NAJEEB BARDISSY v. JOAQUIM D'SOUZA AND OTHERS

HCA9298/94

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H E A D N O T E

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The Plaintiff purchased "Prime Bank Guarantees" ("PBG") from an American company. He was required to pay US$3.8 million into a designated account maintained in the Bank of China ("the Bank"), Hong Kong.

After paying the money, the Plaintiff never received the PBG. Evidence showed that PBG were instruments of fraud.

The Plaintiff sued the Bank for the money.

Held :

(1) The Plaintiff fails in his claim against the Bank.

(2) The Bank is not liable to the Plaintiff in contract, misrepresentation, agency, negligence or constructive trust.

Observation on the liabilities of a receiving bank towards a payer and principles of constructive trust.

HCA9298/94

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9298 OF 1994

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J U D G M E N T

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The Plaintiff's claim

1. The Plaintiff is a Saudi Arabian living in Paris. He is a businessman dealing in financial investments, both for his own account and on behalf of others. He has been involved with complex international investment transactions on a regular basis for a number of years.

2. Through a business contact, Mr Devinder, who managed an offshore investment company, the Plaintiff came to know Dr Joaquim D'Souza ("D'Souza") (the 1st Defendant) of Astro Airlines Inc. ("Astro Airlines") (the 6th Defendant). Astro Airlines was offering to sell discounted ten year Prime Bank Guarantees ("PBG"). Prior to this particular transaction, the Plaintiff had heard of PBG. It was his general understanding that they were a high value form of financial instrument which could be traded for significant profits. Discussion and negotiation between the Plaintiff and D'Souza was by telephone or fax over the first few days of January 1994 and the first two days of February 1994. During that time, the Plaintiff was advised by his banker in Germany, namely Bankhaus Carl M. Gotte ("Bank Gotte") which is a privately held investment bank.

3. Eventually, the Plaintiff entered into a contract with Astro Airlines to buy the PBG. The contract was called "Letter of Intent". Under the contract, Astro Airlines agreed to sell ten year PBG with a total face value of US$2 billion. The purchase price was fixed at 38% of the face value, i.e. a total of US$760 million. The PBG were to be delivered in tranches. The first tranch had a face value of US$10 million. The payment for this tranch was US$3,800,000.

4. Under the contract, payment of the US$3.8 million was to be made to an account in the name of YYL Trust Reg. ("YYL Trust") in Bank of China in Hong Kong ("the Bank"), which is the 4th Defendant in this case. YYL Trust is a registered trust established in Liechtenstein. The Plaintiff duly paid the money into the YYL Trust account. The money he paid for the PBG did not belong to him but a friend of his. The Plaintiff managed to sell the PBG to the investment firm of Merrill Lynch at a profit. The agreement between the Plaintiff and his friend was that the Plaintiff would each receive 50% of the profit of the transaction. The US$3.8 million was withdrawn from the YYL Trust account. However, the PBG was never delivered to the Plaintiff.

The amount

5. In this action, the Plaintiff is suing the Bank for the sum of US$3.8 million together with interest and costs. The Plaintiff had actually recovered from the 2nd, 3rd and 5th Defendants on 11th September 1996 of HK$24,702,549 or US$3,166,993. On 30th October 1996, following default by the 2nd, 3rd and 5th Defendants in complying with a Tomlin Order, the Plaintiff obtained judgment against the 2nd, 3rd and 5th Defendants in the sum of US$2 million together with costs. The Plaintiff had also recovered HK$6,481,459.45 on 15th February 1998 which was the net proceed of sale of a property belonging to the 2nd Defendant.

Other parties

6. Yang You Li ("Yang") (the 2nd Defendant) and Chow Shiu Keung, Sammy ("Chow") (the 5th Defendant), were according to the Plaintiff, "purported to be the President and Vice-President" respectively of the YYL Trust. Vastqueen Limited ("Vastqueen") (the 3rd Defendant) is a company in which Yang was a director and shareholder. Astro Airlines is a corporation established in the State of Illinois, USA on 14th November 1991. It was dissolved on 1st April 1993 and was reinstated as a corporation on 25th July 1994. D'Souza is a director of Astro Airlines.

Withdrawal of money

7. Between 25th February and 24th March 1994, the US$3.8 million paid to the YYL Trust account with the Bank were paid out to the following parties :

(1) 25th February 1994, US$300,000 to D'Souza;

(2) 25th February 1994, US$100,000 to Yang;

(3) 28th February 1994, US$2.6 million to Vastqueen;

(4) 24th March 1994, US$50,000 to Chow;

(5) 25th February and 2nd March 1994, US$150,000 and US$500,000 were respectively paid to an account in New York;

(6) 24th March 1994, US$100,000 were paid to an account in Russia.

How the account was opened

8. The Bank has a subsidiary called China Development Finance Co. (HK) Ltd. ("China Finance"). Yang was introduced by Mr Sze Cheung Pang ("Mr Sze") to China Finance. Mr Sze is known to the Bank for several years. In early January 1994, China Finance referred Yang to the Banking Department of the Bank when Yang expressed an interest to open an account with the Bank.

9. Mr Fung Tin Yiu ("Mr Fung"), the Senior Manager of the Bank handled the account for YYL Trust. In mid-January 1994, Mr Fung met Yang. Yang instructed the Bank to open an account in the name of YYL Trust. Yang produced the following original documents to the Bank for the purpose of opening the account, namely :

(1) a general Power of Attorney dated 8th October 1992 ("the Power of Attorney"), granted by YYL Trust in favour of Yang;

(2) a duly certified and authenticated English translation of the Deed of Incorporation and Articles of Association of YYL Trust dated 15th October 1991;

(3) the duly authenticated and legalised commercial register of YYL Trust; and

(4) the passport of Yang.

10. According to the Power of Attorney, Yang had power to act on behalf of the YYL Trust including "to do bank business and on the whole to represent the firm towards third parties".

11. In late January 1994, Yang informed the Bank that funds would be remitted to Hong Kong in favour of YYL Trust and requested the Bank to designate an account number to YYL Trust in order to facilitate the remittance of the fund. Mr Fung designated an account number to YYL Trust. Mr Fung made clear to Yang that although an account number was designated to YYL Trust, the remittance would not be immediately withdrawable until further account opening procedures were completed.

Correspondence

12. Mr Tai Tak Hung ("Mr Tai") is the Deputy General Manager of the Bank and an officer of China Finance. By a fax dated 2nd February 1994, Bank Gotte informed Mr Tai that :

"We will transmit within our banking hours our swift transfer of funds 3,800,000,- /threemillioneight - hundred-thousand / USD covering the above transaction for the purpose of payment according to agreement AA1/TSD/1022KK/94.

Please confirm latest by 10:00 Cet Feb 3rd 94 that you are ready to receive the funds into your account no 012-876-92-11935-6 in favour of Y.Y.L. Trust Reg and the funds will be released upon receipt of the remitters instruction."

This letter was faxed to China Finance.

13. On 3rd February 1994, Mr Fung received from China Finance the fax message of Bank Gotte dated 2nd February 1994. On the same date, Mr Fung sent a fax to Bank Gotte, stating that :

"We refer your fax of 2/2/94 and please to inform you that we are ready to receive the remittance of USD3,800,000,00. However, please note that the account No. of the payee should read 012-875-9-211935-6."

14. Mr Fung stated in evidence that his understanding of the reference in Bank Gotte's letter of 2nd February 1994 to the funds being released on the remitter's instruction was that Bank Gotte would not release the funds to the Bank until it had already received instructions from its customers, i.e. the remitter, to do so.

15. On 4th February 1994, Mr Tai informed Bank Gotte that :

"I refer to your fax letter dated February 2, 1994 and would like to confirm that our Banking Division is responsible for the above transaction. Our Banking Division is:

Mr Fung Tin Yiu
Banking Division
Bank of China, Hong Kong Branch
Tel. No.: 826 6951
Fax. No.: 845 4738

The said division will contact you directly."

16. On 7th February 1994, following the instruction of Yang to expedite remittance of the funds, Mr Fung sent another confirmation to Bank Gotte that :

"Further to your Fax dated 2/2/94, please be informed that funds can be remitted to account no.01287592119356 in favour of Y.Y.L. Trust reg."

17. On 13th February 1994, Bank Gotte informed the Bank that :

" please be adviced that above mentioned amount - upon instruction of our client and on behalf of our client Mr. N. Bardissy - will be transferred via our accounts at CREDITO ITALIOANO FRA / BANK OF NEW YORK. The delay is due to deferred value date."

18. On 17th February 1994, the Remittance Department of the Bank received a message from Credito Italiano Bank Ag Frankfurt Am Main ("Credito Italiano") that a sum of US$3.8 million would be credited in favour of "YYL Trust Reg. / credit to Astro Airlines" by the order of Bank Gotte.

19. Neither the advice of Bank Gotte dated 13th February 1994 nor the advice of Credito Italiano dated 17th February 1994 contain restrictions on the release of the funds pending the instructions from the Plaintiff.

20. On 17th February, Mr Fung informed Chow, whom he had met when he accompanied Yang to the Bank, that the remittance was not acceptable because the name of the beneficiary was incorrectly stated. On 18th February 1994, Mr Fung informed Credito Italiano that the beneficiary's name and account number did not match.

21. After the name of the beneficiary was clarified, the money was received by the Bank on 23rd February 1994.

Inquiries by the Bank and its lawyer

22. On 2nd February 1994, the Bank enquired with the Swiss Consulate in Hong Kong about the "law concerning Trust enacted in Liechtenstein on 10th February 1928". The Swiss Consulate General replied on the next day that it did not have information on this matter and requested the Bank to contact the Ministry of Foreign Affairs of Liechtenstein and a firm of lawyers in Hong Kong.

23. The Bank also instructed Messrs Koo & Partners, Solicitors to make enquiries of the YYL Trust.

24. On 18th February 1994, the Geneva Office of YYL Trust sent Mr Tai the following letter :

"We are pleased to inform you that - according to the decision of our Board of Directors - we are going to operate a bank account with your Bank.

We are sending you next week an extract of registration duly legalised.

Please provide us by mail return with the opening forms so that them (sic) can be signed.

Please send these documents to :

K. Gmür
Director
Oberfeld 53
9495 Triesen
Liechtenstein

Looking forward to a good and successful co-operation with you, we remain at your disposal for any additional information you might need."

25. This letter was apparently sent in response to a request by Yang to K. Gmür ("Gmür") to contact Mr Tai for "facilitating our account".

26. On 18th February 1994, the Hong Kong Office of YYL Trust sent the Bank a letter from "YYL Trust's lawyer". The letter was from Intertreuhand Corporation ("Intertreuhand") with the name of Gmür as Vice-President. This letter stated, among other things that :

"... the correct procedure is to provide the Bank in China (sic) with a legalised and authenticated extract of registration and with legalised signatories on the account.

Please provide us with :

- the name of the responsible manager

- his fax number

- his exact address

We will undertake the necessary from this and to facilitate the opening of the account. We will confirm by fax to the responsible manager. ..."

27. On 23rd February 1994, YYL Trust asked Messrs Koo & Partners to contact Gmür of Intertreuhand for "further researching". On the same day, Yang wrote to Gmür that the $3.8 million had been paid into the YYL Trust account :

"... but this funds cannot be released out as our company still under researching that this account cannot be operated till now, in order to facilitate our account, please contact to the responsible solicitor of Bank of China, Hong Kong Branch ..."

28. On 24th February 1994, the Bank informed YYL Trust that the money was in the account but it could not be released until the account opening procedure was completed.

29. On 25th February 1994, Mr Fung received from YYL Trust a letter sent by Gmür of Intertreuhand to Messrs Koo & Partners. Their letter was dated 23rd February 1994. It stated that :

"We are pleased to inform you that we are the legal representatives of

Y.Y.L. Trust Reg.

and to confirm that we made the necessary (sic) with Bank of China for the opening of the bank account :

N 012-875-92-11935-6

with them for the Y.Y.L. Trust Reg.

Please note that US$3,800,000.-- arrived on this account. Therefore, we would be grateful if you could undertake the necessary steps to make this account operational. - We will keep you informed concerning the missing extract of registration which will be forwarded to you as soon as possible."

30. Mr Fung was informed by Messrs Koo & Partners that they had also received this letter on 24th February 1994 at 10:50 a.m.

31. At about noon time on 25th February 1994, Mr Leung Siu Ting ("Mr Leung"), the First Deputy General Manager of the Bank asked Mr Fung why the account was not operative. Mr Fung informed Mr Leung the background of this case and that the Bank had received a letter from the trustee of YYL Trust. Mr Leung then told Mr Fung the account could be operational pending the arrival of the extract of the commercial register. Mr Fung said that he agreed with Mr Leung's decision and the decision to allow the money to be withdrawn from the account was based on the following consideration :

(1) YYL Trust had given Yang the express power to do bank business.

(2) The Bank was expressly confirmed by Gmür that they "had made the necessary with the Bank for the opening of the (YYL Trust) bank account" and Gmür instructed the Bank's solicitors to take all the necessary steps to make the account operative.

(3) The Bank had verified the identity of Yang and YYL Trust's deed of incorporation and articles and company register; and

(4) In the light of the background of Yang, the Bank considered that Yang was a reliable customer and accepted his authority to operate the account on behalf of YYL Trust.

32. On 1st March 1994, Gmür as Vice-President of Intertreuhand wrote to Mr Tai informing him that an extract of registration of the YYL Trust had been sent to him by DHL, the letter stated that :

"... however, we are not yet holding the documents from you - therefore please confirm to us when and how this was sent off."

Subsequent inquires by Bank Gotte

33. On 23rd March 1994, Bank Gotte wrote to the Bank stating that :

"... Upon request of our client, Mr. Najeeb Bardissy we hereby ask you to confirm that above mentioned amount has been received with credit to Y.Y.L. Trust as the account holder and beneficiary.

It is of importance for our client to have the confirmation that the funds have been disposed by Y.Y.L. Trust REG upon receipt of the funds. ..."

34. The Bank on 25th March 1994 confirmed to Bank Gotte the receipt of the funds and crediting them to the account of YYL Trust.

The Plaintiff's causes of action

35. The Plaintiff's claim against the Bank is based on the following causes of action :

(1) breach of contract;

(2) misrepresentation;

(3) breach of an agent's duty and negligence; and

(4) constructive trust.

(1) Breach of contract

36. The Plaintiff's case is that a contract existed between the Plaintiff and the Bank whereby the Bank, among other things, undertook that it would not release the US$3.8 million without the Plaintiff's instruction. The Bank had, in breach of contract, released the money without the Plaintiff's instruction.

The principle

37. The Plaintiff was not a customer of the Bank. He was a payer and the Bank a receiving bank. There is no privity of contract between the payer and the receiving bank. Also there are no reported cases in England where it has been held that the receiving bank owed a common law duty of care to the payer : Law of Bank Payments by Brindle and Cox at page 97.

The Plaintiff's contention

38. These principles were accepted by Mr Smith, Counsel for the Plaintiff, but he claimed that a contract came into existence based on the exchange of correspondence between Bank Gotte and the Bank. The four letters were Bank Gotte's letter of 2nd February 1994 and the Bank's letter of 3rd, 4th and 7th February 1994. The Plaintiff contended that by this contract, the Bank :

(1) warranted that the account had been opened by or with the authority of the trustees of the YYL Trust;

(2) acknowledged implicitly that the Bank was aware of the transaction for the purchase of PBG by the Plaintiff;

(3) undertook that the Bank would not release the funds or any part thereof pending the Plaintiff's instructions.

The issue

39. In order for there to be an enforceable, properly constituted contract, the Plaintiff has to prove that there was an offer which was accepted, and there was contractual intention and consideration : Chitty on Contracts, 27th Ed., Vol. 1, para 2-001. The question is simply whether, upon the true construction of the correspondence, there is to be found a clear contractual offer and a clear and unambiguous acceptance of that offer, such as to create a binding contract with the alleged terms : Gibson v Manchester City Council [1979] 1 WLR 294, 297E.

Letter of 2nd February 1994

40. The Plaintiff relied on the letter of 2nd February 1994. The Plaintiff said the letter asked the Bank for confirmation of two matters :

(1) whether the Bank was ready to receive the funds; and

(2) the funds would be released upon receipt of the remitter's instruction.

Pre-advice

41. A banker's relationship with its customer in relation to money held for the customer's account is that of debtor and creditor : Foley v. Hill [1848] 2 HL. Cas 28. If the Bank received the remittance from Bank Gotte, it would be receiving money and incurring a debt to its customer, namely, YYL Trust. The Bank was entitled to refuse to accept the deposit since a liability could not be forced upon the Bank. In my view, the letter of 2nd February 1994 was not an offer at all. It merely served the purpose of a pre-advice, namely, that of giving notice to the Bank of the proposed remittance and seeking the Bank's consent in the event that the money was remitted to it. It did not promise the Bank that the money would be remitted. An offer is an expression of willingness to contract made with the intention that it shall become binding on the offeror as soon as it is accepted by the addressee of the offer : Chitty, Vol. 1, para 2-002. Even if the Bank accepted the terms of the offer, Bank Gotte was not obliged to transmit the funds to the Bank. Neither could the Bank enforce any promise of the transfer of the funds against Bank Gotte because there was simply no offer to be bound which could be accepted.

Construction of last clause

42. The Plaintiff argued that the letter was more than merely a pre-advice because the second part of the letter also required the Bank to confirm "the funds will be released upon receipt of the remitter's instruction". The Plaintiff said that this phrase means the Bank should only release the funds upon his instruction.

43. In construing the meaning of the second part of the letter, I have to ignore the subjective intention of the parties. In my view, even though the last clause followed immediately the request for confirmation by the Bank that it was ready to receive the funds, it did not have the meaning urged upon me by the Plaintiff. If the Bank's promise not to release the funds was required, the letter would have asked the Bank not to release the funds until receipt of the Plaintiff's instructions. Words such as "against your undertaking" were not used. In international banking transactions, if an obligation was to be imposed by Bank Gotte on its counterpart, one would expect clear and assertive terms to be used. This is particularly so because in the usual situation, the payee is free to use the money once it is received in its account. In my view, the last clause means that Bank Gotte would release the funds to the Bank when Bank Gotte itself had received instruction from the Plaintiff to do so. The clause did not say "and that the funds will not be released until receipt of the remitter's instruction".

Offer not accepted

44. In any event, even if the letter was to be treated as an offer, the terms were not accepted by the Bank. The Bank's letter of 3rd February 1994 only stated that they were ready to receive the remittance without giving any promise that the funds would only be released upon instruction of the Plaintiff. The letter of 4th February 1994 was irrelevant. The letter of 7th February 1994 again only confirmed that the funds could be remitted to the account and gave no other assurances whatsoever. At most, these three letters by the Bank constituted no more than a counter-offer that if funds were remitted by Bank Gotte, then they would be received into the account of YYL Trust.

Letter of 4th February 1994

45. The Plaintiff in his evidence stated that he read the Bank's letter of 4th February 1994 as meaning that the Bank was involved in the PBG transaction, it was responsible for it and he placed considerable importance on these facts. In my view, the letter did not have the effect he placed on it at all. It was simply a letter informing Bank Gotte that the banking division of the Bank would be handling the remittance.

Unilateral contract

46. Mr Smith referred briefly to the concept of unilateral contract. He referred to Carlill v. Carbonate Smoke Ball Co. [1893] 1 QB 256, and the discussion of the case by Treitel on the Law of Contract, 9th Ed., pages 35-36. He submitted that consideration was not lacking even if the Plaintiff was under no obligation to remit money to the Bank. Once the Bank had confirmed by its letter of 3rd, 4th and 7th February 1994 that it was ready to receive the US$3.8 million on the terms set out by Bank Gotte, the Bank would be obliged to deal with the money on those terms if and when it was sent. The difficulty faced by Mr Smith is that if unilateral contract is relied upon, then the offer would come from the Bank in promising to do certain things and the acceptance was by Bank Gotte in remitting US$3.8 million to the account. This is totally contrary to the pleaded case of the Plaintiff.

Subsequent events

47. Furthermore, the subsequent events clearly demonstrated that what happened after the Plaintiff had not received the PBG was totally inconsistent with his case that the funds would not be released without his instruction. These matters are not admissible in construing the meaning of the correspondence. However, they are clearly relevant and admissible in testing the Plaintiff's case that the funds would not be released with his instruction.

(1) In the letter of 23rd March 1994, Bank Gotte informed the Bank that "it is of importance for our client to have the confirmation that the funds had been disposed of by YYL Trust Reg. upon receipt of the funds". This is totally inconsistent with the Plaintiff's case. Clearly he understood the funds would be released to YYL Trust upon their receipt in order to fulfill his contractual obligation under the Letter of Intent.

(2) After the Astro Airlines failed to deliver the PBG to the Plaintiff, the Plaintiff instructed his lawyer in Paris, Mr Harry Donkers to send a series of letters to the Bank. The requests contained in these letters are clearly inconsistent with the Plaintiff's case that he intended the funds not to be released until he had given instruction to the Bank to do so. Their letter of 29th March 1994 from Mr Donkers sought to put the Bank on notice "Now that the sum deposited into the account was not to be transferred or disposed of other than for the purpose of the transaction between the Plaintiff and Astro Airlines, Inc.". The second letter of the same date stated that the Bank had confirmed :

"... was taking responsibility for the funds being transferred on behalf of my Client to the SELLER's order, the Y.Y.L. Trust Reg., at the above referenced account."

The letter dated 7th April 1994 stated that :

"...[I] trust that you will not fail to advise us promptly of the current location and status of the funds which were handled by your Banking Division on behalf of the parties to that transaction as well as the Y.Y.L. Trust Reg. We look forward to an early reply."

In the next letter of 21st April 1994, it was stated that :

"You are therefore informed and I trust that in your own good judgment this information will be dealt with appropriately to prevent any transfer of funds deposited at your bank which could further damage my client."

Plaintiff knew what he was doing

48. The Plaintiff obviously knew what he was doing with the US$3.8 million. It was to fulfill the contractual obligation he had under the Letter of Intent. Bank Gotte had advised him that he would lose total control once the funds were transferred in the letter dated 8th February 1994 which stated that :

" According above mentioned transaction is our obligation to reinform you about the risks in connection with the intended transaction and that you from a bank-technical point of view will lose total control over the amount to be transmitted.

With your repeated signature you hereby confirm the above mentioned. ..."

Mr Smith submitted that this letter merely means that the funds would be beyond the control of Bank Gotte once it had been transmitted. The Plaintiff is someone well versed in international investment. It would be meaningless to advise him that the funds would be out of the control of Bank Gotte once it was transmitted. It would be a natural consequence of the transmission. Clearly the advice covered further of the situation after the funds were remitted to YYL's Trust account with the Bank. It is meaningless to construe the letter otherwise.

49. In my view there was no contract between the Plaintiff and the Bank that it would only release the funds upon the Plaintiff's instruction. In the circumstances, it is not necessary for me to consider the alternative case of the Bank that Bank Gotte's letter of 2nd February 1994 was superseded by its subsequent letter of 17th February 1994, in which there was no mentioning of the payment of funds on receipt of the remitter's instruction.

(2) Misrepresentation

50. The Plaintiff claimed that the Bank had failed to exercise proper care in ascertaining whether the trustees of YYL Trust had authorised the opening of the account, and that the account had in fact been opened pursuant to instructions given by Yang. The Plaintiff claimed that the Bank made a false representation that the YYL Trust account had been opened by, or with the authority of the trustees of the YYL Trust, and in reliance of it, the Plaintiff made the remittance and thereby suffered loss and damage.

Elements of misrepresentation

51. The Plaintiff's case is one of negligent misrepresentation. To succeed on negligent misrepresentation, the Plaintiff has to prove that :

(1) there was a "special relationship" between the parties derived from a voluntary assumption of responsibility;

(2) there was a representation made to him which was material;

(3) the representation was false;

(4) the Bank was negligent in making the representation;

(5) the representation was made with the intention that it would be relied on; and

(6) the Plaintiff did rely on the representation to his detriment. See Hedley Byrne v. Heller [1964] AC 465.

No representation

52. The representation said to be relied upon by the Plaintiff is that the account had been opened by, or with the authority of the trustees of YYL Trust. The representation was said to contain in the Bank's letters of 3rd, 4th and 7th February 1994. In my view, all that the letters represented was that there was in existence an account with the Bank, with the designated number, and in the name of YYL Trust. The Plaintiff clearly knew that there was an account in the name of YYL Trust with the designated number. All that the Bank was being asked was to confirm that it was ready to receive the funds into that account in favour of YYL Trust.

Knowledge and authority of trustees of YYL Trust

53. I cannot see any further representation on this matter, and in any event, the Plaintiff in his evidence did not say there was such a representation. While the account was opened on the application of Yang, it was beyond doubt from the evidence that the trustees of the YYL Trust had full knowledge of this account being opened, and had given their authority to Yang for the account to be opened.

54. The YYL Trust was represented by two trustees, namely, Dr. Walser and Gmür. Gmür was at the same time the Vice-President of Intertreuhand. Gmür had corresponded with the Bank and its solicitors, Koo & Partners. In her letter dated 23rd February 1994, Gmür informed Koo & Partners that "we are pleased .... to confirm that we made the necessary with the Bank of China for the opening of the bank account .... therefore we would be grateful if you could undertake the necessary steps to make this account operational ....". It is clear Gmür's letter to the Bank was in response to the request by Yang to her in the letter of 23rd February 1994.

55. Mr Smith argued that Gmür merely addressed the letter to Koo & Partners and not to the Bank. In my view, some reality must be recognised. Gmür is a professional trustee. There is indication from Yang that she is also the lawyer for YYL Trust. Professional trustees are persons well versed with complex commercial dealings. One would ask what was the purpose of Gmür writing the letter to Koo & Partners other than to confirm to them or their principal i.e. the Bank that the trustees gave their blessings and authorities to the operation of their account.

56. Furthermore, a general Power of Attorney was granted by YYL Trust in favour of Yang on 8th October 1992. This Power of Attorney included power to conclude business deals and to do "bank business". A power must be construed so as to include all incidental powers necessary for its effective execution : Howard v. Baillie [1726] 2 H.BL. 618. Clearly if Yang was empowered to conclude business deals and to do "bank business" he must have the power to apply for the opening of accounts in the name of YYL Trust under this Power of Attorney.

Gmür's affidavit

57. Gmür had prepared an affidavit for this case. She said that she is one of the two trustees constituting the Board of Trustees of YYL Trust. She had explained to Yang and Chow that "the opening and operating of bank accounts in the name of and for the benefit of YYL Trust Reg requires the prior approval of its board of trustees, and the signature by one of the trustees of the bank account opening documents and particularly the authorised signatories designations". She also explained to them that it was no longer possible to issue general powers of attorneys. Only special powers of attorneys for specific business purposes were issued. She had no recollection of executing the Power of Attorney in this case. She said that the document was in a form which her firm had stopped using about 10 years ago. The signature appeared so low on the paper when there was plenty of space to put it in a better prospective. The grantor of the power was referred to as "YLL Trust Reg." instead of "YYL Trust Reg.". She considered that the Bank should have been well aware that YYL Trust account could not legally had been operated by Yang at the time when the funds were received from the Plaintiff or when these funds were disposed of. She said that the signature on the Power of Attorney is similar to hers but she does not think it was hers, and she would like to see the original document so that she could carefully verify it.

58. The Plaintiff had chosen not to call Gmür to give evidence. A hearsay notice was served in respect of her affidavit. Gmür's evidence is not tested by cross-examination, and I just cannot conclude from what she said regarding the Power of Attorney that the document was a false document. She had not dealt with the correspondence between Yang and herself in September/October 1992 (pages 13A-E of Bundle D), in which Yang requested her to provide him with a power of attorney from YYL Trust and she on 7th October 1992 sent a power of attorney to Yang. The name YLL Trust was obviously a typing mistake.

Bank statement

59. Statement of the YYL Trust account was sent by the Bank to Gmür and Dr Walser as Trustees of YYL Trust on 25th March 1994. The statement clearly showed the deposit of US$3.8 million and the subsequent withdrawal. Far from saying that the account should not be operated upon, Gmür's response to the bank statement was that she merely requested Yang to provide her with an explanation as to the original of the funds in order to integrate the transaction into the balance sheet.

Authority of Yang

60. Yang was the donor of the YYL Trust, and the Trust was named after him. Yang was the President of the YYL Trust and Gmür addressed him as such. Yang clearly had the ostensible or apparent authority, if not the actual authority, from YYL Trust to open the account and operate on the account. The representation by YYL Trust that Yang had the authority was clearly contained in the letter from YYL Trust dated 18th February 1994, and from Intertreuhand dated 23rd February 1994.

Estoppel?

61. Mr Smith submitted that the plea of apparent authority of Yang would only give the Bank a claim against the trustees in misrepresentation which it could have brought by way of third party proceedings but not as a defence to the Plaintiff's claim. And although the representation by the trustees would operate as an estoppal against the Bank, it cannot have that effect as against the Plaintiff. I really do not understand this argument. The issue here is on the falsity of the representation. If Yang had the authority, be it actual or apparent, then clearly there would be no falsity in the representation.

Reliance

62. From the evidence, it is clear that the Plaintiff did not rely on any representation on the part of the Bank. Under the Letter of Intent, the Plaintiff was required to pay the money into a specified account. There is no evidence that the Plaintiff attached any importance to the name of YYL Trust. What was important to him was that by performing that act, he would comply with his obligations under the Letter of Intent. The issue whether the account had been opened with authority or not is irrelevant. The Plaintiff did not say he relied on any representation by the Bank that the account was opened with the authority of the trustees of the YYL Trust. His evidence was that he was told by D'Souza that the YYL Trust was a big trust in Liechtenstein. This was not a representation by the Bank.

(3) Agency/Negligence

No agency

63. The Plaintiff's plea on agency and negligence was rolled together. Agency is a consensual relationship and arises by agreement between the principal and agent : Bowstead and Reynolds on Agency (16th Ed., para. 2-001). Mr Smith submitted that his plea on agency was in the alternative in the event that the contractual claim failed by reason of consideration. An agency relationship could only arise on the same factual basis as the contractual relationship contended for by the Plaintiff. The contractual claim failed not simply for lack of consideration. The Plaintiff had not specified the ambit of the agency. Once the account had been credited by the Bank with the remittance, there was no further relationship between the Plaintiff and the Bank. The Plaintiff's case on agency also fails.

Negligence

64. As a matter of law, there was no duty of care owed by the Bank as the receiving bank to the Plaintiff as the payer. There was no voluntary assumption or special relationship that existed between the Bank and the Plaintiff to found any duty of care. Further, the Privy Council recognised in Royal Brunei Airlines SDN BHD v. Philip Tan Kwok Ming [1995] 2 AC 378, which I shall deal with in detail later, that there was no compelling reason to impose a duty of care upon a third party (namely the Bank) who already owed duties to its customer, namely, the YYL Trust.

No negligence

65. In any event, I find that the Bank had not been negligent in its dealing with the opening of the account and the release of the funds. The Plaintiff relied on the following allegations of negligence which I shall deal with one by one.

(1) Article 7 of the Deed of Incorporation and Articles of Association of the YYL Trust provided that the authority and approval of the Board of Trustees was required to operate any bank account.

66. Article 7 also specifically provided that the powers of signature shall be determined by the Board of Trustees. The Board of Trustees had given the Power of Attorney to Yang. Further, I find that the YYL Trust had expressly authorised the operation of the account by Yang.

(2) The Power of Attorney was in the name of YLL Trust not YYL Trust. This should have alerted the Bank.

67. The YLL Trust referred to in the Power of Attorney was clearly a typing mistake. I do not consider that this should arouse suspicion on the part of the Bank.

(3) There was no duly completed account opening form with a resolution of the trustees of the YYL Trust when the withdrawals were made.

68. The purpose of obtaining these documents is to show that the person who opened and operated the account was so authorised. In this case, I find that Yang was authorised by the YYL Trust to operate the account by reason of the Power of Attorney and the confirmation given by the trustees in the correspondence.

(4) There was no specimen signature card authenticated by the trustees of the YYL Trust when the withdrawals were made.

69. I do not find the omission to get this document constituted negligence on the part of the Bank. Again, the relevance of this document is to show that Yang had the authority to operate the account. I find that Yang had the authority to do so.

(5) There was no letter of introduction of the YYL Trust as a suitable customer or account holder.

70. This is a non-starter. Letter of reference is used to show the good standing of a customer. Here the introduction was made by a person who is well known to the Bank.

(6) The Bank allowed the withdrawal of US$3,150,000 out of US$3,800,000 within 5 days of the remittance.

71. I shall deal with the issue in detail when I examine the Plaintiff's claim based on constructive trust. I do not accept that the Bank's conduct was negligent.

Ambiguity in the letter

72. The Plaintiff's expert also said that if there is any ambiguity in the letter of 2nd February 1994 from Bank Gotte, the Bank had a duty to seek clarification, and by failing to do so, the Bank again failed in acceptable banking practice.

73. The evidence of Mr Fung is not that he did not understand the letter. If that was the case, one would have expected him to clarify the issue with Bank Gotte. Here he simply understood the letter in a different way from that of the Plaintiff. I fail to see how he should be required to seek further clarification from Bank Gotte.

The Bank did not cause any loss

74. Further, any loss and damage suffered by the Plaintiff was not caused by the Bank and, in any event, the loss was too remote. The Plaintiff had voluntarily entered into a contract with Astro Airlines and made remittance of US$3.8 million into an account, not in the name of Astro Airlines, but one nominated by D'Souza pursuant to the Letter of Intent. He was simply concerned with his obligation of paying the money into the account for the purpose of discharging his contractual obligations with Astro Airlines. He would have remitted the money to any account nominated by D'Souza.

Constructive Trust

The Law

75. The law on constructive trust was reviewed by the Privy Council in Royal Brunei Airlines SDN BHD. One does not need to look beyond this case for guidance. The following principles can be extracted from the speech of Lord Nicholls on the liability of a third party towards the beneficiaries of a trust.

1. A third party (non-trustee) may become liable to account in equity to beneficiaries in two circumstances:

i) as a recipient of trust property or its traceable proceeds;

ii) an accessory to a trustee's breach of trust.

2. Liability as an accessory is not dependent upon receipt of trust property. It arises even though no trust property has reached the hands of the accessory. It is a form of secondary liability in the sense that it only arises where there has been a breach of trust.

3. Dishonesty is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly.

4. In the context of the accessory liability principle, acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard.

5. Although honesty has a connotation of subjectivity, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual.

6. In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others' property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless.

Taking of risks

7. On the issue of the taking of risks, the individual is expected to attend the standard which would be observed by an honest person placed in those circumstances. It is impossible to be more specific. An illustration is whether in a commercial setting, a person is guilty of commercially unacceptable conduct in the particular context involved.

8. Acting in reckless disregard of others' right or possible rights can be a tell-tale sign of dishonesty. An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise and the seriousness of the adverse consequences to the beneficiaries.

9. The circumstances will indicate which one or more of the possible course should be taken by an honest person. He might, for instance, flatly decline to become involved. He might ask further questions. He might seek advice, or insist on further advice being obtained. He might advise the trustee of the risks but then proceed with his role in the transaction. He might do many things. Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct.

10. Likewise, when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did.

Negligence

11. The question of negligence is directed at whether an honest third party who receives no trust property should be liable if he procures or assists in a breach of trust of which he would have become aware had he exercised reasonable diligence. Three categories of persons might be considered :

(1) Persons who acted for trustees such as advisors, consultants, bankers. They have undertaken work for the trustees. They must carry out that work properly. If they fail to do so, they will be liable to make good the loss suffered by the trustees in consequence. This will include, where appropriate, the loss suffered by the trustees, being exposed to claims for breach of trust.

(2) Persons who deal with the trustees. If they have not accepted, and the law has not imposed upon them, any such duties in favour of the trustees, it is difficult to discern a good reason why they should nevertheless owe such duties to the beneficiaries.

(3) Persons who are acting for or dealing with dishonest trustees. In such cases, the trustees would have no claim against the third party. The trustees would suffer no loss by reason of the third party's failure to discover what was going on. The third party does not owe a duty of care to the beneficiaries to, in effect, check that a trustee is not misbehaving. It is enough if the third party is acting honestly. Dishonesty is an essential ingredient here. There may be cases where, in the light of the particular facts, a third party will owe a duty of care to the beneficiaries. As a general proposition, however, beneficiaries cannot reasonably expect that all the world dealing with their trustees should owe them a duty to take care lest the trustees are behaving dishonestly.

12. "Knowingly" is best avoided as a defining ingredient of the principle and the scale of knowledge referred to in previous cases is best forgotten.

Application of the principles

76. Applying the principles to the present case, the liability of the Bank is that of an accessory. The question and the only question to be asked is whether the Bank had dishonestly assisted in the breach of trust by YYL Trust or Astro Airlines towards the Plaintiff. Negligence is not enough. One looks to all the circumstances to consider whether the Bank had acted dishonestly. Mr Smith submitted that the Bank was guilty of commercially unacceptable conduct in the particular circumstances of the case, namely :

1. A large sum of money was received into a newly opened account, with no inquiries made as to its purpose;

2. Withdrawals were made from the account almost immediately;

3. Account opening procedures were not complied with, on the Bank's own case;

4. Although solicitors for the Bank were known to be pursuing inquiries, the account was nevertheless allowed to be treated as operational;

5. Two recent inquiries or instructions from third parties concerning the disbursement of the monies were ignored, when they should have aroused suspicion;

6. The Bank apparently acted on its own interpretation of the meaning and effect of the Power of Attorney, a document subject to Liechtenstein law, when the Bank was ignorant of such matters and had (according to Mr Fung) referred such questions to its lawyers;

7. Gmür's requests for account opening documents to be sent to her were ignored, and they were ignored again when repeated on 1st March at which time some US$651,000 remained in the account.

77. Lord Nicholls in Royal Brunei Airlines had indeed referred to the example of a person who is guilty of commercially unacceptable conduct. This is relevant in ascertaining whether the Bank had attained the standard which would be observed by an honest person placed in those circumstances.

78. I shall deal first with the inquiries or instructions by third parties to the Bank which, according to the Plaintiff should arouse suspicion by the Bank on the nature of the underlining transaction.

Knowledge of the Transaction

79. The Plaintiff suggested that the Bank had knowledge of the underlining transaction of the purchase of PBG by reference to two documents. The first was a letter dated 18th February 1994 from D'Souza to the Bank in which it was stated that :

" This is to authorise Y.Y.L. Trust Reg to receive the above funds in their account number 012-875-92-11935-6 with your instituation (sic) and disburse the funds at our instruction."

The letter was produced by Chow to the Bank. Mr Fung's response was that it was the practice of the Bank that it would take instructions only from the remitting bank and did not take into account instructions from others. D'Souza was not a client of the Bank and clearly the Bank was not expected after receiving this letter to inquire with YYL Trust the nature of the transaction involved.

80. On 24th February 1994, the Bank received a fax from someone called HMD Finance. The letter stated that :

"...

Ref: Verification of Funds in Y.Y.L. Trust Account
(see attached letter from Y.Y.L. Trust)

Pages: Two

Dear Mr Fung Tin Yiu,

As per attached letter from Y.Y.L. Trust we at HMD Finance wish to confirm that the following account has at a minimum of three point two million USD ($3,200,000 USD) in the account available to us for the execution of our intended transaction.

Account Name Y.Y.L. Trust Reg.

Account Number 012-875-92-11935-6

..."

The enclosed letter from YLL Trust was written to Collateral Provider in California in USA. The letter stated that :

"With reference to our transaction of Prime Bank Guarantee (PBG) issued by top 50th world prime bank, Ten (10) years, Zero (0), please be advised that we have sufficient funds on Bank of China, Hong Kong Branch for purchasing the captioned collateral from your good-self in the amount of United States Dollars Three Point Two (3.2) Million (USD3,200,000.00), herewith authorizing 'HMD Finance' to arrange this funds confirmation of our account as below :- ..."

Mr Fung's response to this letter was that he did not pay particular attention to the letter. He would only answer enquiries by the Bank's own customers and he would ignore other enquiries by third parties. He did not see the reference to PBG in the letter at that time. He had no knowledge of PBG and the description was meaningless to him.

81. I cannot see how the response of Mr Fung can be faulted. The Bank was dealing with a remitting bank in the remittance of the money. Instructions should only be taken from that remitting bank. HMD Finance was not a customer of the Bank. The letter asked the Bank for confidential information relating to a customer's account. Such enquiry was simply not to be entertained. Mr Fung could not be faulted for not paying particular attention to the letter.

Instrument of fraud

82. It is suggested that Mr Fung should make enquiries as to the PBG, and if he had done so, he would discover that the fraud was being committed against the Plaintiff. The Plaintiff called a banking expert, Mr Lakshman Yatalatissa Wickremeratne ("Mr Wickremeratne"). Mr Wickremeratne described the PBG as instruments of fraud. He relied on the Special Report on Prime Bank Instrument Frauds prepared in 1994 by the International Chamber of Commerce ("ICC"), Commercial Crime Bureau. This report covers PBG as well. Reliance was also placed on a warning issued by the ICC Commercial Crime Bureau dated 22nd February 1993 on fraud relating to PBG.

The Letter of Intent

83. It is clear that the Letter of Intent relating to the purchase of PBG was a totally meaningless document. The document referred to the delivery of the PBG in the form attached to the Letter of Intent as Exhibit "A". Exhibit "A" in fact was a document described as a "Specimen text of Official Bank Responsible Payment Invoice". The Letter of Intent together with the various exhibits were truly a piece of nonsense consisting of a collection of meaningless long words and legal jargons. Just to give a flavour of the nonsense, the so-called "funding instrument" referred to in the Letter of Intent as Exhibit "C" stated, among other things, that :

" IRREVOCABLE CONDITIONAL SWIFT

We, (Name of Bank), hereby present with full bank responsibility, our cash-backed, callable, irrevocable, divisible, assignable and transferable, SWIFT Wire Transfer in your favor for the account of (Name of Seller), in the total amount of Three Million Eight Hundred Thousand United States Dollars (USD3,800,000.00) (invoice value) with Ten United States Dollars (USD10,000,000) (face value), being the first tranche of authenticated Prime Bank Instruments as described below."

84. The Letter of Intent was never placed with the Bank. I do not find that the Bank had been guilty of commercially unacceptable conduct by not making further enquiries concerning the nature of PBG. Afterall, Mr Fung said that he had to deal with hundreds of letters daily. The Bank had to deal with each day over one thousand remittance valued at over hundreds of millions of dollars. Furthermore, the evidence revealed that the Bank had not received information regarding the fraudulent nature of PBG. The Association of Banks in Hong Kong had not circulated to its member the special report or the warning from ICC on PBG. Research by the Bank revealed that it had not received documents relating to PBG. In the absence of knowledge of this instrument I do not consider that the reference to the PBG was something that would ring an alarm bell in the mind of the Bank for it to make further enquiries with YYL Trust.

Knowledge of fraud by others

85. Furthermore, it appeared that the Plaintiff who had experience in international investment had not considered PBG to be instruments of fraud. He thought that the PBG had an available market. Mr Devinder, who managed an offshore investment company, actually referred the PBG to the Plaintiff. While Mr Depner of Bank Gotte had reservations about the PBG (he had never heard of them before), Bank Gotte itself had never advised the Plaintiff that PBG were instruments of fraud. Furthermore the investment firm of Merrill Lynch appeared to be prepared to acquire the PBG from the Plaintiff. Mr Donkers, the Plaintiff's lawyer in Paris, who had read the Letter of Intent and its exhibits had actually demanded D'Souza to deliver the PBG in compliance with the terms of the Letter of Intent.

86. It is pertinent to refer to Oakley, Constructive Trusts (3rd edn) at pages 221-222, where it was pointed out that a bank must not too readily be suspicious of its customers and disobey their instructions:

"What an agent cannot safely do, however, is to refuse to comply with his client's instructions merely because he has become suspicious; this can only safely be done where he has positive evidence of a misfeasance or breach of trust on the part of the client. In T.T.S. International v Cantrade Private Bank, the Royal court of Jersey went so far as to enter summary judgment against a bank who had refused to comply with instructions to transfer the balance of an account out of the jurisdiction; the court found, first, that at the relevant time there was no evidence of a dishonest and fraudulent design; secondly, that there was no evidence that the funds would be paid to anyone other than their true owners; and thirdly, that the bank had taken an overly cautious view of its duties, appearing more concerned to protect itself against possible claims than to look after the interests of its account holders. Refusing to comply with the instructions of clients, therefore, appears only to be feasible in extreme cases."

Other allegations

87. Turning to items 1 and 2 of Mr Smith's submission, they are not part of the pleaded case of the Plaintiff on the issue of constructive trust. Mr Wickremeratne referred to the Banking Ordinance Money Laundering Guideline ("the Guideline"). The Guideline is on the prevention of the criminal use of the banking system for the purpose of money laundering. Money laundering covers all procedures to change the identity of illegally obtained money so that it appears to have originated from a legitimate source. The Guideline referred to large cash deposits and not simply large deposits. Hence the Guideline was not applicable on this point. The Plaintiff clearly was in a quandary. While his expert referred to money laundering, his case is simply that the money came from his friend. Mr Smith accepted that the question of dishonesty is a matter for the Court and it is not a question on which expert evidence can be of any assistance.

88. The expert referred to Appendix 3 of the Guideline where examples of suspicious transactions were given. An example was where :

"..... a company whose account shows virtually no normal personal banking or business related activities, but is used to receive or disburse large sums which have no obvious purpose or relationship to the account holder and/or his business (e.g. a substantial increase in turnover on an account)."

89. In relation to the withdrawals of the money, this is something that the Bank cannot monitor. Mr Bleach S.C., Counsel for the Bank, conceded that there might be situations where unusual withdrawals could justify suspicion, but whether such withdrawals are "unusual withdrawals" have to be ascertained by reference to the past history of the account prior to such withdrawals. In the present case the withdrawals were made soon after the account was opened, there simply was no past history for suspicion to be justified.

90. In relation to the question of the account opening procedures, I have already dealt with the matter earlier in the judgment. When the Plaintiff allowed the account to be operational, there clearly was sufficient material from the Trustees of YYL Trust confirming that the account was properly operated with the Bank. The decision was not a reckless decision.

91. Item No.7 of Mr Smith's submission is not something that was pleaded or relied upon in the pleadings on constructive trust. In any event, in the context of this case, I do not regard that the Bank is guilty of commercially unacceptable conduct by not obtaining the signed account opening documents before making the account operational.

92. In my view, the Plaintiff has failed to prove the Bank acted dishonestly in the circumstances of the case. Accordingly, the Bank is not liable to account as a constructive trustee.

Evidence of Wolfgang Ladendorf

93. Mr Wolfgang Ladendorf, the Banking Consultant of Bank Gotte also made a witness statement. He also did not give evidence at the trial. Again his evidence was not tested in cross-examination. His statement did not advance the Plaintiff's case further.

Contributory negligence

94. In view of my conclusion on this matter, it is not necessary to deal further with the issue of contributory negligence on the part of the Plaintiff.

Conclusion

95. The Plaintiff has failed in his claim against the Bank. His claim is accordingly dismissed. The Bank shall have costs nisi of the action.