TANG YUAN YI v. TOKYO INTERNATIONAL INVESTMENT LTD

HCA 2078/2018

[2021] HKCFI 944

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2078 OF 2018

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D E C I S I O N

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INTRODUCTION

1.  By a notice of appeal dated 19 June 2020, the Defendant appeals against the decision of Master Gary CC Lam (the “Master”) dated 5 June 2020 (the “Decision”) granting summary judgment for the Plaintiff against the Defendant on the sum of USD160,000 (the “Funds”).

2.  The Plaintiff’s case is fairly straightforward. Between March 2017 to May 2017, the Plaintiff was induced by one Ms Hui and had remitted a total of USD870,000 to various bank accounts in nine tranches, acting under the mistaken belief that he was making genuine investments.

3.  The Defendant is a Hong Kong limited company and the recipient of the 5^th and 6^th tranches of the Funds.  There is no dispute that on 4 May 2017, around USD60,000 was paid into the Defendant’s bank account numbered 848-543872-838 held with HSBC (“D’s Account”); and on 17 May 2017, around USD100,000 was paid into D’s Account.

4.  There is also no dispute that the Plaintiff never had any dealing with the Defendant.  There is no basis upon which the Defendant could have received the sum of USD160,000 and there is also no reason why the Defendant could legitimately keep on to the said sum of USD160,000.

5.  From the Plaintiff’s perspective, but for his mistaken belief that he was making a genuine investment, the Plaintiff had no reason and would not have paid the said sum to D’s Account.

6.  The Plaintiff realised his mistake and discovered the investment scam on or around 16 August 2017 when he was contacted by the Taiwan Police.

7.  In or around early August 2018, the Hong Kong Police informed the Plaintiff that funds in D’s Account have been frozen and suggested the Plaintiff to commence the present action.

8.  The Master found that the Defendant has failed to raise any arguable defence or triable issue.  In particular,

(1)  The Defendant’s Defence contains nothing but mere non-admissions;

(2)  Some alleged “defences” were only belatedly raised in the 1^st Affirmation of Kwok Ping Ching (“Ms Kwok”) i.e. filed some 7 months after the Defendant’s Defence;

(3)  In gist, the Defendant alleges that it received the Funds on behalf of a “Liu Yang Guang” (“Mr Liu”) and had changed its position;

(4)  However, the Master ruled that the Defendant’s defence is full of loopholes, internal contradictions and unexplained discrepancies and it follows that the Defendant’s defence is incredible and unbelievable.

9.  The Defendant appeals against the Master’s Decision.

ANALYSIS

10.  I am of the view that the Plaintiff clearly establishes that he is entitled to have the sum of USD160,000 returned to him. The sum of USD160,000 was paid by the Plaintiff to D’s Account and the Defendant has no identified a good reason as to why the said sum should not be returned to the Plaintiff. I will address the defence raised by the Defendant below.

11.  I agree with Ms Ng for the Plaintiff that the remittance slip dated 16 May 2017 shows that the Plaintiff has directly remitted USD100,000 to D’s Account. The fact that on 16 May 2017, D’s Account received more than one sum of USD100,000 is neither here nor there.  Mr Ko for the Defendant relied on a remittance advice concerning a remittance from one “Fanny Indahwaty” in the sum of USD99,973.   However, I do not see the relevance of that.  The fact that the Defendant received more than one sum of USD100,000 does not mean that the Defendant did not receive a sum of USD100,000 from the Plaintiff.  Indeed, it is up to the Defendant to give a credible explanation as to why on 16 May 2017, D’s Account received sums of money of around USD99,973. The Defendant has offered no credible explanation.

12.  Ms Ng for the Plaintiff is right to submit that it is indeed alarming that the Defendant appears to customarily receive large sums of money from persons unknown to the Defendant.  In my view, this is an indicia of money laundering.  I find it troubling that the Defendant was not able to identify the sending parties to its own bank account.  Unless the Defendant gave the relevant information of its bank account to a third party, no money would be able to transfer to D’s Account. Hence, it is unsettling that the Defendant said that it does not know who “Fanny Indahwaty” is. 

13.  I also agree with Ms Ng for the Plaintiff that the Funds were paid from the Plaintiff to the Defendant at the Plaintiff’s expenses under a mistaken belief that he was making genuine investments.  But for the said mistake, the Plaintiff would not have acted upon the directions of Ms Hui and paid the Funds into D’s Account.  The Defendant has never suggested that there were commercial reasons for the Plaintiff to transfer the Funds to the Defendant.

14.  The Plaintiff has provided consistent accounts on the circumstances in which the mistaken payments were made in his statements made to the Taiwan Police and the Hong Kong Police.

15.  It is established law that money paid under a mistake of fact is prima facie recoverable based on unjust enrichment. 

16.  Mr Ko for the Defendant attempted to challenge the credibility of the Plaintiff’s case.  First, he submitted that the Plaintiff only provided limited information about Ms Hui and Ms Hui was not even mentioned in the Plaintiff’s Taiwan Police Statement.  I am of the view that this is a non-point.  The Plaintiff’s case is that it was only shortly after he made his Taiwan Police Statement that he realised that Ms Hui might be involved in the scam.  In fact, upon being informed by the Taiwan Police that he has fallen victim to a scam, the Plaintiff even alerted Ms Hui, who he still considered as a friend.

17.  Mr Ko for the Defendant complained that the Plaintiff did not do enough to gather and preserve evidence and doubted the Plaintiff’s case that he has deleted his communications with Ms Hui. I do not see the relevance of this complaint. The Plaintiff could have done better and even to have avoided the scam. But that is irrelevant.  The fact is that the Defendant received the Plaintiff’s money for no good reason. The same has to be returned.

18.  The Defendant also attacked the cogency of the Plaintiff’s evidence. However, I am of the view that none of the matters complained of are material. Whether the Plaintiff communicated with Ms Hui via LINE or WeChat first; or whether the Plaintiff had managed to select the best categorisation (“匯款分類名稱”) when remitting money is clearly neither here nor there.

19.  I agree with Ms Ng for the Plaintiff that the totality of the evidence demonstrates that the Plaintiff has remitted the Funds to the Defendant under a mistake.  There is no reason whatever (and the Defendant has not offered any) why the Plaintiff would have paid the Defendant had he not been mistaken.

THE DEFENDANT’S DEFENCE

20.  The Defendant’s case is that in around April 2017, a fellow village clansman of Ms Kwok, the director and a shareholder of the Defendant, viz., Mr Liu asked Ms Kwok “if he could use my bank account to receive some monies for him. He said the monies would be received for business transactions. He assured me that the monies were for genuine business transactions” (paragraph 4 of the 1^st Affirmation of Kwok Ping Ching).

21.  The Defendant further said that the Funds received were then remitted to Mr Liu on 15 May 2017.  Ms Kwok has produced the remittance record showing the transfer of USD128,124 from D’s Account to the account of Xiamen Yong Zhong.  In relation to the remaining sum, it had been returned to Mr Liu in China on about 18 May 2017, and the Defendant had not deliberately kept the transfer advice.  The Defendant submitted that it is an innocent agent and changed its position in good faith.

22.  Putting aside the fact this defence was put forward only for the first time in the 1^st Affirmation of Kwok Ping Ching, I must say I find the Defendant’s case incredible.  First, assuming Mr Liu did pay into D’s Account, D’s Account should have received two sums of USD160,000 and there would not have been any difficulties on the part of the Defendant to repay USD160,000 to the Plaintiff.  Assuming Mr Liu did not pay the sum of USD160,000 into D’s Account, then there is no explanation as to (1) why the Defendant did not verify who paid what sums into its account and (2) significantly, there is no evidence that the Defendant asked Mr Liu whether he did pay the sum of USD160,000 into D’s Account.

23.  One would have thought that the most sensible thing to do is to check with Liu whether he did transfer USD160,000 into D’s account. From the 1^st Affirmation of Kwok Ping Ching, she did not even mention that.  If Mr Liu did not, then most likely the Defendant could have been deceived. This is a serious matter.  Particularly when the Defendant is a party to the present High Court Proceedings. There is not even any evidence on whether the Defendant had contacted Mr Liu and whether Mr Liu confirmed that he or his trading counterparties did transfer the Funds into D’s Account.  The absence of such evidence does not assist the Defendant in establishing a bona fide defence to the Plaintiff’s claim.

24.  Further, it is only common sense that one must have verified the source of payment and satisfied oneself that the Funds received were monies paid in relation to Mr Liu, before paying out the same. It appears that the Defendant had done nothing to verify the sources of payments into D’s Account. This is particularly so when more than one payment of USD99,973 were paid into D’s Account.

25.  Ms Ng for the Plaintiff also submitted that the Funds in the sum of USD160,000 does not sit well with the purported contracted and/or invoiced sums stated in the documents adduced by the Defendant, namely, USD646,380 and USD380,000. No explanation has been provided by the Defendant. I agree. How the Defendant could immediately identify the Funds to be associated with the sums of USD646,380 and USD380,000 is a mystery to this Court.

26.  Ms Ng for the Plaintiff also correctly submitted that the Defendant produced no records of communication between the Defendant and Mr Liu, such as emails, messengers, chat records and/or telephone records, etc, to evidence such arrangement between the Defendant and Mr Liu.

27.  Ms Ng for the Plaintiff further submitted that even on the face of the Defendant’s own evidence, the alleged arrangement between the Defendant and Mr Liu is inherently implausible and improbable:-

(1)  The Defendant does not suggest there were any prior dealings or relationship between the alleged “Mr Liu” and Ms Kwok and/or the Defendant.  The Defendant’s case seems to be that after seeing some documents, Ms Kwok acceded to the request of “Mr Liu”.

(2)  It is nonsensical that Ms Kwok and/or the Defendant would have agreed for a random person, no previously known, to use the Defendant’s bank account on the strength of a few pieces of basic-looking documents.  I tend to agree.  It is also not clear to this Court as to how the Defendant could book its accounting entries for such bank transfers. 

(3)  To highlight some of the curious features of the such documents:-

(a)  While the Defendant’s case is that Ms Kwok only provided details of D’s Account and agreed to the alleged arrangement after being shown the documents, the name of the Defendant somehow already appears on the alleged sales contracts.

(b)  In the first of the alleged sales contracts, “Xiamen Yong Zhong Manufacture & Trade Co., Ltd” (“Xiamen YZ”) (which was supposed to be the seller) somehow affixed its seal as the buyer; while “Care About Trading Co., Ltd” (“Care About”) (which was supposed to be the buyer) affixed its seal as the seller.

(c)  Further, the Defendant has not provided any explanation as to why a Hong Kong bank account is required to accept payment on behalf of “Mr Liu” or Xiamen YZ.

(d)  In fact, it is rather contrary to common sense that “Mr Liu” or Xiamen YZ must ask some random Hong Kong companies for help to receive payments for every single similar transaction.

28.  Additionally, the Defendant alleges that the Funds have been returned to Mr Liu by two transfers and the Defendant had therefore changed its position:-

(1)  The sum of USD59,973.63 was returned on 15 May 2017 (the “1^st Alleged Return”); and

(2)  The sum of USD99,973.14 was returned on or about 18 May 2017 (the “2^nd Alleged Return”).

29.  However, I agree that the 1^st Alleged Return is not substantiated by any credible or probative documentary evidence:-

(1)  As proof for this alleged payment, the Defendant rely solely on an illegible photograph, the quality of which is so poor that almost none of the payment details can be discerned.  As such, one cannot even conclude with confidence that the sum of USD128,124 was in fact paid by the Defendant to the Xiamen YZ.

(2)  The 1^st Alleged Return was allegedly made from D’s HSBC account.  There is simply no reason why D could not have provided at least a legible screenshot; or requested from HSBC a proper payment advice/confirmation.

(3)  Importantly, even assuming that such payment has been made to Xiamen YZ, there is no evidence to suggest that it has anything to do with the Defendant’s receipt of the Funds.  The numbers do not match and no breakdown of the alleged sum of USD128,124 has been provided.

(4)  Furthermore, I agree that the Defendant could well have other reasons to pay Xiamen YZ.  There is nothing to show that the Defendant would not have made the same payment to Xiamen YZ but for its receipt of the Funds.

30.  As to the 2^nd Alleged Return, it is not substantiated by any evidence at all:-

(1)  The Defendant alleges that it had not deliberately kept the transfer advice and therefore it “cannot be found at the moment”.  However, up till the date of the appeal, some 14 months after filing of the 1^st Affirmation of Kwok Ping Ching, the Defendant has still not produced any copy of the transfer advice.

(2)  There is also no explanation as to why the Defendant was unable to obtain some other written proof of payment for the 2^nd Alleged Return, which the Defendant could have requested from its bank.  Instead, not even a bank statement showing the purported payment out has been adduced.

(3)  The Defendant also appears to suggest that the 2^nd Alleged Return was carried out “in China”.  I agree that it is unclear why monies received into D’s Account in Hong Kong would have been returned “in China”. 

(4)  Again, even assuming that such payment has been made, there is no evidence to suggest that it has anything to do with the Defendant’s receipt of the Funds.

31.  For all the above reasons, I am of the view that the Defendant has raised no bona fide or substantive defence to the Plaintiff’s simple claim.

FRAUD EXCEPTION

32.  Finally, Mr Ko for the Defendant relied heavily on the case of Zimmer Sweden AB v KPN Hong Kong Ltd [2016] 1 HKLRD 1016 and submitted that as fraud is involved, the Court has no jurisdiction to grant any order under Order 14 of the Rules of High Court, Cap.4A.

33.  I must say that I find it difficult to fathom why the fraud exception is engaged as the Plaintiff does not make any allegation of fraud or dishonesty against the Defendant. Although the Plaintiff’s claim arises from the background of a scam, the Plaintiff’s unjust enrichment claim against the Defendant simply does not depend upon making or proving any allegation of fraud.

34.  However, as this is an important point, I set out my analysis in detail below.

35.  The fraud exception is provided under Order 14, rule 1(2)(b) of the Rules of High Court, Cap.4A which states that:-

“…this rule applies to every action begun by writ other than –

(b) an action which includes a claim by the plaintiff based on an allegation of fraud…” (emphasis added)

36.  It is indisputable that if the fraud exception is engaged, the court has no jurisdiction to entertain an application for summary judgment.

37.  However, the precise scope of the fraud exception has become a subject of debate recently.  In particular, the question of whether the fraud exception can be triggered by an allegation of fraud made against a non-party (as oppose to the defendant) might have been re-opened by conflicting views expressed in the Court of First Instance.

38.  The Hong Kong Court of Appeal has on 3 previous occasions considered the construction of the fraud exception in some details:-

(a)  Pacific Electric Wire & Cable Co Ltd v Harmutty Ltd [2009] 3 HKLRD 94.

(b)  A-1 Business Ltd v Chau Cham Wong Patrick [2009] 5 HKLRD 579.

(c)  Zimmer Sweden AB v KPN Hong Kong Ltd [2016] 1 HKLRD 1016.

39.  In Pacific Electric (supra):-

(a)  The plaintiff company commenced three actions against its directors and officers for misappropriation.  There were no express claims for damages for fraud.  The plaintiff’s claims were framed as constructive trust, resulting trust and money had and received (see §§1, 7-10, 30-31). 

(b)  The plaintiff’s claims were however based on allegations of deliberate dishonesty including false accounting, concealment of beneficial ownership when there was a duty to disclose, and connivance at the preparation of false financial statements and accounts (see §31).

40.  At p.102, §19, Roger VP (with whom Le Pichon JA agreed) stated:-

“The wording of O.14 r.1(2)(b) makes quite clear that what is excluded is an action where there is a claim which is based on an allegation of fraud. Two matters are clear from that. The first is that there may be one or more claims in the action and the rule envisages that one of the claims may not be based on an allegation of fraud but another may be. In those circumstances it is clear that an application for summary judgment under O.14 will not lie. Secondly, the rule is not confined to excluding actions in which one of the claims is a claim for damages for fraud, what is excluded is any action where there is a claim in respect of which the underlying allegations on which the claim is based constitute an allegation of fraud. It is clear that if r.1(2)(b) applies there is no jurisdiction for the court to entertain an application for summary judgment.” (Emphasis added.)

41.  Pacific Electric (supra) was applied by the Court of Appeal in A-1 Business (supra) which also involved misappropriation by the plaintiff company’s directors.  Essentially: -

(a)  The plaintiff company’s money was used to repay a personal debt of one of the director defendants (§§8-9).

(b)  In defence, the defendants claimed that the money was payment of dividend to the plaintiff’s holding company, A-One Investment Ltd, which directed the plaintiff to make such payment to the first defendant (see §11).

(c)  In reply, the plaintiff responded that the alleged declaration of dividend was a fabrication after the event in order to give the misappropriation a cloak of legitimacy (see §12).

42.  The Court of Appeal affirmed the first instance decision that the fraud exception was engaged as the way in which the plaintiff has addressed the defence clearly involved allegation of dishonesty against the defendants (at p.584, §15, per Cheung JA).

43.  The fraud exception came before the Court of Appeal again in Zimmer (supra), the most recent leading authority on this topic.  The facts in Zimmer were as follows:-

(a)  The plaintiff company made two remittances under fraudulent misrepresentations.  The defendants were the first-layer and second-layer recipients of the defrauded sum respectively (see §§3.1-3.6).

(b)  The plaintiff asserted a proprietary interest in the defrauded sum received by each of the defendants and sought restitution of the same based on unjust enrichment and money had and received (see §§5.1-5.2).

(c)  In defence, the defendants claimed they were bona fide purchasers and/or have changed their position in good faith as the sums were received as payment for goods sold in a normal and ordinary business transaction (see §§6.1-6.2).

(d)  In reply, the plaintiff essentially pleaded that the transaction alleged by the defendant did not take place at all and the invoice relied on by the defendant is a fake (see §7).

44.  After considering Pacific Electric and A-1 Business, Yuen JA (with whom Lam VP and Kwan JA agreed) helpfully summarised the principles at §18.  The following points are pertinent for present purposes:-

(a)  The court should determine whether the fraud exception applies at the time when the application for summary judgment is heard.  The court should not be restricted to a consideration of the statement of claim only but should examine all relevant materials existing at the time of the hearing, including subsequent pleadings and the affidavits.

(b)  Having regard to all the relevant materials, the question to be asked by the court is “does this action include a claim for which an allegation of fraud would have to be made by the plaintiff in order to establish or maintain that claim?”

(c)  If the fraud exception is engaged, the court has no jurisdiction to hear the summary judgment application, even if the plaintiff seeks to hive off that claim from another claim for which summary judgment would have been available.  That consequence follows from the wording of the fraud exception.

(d)  One must look at the substance, and not the mere form, of the plaintiff’s case.  If all the factual constituents of fraud are alleged and relied upon, it does not matter whether the actual word “fraud” has or has not been used.

(e)  The fraud exception would be engaged where what is alleged is an intentional or reckless dishonest act (or omission) done with the purpose of deceiving.

45.  Applying the aforesaid principles to that case, Yuen JA held that the first instance judge was right to hold that the fraud exception was engaged.  This was because in order to maintain its claim, the plaintiff alleged that an invoice produced by the defendant was fake and the transaction alleged by the defendant was a sham (at p.1030, §§19.2-19.3).

46.  Pausing here, the following principles distilled from the aforesaid Court of Appeal authorities are uncontroversial and binding on this Court:-

(a)  The fraud exception is engaged when any one of the claims is based on an allegation of fraud, even though there are other claims which are not.  The wording of Order 14, rule 1(2)(b) does not allow a plaintiff to hive off its claims based on allegation of fraud and seek summary judgment in respect of the other claims.

(b)  “Allegation of fraud” has a wide meaning encompassing allegations of intentional or reckless dishonest acts (or omission) done with the purpose of deceiving.  The word “fraud” need not be used.  In this regard, the Court adopts a substance over form approach.

(c)  In assessing whether a claim is based on an allegation of fraud, the Court is only concerned with the necessary allegations which the plaintiff has to make in order to establish or maintain that claim.  The fraud exception is not automatically engaged merely because an allegation of fraud has been made.

(d)  In conducting this assessment, the Court should not only consider the Statement of Claim.  All relevant materials existing at the time of the hearing shall be examined by the Court.

(e)  Even if it was at first unnecessary for the plaintiff to make an allegation of fraud to establish its claim, the fraud exception will be engaged if an allegation of fraud have to be made by the plaintiff to rebut the defendant’s defence and maintain its claim. This echoes the aforesaid principle that all materials, including subsequent pleadings and affidavit in reply, shall be considered.

47.  Notably, while adopting a wide meaning for “fraud”, the Court has construed the fraud exception to essentially impose a requirement that the allegation of fraud must be an indispensable allegation of the plaintiff’s claim.  This interpretation limits the scope of the phrase “a claim by the plaintiff based on an allegation of fraud” which might arguably, on another interpretation, be capable of bearing a wider meaning.

48.  For present purpose, it is of significance that in all three cases, the Court of Appeal found that allegations of fraud or deliberate dishonesty have been made directly against the defendants.  The issue of whether an allegation of fraud made against a non-party is capable of engaging the fraud exception simply did not arise and was not considered.

49.  The applicability of the fraud exception to a case where an allegation of fraud was only made against a non-party (instead of the defendant) came before the court in Universal Capital Bank v Hongkong Heya Co Ltd [2016] 2 HKLRD 75.

50.  Universal Capital Bank (supra) was a classic email fraud case.  While the plaintiff bank has pleaded an underlying fraud resulting in the remittance of funds into the defendant recipient’s account, the claim against the defendant was based on unjust enrichment.  As against the defendant, there was no allegation of fraud or dishonesty. 

51.  Deputy High Court Judge Burrell (as he then was), in my view, rightly held that the fraud exception was not engaged in that case and made various pertinent observations at p.762-763, §18.  In particular, the learned Judge held that:-

(1)  The underlying reason for the Fraud Exception is to prevent summary judgment in a case where serious allegations of dishonesty are made or implied against a party to the proceedings so that such a party may have an opportunity to answer the allegations or “have his day in court” (see §18(1)).

(2)  The defendant company does not require such protection when no allegations of fraud or dishonesty was made against it (or its operator) (see §18(2)).

(3)  The fraud exception should not be applied automatically merely because there are allegations of fraud or dishonesty in the bigger picture.

(4)  The question is “does the underlying allegation of fraud (which does exist here) on which the claim is based (which it is not in this case) constitute an allegation of fraud against the defendant”? (see §18(4)).

52.  While the distinction between (i) an allegation of fraud against the defendant, and (ii) an allegation of fraud against non-party was not expressly drawn by the Court of Appeal in Pacific Electric, A-1 Business and Zimmer (as the issue was not considered in those case), this distinction has in fact been subsequently endorsed by the Court of Appeal.

53.  In Laerdal Medical Limited v Hong Kong Haocheng International Trade Limited (Unrep., HCA 2193/2016, 21^st June 2017), another typical email fraud case, the plaintiff company brought an unjust enrichment claim against the defendant recipient.  Applying Zimmer and Universal Capital Bank, Deputy High Court Judge Saunders held that the fraud exception was not engaged (see §§10-14) and summary judgment was granted.

54.  The defendant appealed against the decision of Deputy High Court Judge Saunders and the plaintiff sought security for costs of the appeal.  The defendant attempted to resist security by arguing that its appeal was very strong, with substantial prospect of success.  One of the grounds of appeal relied on by the defendant was that the fraud exception was engaged.

55.  The Court of Appeal unequivocally rejected, inter alia, the defendant’s contention in respect of the fraud exception (Unrep., CACV 154/2017, 20^th November 2017).  At §19, Kwan JA (giving the judgment of the Court) held that:-

“…This ground is of no merit. The fraud exception is not engaged. The question is whether the underlying allegation of fraud (which existed here) on which the claim is based (which it is not in this case) constitutes an allegation of fraud against the defendant. The plaintiff has confined its claim against the defendant on unjust enrichment.” (emphasis added)

56.  While the Court of Appeal in Laerdal Medical was considering the fraud exception in the context of a security for costs application, I am of the view that:-

(a)  The Court of Appeal clearly endorsed the distinction drawn in Universal Capital Bank and adopted the test formulated by Deputy High Court Judge Burrell (as he then was) in exactly the same words.

(b)  Applying the aforesaid test, the Court of Appeal squarely rejected the defendant’s ground of appeal and held that it was “of no merit”.

57.  The test in Universal Capital Bank (as subsequently endorsed by the Court of Appeal) has also been consistently applied in other first instance decisions.  See, for example:-

(a)  Arrow ECS Norway AS v M Yang Trading Limited & Others (Unrep., HCA 239/2016, 22^nd September 2016) at §§11-15 per Recorder Lisa Wong SC (as she then was).

(b)  Ferrari North America, Inc v Changhon International Energy Co., Limited [2018] HKCFI 1603 at §§13-15 per Lisa Wong J.

(c)  DBS Bank (Hong Kong) Limited v Happy Grace International Development Limited [2019] HKCFI 2864 [PLOA#13] at §6 per Deputy High Court Judge MK Liu.

58.  The facts in the above cases are strikingly similar to the present case.  An underlying fraud was perpetrated against the plaintiff, who commenced an action against the defendant based on unjust enrichment without alleging any fraud against the defendant.  In all these cases, the test in Universal Capital Bank was applied and the fraud exception was held not to be engaged.

59.  Recently, in the case of R Stahl Inc v AJ Development Ltd [2020] HKCFI 816, the fraud exception was considered by Deputy High Court Judge Hall-Jones in the context of an action brought by the victim of an identity fraud against the recipient.

60.  In reaching his conclusion that the fraud exception was engaged, it appears that Deputy High Court Judge Hall-Jones primarily (if not only) relied on Pacific Electric and the wording of Order 14, rule 1(2)(b) itself.  His Lordship reasoned as follows (at p.1390-1391, §§34-35):-

“34.  Notwithstanding the submissions of Mr Ng, I believe that Order 14 rule 1(2)(b) is problematic for the plaintiff, for at least two reasons. Firstly, the Statement of Claim in this case is replete with references to fraud. Reading the applicable rule on its face - and keeping in mind the clear reminder of Rogers VP of what is excluded from Order 14, it seems apparent to me that in the present case, there are underlying allegations on which the plaintiff’s claim is based which relate to fraud. Even if one accepts Mr Ng’s submission that the plaintiff’s legal claims can be pursued without having to allege or prove fraud specifically by the defendant, that distinction is not one that can be said to arise from the express wording of Order 14 rule 1(2(b). Nor does such a distinction arise from the reasoning of the Court of Appeal in Pacific Electric.

35.  Secondly, it is my view that the plaintiff’s affidavit evidence reinforces this position…Paragraph 22 of the Criswell affidavit refutes the defendant’s assertion that Zhong did not open the SCB Account. As between Criswell and Zhong there is, either directly or by implication, a live issue as to whether Zhong is an honest witness. It seems to me that issues of this type, in the context of an identity fraud case, are very much issues that, applying Order 14 rule 1(2(b), do not fall to be determined by way of summary judgment.” (emphasis added)

61.  I am of the view that the reasoning of Deputy High Court Judge Hall-Jones cannot be squared with the Court of Appeal authorities and is problematic for three reasons.

62.  First, I do not share the view that the fact the Statement of Claim was “replete with references to fraud” it by itself determinative:-.

(1)  While the absence of the word “fraud” does not per se mean that the fraud exception has no application, the fraud exception is likewise not automatically engaged merely because the word “fraud” has been mentioned.

(2)  The is clearly borne out by the Court of Appeal’s affirmation of the result in Newton Chemical Ltd v Arsenis [1989] 1 WLR 1297 (see Zimmer at p.1029, §§18(4)-(5)), noting that in Newton the words “fraud” and “fraudulent” were used to describe the defendant’s conduct in affidavits (see Newton at 1301C-E).

63.  Secondly, I am of the view that there is a clear distinction between claims which can be pursued without having to allege fraud specifically and claims which cannot:- 

(1)  It is plain from Zimmer that only allegations of fraud which “would have to be made” or “relied upon” by the plaintiff in order to establish or maintain its claim are relevant (see §§18(2), 18(4)).  The distinction could not have been made clearer by the Court of Appeal.

(2)  However, reading the decision in R Stahl, it appears that Deputy High Court Judge Hall-Jones did not have the benefit of the Court of Appeal’s judgment in Zimmer.

(3)  Even in Pacific Electric itself, in applying the fraud exception to the facts of the case, Roger VP did confine himself to ask whether “the necessary allegations” made by the plaintiff included allegations of fraud (see p.107, §32).

64.  Thirdly, in holding that direct allegations of fraud have been made against the defendant, the correct test might not have applied:-

(a)  Essentially, Deputy High Court Judge Hall-Jones considered that since the plaintiff has in its affidavit refuted an assertion of the defendant, “there is, either directly or by implication, a live issue as to whether Zhong is an honest witness” and hence an allegation of fraud has been made.

(b)  This is to infer an allegation of fraud when there was none.  The attribution of deliberate dishonesty is a serious charge, and the court should not infer the making of such allegation too liberally. Without any express attribution of dishonesty, a party should not be held to have made an allegation of deliberate dishonesty unless the act or omission complained of is by its very nature inherently or implicitly dishonest: Menfond Electronic Art & Computer Design Co., Ltd v Wong Wang Tat Victor & Another (Unrep., HCA 293/2011, 3^rd January 2013) at §53 per Deputy High Court Judge Lisa Wong (as she then was), affirmed on appeal (Unrep., CACV 18/2013, 14^th May 2014) at §22 per Kwan JA.

(c)  Applying the logic of the learned Deputy Judge, the fraud exception could be engaged whenever a plaintiff suggests in its evidence in reply that the defendant’s assertions are “unbelievable” or “incredible”.  In my view, this is going too far.

65.  In light of the learned Deputy High Court Judge’s conclusion that direct allegation of fraud has been made against the defendant, it was unnecessary for His Lordship to consider the test in Universal Capital Bank, as applied in Ferrari.

66.  The learned Deputy Judge nevertheless expressed reservations to those decisions in obiter.  Essentially, his Lordship did not believe that the “underlying reason” for the fraud exception relied on by DHCJ Burrell in Universal Capital Bank (see §21 above) “sits comfortably with the wording of the rule itself” or with Pacific Electric.

67.  However, this is to entirely overlook that this “underlying reason” was extrapolated from the speech of Kaplan J in Skink Ltd (in liquidation) v Comtowell Ltd [1994] 2 HKLR 26 at 37, lines 23-28 (see also, §7 of Universal Capital Bank):-

“I can only think that the fraud exception to O.14 was inserted in England and maintained in Hong Kong because the O.14 jurisdiction was wholly inappropriate for cases where the Court had to consider whether a person was guilty of fraud or at the material time had an intention to defraud. Such findings have very serious consequences, and it could not have been thought right that persons should be condemned, as it were, unheard save on affidavit.” (emphasis added)

68.  This exact passage from Skink was referred to by the Court of Appeal in Zimmer (at p.1026, §15).  The rationale of the fraud exception illustrated by Kaplan J was expressly endorsed by the Court of Appeal, which in fact considered the same to have already been adopted in the Pacific Electric (at p.1030, §18(6)).

69.  In the premises, not only is R Stahl at odds with previous cases sharing similar facts, as demonstrated above, I am of the view that the reasoning of Deputy High Court Judge Hall-Jones does not sit well with the principles laid down by the Court of Appeal.

70.  Hence, I choose to follow the Court of Appeal’s decisions as they are binding on this Court.

71.  For the sake of completeness, I am of the view that the test formulated in Universal Capital Bank is correct.

72.  First, as a matter of authority, as explained above, the test formulated in Universal Capital Bank has received endorsement from the Court of Appeal in Laerdal Medical.

73.  Secondly, the test formulated in Universal Capital Bank is entirely consistent and fully reconcilable with the principles laid down in the leading Court of Appeal authorities on fraud exception i.e., Pacific Electric, A1-Business and Zimmer.  This is particularly reflected in the first instance decision in Laerdal Medical:-

(a)  The learned Judge first held that the plaintiff simply “need not to establish the fraud that was perpetrated on it in order to establish its [unjust enrichment] claim against [the defendant]” (see §12).  Hence, by a direct application of the principles in Zimmer (see §14 above), the fraud exception was not engaged.

(b)  Thereafter, the learned Judge applied Universal Capital Bank and confirmed that the same result would be reached (see §13).

(c)  The clearly demonstrates that Universal Capital Bank merely refined the question to be asked as laid down in Zimmer. With proper analysis, one would, and ought to, arrive at the same conclusion by taking either route.

74.  Thirdly, as a matter of principle, the test formulated in Universal Capital Bank is plainly justified when the underlying rationale of the fraud exception is considered:-

(a)  Allegations of fraud or dishonesty are indisputably very serious allegations and may attract serious consequences to any person against whom such allegations were made, whether in respect of the person’s reputational or otherwise.

(b)  It is therefore wholly inappropriate for findings of fraud or dishonesty to be made summarily against a defendant, based on affidavit evidence only, without the benefit of full discovery and oral testimony at trial: Skink at 37, lines 23-28.  In this regard, the fraud exception serves to protect the interest of a defendant against whom allegations of fraud or dishonesty have been made.

(c)  However, there is no good reason to shield a defendant from summary judgment when no allegation of fraud has been made against him. Such a defendant simply does not require protection from the fraud exception.

(d)  In fact, contrasting (i) the present facts i.e., the Plaintiff paid the Defendant pursuant to a mistake induced by fraud; with (ii) the hypothetical scenario where the Plaintiff paid the Defendant pursuant to mistake caused by negligence, from the Defendant’s perspective, it received money from the Plaintiff for no good reason in either scenario.  The underlying reason why the Plaintiff has paid the Defendant simply does not concern the Defendant. There is no rational basis to suggest that summary judgment should only be available in the latter case but not the former.

(e)  Further, the fraud exception does not, and could not, be extended to protect a non-party to the proceedings against whom an allegation of fraud has been made.  Quite simply, regardless of whether summary judgment is available, such non-party will in any event not appear to answer the allegation of fraud.  Any findings eventually made will in any case not be binding on the non-party.

75.  Insofar as the Defendant suggests that the rationale set out in Skink does not sits well with the rule that plaintiff cannot hive off its claims based on allegation of fraud and seek summary judgment in respect of the other claims, I am of the view that:-

(a)  As explained in Universal Capital Bank at §18(1), when serious allegations of fraud or dishonesty has been made against a defendant, the defendant should have an opportunity to answer the allegations and have his day in court.

(b)  Such defendant should not be deprived of such opportunity merely because after making the serious allegations of fraud or dishonesty, the plaintiff for whatever reasons decided to seek judgment without relying on those allegations.

76.  In the premises, it is respectfully submitted that the test formulated Universal Capital Bank is well-supported by the authorities, premised upon sound principles, and should continue to be applied.

77.  Applying the above legal principles to the facts of the present case, at §§18-20 of the Amended Statement of Claim, it is pleaded that the Plaintiff’s claims against the Defendant are based on unjust enrichment/money had and received, knowing receipt and constructive trust.

78.  Regarding the Plaintiff’s claim in unjust enrichment and constructive trust:-

(a)  It is clear from the authorities considered above that it is unnecessary for the Plaintiff to make or rely on any allegation of fraud or dishonesty against the Defendant.

(b)  In fact, Deputy High Court Judge Saunders has further held in Laerdal Medical at §12 that the Plaintiff need not establish the underlying fraud that was perpetrated on him in order to establish its claim against the Defendant.  The reasoning therein applies a fortiori.

(c)  At the end of the day, so long as the Plaintiff was mistaken in making the payment to the Defendant, whether the Plaintiff’s mistake was induced by fraud or otherwise simply does not matter.

(d)  The constructive trust claim does not add anything further to the unjust enrichment claim.

79.  Likewise, it is well-established that that dishonesty is not a necessary ingredient of liability in knowing receipt: BCCI (Overseas) Ltd & Another v Akindele [2001] Ch 437 at 448G to 450F per Nourse LJ.

80.  I am of the view that no allegation of fraud or dishonesty is required to establish the Plaintiff’s claim.  Applying Zimmer, the fraud exception is not engaged in the present case.

DISPOSITION

81.  For all the reasons stated above, the Defendant’s appeal is dismissed.

82.  As far as costs is concerned, I make a costs order nisi that the Defendant do pay the costs of and occasioned by this appeal to the Plaintiff, to be assessed on a party to party basis, if not agreed. I will also need the parties’ assistance as to why a claim of USD160,000 was brought in the High Court. I make the following directions on costs:

(1)  The Plaintiff do file a written submissions on costs including a statement of costs to be grossly assessed within 7 days herein;

(2)  The Defendant do file a written submissions on costs including its objections to the Plaintiff’s statement of costs within 7 days thereafter;

(3)  The Plaintiff do file its reply submissions within 7 days thereafter. 

This Court will deal with the issue of costs on paper without any oral hearing.

83.  Finally, it remains for me to thank Ms Ng for the Plaintiff and Mr Ko and Mr Tam for the Defendant for their helpful assistance. In particular, I find Ms Ng’s submissions very comprehensive and helpful.