HILL COSMOS INTERNATIONAL LTD v. OCEAN FISHERY HOLDING NV AND ANOTHER

HCA 2276/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2276 OF 2008

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BETWEEN

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J U D G M E N T

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Preliminary Objection

1.  This is an application taken out by the Plaintiff for judgment against the 1^st Defendant under Order 14 of the Rules of High Court. Mr. Sherry, counsel for the 1^st Defendant raised a preliminary objection that Order14 does not apply to this action, as a claim based on fraud is included in the Statement of Claim.

2.  Order 14 rule 1(2)(b) reads –

“Subject to paragraph (3) 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, …”

3.  It cannot be disputed that the Plaintiff has pleaded fraudulent misrepresentation in the Amended Statement of Claim. It is not disputed that under Order 14 rule 2, when the Plaintiff pleaded fraud in the Statement of Claim, the action cannot proceed under Order 14, even though the Plaintiff does not rely on fraud as the ground for obtaining judgment. Mr. Sherry referred me to the leading authority on this point, Pacific Electric Wire & Cable Co. Ltd. v Harmutty Ltd. And others, CACV208/2008.

4.  But before hearing the Order 14 application, the Plaintiff applied to re-amend the Statement of Claim to remove any reference in the Amended Statement of Claim to fraudulent misrepresentation, and pleaded negligent misrepresentation instead. The application was allowed and the Order 14 application proceeded on the basis of the Re-amended Statement of Claim. Mr. Sherry maintained his objection that the statement of claim, as re-amended, still contains allegation of fraud. I would first consider the case pleaded by the Plaintiff in the Re-amended Statement of Claim. And it would be necessary to understand some background leading to the dispute. This is apparent from the Re-amended Statement of Claim.

Background

5.  The Plaintiff is a subsidiary of one China Fishery Group Limited (“CFHL”). On 27 June 2008, CFGL entered into a Memorandum of Understanding with the 1^st Defendant (“MOU”). The Plaintiff was to participate in a joint-venture with the 1^st Defendant by subscribing for shares in the 1^st Defendant.

6.  It is provided in the MOU that a Formal Agreement would be signed by the parties. It is provided under clause 7 of the MOU that this MOU is not legally binding until the execution of the Formal Agreement. Any Party may terminate this MOU by a written notice of 7 days to the other Party.

7.  The MOU mentions the responsibility of the parties pending execution of the Formal Agreement. Clause 2 provides, inter alia, that “CFGL will advance to the 1^st Defendant a sum of approximately EUR3,330,000 by issuing a letter of credit in favour of Atlas-Stord A/S being the purchase price of fish mill equipment, in the terms and conditions as specified by the 1^st Defendant.” By clause 7 of the MOU, “[The 1^st Defendant] undertakes to repay EUR3,330,000 to CFGL or its nominee forthwith upon termination of this MOU.”

8.  Paragraph 17 of the Re-amended Statement of Claim mentioned, and it was not disputed that it was the Plaintiff which provided a letter of credit to Atlas-Stord for EUR3,885,000, which was advanced pursuant to the said clause 2 of the MOU.

9.  No Formal Agreement had been signed. On 24 September 2008, CFGL issued a letter to the 1^st Defendant as written notice to terminate the MOU. Paragraph 30 of the Re-amended Statement of Claim pleaded that the 1^st Defendant was obliged to repay CFGL and/or the Plaintiff the said sum of EUR3,885,000.

10.  By 24 September 2008, the issuing Bank had not effected payment under the Letter of Credit to Atlas-Stord. The Plaintiff had taken out separate proceeding to stop payment to Atlas-Stord, which failed. The issuing Bank effected payment in or around December 2008, and charged against the Plaintiff.

11.  As a result, the Plaintiff further claims that the Defendants have benefited, by having the Plaintiff to pay the said EUR3,885,000 and having the Plaintiff to store the goods for it. The Plaintiff claims against the 1^st Defendant for the said EUR3,885,000 on various alternative grounds, including money had and received, advancement, and/or restitution.

12.  As an alternative ground, the Plaintiff also pleaded in the Amended Statement of Claim that in order to induce CFGL to enter into the MOU and the Plaintiff to issue the Letters of Credit, one Mr. Nico acting for the 1^st Defendant made various representations to CFGL and/or the Plaintiff, such representations are false, and they are made negligently (after the re-amendment). But the Plaintiff is not relying on this ground to seek judgment.

Any Allegation of Fraud

13.  In his oral submission, Mr. Sherry submitted that the claim of the Plaintiff on negligent misrepresentation as now set out in the Re-amended Statement of Claim contains some element of fraud, and O.14 does not apply.

14.  Mr. Wright, counsel for the Plaintiff, referred me to paragraph 29 of the judgment of Pacific Electric Wire & Cable Co. Ltd.’s case. His Lordship agreed with the English case of Newton Chemical Ltd. And others v Arsenis [1989] 1 WLR 1297, that deliberate dishonesty was required in order to satisfy the meaning of the word “fraud” in Order 14 rule 1(2)(b). I agree with the submission. Having heard Mr. Sherry and having examined the Re-amended Statement of Claim, I do not find any claim based on deliberate dishonesty. This preliminary objection must fail.

15.  Mr. Sherry in his supplemental submission suggests that the burden is on the Plaintiff to prove that the negligent misrepresentation has been made. It is not a case suitable for determination by Order 14 procedure. To that I agree. But since the Plaintiff is not relying on the misrepresentation ground for judgment, this submission has no merit for today’s application.

16.  Hence, I conclude that the Plaintiff is not prevented by Order 14 rule 1(2)(b) from taking out an application for judgment under Order 14.

Arbitration

17.  Mr. Sherry further argued that the proceeding should be stayed for arbitration. He referred to Clause 8 of the MOU which reads –

“This MOU and the Formal Agreement shall be construed in accordance with and governed in all respects by English Law. In the event of any dispute or difference arising between the parties to this MOU from or in connection with this MOU or its performance, construction, or interpretation, the parties shall endeavour to resolve it by agreement through negotiations. In the event that no agreement can be reached without 28 days of one Party giving written notice to the other of such dispute, either party may refer the dispute to arbitration by a single arbitrator…”

18.  And I understand that the Defendant has taken out a separate summons to stay the proceeding for arbitration.

19.  Mr. Wright submitted that the MOU is between CFGL and the 1^st Defendant. It is not binding on the Plaintiff which is not a party thereto. And the MOU provides that it is not legally binding.

20.  Mr. Sherry submitted that CFGL assigned their rights in the MOU to the Plaintiff (which I would come back later). The Plaintiff must take subject to any commitment of CFGL under the MOU.

21.  As a matter of fact, the MOU clearly provides that it is not legally binding. The provision for arbitration would at the highest be an option open to the parties. It is not an arbitration agreement. I agree with the submission of Mr. Wright that the provision of engaging arbitration is not legally binding and is not between the Plaintiff and either of the Defendants. If the Plaintiff does not agree to resolve the dispute by arbitration, and it does not, there is no basis for staying these proceedings for arbitration.

22.  Further, if Mr. Sherry suggests that arbitration should be resorted to, he seems to suggest that the MOU is legally binding. It should follow that the 1^st Defendant is legally bound to repay the sum advanced. There could be no dispute for referral to the arbitrator. To be fair to the 1^st Defendant, Mr. Laracy of Laracy & Co., solicitors for the Defendants has also put in an affidavit in support of another application to stay these proceedings for arbitration. The 1^st Defendant has proceeded to engage a potential arbitrator and sought the agreement of the Plaintiff. There is no mention of what is the dispute between the parties.

23.  Mr. Sherry submitted that I should not rule out arbitration if a prima facie case is established for arbitration. The arbitrator could rule on jurisdiction. I have no objection to this principle. But no prima facie case is made out as I analysed above. I therefore dismiss this argument.

The Defence

24.  I shall consider the application of the Plaintiff. The legal basis in support of the Plaintiff’s claim against the Defendants, as far as this application is concern, has been set out in paragraphs 48 to 50 of the Re-amended Statement of Claim: -

“ 48. Because of the foregoing, the Plaintiff claims for the Sum being money had and received by the 1^st and 2^nd Defendants to the use of the Plaintiff.

49. Further or in the alternative, because of the foregoing, the Plaintiff paid to Atlas-Stord the Sum for and on behalf of the 1^st and 2^nd Defendants and at their request. In the premises, the 1^st and 2^nd Defendants became and are liable to repay the Sum to the Plaintiff.

50. Further and in the alternative, the Plaintiff claims restitution of or for the repayment of the Sum paid out under the L/C and such other expenses expended by the Plaintiff including but not limited to the storage costs of the Driers against the 1^st and 2^nd Defendants for the valuable benefits incontrovertibly conferred by the Plaintiff and received by the 1^st and 2^nd Defendants at the Plaintiff’s expense as pleaded at paragraphs 39 to 41. Particulars on such expenses will be provided in due course.”

25.  Paragraph 48 is a plea of money had and received. Paragraph 49 is a plea of advancement to the 1^st and 2^nd Defendants. Paragraph 50 is a plea of restitution. It is quite obvious that the arrangement of the Letters of Credit resulted in a advancement or loan to the 1^st Defendant. If these are payment made in anticipation of the joint-venture, given the termination of the MOU and that no formal agreement has been signed, that give rise to the claim for refund on money had and received or restitution.

26.  This may be a convenient juncture to look at the 1^st Defendant’s defence affidavit. There is a short affidavit from Mr. Nico. He confirmed under oath that he is not an owner or director of the 1^st Defendant. He was authorized to negotiate with CFGL to start a joint venture. And paragraph 3 reads “I have never met the Plaintiff nor had any meetings or negotiations with the Plaintiff, and therefore I do not recognize and do not accept the Plaintiff as a party in this proceeding.”

27.  From the affidavit, the 1^st Defendant has put forward as the only ground of defence, that the Plaintiff is not the proper party to take out this claim. There is no other defence raised on the claim by the Plaintiff, on the advancement claim, or that the 1^st Defendant has been unjustly enriched.

28.  It is trite law that in resisting an Order 14 application, the 1^st Defendant may show cause against the application by a preliminary or technical objection. I have dealt with the technical objection above. Then the burden rests on the 1^st Defendant to prove that he has a meritorious defence by affidavit or otherwise. And the affidavit must condescend upon particulars, and should as far as possible, deal specifically with the Plaintiff’s claim and affidavit. (Para. 14/4/2 & 14/4/4 of the Hong Kong Civil Procedure 2009).

29.  It is not disputed that at the material time, the 2^nd Defendant purchased 6 units of drier from Atlas-Stord. And according to the MOU, it is provided that Plaintiff was to advance to the 1^st Defendant a sum of approximately EUR3,330,000 by issuing a letter of credit to Atlas-Stord. While this is a non-binding obligation, it is not disputed that an amount of EUR3,885,000 has been paid, at the request of the 1^st Defendant, by letter of credit to Atlas-Stord, in payment of the purchase price which the 2^nd Defendant is liable to pay.

30.  It is not disputed that the terms of the letter of credit was approved by Mr. Nico before issuance by the Bank. It cannot be argued that the arrangement is not arising from the understanding of the MOU. Mr. Wright submitted that the arrangement of payment was at the request of the 1^st Defendant which cannot be disputed.

31.  The MOU is the evidence leading to the request by the 1^st Defendant for an advancement. In fact, the MOU provides under clause 2(ii) (c) that the CFGL was to advance to the 1^st Defendant by issuing a letter of credit in favour of Atlas-Stord. It is the clear intention of the parties that the payment was an advancement to the 2^nd Defendant at the request of the 1^st Defendant. Since the MOU has been terminated, or there is no legally binding agreement, the advancement as requested by the 1^st Defendant has to be repaid by the 1^st Defendant or otherwise it would create an unjust enrichment. I left out the position of the 2^nd Defendant as judgment has been entered against the 2^nd Defendant.

32.  And what is more obvious from the undisputed fact, the said sum is an advancement at the request of 1^st Defendant. There is no defence to this claim.

Assignment

33.  It might be a question as to who should seek restitution or repayment. Mr. Wright submitted that by the assignment, the Plaintiff has the right to seek restitution and to recover the said advancement.

34.  Mr. Sherry also submitted that the Plaintiff’s claim relies on an assignment of an choses in action. Initially, he argued that such assignment is not permissible under the Law of Hong Kong. After the lunch break, he accepted that there is provision for assignment of choses in action under the Law Amendment and Reform (Consolidation) Ordinance, section 9. But he emphases that the Plaintiff must plead the assignment to be an “absolute assignment” in the Statement of Claim. Since the Plaintiff fails to plead absolute assignment the Statement of Claim, the Order 14 application must fail.

35.  The Plaintiff’s plea of assignment is set out in paragraph 37 of the Re-amended Statement of Claim. It reads –

“On 7 November 2008, by a Deed of Assignment CFGL duly transferred and assigned to the Plaintiff all the rights, claims, titles, benefits, advantages and interests in relation to the transaction(s) and/or dealing and/or matters arising under and/or in relation to the MOU and/or dealings and/or matter contained in and/or evidenced by the MOU, together with all rights and benefits attached thereto. By a Notice/Letter in writing dated 10 November 208 issued by CFGL to the 1^st Defendant, CFGL informed the 1^st Defendant of the aforesaid assignment and transfer.”

36.  While the word “absolute” has not been used, the reference to a Deed of Assignment and service of notice is clearly an absolute assignment under s.9 of the LARCO.

37.  I agree that it look odd when the MOU is not legally binding, what is there to assign from CFGL to the Plaintiff. But reading the said paragraph again, the assignment serve to assign not the rights in the MOU, but the rights in relation to the transaction arising under or in relation to the MOU. I believe it is drafted in such a way as the MOU is not legally binding.

38.  And after all, the claim of the Plaintiff is based on money advanced, and/or restitution. The assignment, I believe is to save any technically argument that the Plaintiff does not have the right to sue. In particular, it can image that the Plaintiff provides the L/C to the Defendant at the request of CFGL and it could be argued that the action should be instituted by CFGL. The assignment put such argument at rest.

39.  What is the defence to this line of claim? As stated above, the only defence as disclosed in Mr. Nico’s affidavit is that the Plaintiff is not a party to the transaction. Given the analysis above, and the assignment in place, there is no credible defence raised by the 1^st Defendant to this claim by the Plaintiff and I would give judgment to the Plaintiff in terms of the summons.

40.  In summing up, I would give judgment to the Plaintiff for the said sum of EUR3,885,000 or its Hong Kong dollar equivalent at the time of payment together with interest thereon from the date of writ to payment at judgment rate. As for costs, the Plaintiff should have costs of the action and this application. But some of the 1^st Defendant’s costs are wasted by the last minute amendment to the Statement of Claim. I believe a fair order should be, and I give it as an order nisi, that the Plaintiff do have the costs of the action and 75% of this summons with certificate for Counsel, to be taxed if not agreed.