TOBII TECHNOLOGY INC v. HONG KONG TEAM LIGHT INTERNATIONAL LTD AND ANOTHER

HCA 1100/2022

[2023] HKCFI 1228

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1100 OF 2022

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DECISION

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1.  The question I have to decide is whether the plaintiff (which is a victim of an internet fraud) should bear the costs of the action of the 2^nd defendant (a second-layer recipient of the defrauded monies) following the plaintiff’s discontinuance of the action and the discharge of the freezing injunction against the 2^nd defendant; and if so, on what scale.

2.  The plaintiff is a company incorporated in the United States of America.  It commenced this action to recover two sums of USD600,000 and USD393,000 (collectively, the “Stolen Funds”) transferred to the 1^st defendant’s bank account in Hong Kong on 6 and 7 July 2022 respectively.  The plaintiff claimed to be deceived into making the transfers by bogus WhatsApp message and email sent to its Vice President.  It had no dealings with the 1^st defendant and no legitimate reason to effect the transfers.  The 1^st defendant obtained the Stolen Funds by fraud, hence it held the same on constructive trust for the plaintiff.

3.  The plaintiff’s case is that the 2^nd defendant is a second-layer recipient of the Stolen Funds.  On 6 July 2022, the 2^nd defendant received three sums totaling USD598,983 transferred from the 1^st defendant’s bank account, and on 7 July 2022, the 2^nd defendant received two further sums totaling USD411,905 transferred from the 1^st defendant’s bank account.  In total, the 2^nd defendant received USD1,010,888 from the 1^st defendant (“D1 Payments”), USD993,000 of which (“Onward Monies”) the plaintiff says came from (or represented) the Stolen Funds.

4.  In the Statement of Claim filed on 13 September 2022, the plaintiff claims that the transfer of the Stolen Funds (to the 1^st defendant) and the Onward Monies (to the 2^nd defendant) were an “integral part” of the fraud on the plaintiff, and represented a “conspired, fraudulent and dishonest attempt” by the 1^st and 2^nd defendants to move the Stolen Funds beyond the plaintiff’s reach.

5.  The plaintiff alleges, inter alia, that the 2^nd defendant:

(1)  does not seem to be carrying out any discernible businesses;

(2)  has deliberately and knowingly allowed and/or turned a blind eye to the fact that its bank account has been used to receive, re-transfer out and launder vast sums of money without any legitimate purpose or explanation that it knew or ought to have known or suspected to be the proceeds of crime;

(3)  has not dealt with the 1^st defendant in good faith;

(4)  has not received the Onward Monies into its bank account in good faith for a legitimate purpose;

(5)  had “pre-agreed arrangements” with the 1^st defendant:

(a)   to dishonestly orchestrate the fraud on the plaintiff and effect the transfer of the Stolen Funds and the Onward Monies to deprive the plaintiff of the Stolen Funds;

(b)  to falsely represented “together” to the plaintiff’s Vice President that there was proper instruction to transfer the Stolen Funds to the 1^st defendant (“knowing it to be untrue”) to deprive the plaintiff of the same; and

(6)  received the Onwards Monies with the intention of depriving the plaintiff of the use of the Stolen Funds.

6.  The plaintiff seeks personal and proprietary remedies against both defendants, pleading constructive trust, unjust enrichment, knowing receipt, dishonest assistance, conspiracy to injure, the tort of deceit and conversion as the causes of action.

7.  In the Defence filed on 21 October 2022, the 2^nd defendant’s case is that it operates a legitimate money service business in Hong Kong, offering currency exchange and remittance services and cross-border payment processing. It received the D1 Payments on behalf of a client called Ygs Trade Co Ltd (“Ygs”) as payment by the 1^st defendant (as the buyer) to Ygs (as the seller) for 10,950 leather boss chairs shipped from Shenzhen to New York at the total price of USD1,010,888.  A sales contract, an invoice and a bill of lading were provided by Ygs to the 2^nd defendant, upon which the 2^nd defendant was satisfied that the D1 Payments were for genuine and legitimate commercial purposes.  Further, on about 5 to 7 July 2022, on the instruction of Ygs, the 2^nd defendant made outgoing payments for and on behalf of Ygs totaling USD1,592,651.08 to one Changshu Cloud Business Department Store as the purchase price for various commodities.  Sales contracts and an invoice were provided to the 2^nd defendant, such that the 2^nd defendant was also satisfied that the outgoing payments were for genuine and legitimate commercial purposes.  The 2^nd defendant claims that it was not part of, and had no knowledge of, any fraud on the plaintiff.  The Onward Monies are not trust property of the plaintiff, and the 2^nd defendant was not unjustly enriched at the plaintiff’s expense.  The 2^nd defendant raises the defences of bona fide purchaser for value without notice, change of position and ministerial receipt.  It denies any liability to the plaintiff.

8.  The key procedural steps are as follows:

(1)  On 19 August 2022, the plaintiff obtained an ex parte Mareva and proprietary injunction against both defendants.  At that time, the identity of the 2^nd defendant was not known.  It was referred to as the entity which maintains the bank account that has received the Stolen Funds from the 1^st defendant.  The plaintiff also obtained a banker’s books order.

(2)  On 25 August 2022, through disclosure made by the banks, the identity of the 2^nd defendant was revealed.

(3)  On 29 August 2022, the writ was issued and served on the 2^nd defendant together with the injunction papers.

(4)  On 2 September 2022, the injunction order was amended to give the proper name of the 2^nd defendant and was continued until further order or the conclusion of the trial.

(5)  On 9 September 2022, the 2^nd defendant’s solicitors came on the record to represent the 2^nd defendant.

(6)  On 13 September 2022, the Statement of Claim was filed.

(7)  On 15 September 2022, the 2^nd defendant’s acknowledgment of service (giving intention to defend the claim) was filed.

(8)  On 6 October 2022, the 2^nd defendant filed an affirmation by its director, making asset disclosure and explaining how it received the Onward Monies from the 1^st defendant and made the outgoing payments on behalf of Ygs as detailed above.

(9)  On 21 October 2022, the 2^nd defendant filed its Defence.

(10)  On 16 December 2022, the plaintiff issued a summons for (a) discharge of the injunction order, and (b) discontinuance of the action, against the 2^nd defendant, with costs to be provided for.  Q Au-Yeung J heard the summons on 23 December 2022 and made an order in terms, and directed the parties to file affirmations and lodge written submissions on costs, to be dealt with on papers, which is now before me.

9.  Whilst the Court has an unfettered discretion on costs, it is a general rule that an applicant has to pay the other side’s costs if he decides to withdraw an application or discontinue a claim, since this is normally taken as an acknowledgment of defeat or likely defeat.  The burden rests on the applicant to persuade the Court that there is good reason for the departure from the general rule.  Some examples given in Hong Kong Civil Procedure 2023, para 21/5/12A at p.610 include the dispute having become academic, a crucial witness has died or has otherwise become unavailable, the subject matter of the litigation ceased to exist, or the defendant has no means to satisfy any judgment that may be awarded against him.  The list is of course non-exhaustive.

10.  The plaintiff asks for no order as to costs.  It submits that the 2^nd defendant should not have its costs because it did not conduct the litigation properly to enable the plaintiff to know where it stood at the earliest stage and at the lowest practicable cost, so that the plaintiff could make informed decisions about its prospects and the sensible conduct of its case, contrary to all the underlying objectives of the Civil Justice Reform and Order 1A rule 1 of the Rules of the High Court.

11.  Specifically, the plaintiff complains that the 2^nd defendant should have written to the plaintiff to explain its position and let the plaintiff know where it stands at the earliest possible stage, i.e. promptly after being served with the writ and the injunction papers before or at the very latest conterminous with filing an acknowledgment of service giving intention to defend.  Had the 2^nd defendant done so, the plaintiff says that it would have discharged the injunction order and discontinued the action against the 2^nd defendant without the need for the 2^nd defendant to engage in the action at all.  However, the 2^nd defendant was “late” in responding to the injunction order and “kept the plaintiff in the dark” until service of its Defence (with time extended), and in doing so, the 2^nd defendant has unreasonably and unnecessarily incurred costs that it is now seeking to pay at the plaintiff’s doorstep, when it has “through its own insensibility” brought its legal costs to bear on its own head.

12.  The plaintiff contends that the 2^nd defendant’s position only became known when it filed its Defence.  Trustingly and taking it at face value, the plaintiff has judiciously elected in good faith to discontinue the injunction order and the action against the 2^nd defendant.

13.  As a general remark, I am unable to agree with the plaintiff’s approach, which is to put the cart before the horse.  In the normal course of events, one does not start a legal proceeding without knowing whether one has a solid basis for mounting a claim against a particular named defendant, and only hoping to uncover some useful ammunition as the case proceeds.  While some degree of latitude is to be given to the plaintiff who was a victim of an internet fraud and who understandably was kept in the dark, the plaintiff is to assume the associated litigation risks (including the risks of satisfying any adverse costs order) if a particular defendant turns out to be an innocent recipient. It does not lie in the mouth of the plaintiff to complain that a particular defendant did not reveal his defence early enough, when the burden is always on the plaintiff to formulate (and prove) a viable case against each and every defendant, and to bear the natural consequences (including that relating to costs) if its claim turns out to be bad or is eventually abandoned.

14.  In any event, the plaintiff’s contention does not sit well with the position taken by its solicitors in their letter dated 10 November 2022 to the 2^nd defendant’s solicitors, maintaining (after sight of the Defence) that the 2^nd defendant’s defence “is plainly bad” and it “clearly has no defence whatsoever to [the plaintiff’s] claims”, and demanding for the return of the sum of USD993,000 (i.e. the Onward Monies) within 14 days in return for the plaintiff discontinuing the injunction order and the proceedings with no order as to costs.

15.  The plaintiff explains that the request in the letter for the return of the full claimed sum was “simply as a starting point of the settlement negotiations” and it was all along its intention to discontinue the action even if the initial request was refused.  However, this was not in any way reflected in the letter.  The 2^nd defendant was entitled to take the letter at face value and continue to defend the claim strenuously as it did.

16.  It was not until 7 December 2022 when the plaintiff’s solicitors wrote to the 2^nd defendant’s solicitors offering to discontinue the injunction order and the action against the 2^nd defendant with no order as to costs without asking for the return of any monies.

17.  In light of the above, there is an air of unreality for the plaintiff to claim that it would have discontinued the claim against the 2^nd defendant had it “come clean” earlier.  Based on the correspondence, the plaintiff, at least up till 7 December 2022, does not accept the defence put forward by the 2^nd defendant, let alone “trustingly and taking it at face value”.

18.  The plaintiff argues that it is a victim of a fraud and should not be penalized by having to bear the costs of reasonably and justifiably pursuing an action to recover its assets against the 2^nd defendant whose innocence the plaintiff had good reasons to question at the material time.  It contends that as a matter of natural justice, a victim of a fraud should only be ordered to bear costs if it has somehow acted with impropriety, wholly unreasonably, oppressively or in bad faith.  To decide otherwise would create a significant deterrence against innocent victims to pursue their claims in good faith against third party recipients.

19.  I reject such a broad sweeping proposition.  By withdrawing the claim against the 2^nd defendant, the starting point must be that the 2^nd defendant has a prima facie valid defence (thus it is also prima facie “innocent”) and the plaintiff acknowledges it.  There is no suggestion that the plaintiff’s claim against the 2^nd defendant would have succeeded if the action has been proceeded with.  A claimant who commences proceedings takes upon himself the risk of the litigation.  If he succeeds, he can expect to recover his costs.  But if he fails or abandons the claim at whatever stage in the process, it is normally unjust to make the defendant bear the costs of proceedings which were forced upon him and which the claimant is unable or unwilling to carry through to judgment.

20.  For the above reasons, there is no good reason to depart from the general rule that the plaintiff should bear the costs of the 2^nd defendant in the action upon its discontinuance of the claim.

21.  As to the scale of costs, the 2^nd defendant asks for indemnity costs on the ground that allegations of fraud will in general justify the Court in ordering indemnity costs when the claim is discontinued, relying on Yuen Man Chun v Hong Kong Boxing Association Limited & Ors (HCMP 962/2016, 17 February 2017) which cited Clutterbuck & Paton v HSBC plc [2015] EWHC 3233 (Ch).  The underlying justifications are set out in [16]-[21] of Clutterbuck by David Richards J in the following terms:

“16. Mr Ilyas on behalf of the claimants submits that an allegation of fraud being made in the proceedings which are then discontinued is not of itself reason to order indemnity costs. The general provision in relation to cases in which allegations of fraud are made is that, if they proceed to trial and if the case fails, then in the ordinary course of events the claimants will be ordered to pay costs on an indemnity basis. Of course the court retains a complete discretion in the matter and there may well be factors which indicate that notwithstanding the failure of the claim in fraud indemnity costs are not appropriate, but the general approach of the court is to adopt the course that I have indicated.

17. The underlying rationale of that approach is that the seriousness of allegations of fraud are such that where they fail they should be marked with an order for indemnity costs because, in effect, the defendant has no choice but to come to court to defend his position.

18. In circumstances where, instead of the matter proceeding to trial and failing, the claimant serves a notice of discontinuance, thereby abandoning the case in fraud, it is in my judgment appropriate for the court to approach the question of costs in the same way.

19. The defendant has been put in this case to considerable expense in defending to date the allegations made. As I mentioned earlier a defence was served, applications were made to strike out the particulars of claim and the applications to amend were resisted in circumstances where the amendments would maintain the allegations of fraud.

20. I therefore consider that allegations of fraud will in general justify the court in order costs upon an indemnity basis where the claimant serves notice of discontinuance. In a case to which I drew the attention of counsel, Jarvis pls v PricewaterhouseCoopers [2000] 2 ECLC 368, Lightman J took the same view.

21. I therefore hold that on that ground alone it is appropriate to order the claimants to pay the eleventh defendant’s costs of these proceedings on the indemnity basis and to order assessment on that basis if the costs are not agreed.”

22.  David Richards J cited no authority for the general approach in [16] of his judgment that a party who made allegations of fraud and lost should, “in the ordinary course of events”, pay indemnity costs.  The only authority to which he referred was Jarvis plc v PricewaterhouseCoopers [2000] 2 BCLC 368.  The auditor (PwC) of a company (Jarvis) resigned due to dispute over audit fee and it deposited a statement as required under s.394 of the UK Companies Act 1985 to explain the circumstances leading to its resignation.  Jarvis commenced proceedings against PwC alleging that it was using the statement to secure needless publicity for defamatory matter and the application had the effect of suspending the dissemination of the statement.  The day before the hearing of the application, Jarvis gave notice of discontinuance.  Lightman J ordered Jarvis to pay PwC’s costs on an indemnity basis.  The decision turned on the specific facts of that case.  The Court was highly critical of Jarvis continuing the proceedings until (for all practical purposes) they reached the doors of the court and then gave no explanation for the decision to discontinue (at [10]).  As a matter of public policy, the auditor (which assumes a role analogous to that of a trustee) should not be deflected from discharging his duty by any concern that he will be out of pocket if he acts properly and if the company improperly reacts by instituting proceedings (at [16(1)]).  The statutory regime requires the company to allege that the auditor acted in bad faith.  This is tantamount to an allegation of dishonesty against professional accountants.  When such an allegation is made and not substantiated, the Court has long shown itself to be ready to respond by ordering indemnity costs (at [16(2)]).  These were the exceptional circumstances which justified indemnity costs in that case.

23.  Indemnity costs should only be ordered if the case has some “special or unusual feature”.  The discretion to award indemnity costs is unfettered, and the guiding consideration is whether such an order is “appropriate” in the circumstances: Town Planning Board v Society for Protection of the Harbour (No 2) (2004) 7 HKCFAR 114 at [15]-[17].

24.  As was held in Xu Zhiqiang & Ors v Ng Kwok On & Ors [2018] HKCFI 274 at [29], Clutterbuck and Jarvis did not lay down any general principle that discontinuance of action in itself would be sufficient for the Court to order indemnity costs.  In the absence of a determination that the fraud allegations are unfounded and/or unsupported by evidence and/or something that ought not have been made, the Court should not order indemnity costs simply on the fact of discontinuance alone.

25.  Turning to the present facts, the plaintiff’s allegations against the 2^nd defendant, set out in [5] above, are serious.  They go much further than alleging that the 2^nd defendant is a recipient of the plaintiff’s monies.  In essence, the plaintiff claims that the 2^nd defendant committed a fraud on it together with the 1^st defendant.  However:

(1)  There does not appear to be justification for the plaintiff’s claim that the 2^nd defendant “does not seem to be carrying out any discernible businesses”.  To the contrary, as shown in the online Register of Licensees for Money Service Operators at the website of the Customs and Excise Department (which is accessible to the public), the 2^nd defendant is a licensed money service operator in Hong Kong.

(2)  Since the 2^nd defendant is a licensed money service operator, the significant amount of funds going into and out of its bank account, in such context, does not provide cogent support for the inference drawn by the plaintiff that the 2^nd defendant has “deliberately and knowingly allowed and/or turned a blind eye” to the fact that its bank account has been used to process funds which the 2^nd defendant knew or ought to have known or suspected to be proceeds of crime.

(3)  There is also no evidence to support the plea that the 1^st and 2^nd defendants had “pre-agreed arrangements with each other by dishonesty” to orchestrate the fraud on the plaintiff, or that the 1^st and 2^nd defendants “together” gave false instructions to the plaintiff to effect the transfer of the Stolen Funds in order to deprive the plaintiff of the same.

26.  It is trite that serious allegations of fraud and dishonesty, or inferences of serious misconduct, are not to be lightly made and must be supported by cogent evidence.  A pleader pleading fraud assumes a heavy burden as fraud cannot and should not be pleaded unless the pleader has clear instructions to do so and he has before him reasonably credible material which, as it stands, establishes a prima facie case of fraud: Hong Kong Civil Procedure 2023, para 18/6/5 at p.500.  It is no answer that the plaintiff at the initial stage of the proceedings did not have the full picture and was kept in the dark as to how the fraud on it had come about.  Unless the plaintiff has cogent foundation (and none is put forward in the plaintiff’s affirmations) to support the allegation that the 1^st and 2^nd defendants have orchestrated and committed the fraud together, it ought not have made the serious allegations against the 2^nd defendant.

27.  In my view, where, as in the present case, serious allegations of fraud are made by the plaintiff against the 2^nd defendant which are not supported by cogent evidence and in the end abandoned by the plaintiff in discontinuing the claim against the 2^nd defendant, an award of indemnity costs against the plaintiff is called for to mark the Court’s disapproval. 

28.  For the above reasons, I order the plaintiff to pay the 2^nd defendant’s costs of the action on an indemnity basis.  In light of the quantum of costs claimed by the 2^nd defendant (in excess of HK$800,000) and the plaintiff’s grounds of objections, I order such costs to be taxed by a Master if not agreed, rather than summarily assessed by me on a broad brush basis, so as to ensure that the parties would have the fullest opportunity to elaborate on their respective positions on the necessity of the items and the quantum involved.