ZIEF INCORPORATED v. TEKCHANDANI AJAI MOHAN (t/a D’ZINER COLLECTIONS (HONG KONG)) AND OTHERS

HCA 2459/2017

[2021] HKCFI 38

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2459 OF 2017

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J U D G M E N T

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1.  The plaintiff (“P”) has remitted over HK$3 million to the bank account of the 4th defendant (“D4”). P claims that it did so as a result of an email fraud perpetrated on it. D4 is a diamond trader and was not aware of any fraud. P brings a claim in unjust enrichment against D4. The claim is resisted by D4 on the grounds that it has supplied diamonds to P pursuant to a contract with P, and that it has a defence of bona fide purchase for value without notice and a defence of change of position to P’s claim. This is a trial only involving P and D4.

A.  THE RELEVANT FACTUAL BACKGROUND

2.  The parties have helpfully prepared a statement of agreed facts and an agreed chronology which were provided to the court before the trial.  The facts set out in this section are either derived from these agreed documents, or are undisputed or indisputable.

3.  P is a limited company incorporated on 18 September 2012 under the laws of the Territory of the British Virgin Islands.  At the material times,

(1)  P belonged to a group of companies (“the Group”) engaged in the business of developing mobile gaming applications;

(2)  the Group was controlled and owned by Mr Kerry Pak (“Mr Pak”);

(3)  Hayes Corporation Limited and Primus Media Limited (“Primus Media”) were companies within the Group;

(4)  Ms Jenny Chiu (“Ms Chiu”) was an employee of Primus Media and the Corporate Secretary of the Group, and her main duty was to handle the financial matters of the Group, including in particular arranging for payments to be made to third parties for and on behalf of the Group; and

(5)  P operated and held a bank account (“P’s Account”) with the Hong Kong and Shanghai Banking Corporation (“HSBC”) and Mr Pak was the only person who could authorise and approve payments out of P’s Account.

4.  D4 is a limited company incorporated under the laws of Hong Kong.  Prior to 12 July 2016, D4 was known as Basilica Jewelry Limited.  At the material times, D4 held a bank account with the Bank of East Asia (“D4’s Account”).

5.  On 3 February 2016 at about 10:11am, Ms Chiu received an email entitled “Transfer to Basilica” purportedly from Mr Pak (kerry@primus-media.com). In the email, Ms Chiu was provided with information about D4’s Account and was instructed to wire HK$3,120,000 to the same.

6.  On the same day, Ms Chiu arranged for the sum of HK$3,120,000 to be transferred from P’s Account to D4’s Account.  At 10:33am, Ms Chiu sent an email to a “Reply-To” email address (kerry@prlmus-media.com)[1] attaching a copy of the payment slip.  At 11:49am, Ms Chiu received an email purportedly from Mr Pak from the email address (kerry@primus-media.com) confirming receipt of the same.

7.  On 4 February 2016, three sums of money (namely HK$179,400, HK$741,000, and HK$663,000) were transferred out of D4’s Account.

8.  On 4 February 2016 at about 5pm, Ms Chiu managed to contact Mr Pak by telephone and was told by Mr Pak that he did not give instructions to transfer any money to D4.  On the same day, Ms Chiu reported details of its remittance of HK$3,120,000 to the Hong Kong Police on grounds that it was made as a result of an email fraud perpetrated on P.

9.  On 12 July 2016, D4 changed its trading name to Creator Universal (HK) Limited.

10.  On 25 October 2017, P issued the present proceedings against, amongst others, D4.

B.  THE PLAINTIFF’S CASE

11.  P’s case is that it was a victim to an email fraud and that HK$3,120,000 was transferred to D4:

(1)   by mistake in that Ms Chiu believed that the sum was transferred pursuant to the instructions of Mr Pak and that Mr Pak had authorised and/or approved the same, and that but for the mistake, the payment would not have been effected;

(2)  in the absence of consideration in that D4 did not provide any consideration for the payment.

12.  In the circumstances, P claims that D4 is unjustly enriched by the payment of HK$3,120,000.

13.  Although a wide range of relief has been sought in its Amended Statement of Claim, P has confined the reliefs it seeks in its written closing submissions to (1) a personal restitutionary remedy in the sum of HK$3,120,000 and (2) a declaration that the remaining balance in D4’s Account is to be held on a constructive trust for P.

C.  THE 4TH DEFENDANT’S DEFENCE

14.  D4’s pleaded defence is as follows:

(1)  D4 denies that the payment of HK$3,120,000 by P to D4 was a result of fraud, or by mistake.  D4 contends that the payment was made pursuant to the following bona fide transaction (“the Purported Transaction”):

(a)  In about December 2015, one Mr Leo Alagy (“Mr Leo”) visited D4 and represented to Mr Jhaveri Vijen Girishchandra (“Mr Jhaveri”) of D4 that he wanted to purchase some diamonds from D4 and that he or his company could pay the purchase price by cash or bank transfer when the diamonds were available.

(b)  On or about 20 January 2016, Mr Leo placed and confirmed with D4 an order to purchase diamonds.   

(c)  By a contract made on 1 February 2016, D4 agreed to sell and Mr Leo acting on its behalf of P agreed to buy diamonds in the total quantity of 547.50 carats (“the Diamonds”) for HK$3,120,001.74.

(d)  On 3 February 2016, P paid HK$3,120,000 to D4 by bank transfer to D4’s Account and D4 received HK$3,119,985 (after HK$15 was deducted by D4’s bank as bank charge).

(e)  Upon confirmation of receipt of the payment of purchase price and in reliance of the receipt, D4 delivered to P (through Mr Leo acting on behalf of P) the Diamonds.

(2)  By virtue of the Purported Transaction, D4 was a bona fide seller for full valuable consideration and without notice.

(3)  On 4 February 2016, D4 made two payments of HK$179,400 and HK$741,000 to Aura Hong Kong (“Aura”), and one payment of HK$663,000, to Amigo Trading Company (“Amigo”), for part of the Diamonds that D4 sourced for the Purported Transaction.  D4’s position has changed by (a) the delivery of the diamonds to Mr Leo and (b) the payments to Aura and Amigo, and that it would be inequitable to require D4 to make any restitution, or alternatively to make restitution of HK$3,120,000 in full to P.

D.  THE ISSUES FOR DETERMINATION

15.  P and D4 have agreed a list of issues for the court’s determination at the trial.  In the light of the parties’ pleadings, I consider the agreed issues as appropriate.  The four agreed issues are as follows:

(1)  Whether the remittance of HK$3,120,000 made by P to D4 on or around 3 February 2016 was made by mistake and/or in the absence of consideration.

(2)  Whether D4 was a bona fide seller for value without notice.

(3)  Whether D4 changed its position such that it would be inequitable to require it to make restitution.

(4)  Whether P is entitled to the reliefs sought.

E.  ISSUE 1: WHETHER P MADE THE PAYMENT BY MISTAKE AND/OR IN THE ABSENCE OF CONSIDERATION

E1.  Circumstances under which HK$3,120,000 was paid by P to D4

16.  The question of how the sum of HK$3,120,000 was transferred from P’s Account to D4’s Account is a question of fact.  The court needs to make additional findings of fact further to those made in Section B above. 

17.  In making my findings of fact in this case, I adopt the following general principles as to fact finding and assessment of credibility set out in Hui Cheung Fai v Daiwa Development Ltd (unreported, HCA 1734/2009, 8 April 2014) at §§77-80:

“77. Generally speaking, contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility: Onassis v Vergottis [1968] 2 Lloyd’s Rep 403 at 431 (Lord Pearce) …

78. In deciding whether to accept a witness’s account, importance should also be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events: eg Lam Rogerio Sou Fung v Tan Soon Gin George (unreported, HCA 2576/2005, 5^th May 2011) §39 (Chu J).

79. In determining a witness’s credibility, I have also attached importance to the consistency of the witness’s evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence. The latter type of consistency is often tested by a comparison between the witness’ oral testimony and his or her witness statement.

80. I have cautioned myself against the dangers of too readily drawing conclusions about truthfulness and reliability solely or mainly from the appearance of witnesses: Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336 at §§36-37 (Bokhary PJ).

81. The practical approach to assessing credibility of witnesses in a case such as the present may have best been summarised by the words of Robert Goff LJ, as he then was, in The Ocean Frost [1985] 1 Lloyd’s Rep 1 at 57:

‘Speaking from my experience, I have found it essential in cases of fraud, when considering the credibility of witnesses, always to test their veracity by reference to the objective facts proved independently of their testimony, in particular by reference to the documents in the case, and also to pay particular regard to their motives and to the overall probabilities. It is frequently very difficult to tell whether a witness is telling the truth or not; and where there is a conflict of evidence such as there was in the present case, reference to the objective facts and documents, to the witnesses’ motives, and to the overall probabilities, can be of very great assistance to a Judge in ascertaining the truth.’

82. Whilst these words were spoken in the context of a fraud case, I believe they are applicable to any case where a witness’ credibility features prominently in the court’s determination…”

18.  Both Mr Pak and Ms Chiu gave oral testimony at the trial and were cross-examined by D4.  Both of them gave evidence in a straight-forward manner, and their evidence was entirely consistent with their respective witness statement and the contemporaneous documents.  I find them as reliable and credible witnesses and accept their evidence in their entirety in relation to the circumstances under which the HK$3,120,000 was transferred from P’s Account to D4’s Account. 

19.  In particular, I make the following additional findings of fact:

(1)  P became a victim of email frauds perpetrated by unknown person(s).  It appears that the frauds were committed either by unknown persons (a) gaining access into Mr Pak’s email account at Primus Media and sending emails without his knowledge, and/or (b) creating a forged email address and circulating emails without Mr Pak’s knowledge.

(2)  Ms Chiu received a number of emails purportedly from Mr Pak’s email address with Primus Media (kerry@primus-media.com) which instructed her to make certain wire transfers, namely (a) an email received on 26 January 2016 to transfer US$100,000 to the bank account of the 1st and 2nd defendants, (b) an email dated 28 January 2016 to transfer US$250,000 to the bank account of the 3rd defendant and (c) the email dated 3 February 2016 to transfer HK$3,120,000 to D4’s Account.

(3)  When Ms Chiu received the email dated 3 February 2016 for the transfer of HK$3,120,000 to D4’s Account, she believed that the email was sent by Mr Pak.  However, that email was not sent by Mr Pak and was sent by an unknown person without the knowledge or approval of Mr Pak.

(4)  Mr Leo was never an employee or agent of P.  P never authorised Mr Leo or anyone else to have dealings with D4.  The chop that was affixed on D4’s invoice dated 1 February 2016 by Mr Leo (“D4’s Invoice”) was not P’s company chop.  P and D4 did not enter into any contract for the sale and purchase in respect of the Diamonds.

(5)  When Ms Chiu arranged to transfer HK$3,120,000 from P’s Account to D4’s Account, she mistakenly believed that she was following the instructions of Mr Pak.  

(6)  In D4’s written opening submissions, it was asserted that when Ms Chiu made the transfer of HK$3,120,000 to D4’s Account on 3 February 2016, she “saw the risk, took it and proceeded to transfer the sum” and that the transfer was not made by mistake.  In D4’s written closing submissions, it was submitted that P did not make the transfer to D4’s Account by mistake because the circumstances were “so unusual that [Ms Chiu] is taken to have run the risk of making the wrong payment”.  However, D4’s pleaded case is that there was no mistake of P because P transferred HK$3,120,000 to D4 pursuant to the Purported Transaction.  It is not open to D4 to depart from its pleaded case as to why it says P was not operating under a mistake in transferring the money to D4.  In any event, I find that Ms Chiu was not taking any risk when she arranged the transfer of the HK$3,120,000 from P’s Account to D4’s Account.  As found earlier, she did so because she mistakenly believed that the instruction to transfer came from Mr Pak and that Mr Pak had authorised and approved the same.

(7)  As a result of the frauds, Mr Pak instructed Ms Chiu to dissolve Primus Media.  Primus Media was dissolved on 7 July 2017.

E2.  Whether P made the payment by mistake

20.  It is well-established that the following framework is adopted in determining the validity of a claim in unjust enrichment: (1) Was the defendant enriched? (2) Was the enrichment at the plaintiff’s expense?  (3) Was the enrichment unjust?  (4) Are any of the defences applicable? See Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at §67 (Ribeiro PJ) and Yukio Takahashi v Cheng Zhen Shu (2011) 14 HKCFAR 558 at §26 (Ribeiro PJ).  If the first three matters are established by the plaintiff, it is then for the defendant to prove that there is a defence: Samsoondar v Capital Insurance Co Ltd [2020] UKPC 33 at §18 (Lord Burrows).

21.  In the present case, there does not seem to be any issue that D4 was enriched to the extent of HK$3,120,000 and that the enrichment was at P’s expense.  The first disagreement between P and D4 lies in whether P can establish any ground for restitution, or any “unjust factor”.

22.  As mentioned earlier, D4’s pleaded case is that P paid the HK$3,120,000 pursuant to a binding contract, namely the Purported Transaction.  However, Mr Leo was never authorised by P and had no authority to enter into any transaction with D4.  Therefore, the Purported Transaction is invalid and the HK$3,120,000 was not paid by P to D4 pursuant to the Purported Transaction or any valid contract.

23.  The defendant’s enrichment is unjust if it is caused by a mistake of fact or law made by the plaintiff.  It is prima facie unjust for a recipient of money to retain the payment when, if the payer had known the true state of affairs, he would not have paid: see Kleinwort Benson Ltd v Lincoln CC [1999] 2 AC 349 at 399C-D (Lord Hoffmann). If Ms Chiu had known that Mr Pak never instructed her to transfer HK$3,120,000 from P’s Account to D4’s Account, it is clear that she would not have caused the payment to be made.  In these circumstances, and on the basis of the findings of fact made above, I find that D4’s enrichment of HK$3,120,000 is unjust.

E3.  Whether P made the payment by failure of consideration

24.  P also relies on failure of consideration as an alternative ground for restitution.

25.  “Consideration” in the context of a claim in unjust enrichment is different from that in the law of contract. “Consideration” for the purposes of the law of unjust enrichment does not mean the quid pro quo for there to be a binding contract as it is used in the law of contract.  In the law of unjust enrichment, “consideration” refers to the condition which formed the basis of the plaintiff’s transfer to the defendant of the benefit in question.  In Shanghai Tongji (above) §79, Ribeiro PJ referred to it as “the anticipated performance for which the money was paid, or the ‘basis or purpose’ of the payment”.

26.  Where total failure of consideration is relied upon as the “unjust factor”, it is crucial to correctly identify and characterise the transaction providing the basis for the defendant’s enrichment, and it is only then can one identify the relevant anticipated performance and ascertain whether it has totally failed: see Shanghai Tongji (above) §80 (Ribeiro PJ).

27.  In the law of unjust enrichment, the usual consideration that fails which gives rise to restitution is the promised counter-performance.  If money was paid to secure performance and if performance fails, the inducement which brought about the payment is not fulfilled: see Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 at 48 (Viscount Simon LC); Shanghai Tongji (above) §79 (Ribeiro PJ).

28.  In the present case, prior to the transfer of HK$3,120,000, P has never had any dealings with D4.  P never anticipated any performance by D4.  Although P did not obtain any benefit from the transfer of money, it does not seem appropriate to describe D4’s enrichment as a total failure of consideration.  In any event, given that I have already concluded D4’s enrichment was unjust because of the mistaken belief that P was under, it is unnecessary for P to rely on total failure of consideration as an alternative ground for restitution.

E4.  Conclusion on Issue 1

29.  For the above reasons, subject to the defences to be discussed below in Sections F and G, P is prima facie entitled to recover HK$3,120,000 from D4.

F.  ISSUE 2: DEFENCE OF BONA FIDE PURCHASE FOR VALUE WITHOUT NOTICE

30.  D4 submits that the defence of bona fide purchase for value without notice is a general defence to all claims for unjust enrichment (whether personal or proprietary).  This appears to be accepted by P as a matter of general principle.  However, it is right to note that there are academic views that the defence is not a general defence in the law of unjust enrichment and is only applicable where the plaintiff’s restitutionary claim is founded on the vindication of property rights: see eg W Swadling “Restitution and Bona Fide Purchase” in W Swadling (ed), The Limits of Restitutionary Claims: A Comparative Analysis (1997); G Virgo, The Principles of the Law of Restitution (3rd ed, 2015) p 656.  Nonetheless, given it is common ground that the defence is generally applicable to all restitutionary claims (and assuming, without deciding, that the agreed premise is correct), I shall proceed to determine whether the defence can be established on this basis. 

31.  The burden of establishing the bona fide purchase defence is on the defendant: Barclays Bank plc v Boulter [1999] 1 WLR 1919 at 1924G-H (Lord Hoffmann); Chan Chun Chung v PBM (Hong Kong) Ltd (2004) 7 HKCFAR 178 at §14 (Litton PJ).  One of the conditions that must be satisfied is that the defendant must have provided value for the transfer of the property. 

32.  D4’s pleaded case is that it has given valuable consideration pursuant to the Purported Transaction, namely the Diamonds.  P submits that given that there was no binding contract between P and D4, D4 could not have provided valuable consideration.

(1)  In Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, Cass (a partner of a firm of solicitors), without authority, had drawn on the firm’s bank account to gamble.  The firm brought proceedings for money had and received against the casino where Cass had spent the money.  One of the contentions advanced by the casino was that the claim of money had and received did not lie because it gave valuable consideration for the money it received.  The House of Lords held, amongst other things, that the casino provided no consideration for the money paid over by Cass, and therefore was not a bona fide purchaser for value without notice to have an absolute defence to restitution.  The reason why the defence failed was because the value by the casino was given under a void wagering contract and therefore did not count for the purpose of establishing that it was a bona fide purchaser for value. Lord Goff said:

“In my opinion, when Cass placed a bet, he received nothing in return which constituted valuable consideration. The contract of gaming was void; in other words, it was binding in honour only … But it does not follow that, when Cass placed the bet, he received anything that the law recognises as valuable consideration. In my opinion he did not do so. Indeed, to hold that consideration had been given for the money on this basis would, in my opinion, be inconsistent with Clarke v Shee and Johnson 1 Cowp 197. Even when a winning bet has been paid, the gambler does not receive valuable consideration for his money. All that he receives is, in law, a gift from the club.” [p 575C-F]

“… contracts by way of gaming or wagering are void in English law … It is obvious that each time a bet is placed by the gambler, the agreement under which the bet is placed is an agreement by way of gaming or wagering, and so is rendered null and void. It follows … that the casino, by accepting the bet, does not thereby give valuable consideration for the money which has been wagered by the gambler, because the casino is under no legal obligation to honour the bet. Of course, the gambler cannot recover the money from the casino on the ground of failure of consideration; for he has relied upon the casino to honour the wager - he has in law given the money to the casino, trusting that the casino will fulfil the obligation binding in honour upon it and pay him if he wins his bet - though if the casino does so its payment to the gambler will likewise be in law a gift. But suppose it is not the gambler but the true owner of the money (from whom the gambler has perhaps, as in the present case, stolen the money) who is claiming it from the casino. What then? In those circumstances the casino cannot, in my opinion, say that it has given valuable consideration for the money, whether or not the gambler's bet is successful. It has given no consideration if the bet is unsuccessful, because its promise to pay on a successful bet is void; nor has it done so if the gambler’s bet is successful and the casino has paid him his winnings, because that payment is in law a gift to the gambler by the casino.” [p 577C-F]

(2)  It appears that the effect of the House of Lords’ decision in Lipkin Gorman is that to be valuable consideration for the purposes of the defence of bona fide purchase for value without notice, the value must be given under a valid contract.

(3)  On the authority of Lipkin Gorman, it does not seem to me that D4 had given valuable consideration for the HK$3,120,000 that it “purchased” because there was no promise to deliver the Diamonds to P.  D4 did not advance any submission to contend that valuable consideration was nonetheless provided in the event that there was no contract between P and D4.  Accordingly, I am not satisfied that the defence has been made out.

33.  Insofar as D4 seeks to rely on bona fide purchase as a defence to P’s proprietary claim, there is a further reason why I am not convinced that D4 can establish such a defence in this case.

(1)  The defence of bona fide purchase for value without notice is an exception to the general rule of nemo dat quod non habet (no one gives what they do not have) to grant the defendant good title to a property in situation where the title would otherwise be defective. For example, when X steals P’s property and sells it to D, D will obtain title to the property if he is a bona fide purchaser for value without notice, even though X (being a thief) would not otherwise be able to confer title which he does not have. 

(2)  This is why the defence has been described by Professor Andrew Burrows as “bona fide purchase from a third party” (The Law of Restitution (3rd ed, 2011), p 573). 

(3)  In his article “Restitution and Bona Fide Purchase” in The Limits of Restitutionary Claims: A Comparative Analysis (1997), Professor William Swadling at p 94 said:

“… the defence of bona fide purchase has no work to do in the standard two-party situation. As we have seen, the defence forms an exception to the normal rule of nemo dat. It operates to allow a transferor to confer a title which he does not have. By contrast, two-party restitution cases are concerned with transfers by persons who had a good title to the enrichment concerned. Although their intent to give may be in doubt, their capacity to do so is not in question. And since the transferor in the two-party restitution case starts with a good title to the enrichment in question, there will be no need for the transferee to invoke any exception of nemo dat. The fact that the defendant gave value in exchange for what he received should not blind us to this fundamental fact.”

(4)  In A Burrows, A Statement of the English Law of Unjust Enrichment (2012), the defendant is said to have a defence of purchaser in good faith, for value and without notice if he/she “(a) is a purchaser in good faith of the benefit for value, without notice, of the claimant’s right to restitution, from a person other than the claimant, and (b) can rely on an exception to the rule that no person can give a better title than the person has.” (section 27(1)) [emphasis added]

(5)  Similarly, Justice James Edelman and Professor Elise Bant describe the defence as operating “in cases including those brought for unjust enrichment where more than two parties are involved” and state that the “requirement for more than two parties is because in the simple two-party case the transferor usually has good title”.  They further state that in “unjust enrichment, the bona fide purchase defence operates only in relation to a three-party situation in which the defendant is a subsequent purchaser from a third party whose title to an asset is defective”. See Unjust Enrichment in Australia (2nd ed, 2016), pp 372-373.

(6)  D4 has not produced any authorities to demonstrate how a defendant in a two-party situation (namely a direct recipient of the enrichment) can rely on the defence of bona fide purchase for value without notice to defeat a plaintiff’s claim in unjust enrichment. 

34.  For the above reasons, I am not satisfied that D4 has demonstrated on a balance of probabilities that the defence of bona fide purchase for value without notice should succeed.

G.  ISSUE 3: DEFENCE OF CHANGE OF POSITION

35.  It is well-established that the defence of change of position is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full (Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 at 580F (Lord Goff)).   Further, there must be a causal link between the receipt of the benefit by the defendant and his/her change of position, and the appropriate test of causation is at least the “but for” test (Scottish Equitable plc v Derby [2001] 3 All ER 818 at §31 (Robert Walker LJ); Credit One Finance Ltd v Yeung Kwok Chi [2020] HKCFI 2450 at §§66-70).

36.  D4 relies on the defence of change of position to contend that it should not be liable to P’s claim for unjust enrichment.  D4’s pleaded case (in §§6(d), 6(e), 6(f), 6(j) and 6A of its Amended Defence) is that it received HK$3,119,985 pursuant to the Purported Transaction, that it “delivered to [P] acting by Mr Leo on its behalf the Diamonds”, and that “[its] position since the receipt of [HK$3,119,985] has so substantially changed by (i) the delivery of the Diamonds and (ii) the payments to Aura and Amigo”.  Given that P and D4 did not enter into any contract for the sale and purchase of the Diamonds (as found above), the Diamonds were not delivered to P.  Therefore, on its pleaded case, D4’s position cannot be said to have changed as D4 simply did not deliver the Diamonds to P. 

37.  It is clear from its pleading that D4 seeks to rely on change of position as a complete defence to P’s unjust enrichment claim. No alternative case has been advanced to contend that D4 has only changed its position to the extent that its enrichments from P has been reduced. 

38.  It is right to point out that the defence of change of position was hardly developed in D4’s written or oral submissions during the trial beyond its pleaded case.    A possible reading of its D4’s pleading may give rise to the argument that D4 has changed its position where (1) it had paid some money to Aura and Amigo as a result of its receipt of HK$3,119,985 from P (thereby extinguishing the enrichment) in exchange for some diamonds, and (2) it gave those very diamonds to Mr Leo (even though Mr Leo had no authority to represent P).  My view is that this argument cannot assist D4 (insofar as it is being relied upon) for the following reasons.

(1)  Where a defendant becomes enriched with money at the plaintiff’s expense and uses the money to buy an asset which remains in his hands at the time of the action either in its original form or in the form of a substitute asset, the defence of change of position is disallowed to the extent that he is still enriched: Goff & Jones: The Law of Unjust Enrichment (9th ed, 2016) §27-16. 

(2)  According to the agreed chronology, on 3 February 2016, P paid HK$3,120,000 into D4’s Account and D4 received HK$3,119,985 (after HK$15 had been deducted as bank charge). 

(3)  D4 pleads that on 4 February 2016, it made (a) two transfers in the sums of HK$179,400 and HK$741,000 to Aura, and (b) a transfer in the sum of HK$663,000 to Amigo, to pay for part of the Diamonds.

(4)  According to the bank statement of D4’s Account, it can be seen that three sums of money (namely HK$179,400, HK$663,000 and HK$741,000) were debited from D4’s Account on 4 February 2016.  However, the bank statement does not show the identity of the recipient(s) of these 3 sums.

(5)  In his witness statement, Mr Jhaveri states that on 4 February 2016 (a) two bank transfers were made by D4, one in a sum of HK$179,400 and the other in a sum of HK$741,000, to settle the invoice of Aura, and (b) a bank transfer of HK$663,000 was made by D4 to settle the invoice of Amigo.

(6)  D4 has produced (a) one invoice from Aura dated 29 January 2016 issued to D4 in respect of 52.54 carats of “CUT & POLISHED DIAMONDS 20’ VVS H I” and 107.66 carats of “CUT & POLISHED DIAMONDS 15’ VVS J” for the total amount of HK$920,457.57 (“the Aura Invoice”), and (b) one invoice from Amigo dated 28 January 2016 issued to D4 in respect of 108.2 carats of “CUT & POLISHED DIAMONDS 20’ VVS G H” for HK$663,000 (“the Amigo Invoice”).  No receipt from Aura or Amigo has been produced by D4.

(7)  It is apparent that the total of the two sums of transfers made by D4 on 4 February 2016 (namely HK$179,400 and HK$741,000) do not exactly match the amount stated on the Aura Invoice.  This was not explained by Mr Jhaveri in his evidence.  Nor has any explanation been given as to why it was necessary for D4 to make two payments on the same day to settle the Aura Invoice. 

(8)  Even assuming (without finding) that 3 sums of money (namely HK$179,400, HK$741,000, HK$663,000) were paid from D4’s Account to settle the Aura and Amigo Invoices, it would mean that D4 had substituted a total of HK$1,583,400 for the diamonds as stated on the Aura and Amigo Invoices. However, as shown in D4’s Invoice dated 1 February 2016, the Diamonds given by D4 to Mr Leo consisted 115.05 carats of “G-H COLOUR 10’ VVS” diamonds, 271.71 carats of “H-I COLOUR 15’ VVS” diamonds and 160.74 carats of “D COLOUR 20’” diamonds.  It can be seen that the descriptions of the diamonds on the Aura and Amigo Invoices do not match those stated on D4’s Invoice signed by Mr Leo. 

(9)  In his oral testimony, Mr Jhaveri sought to explain such discrepancies.  Effectively, he asserted that there is no objective standard to determine the quality of diamonds, and suggested that Aura and Amigo’s standards would necessarily be different from his.  I find it difficult to accept Mr Jhaveri’s assertions.  They simply do not explain why the descriptions of the diamonds on the Aura and Amigo Invoices were markedly different from his description of the diamonds in D4’s Invoice issued to Mr Leo.    

(10)  In these circumstances, I am far from being satisfied that D4 gave any of the diamonds mentioned in the Aura and Amigo Invoices to Mr Leo (even assuming, without finding, that D4 had paid a total of HK$1,583,400 on 4 February 2016 to Aura and Amigo).

39.  For the above reasons, I find that D4 has failed to establish a defence of change of position.

40.  On the first day of the trial, D4 made an oral application to include a letter dated 14 August 2020 from Ms Yogita V Gogar, D4’s lawyer in India, into the trial bundle.  The letter relates to some criminal proceedings involving Mr Jhaveri in India.  It was only disclosed by D4 on 27 August 2020, less than a month before the trial started.  The court dismissed the application with costs against D4, and indicated that its reasons for the dismissal would be included in this judgment.  I dismissed the application on the grounds that the contents of the document had only peripheral relevance to the issues in these proceedings, that the application was made far too late, and that it was made without any good reasons for the lateness.  I did not consider how the document would usefully assist D4 in its defence against P’s claim.

H.  ISSUE 4: P’S RELIEF

41.  On the basis of the above, I find that P has paid HK$3,120,000 to D4 by mistake, that D4 is unjustly enriched at P’s expense, and that D4 has no defences to P’s claim.  P’s claim in unjust enrichment therefore succeeds against D4.

H1.  Personal remedy

42.  P claims against D4 the sum of HK$3,120,000.  I have no difficulty giving judgment to P against D4 in respect of this sum.

H2.  Proprietary remedy

43.  In addition to a personal remedy against D4, P initially sought in its pleading a declaration that D4 holds HK$3,120,000 on a constructive trust for P.  In its written closing submissions, P stated that it is “agreeable to limiting its relief to a declaration that whatever is currently preserved in [D4’s Account] is to be held on constructive trust for [P]”.

44.  According to its bank statement, the balance in D4’s Account as at 29 February 2016 was HK$559,545.  D4’s Account was frozen by the Hong Kong Police since February 2016.  According to its letter dated 16 October 2017, Hong Kong Police stated that as at 14 June 2017, the balance of D4’s Account was (and remained at) HK$559,545.  It appears that the Hong Kong Police kept D4’s Account frozen until D4 and P agreed by consent in May 2018 that D4 would “preserve the traceable proceeds still in its possession and/or control (including but not limited to the balance in [D4’s Account]) until trial or further order”. In these circumstances, D4 is effectively seeking a declaration that D4 holds the sum of HK$559,545 in D4’s Account on constructive trust for P.

45.  In Westdeutsche Bank v Islington LBC [1996] AC 669, in the context of describing a thief stealing a bag of coins or moneys, Lord Browne-Wilkinson at 716C-D said obiter that stolen moneys are traceable in equity, and that equity imposes a constructive trust on the fraudulent recipient when property is obtained by fraud.  It appears that his Lordship considered that the thief’s unconscionable conduct in committing theft and his retention of the stolen property would be sufficient to give rise to a constructive trust.  In this case, P transferred HK$3,120,000 directly to D4 by reason of its mistake; the sum was not taken by a thief who then paid the same to D4.  D4 cannot be described, in Lord Browne-Wilkinson’s words, as a “thief” or “fraudulent recipient”, and has not been described by P as such.  I do not believe Lord Browne-Wilkinson’s dictum is applicable in the present case. 

46.  To seek a constructive trust against D4, P submitted that in February 2016, D4 ought to have known about the fraud and knew about (1) the police’s freezing of its account, (2) P’s claim and (3) the fact that its bank would not release the rest of the money to it, such that its state of knowledge would make it unconscionable to retain the money.  None of these matters regarding D4’s knowledge was pleaded by P to justify the imposition of a constructive trust.  P further cited Guaranty Bank and Trust Co v Zzzik Inc Ltd (unreported, HCA 1139/2016, 18 July 2016) at §§28-34 in its written submissions.  It is right to record that only brief submissions were made by P at the trial to support its claim for constructive trust.

47.  For the reasons given below, I am not satisfied that P is entitled to a constructive trust against D4.

48.  Constructive trusts provide proprietary relief.  To obtain proprietary relief in relation to the HK$559,545 in D4’s Account, P must establish that the money claimed can be identified by the tracing process as representing the original property.  In Federal Republic of Brazil v Durant International Corpn [2016] AC 297, Lord Toulson at §17 said:

“The doctrine of tracing involves rules by which to determine whether one form of property interest is properly to be regarded as substituted for another. It is therefore necessary to begin with the original property interest and study what has become of it. If it has ceased to exist, it cannot metamorphose into a later property interest. Ex nihilo nihil fit: nothing comes from nothing.”

49.  It is apparent from its bank statement that immediately after HK$3,119,985 was paid into D4’s Account on 3 February 2016, a further sum of HK$23,500 was paid into the account.  The original sum had therefore become mixed with money from unknown source(s).  Thereafter, various sums of money were paid out of the account.  This left a sum of HK$559,545 as the remaining credit balance in D4’s Account as at 29 February 2016.  P has not made any submissions to demonstrate that the credit balance of HK$559,545 can be established as the traceable proceeds of HK$3,120,000.  In these circumstances, I am not satisfied that the credit balance currently standing in D4’s Account is the traceable proceeds of money that P mistakenly paid to D4. 

50.  Further, I do not think that P has sufficiently demonstrated that there is a proper basis for court to impose a constructive trust on the facts of the case.

(1)  In Westdeutsche (above), Lord Browne-Wilkinson at pp 714C-715C discussed the case of Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105.  In Chase Manhattan, Goulding J held that where money was paid under a mistake, the receipt of such money without more constituted the recipient of the trustee because the payer “retains an equitable property in it and the conscience of [the recipient] is subjected to a fiduciary duty to respect his proprietary right”.  Lord Browne-Wilkinson disagreed with the Goulding J’s reasoning and relevantly said at p 714E-F:

“It will be apparent from what I have already said that I cannot agree with [Goulding J’s] reasoning. First, it is based on a concept of retaining an equitable property in money where, prior to the payment to the recipient bank, there was no existing equitable interest. Further, I cannot understand how the recipient’s “conscience” can be affected at a time when he is not aware of any mistake….”

(2)  Nonetheless, Lord Browne-Wilkinson said that Chase Manhattan might well have been rightly decided on the following basis (at p 715B-C):

“The defendant bank knew of the mistake made by the paying bank within two days of the receipt of the moneys: see at p. 115A. The judge treated this fact as irrelevant (p. l14F) but in my judgment it may well provide a proper foundation for the decision. Although the mere receipt of the moneys, in ignorance of the mistake, gives rise to no trust, the retention of the moneys after the recipient bank learned of the mistake may well have given rise to a constructive trust…”

(3)  It appears that a defendant recipient’s conscience should only be considered to be affected when he was actually aware of the plaintiff’s mistake.  In Westdeutsche, Lord Browne-Wilkinson at p 705D-E stated that “[since] the equitable jurisdiction to enforce trusts depends upon the conscience of the holder of the legal interest being affected, he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience, i.e. until he is aware that he is intended to hold the property for the benefit of others in the case of an express or implied trust, or, in the case of a constructive trust, of the factors which are alleged to affect his conscience” [emphasis added].  See also pp 709C-D and 714F where Lord Browne-Wilkinson used the word “aware” to describe the level of knowledge sufficient to affect the conscience of the “trustee” or the recipient.

(4)  Insofar as P seeks to rely on the above to support its claim of constructive trust (on the basis that it cited Guaranty Bank which contains an oblique reference to the above analyses), and assuming (but without deciding) that Hong Kong courts should follow Lord Browne-Wilkinson’s “conscience” approach to impose a constructive trust,[2] I am not satisfied that there was any time before the making of this judgment that D4 can be said to be actually aware of P’s mistake in making the payment of HK$3,120,000 on 4 February 2016.  It is true that D4 knew that its bank account was frozen in February 2016 and that it subsequently knew about P’s assertions of fraud and mistaken payment.  But D4’s position at all the material times has remained consistent.  As seen from its pleaded case, D4’s case has always been that the payment from P was made pursuant to a contract, and not pursuant to any mistake or fraud.  Unlike the defendant bank in Chase Manhattan which became aware of the plaintiff’s mistake when it received the second payment two days after the first payment, D4 cannot be said to be aware of P’s mistake at the material times. 

(5)  In any event, as pointed out above, none of the matters now submitted by P regarding D4’s knowledge was pleaded.  Furthermore, I am not satisfied that Mr Jhaveri’s knowledge at the material times was in any way established in his cross-examination for the purpose of imposing a constructive trust. 

(6)  In these circumstances, even assuming (but without deciding) that the “conscience” approach is to be followed, I am not satisfied that D4’s conscience was at any time sufficiently affected for the court to impose a constructive trust on the remaining balance in D4’s Account.

51.  Recently, in 廈門新景地集團有限公司v Eton Properties Ltd et al [2020] HKCFA 32, Lord Sumption NPJ (with whom Ribeiro, Fok & Cheung PJJ and Bokhary NPJ agreed) at §174 said:

“A constructive trust can exist only if there is a relevant fiduciary relationship. It may arise on either of two juridical bases. It may be derived from the character of the relationship between the beneficiary or the trustee, where the court recognises that relationship as fiduciary. In such a case the trust gives rise to a true proprietary interest in equity. Or it may be imposed by the court on a purely remedial basis in a case where there is no subsisting proprietary interest (usually because it has been extinguished) but the relevant party is a fiduciary and is before the court. I sought to set out the conceptual framework in Akers v Samba Financial Group [2017] AC 424 at §82. The Plaintiff in this case claims to derive a fiduciary relationship from the executory contract for the sale of the shares. The principle, which was said in 1876 to have been settled law for at least two centuries, is that “the moment you have a valid contract for sale the vendor becomes in equity a trustee for the purchaser of the estate sold”: Lysaght v Edwards (1876) 2 Ch. D. 499, 506 (Jessel MR). This well-known statement of principle related to land. But the same rule has long been applied to contracts for the sale of unquoted shares, which are regarded as unique in the same way as land. It gives rise to a true proprietary interest in equity, arising from the fiduciary character of the relationship between vendor and purchaser under an executory contract of sale. The basis of the rule in both cases, and the essential condition for its operation, is that the contractual obligation to transfer the property should be specifically enforceable. This means that the purchaser’s beneficial interest arises as soon as the contract is made or (if later) as soon as a relevant promissory condition precedent to the transfer has been satisfied.”

The judgment from the Court of Final Appeal was handed down after the conclusion of the trial in these proceedings, and has no impact on my decision not to impose a constructive trust against D4.  Be that as it may, it seems difficult to me to say that there was a relevant fiduciary relationship” between P and D4 at any time for the purpose of imposing a constructive trust.

52.  For these reasons, I decline to give a declaration that the money remaining in D4’s Account is subject to a constructive trust for P.

H3.  Other reliefs

53.  P is entitled to interest on HK$3,120,000.  I direct the parties to submit an agreed order for the court’s approval within 14 days on the applicable re-judgment interest rate and the date on which pre-judgment interest is to run, and give liberty to apply in the event the parties are unable to agree.

54.  I also make the following orders:

(1)  An order nisi that the costs of P in these proceedings (including any reserved costs) be paid by D4, without a certificate for two counsel, to be taxed if not agreed.

(2)  The above costs order nisi shall be made absolute 14 days from the date of this judgment.