RHB Islamic Bank Berhad v AmGeneral Insurance Berhad (02(f)35-05/2018(B))

AMGENERAL INSURANCE BERHAD [COMPANY NO.: 44191-P] (FORMERLY KNOWN AS KURNIA

SUN LIFE MALAYSIA TAKAFUL BERHAD [COMPANY NO.: 689263-M] (FORMERLY KNOWN AS CIMB AVIVA

VEHENG GLOBAL TRADERS SDN BHD [COMPANY NO.: 119835-W] … RESPONDENTS (CONSOLIDATED WITH) IN THE FEDERAL COURT OF MALAYSIA AT PUTRAJAYA (APPELLATE JURISDICTION) CIVIL APPEAL NO. 02(f)-36-05/2018(B) CIVIL APPEAL NO. 02(f)-37-05/2018(B) BETWEEN VEHENG GLOBAL TRADERS SDN BHD [COMPANY NO.: 119835-W] … APPELLANT

AMGENERAL INSURANCE BERHAD [COMPANY NO.: 44191-P] (FORMERLY KNOWN AS KURNIA INSURANS (MALAYSIA BERHAD)) 2

SUN LIFE MALAYSIA TAKAFUL BERHAD [COMPANY NO.: 689263-M] (FORMERLY KNOWN AS CIMB AVIVA TAKAFUL BERHAD) … RESPONDENTS CORAM: ZAHARAH IBRAHIM, CJM DAVID WONG DAK WAH, CJSS RAMLY ALI, FCJ BALIA YUSOF WAHI, FCJ ALIZATUL KHAIR OSMAN KHAIRUDDIN, FCJ JUDGMENT OF THE COURT INTRODUCTION [1] This appeal, Civil Appeal No. 02(f)-35-05/2018, was heard together with Civil Appeal No. 02(f)-36-05/2018 (B) (Appeal No. 36) and Civil Appeal No. 02(f)-37-05/2018 (B) (Appeal No. 37). The appellant in both Appeals No. 36 and No.37 is Veheng Global Traders Sdn. Bhd., the 3rd respondent in this appeal. [2] The background facts pertaining to these two appeals (Appeals No. 36 and No. 37) have been set out in my brother Justice Ramly Ali’s judgment. As with the other two appeals (supra), this appeal arose out of the decision of the Court of Appeal which had allowed the appeals brought by the 1st and 2nd respondents against the decision of the High Court. The High Court had granted the claims of both the 3rd respondent and the appellant. 3 SALIENT FACTS [3] For the purpose of this judgment, the salient facts pertaining to this appeal which we adopt from the appellant’s written submission (with some modification) are as follows:- [4] The 3rd respondent had purchased 4 insurance policies from the 1st and 2nd respondents to protect all its assets located at Lot 711 A, Jalan Batu Tiga, Sungai Rasau, Seksyen 16, 40200, Shah Alam for a period from 1.7.2008 to 30.6.2009 against fire. One of the insurance policies and the one which we are concerned with here, was Fire Insurance Policy no. HB-0-08-H000005 (Fire Material Damage Policy No. HB-0-08-H000005) issued to the insured in the sum of RM45,000,000.00 (hereinafter referred to as FMD Policy 005). [5] In respect of the FMD Policy 005, the 2nd respondent is the co-insurer via CIMB Aviva Takaful Policy No: THOOFR01080000004. From the total insured sum of RM45,000,000.00 the 1st respondent and 2nd respondent insured the sum of 87.5% and 12.5% respectively. [6] The appellant (RHB Islamic Bank Berhad) had granted a Murabahah revolving credit facility to the 3rd respondent that was subsequently restructured to a Commodity Murabahah Overdraft-i’ facility totalling a sum of RM30 million vide letter of offers dated 29.6.2006 and 6.4.2009 and a Facility Agreement dated 23.6.2009. [7] It is not disputed that in the FMD Policy 005, the appellant is cited as the MORTGAGEE over the 3rd respondent’s assets (see the Schedule to the FMD Policy 005). There is also a Mortgagee Clause in the said 4 FMD Policy 005 namely Clause 006(A) that sets out the terms and conditions applicable to the appellant. [8] Fire broke out at the 3rd respondent’s premises on 5.1.2009 and damaged the 3rd respondent’s assets and properties extensively. The 3rd respondent proceeded to make a claim against the 1st and 2nd respondents under the 4 policies of insurance mentioned earlier. [9]

(a) the Mortgagee Clause that is Clause 006(A) of the FMD Policy 005; and 5

(b) the Deed of Assignment executed between the appellant and the 3rd respondent of only the proceeds of the fire insurance in respect of FMD Policy 005, notice of which according to the appellant was provided to the respondents. [12] It was the appellant’s contention that the 1st and 2nd respondents are liable to pay under the FMD Policy 005 based on the Mortgagee Clause regardless of whether the fire was deliberately caused by the 3rd respondent’s conduct, neglect or breaches under the said Policy as the same will not affect or invalidate the appellant’s claim. [13] Thus the central issue in this judgment is whether the appellant is entitled, pursuant to the Mortgagee Clause, to the insurance proceeds from the 1st and 2nd respondents. THE DECISION OF THE HIGH COURT [14] A stated earlier, the High Court after a full trial held that the appellant was entitled to the said insurance proceeds. [15] The learned High Court judge disagreed with the 1st and 2nd respondents’ defence, inter alia, that they were not liable to pay the appellant since there was no privity of contract between them and the appellant and as such the appellant did not have the locus standi to bring this suit. The learned judge however found that the appellant had the necessary locus standi to sue the 1st and 2nd respondents by virtue of the Mortgagee Clause. 6 [16] On the appellant’s entitlement to coverage, the learned High Court judge appeared to agree with the appellant’s submission as follows: “It was the stance of the 2nd Plaintiff [the Appellant] that based on the mortgagee clause which makes it clear that any loss or damage shall be payable to the 2nd Plaintiff irrespective of whether there is any act or neglect on the part of the insured (1st Plaintiff) [3rd Respondent] or whether the insurer had breached the terms and conditions of the policy. Thus even if the 1st Plaintiff’s claim is repudiated and there is no liability to pay the 1st Plaintiff, the Defendants [1st and 2nd Respondents] must pay the 2nd Plaintiff based on the mortgagee clause and the Defendants may be subrogated to the rights of the mortgagee and be put in the position of the mortgagee and claim the sums paid from the Defendants.” [17] On the assignment issue, the learned judge found as follows:-

(a) condition 9(d) of the FMD Policies and FCL Policies applies only where the consent of the 1st and 2nd respondents must be obtained in order to assign the fire policy before the occurrence of the fire loss.

(b) that condition 12 which requires notification of claim to be made within 15 days after loss or damage does not extend to the appellant as the appellant had only come into the picture upon the assignment being created by the 3rd respondent. [18] On quantum, the learned judge ordered that the 1st and 2nd respondents pay to the appellant the sum of RM38,799,784.00 with 5% interest per annum from the date of filing of the writ until full payment. The 7 learned judge had evaluated the 3rd respondent’s stock loss at RM38,799,784.00. THE DECISION OF THE COURT OF APPEAL [19] At the Court of Appeal, the appellant justified its claim to the insurance proceeds on two fronts. First, on the Mortgagee Clause and second, on the Deed of Assignment dated 14.5.2009 (‘Deed of Assignment’). The High Court had allowed the claim on both grounds. The Court of Appeal reversed the High Court’s decision. In reversing the High Court’s decision, the Court of Appeal found as follows:-

(a) The Mortgagee Clause [20] In respect of the Mortgagee Clause, the Court of Appeal was of the view that the appellant had no locus standi to sue for the proceeds because the Policy was only between the 1st, 2nd, and 3rd respondents. While the appellant may have been named in the Policy, it is not a party to it. Applying the doctrine of privity of contract, the appellant was a stranger to the contract and accordingly it has no right to claim for the insurance proceeds. [21] In essence the Court of Appeal’s reasoning on this issue may be summarized in the following manner:

(i) The mere mention of the appellant as a mortgagee in the FMD Policy is not sufficient confer a right in the appellant (a third party) to sue the insurer. In other words as the appellant is 8 not a contracting party to the FMD Policy it has no locus to sue the insurer for the insurance proceed.

(b) The Deed of Assignment [22] The Court of Appeal agreed that the assignment was validly created under section 4(3) of the Civil Law Act 1956. However, the Court opined that an assignee cannot be in a better position than that of the assignor. Considering that the assignor was found to have no right to the proceeds, the assignee too is equally disentitled. 10 [23] The Court of Appeal further opined that the two claims respectively under the Mortgagee Clause and the Deed of Assignment were in conflict. On the one hand, the appellant laid its claim as though it was a contracting party vide the Mortgagee Clause, while on the other hand, it claimed as an assignee under the Deed of Assignment. [24] Lastly, the Court below reiterated that the 3rd respondent had breached the Policy and had no right to indemnity. In this sense, the appellant’s claim had no footing because the 3rd respondent was not entitled to the proceeds having breached the contract. In short, the 3rd respondent was not entitled to the insurance proceeds and hence, he could not have had anything to assign to the appellant.

(c) Quantum [25] Besides liability, the Court of Appeal also disagreed with the findings of the High Court judge in respect of the RM38,799,784.00 awarded to the appellant. The Court of Appeal noted that the policy being an “unvalued policy” and “indemnity in nature” required the insured to prove actual loss arising from the fire incident. This the 3rd respondent failed to do. The Court of Appeal concluded that theirs was an exaggerated claim and that it was not proved in accordance with basic principles of evidence. [26] The Court of Appeal seemed to agree that taking into account the Mestari Adjuster’s report (the 1st and 2nd respondent’s own adjusters) the stock loss would not have exceeded RM23,360,000.00. 11 THE LEAVE QUESTIONS [27] Aggrieved with the Court of Appeal’s decision, the appellant appealed against the whole of the decision of the Court of Appeal. On 3.5.2018, this Court allowed the following Leave Questions:

(i) Whether the Mortgagee Clause which is a standard clause in all fire policies, where a mortgagee’s interest is noted, confer the mortgagee with the right / locus to sue the insurer to recover any loss caused by the fire?

(v) Is it inconsistent for a mortgagee to sue under the terms of the Mortgagee Clause and also to claim for the insurance proceeds where the Deed of Assignment of the Insurance Proceeds is executed in favour of the Mortgagee 4½ months after the occurrence of the fire? OUR DECISION Mortgagee Clauses [28] Before proceeding to discuss this subject, we need to state some general principles with regard to the doctrine of privity of contract. The doctrine of privity of contract is the general rule whereby a stranger to a contract has no rights to sue on the same. This is the case even if the said non-party receives benefits under that contract. See generally: Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847; and Kepong Prospecting Ltd v Schmidt [1968] 1 MLJ 170. [29] That being said, the doctrine has its exceptions. Trusts being creatures of equity, are one such exception. In a typical case, a settlor bequeaths his property to another, called the trustee, for the benefit of another. Courts of equity have always enforced claims by beneficiaries against trustees even though the former are, strictly speaking, strangers to the original agreement between the settlor and the trustee. See: Takako Sakao (f) v Ng Pek Yuen (f) & Anor [2009] 6 MLJ 751, [29]. [30] Statutes may also operate as exceptions to the rule. The United Kingdom enacted the Contracts (Rights of Third Parties) Act 1999 to expressly allow third-parties to enforce contractual claims. 13 [31] A similar situation is true of contracts for motor insurance. Originally, a person named as a beneficiary in an insurance policy but not himself the policyholder, was not entitled to indemnity from the insurer due to lack of privity. See generally: Vandepitte v Preferred Accident Insurance Co. [1933] AC 70. [32] The law in England was later amended to expressly confer named beneficiaries the right to claim indemnity from insurance companies even if they are not the policyholder. A similar provision is found in our road traffic legislation. See:

(i) Section 36(4) of the Road Traffic Act 1930 (England);

A policy between the insurer and the mortgagee as insured. It is generally recognized by the courts that both the 14 mortgagee and the mortgagor have an insurable interest in the mortgaged property since "a person has an insurable interest in property when he sustains such relations with respect to it that he has a reasonable expectation, resting on a basis of legal right, of benefit to be derived from its continued existence, or of loss or liability from its destruction." Although this method affords full protection to the mortgagee, it is seldom used because of the disadvantage to the mortgagee of paying the premiums, and the disadvantage to the insurer in the difficulty of supervising the risk, and because of the possibility of fraudulent collusion between the mortgagor and mortgagee.

An assignment of the policy to the mortgagee by the insured mortgagor. By this method the protection of the mortgagee is entirely dependent upon the conduct of the mortgagor, for when an assignment is made without an actual transfer of the subject of the insurance, the validity of the policy depends upon the acts or neglect of the mortgagor. In other words, the mortgagee stands in the position of his mortgagor with respect to the insurance contract.

A 'loss-payable clause' in the policy. Under this plan the policy contains an endorsement as follows: "Loss, if any, payable to - mortgagee, as - interest may appear, subject nevertheless to all the conditions of this policy." Under this clause the mortgagee is merely an appointee of the insured mortgagor, and is subject to all the defenses to which the insured would be subject. Consequently this method has the same disadvantages with respect to the mortgagee as an assignment.

A 'Standard, or Union, Mortgage Clause' in the policy. This is now the most commonly used and the best method of protecting the interest of a mortgagee in insured property. The New York Standard Mortgage Clause is the leading form 15 of the clause and is as follows: "Loss or damage, if any, under this policy, shall be payable to - as - mortgagee (or trustee) as interest may appear, and this insurance, as to the interest of the mortgagee (or trustee) only therein, shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property, nor by any foreclosure or other proceedings or notice of sale relating to the property, nor by any change in the title or ownership of the property, nor by the occupation of the premises for purposes more hazardous than are permitted by this policy; Provided, that in case the mortgagor or owner shall neglect to pay any premium due under this policy, the mortgagee (or trustee) shall on demand pay the same. "Provided also, that the mortgagee (or trustee) shall notify this company of any change of ownership or occupancy or increase of hazard which shall come to the knowledge of said mortgagee (or trustee) and, unless permitted by this policy, it shall be noted thereon and the mortgagee (or trustee) shall, on demand, pay the premium for such increased hazard for the term of the use thereof; otherwise this policy shall be null and void. "This company reserves the right to cancel this policy at any time as provided by its terms, but in such case this policy shall continue in force for the benefit only of the mortgagee (or trustee) for ten days after notice to the mortgagee (or trustee) of such cancellation, and shall then cease, and this company shall have the right, on like notice, to cancel this agreement. "Whenever this company shall pay the mortgagee (or trustee) any sum for loss or damage under this policy and shall claim that, as to the mortgagor or owner, no liability therefor existed, this company shall, to the extent of such payment, be thereupon legally subrogated to all the rights of the party to whom such payment shall be made, under all securities held as collateral to the mortgage debt or may, at its option, pay to the mortgagee (or trustee) the whole principal due or to grow due on the mortgage with interest, and shall thereupon receive a full assignment and transfer of the mortgage and of all such other 16 securities; but no subrogation shall impair the right of the mortgagee (or trustee) to recover the full amount of - claim.” [Emphasis added]

(a) The Impugned Mortgagee Clause [34] The Mortgagee Clause which is at issue in the present case reads as follows: “C006(A) Mortgagee (Chargee) Clause 1 Loss, if any, payable to (as per Schedule) as Mortgagee (Chargee) as interest may appear in this Insurance, as to the interest of the Mortgagee (Chargee) only therein, shall not be invalidated by any or neglect of the Mortgagor (Chargor) or the Owner of within described property nor any foreclosure or other proceedings or notice of sale relating to the property or by the occupation of the premises for purposes more hazardous than are permitted by this Policy, or the non-occupation thereof, or by any other risk of increase taking place in the property insured hereunder. Provided that in the case the Mortgagor (Chargor) or Owner shall neglect to pay any premium due under this Policy the Mortgagee (Chargee) shall on demand pay the same. Provided also that the Mortgagee (Chargee) shall notify the Company of any non-occupancy or any change of ownership or occupancy or increase of hazard which shall come to the knowledge of the said Mortgagee (Chargee) and unless permitted by this Policy it shall be noted thereon and the Mortgagee (Chargee) shall on demand pay the premium for such increased hazard for the term thereof otherwise this Policy shall be null and void. And it is further agreed that whenever the Company shall pay the said Mortgagee (Chargee) any sum in respect of loss or 17 damage under this Policy and shall claim that as to the Mortgagor (Chargor) or Owner no liability thereof existed, the Company shall become legally subrogated to all the rights of the Mortgagee (Chargee) to the extent of such payment but not so as to impair the right of the said Mortgagee (Chargee) to recover the full amount of any claim it may have on such Mortgagor (Chargor) or Owner or any other party or parties insured hereunder or from any securities or funds available.” [Emphasis added] [35] At first blush, reading only the first paragraph of the Mortgagee Clause, it appears to constitute a ‘loss payable’ clause. As pointed out by Harry Cooper (supra), a ‘loss payable’ clause is no different from an assignment. In explaining ‘loss payable’ clauses, the Court below and the 1st and 2nd Respondents here rely on the following extract from Malcolm Clarke in The Law of Insurance Contracts (2nd Edition) which reads as follows (at paragraph 5-1A): “Some policies direct that the insurance money shall be paid to a named third party, such as a creditor of the insured. Such a clause, known as a loss payable clause, gives no rights to the loss payee unless it also constitutes or evidences an assignment of the insured’s rights under the policy or evidences an assignment of the insured’s rights under the policy or evidences the fact that the designated person is an original assured’. A simple form of the loss payee clause, however, is not as an assignment of the policy proceeds. Such a clause purports to benefit a third party, the loss payee, and is subject to the rule of privity against enforcement by the third party, and subject to the exceptions to or evasions of that rule in the law of insurance discussed the pages that follow. Moreover, the loss 18 payee can be in no better position that the insured through whom he is, if at all, entitled to the insurance money.” [Emphasis added] [36] In this regard, we find, with respect, the Court of Appeal failed to read the Mortgagee Clause in its entirety. The second paragraph which is emphasised in paragraph 24 above appears to have escaped the Court of Appeal’s scrutiny. Reading the clause as a whole, it is in our view, that word for word, it is a Standard New York mortgage clause (also known simply as a “standard mortgagee clause”). It is not merely a ‘loss payable’ clause. [37] We have, by reproducing the article by Harry Cooper (supra), highlighted the stark difference between the two concepts. But we think for clarity, it would be pertinent to explore in greater detail the mechanism of mortgagee clauses. [38] One of the earliest cases on the subject is the decision of the New York Court of Appeals in Hastings v Insurance Co. (1878) 73 N.Y. 141. The facts were these. The relevant insurance policy contained a mortgagee clause effectively stipulating that should the insured, whether prior or subsequent to the issue of the policy enter into some other policy, his insurance coverage thereunder would be reduced. The mortgagee clause was preceded by the following words (very much like the one in the present case): “this insurance, as to the interest of the mortgagee only, shall not be invalidated by any act or neglect of the mortgagor or owner of the property insured.” [Emphasis added] 19 [39] The insured subsequently took out another insurance policy. The question was whether the mortgagee (like the mortgagor) would suffer reduced coverage as a result of the insured (mortgagors) conduct. The New York Court of Appeals held that it was not reduced because the mortgagee clause constituted a separate and independent contract. [40] The bulk of the issues raised and answered in the aforesaid case, to our mind, answer those raised in the present appeal. [41] We consider first, the judgment of Rapallo J, who in concurrence with the majority held as follows: “I think the intent of the clause was to make the policy operate as an insurance of the mortgagors and the mortgagees separately, and to give the mortgagees the same benefit as if they had taken out a separate policy, free from the conditions imposed upon the owners, making the mortgagees responsible only for their own acts. It established a privity between the company and the mortgagees, and provided that, notwithstanding that the insurance might be invalidated as to the mortgagors, it should, nevertheless, protect the mortgagees; and, as a consideration for this undertaking, it was stipulated that, in case the company should be called upon to pay the mortgagees, under circumstances which discharged it from liability to the mortgagors, it should be indemnified by subrogation, or an assignment of the mortgage and all securities held by the mortgagees for the mortgage debt. This provision, in case the policy were invalidated as to the mortgagors, made it, in substance, an insurance solely of the interest of the mortgagees, by direct contract with them, unaffected by any questions which might exist between the company and the mortgagors. The same consequences would 20 follow, pro tanto, from a partial, as from an entire invalidation, or a reduction of the policy as to the mortgagors.” [Emphasis added] [42] With Rapallo J’s judgment as the backdrop, we now turn to consider the views of Miller J who wrote for the majority. The learned judge began his judgment by noting that at the forefront, the Court must give effect to the intention of the parties to the insurance contract. By including the mortgagee clause, the insurers clearly manifested an intention to protect the mortgagee. Miller J held as follows: “A contract of insurance stands upon precisely the same basis as any other agreement and, in accordance with a general rule, must be interpreted according to its purport in connection with the facts and circumstances which attend its execution. The main object should be to carry out and to give effect to the intention of the parties... At the time when the contract, expressed in the entry upon the policy of insurance, and in the stipulation to which we have referred, was made, it appears to have been quite obvious that the design of the parties was to secure to the plaintiffs the amount named in the policy of insurance in case of loss by fire, and that the defendant should pay the whole amount of any loss, with the right of subrogation, in the place of the plaintiffs, in case of the happening of the contingency stated therein.” [Emphasis added] [43] He then went to consider the privity argument which is in effect the same as the argument before. The learned judge rejected such a claim on the grounds that the mortgagee clause effectively created a separate 21 and independent contract between the insurers and the mortgagee. He held: “It is claimed, however, by the appellant's counsel, that the policy was an insurance of the interest of the owner of the property solely; that such owner was the assured, and the defendant only agreed to make good the loss of such owner; and inasmuch as another policy existed at the time, in favor of such owner, although entirely unknown to both the plaintiffs and the defendant, the latter was entitled to the benefit of the condition contained in its policy, which declares that in case of any other insurance, whether prior or subsequent to the date of the policy, the assured was entitled to recover no greater proportion of the loss sustained than the sum insured bears to the whole amount insured thereon. This position cannot, I think, be maintained. Prior to the time when the mortgage clause was entered upon the policy, the word "assured" referred to the owner, and it is hardly to be assumed that the mortgagees would have accepted such a provision if there was any reason to suppose that they would be affected by any prior insurance. They would, no doubt, have demanded a separate policy as mortgagees, instead of trusting to the hazard and uncertainty of pursuing a remedy upon a policy of which they had no knowledge, and against a company to which they were strangers, and in regard to whose responsibility they had no information whatever.” [Emphasis added] [44] The gist of what Miller J held was this. The Mortgagee Clause manifested a separate and independent contract between the insurer and the mortgagee. The consideration for the contract was the right of subrogation. With this right, the insurer was required to reimburse the mortgagee the money owed, but by doing so, acquired the right to take 22 the place of the mortgagee to sue the party at fault for the recovery of the sum paid by the insurer to the mortgagee. [45] Miller J in the following words does not expressly describe the subrogation as being consideration but reading the following words with the concurring judgment of Rapallo J (supra), it can be inferred that, that was what Miller J meant. We reproduce below Miller J’s views which we consider to be self-explanatory: “The legal effect of the mortgage clause was, that the defendant agreed that in case of loss it would pay the money directly to the mortgagees; and they were thus recognized as a distinct party in interest. It created a new contract from that time with the mortgagees, the terms of which most clearly indicate that it had no relation to the application of the condition referred to. The insurance had been to the owner, and the additional provisions, which were incorporated in the policy by the mortgage clause, created a distinct contract with the mortgagees. It was an independent agreement partaking in no sense of the character of an assignment of a policy of insurance, but one in which the mortgagees were recognized as a separate party, having distinct rights, and entitled to receive the full amount of insurance money, without any regard whatever to the owner of the property... The interest of the latter was distinct and separate when this change in the policy was made, and the intention of the parties was, beyond question, to insure the plaintiffs under a new contract. Any different interpretation would lead to great injustice, and place the mortgagees under the control and at the mercy of the owner, by changing the character of the defendant's liability, which might operate to prevent the 23 indemnity which the defendant intended to provide. If the condition referred to was in force either before or after the arrangement, the owner might effect other insurance, and thus jeopard the rights, if not entirely control the security, of the plaintiffs.” [Emphasis added] [46] The position is the same in Canada. Two points are relevant here. Firstly, that the Canadian courts have strongly rejected the privity point by upholding mortgagee clauses as having created a separate and independent contract between the insurer and the mortgagee. In Trans Canada Credit Corporation v Royal Insurance Company of Canada 149 DLR (3d) 280, the trial judge made the following observations with which on appeal, Jones JA of the Nova Scotia Supreme Court seemed to be in agreement with (at paragraph 5): “It has been the acknowledged commercial practice for over 100 years in both Canada and the United States to recognize and to give legal effect to loss-payee clauses in policies of insurance of various kinds. It would be disruptive of those commercial practices as they exist today if, suddenly, the validity of policies of insurance containing mortgage clauses or loss-payee clauses was called into question. It would be better if the Legislature of the Province of Nova Scotia saw fit to amend the existing Insurance Act or to enact other Legislation in order to effect a statutory solution of this long-standing problem but, in the absence of such legislation, the courts have a duty to ensure that all parties to substantial obligations live up to the covenants which they have made and which they know or should know will be relied upon by others.” [Emphasis added] 24 [47] The above passage suggests that this “separate and independent contract” has been the preferred approach for a considerable length of time. Further, it developed and gained traction through judicial decisions. It was not an approach imposed by statute. We will come back to this point shortly. [48] We refer to the decision of the Supreme Court of Canada in Caisse Populaire v Societed’ Assurances (supra), the facts of which are directly relevant to those in the present appeal. [49] A farmer had obtained security for a loan over certain immovable property. One of the conditions of the loan was that the farmer had to undertake to insure this property. In accordance with that clause the farmer purchased an insurance contract with the insurers. It was later found that the farmer intentionally burned down the property. The insurance contract provided that in the event of loss the indemnity was payable to the respondent, under the mortgagee clause (which the judgment styled as “the hypothecary clause”). [50] The mortgagee brought an action against the appellant, claiming $112,359.50 as the loss suffered on the date of the fire. The lower court ordered the appellant to pay the respondent $62,726.50 with interest and costs premised on the value of the insured property and the limit of the insurance contract. This was affirmed on appeal. The matter was then taken up to the Supreme Court of Canada. The question there was whether the insurer was liable to pay the mortgagee under the Mortgagee Clause even though the mortgagor farmer was essentially guilty of fraud. 25 [51] The Supreme Court upheld the lower Courts’ decisions. It noted the four requisites to the formation of contracts, namely:

(i) Parties legally capable of contracting;

(b) Public Policy [64] On this issue, to recapitulate, the Court of Appeal found that allowing the appellant’s claim would conflict with public policy. The 1st and 2nd respondents canvassed the same point before us. With respect we are unable to agree with the Court of Appeal and the 1st and 2nd respondents. [65] Firstly, in this context, the Court of Appeal’s view that an assignee cannot be in a better position than the assignor is, in our considered view, incorrect. Based on what we have elucidated above, standard New York mortgagee clauses do not amount to assignments. They are separate and independent contracts. Therefore, the question that the assignee cannot be in a better position than the assignor does not arise. [66] Secondly, taking the above quoted words of Miller J in Hastings (supra), the Court must give effect to the intention of the contracting parties. A plain reading of the Mortgagee Clause shows that the 1st and 2nd respondents intended to indemnify the appellant notwithstanding any disentitlement of the 3rd respondent to the same. [67] On this point, also relevant is the observation of the Supreme Court of Canada in Caisse (supra). 31 “In the second insurance contract contained in the policy, the hypothecary creditor and not the debtor is the insured. Accordingly, the hypothecary creditor is not benefiting from his intentional fault when he claims to be entitled to the insurance indemnity as a result of the fire caused by the intentional fault of his debtor. In such circumstances, the insured (the hypothecary creditor) has not committed any fault, intentional or otherwise. Neither does the hypothecary debtor benefit from his intentional fault, since the payment of the indemnity by the insurer does not result in his release, but simply a substitution of debtor (subclause

(b) of the hypothecary clause). Thus, moral considerations discussed above do not stand in the way of indemnifying the hypothecary creditor... When dealing with a hypothecary clause evidencing a separate insurance contract with the insurer, as is the case here, fault by the hypothecary debtor must be treated as fault by a third party… since the creditor and not the debtor is the insured. Consequently, the clause stating that the hypothecary debtor's intentional fault cannot be set up against the hypothecary creditor in no way contravenes that provision.” [Emphasis added] [68] In other words, because the contract of indemnity between the insurers and the mortgagee exists independently from the contract between the insurers and the insured, the finding of fraud (or any other vitiating factor) as between the insured and the insurer has no bearing to the claim of the Mortgagee. The validity and entitlement of the mortgagee to the insurance proceeds must be assessed on the conduct of the mortgagee alone. 32 [69] We agree with the appellant that the principle that a man should not profit from his wrong has no obvious application to an innocent mortgagee. As submitted by learned counsel for the appellant the insured does not benefit from its own wrong doing as the insurer after having made payment to the Mortgagee when there is no liability to pay the insured is entitled to sue and recover the amount paid under its subrogation right. [70] That is the reason why the wording of the Mortgagee Clause is as such and that upon payment of the sum to the mortgagee, the insurer shall become legally subrogated to all the rights of the mortgagee to the extent of such payment and may thus have a right of recovery against the insured. [71] One of the chief purposes of subrogation is to place the loss ultimately on the wrongdoer or tortfeasor who caused the loss in the first place. Courts have stressed that one goal of subrogation is to place the burden for a loss on the party ultimately liable or responsible for it and by whom it should have been discharged, and to provide relief entirely to the insurer who indemnified the loss and who in equity can recover such loss. [72] As there is a right of subrogation and the insurer has the absolute right to bring a suit against the insured to the extent of the monies paid to the mortgagee, the issue of public policy and the insured benefitting by reason of payment to the mortgagee does not apply at all. [73] The Mortgagee Clause clearly provided that when a mortgagee is paid where no liability existed then the insurer, the 1st and 2nd respondents in this case are subrogated to all the rights of the mortgagee to the extent of such payment and will be entitled to recover this sum from the insured 33 in default. In this regard we agree with the appellant that this important fact was not considered by the Court of Appeal. [74] On this issue, the learned author Harry Cooper (supra) indicates that there is a policy reason to uphold mortgagee clauses. In the United States where such clauses were conceived, about 60 per cent of property is mortgaged. This prompted the Courts to extend the extent of coverage in favour of mortgagees. [75] The appellant contended that the judgment of the Court of Appeal puts in jeopardy the interest and security of all the banks in Malaysia who are inevitably stated as mortgagees in millions of fire policies that currently exist and consequently it will appear that banks and the banking industry will have to continuously monitor whether the insured/borrower complies with the terms and conditions of the policy. In this sense, it appears the policy reason to uphold mortgagee clauses in other jurisdiction remains equally relevant in a Malaysian context. [76] Both the mortgagee and the insurer in any given case bear a risk. Giving out a loan involves the risk of non-repayment. It is a risk of suretyship. Indemnity insurance however involves the purchase of risk of loss. So in fire insurance cases, the insurer enters into the insurance contract acknowledging full well the risk of having to compensate potential loss. It is for this reason, as gleaned from the learned author Harry Cooper’s reasoning, that Courts are moved to uphold standard mortgagee clauses in favour of mortgagees. After having manifested the intention to indemnify the appellant via the Mortgagee Clause, it cannot therefore be the case that the 1st and 2nd respondents were entitled to evade such contractual responsibility. 34 [77] For completeness, we quote the learned author from pages 51 and 62: “By 1922, one authority states, 60 per cent of the realty in the United States was mortgaged. To secure this protection, there has been both a growth of insurance covering the mortgagee's interest, and an increase in the measure of protection afforded him… However, the preponderance of interest would be determined by the circumstances of the case, that is, upon whom should fall the risk of the mortgagor's conduct at the inception of the mortgage clause. If the circumstances indicate this to be a risk of suretyship, the mortgagee should bear it, but if they indicate it to be a risk of insurance, the insurer should bear it.” [78] For the foregoing reasons, and bearing strictly in mind that we are dealing with a standard Mortgagee Clause as contained in the FMD Policy 005, we would answer Leave Question (i) in the affirmative and Leave Questions (ii) and (iii) in the negative.

(c) The Deed of Assignment [79] In light of what we have decided above, the Mortgagee Clause clothed the appellant with the necessary locus standi to sue the 1st and 2nd respondents for the insurance proceeds. Thus, we think it necessary issues surrounding the Deed of Assignment have become academic. Therefore, we consider it unnecessary to answer Leave Questions (iv) and (v). 35 The Final Analysis [80] There is a final point which we have to deal with. The 1st and 2nd respondents brought to our attention that subrogation is impossible in this case as the appellant has obtained summary judgment against the 3rd respondent for the same amount of the debt owing under the facilities. See generally: RHB Islamic Bank v Veheng Global Traders Sdn Bhd & Ors [2011] 1 LNS 684. We do not think this contention is sustainable on the facts and the law. [81] We have closely scrutinised the language of the second paragraph of the Mortgagee Clause. For clarity, we think the crucial portion bears repetition. To better understand it we broke it down to its constituent parts:- “i. … the Company shall become legally subrogated to all the rights of the Mortgagee (Chargee) to the extent of such payment but ii. not so as to impair the right of the said Mortgagee (Chargee) to:

(a) recover the full amount of any claim it may have on such Mortgagor (Chargor) or

(b) Owner or any other party or parties insured hereunder or from any securities or funds available.” [Emphasis added] [82] A literal reading of the above indicates that the right of the insurers is without prejudice to the right of the mortgagee to claim the full amount 36 of the outstanding debt. It stands to reason that the intention of the parties was that should the mortgagor or any other third-party occasion loss, it would be open to the mortgagee to claim indemnity from the insurers and at the same time, claim the full amount from the mortgagor. For the reasons mentioned earlier, Courts are duty bound to give effect and carry out the intention of the parties to the contract. [83] We have scoured the law reports for authorities to determine whether our view is fortified in law. We have found one case directly on point. It is the judgment of the District Court of Georgia in Corbin, Standard Federal Savings v Aetna Life & Casualty Co. & Anor (1978) 447 F. Supp. 646. [84] The facts have already been summarised and we reproduce them as follows. A homeowner's property was damaged by fire, and the insurers refused to pay his claims under two separate homeowner's insurance policies. The homeowner defaulted on his mortgage, which prompted the first mortgagee to foreclose on the property. [85] The insurers argued that by foreclosing on the property subsequent to a loss, the first mortgagee extinguished its rights to insurance proceeds as the loss payee on the policy in the amount of the foreclosure. The question before the Court was whether the mortgagee was entitled to the indemnity notwithstanding that it had satisfied its debt via the forfeiture. [86] The Court rejected the insurer’s argument as otherwise, it would have amounted to a windfall for the insurers were they allowed refusal to pay under the policy. The Court was of the view that the insured should not be required to preserve its contractual rights by initiating lengthy, 37 expensive litigation prior to foreclosure. Such wasteful litigation could be avoided, at least in part, by establishing as a rule of law the date of the loss as the date when adverse rights were to be determined. The Court granted the first mortgagee's motion for partial summary judgment as to liability and denied the insurers' motions to dismiss the action. [87] In our view, the Court in that case made two pertinent observations. The first was in relation to the injustice occasioned by the insurer’s refusal to pay. Freeman J held: “The defendants' argument that the insured could have preserved its rights by filing suit prior to foreclosure, is not well-taken. This court will not reward unreasonable delay by insurers, neither will we, as a general rule, condition an insured's recovery on the filing of a lawsuit. Resort to the courts should be the exception and not the rule of contract performance. Standard Federal [the mortgagee] appeared eminently reasonable in seeking settlement and in foreclosing when it did. Insureds should not be required to preserve their contractual rights by initiating lengthy, expensive litigation prior to foreclosure. Such wasteful litigation can be obviated, in part, by establishing as a rule of law the date of the loss as the date when adverse rights are to be determined. The extent of the mortgagee's interest at the time of the loss sets the bounds of its possible recovery with an allowance for damages caused by delay or any bad faith which can be demonstrated. Neither later extinguishment nor augmentation of the debt should alter an insurer's liability and thus the state deficiency judgment procedures…” [Emphasis added] 38 [88] The District Court of Georgia had also occasion to consider the relevant portion of the mortgagee clause which is, for all intents and purposes, in pari materia with the one in the present case. On this point, the Court held: “Defendants' [the insurers’] subrogation rights in an action against the mortgagor or some other third party were not impaired upon the mortgagee's foreclosure. The terms of the standard clause deny such a result: Whenever [the insurer] shall pay the mortgagee . . . any sum for loss under this policy . . . this "insurer" shall, to the extent of such payment, be thereupon legally subrogated to all the rights of the party in whom such payment shall be made, under all securities held as collateral to the mortgage debt, or may, at its option, pay to the mortgagee . . . the whole principal due or to grow due on the mortgage with interest and shall thereupon and of all such other securities; but no subrogation shall impair the right of the mortgagee . .. to recover the full amount of said mortgagee's . . . claim. Subrogation rights vest only upon payment of the claim to the insured. The amount of settlement with the mortgagee would have determined the extent of loss to be pursued against a wrongdoer who may have ultimately caused the loss. If defendants had been concerned about their subrogation rights, they should not have been loath to compensate the insured upon its rightful claim. By the terms of the contracts, Standard Federal did not impair the insurers' subrogation rights when it foreclosed on the Corbin property after a seven-month default.” [Emphasis added] 39 [89] We think the above case also puts into perspective our point on the distinction between the risks of suretyship and insurance. Taking the above case analogously, and applying them into the context of this case, the Mortgagee Clause effectively allows the mortgagee to enforce his contractual rights against the mortgagor for any outstanding sum of the loan. At the same time, the mortgagee may also enforce his contractual right of indemnity against the insurers. The former is the mortgagee’s enforcement of suretyship. The latter is the mortgagee’s right to claim indemnity upon the materialisation of the risk. [90] In plain language, the terms of the Mortgagee Clause herein expressly enabled the appellant to seek out full settlement of its outstanding debt. Doing so was not inconsistent with its right to claim indemnity from the 1st and 2nd respondents. [91] Further, on the evidence, the said respondents repudiated liability to the appellant vide a letter dated 16.7.2009. The summary judgment in favour of the appellant against the 3rd respondent was granted on 3.6.2011 which was a period of almost two years from the 1st and 2nd respondents’ repudiation. Taking heed from the rationale of the above-cited judgment of the District Court of Georgia, the appellant was within its rights to pursue the summary judgment without prejudicing its claim. [92] At the outset of this judgment we stated that the central issue in this judgment is whether the appellant is entitled to the insurance proceeds from the 1st and 2nd respondents. In our view the High Court judge was correct in his interpretation of the Mortgagee Clause. It therefore follows that the appellant is entitled to be paid the proceeds of the insurance by the 1st and 2nd respondents. As to how much the appellant is entitled to 40 be paid, we observe that the Court of Appeal disagreed with the High Court’s findings on quantum. To recapitulate, the High Court awarded the sum of RM38,799,784.00 to the 3rd respondent and the appellant. The Court of Appeal however expressed the view that based on the 1st and 2nd respondents’ own adjuster’s report, at the most the value of the loss is RM23,360,000.00. We therefore consider that RM23,360,000.00 is the appropriate sum that the appellant is entitled to. CONCLUSION [93] For the reasons stated above, we would allow the appeal with costs and set aside the order of the Court of Appeal. We restore the order of the High Court but vary the amount awarded from RM38,799,784.00 to RM23,360,000.00 for the reasons indicated earlier. ALIZATUL KHAIR BINTI OSMAN KHAIRUDDIN Federal Court Judge Dated: 13th May 2019 Counsel for the Appellant: Dato’ Anad Krishnan, Navamalar Ganesan and Lee Sze Yiing [Messrs Anad & Noraini] Counsel for the 1st and 2nd Respondents: Tunku Farik bin Tunku Ismail, Wong Hok Mun, Tan Sixin, Cheong Pek Peng and Shaun Lee Chee Yoong [Messrs Azim, Tunku Farik and Wong] 41 Counsel for the 3rd Respondent: Datuk Seri Gopal Sri Ram, Joseph Yeo, Kelvin Ng Seng Huat, Ng Chee Keong, Ooi Tiong Sieng, Magita Hari Mogan, Emily Wong and Ng Jun Wei [Messrs Tan Ng & Ong]