DEX ASIA LTD v. DBS BANK (HONG KONG) LTD AND ANOTHER

HCA2361/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2361 OF 2006

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JUDGMENT

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1.  This was the trial of an unusual banking dispute.

2.  For ease of reference, this judgment is arranged in the following sections :

I.       Introduction

3.  The plaintiff DEX Asia Ltd (“DEX”) is a special purpose BVI company.

4.  The 1^st defendant DBS Bank (Hong Kong) Ltd (“DBS” or “the Bank”) is a well-known bank carrying on business in Hong Kong.

5.  The 2^nd defendant Lin Howe (also known as Albert Lin) (“Mr Lin”) was the former sole director of DEX, who gave the disputed fax instruction in question to DBS as appears below.  He was acting in person, and was absent at trial.

6.  The 1^st third party BBMF Corporation (“BBMF”) is a Nevada company.

7.  The 2^nd third party Yih Hann Lian (“Mr Lian”) has not given notice of intention to defend, and did not appear at the trial.

8.  The 3^rd third party Anthony Ip Ren Haw (“Mr Ip”) was and is a director and chief strategy officer of BBMF.

9.  DEX filed and served witness statements from the following persons :

(1)     Kazuhiko Moriya (“Mr Moriya”), the C.E.O. of DEX's parent company Design Exchange Co. Ltd (“DEXJ”), and DEX's sole director since 10 April 2007;

(2)     Suzanna Mo Ma Lo (“Ms Lo”);

(3)     Go Muramatsu (“Mr Muramatsu”); and

(4)     Masaki Ishibe (“Mr Ishibe”).

Messrs Muramatsu and Ishibe had left the employment of DEXJ before the trial of this action, and their witness statements were adduced by hearsay notice.

10.  DBS filed and served witness statements from these witnesses :

(1)     Mr Philip Chan Wa Chuen (“Mr Chan”), a Senior Vice President, Corporate and Investment banking.

(2)     Mr Andy Sung Che Keung (“Mr Sung”), a Vice President, Corporate and Investment banking, and the Relationship Manager for DEX's bank account.

(3)     Mr Woo Kwai Wing (“Mr Woo”), a Senior Vice President of Corporate and Investment banking, who had left DBS by the time of trial.

(4)     Mr Simon Tang Hon Loi (“Mr Tang”), a bank executive.

(5)     Ms Sandy Wat King Chi (“Ms Wat'), a former bank executive in the Sales Support Team.  By the time of trial, she had left the bank's employment.  Ms Wat did not give oral evidence at trial, and her witness statement was adduced by hearsay notice.

11.  BBMF called one witness, Mr Ip.

II.      Background

The Main Action

12.  On 9 October 2006, DBS paid the sum of US$3,250,000 out of DEX's bank account no. 470615675 (“the bank account”) pursuant to a fax instruction that day (“the disputed instruction”) signed by Mr Lin.  Mr Lin was the sole authorized signatory on DEX's Account, but he had resigned as a director on 29 September 2006 with immediate effect, and DEX contends his authority to sign on DEX's behalf had also been withdrawn. However, formal amendments to the bank mandate had not been completed by 9 October 2006 when he gave the disputed instruction.  The US$3,250,000 was paid initially to another account with DBS in the name of BBMF, the 1^st third party.  On 20 October 2006, that sum was paid out by DBS to a BBMF account with HSBC.

13.  In the Main Action, DEX claims against DBS for repayment of the US$3.25 million on several main bases.  First, the disputed instruction was not valid and authorized, particularly in the absence of DEX's chop.  Second, the payment was made in breach of contract and mandate in that DBS knew that Mr Lin's authority had been withdrawn, and as a result knew he was not authorized to give the instruction, or must have been put on enquiry as would cause an ordinary prudent bank to make enquiries on whether the instruction in fact represented DEX's true intentions.  Third, DBS held the sum of US$3.25 million in the BBMF account (which was in credit) as constructive trustee for DEX, and DBS ought not to have allowed that money to be paid out to HSBC.

                   The pleaded claims for breach of fiduciary duty (apart from constructive trustee) and for dishonest assistance and knowing receipt were not pursued.

14.  DBS relies on several main points.  First, the strict terms of the mandate.  When the disputed instruction was given, Mr Lin was the sole authorized signatory for DEX's account, and the Bank was entitled and indeed obliged, to act upon his instruction.  At that time, DEX had a mere intention to change the account signatories, but this was not completed.  Second, DEX received a “practical benefit” from the transfer of the US$3.25 million to BBMF, which precludes DEX from claiming against the Bank because the transfer was to repay a loan in the sum of US$3.25 million clearly due and owing by DEX to BBMF.  Third, DEX's loss was caused by its own conduct because it should reasonably have applied for an injunction against BBMF, to prevent the Bank from paying the money to BBMF, or from following BBMF's subsequent instruction to pay the money out of BBMF's DBS account into the HSBC account.  Fourth, DBS is not liable under any trust, or as constructive trustee.

15.  DEX initially sued both Mr Lin and DBS, but subsequently discontinued against Mr Lin, who was said to reside overseas.  However, the Bank issued a contribution notice against Mr Lin, and hence he remains party to the proceedings.

16.  The Bank also issued third party notices against BBMF, and its directors Messrs Lian and Ip.  Those proceedings were heard concurrently with the Main Action, but there is a distinction between the 2 sets of proceedings.  There is no direct lis between DEX and BBMF, i.e. there are no fourth party proceedings brought by BBMF against DEX.

17.  The overlap between the proceedings relates to DBS' defence that DEX obtained a “practical benefit” by the payment of the US$3.25 million to BBMF, as this was repayment of a loan in that sum by BBMF.

The Third Party proceedings

18.  As stated earlier, DEX's parent company is DEXJ which wholly owns DEX, and is listed on the Tokyo Stock Exchange.  DEX's primary purpose was to give effect to a joint venture agreement (“JVA”) between the BBMF group of companies and DEXJ, to exploit the “mobile content” business (i.e. the business of providing content such as music, data, photos, services etc., to mobile telephones).  DEX was to facilitate this business primarily by acquisition of other companies operating in that business.  The JVA was apparently concluded in November 2005, in the Japanese language, and subject to Japanese law.  I have not seen a copy of the JVA, or any translation of it.

19.  As appears from DEXJ's Press Release dated 7 March 2006 concerning “Issuing of new shares and share warrants through third party allocation” to facilitate the joint venture, BBMF through an associated company SCD Swiss Content and Design Holding Gmbh (“SCD”) took a 9.9% shareholding in DEXJ and further Share Warrants which when exercised, would result in funds being available to DEX to fund its acquisition of businesses.  In return for the provision of those funds, BBMF would be issued further shares under the Share Warrants, such that ultimately BBMF would own up to 49.9% of DEXJ's equity.

20.  At the time of the joint venture, Mr Lin was a BBMF employee, although he describes himself as an independent contractor.  He is a cousin of Mr Lian.

21.  DEX's opened its bank account with DBS on about 7 June 2006.  By Mandate dated 17 June 2006, Mr Lin became the sole signatory on the bank account.

22.  DEX made several acquisitions in China, and by about June 2006, further funds were apparently required to continue this business development.  For instance, DEXJ's email of 16 June 2006 to Mr Lin and Mr Lian stated :

“… will you consider BBMF to provide DEX with a bridge loan, USD3.28 million, until the warrant is exercised or other finance is materialized”

DEX says that BBMF realized around this time that if it exercised its share warrants, it would hold more than 10% of DEXJ's equity and would therefore be obliged to disclose that fact to the Tokyo Stock Exchange.  DEX says that BBMF did not want this, and to fund continued activities, BBMF advanced US$3,250,000 to DEX as a loan.  However, DEX says that such advance was in fact, part of BBMF's ongoing obligations under the JVA.

23.  Despite the JVA between DEXJ and the BBMF Group as to investment by BBMF, BBMF was slow to invest.  Mr Lin says this was due to changing investment conditions on the Tokyo Stock markets, and BBMF preferred not to make the investments they were meant to make, but decided to wait and see until stock prices stabilized.

24.  Both Mr Lin and BBMF maintain the US$3.25 million loan was a short term bridging or emergency loan because DEXJ was unable to raise funds in the financial markets to fund the acquisitions which DEX wished to make.  There is no dispute about the form of the loan, in a Loan Agreement dated 30 June 2006, and advanced on 2 July 2006.  However, there is a dispute between DEX and BBMF as to its substance.  That dispute will have to be resolved between BBMF and DEX.  It will depend among other things, on the nature and terms of the JVA, and the way in which that Joint Venture was operated.

25.  It is clear the joint venture between the BBMF Group and DEXJ did not go well.  Relationships between the 2 parties were strained early on, due to lack of communication, and as a result of BBMF's delayed investment.  Relations deteriorated substantially in August 2006.  On about 11 August 2006, DEXJ terminated the JVA, as stated in a Press Release that day.

26.  As a result, Mr Lin emailed DBS' Mr Sung on 24 August 2006, and informed him that he had stepped down as President and director of DEXJ, and wanted to have the signatory of the DBS bank account changed over to the new President, Mr Masaki Ishibe.  Mr Lin asked Mr Sung how this should be done, and asked for it to be executed “as soon as possible”.  In a further email dated 29 August 2006, copied to DEXJ's Mr Moriya, Mr Lin informed Mr Sung that the new contact person for the changes would be Mr Moriya.

27.  By email dated 29 August 2006, Mr Moriya informed Mr Sung that “from now on, I will be in charge of banking activities with regards to [DEX's] account”; the authorized signatory of the bank account would be changed from Mr Lin to Messrs Moriya, Ishibe, and Mr Kiyoto Omori (“Mr Omori”); that they hoped to visit the Bank “as early as next week” to make these changes; and further requested the “necessary documents to register our signatures as authorized signatures”.

28.  In the 1 month period between 29 August 2006 to late September 2006, there were further emails between Mr Sung, and Mr Moriya and other representatives of DEX and/or DEXJ.  DEX contends it is clear from such emails that : (1) DEX wished to change the signatory of the bank account with DBS, (2) Mr Lin no longer had authority to represent DEX's true intentions, and (3) Mr Lin would step down as DEX's sole director, to be replaced by at least Mr Ishibe, if not also Messrs Moriya and Omori.  Nonetheless, DBS reminded DEX by email that on its records, Mr Lin was the sole authorized signatory, and that DEX may wish to update this as soon as possible.  I refer to Messrs Tang's and Sung's emails of 12 and 13 September 2006 respectively.

29.  Meanwhile, a dispute was developing between DEXJ and BBMF concerning the US$3.25 million advanced.  On 29 September 2006, DEXJ's Mr Ishibe write to BBMF's Mr Lian :

“… we are currently undertaking negotiations to terminate the agreement in place for the transfer of shares.

Accordingly, we are considering filing a claim against you for compensation of monies already paid by the Design Exchange Group … As it is possible that credit obligations will arise between you and Design Exchange and/or the Design Exchange Group, payment of the monies borrowed by [DEX] and any compounding interest will be withheld” [Emphasis added]

30.  Messrs Moriya, Ishibe, and Omori visited Hong Kong from Japan to attend a meeting at DBS on 28 September 2006, and to change DEX's bank account signatory.  They met with DBS' Messrs Chan and Woo.  It is common ground the purpose of the meeting was to deal with the change of signatories for DEX's bank account.  The Bank required certain formal documents to be completed.  The Japanese gentlemen did not have that documentation, and so the following day went to see Ms Lo of EC Com Corporate Services Limited (“ECC”), the company that organized DEX's corporate formalities.  She was contacted by DBS via telephone on 29 September 2006, and asked what was necessary to effect the change in director and signatory of DEX.  She advised that she would need : (1) a resignation letter from Mr Lin as sole director, and (2) a replacement director.  Mr Lin's resignation letter, and the written resolution that Mr Lin was replaced by Mr Ishibe as director with immediate effect, were both handwritten by Mr Lin, dated 29 September 2006, and signed by him (collectively “the 2 handwritten documents”).  These 2 documents were faxed to her office on 29 September 2006 (at around 12:50 p.m.).  She handed a copy of these documents to Mr Moriya and Mr Ishibe when they went to her office that day.

31.  Later on 29 September 2006 after lunch, there was a further meeting between Messrs Moriya and Ishibe, and DBS.  There is a factual dispute about what happened at this meeting.  DEX says the 2 handwritten documents dated 29 September 2006 and signed by Mr Lin which they were given by Ms Lo, were handed to DBS.  However, DBS' witnesses say these 2 documents were never received, although it was interested to see the resolution of change of directors, but not Mr Lin's resignation letter.

32.  It is not disputed :

(1)     the purpose of the visit to the Bank by Messrs Moriya, Ishibe, and Omori was to change and update the authorized signatory of DEX's bank account.

(2)     DBS was informed at the meeting on 28 September 2006 that Mr Lin has resigned, and that Mr Ishibe had replaced him.  However, the corporate documents had not been updated to reflect this.

(3)     At the first meeting (on 28 September 2006), Mr Chan assisted Messrs Moriya, Ishibe, and Omori to complete and sign 2 documents, namely : (a) a new Mandate for Limited Company and (b) Change of Specimen Signature/Company Chop.  The first document was left undated, but the 2^nd document referred to a Board meeting that day.  Both documents were in the form of a board resolution of the company.

33.  Mr Chan says he informed Messrs Moriya, Ishibe, and Omori that the changes would only become effective on receipt of 3 corporate documents : (1) a certified register of members list, (2) a certified register of officers list, and (3) a registered certificate of incumbency (collectively “the 3 requested documents”).

In his witness statement, he says he told them the changes would “not be effective and would have no legal effect at all unless and until all the requisite corporate documents of [DEX] are provided to [DBS].”

34.  The 3 requested documents were provided to DBS on 12 October 2006, by fax and courier.  Upon receipt, the long requested changes were officially effected by DBS, such that Messrs Moriya, Ishibe, and Omori became the authorized signatories of DEX's account that day.

35.  However, 3 days earlier on 9 October 2006, following BBMF's Elaine Kwok (“Ms Kwok”) demand letter of 6 October demanding repayment of the US$3.25 million and all accrued interest by 9 October 2006, Mr Lin gave DBS the disputed instruction by fax to transfer UD$3,250,000 from DEX's account to BBMF's account, also with DBS.  The transfer was effected the same day.  The instruction did not bear DEX's company chop, and states it was to repay a loan.  The transfer coincided with a National Holiday in Japan.

It is not disputed DBS did not make enquiries with anyone before making the US$3.25 million transfer, whether with Mr Lin, any of the 3 Japanese gentlemen above, with the Relationship Manager Ms Sung, or ECC's Ms Lo as to : (1) whether Mr Lin was still authorized to give the instructions notwithstanding the emails, documents, and meetings referred to above, and (2) the absence of DEX's company chop, although appearing in its Mandate.

36.  On 10 October 2006, Mr Moriya contacted DBS and stated that Mr Lin's transfer instruction was made without DEX's authority.  After receiving this complaint, DBS froze the funds in BBMF's account.  DEX maintains it was unaware that the monies were in BBMF's account with DBS until 17 October 2006.

37.  On 13 October 2006, Mr Sung emailed BBMF's solicitors, and said :

“… in view of these conflicting intentions, as a prudent bank we had no choice but to hold the funds, until we are able to ascertain our obligations in respect of the payment instructions received on 9 October 2006.”

38.  On 17 October 2006, DBS' Mr Sung wrote to DEX stating that the Mandate of 17 June 2006 and the TT instruction were both valid, and informing it that as there were competing claims to the monies by DEX and BBMF, DBS would have to consider interpleader proceedings to protect the bank's interest.  DBS was informed the following day by DEX's solicitors' email that this course of action was appropriate.  And that DEX regarded DBS as a constructive trustee, under a duty to safeguard the monies.

39.  Various correspondence followed between DEX and the Bank, culminating in a “very urgent” letter from the Bank's solicitors dated 20 October 2006 (faxed around 9:38 a.m.) informing DEX's solicitors' that if DEX did not obtain an injunction by 3 p.m. that day against BBMF, that the Bank would release the funds to BBMF.

40.  On 20 October 2006 (but unknown to DEX until afterwards) BBMF applied ex parte for an injunction at a hearing at 2:30 p.m. that day before the Hon Hartmann J in HCA 2348 of 2006 (“the 1^st Action” or “the Injunction Proceedings”) for an injunction ordering DBS to unfreeze the funds in BBMF's account.  Mr Lian's supporting Affirmation that day stated (at para. 23) that the US$3.25 million as loan repayment, would be used for the operational cash needs of BBMF Group Inc, and “there would be irreparable damage if monies are frozen by the intended Defendant.”

DBS did not contest the injunction application nor attend the hearing, apparently due to insufficient notice, the fact the application was ex parte, and that they had not received any documents filed for that application.  By letter that day, DBS' solicitors informed BBMF's solicitors that DBS had received an “adverse claim” by DEX, and attached correspondence with DEX's solicitors.  It appears DBS released the funds to BBMF just after 3:00 p.m. that day, before the Court order later that afternoon.  The money was transferred that day to BBMF's account with HSBC.

41.  On 24 October 2006, DBS's solicitors wrote to DEX's solicitors stating :

“… our client has no legal right and basis and/or under no legal obligation, to withhold the release of the money standing in the credit of the recipient's bank account.” [Emphasis added]

III.     The Parties' Contentions

42.  The parties contended as follows.

DEX's contentions

43.  DEX had 3 main points :

(1)     DBS had no authority to pay the sum of US$3.25 million from DEX's account because :

(a)      There was no valid contract between DEX and the Bank concerning remote instructions;

(b)     In any event, the disputed instruction was invalid as the Mandate required the signature of one authorized signatory together with the company's chop, but the Instruction had no chop; and

(c)     In any event, in all the circumstances, DBS had actual knowledge that Mr Lin had no authority to operate DEX's account (irrespective of the terms of the Mandate), since 29 September 2006 at the latest.

(2)     If there was no actual want of authority, in the circumstances, no reasonably prudent banker would have acted on the instruction given the circumstances.  Even if the Bank did not know that Mr Lin no longer had actual authority to represent DEX's intentions in banking transactions, DBS knew enough to put a reasonably prudent banker on inquiry that any instruction from Mr Lin did not in fact represent DEX's true intentions.

(3)     Alternatively, irrespective of the position on 9 October 2006, by 10 October 2006, the Bank was put on inquiry.  DBS was informed there was a dispute as to Mr Lin's authority and DBS froze the fund—as any prudent banker would have done.  DBS became a constructive trustee for the rightful owner.  Upon investigation, by 13 October 2006 DBS became fully aware of all the facts, and ought to have passed the US$3.25 million to DEX, as it was or ought to have been clear by then that DEX was the rightful owner.  DBS should at least have interpleaded, but chose to do nothing and ultimately before any court order, released the funds to the wrongful owner.

44.  There is also an issue between DEX and BBMF whether the US$3.25 million received by DEX from BBMF was a loan, or a capital contribution.  DEX contended the former, and maintained it received no practical benefit by DBS paying that sum to BBMF as such payment was neither authorized nor ratified and DEX received no benefit, but a detriment by that payment.

DBS' contentions

45.  DBS made the following contentions in essence :

(1)     DEX owed a sum of US$3.25 million to BBMF.  By 9 October 2006, despite the fact the Japanese management of DEX might have wanted to withhold payment, that sum was clearly due and payable by DEX to BBMF.

(2)     Despite the fact that prior to 9 October 2006, the Japanese representatives of DEX had indicated an intention to change the authorized signatory of DEX's account at DBS, that process had not been completed by 9 October 2006.  Even DEX's Japanese representatives knew that it had not been completed by that date.

(3)     On the true construction of the Mandate and the other contractual documents between DEX and DBS, DBS was entitled to act on the instructions given by Lin on 9 October 2006, and transfer the US$3.25 million from DEX's account to BBMF's account.

(4)     Also, since DBS was entitled to act on Lin's instructions to effect the transfer on 9 October 2006, DBS was also entitled to transfer US$3.25 million from the BBMF Account to BBMF's HSBC Account on 20 October 2006.  No constructive trust arises.  Nor should DBS be required to account as trustee.

(5)     If for whatever reason, DBS is entitled to claim against BBMF, then it should not be liable to DEX because DEX will have acquired a practical benefit in not having to repay a valid and subsisting loan to BBMF, and hence DEX should not recover against DBS.

(6)     If which is denied, DBS is liable to DEX, then :

(a)      DBS is entitled to recover the US$3.25 million against BBMF as the payment of 9 October 2006 and/or 20 October 2006 to BBMF would be a payment under mistake.

(b)     Also, DBS is entitled to recover against BBMF and Ip on the contractual documents executed by these parties.

(c)     Further, DBS is entitled to recover against Lin for breach of warranty of authority or the contractual documents executed by Lin.

BBMF's and Mr Ip's contentions

46.  BBMF contended :

(1)     The payment from DEX's bank account of US$3.25 million was not made under any mistake of law or fact.  Any misprediction or deliberate risk taken by DBS was not a mistake;

(2)     BBMF is not liable to DBS under the contractual documents; and

(3)     DBS is precluded from claiming against BBMF by virtue of an alleged discontinuance undertaking given in the 1^st Action.

47.  Mr Ip took similar points to BBMF :

(1)     DBS is precluded from claiming against him by virtue of an alleged discontinuance undertaking given in the 1^st Action.

(2)    DBS is not entitled to compensation nor an indemnity from Mr Ip pursuant to clause (b) of the letter of undertaking dated 16 September 2005.

IV.     The Issues

48.  DBS' leading and junior counsel Mr Shieh SC and Mr Man very helpfully produced the 1^st defendant's List of Issues.  That List of Issues is not substantially disputed, and I set it out :

“A.    Between DEX and DBS

1.       Whether DBS was in breach of the alleged implied term of the contract and/or mandate between DEX and DBS pleaded in §13 of the Statement of Claim.

2.       Whether DBS had actual or constructive notice or reasonable grounds for believing that the 2^nd defendant's (‘Lin') transfer instruction of 9 October 2006 was made without DEX's authority as alleged in §14 of the Statement of Claim.

3.       Whether DBS had acted and carried out Lin's transfer instruction in strict accordance with the Mandate (in particular clauses 4 and 7 thereof) and the Terms and Conditions (in particular clause 24 thereof) and if so, whether DEX was entitled to complain of any alleged breach of duty by DBS or lack of authority on the part of Lin.

4.       Whether Lin acted in breach of fiduciary duty as alleged in §15 of the Statement of Claim.

5.       Whether DBS knowingly received the funds and/or dishonestly assisted Lin's breach of fiduciary duty as alleged in §18 of the Statement of Claim.

6.       Whether DBS owed any fiduciary duty to DEX and what the content and scope of such duty was.

7.       Whether DBS was in breach of its fiduciary duty to DEX.

8.       The effect of clause (a) of the Remote Channel Authority and Indemnity dated 17 June 2006.

9.       Whether the loan pleaded in §29A–29C was a genuine and subsisting loan as at 9 October 2006 (the date of the transfer instruction) owed by DEX to BBMF and if so, If BBMF succeeds in defending the third party claim against it, whether DEX is precluded from making the present claim against DBS on the ground that DEX has received a practical benefit from the transfer of US$3,250,000 to BBMF in that BBMF would be entitled to keep the benefit of that payment and would not, in reality, pursue the recovery of that loan against DEX.

10.     What relief (if any) should be granted to DEX, in particular:

(1)   Whether and if so what damages have been suffered by DEX;

(2)   Whether the loss suffered by DEX (if any) was solely caused or contributed to by DEX's refusal and/or failure to take any reasonable steps sufficiently or at all to prevent BBMF from obtaining the US$3,250,000 from BBMF's account.

B.      Between DBS and Lin

11.     In the event that DBS is held liable to DEX or alternatively in the event of its paying to DEX any sum in compromise of DEX's claim,

(1)   Whether Lin impliedly warranted to DBS that he was still authorized by DBS to give the instruction for the transfer of US$3,250,000.

(2)   Whether DBS relied on such implied warranty.

(3)   Whether Lin was in breach of such warranty.

(4)   Whether such breach caused any loss to DBS and whether DBS had failed to mitigate its loss.

(5)   Whether DBS is entitled to be compensated or indemnified by Lin pursuant to clauses (a) and/or (b) of the Letter of Undertaking dated 17 June 2006.

C.      Between DBS and BBMF

12.     In the event that DBS is held liable to DEX or alternatively in the event of its paying to DEX any sum in compromise of DEX's claim:

(1)   Whether DBS is entitled to recover the sum of US$3,250,000 from BBMF as money had and received by BBMF, paid by DBS under mistake of law and/or fact.

(2)   Whether DBS is entitled to be compensated or indemnified by BBMF against any such claims by DBS pursuant to clause (g) of the Letter of Indemnity dated 25 October 2005.

(3)   Whether DBS is precluded from bringing the claim against BBMF by virtue of any alleged ‘discontinuance undertaking' given in HCA 2348 of 2006 or the principle of res judicata as pleaded in §17 of BBMF's Defence.

13.     In respect of BBMF's counterclaim,

(1)   Whether DBS is in breach of the aforesaid alleged ‘discontinuance undertaking'.

(2)   What (if any) relief should be granted to BBMF.

D.      Between DBS and Ip

14.     In the event that DBS is held liable to DEX or alternatively in the event of its paying to DEX any sum in compromise of DEX's claim,

(1)   Whether DBS is precluded from bringing the claim against Mr Ip by virtue of any alleged ‘discontinuance undertaking' given in HCA 2348 of 2006 or the principle of res judicata as pleaded in §13 of Ip's Defence.

(2)   Whether DBS is entitled to be compensated or indemnified by Mr Ip pursuant to clause (b) of the Letter of Undertaking dated 16 September 2005.”

At the beginning of trial, DEX abandoned issue A.5 above against DBS on knowing receipt and knowing assistance.

I propose to deal with the issues in essentially the order above.

49.  On Day 3 of the trial on 14 January 2006, DEX sought and obtained leave to amend the Statement of Claim to among other things, expressly plead the “no chop” point concerning the disputed instruction of 9 October 2006.  Leave to amend was unopposed.  As a result, DBS filed a Re-Amended Defence 2 days later on 16 January 2009, with a Re-Re-Amended Third Party Notice that day.

V.       Main Action

The contractual documents

50.  It is convenient to first set out the relevant terms in the contractual documents between DEX and DBS.  Some parts of these terms are in bold, and these are set out below.

51.  First, DBS' Standard Terms and Conditions, December 2005 edition :

(1)   “Withdrawals …

          Any payments made by the Bank to a person producing a withdrawal or transfer form purporting to be duly signed and or sealed or chopped by or on behalf of the Customer shall, provided the Bank has in good faith, have the same effect as if made by the Customer personally.  The Customer shall produce such evidence as the Bank may require if any to prove the Customer's Identity.” (clause 6; emphasis added)

(2)    “Authority

          All cheques, bills of exchange, notes, drafts, promissory notes, and other payment orders (collectively ‘orders') drawn in the name of, or accepted by, the Customer and/or Instructions in respect of an Account must be signed or given by or on behalf of the Customer in strict accordance with these Terms and Conditions and other applicable authorizations, mandates or other documents in respect of such Account.” (clause 8; emphasis added)

(3)    “Limitation of Liability

          Save only in cases of its negligence or wilful default, neither the Bank nor the Bank's officers shall have any liability or obligation to the Customer or any third party in respect of : …” (clause 24; italics added)

(4)    “Loss of seal/chop

          If a seal or chop used for operating any Account is lost or stolen, the Customer shall immediately notify the Bank in writing.  The Bank shall not be liable for any loss suffered by the Customer arising from a payment or transaction effected prior to receiving such notification.” (clause 32; italics added)

(5)    “Instructions

          The Customer may communicate with the Bank and the Bank may accept any Instructions given :

(iii)   by facsimile—facsimile Instructions should bear the Customer's specimen signature and should be faxed to the designated branch with prior arrangement …

The Bank may in good faith rely on such Instructions and shall not beliable for any resulting claim, obligation or loss.” (clause G1).

52.  Second, DEX's Mandate to DBS dated 17 June 2006 (“the Mandate”) :

(1)    “Applicable Banking Rules, Terms and Conditions

          That the Company hereby agrees and undertakes as follows … to be bound by and comply with the Bank's policies, rules, terms and conditions and regulations governing the operation and conduct of Accounts, Products and Additional Services … now and from time to time in force …” (clause 3(a); emphasis added)

(2)    “the Bank is hereby supplied with a schedule of the names and specimen signatures of the Authorized Signatory(ies) and that the Bank be notified from time to time by the Company's Board of Directors of any changes thereto and that the Bank is entitled to act upon any requests, instructions or directions given by the Authorized Signatory(ies) unless and until modification has been completed in accordance with paragraph 7 below; and …

          The Bank will be notified from time to time by the Company's Board of Directors of any change to the Authorized Signatory(ies) and to the schedule of Delegated Person(s) for Confirmation and the Bank is entitled to act upon any confirmation given by them unless and until modification has been completed in accordance with paragraph 7 below.” (clause 4(a), and 4; emphasis added)

(3)    “Required Documentation

That the Bank be forthwith supplied with an up-to-date copy of :

(a)   the Company's Memorandum and Articles of Association (or other constitutional documents, as applicable);

(b)   each amending resolution as soon as the same has been passed; and

(c)   the Company's certificate of incorporation and business registration certificate.

          and be kept promptly updated of all variations, modifications or replacement of any of these items.” (clause 6; emphasis added)

(4)    “Modification of Mandate

          That :

(a)   these resolutions be communicated to the Bank and shall remain in full force and effect unless and until the Bank receives a duly certified copy of an amending resolution duly passed by the Company's Board of Directors and has had a reasonable opportunity to act upon such amending resolution; and

(b)   a copy of any resolution of a meeting of the Company's Board of Directors, if purporting to be certified as correct by the Chairman of that Meeting, shall, as between the Bank and the Company, be conclusive evidence of the passing of such resolution and once so delivered to the Bank, shall be binding on the Company. (clause 7, emphasis added)

Under the Mandate, the “signing instruction” was “any one of us”.  DEX's company chop was affixed next to the signing instruction.  The Mandate was certified by Mr Lin as the then sole director, that among other things (at clause (b)) :

“… the names of the authorized signatories, their specimen signatures and the impression of the company chop, as supplied to the bank, are correct and genuine” [Emphasis added]

53.  Third, a Remote Channel Authority and Indemnity dated 17 June 2006 (“DEX's Remote Channel Authority) :

“I/We, the undersigned, hereby request DBS BANK (HONG KONG) LIMITED (‘the Bank', which expression shall include its successors and assigns), if it sees fit, to act on any instructions, requests and/or other communications (a ‘Remote Instruction') given by telephone, facsimile or such other communication device as the Bank may from time to time approve, which the Bank in good faith believes to have been given by me/us or by the person(s) from time to time authorized to operate such account(s) under the above account title(s) which is/are currently, or may hereafter form time to time be, opened by me/us with the Bank.

In consideration of the Bank agreeing to act on Remote Instructions, I/we acknowledge, accept and agree that use of such Instructions involves some risk, in particular, that Instructions may be given by unauthorized persons and/or for dishonest purposes.  I/We also agree and undertake

(a)     that I/we shall bear all risks arising from any Remote Instructions received by the Bank, and the Bank shall have no liability or responsibility provided that the Bank has acted in good faith.  The Bank shall not be responsible for any matters beyond its control, including, but not be limited to, error, failure or breakdown in any equipment or interference with or interception of any transmission; ,…

(c)     that all Remote Instructions must comply with any per-transaction, daily or other monetary limits, or such operating, procedural or other limits or requirements and applicable terms and conditions from time to time required by the Bank …

If the undersigned is a Company, we enclose a duly certified copy of a Board resolution of the Board of Directors (in a form acceptable to the Bank) duly passed at a duly convened and quorate meeting held on ____________________, approving the entering into and delivery of this Authorisation by the undersigned and for the persons authorised to give Remote Instructions.” [Emphasis added]

Although the document refers to a Board Resolution, it appears there was no such board resolution.  Nor does this document contain a chop—unlike DEX's Mandate, and the Customer Information Sheet (at pg. 2).

54.  Fourth, a Letter of Undertaking provided by DEX to DBS also on the same date (“DEX's Letter of Undertaking”), which provided :

“NOW IN CONSIDERATION of your agreeing to comply with my/our request aforesaid, I/we in my/our personal capacity HEREBY JOINTLY AND SEVERALLY AGREE AND UNDERTAKE with you as follows :

a.       henceforth and from time to time give you and to procure the said Company to give you written notice in the manner as stipulated in the Company's Mandate dated 17 June 2006 given to you, forthwith of any change of or in the said Company's shareholders or stockholders, directors, …

          … and of the happening of any event which may affect the validity and operation of the account or account(s); and

b.       to indemnify you and keep you fully indemnified from and against all sums of money, accounts, claims, actions, proceedings, liabilities, damages, costs, charges, expenses or losses of whatsoever nature which you may suffer, sustain, incur or be liable to or for or by reason or in respect of your allowing the said Company to open, operate and continue to operate the account or account(s) and/or in respect of my/our or said Company failing to furnish you with the change of any of the information mentioned in clause (a) above.” [Emphasis added]

I deal below with the construction of these 4 documents.

Principles—Main Action

Whether bank acts within mandate

55.  The following propositions arise :

(1)     If a bank acts without mandate, it cannot seek to rely on its customer's authority : Tai Hing Cotton Mill Ltd v. Liu Chong Hing Bank Ltd & Anor [1986] 1 AC 80 [P.C.], per Lord Scarman (at 106C) :

“If they pay out upon cheques which are not his, they are acting outside their mandate and cannot plead his authority in justification of their debit to his account.  This is a risk of the service which it is their business to offer.”

(2)     The courts distinguish between a mandate being revoked, and an authorized signatory acting without authority.  In the former case, the question is whether a bank is aware of the possibility of the mandate being revoked : Sierra Leone Telecommunications Co. Ltd v. Barclays Bank [1998] 2 All ER 821, perCresswell J (at 826d–e) :

“A case where a bank has reasonable grounds for believing that there is a possibility that the existing mandate has been revoked is a case a fortiori to the case of a regular order complying with a mandate but in fact unauthorized by the (e.g. because of the customer's agent's fraud).” [Emphasis added]

Here, a key issue is whether the bank acted within its mandate, or had reasonable grounds for believing there was a possibility the existing mandate had been revoked.

Bank's duty to take reasonable care; when bank put on enquiry

56.  The following principles are relevant :

(1)     Whether a person exercises reasonable care depends on consideration of all relevant circumstances.  In the case of a bank, the relevant circumstances include those identified in Barclays Bank v. Quincecare Ltd, per Steyn J (at 377a–b) :

“Everything will no doubt depend on the particular facts of each case.  Factors such as the standing of the corporate customer, the bank's knowledge of the signatory, the amount involved, the need for a prompt transfer, the presence of unusual features, and the scope and means for making reasonable inquiries may be relevant.” [Emphasis added]

(2)     At the same time, caution must be exercised concerning statements in the authorities on relevant factors in deciding whether a bank fails to exercise reasonable care.  This depends on the facts of the particular case on what would put a bank on enquiry, and are not principles of law.  In the well-known English Court of Appeal decision in Lipkin Gorman v. Karpnale [1989] 1 WLR 1340, Parker LJ said (at 1376B–C) :

“In my view such cases must be approached with caution, for essentially they are no more than decisions of fact, i.e. of the application of the law to an endless variety of circumstances.  Expressions in them, such as that a paying bank must pay under its mandate save in extreme cases, or that a bank is not obliged to act as an amateur detective, or that suspicion is not enough to justify failing to pay according to the mandate, or other like observation which are to be found in the cases, are no more than comments on particular facts or situations and embody in my view no principles of law.  Furthermore what would or might have been held to be a breach of duty at one time may not be a breach of duty at another.” [Emphasis added]

When a bank is entitled not to comply with a customer's instruction

57.  Depending on the particular circumstances, a bank may be justified in not complying with its customer's instructions if the bank :

(1)     Has notice of any fraud or irregularity : Lipkin Gorman v. Karpnale (above) per, May LJ (at 1354C) :

“Finally, in Bank of New South Wales v. Goulburn Valley Butter Co. Proprietary Ltd [1902] A.C. 543, 550, Lord Davey, in giving the opinion of the Privy Council said : “The law is well settled that in the absence of notice of fraud or irregularity a banker is bound to honour his customer's cheque.” [Emphasis added]

(2)     Is put on enquiry, i.e. has reasonable grounds (although not necessarily proof) for believing the order is an attempt to misappropriate the company's funds : Barclays Bank v. Quincecare Ltd (above) per Steyn J (at 376f–g) :

“To hold that a bank is only liable when it has displayed a lack of probity would be much too restrictive an approach.  On the other hand, to impose liability whenever speculation might suggest dishonesty would impose wholly impractical standards on bankers.  In my judgment the sensible compromise, which strikes a fair balance between competing considerations, is simply to say that a banker must refrain from executing an order if and for as long as the banker is ‘put on inquiry' in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company” [Emphasis added]

(3)     Is put on enquiry that the customer might be defrauded (or of an irregularity, or improper and extraneous purpose) : Lipkin Gorman v. Karpnale (above) (C.A.) per Parker LJ (at 1378B–C) :

“The question must be whether, if a reasonable and honest banker knew of the relevant facts, he would have considered that there was a serious or real possibility, albeit not amounting to a probability, that its customer might be being defrauded, or, in this case, that there was a serious or real possibility that Cass was drawing on the client account and using the funds so obtained for his own and not the solicitors' or beneficiaries' purposes.  That, at least, the customer must establish.  If it is established, then in my view a reasonable banker would be in breach of duty if he continued to pay cheques without inquiry.” [Emphasis added]

(4)     As an honest and reasonable banker, would be put on enquiry, until it receives answers to enquiries that would satisfy an honest and reasonable banker : Baden Delvaux and Lecuit v. Societe General [1983] BCLC 325 per Gibson J (as he then was) (at §283, 284) :

“He posed the example of a proper inquiry which elicits the response ‘Mind your own business'. But in that case no answer was given to the inquiry and unless information is received from another source which dispenses with the need to persist in the inquiry, the duty to refuse to comply with the customer's instructions continues to subsist just as the duty of inquiry subsists.  In the circumstances of the present case Mr Price submits that none of the inquiries which he says ought to have been made could have satisfied the honest and reasonable banker.

In my judgment therefore a bank when put on inquiry remains under a duty not to comply with its customer's instructions either if it acquires knowledge of the intended misapplication of moneys which it holds or whilst it is pursuing its inquiries.  It ceases to be under such duty when it receives information, whether in answer to its inquiries or from another source, that the honest and reasonable banker would accept without further inquiry.” [Emphasis added]

Hence, situations where a bank may be put on enquiry are not limited to situations when it is put on enquiry of possible fraud or misappropriation by a signatory.  There may be situations for instance, when a bank is put on enquiry, i.e. has reasonable grounds for belief (although not necessarily proof) that a particular transaction may be irregular, unauthorized, or for a private purpose as opposed to the customer's best interests.

58.  If an honest and reasonable banker would be put on enquiry, but the bank does not make enquiries, then it would be negligent : Lipkin Gorman (above) (C.A.) (at 1378B–C); Selangor United Rubber Estates Ltd v. Cradock (No. 3) [1968] 1 WLR 1555 per Ungoed-Thomas J (at 1607C) :

“If inquiry ought to be made, and no inquiry is made, then the weight of authority establishes, in my view, that it is to be assumed that a true answer would be given; and, if no inquiry is made, that negligence is established.” [Emphasis added]

A bank as constructive trustee?

59.  The relationship between banker and customer is usually that of debtor and creditor, rather than the bank assuming a position as trustee or constructive trustee : Foskett v. McKeown [2001] AC 102 [H.L.] per Lord Millett (at 128A) :

“Money paid into a bank account belongs legally and beneficially to the bank and not to the account holder. The bank gives value for it, and it is accordingly not usually possible to make the money itself the subject of an adverse claim.  Instead a claimant normally sues the account holder rather than the bank and lays claim to the proceeds of the money in his hands.”

60.  Moreover, it is well known that the courts are slow to import notions of a trust into commercial transactions, where certainty, and speed are essential : Westdeutsche Landesbank Girozentrale v. Islington London Borough Council [1996] AC 669 [H.L.] per Lord Browne-Wilkinson (at 704H) :

“My Lords, wise judges have often warned against the wholesale importation into commercial law of equitable principles inconsistent with the certainty and speed which are essential requirements for the orderly conduct of business affairs …”

61.  However, when a bank faces adverse claims to particular monies from 2 or more claimants, it may be appropriate to interplead : Baden Delvaux (above) perGibson J (at §281) :

“In circumstances where a bank holds money which is not its own and of which it is not a trustee and it is sued or expects to be sued by two or more persons with adverse claims, the bank would be under a duty of inquiry and could not comply with its customer's instructions until the true owner was ascertained, and no doubt the most practical course for the bank to adopt in the performance of its duty would be to interplead.” [Emphasis added]

I deal below with the question whether DBS could and should have instituted interpleader proceedings.

When a bank pays a customer's debts without the customer's authority

62.  In situations when a bank pay a customer's debts without the customer's authority, the learned authors of Charles Mitchell's Subrogation (Law & Practice) (2007), provide a helpful summary of the legal position (at §2.06) :

“The courts have given inconsistent answers to the question whether a defendant's obligation is discharged by an unauthorized intervener's mistaken payment.  According to one line of authority, starting with Wright J's decision in B Liggett (Liverpool) Ltd v. Barclays Bank Ltd [1928] 1 KB 48, the effect of such a payment is to discharge the defendant's liability.  However, a stronger line of authority holds the opposite, starting with the Court of Appeal's decision in Re Cleadon Trust Ltd [1939] Ch 286, running through Robert Goff J's decision in Barclays Bank Ltd v. W J Simms Son & Cooke (Southern) Ltd [1980] QB 677, 700, and culminating in the Court of Appeal's decision in Crantrave Ltd v. Lloyds Bank plc [2000] QB 917.” [Emphasis added]

63.  In Crantrave (above), the defendant bank made a payment out of the plaintiff company's account to the plaintiff's judgment creditor, in the mistaken belief it was obliged to do so under a garnishee order which had not been made absolute.  The bank argued it was entitled to debit the plaintiff's account for the amount of this payment because the payment had partially discharged the claimant's debt.  The court rejected this argument and Pill LJ stated (at 923G–924G) :

“In the absence of evidence that the bank's payment has been made on the customer's behalf or subsequently ratified by him, the payment to the creditor will not of itself discharge the company's liability to the creditor … In the absence of authorization or ratification of the payment, the bank must in my judgment meet this claim and recoup the sum paid, if they can, from the third party to which it was paid.” [Emphasis added]

Applying the principles—Main Action

(a)     Issues A.1, 2, 3—whether breach of mandate; breach of implied terms or negligence; whether strict construction given to Mandate

64.  Having considered all the documentary and other evidence and counsel's submissions, in my judgment DBS acted outside its mandate in transferring the sum of US$3.25 million on 9 October 2006 to BBMF, for any or all of the 3 main reasons relied upon by DEX's counsel :

(1)     DEX's Remote Channel Authority was not authorized by any board resolution and meeting.  Nor did that document have DEX's company chop—in spite of the chop appearing in DEX's Mandate, and Customer Information Sheet.

(2)     In any event, the disputed instruction of 9 October 2006 did not have DEX's chop—in spite of the Mandate, and Clause 6 of the Standard Terms referred to above (para. 51(1) above).

(3)     I also consider that by 29 September 2006, the date of Mr Lin's formal written resignation letter, and as a result of the 3 meetings with the 3 Japanese gentlemen on 28 and 29 September 2006, DBS had actual knowledge that Mr Lin did not have authority to operate DEX's bank account.

65.  As to the absence of the chop in (1) and (2) above, having considered DBS's Standard terms, and DEX's Mandate, a chop was not merely optional, but was part of the Mandate :

(a)      It is well known that certainty is of great importance in commercial agreements.  Here, if a chop was merely optional, the situation would be unclear and uncertain—which would not be consistent with certainty in this commercial agreement.  There is nothing in any of the contractual documents to show that the presence of a chop was merely optional in DEX's Mandate.

(b)     As Mr Manzoni rightly submitted, a chop was necessary because as appears from Clause 32 of the Standard Terms (para. 51(4) above), if it was lost or stolen, the “customer shall immediately notify the Bank in writing”.  If a chop was optional in the Mandate, it is unclear why the bank would require notification, let alone immediately, and in writing.

(c)     Moreover, the Mandate certifies that DEX's chop was “correct and genuine”.  Again, if a chop was merely optional, such certification would be superfluous.

66.  Although the Standard Terms (at clause G1) refer to fax instructions from a customer with a signature, without expressly referring to a chop, such terms must be read with DBS' contractual documents as a whole.  These include the Mandate here for a limited company, with a chop next to the signing instruction.

                   At the very least, the absence of a chop on the 9 October 2006 instruction should have put DBS on enquiry.  Indeed, on the evidence, Ms Wat was put on enquiry by the absence of a chop, but one of her superiors—Mr Chung Wai Sing (“Mr Chung”) authorized payment without making any enquiries concerning the absence of a chop.  Regrettably, the bank's staff appear to have considered the question of payment as more of a mechanical transaction without taking proper care to make enquires (e.g. with the Relationship Manager, Mr Sung), or to apply their minds to the significance of the absence of the chop.  Not surprisingly, on the evidence, DEX's chop was in fact locked in DEXJ's safe in Japan.  DBS staff may have thought the transaction was authorized as it was “confirmed by Ms Kwok (DEX Asia)” as recorded by hand on the disputed instruction.  However, Ms Kwok was neither an authorized signatory, nor DEX's personnel.  DEX's chop was part of the Mandate to provide : (a) protection to DEX, and (b) certainty to both parties.  DBS was not entitled to unilaterally override the requirement of a chop.

67.  In my judgment, DBS also had actual knowledge by 29 September 2006, well before the date of the disputed instruction on 9 October 2006, that Mr Lin was no longer authorized as a signatory to DEX's bank account.  At the very least, DBS was aware of the possibility the Mandate had been revoked by those dates :

(1)     Mr Sung was informed by Mr Lin of his resignation as a director by email of 24 August 2006, and knew that Mr Ishibe was to become the signatory, which Mr Lin wanted done “as soon as possible”.

(2)     Mr Sung was also informed by Mr Lin's email of 24 August 2006 that Mr Moriya would represent the company in all banking transactions from that date.

(3)     On 30 August 2006 by email, Mr Sung confirmed with DEX that Mr Lin had left.

(4)     DEX had tried to remit US$248,000 out of the Account, but when it was pointed out that Mr Lin was the only signatory, they withdraw the request and said that it would be done out of the DEXJ account.

(5)     The Japanese gentlemen travelled from Japan to Hong Kong for the purpose of changing the signatories on the account.  Mr Sung had told them by email of 13 September 2006 that because Mr Lin had resigned, they may wish to change the signatories as soon as possible.

(6)     Mr Sung told them by email of 14 September 2006, that : (a) “In your case Mr Lin has resigned and a new signor will replace his designation”, and (b) the “formality to arrange the update of the account signatory had to be completed before a new transaction takes place” [my emphasis].  This would suggest that DBS knew a change of signatories was in process, and would require the change to be completed before any payment was processed on the account—rather than afterwards.

(7)     By Mr Sung's email of 26 September 2006, it is clear he knew the purpose of the meeting on 28 September 2006, and told the Japanese gentlemen what they needed to bring to effect the change.

(8)     At the 3 meetings on 28 and 29 September 2006, DBS was told again that Mr Lin had resigned, and that the new directors wanted to change the signatories. They even signed a resolution on 28 September 2006 at their first meeting, to update the Mandate.  The updated Change of Specimen Signature form was also signed in full (para. 32(3) above).

(9)     Mr Chan confirmed in evidence that as far as he was concerned, DEX had a new mandate as at 28 September 2006.  He knew DEX had changed its authorized signatory as at that date.

68.  The argument on the updated Mandate and specimen signature also involves a consideration of whether DBS had or saw a copy of Mr Lin's resignation letter, and of DEX's resolution of change of Director both handwritten and dated 29 September 2006 (paras. 30 to 31 above).  Although these 2 documents did not expressly deal with change in signatory, as opposed to change of director, on the documentary and oral evidence, the 2 matters went hand in hand, to DBS' knowledge.  I refer for instance, to Mr Lin's first email (of 24 August 2006) notifying DBS that he wanted the signatory of DEX changed, “as soon as possible”.

69.  DEX contends that Mr Moriya brought the copies which he had been provided by Ms Lo to DBS on the afternoon of 29 September 2006, and showed it to Mr Chan, but Mr Chan was not interested, saying that he had already received copies of the documents from Mr Lin directly.  Mr Chan denies this.  This is a conflict of evidence to resolve.

70.  It is not disputed : (1) Ms Lo gave copies of these 2 handwritten documents signed by Mr Lin to Mr Moriya, (2) he told her he would return to the Bank that afternoon and hand it over, and (3) he indeed returned to the Bank that afternoon.

71.  As a matter of inherent probability, I prefer Mr Moriya's version of events to DBS' case :

(1)     He and his colleagues had come from Japan for the primary purpose of changing the signatories on the DEX account.

(2)     They had been told they needed to prove that Mr Lin had resigned, and was replaced by Mr Ishibe.  For that purpose, they telephoned Mr Lin in Shanghai, and apparently had several telephone calls because of weak mobile phone reception.

(3)     They procured Mr Lin to write and sign the 2 handwritten documents, and fax these to Ms Lo.  It was obviously a fair amount of effort and involvement over a few days.  As Mr Moriya said in evidence (Day 2, pg. 42 (12–15)), which I accept :

“If it is not the required documents by the bank … there is no reason I can see that we have been running around bringing the documents for the bank.”

(4)     It is almost inevitable Mr Moriya would take the handwritten documents back to the Bank on the afternoon of 29 September, whatever other reason he may have had for going to the Bank that afternoon.  It would make sense for him to at least show DBS the handwritten documents so the formalities for change of signatories could be completed.

72.  The Bank contends the handwritten document were not required by them, but by Ms Lo.  With respect, this is not easy to understand :

(1)     Whatever Mr Chan says, what the Bank needed to know was whether Mr Ishibe was entitled to sign the bank documents and resolutions that he signed on 28 September 2006.  The letter and resolution from Mr Lin would confirm that.

(2)     It is apparent that Mr Moriya and his colleagues were led through this process by the Bank and Ms Lo.  It was the Bank's own internal procedure, and Mr Moriya and colleagues were doing what they reasonably could to ensure the Bank was sufficiently satisfied to effect the intentions that Mr Moriya himself had expressed.  For that purpose, the overwhelming likelihood is that Mr Moriya would show the Bank all documents which came into his hands that were relevant to this purpose.  It is unlikely as a matter of common sense, that he would draw the fine distinction that the Bank now draws between documents required primarily by Ms Lo, and documents required primarily by the Bank.  Instead, he would show all relevant documents to DBS.

73.  It is of course, possible that Mr Chan was not interested in the handwritten documents :

(1)     Mr Chan wanted to follow the Bank's internal procedure, which apparently requires the 3 requested documents (para. 33 above) to be provided.  These corporate document were the documents Mr Chan said he wanted to see.

(2)     Thus, it is quite possible Mr Chan was not interested in the handwritten resolution and resignation letter because as far as he was concerned, they would not justify him under DBS' internal guidelines, from effecting the change in signatories.

In those circumstances, it is quite likely in my view, Mr Moriya offered the 2 handwritten documents to Mr Chan, but Mr Chan did not take them.

74.  The important point is and I find, that Mr Moriya offered the handwritten documents to the Bank on 29 September 2006.

75.  If as I have found, DBS had sight of the handwritten documents on 29 September 2006, the Mandate was validly changed.  DBS had all it required under clause 7 of the Mandate (para. 52(4) above).  The Bank had a valid resolution changing the Mandate (the new mandate itself), and knew it had been signed by the new director.  The Bank had a reasonable opportunity to act on that before 9 October 2006.

76.  At the very least, the bank was unquestionably aware by 9 October 2006 of the possibility the previous Mandate had already been revoked.  Without authority or ratification of that payment by DEX, DBS made the transfers to BBMF on 9 and 20 October 2006 as principal, and not as agent.

77.  Even if I am wrong, and Mr Lin was still an authorized signatory on 9 October 2006, in my opinion, having regard to all the contemporaneous documents and other evidence, the circumstances were such that a reasonably prudent banker would have been put on enquiry.  DBS was in fact put on enquiry for the reasons above (paras. 66 to 76 above).

78.  The mere fact of an existing mandate, even if valid, does not exclude DBS's obligations : (1) to exercise reasonable skill and care as a matter of contract and tort and (2) not to act on the Mandate if a reasonably prudent banker would be put on inquiry, or had reasonable grounds for believing the instruction given ostensibly under the Mandate did not represent DEX's true intention.

                   Mr Shieh SC argued with the great force that any duty to make enquiry was excluded by clause 7 of the Mandate.  However with respect, clause 7 neither expressly nor by implication excludes a duty of enquiry.  More fundamentally, it is difficult to see how DBS can be admittedly under a duty to take reasonable care (as admitted in DBS' pleading, and as set out for instance at clause 24 of the Standard Terms)—and yet have no duty to make enquiries when appropriate.

79.  In my opinion, DBS was put on enquiry for the reasons above, and because :

(1)     The transfer of USD3.25 million was a very substantial sum, from a bank account which was essentially inactive.

(2)     The absence of DEX's company chop on the 9 October 2006 fax instruction.

Either or both of these factors should have put the Bank on enquiry.  If the Bank made the enquiries they should have made, it is quite likely they would have discovered the disputed instruction did not represent DEX's true intention.

Instead, Mr Sung accepted in evidence that he did not look at the fax instruction carefully or at all (Day 5, pg. 11.1).

80.  As appears from the authorities, a bank may have notice of “irregularity”—which is not the same thing as fraud : Lipkin Gorman v. Karpnale (C.A.) (above) (at 1354C).  Second, the question is not whether the instruction is unauthorized as a matter of probability but whether there is a serious or real possibility the instruction might be unauthorized, or for an improper or extraneous purpose : Lipkin Gorman(above) (at 1378B–C).  As Mr Shieh SC accepted in argument, the fact a person is an authorized signatory does not necessarily mean that all his instructions are necessarily authorized.  There will be cases for instance, when a bank is put on enquiry of possible fraud or misappropriation, or in all the circumstances (e.g. para. 79 above).  This will depend on the facts of each case.

81.  Mr Shieh SC asked rhetorically : who should the bank make enquiries with? It is not disputed that on 9 October 2006, the bank did not make enquiries with Mr Lin, with any of the Japanese gentlemen who had been corresponding and meeting DBS, with ECC's Ms Lo as DEX's corporate agent, nor with the Relationship Manager for DEX, Mr Andy Sung.  With respect, the fact no enquiries were made in these circumstances when DBS was put on enquiry, leads to the conclusion that the bank failed to exercise reasonable care in all the circumstances.

82.  I am aware of the 2 interlocutory decisions in this action when on DBS' application for security for costs, the court has been of the preliminary view that the merits favoured DEX.  In the Court of Appeal in CACV 247 of 2007 unrep., 6 December 2007, Cheung JA said (at §29, 30) :

“my view is that this approach [by DBS] is too restrictive.  While the 2^nd defendant was the sole signatory under the mandate given to the 1^st defendant, events had developed to such a stage that in my view that the plaintiff has put forward a strong case that the 1^st defendant must be put on inquiry as to whether the 2^nd defendant still had authority to transfer the fund when he gave the instructions.  The plaintiff had by correspondence informed the 1^st defendant of its intention to replace the 2^nd defendant as the authorized signatory.  Representatives of the plaintiff had come to Hong Kong and met the 1^st defendant for the purpose of amending the bank records …

Certainly the correspondence starting from 29 August 2006 showed that the 1^st defendant was corresponding with these representatives instead of with the 2^nd defendant.  In these circumstances an ordinary prudent bank ought to make enquiries with the plaintiff to see whether the 2^nd defendant still had the authority to transfer the fund before his instruction was to be complied with.  There were sufficient reasonable grounds for the 1^st defendant to consider whether the 2^nd defendant was misusing his authority for the purpose of defrauding the plaintiff or otherwise defeating its true intention.  The situation went beyond ‘mere suspicion or unease' on the part of the 1^st defendant.  The simplest way for the 1^st defendant was to make inquiries with the plaintiff before carrying out the instruction of the 2^nd defendant.  This was not done by the 1^st defendant.” [Emphasis added]

Although I am not bound by this judgment made at the interlocutory stage, without discovery and oral evidence, I respectfully agree with Cheung JA.

83.  DBS argues that on a strict construction of the Mandate in particular clauses 4 and 7, DEX cannot complain of any alleged breach of duty by DBS, or lack of authority by Lin.  With respect, I disagree.  Whether the contractual documents are strictly construed, or given their proper construction, DBS cannot have it both ways :

(1)     On a strict or proper construction, in my view the chop being part of the Mandate, the bank was in breach by paying without a chop on the transfer instruction of 9 October 2006.

(2)     Under clause 7 of the Mandate, DBS had by 29 September 2006, the amending resolution, duly certified by Mr Ishibe as the new sole director.

(3)     The required documents set out in clause 6 of the Mandate did not include the 3 required documents (para. 33 above) for instance, the register of members, and certificate of incumbency.  If the Bank wished to make these 3 documents necessary for a change of mandate, it could and should have provided for these contractually, for instance in the Standard Terms, or in the Mandate.  Indeed, Mr Sung's email of 26 September 2006 referred to additional documents without suggesting they were necessary documents.  Moreover, it is trite that a contract is construed at the time it is concluded, and not by reference to subsequent conduct, absent any agreed variation or estoppel, neither of which are alleged here.

(4)     Clause 4(a) of the Mandate provides that DBS is “entitled” to act upon any requests or instructions by an authorized signatory unless modification is completed under clause 7— and not that the Bank is “bound” to so act.  The latter would make little sense, and would be inconsistent with the Bank's duty to exercise reasonable care in all the circumstances.

84.  It follows on my construction of the contractual documents that DEX is entitled to complain of breach of mandate and negligence by DBS.  And it was not seriously suggested by Mr Shieh SC that Mr Lin was authorized on 9 October 2006, to operate the account (see DBS' Opening at para. 65, and Closing Submissions at para. 117(1)).  Either Mr Lin was authorized to operate the account on 9 October, or he was not.  He had no actual authority.  And any apparent authority was withdrawn to DBS' knowledge, during the course of numerous emails exchanged with DBS since the third week of August 2006, and at the 3 meetings with the bank on 28 and 29 September 2006.  It is trite that in general, apparent authority arises when a representation is made by the principal (DEX), and not merely by the agent, that the agent has authority.

85.  DBS also raises these arguments :

(1)     That DEX merely informed DBS of its intention to change the mandate, and not that the mandate was being or had been changed.

(2)     DEX did not inform DBS that Mr Lin ceased to have authority.

(3)     A signatory need not be a director.

86.  With respect, the evidence and inherent probabilities do not support any of these points, which I deal with in the same order :

(1)     This point is inconsistent with the evidence, and my findings above.

(2)     It was clear from all the emails to DBS, and in any event at the meetings on 28 and 29 September 2006, that Mr Lin's authority as signatory was changed.  Even if I am wrong and the position was not express, it was implicit.

(3)     See (2) above.  With respect, DBS' position in this respect is too dogmatic, and unrealistic.

(b)     Issue A.4—whether Mr Lin in breach of fiduciary duty

87.  Although Mr Lin formally resigned as a DEX director by 29 September, he had no actual nor apparent authority to give the disputed instruction on 9 October 2006 to DBS.

88.  By 9 October, he knew or must have known :

(1)     He had resigned as a director by 29 September, and the signatories were being or had been changed.  And he did not ask or confirm with any representative of DEX and DEXJ whether he still had authority to operate DEX's bank account.  He should have known that if he had asked, the answer would clearly have been “No”.

(2)     In his email to DBS of 24 August 2006, he made clear he wished to change the signatory “as soon as possible”.

(3)     It is extraordinary that his email on 9 October (at 5:29 p.m.) states he “sees no reason in not repaying the loan”—when he had already given the fax instruction to DBS that morning, around 10:08 a.m.  He did not tell DEX or DEXJ that he had already given payment instructions to DBS.

(c)     Issues A.5 to A.7—whether DBS in breach of fiduciary duty

89.  In view of my findings above, it is unnecessary to find an exceptional case where DBS was not merely in the position of debtor and creditor, but was also a trustee, with fiduciary duties which it breached : the requirements of certainty and speed for commercial transactions are such that I should be slow to recognize the bank owed duties as a fiduciary or trustee.  As already stated, DEX has abandoned its allegations of knowing receipt and dishonest assistance.

90.  I do however, consider DBS could and should (as it initially proposed) instituted interpleader proceedings when the dispute arose.  See Baden Delvaux (above) per Gibson J (at §281) (para. 61 above).

91.  I also consider that when BBMF applied for an injunction, DBS as DEX's agent and banker, should at least have appeared at that hearing albeit at short notice, to fairly put the position before the court—rather than rely on BBMF's counsel to inform the court of the full and frank position.  At the hearing for security for costs, Saunders J said (at §15) :

“Had they attended the hearing, and it had been made plain, as it ought to have been, to the judge, that the fund was in dispute, and the fact that the transfer had been made in reliance upon the signature of a person whose authority had been withdrawn, and whom the Bank apparently knew had an association with BBMF, had been made clear to the judge, it may well have been that the injunction would not have been granted.” [Emphasis added]

I respectfully agree.

(d)     Issue A.8—Effect of clause (a) of Remote Channel Authority and Indemnity

92.  Without prejudice to my conclusion that this document did not bind DEX as it was not authorized by any board resolution and meeting, and did not have DEX's chop as required by the Mandate, this document does not assist DBS.  It does not expressly nor impliedly, exclude liability for negligence—indeed clause (c) expressly relies on the bank's “terms and conditions”.  Nor do I consider that the payment by DBS on 9 October was such that it concerned a matter “beyond [DBS'] control”—it was within DBS' control whether to make proper enquiries when put on enquiry, and to exercise reasonable care.

(e)     Issue A.9—Loan or capital contribution; practical benefit

93.  In view of my findings on the third party proceedings, I need not spend too long on this issue.

94.  I accept that on the contemporaneous documents I have seen, in particular the Loan Agreement dated 30 June 2006, the transfer of US$3.25 million from BBMF to DEX was by way of loan rather than capital contribution.  It also appears that the Joint Venture Agreement with the BBMF Group was concluded with DEXJ, not DEX.

95.  However, having carefully considered the matter, it is unnecessary for me to finally determine the issue whether the transfer of US$3.25 million was by way of loan, or was a capital contribution, for 2 main reasons.  First, in general, when a third party e.g. a bank, pays a customer's debt for the customer, the customer is not bound, absent its authority or ratification.  Neither of these is alleged nor supported by the evidence.  Second, I do not have all relevant documents and facts before me, and am therefore reluctant to try this matter on the material before me.  I do not for instance, have a copy of the JVA apparently concluded in November 2005, in the Japanese language, and governed by Japanese law.  Third, Mr Shieh SC has submitted that if I find for his client on the question of mistake of law and/or fact, he would not be pressing the issue of DEX receiving a practical benefit

(f)      Issue A.10—relief

96.  Although DBS has alleged that DEX's loss was caused or contributed to by its failure or refusal to take any reasonable steps to prevent BBMF from obtaining the US$3.25 million from BBMF's account, DBS has not alleged contributory negligence, as opposed to causation.

97.  I am not persuaded that DEX caused its own loss, as alleged.  Before the transfer to BBMF on 20 October, it appears from the contemporaneous documents that it was unclear to DEX's solicitors whether the US$3.25 million was still in a bank account with DBS, or with another bank.

98.  DBS' Solicitors gave notice to DEX's solicitors by a fax on 20 October (at 9:38 a.m.) to ask it to obtain an injunction by 3:00 p.m. that day.  I accept Mr Manzoni's submission that there was insufficient time and it was impractical, particularly with DEX's directors resident overseas (as the Bank knew) for DEX to apply within a few hours for : (1) an urgent injunction, and (2) service out of the jurisdiction on BBMF in Nevada, and with the requisite Skeleton Argument and research.  Instead, DBS could (and should) have instituted interpleader proceedings (para. 9 above) under Order 17 as they had previously proposed (to the approval of DEX's Solicitors) and/or paid the disputed sum into court.  DBS could not be criticized if it had done either or both of these things, and would have sought to step out of the picture, or to limit its role in the proceedings.

I deal later with the relief I grant to DEX.

VI.     DBS' case against Lin—contribution proceedings (Issue B.11)

The contractual documents

99.  The Letter of Undertakings signed by Mr Lin dated 17 June 2006 is set out above (at para. 54).

Applicable principles

100.  The principles on warranty of authority are trite.  When a person or agent, by words or conduct, represents that he has actual authority to act on behalf of another, and a third party is induced by such representation to act in a manner in which he would not have acted if that representation had not been made, the representor is deemed to have warranted that the representation is true, and is liable for any loss caused to such third party by a breach of that implied warranty, even if he had acted in good faith, under a mistaken belief that he had such authority : Bowstead & Reynolds on Agency (18^th ed., 2006) §9–060.

Applying the principles

101.  In my judgment, Lin was in plain breach of warranty of authority :

(1)     By issuing and signing the disputed instruction, he impliedly warranted to DBS that he was still authorized by DEX to give the Instruction for the transfer of the funds;

(2)     DBS relied on this implied warranty in debiting the funds from the bank account, and crediting the same to BBMF's Account;

(3)      Lin was in breach of his warranty of authority; and

(4)     Such breach caused loss to DBS which is liable to compensate DEX.

102.  In my view, Lin is also liable to compensate and/or indemnify DBS under clauses (a) and (b) of his Letter of Undertaking.  First, he failed to give notice to DBS forthwith, of any change in the company's directors, and of any event which may affect the validity and operation of the account.  Second, DBS' liability was “by reason or in respect of [DBS] allowing [DEX] to open, operate and continue to operate [the DEX Account]” within the meaning of clause (b) of the Letter of Undertaking.  Although Mr Lin by letter dated 29 September 2006 resigned that day, that letter was not addressed to DBS.  Nor did it expressly deal with his position as signatory, as opposed to director.  He could and should have taken clear steps to inform DBS direct, in writing.

103.  In my judgment, it is no defence for Mr Lin that DBS was in breach of mandate or negligent because the Letter of Undertaking refers to DBS' liability “of whatsoever nature”.  In my view, this is wide enough to include liability for negligence and breach of contract.

104.  At §10(vi) of Lin's Amended Defence, he maintains that the Loan Agreement was in essence, a Quistclose trust arrangement between DEX and BBMF whereby :

(1)     the loan was advanced by BBMF for a specific purpose, to be used as funding for the acquisition of various target companies;

(2)     DEX could not use or dispose of the loan other than for the specific purpose;

(3)     the beneficial interest in the entire loan rested and remained with BBMF;

(4)     DEX was holding on the loan in the bank account as trustee for BBMF;

(5)     once DEX decided not to use the loan for the specific purpose, it was liable to return the loan to BBMF and/or to hold the same as trustee for BBMF;

(6)     the transfer of the funds constituted a transfer of the loan from DEX as trustee to BBMF as beneficial owner.

105.  I accept Mr Shieh SC's submission that none of the matters raised by Mr Lin have any bearing on his liability to indemnify DBS which is liable to DEX.

VII.    DBS' case against BBMF—third party proceedings (Issues B.12 to 13)

The contractual documents

106.  There are 2 contractual documents here.  First, the Remote Channel Authority and Indemnity dated 25 October 2005 signed by Messrs Ip and Lian, which provided :

“I/We, the undersigned, hereby request DBS BANK (HONG KONG) LIMITED (‘the Bank', which expression shall include its successors and assigns), if it sees fit, to act on any instructions, requests and/or other communications (a ‘Remote Instruction') given by telephone, facsimile or such other communication device as the Bank may from time to time approve, which the Bank in good faith believes to have been given by me/us or by the person(s) from time to time authorized to operate such account(s) under the above account title(s) which is/are currently, or may hereafter form time to time be, opened by me/us with the Bank.

…

(c)     that all Remote Instructions must comply with any per-transaction, daily or other monetary limits, or such operating, procedural or other limits or requirements and applicable terms and conditions from time to time required by the Bank;

…

(g)     (if there is more than one of us, jointly and severally) to hold the Bank harmless and to keep the Bank indemnified on demand against any claims proceedings, liabilities, losses and expenses (including legal expenses) directly or indirectly suffered or incurred as a result of acting on Remote Instructions in accordance with this Authority.  I/we agree to perform and ratify any obligation entered into or action taken by the Bank as a result of such instructions.”

107.  Second, BBMF's Letter of Undertaking dated 16 September 2005 signed by Messrs Ip and Lian, which provided (at clause (b)) :

“… to indemnify you and keep you fully indemnified from and against all sums of money, accounts, claims, actions, proceedings, liabilities, damages, costs, charges, expenses or loses of whatsoever nature which you may suffer, sustain, incur or be liable to for or by reason or in respect of your allowing the said Company to open, operate and continue to operate the account or account(s) and/or in respect of my/our or said Company failing to furnish you with the change of any of the information mentioned in clause (a) above.”

Applicable principles—DBS' case against BBMF

(a)     Payment by mistake

108.  The starting point is that if a person pays money to another under a mistake of fact or law, which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake : Barclays Bank v. WJ Simms & Cook[1980] 1 QB 677 at 677E–F (headnote), perGoff J (as he then was) (at 692B, 695C, 703C–D).

109.  There are various reasons stated in the authorities for the recovery of money paid under mistake of fact and/or law, which include :

(1)     when money is paid by mistake, the payment is unintended, and prima facie should be recovered.

(2)     when a payment is made by mistake it is usually unconscionable for the recipient to receive and retain the money.

110.  It is well established that any negligence by the payer in making the mistaken payment is no defence to a claim for payment by mistake :

(1)     The leading authority is Kelly v. Solari (1841) 152 ER 24 (at 26) where Parke B held :

“… if [the money] 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.” [Emphasis added]

(2)     In Barclays Bank v. W.J. Simms (above), Goff J referred (at 686F) to Kelly v. Solari as “the basis of the modern law” on recovery of money paid under a mistake of fact.

          He continued (at 686H–687A) :

“The principal issue in [Kelly v. Solari] was therefore whether negligence on the part of the plaintiff precluded recovery : it was held that it did not; that has stood ever since.” [Emphasis added]

(3)     Kleinwort Benson Ltd v. Lincoln City Council [1999] 2 AC 349 [H.L.], per Lord Hoffmann (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 receipt to retain the money when, if the payer had known the true state of affairs, he would not have paid … 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.” [Emphasis added]

(4)     Dextra Bank & Trust Co. Ltd v. Bank of Jamaica [2002] 1 All ER (Comm) 193 [P.C.], per Lords Bingham and Goff (at 207c–d) :

“Their Lordships are, however, most reluctant to recognise the propriety of introducing the concept of relative fault into this branch of the common law, and indeed decline to do so … 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) 9 M & W 54 at 59, [1835–42] All ER Rep 320 at 322 per Parke B.” [Emphasis added]

111.  As to what constitutes a mistake in this context :

(1)     The concept of mistake is very wide : Barclays Bank v. Simms (above) perGoff J (at 689D) :

“Furthermore, the kind of mistake that will ground recovery is, as Parke B.'s statement of the law in Kelly v. Solari, 9 M. & W. 54 shows, far wider than the kind of mistake which will vitiate an intention to transfer property.” [Emphasis added]

(2)     Mistake includes situations where the payer believes he is bound to pay the amount paid, and situation of a positive but mistaken belief.  Mistake does not however, includes situation where the paying party is in doubt, or mispredicted the situation : Kleinwort Benson Ltd v. Lincoln City Council (above) [H.L.] perLord Goff (at 379G–H) :

“To me, it is plain that the money was indeed paid over under a mistake, the mistake being a mistake of law.  The payer believed, when he paid the money, that he was bound in law to pay it.”

          Lord Hope said (at 409H–410C) :

“Nor is there any essential difference as between fact and law in regard to the payer's state of mind.  This may vary from one of complete ignorance to a state of ample knowledge but a misapplication of what is known to the facts.  The mistake may have been caused by a failure to take advice, by omitting to examine the available information or by misunderstanding the information which has been obtained ...

As Mason C.J. said in the David Securities case, at p. 374, the concept of mistake includes cases of sheer ignorance as well as of positive but incorrect belief.

Cases where the payer was aware that there was an issue of law which was relevant but, being in doubt as to what the law was, paid without waiting to resolve that doubt may be left on one side.  A state of doubt is different from that of mistake.  A person who pays when in doubt takes the risk that he may be wrong – and that is no whether the issue is one of fact or one of law.  As for mistake, this may arise where there is no suggestion that the law has changed since the payment was made.”

112.  In Barclays Bank v. Simms (above) Goff J identified various potential defences (at 695C–D) :

“From this formidable line of authority certain simple principles can, in my judgment, be deduced : (1) If a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact. (2) His claim may however fail if (a) the payer intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend; or (b) the payment is made for good consideration, in particular if the money is paid to discharge, and does discharge, a debt owed to the payee (or a principal on whose behalf he is authorized to receive the payment) by the payer or by a third party by whom he is authorized to discharge the debt; or (c) the payee has changed his position in good faith, or is deemed in law to have done so.”

Here, none of defences (a) to (c) above have been pleaded by BBMF, and are unsupported by the evidence.  As to defence (b) above, there is no consideration moving between DBS and BBMF, and DBS was not authorized by DEX to make the payment.

113.  As to a defence of bona fide change of position, Mr Shieh SC urged upon me the well established principle that the mere fact money is spent (here, by BBMF) does not necessarily establish a bona fide change of position, citing Goff & Jones : The Law of Restitution (7^th ed., 2007) §40–001 which quoted Lord Goff in Lipkin Gorman v. Karpnale [1991] 2 AC 548 [H.L.], 579–80 :

“I wish to stress however that the mere fact that the defendant has spent the money, in whole or in part, does not of itself render it inequitable that he should be called upon to repay, because the expenditure might in any event have been incurred by him in the ordinary course of things.  I fear that the mistaken assumption that mere expenditure of money may be regarded as amounting to a change of position for present purposes has led in the past to opposition by some to recognition of a defence which in fact is likely to be available only on comparatively rare occasions.  In this connection I have particularly in mind the speech of Lord Simonds in Ministry of Health v. Simpson [1951] A.C. 251, 276.”

I respectfully agree.

Applying the principles—DBS' case against BBMF

114.  In my judgment, BBMF is liable to make restitution of the sum of US$3.25 million paid by DBS under mistake of fact and/or law :

(1)     DBS obviously believed it was authorized to make the transfer, and indeed mistakenly believe it was entitled, and bound to follow the instruction.

(2)     DBS would obviously not have paid the sum if it had believed otherwise.

(3)     With respect, I do not accept Mr Chu's submission that this was a case where the Bank was in any relevant doubt, or mispredicted the situation.  Although the Bank temporarily sought to freeze the sum pending enquires, it mistakenly changed its position when it mistakenly concluded that it had a legal right and duty to make the transfer from DEX to BBMF.

(4)     Although I find that the Bank with respect, failed to exercise due care in all the circumstances, it is trite that this is not a defence to a claim for payment under mistake of fact or law.

115.  In my view, the payment to BBMF should be recovered because it was unintended, and for reasons below.

116.  As stated earlier, BBMF has not pleaded for whatever reason, a defence of bona fide change of position as a result of receiving the US$3.25 million.  As a result, the point was not dealt with in the witness statements, nor in cross-examination.  Although BBMF sought to rely on this defence during closing submissions, I did not think it fair to DBS or permissible as a matter of procedural fairness, for this point to be taken well past the 11^th hour.

117.  Although BBMF may consider this result is unfair, I would point out :

(1)     It follows from my findings above that DBS acted in breach of mandate and without proper care, that it is liable to repay DEX the entire US$3.25 million.  DBS is entitled to recover the same sum from BBMF.

(2)     If BBMF is confident it has a good case for loan repayment, and even applying for summary judgment, there is nothing to stop it from doing so.  There is no possible suggestion that any claim by BBMF against DEX is time barred within the 6 year period for contract claims.

(3)     If the issue should arise in proceedings brought by BBMF whether the natural and appropriate forum is Hong Kong or Japan, this issue can be ventilated, and the Hong Kong Court can decide where the dispute between DEX and BBMF should be tried, or summarily determined as the case may be.

(4)     I accept Mr Shieh SC's submission that BBMF could and should have “closed the loop” by instituting 4^th party proceedings against DEX, as a result of the 3^rd party proceedings instituted.  BBMF could not assume it would necessarily succeed against DBS.  It should as a matter of prudence, have instituted 4^th party proceedings against DEX.  Without such proceedings, there is no direct lis between DEX and BBMF to be addressed in pleadings between them, which would determine the scope of their discovery, and witness statements.  As a result, I am conscious I have not seen all relevant documents between DEX and BBMF on the issue of loan or capital contribution, for instance the JVA in the Japanese language, governed by Japanese law.

(5)     I am also troubled by the fact the transfer of monies between DEX and BBMF on 9 October 2006 occurred in suspicious circumstances.  It happened on a Japanese public holiday when DEX and DEXJ personnel in Japan were unlikely to be alerted.  On the evidence, Mr Lin with the assistance of BBMF's Ms Elaine Kwok, engineered a situation on 9 October for DEX to pay BBMF without authority, when Mr Lin must have known he had resigned as a director, and his authority as a signatory had either ended, or would very soon end.  Mr Lin was clearly aware of a dispute between the DEX Group and BBMF, but failed to consult DEX's other directors and personnel before sending DBS the disputed instruction by fax.

118.  As to BBMF's Remote Channel Authority and whether it is liable to compensate and/or indemnify DBS, I accept this document concerns the operation of BBMF's account, not DEX's account.  Nonetheless, since BBMF repeatedly demanded that DBS unfreeze its account, and make the transfer from DEX, BBMF can hardly complain that DBS carried out its instructions, thereby suffering loss.

I accept DBS' submission that where DBS is liable to DEX by reason of the transfers to BBMF's account on 9 and 20 October 2006, this arose and was a consequence of DBS' compliance with BBMF's instructions concerning its account.  As such, DBS is entitled to be compensated or indemnified by BBMF.

119.  BBMF counterclaims on the basis that DBS consented to the discontinuance of the Injunction Proceedings in the 1^st Action, and DBS is therefore precluded from bringing the present case on the basis of res judicata and/or that DBS is in breach of an undertaking given to deputy judge.

120.  However, the principle of res judicata operates only where a final judicial decision on the merits of the case has been pronounced : Halsbury's Laws of England (4^th ed., 2003) Vol. 16(2) §978.

Here, there was no adjudication of the merits of the issues raised in the Injunction Proceedings.

Nor did DBS give an undertaking that the issues raised in the Injunction Proceedings would not be raised in other proceedings.

121.  In my view, DBS is also entitled to rely on R.H.C. O. 21 r.4 :

“Subject to any terms imposed by the Court in granting leave under rule 3, the fact that a party has discontinued an action or counterclaim or withdrawn a particular claim made by him therein shall not be a defence to a subsequent action for the same, or substantially the same, cause of action.” [Emphasis added]

122.  Although BBMF sought to rely on the belated plea of estoppel by conduct, this was not pleaded.  In the absence of such plea, let alone dealt with in the witness statements, or cross-examination, BBMF cannot rely on this argument.  Moreover, a representation to found an estoppel by conduct must be clear and unequivocal, and I fail to see how this can sensibly be satisfied.

VIII.   DBS' case against Ip—third party proceedings (Issue D.14)

123.  DBS is not precluded from claiming against Mr Ip because of any alleged discontinuance undertaking, for the reasons in paras. 119–120 above.  Mr Ip was not party to the 1^st Action, and cannot enforce the alleged discontinuance undertaking.

124.  However, I am not persuaded that Mr Ip is or should be personally liable under the Letter of Undertaking dated 16 October 2005 although he signed the fax instruction to DBS dated 12 October 2006 (to transfer US$3.8 million from its BBMF's DBS account to its HSBC account), for 2 reasons :

(1)     He signed that fax instruction “for and on behalf of” BBMF.  It is well known that these words exclude an agent's personal liability.  In these circumstances, he should not be personally liable in the third party proceedings.

(2)     The subsequent solicitors' letters were sent on BBMF's behalf by W.I. Cheung & Co., rather than his behalf.

125.  In assessing contribution, under s. 4 Civil Liability (Contribution) Ordinance, Cap. 377, the contribution recoverable from any person shall be such as may be found by the court “to be just and equitable having regard to the extent of that person's responsibility for the damage in question”.  Applying that section and having regard to all the relevant circumstances, I consider :

(1)     DBS should repay to DEX the entire sum of US$3.25 million wrongly transferred.

(2)     BBMF should pay DBS the same sum which DBS is adjudged liable to pay DEX.

(3)     It is inappropriate to apportion responsibility between DBS and BBMF towards DEX, and there was no serious suggestion to the contrary.

(4)     I decline to hold Mr Lin personally liable in the third party proceedings.

IX.     Credibility

126.  For the avoidance of doubt, in the Main Action in general, I found the plaintiff's case to be more consistent with the contemporaneous documents and inherent probabilities than DBS' case.  Insofar as there was any conflict of evidence between their witnesses, I preferred the plaintiff's version of events, on the balance of probabilities.  I intend no disrespect to DBS' witnesses who as busy bankers suffered a lapse in proper communication and coordination, and failed to properly appreciate all the ramifications of the contemporaneous documents and meetings.

127.  Insofar as DBS' case against BBMF and Lin is concerned, for the avoidance of doubt, I find that DBS' case was more consistent with the contemporaneous documents and inherent probabilities.  Where there is any conflict of evidence between DBS and the third parties, I prefer DBS' case on the balance of probabilities.

128.  Although there is no direct lis between BBMF and DEX, Elaine Kwok of BBMF was not called, did not make a witness statement, and has provided no explanation nor evidence although she was a material witness in :

(1)     sending the written demands to DEX for loan repayment, with interest;

(2)     on DBS' evidence, pressurising it by at least 3 phone calls on 9 October 2009 (two to Ms Wat, and one to Mr Sung); and

(3)     on DBS' Mr Sung's evidence, complaining on 9 October 2006 that Ms Wat had failed to process the payment promptly.

As a result, it appears DEX's disputed instruction to DBS was approved as it was marked “urgent please”.  It is unclear whether Ms Kwok misled DBS by stating she represented “DEX Asia” (as recorded in the payment instructions), or this was DBS' own mistake.

129.  In these circumstances, although there is no direct lis between BBMF and DEX, I am entitled to draw an adverse inference against BBMF from the absence or silence of Ms Kwok as a witness who may be expected to give material evidence on the circumstances surrounding the transfer of US$3.25 million from DEX to BBMF.  Such inference would tend to strengthen the evidence adduced by DEX and DBS against BBMF, and to weaken BBMF's evidence.  I am satisfied there is evidence before me that the transfer was effected in circumstances where Mr Lin was plainly in breach of warranty of authority and/or fiduciary duty, assisted by BBM's Ms Kwok.  There has been no reason put forward for Ms Kwok's absence and silence.  BBMF may have thought they were saving time and costs by recovering a debt in dispute, which they considered was plainly due and owing.  However, any debt recovery should be done properly through the court if necessary, and not by unorthodox or unilateral means.

130.  Although DEX discontinued its claim against Mr Lin, his credibility is suspect to say the least :

(1)     He maintains that DEX did not specifically explain to him that his position as a signatory had come to an end (his statement §33).  However, this is contradicted by his own stance in his email of 24 August 2006 that the signatories were to replaced, “as soon as possible”.  He also admits he knew that the change of signatory was in process (his statement §34).

(2)     As Mr Manzoni pointed out, the 9 October 2006 disputed instruction which he signed has an indicated time of around 10:08 a.m.  However, that afternoon his email sent around 17:29, stated that he saw no reason for this payment not to be paid—without stating he had already approved the payment.

(3)     He states that as a sole signatory, he believed he still had proper authority (his statement §34).  However he must have been put on inquiry at the very least, or could not care less that his authority had or would shortly come to an end, with the steps taken to change signatories. Moreover, all BBMF directors on the board of DEXJ were asked to resign, and did so in August 2006—2 months before the transfer on 9 October 2006.

X.      Conclusion

131.  In the circumstances, I make the following order in the Main Action in entering judgment against DBS in DEX's favour with the following relief :

(1)     DBS is ordered to return the USD3,250,000 wrongfully transferred from the plaintiff's bank account on 9 October 2006 without the plaintiff's authority.

(2)     A declaration that DBS wrongly debited DEX's bank account with the sum of UD$3,250,000 on 9 October 2006, and that the said amount is due and owing by DBS to the plaintiff.

I decline to order or declare that DBS is liable as constructive trustee or for breach of fiduciary duty, or that it was subject to fiduciary duties.

132.  I enter judgment in DBS' favour against Mr Lin in the sum of UD$3,250,000 which DBS has been adjudged liable to pay DEX.

133.  I also enter judgment in DBS' favour against BBMF for the same sum of US$3,250,000 which DBS has been adjudged liable to pay DEX.

134.  I dismiss the third party proceedings against Mr Ip.

135.  As to costs, having considered all the evidence and the circumstances leading up to and prior to the litigation, with respect to DBS, its conduct prior to 9 October and at the time of payment on 20 October 2006 was such as significantly added to legal costs, and the length of these proceedings.  If it had instituted interpleader proceedings as it had itself suggested, time and costs could have been significantly reduced.  Moreover, if it had informed Hartmann J in writing or otherwise at the hearing on 20 October 2006 of the full and frank position concerning the dispute between the 2 customers, His Lordship may not have been inclined to grant the injunction.  Put another way, the Bank has at least to some extent, brought these proceedings upon itself.  At the same time, it is fair to point out the Bank had an arguable defence such that the matter was suitable for trial as opposed to summary determination.

136.  Having considered all the circumstances, I make the following costs order nisi :

(1)     DBS is to pay DEX the costs of the action, to be taxed if not agreed, on a party and party basis, with certificate for 2 counsel (all parties at trial having appeared by 2 counsel).

(2)     DBS is awarded half its costs against Mr Lin and BBMF of defending the Main Action, and of the contribution and third party proceedings, on a party and party basis, with certificate for 2 counsel.

(3)     DBS is to pay Mr Ip's costs on a party and party basis, with certificate for 2 counsel.  Such costs will need to be apportioned since Mr Ip and BBMF both appeared by the same counsel and solicitors.

137.  As to interest, I award DEX interest from 9 October 2006 until judgment at a commercial rate, and from judgment until payment in full at the judgment rate.  I award DBS interest against BBMF at a commercial rate from 20 October 2006 until judgment, and thereafter at judgment rate until payment in full.  I grant liberty to apply to the parties, in particular to make such written submissions as they see fit on the interest rate and/or period.

138.  It remains to thank all Counsel for the considerable assistance they gave me.