JP MORGAN CHASE BANK v. HK POWER LTD

HCA4757/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4757 OF 2003

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REASONS  FOR  DECISION

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1. The plaintiff is seeking to strike out paragraph 8 of the Re-Amended Defence save as to the first sentence.  I have granted the application at the hearing and I now give my reasons.

Background

2. The plaintiff is a bank operating, inter alia, in Sydney. 

3. The 3^rd defendant is an agent for the casino ship “Omar III”.  For the present purpose, its modus operandi may be put shortly as follows.  The 3^rd defendant maintains a running account with the casino ship for gambling chips.  The gambler will be introduced to the 3^rd defendant by a “junket leader”.  Deposit will be made by or on behalf of the gambler into the bank account of the 3^rd defendant, and chips will be given to the gambler on board out of the 3^rd defendant’s account with the casino.  At the end of the day, the chips will be counted, and the winnings or losses will be reckoned as between the gambler and the 3^rd defendant, and in turn between the 3^rd defendant and its casino.

4. On 24 December 2003, the plaintiff received a transfer instruction by fax purportedly form State Street Global Advisors in Sydney, operator for the account of the Commonwealth Superannuation Scheme, Australia, to transfer, inter alia, HK$175 million into the 3^rd defendant’s bank account with HSBC in Hong Kong.

5. It transpired that the instruction fax was a fraud.  The plaintiff alleged that the payment to the 3^rd defendant was made by a mistake of facts which were untrue whereby it would not have made the payment had it known the truth at the time.

6. The 3^rd defendant was given to understand by a junket leader that the HK$175 million deposit was the deposit from a gambler.  The upshot was that the gambler was given chips by the 3^rd defendant and he lost HK$19.7 million.  The 3^rd defendant was liable to the casino for the sum on the running account.  As the plaintiff had made the claim for restitution, the 3^rd defendant had returned HK$175 million less HK$19.7 million.  The 3^rd defendant is putting up the defence of bona fide purchase and change in position in relation to the HK$19.7 million.

7. Apart from money paid under mistake, the plaintiff also pleaded constructive trust by reason of knowing receipt, based on the fact that an officer of the 3^rd defendant did have concern as to whether the remittance was money laundering.  The plaintiff has obtained a Mareva injunction over the HK$19.7 million.

Negligence on the part of the plaintiff

8. The impugned part of paragraph 8 of the Re-Amended Defence is as follows :

“	Insofar as the Plaintiff was acting under a mistake when it instructed HSBC to transfer the sum of HK$175,625,839.38 into the Current Account, it is averred that the Plaintiff’s mistake was partly caused or contributed to by its own negligence in that despite the substantial amounts involved, the Plaintiff’s Sydney branch should have but failed to :
	(1)	take any appropriate steps to check the authenticity of the fax instructions referred to in paragraph 5(1) of the Amended Statement of Claim (‘Fax Instructions’);
	(2)	notice that the bottom part of the first page of the Fax Instruction was different from the official fax cover sheet of State Street Global Advisers (‘State Street’) in that the former had the name “State Street Global Advisors, Australia, Limited” printed there whereas the latter did not;
	(3)	take any appropriate steps to verify whether the male who called up Mr. Greg Bourchier of the Plaintiff as allege in paragraph 5(2) of the Amended Statement of Claim was in fact Mr. Slater of State Street.”

9. Mr Chua SC for the plaintiff referred to Kelly v. Solari (1841) 152 ER 24 and submitted that any negligence on the part of the payer in making payment is no defence.  Parke B said at p.26 :

“

I think that where money is paid to another under the influence of a mistake, that is, upon the supposition that a specific fact is true, which would entitle the other to the money, but which fact is untrue, and the money would not have been paid if it had been known to the payer that the fact was untrue, an action will lie to recover it back, and it is against conscience to retain it; … If indeed, the money is intentionally paid, without reference to the truth or falsehood of the fact, the plaintiff meaning to waive all inquiry into it, and that the person receiving shall have the money at all events, whether the fact be true or false, the latter is certainly entitled to receive it; if it is paid under an impression of the truth of a fact which is untrue, it may, generally speaking, be recovered back, however careless the party paying may have been, in omitting to use due diligence to inquire into the fact. In such a case the receiver was not entitled to it, nor indeed to have it.”

10. Kelly v. Solari has consistently been followed.  In R.E. Jones Ld v. Waring & Gillow Ld [1926] AC 670, 688-9, Lord Shaw of Dunfermline, after citing from Kelly v. Solari, said :

“

It is quite true that various attempts have been made, not to attack the elementary rule set forth in the first portion of the citation, but to set up a species of estoppel by reason of the careless of the person who was misled into the mistake of fact. I am not aware in the whole course of the decisions such an assault upon Solari’s case has ever been successful, and since its date in 1841 it has, I believe, remained of paramount authority as part of the law of England.”

11. In Barclays Bank Ltd v. W.J. Simms Son & Cooke (Southern) Ltd & anor [1980] 1 QB 677, Goff J (as he then was) referred to Kelly v. Solari as one of the early cases which provided the basis of the modern law on the topic and said at 686H-687A :

“	The principal issue in the case was therefore whether negligence on the part of the plaintiff precluded recovery; it was held that it did not, a conclusion that has stood ever since.”

12. In Kleinwort Benson Ltd v. Lincoln City Council [1999] 2 AC 349, Lord Hoffman said at 399D-E :

“

The lawyer would, I think, start by considering why, in principle, a person who had paid because he held some mistaken belief should be entitled to recover. The answer is that it is prima facie unjust for the recipient to retain the money when, if the payer had known the true state of affairs, he would not have paid. It has never been suggested that, in the case of a mistake of fact, he could not recover if everyone would probably have shared the same false belief. On the contrary, there was once a view that he should not be able to recover if a reasonable person in his position would not have shared his false belief, but this was repudiated in Kelly v. Solari, 9 M. & W. 54. Since then, it has not mattered whether the person making the payment could have discovered the true state of affairs or not.”

13. Mr Chua submitted that the above principle is directly in point, and the 3^rd defendant’s defence of negligence on the part of the plaintiff has no real prospect of success, and is liable to be struck out.

14. Mr Chua also referred to Dextra Bank & Trust Co Ltd v. Bank of Jamaica [2002] 1 All ER 193 where the Privy Council considered the matter of relative fault.  In the judgment of Lord Bingham of Cornhill and Lord Goff of Chieveley at p.207 [45], it was said :

“

Their Lordships are, however, most reluctant to recognize the propriety of introducing the concept of relative fault into this branch of the common law, and indeed decline to do so. They regard good faith on the part of the recipient as a sufficient requirement in this context. In forming this view, they are much influenced by the fact that, in actions for the recovery of money paid under a mistake of fact, which provide the usual context in which the defence of change of position is invoked, it has been well settled for over 150 years that the plaintiff may recover ‘however careless [he] may have been, in omitting to use due diligence’: see Kelly v Solari (1841) 9M & W 54 at 59, [1835-42] All ER Rep 320 at 322 per Parke B. It seems very strange that, in such circumstances, the defendant should find his conduct examined to ascertain whether he had been negligent, and still more so that the plaintiff’s conduct should likewise be examined for the purposes of assessing the relative fault of the parties. Their Lordships find themselves to be in agreement with Professor Peter Birks who, in his article already cited on ‘Change of Position and Surviving Enrichment’ at p41, rejected the adoption of the criterion of relative fault in forthright language. In particular he stated (citing Thomas v Houston Corbett & Co [1969] NZLR 151) that the New Zealand courts have shown how hopelessly unstable the defence (of change of position) becomes when it is used to reflect relative fault. Certainly, in the case of Thomas, the reader has the impression of judges struggling manfully on control and to contain an alien concept.”

15. In the recent case of Patel’s Wall Street Exchange Ltd v. SK International [2005] 2 HKLRD 552, Barma J said at 570G-I :

“	Moreover, the suggestion that the plaintiff should be debarred from recovery because of an act of its agent would seem to be at odds with the decision in Barclays Banks v WJ Simms Son & Cooke (Southern) Ltd & anor [1980] QB 677, where the payment to the defendant of the stopped cheque must have been an act done by an employee, and thus an agent of the bank, and with the well known established principle that carelessness on the part of the plaintiff is no bar to recovery of a payment made under a mistake of fact – as Lords Bingham and Goff pointed out in para.45 of their judgment in Dextra Bank & Trust Co Ltd v Bank of Jamaica, where they said (at p.270C):
		… in action for the recovery of money paid under a mistake of fact … it has been well settled for over 150 years that the plaintiff may recover “however careless [he] may have been, in omitting to use due diligence”: see Kelly v Solari (1841) 9 M & W 54 at p.59 per Parke B.”

Relative fault

16. Miss Wee, for the 3^rd defendant submitted that although negligence on the part of the plaintiff is not a complete defence, the pleading is relevant as the factual matrix of the defence of change of position.  The law on the subject is developing, and given the autonomy of the Hong Kong Courts from the precedent of the Privy Council, it is possible that our Courts may hold that contributory negligence on the part of the plaintiff is a basis of apportionment of the relevant loss.  Miss Wee also submitted that the application to strike out was late in time.

17. Miss Wee referred to several text books on the development in the law of restitution in other jurisdictions.

18. In Grubb on The Law of Restitution at 21.52, the author referred to the American Restatement on Restitution (1937), para.142(2) that the defence of change of position would be available only where the defendant “was no more at fault for his receipt, retention or dealing with the subject matter than was the claimant”.   Grubb suggested that given that contributory negligence is recognized by statute in the law of tort, more thoughts should be given to apportionment on the basis of relative fault.  Although the Privy Council’s unequivocal rejection of the relevance of fault in Dextra Bank & Trust Co Ltd v. Bank of Jamaica [2002] 1 All ER 193 is liable to be followed by the English courts, the author considered that the reasons were far from convincing.

19. In Burrowson The Law of Restitution (2^nd Ed.), the author referred to “balancing the equities” in that the defendant’s “contributory negligence” could be taken into account to reduce the relevant loss under the New Zealand statutory defence of change of position.  The same “contributory negligence” approach was applied to the non-statutory change of position defence by the New Zealand Court of Appeal in National Bank of New Zealand Ltd v. Waitaki International Processing (NI) Ltd [1999] 2 NZLR 211.

20. Miss Wee pointed out that the observations in both Dextra Bank and Patel’s were obita as there was finding of no mistake of facts.

21. Miss Wee also pointed out that in Lipkin Gorman v. Karpnale Ltd [1991] 2 AC 548 where the House of Lords had to consider whether change of position should be recognized as a defence to claims in restitution, Lord Goff noted that the subject has been much debated in the books, and such defence was then widely recognized throughout the common law world. 

22. Miss June submitted that given the lack of binding authorities in Hong Kong, it is possible that relative change in position may be recognized in Hong Kong as in New Zealand.  Hence, the 3^rd defendant has an arguable case.

23. Miss Wee submitted that the court should only strike out a defence where it is plain and obvious that there is no defence.  She referred to Ha Francesca v. Tsai Kut Kan & ors (No.1) [1982] HKC 382, 392 per Silke JA (as he then was) :

“

My attention has been directed by counsel to the principles upon which the court acts on striking out applications. If I may encapsulate them, striking out should only be done in plain and obvious cases, there should be no trial upon affidavit. Disputed facts are to be taken in favour of the party sought to be struck out. The claim must be obviously unsustainable, the pleadings unarguably bad and that it be impossible, not just improbable, for the case to succeed before a court will strike out. If the court does not think the matter to be clear beyond doubt or if it fails to be satisfied that there is no reasonable cause of action or that the proceedings are frivolous or vexatious, then, there should be no striking out. One must be careful not to drive a plaintiff from the judgment seat nor should the court decide difficult points of law in proceedings such as this.”

24. Miss Wee submitted that where there is an area of law which is developing, a fortiori, the court should be slow to strike out the pleading.  She referred to Malayan Banking Berhad v. China Insurance Co. Ltd, CACV424/2002 (12 November 2003), para.11 where Wo JA (as he then was) cited Lonrho Plc v. Tebbit [1991] 4 All ER 973, 979F-980C per Sir Nicholas Browne-Wilkinson VC :

“

In considering whether or not to decide the difficult question of law, the judge can and should take into account whether the point of law is of such a kind that it can properly be determined on the bare facts pleaded or whether it would not be better determined at the trial in the light of the actual facts of the case. The methodology of English law is to decide cases not by a process of a priori reasoning from general principle but by deciding each case on a case-by-case basis from which, in due course, principles may emerge. Therefore, in a new and developing field of law it is often inappropriate to determine points of law on the assumed, and scanty, facts pleaded in the statement of claim.”

25. Under the present law, in order to make out the defence to restitution of bona fide purchase and change in position, it is not necessary for the defendant to prove negligence on the part of the plaintiff.  If the defendant relied on the fact of the payment which resulted in a change of position in circumstances that he is not to be affixed with any knowledge to make it unconscionable to retain the money, the defence is made out. 

26. In Lipkin Gorman, Lord Goff noted that there was a remarkable unanimity of view, the consensus being to the effect that the defence of change of position should be recognized in English Law.  However, it is far from being the case in respect of relative fault.   In Dextra Bank, their Lordships recognized the strength of Kelly v. Solari, and the uncertainty in the law the examination of relative fault may bring.  Both Grubb and Burrows also recognized the reality of the rejection of the relevance of relative fault given the decision in Dextra Bank.  Unlike New Zealand, there is no statue providing for apportionment in restitution for contributory negligence or relative fault in Hong Kong.

27. In the premises, I hold that negligence on the part of the plaintiff is not relevant to the recovery by the plaintiff, and there is no real prospect of success in the defendant’s argument of relative fault in the defence of change of position.

Late application

28. Miss Wee pointed out that the plaintiff has obtained a Mareva injunction against the HK$19.7 million for 20 months, the pleadings have long been closed, and the plaintiff’s application to strike out is very late in the day.

29. Mr Chua pointed out that the issue of negligence on the part of the plaintiff is not addressed by the plaintiff’s witnesses, nor is the issue of suspicion of money laundering dealt with by the 3^rd defendant’s witnesses notwithstanding the earlier mention in affidavits.  If relative fault were relevant, there would have to be supplemental witness statements on it.  Hence, the application is not too late.  I agree.

Conclusion

30. In the premises, I ordered that paragraph 8 of the Re-Amended Defence save as to the first sentence be struck out.

31. I also ordered that the costs of the application be to the plaintiff.