LAERDAL MEDICAL LTD v. HONG KONG HAOCHENG INTERNATIONAL TRADE LTD

HCA 2193/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2193 OF 2016

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REASONS FOR DECISION

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The parties:

1. The plaintiff, (Laerdal) is a private company established in the UK, and as the English subsidiary of a Norwegian company and a member of the Laerdal Group which carries on business providing training, educational and therapy products for life-saving and emergency medical care.

2. The defendant (Haocheng) was incorporated on 5 January 2016, in Hong Kong by Xu Beiyu (Mr Xu), who operates a business of plastic materials trading and manufacturing of shoes in Guangzhou.  Haocheng has a bank account at HSBC in Hong Kong. 

3. The claim arises from an email fraud which was perpetrated on Laerdal by unknown persons, and which resulted in the sum of €496,000 being paid by Laerdal to Haocheng on or about 20 June 2016, without Laerdal’s authority and in circumstances where there was no business relationship between Laerdal and Haocheng.  Laerdal has demanded repayment by Haocheng, which has refused to repay asserting that it is entitled to the sum.

The pleadings:

4. Paragraph 4 of the statement of claim records:

“ Apart from being directed to and did transfer a sum of €496,000 to (Haocheng’s) account on or about 20 June 2016 in the circumstances particularised in paragraph 5 below, (Laerdal) had no connection or dealing whatsoever (whether in business or personal) with (Haocheng) or (Mr Xu).”

5. The statement of defence filed by Haocheng:

 (a)  puts Laerdal to proof of paragraph 1 (the identity of Laerdal);

 (b)  admits paragraphs 2, (the identity of Haocheng);

 (c)  admits paragraph 3, (Haocheng’s ownership of the bank account into which the funds were paid); and

 (d)  does not admit paragraph 5, (in which the fraud is described), and puts Laerdal to strict proof of that paragraph. 

6. The defence goes on in paragraphs 6 – 15, to describe a transaction, which does not in any way involve Laerdal, in the course of Haocheng’s business, and essentially asserts that Mr Xu mistakenly believed that he had received the sum of €496,000 by way of payment from that business transaction, and that having acted in that belief he is entitled to retain the sum and is under no obligation to return €496,000 to Laerdal.

7. There is no pleading at all to paragraph 4. The effect of failing to plead to paragraph 4 is that that paragraph is deemed to be admitted: see Order 18, rule 13 of the Rules of the High Court.  There is a saving provision in Order 18, rule 13(6) whereby a party who:

  (a)   fails to deal with an allegation; and

  (b)   sets out in his defence the nature of his case in relation to the issue to which that allegation is relevant, is to be taken not to require that allegation to be proved.

8. The allegations in paragraph 4 of the statement of claim are an essential element of Laerdal’s claim.  The business transaction, pleaded in paragraph 6 – 15, which does not in any way involve Laerdal, could not in any way be argued to be relevant to the allegation by Haocheng that it was entitled to the sum of €496,000 that was transferred from Laerdal to Haocheng, or that the two companies had some sort of personal or business relationship.

9. Consequently, rule 13(6) does not save Haocheng from the consequences of rule 13(1), which has the effect of admitting paragraph 4 of the statement of claim.  In any event, Mr Tang for Haocheng confirmed to me in the course of the hearing that Haocheng does not assert to any personal or business relationship with Laerdal.

The fraud exception:

10. Mr Tang’s first argument was that summary judgment under Order 14 was not available in an action which includes a claim by the plaintiff based on an allegation of fraud: see Order 14, rule 1(2)(b).  That summary judgment is not available where there is claim based upon fraud is undoubtedly correct, but he is unable to claim that protection in the circumstances of this case. 

11. That is clear from the decision in Zimmer Sweden AB v KPN Hong Kong Ltd [2016] 1 HKLRD 1016, CA.  The following principles from the judgment of the Yuen JA, with whom Lam VP and Kwan JA agreed, are set out in the head note:

 (a)  the court should determine whether the “fraud exception” applied by examining not only the statement of claim, but also all available relevant materials including subsequent pleadings and the affidavits;

 (b)  the question to be asked was “did the action include a claim for which an allegation of fraud would have to be made by the plaintiff in order to establish or maintain that claim?”  If the answer was and the affirmative, the “fraud exception” was engaged in the court had no jurisdiction to hear the application; and

 (c)  what mattered was the substance, and not the mere form of the plaintiff’s case, ie whether all the factual constituents of fraud were alleged and relied on in order to establish or maintain the claim?

12. Laerdal need not establish the fraud that was perpetrated on it in order to establish its claim against Haocheng.  It is sufficient for Laerdal simply to establish that Haocheng received the sum of €496,000 without any proper authority.  Haocheng’s admission that there was no business or personal relationship between the two companies to explain or justify the payment is sufficient to establish that the sum was received without any proper authority.

13. The same result was found by Deputy Judge Burrell in Universal Capital Bank v Hongkong Heya Co Ltd [2016] 2 HKLRD 757.  Exactly as in the present case, that was a case in which the payment was made as result of an email fraud.

14. For these reasons I am satisfied that the fraud exception is not engaged and there is no reason why I cannot proceed to consider whether, on the papers, Laerdal is entitled to summary judgment.

The claim for summary judgment:

15. In paragraph 5 of the defence Haocheng asserts:

“ (Haocheng) is entitled to receive, handle, deal with them sum of money from (Laerdal). (Haocheng) is not obliged to return the sum to (Laerdal).”

16. In the subsequent paragraphs, 5 – 15 of the defence, and in the affirmation by Zhang Caihong, the rationale for Haocheng’s entitlement to deal with the fund is set out.

17. Both the defence and the affirmation are verbose and confusing, but Mr Tang accepted that the essence of the events may be described in the following way:

(i) Haocheng entered into a contract to sell shoes to S & Y International, a mainland company.  The shoes were applied to Haocheng by another of Mr Xu’s companies, Cong Nan.

(ii) The invoice from Haocheng to S & Y was expressed in Euros, with a total purchase price is €550,000.  There is an inference that the shoes were to be exported to Europe which may explain why the price was expressed in Euros.

(iii) S & Y paid to Cong Nan RMB393,500, by way of deposit.  That sum is said to be the equivalent of €54,000, leaving a balance due of €496,000.

(iv) It was agreed that the outstanding payment of €496,000 would be remitted to Haocheng’s HSBC account after the stock of shoes had been quality checked on behalf of S & Y.

(v) Haocheng then placed its order for the supply of the shoes with Yutai Int’l (HK) Trading Ltd (Yutai).

(vi) In mid June 2016, Haocheng was informed by Yutai that the shoes were ready for delivery.  Haocheng then informed S & Y that it should receive the goods on 20 June 2016.

(vii) On 21 June 2016, Haocheng received the sum of €496,000 in its HSBC bank account.  S & Y then took delivery of the shoes.

(viii) The next day, 22 June 2016, Haocheng transferred the sum of €495,900 to Cong Nan for payment to the original supplier of the shoes.

18. It is effectively asserted in both the defence and the affirmation that Mr Xu innocently believed that the sum of €496,000 remitted into Haocheng’s bank account was payment for the balance of the transaction by S & Y. 

19. On the basis of these assertions it is said in paragraph 14 of the defence:

“ (Haocheng) has its bona fide change of position. (Haocheng) avers that (Haocheng) is the bona fide purchaser without notice for consideration to receive the amount of money. (Haocheng) had no knowledge or reason to believe that the receipt was in connection with any illicit source but simply on the belief of receiving the money on behalf of its associate company Cong Nan for settling the transaction of the female shoes Cong Nan made with S & Y assigned by Yip.” (sic)

20. Exhibited to an affirmation by Zhang Caihong, the manager of Cong Nan, who says he is an employee of and a director of both Cong Nan and Haocheng, and authorised by Mr Xu to make the affirmation, is a copy of the banking record showing the receipt of the sum of €496,000 by Haocheng.

The correct approach in summary judgment:

21. It is right that on a summary judgment application the court does not conduct a mini trial on the affidavits.  However the cases cited by Mr Tang make it quite clear that the answer or assertion by way of defence is not assessed in isolation, but by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute: see Mass International Ltd v Hillis Industries Ltd [1996] 1 HKC 434 at 439.

22. First, the banking document is quite clear in its terms: the amount is credited in favour of Haocheng by Laerdal.  Nobody reading the document could have believed that the payment had been received from anyone other than Laerdal, a company with whom Haocheng has no business relationship whatsoever.  There is no suggestion in the document that the payment came from S & Y International Trading Company who were allegedly indebted to Haocheng in that sum.

23. In those circumstances it is simply not arguable that Mr Xu could have believed that the payment was from S & Y.

The argument made:

24. Mr Tang relied upon the proposition set out in paragraph 14 of the defence.

25. The suggestion in paragraph 14 of the statement of defence that Haocheng was a “bona fide purchaser without notice for consideration to receive the amount of money” is without any foundation at all.  It represents a complete misunderstanding of the concept.  Haocheng has sold nothing at all to Laerdal, and has purchased nothing at all from Laerdal. Haocheng has given no consideration at all for any transaction that might render it entitled to receive €496,000.  Haocheng cannot properly be described, in relation to Laerdal, as a bona fide purchaser for consideration.

26. Mr Tang referred me to the decision in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, where, in the speech of Lord Templeman, at p 560D, the example is given of an innocent recipient of the sum of £20,000 which he spends on a trip around the world, which he would not have taken had he not received the payment.  That person, says Lord Templeman, has altered his position on the faith of the payment and he is not unjustly enriched when the victim of the theft seeks restitution.

27. Mr Tang was obliged to accept that Haocheng had not received payment from S & Y in respect of the shoes, but that the shoes had been delivered to S & Y.  The shoes having been delivered to S & Y, that company was obliged to make payment for them to Haocheng.  I pressed Mr Tang to explain what Haocheng would do with the funds when payment was received.

28. At first Mr Tang endeavoured to assert that Mr Xu could not find S & Y, but there was no evidence to that effect. Ultimately, Mr Tang was quite unable to explain to me what Haocheng would do with that fund when it received payment.

29. The fact that Haocheng has a debt due to it from S & Y, which it is entitled to enforce, sets this case into a very different category in the example given by Lord Templeman in Lipkin Gorman.

30. In cases of “unjust enrichment” the courts have determined that it is usually less “unjust” to deprive the source of the payment of repayment, than it is to deprive an innocent receiver who has relied upon the payment and has thereby changed his position.  The proposition is best put by a decision of Barrett JA, in the Court of Appeal of New South Wales, to which Mr Tang referred me: Citigroup Pty Ltd v National Australia Bank Ltd [2012] NSWCA 381 at §57:

“ It may be accepted, therefore, that the High Court (of Australia) has confirmed detrimental change of position by the recipient, in good faith and in reliance on the receipt, as a ‘defence’ to a restitutionary claim in respect of a payment made under a mistake, whether of fact or law - or, perhaps more accurately, as a matter that displaces the prima facie right of recovery under the restitutionary claim because it rendered the enrichment resulting from receipt of the payment (and its retention) not ‘unjust’.”

31. In evaluating whether or not it is “not unjust” to require the recipient of the payment to make restitution it is necessary to look at the whole they recipient pays out “in reliance on” the receipt if its actions are based on the fact of receipt, coloured by information obtained in connection with the receipt which, taken in the whole of the surrounding context, supports the recipient’s belief of entitlement to act on the faith of the receipt. 

32. As I have held, (see §22 above), nobody reading the banking receipt could have thought that the payment came from S & Y. Is no answer to say, (which was not said), that the banking receipt was not read.

33. Plainly a second most significant circumstance is that the recipient has a right to recover the sum that he now says that he has “lost”.  Haocheng has the right to pursue S & Y for the amount that is properly due by S & Y.  That feature of the position of Haocheng has no parallel in any of the Lipkin Gorman examples.

34. In reaching this conclusion I am not unmindful of the quite extraordinary coincidence that the sum of €496,000 transferred from the bank account of a company in Norway, which has absolutely no business or personal association with Haocheng or its owner, should precisely match the amount remaining due to Haocheng by S & Y.  It is a coincidence which simply cannot be ignored.

Disposal:

35. The defence is hopeless, and Laerdal is entitled to judgment in respect of the whole sum of €496,000.

36. There is no sensible reason why the master could not have given judgment for the full amount claimed and whole of the relief claimed.  There will be judgment Laerdal for €496,000 and orders in terms of the prayers for relief.

Costs:

37. Laerdal is entitled to its costs both here and below.  The cost to be taxed on a party and party basis if not agreed.