LEE CHAU MOU t/a CHAU MOU ENGINEERING & CO v. THE INCORPORATED OWNERS OF SUNVIEW INDUSTRIAL BUILDING

DCCJ 4217/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4217 OF 2006

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JUDGMENT

1.  Lee ran the business as a building contractor in the name of Chau Mou Engineering & Co.  In 2002, the incorporated owners (the IO) of the industrial building in question contracted Chau Mou to carry out renovation works over the exterior of the building.  Chau Mou completed the works for which the IO also made payments.  However the last 2 payments by the IO were procured by the fraud of the person whom Lee put in charge of the works.  In fact Chau Mou never received these 2 payments.  Chau Mou now claims against the IO for such amount.

BACKGROUND

2. The culprit was Fan Chun Man.  Lee put Fan in charge of the renovation works on a daily basis.  At the end of 2002, the works came to a halt.  By then, most of the works had been completed and over HK$1.9 million had been paid by the IO and received by Chau Mou.  Only an external wall remained to be painted and the balance payable by the IO was HK$200,000.  In about late May to early June 2004, Chau Mou was informed that the work in respect of this wall could resume.  Lee again put Fan in charge of the work.  The work actually resumed in July.

3. After completion of the remaining work, Chau Mou issued invoice to the IO in August 2004 for the HK$200,000 balance.  Reminder was sent in the following month.  It then transpired that prior to Chau Mou’s invoice, Fan had already presented 2 invoices, each instructing the IO to make payment of HK$100,000 to one Chau Mou Construction Engineering Co (CMCE).  CMCE was entirely unrelated to Chau Mou or Lee.  It was in fact registered by Fan.  The IO had also settled the 2 invoices by way of cheques.  Fan had of course dissipated the money.

4. Discovering this, Lee informed the IO and reported the matter to the Independent Commission Against Corruption (ICAC).  Fan was subsequently arrested.  He was charged with fraud, namely, by falsely representing to the IO that CMCE was related to or authorised to receive payments for Chau Mou and thus inducing the IO to issue the cheques and causing prejudice or risk of prejudice to the IO.  Fan was convicted as charged after trial at the Eastern Magistracy in May 2006 (ESCC 5422/2005).

5. I find the above background to be facts.

ISSUES

6. The question now is which party should bear the financial consequence of Fan’s fraud.  Parties have concensus over what issues pertinent to this question need to be determined.  To begin with, there is dispute whether Fan was an employee or a contractor of Chau Mou.  The other issues, and in my view the crux of the matter, are those of (1) the scope of Fan’s authority and (2) whether the IO knew or ought to have known whether Fan, in perpetrating the fraud, had exceeded his authority.

7. Lee gave evidence.  So did the office bearers of the IO, namely, Ip, the secretary, Chan, the chairman, and Tam, the vice-chairman.  The IO also called the director of the management company, T F Chan, as a witness.

FAN’S CAPACITY

8. The IO’s witnesses emphasized the management committee’s concensus against subcontracting of the works.  They expected the works to be carried out by one contractor.  They said that if the IO had known that Chau Mou would contract the works out, they would not have accepted his bid for the works.  They said that Lee had introduced Fan as his relative and his general manager.  Lee denied that and insisted that Fan was merely his contractor.

9. The written contract between the IO and Chau Mou apparently contemplated subcontracting with no clear limit on its extent (see clause 1d of the general conditions).  After entering into the contract with the IO, Chau Mou entered into a written contract with Fan whereby the former contracted the works to the latter.  In connection with the works, the contractor’s all risks and employees’ compensation insurance policies were taken out for Chau Mou and its subcontractors of all tiers.  Objectively, the evidence supports that not only might Chao Mou contract the works out, Chau Mou also did so.  I find that this was the arrangement at least formally between Chau Mou and Fan.

10. During the contract tender stage, Lee and Fan handed out Chau Mou’s business cards to the members of the IO.  The IO produced these cards.  It was printed on Fan’s card that he was the general manager of Chau Mou.  Whilst Lee denied that Fan was in fact Chau Mou’s general manager, he could not really explain the existence of Fan’s such business cards or deny their having been handed out to the members of the IO.  I accept that such business cards were indeed handed out to the members of the IO.  I therefore doubt Lee’s evidence, as it would have been strange, that he somehow made clear to the IO at the same time that Fan was only his contractor.

11. During the contract stage, Fan as witness also signed the contract between Chau Mou and the IO.  Lee admitted that he stamped the company chop of Chau Mou next to Fan’s signature.  Whether intended or not, the composition of Fan’s signature and Chau Mou’s company chop by Lee made a reasonable impression of the representative capacity of Fan.

12. During the work stage, Fan was in daily charge of the works while Lee was seldom seen at the site.  Lee admitted that he only occasionally contacted T F Chan of the management office.  The minutes of the progress meetings with the IO recorded that Fan attended the meetings as the site manager.  There was no separate representative from Chau Mou in these meetings.

13. In my judgment, between Chau Mou and Fan, their own formal arrangement might well be that Chau Mou contracted the works to Fan.  However, I have no doubt that Chau Mou effectively held Fan out as its representative or agent in charge of the works.  This became the understanding of the IO, whether they had a precise understanding that Fan was an employee, as opposed to contractor, of Chau Mou or not.  In court, even Lee agreed at one point that the IO might believe Fan had authority to represent Chau Mou.

AUTHORITY OF FAN

14. Whether a principal is bound by the fraud of his agent cannot be answered by simply deciding whether the agent is an employee or an independent contractor of the principal.  Instead, it should be whether the fraudulent act was committed within the authority of the agent, be the agent an employee or a contractor of the principal: see Armagas Ltd v Mundogas SA [1986] 1 AC 717 at 780H-783B.

15. Counsel for the parties referred to numerous authorities.  In the context of fraud of an agent, the principles are best summarised as these: For the principal to be responsible for the agent’s fraud under the agency principles, the agent must normally have been acting within the scope of his actual or apparent authority.  The mere fact that the principal by appointing an agent gives that agent the opportunity to steal or otherwise to behave fraudulently does not without more make him liable.  An act of an agent within the scope of his apparent authority does not cease to bind his principal merely because the agent was acting fraudulently and in furtherance of his own interests.  But the fact that an agent is acting in furtherance of his own interests may negative actual authority and may if known to him or such that he ought to know it put the third party on notice as regards apparent authority: see Boustead on Agency (18^th ed), Art.74, paras.8-064 and 8-065.

16. Therefore, whether such fraudulent act done by an agent in excess of his authority is binding on the principal with respect to the third party depends on whether the third party knew or ought to have known about the same.  The court would infer from the circumstances whether the third party must have known of the facts or at least must have been suspicious to the extent that further inquiries would have been appropriate in the context.  The court will look objectively at the circumstances said to have constituted such notice: see Boustead, Art.73, paras.8-050 & 8-051.

17. In the present case, the circumstances known to the IO were these:  Payment under the contract should be made to Chau Mou (see clause 4A of the general conditions).  Up to the suspension of the work at the end of 2002, over HK$1.9 million had been paid by the IO and collected by Chau Mou in the following manner:

(1) At various stages of work, Chau Mou issued invoices to the IO for payment.  The invoices were stamped with the company chops of Chau Mou.  Besides Lee, Fan also signed a few of these invoices.

(2) The management committee of the IO then resolved on the appropriate amount of each payment in accordance with the extent of work actually completed by the time of the particular invoice.

(3) The account staff of Ip and Tam would prepare cheques to be drawn by the IO.  The cheques were signed by 2 of the 3 signatories for the IO, i.e., Ip, Chan and Tam.  The payee of the cheques was invariably Chau Mou.

(4) The drawn cheques were invariably collected by Fan on behalf of Chau Mou.  Fan signed on copies of the cheques to acknowledge receipt of them.

(5) Chau Mou then issued its official receipts for the payments.  The official receipts were signed by Lee or his staff.

18. Insofar as invoicing and collecting payment for works done were concerned, these past dealings between Chau Mou and the IO best manifested Fan’s relevant authority, both actual and, more importantly, as apparent to the IO.

19. When the work resumed one and a half year later, Chau Mou put Fan in charge again.  For this purpose, Chau Mou provided a letter dated 2 June 2004 to the IO.  In a single sentence, the letter authorised Fan to manage the remaining work.  It was literally silent on Fan’s authority to invoice or collect payment for the work done in due course for Chau Mou.  Ip said that the authorisation was the result of his prior conversation with Lee shortly before.  He said Lee specifically represented that Fan had the same authority to collect payment as before.  That means on the one hand, Lee found it necessary to specify to Ip about Fan’s authority to collect payment for the remaining work.  On the other hand, Lee would make no mention of that in his consequential letter of authorisation.  I doubt that.  Having said that, since this was the resumption of the truncated work, and without express reservation in the letter of authorisation, I believe the IO would not be surprised if Fan would present Chau Mou’s invoice for payment for the remaining work in due course as before.  I find that Fan had the implied authority or ostensible authority (as before) to do that.

NOTICE OR DUTY TO ENQUIRE

20. Fan presented 2 invoices to the IO for payment of the HK$200,000.  But by them, Fan requested the IO to make cheques payable to CMCE, not Chau Mou as before.

21. According to Ip, Fan explained to him that Chau Mou’s bank account had been frozen as a result of some taxation dispute with the Inland Revenue Department.  Therefore the payments had to be made to CMCE which was allegedly associated with Chau Mou.  No other IO member was privy to such alleged representation.  Ip asked Fan for documentation which, he said, came in the form of the first fake invoice dated 1 June 2004.

22. The inconsistency between Ip’s statement and evidence in court in respect of when such representation allegedly took place certainly weakens his reliability.  More importantly, no mention of Fan’s such representation was made in Ip’s statements to the ICAC in 2005.  Ip explained in court that he did mention Fan’s such representation when he testified as a prosecution witness during the criminal trial of Fan.  Regrettably, the transcript of the criminal proceedings was not available for verification during this trial.

23. Such representation, whether indeed mentioned in the criminal proceedings or only now, would not really sit well with Ip’s statements to the ICAC.  To the ICAC, Ip stated clearly that he and the other members of the IO believed that CMCE would be the same as Chau Mou.  The reasons were that the invoice was presented by Fan as before and that the names of CMCE and Chau Mou looked very similar.  Therefore IO believed the cheques they drew were for payment to Chau Mou.  That was how the IO was deceived.

24. It should be borne in mind that at that stage, the ICAC was also investigating whether there was any element of corruption involving the IO or the management office, probably upon the suggestion of Lee.  Ip indeed denied such element in his statement to the ICAC.  I find it hard to believe that if the alleged representation by Fan had really been what caused Ip and the IO to fall into the trap, they would have simply stated their explanation to the ICAC the way they did without reference at all to Fan’s deceptive representation.

25. Ms Fong for Chau Mou submitted that such alleged representation by Fan to Ip was simply too significant to have been left out of mention at all in Ip’s statements to the ICAC.  I share the same view.  I would further infer that Ip believed the IO was paying Chau Mou simply because the fake invoices were presented by Fan as before and the name of CMCE as appearing on the invoices was similar to Chau Mou, exactly as he explained to the ICAC.

26. Even assuming that Fan had made such representation to Ip before the first fake invoice, I am surprised that Ip and the IO simply took Fan’s words in the circumstances then known to them.

27. Chau Mou could request the IO to make payment to a designated payee for whatever reason.  The IO might also agree, provided that payment to the designated payee would be good and valid discharge of their liability to Chau Mou.  In any event, such payment instruction would have constituted deviation from the contract (clause 4A) and the past dealings.  According to their statements to the ICAC, Tam and Ip had clear understanding of the limit of Fan’s authority by virtue of the letter of authorisation dated 2 June 2004.  Specifically, they understood that Fan was not authorised to ask for payment in the name of his or other company.  As I found above, Fan had ostensible authority to collect payment but only for Chau Mou as before.  The request for payment to another company and the representation of authority to request that now came from Fan himself.

28. It was suggested that Fan had previously exercised his authority to vary the terms of the contract on behalf of Chau Mou.  The example was the variation of the maintenance period in the contract.  However, the contemporaneous documents clearly show that parties had simply failed to revise that part in line with the parties’ agreement already achieved prior to the signing of the contract.  This led to the correction only after the contract had been signed.  This does not evidence Fan’s authority to vary the contractual terms as alleged.

29. Even assuming that it was within Fan’s authority to make such request, there would still be a duty to enquire if there were further circumstances giving grounds for suspicion: see Boustead at para.8-055.  Were there such circumstances?

30. First, there was the issue of Fan’s integrity.  It was Ip’s statement to the ICAC that Fan’s integrity was called into question when the works were truncated at the end of 2002.  Due to Fan’s failure to pay the workers, the workers went on strike then.  Lee confirmed his knowledge about that.  For this reason, Lee paid for Fan and treated the amount as his loan to Fan.  The loan receipts signed by Fan in January 2003 evidence that.  The integrity of Fan remained in issue when the works could be resumed in 2004.  For the resumed work, Ip also queried Fan’s request to purchase new paint.  The concern about Fan’s integrity explained why Chau Mou was requested to supply the letter of authorisation of Fan dated 2 June 2004.

31. Second, the members of the IO had actual knowledge of Chau Mou’s associated businesses.  The registry documents show that CMCE was actually formed immediately after the date of the first fake invoice and Chau Mou’s letter of authorisation.  It was formed by Fan alone and the registered address was his own residential address.  The IO did not actually know that at the time.  But the members of the IO had the business cards of both Lee and Fan which the IO now heavily relied on.  The cards showed the 2 businesses of Lee, namely Chao Mou Engineering & Co and Chao Mou Engineering & Co Ltd.  Both had the same business addresses.  There was no business by the name of CMCE.  Short of carrying out a business search, the IO should at least be put on enquiry about the alleged association between Chau Mou and CMCE in view of what they knew.

32. Third, the invoices and receipts presented by Fan in respect of the HK$200,000 payments were suspicious.  I accept that those invoices were not Chau Mou’s invoices.  I also accept that Lee had no idea about them until copies of them were supplied by the IO to him after the fraud.  These fake invoices and receipts bore what appears to be the company chop of Chau Mou.  However, there is nothing to show that the office of Chau Mou or its staff had anything to do with the preparation of the fake invoices or the stamping of the chop on them.  Lee was fair enough to admit that Fan might somehow have access to the company chop in Chau Mou’s office.  But it is not actually established that the chop stamped on these document was in fact the very chop of Chau Mou rather than another piece of counterfeit by Fan.  I therefore do not accept that the mere fact that the fakes documents bore what appears to be Chau Mou’s chop amounted to actual representation by Chau Mou of the authenticity of the documents or Fan’s authority to make the request therein contained: see also Ruben v Great Fingall Consolidated [1906] AC 439 at 444.

33. The first fake invoice was issued on 1 June 2004 well before the actual resumption of work.  This differed from the previous dealings between the parties when Chau Mou invoiced the IO for payment for work done at different stages of the project.

34. If the only change was that of the payee of the cheque, one would still have expected Chau Mou to issue the invoice with the instruction regarding the designated payee.  Yet it was issued under the apparent letterhead of CMCE.  Contrary to the past dealings, the invoice was not signed too.

35. The first fake invoice was settled only in July 2004.  I doubt whether any attention was paid to this invoice which had already been kept in the IO’s file for more than a month by then.  In particular, unlike the previous dealings, this payment was not formally sanctioned by the IO’s meeting or the IO’s monitor group.  It was the account staff of Ip and Tam who prepared the cheque in accordance with the invoice.  According to Tam, he saw the fake invoice only when he was asked to sign the cheque in July.  Chan said he was often in the Mainland and I am not impressed that he was involved materially in following up with the resumed work.  The lack of care was also reflected by the fact that the cheque for settling the first fake invoice was not even crossed.  Neither the account staff nor the IO members who signed the cheque discovered that.

36. After the issuing of the first cheque in accordance with the first fake invoice, the IO continued to fail to develop suspicion.  The receipt issued for this payment in July 2004 was completely different from all those official receipts under Chau Mou’s letterhead previously received.  This one was nothing more than what is readily obtainable from a stationery shop.  The second fake invoice dated 4 August 2004 was issued under the English letterhead of CMCE while the Chinese letterhead was that of Chau Mou.  The suspicious feature was obvious.

37. Much was said about the integrity of Lee too.  Reference was made to a judgment earlier this year against Lee regarding how he came to be removed from the list of approved contractors of public works as a result of corruption related misconduct as such contractor.  I have no reason to query the adverse comment by the court about Lee in that judgment.  Yet I still have to decide on the basis of the circumstances of the present case.

38. Considering all the evidence, including those specifically analysed above, I am satisfied that there were sufficient circumstances to put the IO on enquiry about Fan’s requests for the payments of the HK$200,000 to CMCE in 2004 and his authority to do so.  In the circumstances, I find that Chau Mou is not bound by the fraud of Fan nor is Chau Mou estopped from claiming the HK$200,000 from the IO.

ORDER

39. Judgment is entered in the sum of HK$200,000 in favour of Chau Mou.  Interest on the sum shall run at 1% above HSBC prime rate from the date of writ until today and at the judgment rate thereafter until payment.  There is no reason why costs of the action should not follow the event and I order that against the IO.  Such costs shall be taxed, if not agreed.  For clarity, I certify the engagement of counsel.  The costs order is nisi and shall become absolute in the absence of appointment to argue in 14 days.