SWEETSTAR ASIA LTD AND ANOTHER v. INFRALUTIONS LTD AND OTHERS

HCA 1048/2020

[2020] HKCFI 2794

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1048 OF 2020

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REASONS FOR DECISION

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INTRODUCTION

1.  By summons issued on 15 September 2020 (“the Summons”), the Plaintiffs (“P1” & “P2” respectively) applied for default judgment against the 1st and 2nd Defendants (“D1” and “D2” respectively), pursuant to RHC Order 19 Rule 7, in circumstances where, notwithstanding that on 7 July 2020, D2 filed an acknowledgment of service on his own behalf and also purportedly, on behalf of the D1, each stating an intention to defend the proceedings, neither defendant filed a defence within the prescribed time.

2.  By the Summons, the Plaintiffs sought declaratory relief, judgment in respect of their liquidated claims (for moneys had and received), judgment for damages to be assessed and orders for the taking of accounts and/or enquiries.

3.  At the hearing of the Summons, I was told that the 3rd Defendant (against whom a claim is made for unjust enrichment on the basis of the receipt by her of alleged trust funds) is defending the proceedings and that as between the Plaintiffs and the 3rd Defendant, pleadings have closed.

4.  At the hearing of the Summons, I ordered that judgment be entered for P1 & P2 against D1 for damages to be assessed for non delivery of goods pursuant to s. 53 of the Sale of Goods Ordinance and costs (to be summarily assessed on paper) but otherwise I ordered that the Summons be stood over to the trial of the action as against the 3rd Defendant, to be heard at the same time as that trial.

5.  I now give my reasons for my decision.

RHC ORDER 19 RULE 7

6.  RHC Order 19 Rule 7 provides as follows:

“ Default of defence: other claims (O. 19, r. 7)

(1) Where the plaintiff makes against a defendant or defendants a claim of a description not mentioned in rules 2 to 5, then, if the defendant or all the defendants (where there is more than one) fails or fail to serve a defence on the plaintiff, the plaintiff may, after the expiration of the period fixed by or under these rules for service of the defence, apply to the Court for judgment, and on the hearing of the application the Court shall give such judgment as the plaintiff appears entitled to on his statement of claim.

(2) Where the plaintiff makes such a claim as is mentioned in paragraph (1) against more than one defendant, then, if one of the defendants makes default as mentioned in that paragraph, the plaintiff may—

(a) if his claim against the defendant in default is severable from his claim against the other defendants, apply under that paragraph for judgment against that defendant, and proceed with the action against the other defendants; or

(b) set down the action for judgment against the defendant at the time when the action is set down for trial, or is set down for judgment, against the other defendants.

(3) An application under paragraph (1) must be by summons.

(L.N. 152 of 2008)”

7.  On an application under RHC Order 19 rule 7 the court cannot receive any evidence but must consider the application on the basis of the Statement of Claim alone. In order for such an application to succeed, the Statement of Claim must show the right to the relief claimed but, even then, the Court has a discretion as to whether or not to accede to the application.

THE STATEMENT OF CLAIM

8.  As appears from the Statement of Claim (“the SOC”), the Plaintiffs’ claims concern 3 contracts for the sale by D1 and the purchase by the Plaintiffs of a quantity of medical gowns (“the Contracts”), which are evidenced by the following invoices:

8.1   8 May 2020 - purchase by P2 of 700,000 gowns at a price of US$1,120,000 (US$1.6 each) [“1st Invoice”];

8.2   13 May 2020 - purchase by P1 of 270,000 gowns for the price of US$405,000 (US$1.5 each) [“2nd Invoice”], and

8.3   15 May 2020 - purchase by P1 of 500,000 gowns for the price of US$750,000 (US$1.5 each) [“3rd Invoice”].

9.  It is the Plaintiffs’ pleaded case that, prior to the formation of the Contracts, D2 (on behalf of himself and on behalf of D1) represented that:

9.1   he had been in touch with a trading and quality control company based in the PRC (“Market Union”) which could supply D1 with medical gowns (sourced from a PRC factory) at a “competitive price” (SOC, §4);

9.2   D1 could sell the gowns at a price of around US$1.4 each (SOC, §22.1.2);

9.3   deposits and pre-payments made by the Plaintiffs for the gowns would be used to purchase them from D1’s suppliers (SOC, §22.1.2);

9.4   the gowns would be delivered to the Plaintiffs “within a few days” (SOC, §22.1.2).

10.  It is pleaded in the SOC, §22.1.23 that, induced by these representations, the Plaintiffs entered into the Contracts and that P1 made pre-payments for the gowns amounting in total to US$780,000 (in part payment of the 2nd and 3rd Invoices), whilst P2 made payment of the 1st Invoices in full (together, described in the SOC as “the Lost Funds”), notwithstanding which D1 failed to make delivery of any of the contract goods.

11.  The Plaintiffs claim that each of the representations was false in that, at the time they were made, “...(a) the unit price of gown (sic) was much higher than US$1.4 per unit, (b) only some US$710,000 out of the Lost Funds were paid to Market Union by D1 and (c) the gowns would not be delivered to the Plaintiffs within a few days.” (SOC, §22.1.4).

12.  In the SOC, §22.1.5 it is alleged that D1 & D2 made the representations fraudulently in that they knew the representations were false or were reckless not caring whether they were true or false and in SOC, §22.1.6 it is alleged that as a result, the Plaintiffs rescinded the Contracts.

13.  In the SOC, §16 & 17 of it is pleaded that D2 admitted making the alleged fraudulent misrepresentations and that he signed 2 promissory notes (on his own behalf and on behalf of D2) in which:

13.1   he admitted that he and/or D1 had received US$805,000 from P1[1] and US$1,120,000 from P2;

13.2   he admitted that he and/or D1 had made false representations that he had the gowns in stock and ready for shipment and delivery;

13.3   he admitted that he and D1 had taken “multiple payments” from P1 & P2;

13.4   he acknowledged that he and/or D1 were liable for “criminal fraud”, misrepresentation and conversion;

13.5   he promised to pay the sums owed with interest and costs, and

13.6   he promised that the sums of US$805,000 and US$1,120,000 with interest would be repaid to P1 and P2 respectively on or before 31 July 2020 by means of weekly installments of US$200,000.

14.  In the SOC,§18 it is alleged that US$403,750.99 has been repaid by D2 to P1 and in paragraph 19 it is alleged that P1 paid US$917,000 to P2 in “partial acquisition” of P2’s rights and interest in its claims to “the Lost Funds”. As a result it is alleged that:

14.1   US$1,293,249 remains due and owing to P1 (US$780,000 plus US$917,000 less US$403,750.99), and

14.2   US$203,000 remains due and owing to P2 (US$1,120,000 less US$917,000).

15.  In the SOC, §20 it is alleged that D2 had volunteered the fact that he had caused D1 to transfer US$35,000 of the Lost Funds to D3 and in SOC, §21 it is alleged that D3 has knowledge of the alleged fraud “orchestrated” by D1 & D2.

16.  On the basis of the Plaintiffs allegations it is pleaded that:

16.1   D1 (and D3) has been unjustly enriched and holds “the Lost Funds” and traceable proceeds therefrom on constructive trust for P1 & P2;

16.2   it would be unconscionable for D1 (and D3) to retain the Lost Funds and that they hold them on constructive trust for the Plaintiffs;

16.3   P1 & P2 have at all material times been entitled to trace the Lost Funds which have come into the hands of D1, D2 and/or D3;

16.4   D2 and/or D3 have assisted in a breach of trust.

17.  By the prayer for relief, the Plaintiffs seek various declarations concerning their alleged rights, judgment in respect of their liquidated claims (for moneys had and received), damages to be assessed and orders for the taking of accounts and/or enquiries.

DISCUSSION

18.  Whilst I am satisfied that the SOC discloses a good cause of action for breach by D1 of the Contracts on the grounds of the non delivery of the goods which are the subject thereof and entitles the Plaintiff to default judgment against D1 for damages to be assessed for non delivery pursuant to section 53 of the Sale of Goods Ordinance, I am not satisfied that the SOC otherwise shows a good case against either D1 or D2 for the orders that are sought on this application.

19.  As regards the alleged fraudulent misrepresentations:

19.1   I do not see the materiality or actionability of the alleged representation to the effect that D1/D2 could sell the gowns to the Plaintiffs at around US$1.4 per unit [SOC, §22.1.2(i)] in view of the fact that, subsequent thereto, the P1 & P2 entered into the Contracts for the purchase of the gowns at between US$1.5 to US$1.6 per unit;

19.2   even if [contrary to the allegations in the SOC, §22.1.2(i)], the alleged representation concerning unit price related to the price at which D1 anticipated it could purchase gowns from its suppliers, I would not have been satisfied that any sufficient cause of action would have been disclosed because the alleged representation pleaded in §4 was only to the effect that Market Union would supply the gowns to D1 “at a competitive price”.

19.3   The fact, that as pleaded in the SOC, §5, it was “later discovered” that Market Union offered to sell the gowns (presumably to D1) at US$3.9 - US$4.3 seems to me to be immaterial on the basis of the pleading as it stands, in the absence of a plea to the effect that, at or before the time of the Contracts, D1/D2 had actual knowledge that D1 could not acquire the gowns for less than US$3.9 to US$4.3.

19.4   if, before the Contracts were entered into, it had been represented that the payments to be made by the Plaintiffs thereunder would be used by D1 to purchase the gowns, that would be a representation as to the future which would not be actionable in the absence of a plea to the effect that, before the Contract were entered into, D1/D2 had no intention of making payment to Market Union. In fact, as pleaded it would seem that part of the funds were in fact used for this purpose.

19.5   On any basis the proposition that the alleged representation that the payments to be made by the Plaintiffs under the Contracts would be used by D1 to purchase the gowns was false at the time it was made on the basis that only part of the funds was used to make payment to Market Union cannot be right as the payments made by the Plaintiffs to D1 pursuant to the Contracts were only made after the Contract were entered into and (necessarily) after the alleged representation was made.

19.6   The alleged representation that the gowns would be delivered “within a few days” is not actionable and the failure to do so would not amount to a breach of contract in the absence of a condition making time of the essence (which is not pleaded).

19.7   No or no adequate particulars of fraud are pleaded.

20.  As regards the claim on the promissory notes:

20.1   As against D1, the claim on the promissory notes adds nothing to the claim for the return of the balance of the price paid for the goods following rescission;

20.2   As against D2, the claim on the promissory notes can only succeed to the extent that the underlying personal claims against D2 are enforceable. In this respect:

20.2.1   As to the SOC, §17.1, the purported admission that D2 had received funds from P1 and P2 is contradicted by the SOC, §11, to the effect that the funds were received solely by D1;

20.2.2   As to the SOC, §17.2, the purported admission that D2 had represented that he had the gowns in stock and that they were ready for shipment is inconsistent with the matters pleaded in the SOC, §15.

20.2.3   As to the SOC, §17.3, the purported admission that D2 had “taken multiple payments” from Ps is contradicted by, SOC, §11, to the effect that the funds were received solely by D1;

20.2.4   As to the SOC, §17.4, the purported admission that D2 was liable for “criminal fraud”, misrepresentation and conversion is of no weight in the absence of a properly pleaded case on these elements;

20.2.5   A promise to make payment by D2 personally is not actionable in the absence of proper consideration.

21.  As regards other allegations/claims:

21.1   The proposition in the SOC, §22.2, 22.4 & 23 that D1 has been unjustly enriched; that it would be unconscionable for D1 to retain the purchase price paid by the Plaintiffs for the goods; that it holds the purchase price for the goods paid by the Plaintiffs on constructive trust and is entitled to tracing remedies is unconvincing in the absence of a properly pleaded (and particularised) case in fraud. Absent fraud, D1 is simply liable for damages for non delivery of the gowns.

21.2   If the Plaintiffs cannot establish a constructive trust as against D1, the case advanced against D2 in the SOC, §24 on the basis of allegedly assisting in a breach of trust doesn’t get off the ground.

CONCLUSION

22.  For all of the above reasons, at the hearing of the Summons, in the exercise of my discretion:

22.1   save to the extent of ordering that judgment be entered for the Plaintiffs against D1 for damages to be assessed for non delivery of goods pursuant to s. 53 of the Sale of Goods Ordinance and costs (to be summarily assessed on paper), I declined to accede to the Plaintiffs’ application and, save as aforesaid

22.2   I ordered that the Summons be stood over to the trial of the action as against the 3rd Defendant, to be heard at the same time as that trial.