FALCON INSURANCE CO (HONG KONG) LTD v. FLAGSHIP UNDERWRITING MANAGEMENT LTD

HCA 312/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 312 OF 2010

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J U D G M E N T

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1. This is an appeal from the judgment of Master de Souza granting summary judgment against the defendant in the sum of US$624,005.52 together with interest thereon and costs on a full indemnity basis.

Background

2. The plaintiff is a company providing direct insurance in a wide range of personal and commercial insurance products including but not limited to hull insurance for high seas going vessels.  The defendant is a company providing insurance agency services.  By an agency agreement dated 1 August 1999 (“the Agency Agreement”) made between Falcon Insurance Company Limited (“Falcon Insurance”), a wholly owned subsidiary of the plaintiff, and the defendant (at the time known as “Lippocean Winterthur Underwriting Management Limited”), the defendant was appointed the exclusive agent in Hong Kong for the purpose of introducing marine hull and related insurance business from the Asia-Pacific region.  All rights and obligations of Falcon Insurance under the Agency Agreement were subsequently transferred from Falcon Insurance to the plaintiff in early 2002. 

3. In May 2002, the plaintiff issued a hull insurance policy in respect of a cargo vessel, MV Springbok (formerly known as MV Reedbuck).  In February 2003, MV Springbok had a collision with another vessel MV Gas Roman.  The owners of the 2 vessels had cross-claims against each other.  The plaintiff had indemnified the owners of the MV Springbok of their loss and damage resulting from the collision under the terms of the hull insurance policy and thereby subrogated the rights on recovery of such loss, damage and/or expense from the owners of the MV Gas Roman and likewise those to defend the claims of the owners of the MV Gas Roman.

4. In exercise of their subrogation rights under the hull insurance policy, under the terms and conditions of the Agency Agreement, the plaintiff had engaged the defendant to act as the plaintiff’s agent in recovering the loss, damage and/or expense suffered by the owners of the MV Springbok from the owners of the MV Gas Roman and, at the same time, in defending the loss, damage and/or expense suffered by the owners of the MV Gas Roman (“the Recovery Actions”).

5. By a settlement agreement dated 12 July 2005 (“the Settlement Agreement”), the Recovery Actions were settled between the respective owners of the MV Springbok and the MV Gas Roman.  However, despite repeated requests from the plaintiff to the defendant to report on the progress of the Recovery Actions and/or to pay over the money received from the Recovery Actions throughout 2007 to 2009, the defendant failed to pay over to the plaintiff the sum paid by the owners of the MV Gas Roman pursuant to the Settlement Agreement.  It was only through enquiries made by the plaintiff’s solicitors in late 2009 or early 2010 that it was discovered that the Settlement Agreement had been entered into and that the sum of US dollars $1,398,007.76 (“the Settlement Sum”) had been paid to the defendant pursuant to the Settlement Agreement together with interest.

6. Upon demands made by the plaintiff’s solicitors, the defendant made payment of US$600,000 to the plaintiff by way of a bank draft dated 15 January 2010.  On 26 January 2010, the plaintiff and the defendant entered into an agreement in writing (“the January Agreement”) relating to the claim by the plaintiff for the repayment of the Settlement Sum.  In the preamble of the January Agreement, the defendant acknowledged its obligation to pay to the plaintiff the whole of the Settlement Sum and the plaintiff acknowledged receipt of the sum of US$600,000 in partial settlement thereof, leaving a balance of US$798,007.76 (“the Balance”).  The January Agreement went on to record that in consideration of the plaintiff agreeing to refrain from commencing legal proceedings against the defendant for recovery of the Balance, interest and legal expenses, the defendant agreed to pay to the plaintiff:

(a)  the whole of the Balance;

(b)  interest in the agreed sum of US$125,997.26;

(c)  the plaintiff’s legal expenses in the agreed some of HK$78,500;

in the manner and at such time as stipulated in the January Agreement.

7. The January Agreement also provided that “For the avoidance of doubt, this Agreement shall not waive, compromise, release or prejudice whatsoever any claim or cause of action by [the plaintiff] against [the defendant], whether in relation to any debt may be owing by [the defendant] to [the plaintiff] (in relation to this or other subject matter) or otherwise.”  Interestingly, the January Agreement contained no similar clause relating to any possible claim or cause of action by the defendant against the plaintiff.

8. The defendant made payment of the sum of HK$78,500 agreed legal expenses and part of the other amounts which it had agreed to pay under the January Agreement.  However, it defaulted in paying a balance off US$624,005.52 and the plaintiff accordingly instituted the present Action to recover the said sum together with interest.

The defendant’s case

9. Although the defendant had, in its Defence and Counterclaim, denied that the January Agreement is a legally binding agreement and that it failed for consideration, the defendant does not now dispute the plaintiff’s claim to US$624,005.02.  However, the defendant contends that it has a counterclaim for larger sum of US$736,558.53 and accordingly a defence of set-off.  The amount counterclaimed by the defendant can be broken down as follows:

(i)  Payment allegedly made on 13 June 2002 by the defendant in respect of a reinsurance policy covering a vessel known as CHIN HSING NO 618, which caught fire and sank on or about 6 January 2002 (“the Chin Hsing Claim”)	US$292,638.87
(ii)  Payments allegedly made between 24 September 2003 and 12 May 2004 by the defendant in respect of another policy covering a vessel known as SHUN DE, which sustained engine damage on or about 17 February 2002 (“the Shun De Claim”).	US$443,919.66
TOTAL:	US$736,558.53
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10. The plaintiff makes no admission that such payments were made by the defendant and further asserts that if these payments were in fact made, they were made in excess of the authority granted to the defendant under the Agency Agreement and in breach of the provisions of the Agency Agreement.  In particular, the plaintiff contends that under the Agency Agreement, the defendant’s authority to settle claims was limited to “HK$1,000,000 or equivalent in other currency any one loss or claim” as provided for in Schedule 2 of the Agency Agreement.

11. The defendant does not appear to dispute strongly that it made the payments in excess of the authority granted to it under the Agency Agreement.  However, it argues that even if it was acting beyond its authority, this does not prevent it from recovering the sums paid on behalf of the plaintiff on the following grounds:

(a)  The defendant was not the cause of the plaintiff’s liability under the Chin Hsing and Shun De policies.  The plaintiff’s liability arose when proper claims under those policies were made.  That the defendant then settled the plaintiff’s liabilities in breach of the Agency Agreement is not a defence to the defendant’s claim for reimbursement.  The plaintiff is only entitled to seek damages for the breach of agency.

(b)  The plaintiff has ratified the defendant’s settlement of the claims made under the Chin Hsing and Shun De policies.

(c)  The defendant’s counterclaim is restitutionary.

12. I shall consider each of these arguments in turn.

Were the payments made?

13. Mr Yuen, who appears on behalf of the plaintiff, accepts that this court should not embark upon a mini trial of the defendant’s case of set-off.  However, he argues, relying upon well-established principles as repeated in Fortis Insurance Company (Asia) Ltd v Lam Hau Wah Inneo, HCA 1840/2009, unreported, 30 March 2010, per Fok J at 19-21, that this court should consider whether the allegation of set-off is a believable one.  He argues that the defendant’s case is plainly contrary to all the contemporaneous documents, inconsistent with the defendant’s contemporaneous conduct and is thus utterly unbelievable.  In summary, Mr Yuen relies upon the following points:

(a)  There is only scanty evidence to support the defendant’s claim that the payments under the Chin Hsing and Shun De policies had been made.

(b)  If the defendant had in fact made the payments as early as in the period from 2002 to 2004, why did it not seek prior approval from the plaintiff or least inform the plaintiff first?  Why did it not seek reimbursement immediately after the payments were made?  These cry out for an explanation but none has been proffered by the defendant notwithstanding that it has had ample opportunity to do so.

(c)  If the defendant genuinely believes that it has a right of set-off, one would naturally expect the defendant to have raised it when the plaintiff demanded for payment of the Settlement Sum or when the January Agreement was discussed and signed.  It did not do so.  On the contrary, by signing the January Agreement, the defendant unequivocally acknowledged its liability to pay the whole of the Settlement Sum to the plaintiff.

(d)  The defendant only raised for the first time that it had made the payments after this Action had been commenced.  In none of the contemporaneous communications between the plaintiff and the defendant prior to the commencement of this action did the defendant ever suggest that the payments had been made.  Instead, all the contemporaneous documents pointed to the contrary.

(e)  The suggestion by the defendant’s Mr Frankie Yong that the defendant had tried to contact the plaintiff’s management to discuss reimbursement off the payments but found it “impossible” to get someone to agree to meet him is a plain lie and completely unbelievable.

14. Whilst there is considerable force in Mr Yuen’s arguments, I am of the view that there is nevertheless sufficient evidence and material before me to at least raise a triable issue whether the payments had in fact been made.  In particular,

In respect of the Chin Hsing Claim:

(a)  There has been exhibited to the Affirmation of Yong Yiu Tung (“the Yong Affirmation”) a copy of the Application for Remittance (dated 13 June 2002) made by the defendant to The Hong Kong Chinese Bank Ltd for the remittance of the sum of TWD10,066,777 (equivalent to US$292,638.87) to Tong Tai Insurance Company Limited (“Tong Tai”), the lead insurer of the Chin Hsing.  The plaintiff does not appear to dispute the authenticity of this document.

(b)  It is pleaded in paragraph 6(2)(xvi) of the Re-Amended Reply that “in or about early 2007, when the Plaintiff sought an explanation from the Defendant on the reason why it had taken the Defendant almost some four and a half years to report to the Plaintiff on the settlement of the Chin Hsing claim which had allegedly taken place in June 2002, no or no substantive reply has been given by the Defendant to the Plaintiff to date”.  This is an acknowledgement by the plaintiff that the defendant had indeed reported to the plaintiff on the settlement of the Chin Hsing Claim by early January 2007.  It is not clear how the plaintiff had allegedly “sought an explanation from” the defendant as pleaded in the Re-Amended Reply as the correspondence between the parties which have been put in evidence does not include any correspondence in which the plaintiff had sought the explanation as alleged.

(c)  However, in an e-mail from the plaintiff’s Mr Elden Yau to the defendant’s Mr Frankie Yong dated 17 January 2007, it was stated in respect of the Chin Hsing Claim as follows:

“Further to our recent conversation, please send us the receipts for the various expenses and the signed Discharge Form for our proceeding with payment.”

By a further e-mail from Mr Yau to Mr Yong dated 19 March 2007, the plaintiff indicated that it wished to “conclude this case as soon as possible” and again pressed the defendant to “please send the receipts for the various expenses and the signed Discharge Form for our proceeding with payment”.  It therefore appears at least arguable that even assuming that the plaintiff had, in early 2007, sought an explanation from the defendant on the reason why it had taken the defendant almost some four and a half years to report to the plaintiff on the settlement of the Chin Hsing Claim and had not received any response from the defendant providing the explanation sought, the plaintiff was prepared to make payment on the Chin Hsing Claim.

(d)  By an e-mail dated 21 March 2007, Mr Yong informed Mr Yau as follows:

“All the relevant papers will be sent to your office within this week. However, please note the cedant will not issue Discharge Form as it is not a practice but definitely liability will be fully discharged upon settlement of a total loss.”

(e)  The next e-mail which has been put in evidence is one dated 19 April 2007 from Mr Yau to Mr Yong in which he referred to an earlier e-mail of 10 April 2007 (which is not in evidence) and stated:

“we need Cedant’s advice on the various queries raised by Munichre”

Munichre appears to have been the reinsurer with whom the plaintiff had reinsured some or all of the risk under the Chin Hsing policy.

(f)  In another e-mail dated 6 June 2007 from Mr Yau to a Mr Kenneth Kwok (also of the plaintiff), Mr Yau stated:

“Frankie said he would discuss with the placing broker on the various issues raised by Munichre. We await Frankie’s advice on this.”

(g)  In an e-mail dated 21 November 2007 from Mr Kenneth Kwok to Mr Yong, Mr Kwok sought to set out the matters discussed over lunch with Mr Yong that day.  These included (in respect of the Chin Hsing Claim):

“There are still some documents outstanding but you are hopeful that this case will be resolved before year end.”

(h)  The next item of relevant correspondence is an e-mail dated 15 December 2008 (over a year later) from the plaintiff’s Mr Alex Li to Mr Yong in which Mr Li pointed out that Mr Yong had advised in late November 2007 that there were still some documents outstanding and asking to be advised of the status.  However, more significantly, it was stated in this e-mail that the plaintiff was holding a reserve of TWD10,066,777, which is the amount which the defendant claims had been  paid to Tong Tai.  Indeed, the fact that the plaintiff was holding this reserve of TWD10,066,777 was repeated in further e-mails from the plaintiff to the defendant in March, May, June and August 2009 in which the plaintiff continue to chase the defendant for “the placing broker’s advice” on the various issues raised by Munichre.  There is no evidence from either the plaintiff or the defendant as to why the plaintiff mentioned the reserve of TWD10,066,777 in these e-mails.  Suffice it to say that I am of the view that it is certainly arguable, based on these e-mails, that the plaintiff had been satisfied that the defendant had indeed paid the sum of TWD10,066,777 to Tong Tai.

In respect of the Shun De Claim:

(i)  There has been exhibited to the Yong Affirmation a copy of an Adjustment of Claim dated 20 December 2002 prepared by Richards Hogg Lindley, the marine adjuster engaged, finding that the amount payable in respect of the damage to Shun De to be US$554,899.58.  This represented the amount which the plaintiff was required to pay to the owners of the Shun De.

(j)  It is not in dispute that the plaintiff had reinsured 20% of the risk under the Shun De policy with Partner Re.  There has been exhibited to the Yong Affirmation an Application for Funds Remittance dated 2 January 2004 evidencing the remittance by the defendant of the sum of US$110,979.92 to the Bank of China account of the owners of the Shun De, Chu Kong Maritime Consultant Company Ltd (“Chu Kong”). This is equivalent to 20% of US$554,899.58.  The Application for Funds Remittance expressly states in the section “Message & Payment Detail” that it is for “PAYMENT OF “SHUN DE” CLAIM” and in the Yong Affirmation it was deposed that the sum of US$110,979.92 represented Partner Re’s 20% contribution.

(k)  There have been exhibited to the Yong Affirmation copies of cheques dated 24 September 2003, 1 October 2003 and 12 May 2004 made in favour of the owners of the Shun De and totalling US$443,919.66.  The cheques dated 12 May 2004 bear the chop of Bank of China (Hong Kong) Ltd, Sheung Wan (Guangdong Investment Tower) Branch.  As noted above, Chu Kong maintains an account with the Bank of China.  Further, Chu Kong has an office address at Connaught Road West in Sheung Wan.

(l)  The plaintiff does not appear to dispute the authenticity of any of the documents referred to in sub-paragraphs (i), (j) and (k) above.

15. Further, in respect of both the Chin Hsing and Shun De Claims, there is no evidence that the owners of either the Chin Hsing or the Shun De have continued to press for settlement of their claims.

16. I therefore find that there is a triable issue as to whether or not the defendant had made the payments to the insured under the Chin Hsing and Shun De Claims.

17. As I find that there is a triable issue as to whether or not the defendant had made the payments to the insured under the Chin Hsing and Shun De Claims, I shall next consider whether, assuming the payments to have been made by the defendant, there is a triable issue that the defendant is entitled to recover the sums from the plaintiff (despite the fact that it was acting beyond its authority in making these payments) on any of the grounds relied upon by the defendant as set out in paragraph 11 above.

Is the plaintiff only entitled to seek damages for the breach of agency?

18. Mr Manzoni, who appears on behalf of the defendant, argues that notwithstanding that the defendant had made the payments under the Chin Hsing and Shun De Claims in excess of its authority under the Agency Agreement, it is nevertheless entitled to recover these payments from the plaintiff and that the plaintiff is only entitled to seek damages for the defendant’s breach of the Agency Agreement.  The only authority cited by him in support of his argument is John Koch Ltd v C & H Products Ltd [1956] 2 Lloyd’s Rep 59.

19. In that case, the plaintiffs acted as the agent for the defendants on the purchase of a lot of frozen fish from a seller.  The fish were originally to be shipped in November 1951 from Fraserburgh, Scotland to Israel.  However, the defendants were unable to take delivery on that date and a variation was agreed to and approved by the defendants whereby the fish were kept in cold storage in Fraserburgh until delivery, which was postponed to 15 January 1952.  As part of that variation, the defendants agreed to the payment by the plaintiffs of the sum of £1000 to the seller as deposit.  It was also agreed by the defendants that storage fees would be paid.  By late December 1951, it became apparent that the defendants would not be able to take delivery of the fish by 15 January 1952.  The plaintiffs endeavoured to obtain instructions from the defendants but were unable to do so as the person in charge at the defendants could not be contacted.  Accordingly, on 2 January 1952, the plaintiffs gave notice to the seller to cancel the contract and paid the sum of £200 to the seller as storage fees.  In so cancelling the contract, the plaintiffs helped the defendants to save about £300 in storage fees.  The £1000 deposit was forfeited and the plaintiffs claimed reimbursement of that amount together with the £200 paid as storage fees.  At first instance, judgment for the sum of £1200 was given in favour of the plaintiffs.

20. The defendants appealed.  Whilst it was not contested that the £200 storage charges should be paid to the plaintiffs, the defendants contended that the trial judge had been wrong insofar as he had awarded not only the £200 to the plaintiffs, but also the £1000.  The defendants argued that whilst in the ordinary case, an agent is entitled to be reimbursed money which he properly expends on his principal’s behalf, and whilst it was accepted that the £1000 was money properly expended on the defendants’ behalf, that was subject to an implied term that the agent will not act wrongfully in regard to the payment claimed.  The defendants further argued that as the plaintiffs had cancelled the contract without the authority of the defendants, and as that cancellation meant that the £1000 became forfeited under the terms of the contract, that was a wrongful act done by the plaintiffs and therefore the plaintiffs could not recover the £1000 under the indemnity which would otherwise would have been available to it.  The English Court of Appeal upheld the judgment which had been entered for the plaintiffs in the court below.  The majority of the court (Singleton and Romer LJJ) held that whilst the plaintiffs had indeed acted in breach of their duty as agent to the defendants by cancelling the contract without the authority of the defendants and such breach gave rise to a claim by the defendants against the plaintiffs for damages for such breach, the defendants had not been able to prove that they had suffered any damage by reason of the breach.  As regards the £1000, this was money which the plaintiffs had paid to the seller at the request of the defendants before any breach committed by the plaintiffs. Accordingly, the vested right of the plaintiffs to recover that amount from the defendants subsisted and the breach of contract by the plaintiffs was no defence to the defendants to the plaintiffs’ claim.

21. I am of the view that the facts in John Koch Ltd v C & H Products Ltd are very different from the facts of the present case and that that case does not assist the defendant.  In that case, the amount of £1000 claimed by the plaintiffs had been paid by the plaintiffs with the express approval and agreement of the defendants and the defendants did not dispute that the amount of £1000 had been paid with their approval.  There was accordingly no question of the amount having been paid without authority.  The breach of contract by the plaintiffs occurred after such payment and had nothing to do with the payment. Conversely, in the present case, what the plaintiff contends is that the very payments made by the defendant were made in breach of the Agency Agreement and that the payments were made without authority or in excess of the defendant's authority.  I do not accept Mr Manzoni’s argument that in such circumstances, the defendant’s breaches of the Agency Agreement is not a reason entitling the plaintiff to refuse reimbursement to the defendant and that the plaintiff is, in such circumstances, only entitled to sue the defendant for damages arising from the breach.  I am therefore unable to find that the defendant has any triable claim against the plaintiff for recovery of the sums allegedly paid under the Chin Hsing and Shun De Claims on this ground.

Ratification

22. Mr Manzoni also argues that the plaintiff has in any event ratified the defendant’s settlement of the claims made under the Chin Hsing and Shun De policies and cannot therefore complain that they were made in breach of the Agency Agreement.  Relying on Reid v Rigby & Co[1894] 2 QB 40, he argues that where an agent without authority pays for the liabilities of its principal, the principal must either repudiate the payment or adopt it, and it will be taken to have adopted it if it accepted the benefit of the payment.

23. In Reid v Rigby & Co,the defendants’ manager, Allport, had, without authority, borrowed money from the plaintiff, stating that he wanted the money to pay the wages of the defendants’ workmen.  The money was paid into the defendants’ bank account and was used to discharge the defendants’ workmen’s wages.  It was held that the plaintiff was entitled to recover the money from the defendants.  Charles J stated (at p 43):

“Allport has paid the money in to the defendants’ banking account; and either it is there now or it has been paid in wages to the defendants workmen. The latter, I think, is the true inference; but in either case I think the result is the same. Suppose that Allport had paid the money direct to the workmen, and asked the defendants to repay him, could the defendants have refused? It seems to me, that if the wages had been so paid, then, when the defendants had discovered the fact of payment, they must have either repudiated such payment or adopted it. By accepting the benefit of the payment they would adopt it.”

24. Collins J agreed with Charles J and stated (at p 44):

“The question for our determination is whether the plaintiff can maintain an action to recover that sum. If, instead of giving a cheque, Allport had asked the plaintiff to pay the workmen, and the plaintiff had done so, could not the plaintiff have maintained an action against the defendants to recover what he had paid? I am of opinion that he could; for what he did would have been a payment of the defendants’ debt.”

25. Mr Manzoni argues that the payments made by the defendant under the Chin Hsing and Shun De policies had the effect of meeting the plaintiff’s liability as insurer under these policies.  He also argues that the plaintiff has accepted the benefit of these payments and has therefore adopted them.  He further argues, relying on the e-mails which I have referred to in paragraph 14(e) to (h) above that not only has the plaintiff accepted the benefit of the payments, it had, after learning of the defendant’s settlement of the Chin Hsing Claim proceeded to submit its own claim with Munich Re, the reinsurer.  He argues that having been made aware for a significant period of time of the defendant’s settlement of the Chin Hsing Claim, the plaintiff never repudiated it but had acted on it when it submitted its own claim to Munich Re.  In those circumstances, he argues that the plaintiff’s actions are (in the words of McNair J in Bank Melli Iran v Barclays Bank [1951] 2 The Times LR 1057 at 1064) “completely inconsistent with an intention to repudiate” and accordingly constituted ratification of the payment made by the defendant.

26. In Bank Melli Iran v Barclays Bank, McNair J held (at p 1063) that “it is plain that mere inaction or silence may be evidence from which a jury might infer an intention to ratify” and on the facts of the case, expressed the view (at pp 1064-1065) that an interval of nearly 6 weeks of delay and inaction might afford evidence from which an intention to ratify might be inferred.

27. Mr Yuen, however, argues that the defendant’s allegation of ratification is misconceived.  He argues that the ratification relied upon by the defendant is implied ratification.  Relying on Bowstead & Reynolds on Agency, 19^th Ed, §§2-070 & 2-073 and Bank Melli Iran v Barclays Bank, op cit, at pp 1058 & 1064, Mr Yuen contends that:

(a)  implied ratification requires clear evidence;

(b)  the words of conduct relied on have to be unequivocal, and must not be such that they could be accounted for by other interpretations; and

(c)  the principal’s conduct in question has to be inconsistent with the non-recognition of the act done by the agent.

28. Mr Yuen then argues that none of the conduct relied on by the defendant can be said to be unequivocal conduct that can only be explained on the basis of ratification:

(a)  Mr Yuen argues that the plaintiff cannot possibly be said to have accepted the benefit of the payments allegedly made by the defendant.  He argues that Reid v Rigby & Co is wholly distinguishable from the present case as in that case, the payment was made directly to the principal and the principal had the benefit of the payment whereas in the present case, the payments were not made to the plaintiff but to third parties.  He further argues that the plaintiff cannot possibly be said to have accepted the benefit since the payments were made without prior notice to the plaintiff and the plaintiff was presented with a fait accompli and could not have done anything to reverse the situation.

(b)  Mr Yuen contends that none of the conduct relied on by the defendant as constituting evidence of ratification can possibly amount to ratification.  In particular, he contends that:

(i)  At the material time, the plaintiff was only aware that claims had been made in respect of the damage to the 2 vessels but it cannot be disputed that the plaintiff was not aware of the fact that the payments had been made.  Without such knowledge, they cannot possibly be any ratification.

(ii)  The conduct and e-mails relied upon by the defendant at most show that the plaintiff was on the one hand making enquiries with the defendant on the progress and on the other hand seeking to preserve its rights towards its reinsurer; there is no evidence that the plaintiff sought to claim (let alone received) reimbursement from the reinsurers.

(iii)  As a result of the defendant’s conduct, the plaintiff is now exposed to the risk that the reinsurers may not agree to reimburse the plaintiff in the event that the plaintiff has to reimburse the defendant.

(c)  Mr Yuen also argues that the defendant’s contention that the plaintiff had benefited from the payments allegedly made by the defendant is misleading, if not altogether a red-herring, for the following reasons:

(i)  If a claim is properly handled, the plaintiff would be able to obtain reimbursement from its reinsurer.  On the contrary, if a claim is not handled properly, the plaintiff’s reinsurer may decline to pay.

(ii)  In the present case, it is not yet known if the plaintiff can derive any benefit as suggested by the defendant.  Since the defendant had failed to report the progress of the matter to the plaintiff and since the payments which had allegedly been made by the defendant had been made without the plaintiff’s prior knowledge, the plaintiff has been deprived of the chance to procure the necessary investigation to be made.  The defendant’s reliance on adjusters’ reports is irrelevant since the plaintiff was not informed of the progress, and thus deprived of the chance to participate if it found it necessary to do so. Hence, whether or not there was in fact a liability to make the payments (or any part thereof) remains uncertain.

(iii)  Even if the defendant had in fact made the payments, it would only mean that the defendant (in law, as a volunteer) had procured a discharge of the plaintiff’s liability towards the assured.  Yet, due to its failure to report to the plaintiff and to obtain approval from the plaintiff before paying, the defendant has put the plaintiff at risk as the reinsurers may not necessarily reimburse the plaintiff.

(iv)  From the e-mails exchanged, it is clear that the plaintiff’s reinsurers have been pressing the plaintiff very hard for answers to its enquiries.  Due to the defendant’s breach of its agent duties, the plaintiff could not provide satisfactory answers to the reinsurers.  In the event that the plaintiff’s reinsurers decline to reimburse the plaintiff, and yet the plaintiff has to pay the defendant, the ultimate one who suffers is the plaintiff.

29. Despite Mr Yuen’s detailed, eloquent and persuasive arguments, I am of the view that there is, on the evidence and materials now before me, at least a triable issue as to whether or not the plaintiff had ratified the payment allegedly made by the defendant under the Chin Hsing policy.

30. Dealing first with Mr Yuen’s submissions as to whether or not the plaintiff has benefited from the payments allegedly made by the defendant, it is important to note that Mr Yuen’s submission is that it is not yet known if the plaintiff has benefited from the payments, not that the plaintiff has not benefited.  Whilst only the plaintiff is in a position to place evidence before this court as to whether or not its reinsurers have declined to pay, as Mr Manzoni pointed out in his submissions, no disclosure of this has been made by the plaintiff nor indeed has the plaintiff disclosed whether or not it has received any reimbursement from its reinsurers.  These are matters which accordingly need to be investigated at trial and I am not able on this application to make any finding as to whether or not the plaintiff has benefited from the payments allegedly made by the defendant.

31. As regards Mr Yuen’s argument that Reid v Rigby & Co is distinguishable from the present case as in that case, the payment was made directly to the principal and the principal had the benefit of the payment whereas in the present case, the payments were not made to the plaintiff but to third parties, this overlooks the views expressed by Charles J and Collins J in the passages I have cited above that it would not have made any difference to the result had the money which the defendant’s manager had borrowed from the plaintiff not been paid into the defendant’s account but directly to the workmen.  Accordingly, the mere fact that the payments in the present case were not made to the plaintiff but to the owners of the Chin Hsing and Shun De does not provide any valid distinction between the present case and Reid v Rigby & Co.  The crucial question is whether or not the plaintiff has benefited from the payments allegedly made by the defendant and this is a matter which, for the reasons I have stated above, needs to be investigated at trial.  This is particularly so given that there is no evidence that the owners of the Chin Hsing and Shun De are still pursuing payment on their claims for compensation.

32. I am also not able to accept Mr Yuen’s argument that the plaintiff cannot possibly be said to have accepted the benefit of the payments allegedly made by the defendant since the payments were made without prior notice to the plaintiff and the plaintiff was presented with a fait accompli and could not have done anything to reverse the situation.  It is in the very nature of cases in which an agent seeks to argue that the principal has ratified a payment made by him without prior authority that the payment would probably have been made by the agent without prior notice to the principal and the principal is presented with a fait accompli.  However, what is crucial is how the principal responds when he discovers the payment.

33. I do not agree with Mr Yuen’s contention that none of the plaintiff’s conduct relied on by the defendant as constituting evidence of ratification of the payment under the Chin Hsing Claim can possibly amount to ratification:

(a)  Insofar as Mr Yuen argues that the plaintiff was only aware that claims had been made in respect of the damage to the 2 vessels but that it cannot be disputed that the plaintiff was not aware the fact that the payments had been made, this clearly cannot be correct insofar as it relates to the payment allegedly made by the defendant in respect of the damage to the Chin Hsing.  Although, by way of a re-amendment of the Reply and Defence to Counterclaim, an allegation pleaded in the original paragraph 6(2)(vii) that:

“it was later known to the Plaintiff by way of request of payments made by the Defendant in about November 2006 that in about June 2002 (even before the Defendant had first reported the claim to the Plaintiff and without any or any sufficient authority from the Plaintiff), the Defendant had allegedly made settlement payment to the cedant, Tong Tai, in the alleged sum of USD292,638.87”

was amended to read:

“it was not until the filing of the Defence and Counterclaim in May 2010 in this action that the Plaintiff first became aware that the Defendant had allegedly made settlement payment to the cedant, Tong Tai Insurance Company Ltd., in the alleged sum of USD292,638.87”,

as noted in paragraph 14(b) above, it is still pleaded in paragraph 6(2)(xvi) that:

“further, in or about early 2007, when the Plaintiff sought explanation from the Defendant on the reason(s) why it had taken the Defendant almost some four and a half years to report to the Plaintiff on the settlement of the Chin Hsing claim which had allegedly taken place in June 2002, no or no substantive reply has been given by the Defendant to the Plaintiff to-date”.

Thus, even by its own pleading, the plaintiff appears to have accepted that it was already aware of the settlement by the defendant of the Chin Hsing Claim by at least early 2007.  Furthermore, I am of the view, based on the e-mails which I have referred to in paragraph 14(c) to (h) above, that there is at least a triable issue that the plaintiff was, by at least December 2008 (if not by early 2007), already aware of the settlement by the defendant of the claim under the Chin Hsing policy. In particular, if the defendant had not told the plaintiff of the settlement of the same, it is strange that the plaintiff would have stated in its e-mails from December 2008 onwards that it was holding a reserve of TWD10,066,777, the very amount which the defendant says (and the Application For Remittance which I have referred to in paragraph 14(a) above shows) it had paid to Tong Tai.

(b)  Whilst it is certainly open to the plaintiff to argue, as Mr Yuen has done before me, that the conduct and e-mails relied upon by the defendant only show that the plaintiff was on the one hand making enquiries with the defendant on the progress and on the other hand seeking to preserve its rights towards its reinsurer, I am of the view that it is also arguable that the plaintiff’s conduct (and in particular, its various e-mails) since at least December 2008 (if not before) is inconsistent with an intention to repudiate the payment which was allegedly made by the defendant in respect of the damage to the Chin Hsing.  Indeed, I am of the view that on the evidence now before me, the latter argument would be more compelling.  However, as I am of the view that this is an issue which should be resolved at trial, I should not express any concluded view on the issue.

34. The situation with regard to the Shun De Claim is, however, quite different.  Whilst there is evidence that the defendant informed the plaintiff of the claim under the Shun De policy, there is no evidence that the plaintiff was ever informed about the alleged payment made by the defendant under the Shun De policy before the defendant pleaded, in the Defence and Counterclaim, that it had done so.  There is also no evidence of any conduct on the part of the plaintiff which is inconsistent with an intention to repudiate the alleged payment made by the defendant under the Shun De policy.  I am therefore of the view that the defendant has failed to show but there is any triable issue as to whether or not the plaintiff had ratified the alleged payment made by the defendant under the Shun De policy.

35. Mr Manzoni argues, however, that although there is no information as to whether or not the plaintiff had reinsured the Shun De policy as well, reinsurance is common and the plaintiff may well have made a claim with its reinsurers in respect of the Shun De Claim.  He argues that given the plaintiff’s lack of disclosure in respect of what had happened in relation to the reinsurance of the plaintiff’s liability under the Chin Hsing policy, the defendant’s claim under the Shun De Claim should also proceed to trial so that full disclosure can be made.  I do not accept Mr Manzoni’s argument in this regard.  After all, it is trite law that on an application for summary judgement, the defendant bears the burden of showing that there is a triable issue and a desire to investigate alleged obscurities and a hope that something will turn up on the investigation cannot, separately or together, amount to sufficient reason for refusing to enter judgment for the plaintiff.  A defendant cannot get leave to defend by putting forward a case that is all surmise.  See, for example, The Lady Anne Tennant v Associated Newspapers Group Ltd [1979] FSR 298, at 303.

36. In the light of the foregoing, I hold that the defendant has a triable claim against the plaintiff for recovery of the payment allegedly made in respect of the Chin Hsing Claim on the ground that although such payment was made in excess of the authority granted to the defendant, the plaintiff has nevertheless ratified the payment.

Restitution

37. Mr Manzoni argues that an agent's right to be reimbursed by its principal may arise both under contract and in restitution (see Bowstead & Reynolds on Agency, 19^th Ed, §§7-057 to 7-059).  Where the claim is made in restitution, the claim is “confined to the reimbursement of payments made by the agent under compulsion, in respect of which the ultimate liability is on the principal, and the benefit of which the principal obtains” (Bowstead & Reynolds on Agency, §7-059).  These principles are not disputed by Mr Yuen.

38. However, Mr Manzoni goes on to argue that as for whether an agent had made a payment under compulsion, “the fundamental question is whether in the circumstances it was reasonably necessary in the interests of the volunteer or the person for whom the payment was made, or both, that the payment should be made - whether in the circumstances it was ‘just and reasonable’ that right of reimbursement should arise” Owen v Tate [1976] 1 QB 402, per Scarman LJ at 409H-410A.  Mr Manzoni further relied on the following passage from the judgment of Scarman LJ (at 411H-412B):

“In my judgment, the true principle of the matter can be stated very shortly, without reference to volunteers or to the compulsions of the law then I stated as follows. If without an antecedent request a person assumes an obligation or makes a payment for the benefit of another, the law will, as a general rule, refuse him a right of indemnity. But if you can show that in the particular circumstances of the case there was some necessity for the obligation to be assumed, than the law will grant him the right of reimbursement if in all the circumstances it is just and reasonable to do so.”

39. Relying on the above passages from the judgment of Scarman LJ, Mr Manzoni argues that the circumstances in the present case are such that it would be just and reasonable for the plaintiff to reimburse the defendant for the amounts which the defendant as allegedly paid out on the plaintiff’s behalf in respect of the Chin Hsing and Shun De Claims for the following reasons:

(a)  The plaintiff and the defendant were in a pre-existing relationship of principal and agent, unlike the plaintiff and defendant in Owen v Tate who were strangers.

(b)  The defendant’s actions were not completely unforeseeable.  The defendant was the plaintiff’s exclusive agent and that the authority to settle claims on the plaintiff’s behalf, subject to a limit of HK$1 million. The plaintiff’s complaint is not that the defendant’s actions were totally unauthorised, but rather that the defendant was acting in excess of the authority which it had.

(c)  The payments were clearly for the benefit of the plaintiff.  They had the effect of extinguishing the plaintiff’s liability as the insurer in respect of the Chin Hsing and Shun De Claims.

(d)  There was clearly an obligation on the plaintiff to make a payment under both policies of insurance.  There is no criticism as to the settlement per se or their quantum.

(e)  The payments were not of the defendant’s own choosing.  The defendant’s evidence is that it was under pressure from the brokers to settle the claims quickly.

(f)  Both claims being payable, and in light of the pressure from the brokers, the defendant decided to pay out the claims on the plaintiff’s behalf first.

40. Mr Yuen, argues, however that the defendant’s case on restitution is doomed to fail for the following reasons:

(a)  There cannot be any claim for restitution unless the defendant was under compulsion to make payment.  Such compulsion has to be compulsion in law, not just any other compulsion.  See Owen v Tate, op cit 407G-H; Bowstead & Reynolds on Agency, op cit §7-059 and Goff & Jones, The Law of Restitution, 7^th Ed 2007, §§15-001 & 15-002.

(b)  In the present case, there is no suggestion, let alone evidence, that the defendant had been compelled in law to make the payments under the Chin Hsing and Shun De Claims.  On the contrary, on the defendant’s own case, the relevant insurance policies were written by the plaintiff and the defendant only acted as an agent.  Hence the legal liability (if any) to pay the insured rested with the plaintiff.

(c)  The allegation that the defendant was under pressure to make the payments under the Chin Hsing and Shun De Claims are difficult to follow.  If there was in fact such pressure, why didn’t the defendant inform the plaintiff?  It is not disputed that the defendant did not inform the plaintiff and there is no explanation from the defendant for its failure to do so.

(d)  In any event, even assuming that there was such alleged pressure to make the payments, such pressure did not constitute compulsion in law.

41. In citing the above passages from the judgment of Scarman LJ in Owen v Tate, and in emphasising that the fundamental question is whether in the circumstances it is just and reasonable that the right of reimbursement should arise, Mr Manzoni appears to be trying to downplay the requirement that a plaintiff claiming restitution must have made a payment under compulsion of law before it is entitled to claim to be reimbursed by the defendant in restitution.  However, it does not appear to me that in saying, in the passage relied upon by Mr Manzoni, that the fundamental question is whether in the circumstances it is just and reasonable then a right of reimbursement should arise, Scarman LJ was saying that there is no requirement for the plaintiff to prove that he made the payment under compulsion before he can succeed in claiming restitution from the defendant.  Indeed, just before the first passage cited by Mr Manzoni above, Scarman LJ stated:

“These cases, to my mind, amply support the proposition that a broad approach is needed to the question whether in circumstances such as these a right of indemnity arises, and that broad approach requires the court to look at all the circumstances of the case. It follows that the way in which the obligation came to be assumed is a relevant circumstance. If, for instance, the plaintiff has conferred a benefit upon the defendant behind his back in circumstances in which the beneficiary has no option but to accept the benefit, it is highly likely that the courts will say that there is no right of indemnity or reimbursement. But (to take the other extreme) if the plaintiff has made a payment in a situation not of his own choosing, where the law imposes an obligation upon him to make the payment on behalf of the principal debtor, then clearly the right of indemnity does arise.”

Further, in the second passage cited by Mr Manzoni, Scarman LJ reiterated that the plaintiff must be able to show that “in the particular circumstances of the case there was some necessity for the obligation to be assumed”.

42. It is also important to note that Stephenson and Ormrod LJJ, whilst expressing their agreement with the judgment of Scarman LJ, both emphasized the requirement that the payment made by the plaintiff must have been under compulsion.  Stephenson LJ expressed his agreement (at p 413C-D) with the following statement in Cheshire and Fifoot’s Law of Contract, 8^th ed (1972), p 632:

“At common law … the mere volunteer, officious or benevolent, has no right of action. Only if the plaintiff has paid money under constraint is he entitled to sue the defendant for restitution. The nature of the constraint varies with the circumstances.”

Ormrod LJ also stated (at p 413E-F):

“It seems to me that the crucial question in this area of the law is whether the plaintiff is truly a volunteer in the proper sense of the word, or whether he has been compelled to make the payments.”

I am therefore of the view that a plaintiff claiming restitution must have made a payment under compulsion in law before it is entitled to claim to be reimbursed by the defendant in restitution.

43. As I have already held above that the defendant has a triable claim against the plaintiff for recovery of the payment allegedly made in respect of the Chin Hsing policy on the ground that the plaintiff has ratified the payment, it is not necessary for me to consider whether the defendant is entitled to claim reimbursement of this payment from the plaintiff in restitution.  However, for the sake of completeness, I would say that if I had had to decide the point, I would have held that the defendant does not have a triable claim against the plaintiff based on restitution.  This is because the only evidence of alleged compulsion which the defendant is able to point to is a statement in the Yong Affirmation that Tong Tai and the brokers were placing the defendant under great pressure to settle the Chin claim very quickly.  I am of the view that this is not evidence that the defendant was under compulsion in law to make the payment.

44. As regards the payment made under the Shun De Claim, the alleged compulsion was a threat by the insurance brokers to deduct the amount of the claim premium that was otherwise payable to other insurers who underwrote the same fleet and other accounts. Again, I am of the view that this is not evidence that the defendant was under compulsion in law to make the payment.  In particular, Mr Yong himself admits that this is not something the brokers should do.  I therefore hold that the defendant does not have a triable claim against the plaintiff for reimbursement of the alleged payment made under the Shun De policy based on restitution.

Limitation

45. Whilst I have held above that the defendant has a triable claim against the plaintiff for recovery of the payment allegedly made in respect of the Chin Hsing Claim on the ground that the plaintiff has ratified the payment, Mr Yuen argues that the defendant’s claims for reimbursement under the Chin Hsing and Shun De Claims are both statute barred.

46. As I have held that the defendant does not have a triable claim against the plaintiff for recovery of the payment allegedly made in respect of the Shun De Claim, I do not propose to deal with Mr Yuen’s arguments that such a claim would be statute barred.

47. In respect of the defendant’s claim for reimbursement under the Chin Hsing Claim, Mr Yuen argues that as the alleged payment made by the defendant under the Chin Hsing Claim was made in June 2002, more than 6 years had elapsed by the time the defendant made its claim for reimbursement and the claim is accordingly time-barred under section 4(1) of the Limitation Ordinance (Cap 347).  He also argues that the various points raised by the defendant in its pleadings to answer the plaintiff’s limitation plea are unarguable:

(a)  Mr Yuen argues that the defendant’s assertion that its entitlement to a set-off is in the nature of the defence and thus not subject to any time bar is unarguable because only a defence properly so-called is not subject to any time bar.  However, the defendant’s counterclaim in the present case is a claim for a debt arising from a separate transaction.  Such a set-off is the subject of the statutory limitation period.

(b)  The defendant’s assertion that the monies owed by the plaintiff to the defendant (or vice versa as the case may be) were in the nature of running account is an arguable because there is simply no evidence to support the existence of such a running account.

(c)  Insofar as the defendant relies upon section 23 of the Limitation Ordinance and contends that the plaintiff has made acknowledgement of the debt arising from the Chin Hsing Claim in various emails sent by the plaintiff in 2007 and thereafter which I have already referred to in paragraph 14 above, Mr Yuen argues that when one looks at the e-mails relied on by the defendant, they are far from sufficient to constitute any acknowledgement for the purpose of section 23.

48. Dealing first with the defendant’s contention that the plaintiff has made acknowledgement of the debt arising from the Chin Hsing Claim, section 23(3) of the Limitation Ordinance provides:

“Where any right of action has accrued to recover any debt or other liquidated pecuniary damage … and the person liable or accountable therefor acknowledges the claim …, the right shall be deemed to have accrued on and not before the date of the acknowledgement or the last payment …”

49. As held by the Court of Final Appeal in New World Development Co Ltd & Others v Sun Hung Kai Securities Ltd & Another (2006) HKCFAR 403 at §89, the question which calls for determination is whether the relevant e-mails relied upon by the defendant constitute a sufficient acknowledgement of the claim for the purposes of section 23.  The Court of Final Appeal further gave the following guidance as to the proper approach (at §§90-93):

(a)  The question is one of construction.  Whether a document is or is not an acknowledgement must depend on what the document states.

(b)  In construing the document relied on, the court will look at connected documents (not necessarily expressly referred to in the document relied on) to ascertain its proper meaning, as where, for instance, an acknowledgement emerges from weaving together two or more letters written by the debtor in response to letters from the creditor.

(c)  The object of the construction exercise is to decide whether, fairly read, the document relied on constitutes an acknowledgement by the debtor of a liability to pay outstanding amounts to the creditor.  There is no need for the document to specify the amount of the debt so long as it can be ascertained by other means, including resort to extrinsic evidence, without requiring the parties’ further agreement.

(d)  Even if the document relied on acknowledges that debt, it is not a sufficient acknowledgement for the purposes of this section if it is accompanied by words which nullify or materially qualify that acknowledgement, for instance by confessing and avoiding the debt or asserting a set-off or cross-claim which renders the document in effect a denial of liability: see, eg, Surrendra Overseas Ltd v Government of Sri Lanka [1977] 1 WLR 565 at p 575.

50. Adopting the above approach, I am of the view that it is certainly arguable that the relevant e-mails from the plaintiff which are relied upon by the defendant do constitute a sufficient acknowledgement for the purposes of section 23(3).  In the circumstances, I am of the view that even assuming the correctness of Mr Yuen’s arguments set out in paragraph 47(a) and (b) above, there remains a triable issue whether or not the defendant’s claim is time-barred.  I do not accordingly propose to express any views on these other arguments of Mr Yuen.

The connection between the plaintiff’s claim and the defendant’s counterclaim

51. As I have concluded that the defendant has a triable counterclaim against the plaintiff for the sum of US$292,638.87 under the Chin Hsing Claim, the question which arises is how this impacts upon the plaintiff’s application for summary judgment.  The law in this regard has been summarised in Hong Kong Civil Procedure 2012, Vol 1, §14/4/14 as follows:

“An analysis of the authorities as to what orders should be made for human where the defendant raises a set-off or counterclaim shows that there are four different classes or groups of such orders, namely:

(a) where the defendant can show an arguable set-off, whether equitable or otherwise, he is entitled to leave to defend to the extent of the set-off and the court has no discretion;

(b) where the defendant sets up a bona fide counterclaim arising out of the same subject matter as the action and connected with the grounds of defence, the order should not be for judgment on the claim, subject to a stay pending trial of the counterclaim, but should be for unconditional leave to defend, even if the defendant admits the whole or part of the claim;

(c) where there is no defence to the claim but a plausible counterclaim of not less than the claim is set up, judgment should be for the plaintiff on the claim with costs, stayed until trial of the counterclaim;

(d)  where the counterclaim arises out of a separate and distinct transaction or is wholly foreign to the claim, judgment should be for the plaintiff with costs without a stay; the lack of clarity between classes (b), (c) and (d) gives the court freedom to respond to the perceived justice of the individual case (United Overseas Ltd. v. Peter Robinson Ltd., March 26, 1991, CA Transcript 91/0297, per Bingham L.J.).”

52. Mr Manzoni argues that the defendant’s counterclaim constitutes both a legal and equitable set-off and hence unconditional leave to defend should be granted.

53. In respect of legal set-off, Mr Manzoni contends, relying on the following passage in the judgment of Leggatt LJ in Axel Johnson Petroleum AB v MG Mineral Group AG [1992] 1 WLR 270 at 272 that legal set-off applies to debts which are liquidated (or capable of being ascertained with precision) and mutual, though they need not be connected:

“For set-off to be available at law the claim and cross claim must be mutual, but they need not be connected. They need not be debts strictly so-called, but may sound in damages. The question is, in the language of Tindall C.J. in Morley v. English (1837) 4 Bing. N.C. 58, 71, ‘whether the demand is capable of being liquidated, or ascertained with precision at the time of pleading.’ ”

54. Mr Manzoni contends that in the present case, both the plaintiff’s claim and the defendant's counterclaim are liquidated - the plaintiff’s claim is for the sum of US$624,005.52 and the defendant’s counterclaim is for the sum of US$292,638.87.

55. Relying on the judgment of Le Pichon J (as she then was) in Re Finbo Engineering Co Ltd [1998] 2 HKLRD 695 at 702, Mr Manzoni argues that the plaintiff’s claim and the defendant’s counterclaim are also mutual.  In Re Finbo Engineering Co Ltd,Le Pichon J cited the following passage from Deerham on Set-Off (2^nd Ed, 1996) at pp 319-320 with approval:

“Mutuality in fact refers to two characteristics, that the demands must be between the same parties, and that they must be held in the same capacity, or right, or interest. It is concerned with the status of the parties and their relationship to each other. It is not concerned with the nature of the claims themselves. ... The requirement of same parties is intended to ensure that A’s right to sue B may not be set off against A’s indebtedness to C, or that a joint demand may not be set off against a separate demand. The same capacity or right means that each of the parties, who is liable to the other, must be beneficially interested in a cross-claim against that other. In other words, ‘there must be identity between the persons beneficially interested in the claim and the person against whom the cross-claim existed.’ ”

56. Mr Manzoni therefore argues that “mutual” simply means that the demands are between the same parties and held in the same capacity, right or interest.  He contends that the plaintiff’s claim and the defendant’s counterclaim are mutual because they are both held in the capacity as principal and agent.

57. Mr Yuen does not dispute the propositions of law as contended for by Mr Manzoni although he relies upon different authorities to support the same propositions: Johnson & Werlen, Set-Off Law and Practice: An International Handbook (2^nd Ed) at §11.09 and Henriksen Rederi A/S v THZ Rolimpex, “The Brede” [1974] 1 QB 233 at p 246C.

58. Mr Yuen also does not dispute that the plaintiff’s claim and the defendant’s counterclaim are mutual.  However, he argues that although the defendant claims a fixed sum under the Chin Hsing Claim, it is not a debt or ascertained sum as such.  He argues that in law, the defendant is seeking reimbursement from the plaintiff for the payment it had allegedly made on the plaintiff’s behalf.  This would involve the question of whether the defendant is entitled to payment, and if so, how much.  He argues that since the defendant had failed to report to the plaintiff the progress of the claims, there were clear breaches of duties on the defendant’s part and the plaintiff would be in a position to claim loss and damage against the defendant.  The defendant would therefore not be entitled to recover the full amount of the payment made under the Chin Hsing Claim.  Accordingly, even if the defendant had in fact made the payment under the Chin Hsing Claim, it does not follow that the sum (if any) recoverable by the defendant from the plaintiff is necessarily the same as the amount that the defendant asserts.

59. I do not accept Mr Yuen’s submission.  As is stated clearly in the citation from the judgment of Leggatt LJ in Axel Johnson Petroleum AB v MG Mineral Group AG above, in the passage from the judgment of Lord Denning in Henriksen Rederi A/S v THZ Rolimpex, “The Brede” which is relied upon by Mr Yuen and also in the judgment of Leggatt LJ in Gary Fearns v Anglo-Dutch Paint & Chemical Paint Co Ltd [2010] EWHC 2355 (another authority relied upon by Mr Yuen) at §16, what is required is that the defendant’s claim is one which can be ascertained with certainty at the time of pleading.  The effect of Mr Yuen’s submission, however, is that to be able to rely on a legal set-off, a defendant must show that he would be entitled, at the time of judgment, to the very amount which he claims.  That is not supported by any of the authorities which both he and Mr Manzoni rely upon.  Indeed, it appears to me that Mr Yuen’s submission runs contrary to the following description of the nature of a legal set-off as set out in the judgment of Lord Hoffman in Stein v Blake [1996] AC 243 at 251C-D, cited in the judgment of Leggatt LJ in Gary Fearns v Anglo-Dutch Paint & Chemical Paint Co Ltd at §14:

“Legal set-off does not affect the substantive rights of the parties against each other, at any rate until both causes of action have been merged in a judgment of the court. It addresses questions of procedure and cash-flow. As a matter of procedure, it enables a defendant to require his cross-claim (even if based upon a wholly different subject matter) be tried together with the plaintiff’s claim instead of having to be the subject of a separate action. In this way it ensures that judgment will be given simultaneously on claim and cross-claim and thereby relieves the defendant from having to find the cash to satisfy a judgment in favour of the plaintiff (or, in the 18th century, go to a debtor’s prison) before his cross-claim has been determined.”

60. I therefore agree with Mr Manzoni that it is arguable that the defendant’s counterclaim under the Chin Hsing Claim constitutes a legal set-off.  Accordingly, the defendant should have leave to defend to the extent of this counterclaim.

61. As I have found that it is arguable that the defendant’s counterclaim constitutes a legal set-off, it is not necessary for me to express any view as to whether not it is also arguable that it constitute an equitable set-off or indeed whether the defendant’s counterclaim falls under classes (b), (c) or (d) set out in Hong Kong Civil Procedure 2012, Vol 1, §14/4/14.

Conclusion

62. In the light of the foregoing, I would allow this appeal and order as follows:

(a)  the judgment of Master de Souza dated 14 October 2010 be set aside;

(b)  the defendant do pay the plaintiff the sum of US$331,366.65 or the Hong Kong dollar equivalent at the time of payment with interest thereon at the rate of 2% above judgment rate from the 26 February 2010 until payment; and

(c)  the defendant do have unconditional leave to defend to the extent of US$292,638.87.

I also direct that the parties fix a hearing before me to argue the issue of costs, the parties’ solicitors to agree with each other on the estimated length of the hearing.