HASHFUTURE HOLDINGS LTD v. ZHANG TIANHAO

DCMP 2827/2018

[2019] HKDC 896

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO 2827 OF 2018

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JUDGMENT

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Introduction

1.  The plaintiff commenced these proceedings by way of Originating Summons dated 3 October 2018.  As I gather from the plaintiff’s supporting affirmation[1], the plaintiff’s case was that it provided services to facilitate the trading of tangible assets in a digital form inside a blockchain community.  The plaintiff’s business was to render the tangible assets recognizable and capable of being uploaded into the blockchain trading platform; the rendering was by way of issuing a digital token which could be loaded onto the trade platform; at the same time, the tangible assets would be placed into custody under certain escrow arrangement with the escrow agents.  In short, it is issuing of tokens and the defendant called it asset tokenization.  The plaintiff’s service was rendered to customers for a fee.

2.  When the tokens later came to be traded, the plaintiff offered settlement of the tokens to allow the changing hands of the tokens, in digital form.  It is basically a  redeeming of the original token and releasing the underlying tangible asset.  These proceedings concerned the redeeming part.  It arose from the request of the defendant, as one of the first customers of the plaintiff, to redeem the token issued to the defendant. 

3.  The defendant offered to tokenize a piece of jade[2]. The parties have executed a User Agreement on 17 August 2018 for the plaintiff’s tokenization service to be offered to the defendant.  Mr Jia Yinghao executed the agreement on behalf of the plaintiff.  The piece of jade was delivered to the escrow agent by the defendant on 23 August 2018.  The custody was in place purportedly pursuant to the User Agreement, and the two escrow agreements namely a Framework Escrow Agreement dated 17 August 2018 entered into by the parties and the escrow agent, and a User Escrow Agreement entered into by the defendant and the agent.  Thereafter, in the end of August 2018, the plaintiff issued the token to the defendant. 

4.  What gave rise to these proceedings was that in a matter of a few days, on about 3 September 2018, the defendant requested for redeeming the token, and for the return of the jade. This change of mind in a matter of a few days, according to the defendant[3], followed from his alleged loss of the digital access key to the token. He added that originally he planned to just try the service out to show support to the plaintiff which was a newly founded business.

5.  The plaintiff considered that they were entitled to reject the defendant’s request.  The reasons were not articulated to the court until the court heard the oral submissions of the plaintiff’s counsel.  The submissions were that under clauses 2.7.2 and 2.7.3 of the User Agreement, the defendant was obligated to tender the token to the plaintiff as a condition for the redeeming, or the settlement.  Clause 2.7 is in the following terms:-

“2.7  Settlement of Applicable Tokens and Applicable Assets

2.7.1  In the event that any holder of the Applicable Token intends to settle the Applicable Token and the Applicable Assets, such holder (the “Settling Holder”) shall apply to us for the settlement and provide all necessary information as required by us.

2.7.2  Upon verifying (i) the Settling Holder is the holder of the relevant Applicable Token; (ii) the Applicable Token was issued by us (confirming that the creator of the Applicable Token matches our Ethereum address); and (iii) the Applicable Token has not been destroyed (in which case the “validity” identification for the Applicable Token shall be “true”, i.e., the Applicable Token shall contain “isValid: true”), we irrevocably make an offer, as distinguished from a non-binding invitation to treat, to exercise any right, power or otherwise entitlement granted, assigned or Transferred to us in relation to the relevant Applicable Asset upon issuance of the Applicable Token pursuant to Section 2.5 in favor of the Settling Holder in order to settle the relevant Applicable Asset with the Applicable Token. For avoidance of doubt, we irrevocably declare our intention to be bound immediately upon acceptance of the foregoing by the Settling Holder for settlement supported by the relevant Applicable Token pursuant to this Agreement. We will notify the Settling Holder and the Escrow Agent about details of the settlement (including the date and venue for such settlement).

2.7.3  To settle the Applicable Token and the Applicable Asset, the Settling Holder shall (i) destroy the Applicable Token (in which case the “validity” identification for the Applicable Token shall be “false”, i.e., the Applicable Token shall contain “isValid: false”); and (ii) notify us in writing upon completion of (i).

2.7.4  Upon verifying that the Applicable Token has been irrevocably destroyed, we will procure the Escrow Agent to release the escrow and deliver the relevant Applicable Asset to the Settling Holder at the designated time and venue as notified to the Settling Holder pursuant to Section 2.7.2.  The Applicable Asset to be delivered by the Escrow Agent must match the Applicable Asset in respect of which the relevant Applicable Token was created.”

6.  The argument of the plaintiff is that as the defendant has lost the key to the token, the token was not tendered, and the pre-conditions for settlement as stated in Clauses 2.7.2 and 2.7.3 were not met. 

Defendant’s request made by wechat calls only

7.  Saliently, irrespective of whether the refusal was grounded, the defendant has not commenced any legal action to further his request.  He has only pursued the request by wechat calls to Mr Jia and Mr Yuan[4].  Yet, the plaintiff saw fit to commence these proceedings at this point, and the reason was stated at paragraph 35 of Mr Yuan’s affirmation as follows:-

“35. Pursuant to the User Agreement, the Plaintiff duly refused the Defendant’s said request. But the Defendant indicated that if the Plaintiff would not deliver the Hetian Jade, he would take legal action. The Plaintiff hence makes this Application for the reliefs sought.”

8.  The plaintiff seeks the following declarations, as stated in the Originating Summons: -

“(1)  A declaration that on the proper construction of the User Agreement executed on 17^th day of August 2018, it shall be lawful for the Plaintiff to refuse to deliver the Hetian Jade, or instruct or cause any third party to deliver the same, to the Defendant after the corresponding Token was issued in or around end of August 2018;

(2)  A declaration that on the proper construction of the User Agreement executed on 17^th day of August 2018, it shall be lawful for the Plaintiff to deliver the Hetian Jade to the Defendant only upon expiry of the escrow services and if the Defendant satisfies the Plaintiff in the Plaintiff’s sole and absolute discretion with all undertakings and/or actions to indemnify the Plaintiff for all losses, incurred or to be incurred, in relation to the Hetian Jade against any third party.”

No cause of action arose – the 1^st declaration sought

9.  I doubt that a cause of action has arisen at all to entitle the plaintiff’s commencing of this action.  Although the matter in the case heading was cited as for “breach” of user agreement, the plaintiff has not asserted any breach to found the present proceedings, whether in the supporting affirmation or the counsel’s arguments.  The affirmation has not even contained a formulation of the reasons for rejecting the defendant’s request.  If, allegedly, the settlement/redeeming pre-conditions have not yet been satisfied by the defendant, it is still not yet a breach of the agreement.  The plaintiff’s counsel, Ms Yao, has made no submission on what constituted any alleged breach.

10.  I find that the cause of action has not arisen.  The proceedings are misconceived, and has to be dismissed on this ground.

11.  Cause of action is a factual situation the existence of which entitles one person to obtain from the court a remedy against another person.[5]  In this case, the defendant ought to be the one aggrieved by the refusal.  At this stage, the plaintiff has no cause to complain, and no cause of action to seek any substantive remedy. 

Declarations should not be sought for advisory opinion

12.  The plaintiff sought declarations in these proceedings.  I am mindful that in Cheng Sin Yau & Anor v Wong Kam Piu Dicky [2015] 3 HKC 173, the court held that it would not make a declaration to effectively bless the further proceeding of a conveyancing transaction. In paragraphs 12 to 13, the Honourable Mr Justice Chung applied the principles that declaration would not be made where there was no right asserted, no formulated claim, no breach or no threat to commit a breach of agreement. Paragraphs 12 to 17 reads:-

“[12] It is common ground a declaration is a discretionary relief. In determining whether to grant a declaration, the following ought to be borne in mind:

(1) in exercising its discretion the court will consider whether any useful purpose would be served by granting declaratory relief: Tsang Yuen Ling v Incorporated Owners of Siu Lung Court [2001] HKCU 1431, [2001] HKEC 1121;

(2) a declaration will not be made against a person who has asserted no right nor formulated any specific claim: Re Clay [1919] 1 Ch 66 CA;

(3) similarly, a declaration will not be granted where there is no breach and no threat or intention to commit a breach of agreement: Mellstrom v Garner [1970] 1 WLR 603.

[13]  Further, the court of appeal, in refusing to grant a declaration, made the following observations in Fred Jackson v Attorney General [1980] HKC 182, CACV 58/1979 (13 May 1980):

‘Neither counsel in the present case in dealing with the Guaranty Trust Co case [Guaranty Trust Co of New York v Hannay & Co [1915] 2 KB 536] sought to urge the claims of any of the many later decisions in which that case has been considered. It is in the latest of those cases Malone v Commissioner of Police (No 2) [1979] 2 WLR 700] however, that I find, in the judgment of Sir Robert Megarry VC, a commentary upon this part of the judgment of Lord Justice Bankes which, to my mind, effectively explains it and limits the wide reach of the words used by that learned judge …

At p 707 the learned Vice-Chancellor says:

‘… True, a plaintiff who seeks such a declaration may have no cause of action; but it suffices if he is claiming ‘relief’. This, I think, means relief from ‘[some] real liability or disadvantage or difficulty’ which affects him … ’

To my mind what the plaintiff was seeking in that case was in the nature of a purely advisory judgment of the court. No doubt if such declarations had been made they might have been of some practical use to the plaintiff inasmuch as he might have relied upon them …

… I do not think however that we have any right or authority to give such an advisory opinion. …’ (emphasis supplied).

The court of appeal said later:

‘I … consider that as judicial courts what we deal with are justiciable issues not mere questions of construction nor academic questions. There is no jurisdiction in the court to make a declaration in respect of a hypothetical or academic question nor to act in an advisory capacity whether between subject and subject … or between subject and the Crown … ’ (emphasis supplied).

[14] In making the above observations, the courts were mindful of the risk of ‘opening the floodgate’ if the discretion were exercised differently. Thus, the court of appeal said (quoting from Barnato, Deceased [1949] Ch 258):

‘… for the trustees this was a practical instant question, because, he said, without guidance from the court on this doubtful question, the trustees will be unable to act … Unfortunately, it is not only trustees who may find themselves in that kind of difficulty … Any ordinary subject may find himself in precisely the same difficulty, and if these trustees could ask the court to bring the Crown here … merely because they want guidance as to the ordering of their affairs, I can see no end to the litigation that would inevitably follow … ’.

[15] The court of appeal also said (quoting from the Malone decision):

‘I shall not discuss the engaging examples which emerged in argument, ranging from moral obligations to the decisions of referees in football matches. I shall only say that I cannot believe that the court could, or should, grant a declaration that, for instance, a referee was right (or wrong) in awarding a penalty kick … ’.

[16] The above observations apply equally to this application. In addition, in the context of conveyancing transactions, if an application such as the present were acceded to, there does not seem to be a sensible distinction between doing so, and a case (perhaps an extreme case) where the conveyancers seek the court to examine the whole conveyancing file and declaring its general ‘approval’ (or ‘disapprove’) of the vendor’s title.

[17] By reason of the above matters (namely, that the declarations sought herein are in the nature of an advisory judgment, and the risk of ‘opening the floodgate’ if the declarations were granted), I decline to exercise my discretion (assuming the same exists) to grant the declarations sought herein.” (emphasis added)

13.  In addition, I accept Mr Lai’s submission, made for the defendant at the hearing, that the conditions clauses 2.7.2 and 2.7.3 did not constitute obligations on the defendant.  The process was for the plaintiff to conduct verification.  In the clauses, there is no provision obliging the defendant to provide anything.  The evidence of the plaintiff was not that it could not access the token without that one and only one key issued to the defendant.    

2^nd declaration sought

14.  To my mind, looking at the terms of the 2^nd declaration sought, it is not clear what the terms of the declaration sought means, and what they are intended for. 

15.  In any event, it suffers from the same problem that the proceedings are premature, if not misconceived.

16.  In fact, the problem, in relation to this 2^nd declaration, is even more fundamental.  I understand from Ms Mao at the hearing that the declaration is to the effect that an undertaking has to be imposed on the defendant to require the defendant to provide an indemnity to the plaintiff against any loss of any claims against the plaintiff that may be made by any purported holders of the token.  The need for such indemnity arose, as Ms Mao suggested, from the defendant’s loss of the key, which might find its way into some unauthorized third parties.  Ms Mao also referred me to clause 3.1 and contended that it provided for a validity period of the token for two years.  Hence, it was argued that the risk of third party unauthorized token holders would present itself upon the expiry of the two years.  Hence, Ms Mao asked for the 2^nd declaration to address the alleged risk which may arise in the future ie from the time after the expiration.  Clause 3.1 provides as follows:-

“3.1 Specified Term

We only provide our services to the applicable tokens that are created within two (2) calendar years after their respective creation (or such other term as we may agree from time to time (the “Specified Term”). We reserve the right to decline to provide any of our services to any holder of the applicable token if such applicable token has been created for a period longer than the specified term. It is the user’s responsibility to ensure that the applicable token is settled before expiry of the specified terms.”

17.  Ms Mao submitted that the court should find an implied term to this effect and such would form the basis of the declaration.  The basis for the implication was said to be merely a matter of business efficacy.

18.  The seeking of this declaration is ill conceived.  Any future risk, even if justified, should be for parties to negotiate and to make further agreement to cover.

19.  It is not the function of the court to impose commercial agreements on parties.  The perceived risk, even if it is rightly bothering the plaintiff, is not capable of founding any cause of action nor the sought declaration.  

20.  I also accept Mr Lai’s submission that the plaintiff did not need to entertain any request for redemption/settlement after the two year period.  The provision in clause 3.1 goes on to read “we reserve the right to decline to provide any of our services to any holder of the applicable token if such applicable token has been created for a period longer than the specified term”.  The alleged risk is simply misconceived. 

The defendant’s objections

21.  The defendant’s affirmation contains no clear ground of objection; Mr Lai argued for illegality of the User Agreement on the ground that the tokens are in substance securities and its dealings are regulated by the Securities and Futures Ordinance (Cap 571). Alternatively, the defendant dealt as a consumer and the User Agreement is unconscionable under the Unconscionable Contracts Ordinance (Cap  458 of the Laws of Hong Kong), given that the terms were all one-sidedly in favour of the plaintiff. 

22.  Given my findings that the proceedings are unsupported by any cause of action, I do not need to consider the defendant’s objections based on illegality as such.

23.  For completeness sake, I also mention that I understand from Ms Mao that she relied on both limbs under Order 5 Rule 4(2)(a) and (b) of the Rules of District Court to argue that the mode of commencement of proceedings could properly be originating summons.  It was submitted that the matter was one of construction of contract and one involving no substantial dispute of fact.  The defendant did not object to such mode of commencement of proceedings.  Given my findings that the proceedings fundamentally lack cause of action, the issue of whether originating summons is the suitable mode does not arise.    

Conclusion

24.  I dismiss the originating summons with costs to be awarded to the defendant.  Such cost is to be summarily assessed payable by the plaintiff forthwith.  Summary assessment is appropriate for this matter.  The defendant is to lodge the statement of costs for my assessment within the next 14 days, and the plaintiff is to lodge the list of objection, if any, within the following 14 days.

25.  I thank Ms Mao and Mr Lai for their assistance.