Contract of insurance – Breach of warranty – Insured failed to keep proper records of stock – Warranty required proper records for insurance purposes, not records acceptable for family business – Meaning of ‘keeping proper records’

RICHFINE DEVELOPMENT LTD (T/A KENG FAI JEWELLERY) v RIVINGTON [2009] 3 HKC 430

Court of Appeal Civil Appeal No 257 of 2008 Tang VP, Cheung and Yuen JJA 2, 27 April 2009

Russell Coleman SC and Zabrina Lau (Piper Hong Kong) for the defendant.
Robert Whitehead SC and Karen Ma (Simon Ho & Co) for the plaintiff.

The plaintiff was a wholesale jeweller. The jewellery business was insured by the defendant’s Lloyd’s jewellers block policy for HK$7 million. On 28 March 2000, the plaintiff was robbed and claimed HK$5.9 million from the defendant. The plaintiff ’s written proposal and declaration was made ‘the basis of the contract’ and it declared it had kept proper records of its stock. On appeal, the defendant complained that the plaintiff was in breach of its warranty to keep proper records of all transactions, and as a result, the policy was never incepted. Alternatively it was argued that the plaintiff had failed to keep detailed records of transactions as required under Condition 1, or was unable to give ‘all information as to the property lost ... as the Underwriters may require’ under Condition 5.

The trial judge held that deficiencies in the plaintiff ’s record-keeping could be reflected in quantum and ordered the defendant to pay HK$4.7 million, after deductions were made to provide ‘substantial justice’ between insurer and insured. Evidence showed various flaws in the plaintiff ’s records, including almost 500 missing purchase and sale invoices. The defendant argued these flaws meant it was practically impossible to ascertain or verify whether the plaintiff had the stock and consignment stock it claimed to have on its premises; or the actual cost of the plaintiff ’s claimed own stock.

Held, allowing the appeal:
The requirement of proper records had to be viewed in the context of a proposal for insurance, the commercial purpose of which was the obtaining of insurance. The trial judge mistook what might be regarded as proper records for a small family business as proper records for insurance purpose. It was the essence of the matter that the underwriters should, if a claim arose, be able to look at the books and see whether the man claiming so much for his stock had got the stock and the price he paid for the stock.

Substantial justice was not a sufficient answer to a breach of warranty or condition precedent. The judge was unable to look at the books and see whether the insured had got the stock and the price he paid for the stock on the evidence available to him. He was obliged to adopt a broad-brush approach. It was true that the plaintiff had suffered substantial loss. But that was not the basis upon which the insurance cover was provided to the plaintiff. The trial judge’s findings of fact were marred by this view that the warranty only required proper records for the plaintiff’s business as opposed to proper records for the purpose of insurance.

The number of missing invoices, 495 in total, was significant. The plaintiff had failed to keep proper records and was in breach of warranty.

To ‘keep proper records’ in the context meant proper records would be maintained. The statement was not simply one of opinion or belief so that the answer could only be untrue if dishonest. Keeping proper records was not satisfied merely if the assured honestly believed the records to be proper. The plaintiff was also in breach of the conditions precedent. All information as the underwriter might require meant being able to look at the books and see whether the claimant had got the stock he was claiming for and what he paid for the stock. Moreover, 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 insured was by Condition 1 required to keep and make available for inspection. Moreover, such ‘detailed records’ must also have the attributes of ‘proper records' under the warranty. That was so whether or not Condition 1 was itself a condition precedent. The court was inclined to the view that Condition 1 was also a condition precedent.