the voyage as required under the current law.
Carriers’ bills of ladings will also be prohibited from
excluding liability for cargo damage either pre or
post “ship’s rail” (ie before cargo is loaded on the
ship or after discharge).
Furthermore, the package limitation has been
raised to 835 special drawing rights (SDRs) per
package (equivalent to about US$1,260 per
package) and weight limitation to three SDRs per
kilogram (equivalent to about US$4.44 per kg),
which is a substantial increase from the current
limitations under the COGSA/Hague-Visby rules.
However, the higher package limit can be avoided
if the parties enter into volume contracts. Carriers
may potentially take advantage of the volume
contract in an attempt to escape the increased
liability. Finally, the carriers can be held liable for
delay in delivery if the time for delivery has been
agreed in the contract of carriage.
• Maritime performing parties. The Rules also
introduce new concepts, including “maritime
performing parties”. This means that a carrier’s
employees, agents and independent contractors
will have the rights and obligations enjoyed by the
carrier without the need to include a Himalaya
clause (ie a contractual provision giving benefits
to a third person or entity who is not a party to the
contract) in the transport agreement.
However, all maritime performing parties will be
jointly and severally liable to cargo interests for
cargo claims. This means that, under the new
regime, cargo interests will have several targets
to pursue. This may have a substantial commercial
impact on (for example) terminal operators, who
fall within the definition of “maritime performing
parties”, since they will be forced to accept greater
risk and, as a result, higher insurance spend.
• Time limitation for cargo claims. The Rules
increase the time allowed for a cargo claim to be
filed against the carrier from the standard one year
(beginning with the date of delivery) under the
COGSA/Hague-Visby rules to two years.
• Jurisdiction and arbitration. The provisions on
jurisdiction and arbitration will not apply unless
the adopting state specifically declares that it
will be bound by them. Such a declaration may
be made – and withdrawn – at any time. If the
declaration is not made at the time the Rules come
into force in a particular state, it will take effect
six months after the declaration. The downside of
this freedom to allow a state to choose whether to
adopt the provisions on jurisdiction and arbitration,
or whether to include either or both of them, is
that it will lead to considerable variations between
nations. This will defeat the underlying objective
of the Rules to provide an internationally uniform
regime.
Future of the Rotterdam rules
At this stage, when the Rules have not yet been
signed let alone ratified, no-one can be sure whether
or not the new convention will succeed in establishing
a widely accepted international maritime regime.
Several legal commentators are concerned that the
length and complexity of the Rules may be a source of
litigation, as parties struggle to agree on the precise
meaning of some of the provisions of the convention.
Others are actually lobbying against ratification.
Many uncertainties remain and the fate of the Rules
will depend on several factors, especially on how many
and which countries will ratify the Rules and how
quickly they will come into force. It will only be when
the 20th nation has ratified convention and the Rules
have come into force, that it will be possible to start
assessing their practical impact on international trade.
Anthony Woo
Partner
a.woo@kennedys.com.hk
Vanessa Liu
Solicitor
v.liu@kennedys.com.hk
obligations.
5

The jeweller
Insureds need to be careful if they wish to successfully make a
claim under a policy.
This article examines the recent Court of
Appeal decision of Richfine Development
Ltd t/a Keng Fai Jewellery v Hugh Rupert
Rivington [2009] HKCU 583 which
discusses warranty breaches and waivers
of a Lloyds jewellers’ block policy.
When the Policy became due for renewal, Anglo’s
agent visited the office premises of Richfine with a
pre-completed proposal form. During the meeting,
Richfine’s director informed Anglo’s agent that Richfine
was stocking 50% less gold than what was listed in the
original Policy. Anglo’s agent assured the director that
there was no need to amend the proposal form as gold
trading posed less risk and renewed the Policy based
Background
Richfine Development Ltd (Richfine) operated a
on the information provided when the Policy was first
entered into in 1998 (the Renewed Policy).
wholesale jewellery business which took out a Lloyds
jewellers’ block policy with Lloyds Syndicate (HRR),
through a Hong Kong agent, Anglo East Surety
Limited (Anglo). A jewellers’ block policy is an “all
risk” coverage for hazards and risks involved in the
jewellery industry. As with all policies, the Insurer is
required to list out exclusions for coverage. Typical
risks that are covered in such policies include burglary,
robbery, shoplifting, grab and run, fire and accidental
damage.
The claim
Richfine later made a claim under the Renewal Policy
in the sum of HK$6,199,343 for consequential
loss suffered as a result of a robbery. HRR refused
to pay the claim on the basis that Richfine had
breached a warranty contained in a ‘basis’ clause
of the proposal form which related to the agreed
standards of transactional record keeping. HRR
alleged that “[Richfine]’s records were inadequate…
[Richfine] could not satisfactorily justify any element
Court of first
instance decision
The crux of the issue was
what constituted a ‘proper
record’. At first instance,
the court, taking into
The entering of the policy
In order to facilitate obtaining insurance coverage,
at least two meetings took place between a
representative from Anglo and a director from
Richfine. Thereafter, the director took out policy cover
on behalf of Richfine via Anglo, with HRR for a period
of one year in 1998 (the Policy).
of its claim by producing sufficient contemporary
records supported by invoices and purchase notes…
[Richfine] did not keep proper records… [Richfine]
has been in breach of warranty from the date of the
Proposal Form. Therefore, the policy never incepted
and as a consequence [Lloyds] was never on risk…”.
Accompanying the letter of rejection was a cheque in
the sum of HK$46,700, being the insurance premium
for the Renewal Policy.
consideration the relative
size, family-run nature
and operational practices of Richfine, concluded that
the record keeping methods were “appropriate to the
prevailing circumstances” and held that no warranty
had been breached. The Court of First Instance also held
that the policy was valid because proper record keeping
was not a warranty or condition precedent to liability.
Even if it were a warranty, Anglo, having inspected the
accounting papers, invoices and other documents and
having indicated that Richfine’s related keeping system
was satisfactory when the Policy was entered into, and
being aware that the original system was in operation
and made no indication that this was unsatisfactory
when the Policy was renewed, Anglo (as the Insured’s
agent) had waived any breach of warranty brought
about by Richfine’s substandard record keeping.
6

The court of appeal decision
HRR appealed to the Court of Appeal where the Court
of First Instance decision was reversed. The Court
of Appeal judge held that Richfine had breached the
warranty of keeping proper records and HRR had
not waived the warranty; and as a result dismissed
Richfine’s claim under the Renewed Policy (see
reasoning below).
The extent of the warranty
Richfine argued that proper record keeping could
not be regarded as a warranty in consideration of it
being granted insurance coverage. Tang VP was of
the opinion that proper record keeping in this context
could only mean proper records would be maintained.
Proper record keeping could not be satisfied even if the
Insured honestly believed the records to be proper.
Reinsurers
reassured
The main legal issue on appeal was whether Richfine
was in breach of a warranty, as a condition precedent
to liability, arising by reason of a “basis” clause in the
proposal form.
What is a “basis” clause?
This principle was explained by Viscount Haldane in
Dawsons Ltd v Bonnin (1922). Viscount Haldane
said that “when answers 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… 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”.
Keeping proper records
Tang VP agreed with Branson J in Shoot v Hill
(1936) 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”. Tang VP ruled that the requirement of
proper record keeping had to be viewed in the context
of a proposal for insurance, the commercial purpose
of which was the obtaining of insurance and that the
findings of the learned judge were marred by his view
that the warranty only required proper records for the
Richfine’s family business.
Waiver
Having heard Counsels’ argument, Tang VP concluded
that having the authority to fill in the proposal form
on behalf of an Insured would not clothe the agent
with actual or ostensible authority to waive any
flaw/defect in Richfine’s accounting system. As for
imputation of knowledge, unless Richfine had told the
agent that if a claim arises, the underwriters would not
be able to look at the books and see whether Richfine
had got the stock and what it paid for, the agent could
not be said to have waived the warranty.
Conclusion
This case illustrates that Insureds must be aware
of the extent of the obligations they undertake,
particularly when a breach of those obligations will
prevent the inception of the policy, resulting in refusal
to meet a claim under the insurance policy.
Hailien Tam
Trainee Solicitor
h.tam@kennedys.com.hk
The House of Lords recently handed
down its much-anticipated judgment in
the Lexington v Wasa case. In what is
good news for reinsurers, the appeal was
allowed and clarity provided to reinsurers
on the scope of their back-to-back cover.
Lexington provided property damage cover to the
Aluminium Company of America (Alcoa) between
1st July 1977 and 1st July 1980. Lexington entered
into a contract of reinsurance with Wasa for the same
three-year period. Both the contract of insurance
and reinsurance were losses occurring / occurrence
policies.
Alcoa was ordered by the US Environmental Protection
Agency to remove waste caused by pollution going
back as far as 1942. Following this order Alcoa began
proceedings in the state of Washington against
various insurers who were on cover between 1956
and 1985 seeking a declaration of entitlement to
insurance coverage in respect of the clean up costs.
The Washington Supreme Court held that the direct
insurance was governed by Pennsylvanian law (where
Alcoa was incorporated) and ordered Lexington to
pay Alcoa the full remediation costs for pollution
that occurred at Alcoa’s sites, including that which
occurred before and after Lexington was on cover, on
the basis that at least some of the damage occurred
between the Policy years of July 1977 and 1980
when Lexington was on risk.
Lexington settled Alcoa’s claim for US$103 million
and sought to recover from Wasa who had been the
reinsurer on risk for the period in question.
The reinsurance contract incorporated the terms of
the direct policy and was subject to a full reinsurance
clause containing a follow the settlements provision,
however, it did not contain an express choice of law.
Although the reinsurance policy did not contain an
express choice of law, both parties accepted that
English law applied.
Wasa brought proceedings in London seeking
a declaration that the reinsurance contract was
governed by English law and it was therefore only
liable for the costs of remedying damage, which
occurred during the three-year period of reinsurance,
and not the damage, which occurred before or after
that period. The judge at first instance agreed with
Wasa and Lexington appealed to the Court of Appeal.
Court of Appeal
In 2008, the Court of Appeal, allowed Lexington’s
appeal held that where insurers agreed that policies of
insurance and reinsurance provided for back-to-back
cover for the same period on the same conditions, the
same or equivalent wording should be interpreted in
both the insurance and reinsurance contract, unless
7

the contract wording specifically provided for the
In delivering the leading Judgment, Lord Collins found
• Although the terms of a reinsurance contract may
contrary and that differences in governing law alone
that at the time the reinsurance was entered into
be construed to be consistent with the terms of
would not stop contracts being back-to-back. Wasa
back in 1977, it would not have been clear that
the insurance (back-to-back), whether the risk has
was therefore ordered to pay Lexington.
Pennsylvanian law was applicable to the direct policy,
been assumed under the reinsurance is a question
The Court of Appeal concluded that reinsurers who
did not want words in the reinsurance policy to be
construed in accordance with the wording of the
underlying policy should clearly indicate so in the
or how Pennsylvanian law would have determined
coverage for Alcoa’s losses and as the reinsurance
was entered into in the London reinsurance market it
should be governed by English law.
of construction of the reinsurance contract
against the relevant background and surrounding
circumstances.
• Where the insurance and reinsurance contracts do
wording of the reinsurance contract.
Rather helpfully the Lords recognised that clauses
not contain an express choice of law they may be
The Court of Appeal’s decision was, not surprisingly,
appealed by Wasa.
House of Lords
On 31 August 2009 their Lordships unanimously
gave judgment in favour of Wasa, allowing the appeal.
Whilst accepting that the normal commercial purpose
of proportional facultative reinsurance should be to
provide back-to-back cover for the direct policy, their
Lordships held that where the contracts are governed
by different laws, it remains a question of construction
of both contracts as to what risk is assumed.
The Lords held that both policies were on a loss
occurring basis and under English law, the insurer/
reinsurer is only liable to indemnify for loss / damage
that occurred during the policy period.
contained in a reinsurance contract are inserted for
good reason and held that:
• Reinsurance is an independent contract to the
direct insurance. It is not to be treated as simply
insuring the direct insurer’s own liability, but
the ‘period of risk’ which is to be determined in
accordance with the policy provisions.
• There is no rule of construction, and no rule of law,
that a reinsurer must respond to every valid claim
under an insurance policy, irrespective of the actual
terms and conditions of the reinsurance contract.
• As an independent contract, the reinsurance may
contain independent terms requiring satisfaction
before reinsureds can claim.
• The words “full reinsurance” and “follow the
settlements” clauses did not have the effect of
bringing within cover a resinsurance risk that, on
the true interpretation of the policy of reinsurance
would not otherwise be covered.
governed by different laws. It remains a question
of the construction of each contract as to under
which applicable law the risk was assumed.
In the case of Wasa the Lords were not prepared
to ignore the fact that the parties had entered into
the reinsurance contract on the basis of English law
and that the clause setting out the period of cover
would be given its ordinary interpretation according
to English law and not the interpretation given to the
underlying insurance under Pennsylvanian law.
The House of Lords further clarified that the fact a
reinsurance policy was back-to-back did not mean
that it merely indemnified the reinsured’s losses
but rather that it was an independent contract that
reinsured a proportion of the underlying risk.
Julian Wallace
Partner
j.wallace@kennedys.com.hk
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