巨展皮具香港有限公司 v. 上海兄弟海運有限公司 AND ANOTHER

HCA 2731/2016
[2018] HKCFI 53

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2731 OF 2016

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R E A S O N S   F O R   D E C I S I O N

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The application

1.  This is an application by the plaintiff for default judgment against the defendants, pursuant to Order 13, rule 6 and Order 19, rule 7 of the Rules of High Court.

Outline of the pleaded facts

2.  The plaintiff’s pleaded case is that it is the victim of two incidents of email fraud perpetrated against it by the defendants. 

3.  The plaintiff is a Hong Kong company trading in leather and leather goods.  The defendants are also Hong Kong companies.  The plaintiff has had no business dealings with them.

4.  On 18 February and 28 March 2016, to fulfill orders placed upon it by one of its customers called Freedom Trading Co, Inc (“FTC”), the plaintiff delivered to FTC two lots of leather goods (“1^st and 2^ndDeliveries”).  FTC is a company in South Korea.  For those two deliveries,the plaintiff expected from FTC payment of US$33,177.60 (“the 1^st Sum”) and US$96,212.10 (“the 2^nd Sum”).  The payments never came.  As it turned out, and according to the pleaded case of the plaintiff:

(i) in respect of the 1^st Delivery, the 1^st defendant had wrongfully used the email account of a director of the plaintiff, sent an email to FTC and instructed it to pay the 1^st Sum into an account held in the name of the 1^st defendant;

(ii) in respect of the 2^nd Delivery, the 2^nd defendant had wrongfully used the email account of a related company of the plaintiff, sent an email to FTC and instructed it to pay the 2^nd Sum into an account held in the name of the 2^nd defendant;

(iii) FTC did as instructed, and effected payment of the 1^st and 2^ndSums respectively into the 1^st and 2^nd defendants’ accounts; and

(iv) the plaintiff has to date not been paid for those deliveries, and has suffered loss and damage.

Writ, and its service

5.  A Writ of Summons indorsed with a statement of claim was issued on 19 October 2016 against the two defendants.  It was subsequently amended on 12 October 2017.  Fraud has been pleaded.  Various forms of relief are being sought, namely repayment of the Sums on the basis of unfair enrichment and hence restitution (paragraphs 1, 2 and 3d of the prayer), a declaration that the defendants received the two Sums (including any traceable proceeds) upon constructive trust for the plaintiff (paragraphs 3a and 3b of the prayer), and further or in the alternative an account (paragraph 3c).

6.  No acknowledgement of service or defence, whether to the original Statement of Claim or the amended version, has been filed by either defendant.

7.  I have read the 2^nd Affirmation of Chan Cheung Cheong.  Based on its contents, I am satisfied that service of the Amended Writ and Statement of Claim has been validly effected.

Application for default judgment and the hearing

8.  On 28 November 2017, the plaintiff took out the present summons.  I have read the 3^rd Affirmation of Chan Cheung Cheong.  Based on its contents, I am satisfied that service of the summons has been validly effected.

9.  Despite the service, the defendants were absent during the hearing of the summons on 9 January 2018.  Pursuant to Order 32, rule 5(1), the court may proceed in the defendants’ absence if “having regard to the nature of the application, it thinks it expedient to do so”. 

10.  This application is for judgment in default of acknowledgementof service and defence.  It belongs to the type of applications which, given their nature, are more often than not proceeded with in the absence of the defendant.  In the present case, I also deem it expedient to do so.

Approach for granting default judgment

11.  As the Amended Writ and Statement of Claim contain claims not mentioned in Order 13, rules 1 to 4 and Order 19, rules 2 to 5, the present application is governed by Order 19, rule 7(1).  Under that rule:

“ …the plaintiff may, after the expiration of the period fixed by orunder 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.”

12.  In the present case, when considering what judgment the plaintiff appears entitled to, the court has to take into account the fact that a declaration is being sought.  In Order 19, rule 7(1), although the words “the Court shall” are used, “the rule is not mandatory but discretionary, and the court retains its discretionary power whether to give judgment…” — see Hong Kong Civil Procedure 2018, Volume 1, paragraph 19/7/13.  It is further stated at paragraph 15/16/2 that:

“ The power to make binding declaration of right is a discretionarypower….A declaration can only be made after proper argumentand cannot be made merely on admissions by the parties whether in pleadings or otherwise … nor in default of compliance with rules of court.”

Similarly, it is stated at paragraph 19/7/20 that “It is not the normal practice of the court to make a declaration without a trial, particularly where the declaration is that the defendant in default of defence has acted fraudulently”(which is the case here).

13.  On the other hand, as has been explained at paragraph 15/16/2 of Hong Kong Civil Procedure 2018, Volume 1:

“ …the rule of the court that a declaration will not be granted whengiving judgment by consent or in default without a trial is a rule of practice and not of law and will give way to the paramount duty of the court to do the fullest justice to the plaintiff to which he is entitled;” (See also to the same effect paragraph 19/7/20.)

Declaratory relief was hence granted by Lam J (as he then was) in Lai Wai Kuen v Wong Shau Kwong [2004] 4 HKC 528 where he was satisfied that the plaintiff had a genuine need for the same, and that the court could properly grant it on the merits of the case (paragraph 6).  I will come back to the exercise of this aspect of my discretion later when I deal with the relevant relief concerned.

Repayment of the two Sums, and restitution

14.  As has been mentioned above, the plaintiff seeks repayment of the 1^st and 2^nd Sums in paragraphs 1, 2 and 3d of the prayer.  On the face of pleadings, there is considerable overlap between those three paragraphs.  In the course of her submissions, Ms Wong, counsel for the plaintiff, confirmed to me that all the reliefs sought in those three paragraphs are based on the concept of unfair enrichment.  Restitution is accordingly sought.

15.  A useful framework for approaching a claim for unjust enrichment involves asking four questions: (a) Was the defendant enriched?(b) Was the enrichment at the plaintiff’s expense?  (c) Was the enrichment unjust? and (d) Are any of the defences applicable? — Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 (at paragraph 67), and Benedetti v Sawiris [2014] AC 938 (at paragraph 10).

16.  The pleaded facts in the present case sufficiently support the conclusions that the defendants have been enriched, and that the enrichmentwas unjust.  There is no evidence of any defence being available to either ofthem.  The only remaining question which has to be considered is whether the enrichment was at the plaintiff’s expense.

Whether enrichment at the expense of the plaintiff

17.  Relevant to this remaining question is the fact that the two Sums were not made directly by the plaintiff to the defendants, but were obtained by fraud from FTM.  The plaintiff was not the direct provider of the benefit. This gave rise to the concern that the loosely so-called “direct transfer rule” (see Goff & Jones: The Law of Unjust Enrichment (9^th edition), paragraph 6-12) may not have been satisfied, leading to the suggestion that the defendants might not have been enriched at the plaintiff’s expense.

18.  Ms Wong, counsel for the plaintiff, submits that the absence of any direct transfer from the plaintiff to the defendants in the present case poses no problem.  She relies on Menelaou v Bank of Cyprus plc [2016] AC 176, where Lord Clarke JSC observed at paragraph 27 that:

“ I would reject the submission that there must be a direct payment by the bank to Melissa. Such a requirement, while sufficient, is not in my view necessary because it would be too rigid. As I see it, whether a particular enrichment is at the expense of the claimant depends on the facts of the case. The question in each case is whether there is a sufficient causal connection, in the sense of a sufficient nexus or link, between the loss to the bank and the benefit received by the defendant, here Melissa.”

Menelaou was cited to and applied by the Court of Appeal in Lee Yuk Shing v Dianoor International Limited (In Liquidation) CACV 185/2015 (unreported, 23 May 2016) — see paragraphs 109 – 112 of the judgment.

19.  Ms Wong, in further support of her submissions that there is “sufficient nexus or link” here, seeks to rely on the “principle of interceptive subtraction”, which, as explained at page 112 of Virgo, The Principles of the Law of Restitution (3^rd Ed), “is founded on there being a sufficient causative link between the claimant’s loss and the defendant’s gain since, but for the defendant’s interception, the claimant would have received the benefit.”

20.  The right test to apply when considering the issue of “at the expense of the plaintiff” in the context of a three-party case (as we have here) is not altogether straightforward, and is a developing area of the law.  It is noteworthy that according to paragraphs 6-12 and 6-13 of Goff & Jones:

“ At the time when the last edition of this book was publishedin 2011, no case had clearly held that English law has any such ‘direct transfer’ rule…[W]e suggested that the law would do better to approach the question whether a defendant has been enriched at a claimant’s expense in a three-party case, as in a two-party case, by undertaking a ‘causal inquiry’. There was no need to qualify this test by holding that a benefit can only be gained at one party’s expense, or that a defendant can only be enriched at the expense of a party who ‘directly’ enriched him.

During the five years that have passed since then, the proper approach to identifying qualifying transfer of value in multiple-party cases has received unprecedented levels of scrutiny from the English appellate courts. Proceedings in Investment Trust Companies (In Liquidation) v HMRC, Relfo Ltd Ltd (In Liquidation) v Varsani, Menelaou v Bank of Cyprus UK Ltd, and TFL Management Services Ltd v Lloyds TSB Bank Plc, have culminated in four Court of Appeal decisions and two Supreme Court appeals.  At the time of writing, and with the Supreme Court’s decision in the Investment Trust Company case pending, the correct approach to these issues has yet to be finally settled by the English courts.”

21.  The English Supreme Court reached its decision in Investment Trust Companies v Revenue and Customs Commissioners [2017] 2 WLR 1200 in April 2017.  It however did not, as the authors of Goff & Jones had hoped, finally settle the issue.  Importantly for our present purpose, Lord Reed JSC raised concern about the lack of clarity in the tests formulated in previously authorities, including Menelaou, and observed further that it is “unwise” at this stage to suggest any definitive test.  He observed at paragraphs 37 and 38 of the judgment that:

“ 37 Decisions concerning the question whether an enrichmentwas ‘at the expense of’ the claimant demonstrate uncertainty as to the approach which should be adopted. Such tests as have been suggested have been too vague to provide clarity. For example, in Menelaou v Bank of Cyprus UK Ltd [2016] AC 176, Lord Clarke of Stone-cum-Ebony JSC said, at para 27, with the agreement of Lord Neuberger of Abbotsbury PSC, Lord Kerr of Tonaghmore and Lord Wilson JJSC, that ‘the question in each case is whether there is a sufficient causal connection, in the sense of a sufficient nexus or link, between the loss to the bank and the benefit received by the defendant’. This leaves unanswered the critical question, namely, what connection, nexus or link is sufficient? …

38 It would be unwise to attempt in this appeal to arrive at a definitive statement of the circumstances in which the enrichment of a defendant can be said to be at the expense of the claimant.  Nevertheless, in view of the uncertainty which has resulted from the use of vague and generalised language, this court has a responsibility to establish more precise criteria.  Some observations of a general nature should therefore be made, before turning to the specific context in which the issue arises in the present case. …”

22.  Having made some observations of a general nature at paragraphs 39 to 45, Lord Reed turned to (between paragraph 46 and 51) the specific issue of “Direct and indirect provision of a benefit” and observed:

“ 46 Situations in which the defendant has received a benefit from the claimant, and the claimant has incurred a loss throughthe provision of that benefit, usually arise where the parties have dealt directly with one another, or with one another’s property. …

47 There are, however, situations in which the parties have not dealt directly with one another, or with one another’s property, but in which the defendant has nevertheless received a benefit from the claimant, and the claimant has incurred a loss through the provision of that benefit.  These are generally situations in which the difference from the direct provision of a benefit by the claimant to the defendant is more apparent than real.”

23.  Lord Reed then at paragraph 48 named five of those situations, which may be summarized as (1) the interposing of an agent of one of the parties between them; (2) the assignment of the right to restitution; (3) an intervening transaction being found to be a sham; (4) a set of co-ordinated transactions being treated as forming a single scheme or transaction for the purpose of the “at the expense of” enquiry, and (5) “situations where the defendant receives property from a third party into which the claimant can trace an interest.  Since the property is, in law, the equivalent of the claimant’s property, the defendant is therefore treated as if he had received the claimant’s property.”  I will come back to the third and fifth categories of situations, as they have relevance to the present application.

24.  At paragraph 49, Lord Reed dealt with the situation of a claimant discharging a debt owed by the defendant to a third party.  He then observed at paragraph 50 that:

“ It has often been suggested that there is a general rule, possibly subject to exceptions, that the claimant must have directly provided a benefit to the defendant. The situations discussed in the two preceding paragraphs can be reconciled with such a rule, if it is understood as encompassing a number of situations which, for the purposes of the rule, the law treats as equivalent to a direct transfer, in the sense that there is no substantive or real difference. So understood, the suggested rule is helpful. It may nevertheless require refinement to accommodate other apparent exceptions, and it would be unwise at this stage of the law’s development to exclude the possibility of genuine exceptions, or to rule out other possible approaches.”

25.  I have considered the law outlined above.  I have also considered Ms Wong’s submissions.  On the facts pleaded in the present case, I find that the defendants have been enriched at the plaintiff’s expense.  My reasons are as follows:

(i) Menelaou has been cited to and applied by the Court of Appeal in Lee Yuk Shing.  Ms Wong submitted that Lee Yuk Shing is binding on this court. On the state of the authorities in Hong Kong, I agree.

(ii) I note that whilst Lord Reed in Investment Trust Companies did not fully endorse the test enunciated in Menelaou, he did not find it to be necessarily wrong.  All that was said was that it leaves “unanswered the critical question, namely, what connection, nexus or link is sufficient?”

(iii) In the present case, FTC was contractually bound to pay the two Sums to the plaintiff.  The defendants used fraud, impersonated the plaintiff, and misled FTC into paying those Sums to them instead.  On the facts, there is quite clearly a sufficient nexus or link between the plaintiff’s loss and the defendants’ enrichment.

(iv) Application of the further guidance Lord Reed provided in Investment Trust Companies in fact reinforces my view. What the defendants did was tantamount to the interposing of an intervening transaction which was a sham (the third category of situations I identified above).  In any event, on the present case, and for the purpose of this “at the expense of” inquiry, I see no substantive or real difference between the plaintiff effecting a direct transfer on the one hand and it being cheated of the two Sums in the given circumstances on the other.

(v) Investment Trust Companies in fact supports a further basis for ordering restitution in the present case, namely, the defendantshaving received property from FTC into which the plaintiff can trace an interest (the fifth category of situations I identified above).  As will be made clear below, I have also decided to grant the plaintiff the declaratory relief sought.

Constructive trust

26.  I now turn to the balance of the prayer.  To recap, the plaintiff claims a declaration that the defendants received the two Sums (including any traceable proceeds) upon constructive trust for the plaintiff (paragraphs 3a and 3b of the prayer), and further or in the alternative an account (paragraph 3c).

27.  I am satisfied that if the plaintiff can prove the pleaded facts after a trial, it would be entitled to the other relief sought based on the concept of constructive trust.  The two Sums were obtained by fraud.  When property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient so that the property is recoverable and traceable in equity: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, per Lord Browne-Wilkinson at 716C–D, applied by Sakhrani J in Michael Chen Kang Huang v Peter Lit Ma [2009] 6 HKC 191 at 199I–200C, and by Recorder Lisa Wong SC (as she then was) in Mesirow Financial Administrative Corporation v Best Link Industrial Co Limited HCMP 1846/2015, 25 January 2016, at paragraph 33.

28.  But there has not been any trial in this case.  And a declaration is being sought.  I need to bear in mind the rules of practice set out in paragraphs 12 and 13 above and decide how I should exercise my discretion. I take into account the important fact that the plaintiff was the victim of two incidents of fraud.  Little is known about the defendants, including whether they have any other creditors.  The plaintiff has a genuine need for the declaration and equitable relief sought, so as to avert any need for itto race against other creditors.  Fairness justifies it.  I note that declaratory relief was also granted in the absence of the defendants in a number of earlier cases in which the claimants were victims of fraud or email fraud: Mesirow (supra), Guaranty Bank and Trust Co v Zzzik Inc Limited HCA 1139/2016, 18 July 2016 and Halliburton BV Merkezi Hollanda Ankara Merkez Turkiye Subesi v Sheng Yi (HK) Trade Co Ltd & Ors HCA 1627/2016, 24 January 2017.  I am satisfied that the facts of the present case are such that I should exercise my discretion in favor of granting the declaratory and related equitable relief sought.

Conclusion

29.  For the above reasons, I order that judgment in terms of the present summons be entered against the defendants, together with costs of the action and this application.