FLYWORLD GROUP CO.LTD v. CRECEEDOR INDUSTRIAL CO. LTD

HCA 101/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 101 OF 2014

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D E C I S I O N

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1. The present application is made by the defendant to strike out the Statement of Claim on the main ground that the plaintiff lacks the requisite locus standi.

2. The plaintiff is a Hong Kong company.  It operates a trading business selling commercial commodities worldwide.

3. The defendant is also a Hong Kong company.  Prior to the subject matter of this litigation it had no previous dealings with the plaintiff.

4. The plaintiff entered into a series of contracts with an Australian company, Mediflex Industries Pty Ltd (Mediflex), for the sale of various commodities for US$240,515.50.

5. The parties communicated with each other by an exchange of emails.

6. It was provided in the said contracts that payment for the goods would be effected after shipment of the goods to Mediflex.  The invoices issued by the plaintiff contained genuine and correct details of the plaintiff’s bank account.

7. It is the plaintiff’s case that the said invoices were intercepted by an alleged computer hacker.  This hacker gave false and fake instructions to Mediflex to make payment into the defendant’s bank account.  Mediflex complied with the hacker’s false instructions and made payment into the defendant’s bank account.

8. A similar situation arose in connection with the plaintiff’s contract for the sale of commodities to an Italian company, Pizzi SRL Forniture Medico Chirurgiche (Pizzi).  The purchase price of the goods sold to Pizzi was US$13,620.

9. In both cases the defendant declined complying with the plaintiff’s requests to pay to them the moneys they had received on the grounds that the plaintiff should make the demand for payment to Mediflex and Pizzi whereupon they would return the moneys they had received to them.

10. Mr Hingorani who represented the defendant submitted that in a claim for unjust enrichment or money had and received the defendant had received the payments from Mediflex and Pizzi without any consideration and as a result of the hacker’s conduct.

11. So far as the claim being made by the plaintiff that the defendant was a constructive trustee for the money this claim was not sustainable as the defendant had received the money stolen from the unknown hacker.

12. In each of these situations the plaintiff’s action could only succeed if Mediflex and Pizza were parties to the action.

13. A helpful definition of the elements required for an action for unjust enrichment to succeed is contained in Chapter 29‑017 of the 31^st Edn of Chitty on Contracts, vol 1:

“ (a) The Content of the Unjust Enrichment Principle

The elements of unjust enrichment. A claim in unjust enrichment is a claim in debt and not for damages and is a claim which is not founded on the commission of a wrong. The principle of unjust enrichment requires: first, that the defendant has been enriched by the receipt of a benefit; secondly, that this enrichment is at the expense of the claimant; thirdly that the retention of the enrichment be unjust and finally that there is no defence or bar to the claim. The development of the law of restitution in England has meant that the principle of unjust enrichment has not manifested itself in a general action for the recovery of money paid and other benefits conferred on the ground that they were not due, but instead as a number of specific substantive grounds upon which restitution may be ordered. In Moses v Macferlan Lord Mansfield stated that the action for money had and received:

‘… lies for money paid by mistake; or upon a consideration which happens to fail; or for money got through imposition (express or implied); or extortion; or an undue advantage taken of the claimant’s situation, contrary to the laws made for the protection of persons under those circumstances.’

Where a sum has been paid which is not due but the payer cannot establish a ground for recovery, it is not recoverable.  But the non‑recognition of the principle of unjust enrichment in the past has meant that the concepts of ‘benefit’, ‘at the expense of the claimant’ and ‘unjustness’ of retention have tended to develop in a fragmented way within the substantive categories in which relief has been given and sometimes, as in the former rules that only mistakes as to liability gave rise to restitution and that in general a payment under a mistake of law was not recoverable, in an unsatisfactory way.”

14. Mr Hingorani particularly emphasised the second requirement in this analysis, namely that the enrichment had to be at the expense of the claimant.

15. So far as the claim that there was a constructive trust Mr Hingorani referred to Chapter 7‑11 of the 18^th Edn of Lewin on Trusts:

“Institutional and remedial constructive trusts

The first classification of constructive trusts is into what have been called institutional and remedial.  Institutional constructive trusts are trusts which arise from some pre‑existing fiduciary relationship before and apart from any breach of trust or of duty, whereas remedial constructive trusts are imposed where no fiduciary relationship previously existed.  Institutional constructive trusts arise where persons have accepted or assumed the duties of a trustee by transactions not impeached by the claimant, independently of, and preceding, any breach of duty.  Such a constructive trustee really is a trustee.  He does not receive the trust property in his own right, but by a transaction which was intended to create a trust from the start.  The trustee’s possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and any subsequent appropriation of the property to his own use is a breach of that trust.  Remedial constructive trusts are those where either the trust obligation arises from a non‑fiduciary relationship which is not impeached by the claimant or as a direct consequence of an unlawful transaction which is impeached by the claimant.  Another classification of institutional and remedial constructive trusts is this.  An institutional constructive trust is a trust which arises by operation of law from the date of circumstances which give rise to it, where the function of the court is to declare that the trust has arisen in the past, while a remedial constructive trust is a judicial remedy giving rise to an enforceable equitable obligation, the extent to which it operates retrospectively lying in the discretion of the court.  The remedial constructive trust under this alternative classification is one we call a purely remedial constructive trust.”

16. He submitted that the institutional type could not be applicable as there was no pre‑existing fiduciary relationship between the plaintiff and the defendant. That left the remedial type.  For a claim under this head to succeed it was necessary to establish that there had been some form of dishonest assistance by the defendant or other knowledge concerning the receipt of the moneys.

17. On the case as articulated in the Statement of Claim neither of these claims was maintainable.

18. Mr Felix Ng for the plaintiff contended that both unjust enrichment and the presence of a constructive trust could be made out upon the case as it was pleaded in the Statement of Claim.

19. Mr Ng did not take issue with the definition of unjust enrichment in Chitty on Contracts.  He contended however that the facts pleaded in the Statement of Claim were sufficient to make out a case of unjust enrichment.

20. He contended that at the core of Mr Hingorani’s submission was his argument that the plaintiff could not establish a claim for unjust enrichment because there was an insufficient causal link between the plaintiff’s loss and the defendant’s gain.

21. The litmus test to determine whether or not there was sufficient linkage was the “but for …” test.  This was propounded in para 182 of the judgment in Test Claimants in the FII Group Litigation v Revenue & Customs Commissioners [2010] STC 1251:

“ Furthermore, the unjust enrichment alleged under this construct is too remote from the operative mistake. That was the mistake in year 1 that the Case V charge was valid and the reliefs were required to off-set that tax. The test of causation for unjust enrichment is the ‘but for’ test: Kleinwort Benson ([1998] 4 All ER 513 at 553, [1999] 2 AC 349 at 399 (Lord Hoffmann)); DMG ([2007] STC 1 at [143], [2007] 1 AC 558 at [143] (Lord Walker)). In applying the ‘but for’ test, it is important to identify the operative mistake and to limit recoverable loss to what is directly caused by it. In Dextra Bank & Trust Co Ltd v Bank of Jamaica [2001] UKPC 50 at [30], [2012] 1 ALL ER (Comm) 193 at [30], [2002] 2 LRC 212, the Privy Council recognised that the mistake was causative according to the ‘but for’ test of causation, but considered that it was too remote from the relevant payment of the money to the defendants. The need for a close connection between the mistake and the enrichment is appropriate in the case of restitutionary relief for unjust enrichment since the cause of action is concerned with the restitution of an identified gain and not compensation for a fault-based tort. In relation to the claimants’ second construct, there was no mistake by the claimants about the lawfulness of the tax paid in year 2. It was lawfully due. The mistake was in year 1 in relation to the tax due in that year and the need for the set off of reliefs to reduce it. The connection between the payment of tax lawfully due in year 2 and the mistake in year 1 is not sufficiently direct to satisfy the requirements of causation in restitution. The loss is too remote.”

22. There can be no doubt when adopting this test the plaintiff is able to establish that it had suffered loss bringing it within the scope of the requirements of unjust enrichment.

23. An examination of more recent cases on the subject of unjust enrichment would indicate an ever more liberal approach by the courts to the “but for …” test. On example of this could be gleaned from the speech of Lord Goff at p 570 of Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548:

“The solicitors’ appeal

I turn then to the solicitors’ appeal in respect of the money, which they claim from the respondents as money had and received by the respondents to their use. To consider this aspect of the case it is, in my opinion, necessary to analyse with some care the nature of the claim so made.

The solicitors’ claim is, in substance, as follows. They say, first, that the cash handed over by the bank to Chapman in exchange for the cheques drawn on the solicitors’ client account by Cass was in law the property of the solicitors. That is disputed by the respondents who say that, since the cheques were drawn on the bank by Cass without the authority of his partners, the legal property in the money immediately vested in Cass; that argument was however rejected by the Court of Appeal. If that argument is rejected, the respondents concede for present purposes that the cash so obtained by Cass from the client account was paid by him to the club, but they nevertheless resist the solicitors’ claim on two grounds: first, that they gave valuable consideration for the money in good faith, as held by a majority of the Court of Appeal; and second that, in any event, having received the money in good faith and having given Cass the opportunity of winning bets and, in some case, recovering substantial sums by way of winnings, it would be inequitable to allow the solicitors’ claims.

At the heart of the solicitors’ claim lies Clarke v. Shee and Johnson, 1 Cowp. 197; Lofft 756. In that case the plaintiff’s clerk received money and negotiable notes from the plaintiff’s customers, in the ordinary course of the plaintiff’s trade as a brewer, for the use of the plaintiff. From the sums so received by him, the clerk paid several sums, amounting to nearly £460, to the defendant ‘upon the chances of the coming up of tickets in the State Lottery of 1772,’ contrary to the Lottery Act 1772. The Court of Queen’s Bench held that the plaintiff was entitled to recover the sum of £460 from the defendant as money had and received by him for the use of the plaintiff. The judgment of the court was delivered by Lord Mansfield. He said, at pp. 199‑201:

‘This is a liberal action in the nature of a bill in equity; and if, under the circumstances of the case, it appears that the defendant cannot in conscience retain what is the subject matter of it, the plaintiff may well support this action. … the plaintiff does not sue as standing in the place of Wood his clerk; for the money and notes which Wood paid to the defendants, are the identical notes and money of the plaintiff. Where money or notes are paid bona fide, and upon a valuable consideration, they never shall be brought back by the true owner; but where they came mala fide into a person’s hands, they are in the nature of specific property; and if their identity can be traced and ascertained, the party has a right to recover.  It is of public benefit and example that it should; but otherwise, if they cannot be followed and identified, because there it might be inconvenient and open a door to fraud.  Miller v. Race, 1 Burr. 452: and in Golightly v. Reynolds (1772) Lofft 88 the identity was traced through different hands and shops.  Here the plaintiff sues for his identified property, which has come to the hands of the defendant iniquitously and illegally, in breach of the Act of Parliament, therefore they have no right to retain it; and consequently the plaintiff is well entitled to recover.’”

24. This passage also offers some support for the claim which is being made by the plaintiff that the defendant is holding the moneys as a constructive trustee.

25. It is clear from paras 6‑56 and 6‑57 of Goff & Jones, The Law of Unjust Enrichment, 8^th Edn that the plaintiff can elect whether to sue the defendant or Mediflex & Pizzi. 

26. For all of these reasons I am satisfied that Mr Hingorani has failed to establish that this is a plain and obvious case where the Statement of Claim should be struck out.

27. I order that the application is dismissed.

28. I make an order nisi that the plaintiff will have its costs.