LEGRAND JEWELLERY (MFG) LTD v. WO FUNG PAWNSHOP (A FIRM) AND OTHERS

No. 28 of 1988

(Civil)

Headnote

(1) The 1984 amendments to section 23 of the Pawnbrokers Ordinance (Cap. 166) impose a new statutory duty upon the owner of goods to take reasonable care of his goods, that was very special in that it was owed only to a pawnbroker in possession of such goods in consequence of an unlawful pawning.

(2) The duty was to be judged by the standards of the reasonable owner, and "carelessness" involved a failure to take what any owner would regard as an obvious precaution.

(3) On the facts the conduct of the pawnbrokers was in each case the sole effective cause of the unlawful pawning.

(4) Observations upon

(i) The mandatory effect of section 23.

(ii) The procedures to be adopted.

 

IN THE COURT OF APPEAL

No 28 of 1988

(Civil)

_______________

J U D G M E N T

_______________

Hunter, J.A.:

1. On 4th January 1988 Li King Tim Patrick pleaded guilty before H.H. Judge Chism in the Hong Kong District Court to five charges of theft. He asked for sixteen other offences of an identical nature to be taken into consideration.

2. Very briefly the offences arose in these circumstances. On 2nd June 1987 Li commenced employment with the respondent to the present appeal, Legrand Jewellery (Manufacturing) Company Limited as a gem-matcher. Part of his job was to sort and match large numbers of small diamonds, place them in plastic bags, and deliver them to other employees for mounting.

3. There are strong grounds for believing that he entered the respondent's employment intending to steal, for on 6th June he committed his first offence. The same pattern was followed in the other twenty offences. He stole a plastic bag of diamonds instead of delivering it to the mounters, and covered his theft by false entries in the books. He took the packet to one of the seven pawnbroker appellants and there pawned it for a sum representing about one third of the wholesale cost of the diamonds. Li ingratiated himself with his employers who regarded him as competent, diligent and trustworthy. After about a month he was given the job of checking the records that he was falsifying. He thus escaped detection until 10th September. By then he had committed twenty one offences; and pawned for HK$440,000 diamonds to the value, measured by wholesale cost, of HK$1.2m.

4. At the conclusion of the strictly criminal part of the hearing, the judge proceeded with an investigation under section 23 of the Pawnbrokers Ordinance (Cap. 166) (The Ordinance) into the disposition of the pawned diamonds which were then before the court. He was not invited to consider pleadings the formulation of issues, or discovery, and no such step was taken. For the convenience of the parties the matter was adjourned until 6th January. Then, and on the day following, the judge heard evidence from the employer and from each of the seven pawnbrokers. At the conclusion on 7th January, he ordered that all the diamonds be delivered up to the employer without Payment of any compensation to any of the pawnbrokers. From that decision the pawnbrokers, with leave of the judge, appeal.

5. It is convenient at the outset to consider the position which arises at common law between the owner of goods, from whom they have been stolen, and any third party who innocently receives, handles, buys or accepts the goods as security for a loan. It can be summarised as follows:

(1) The basic principle is "nemo dat quod non habet", subject to any estoppel. Sale of Goods Ordinance (SGO) Cap 26 section 23.

(2) No estoppel can arise by negligence because the owner owes no duty of care Farquharson Brothers & Co v. King⁽¹⁾: There Lord MacNaghten said : "the right of the true owner is not prejudiced or affected by his carelessness in losing the chattel, however gross it may be". p 335. This proposition was confirmed both by Lord Wright in Merchantile Bank of India v Central Bank of India⁽²⁾, and Lord Fraser in Moorgate v Twitchings⁽³⁾.

(3)    A defence of contributory negligence which might arise under section 21 of the Law Amendment and Reform (Consolidation) Ordinance Cap 23, does not depend upon the existence of any duty of care. But it is no answer to a claim in conversion. This is now statutory in England under section 11(1) of the Torts (Interference with Goods) Act 1977. We do not have this statute, but I believe it simply, reflected the common law, See Lloyds Bank v Savory⁽⁴⁾where at p 229 Lord Wright, treated a plea of negligence to a claim in conversion as "an immaterial averment".

(4) The innocence of the handler is equally irrelevant. "He acts at his peril" Marfani v Midland Bank⁽⁵⁾ per Diplock LJ p 970.

(5) Basically the only exceptions are statutory and arise in favour of the bona fide purchaser for value e.g. market overt SGO section 24 voidable title SGO section 25 : buyer or seller in possession SGO section 27 or under the Factors ordinance.

6. The 1984 amendments to the Ordinance have materially qualified this common law position to relation to pawnbrokers in possession of goods unlawfully pawned. The sections of the Ordinance which require noticing are:

(a)    Section 17(1). This vests the property of unredeemed goods in the pawnbroker at the expiration of four lunar months from the date of pawning. But such vesting does not now purport to be "absolutely" as in the 1970 edition but "subject to this Ordinance and to any other law".

(b) Section 21. This imposes basic statutory obligations upon the pawnbroker and is made subject to a criminal sanction.

(c) Section 23 the material provisions of which are:

"(1) Where in any proceedings before a court or magistrate -

(a) it appears that any goods have been unlawfully pawned with a pawnbroker...

the court or magistrate shall dispose of the goods in the manner provided by this section.

(2) The court or magistrate may, in respect of any goods to which subsection (1) applies, of its or his own motion or upon application -

(a) on proof of ownership of cite goods, make, subject to subsection (3), an order for the delivery or non-delivery thereof to the owner -

(i) on payment to the pawnbroker of the amount of the loan advanced by him thereon and the interest due; or

( ii) on payment to the pawnbroker of any part of such loan or interest; or

(iii) without payment to the pawnbroker of any part of such loan or interest,

as may seem just in all the circumstances;

(3) In the making of an order under subsection (1)(a), the court or magistrate shall take into account the conduct of the owner and of the pawnbroker and consider whether the fault or carelessness of either party has caused or contributed to the unlawful pawning of the goods and shall as regards the apportionment between them of any loss or damage -

(a) in the case where the court or magistrate finds -

(i) that no fault or carelessness in their conduct; or

(ii) that equal fault or carelessness in their conduct,

has caused or contributed to the unlawful pawning of the goods, apportion the loss or damage in equal shares;

(b) in the case where the court or magistrate finds that the fault or carelessness in the conduct of the owner or of the pawnbroker, as the case may be, has caused or contributed to the unlawful pawning of the goods in the whole or in the greater part, apportion the loss or damage in such whole or greater part, having regard to their respective shares in the responsibility for such unlawful pawning.

(5) Any order made by the court or magistrate under subsection (2) shall bar any civil remedy which the owner or any other person would have had for the recovery of the goods, and the owner shall not be entitled to claim the return of the goods except under the terms of such order".

7. Two points stand out from the present form of section 23. First it is mandatory. Where the facts fall within section 23(1) the court "shall" follow the provisions of the section to the exclusion of all other civil remedies in the "owner", which word is, given an extended meaning in subsection (9). I shall return later to this procedural problem. Secondly, section 23(3) brings in "fault or carelessness" in relation to owners which concepts were, and are in every other context, irrelevant at common law. This means that the cases decided under the old Ordinance e.g. Kung Ting Kir v R.⁽⁶⁾ Briggs CJ and R. v Chan Chi keung⁽⁷⁾ Penlington J. are no longer authoritative, and are of assistance only as reflecting the practices of pawnbrokers in Hong Kong. Insofar as the trial judge relied upon them as negativing the existence of any duty of care he was wrong_.

8. The relevance of fault or carelessness in an owner is not introduced generally but in favour of a limited class in particular circumstances. It was suggested in argument that the legislature was adopting a proposal advanced by Devlin LJ in Ingram v Little⁽⁸⁾ in favour of the general rule of apportionment between innocent sufferers from a third party's wrong doing. But the law has been altered not generally, but very specially. The common law continues to apply to everyone but the pawnbroker, and even to pawnbrokers themselves in certain circumstances e.g. if they operate outside the Ordinance or following a sale of an unredeemed article. Putting the matter an other way, pawnbrokers in possession are put at a privileged position. But how privileged is this? How is the obligation the owner now owes to them, to be reconciled with the absence of any such obligation to others?

9. We have to seek answers to these questions without the assistance of any definition, and without any indication of the mischief to which the section is directed.

10. My own approach to this question can be summarised thus :

(1) Section 23(3) must impose some statutory duty on owners. It is unnecessary to decide whether fault imports actionability or not. The use of the word carelessness must I think import an obligation akin to contributory negligence, a duty on the owner to take reasonable care of his own.

(2) The language used bears considerable similarity to that of section 21 of Cap 23. Under section 21 it is established that the court has to consider both "causal potency" and blameworthiness. The same is probably true of this subsection.

(3) As with contributory negligence the first essential requirement is causation. Has "fault or carelessness .... caused or contributed to the unlawful pawning"? Only if causation is established in relation to the pawning, not the theft, do the "respective shares in the responsibility for such unlawful pawning" have to be considered.

(4) The use of identical language in relation to both owner and pawnbroker provoked the submission from the appellant that both should be treated equally, and that the same standards should be applied to each. This I cannot accept. What has to be considered is the fault or carelessness of the owner qua owner and the pawnbroker qua pawnbroker. They do not stand in the same position. Each must be separately judged by the standard of the hypothetical reasonable owner or pawnbroker as the case may be.

11. I take first the position of the pawnbroker. First as the earlier decisions show, every pawnbroker is always on risk of being offered stolen goods. It is a risk which arises daily and must therefore constantly be in the fore front of his mind. Secondly, the practice of thieves in relation to pawnbrokers in Hong Kong is I think notorious. They readily use pawnbrokers as receivers, with not the slightest intention of redeeming the goods. It follows that the pawnbroker's risk of accepting the stolen goods is both real and double-edged. If the thief is found and the goods are traced to the pawnbroker, he loses his advance, subject only to section 23. If the thief is not found or the goods are not traced, then most probably after four months he will he free to sell with an apparent title. Here the pawnbrokers collectively risked HK$440,000 : but on the wholesale cost figures they stood to gain double the sum, on sale. In these circumstance I think the legislature must have expected pawnbrokers to take serious and effective steps to reduce this risk, if they were not to be held to be the sole effective cause of an unlawful pawning.

12. By contrast the position of owners is very different. First and foremost they are not conducting a risky business or constantly on risk. Basically against the world they can rely upon their title. The hypothetical reasonable owner does not have, or need to have, security' at the front of his mind. He will take reasonable not obsessive care. Equally the hypothetical reasonable employer is not constantly concerned with the fidelity of his staff. He will make such enquiries as he thinks reasonable and try to exercise his own judgment. Basically he is looking to the profitable running of his business and is not obsessed with the risk of hiring a thief in my judgment therefore when the legislature used the word "carelessness" in this subsection it was not expecting owners to be judged by the standard of the perfectionist or with the wisdom of hindsight; but rather by the standard of the reasonably sensible owner. He, I think, would have little difficulty in drawing, a dividing line between misfortune - "oh, that was bad luck" - and something more - "oh, you were really asking for trouble". I think that in order to fit this provision most conveniently into the general law, and to give proper effect to it, the word "carelessness" should be construed as relating to conduct of the latter character; a failure to take what any owner would regard as an obvious precaution. The sort of failure I have in mind is that which Lord MacNaghten might have called "gross".

13. Applying these principles to the respondent owners I am firmly of opinion that this was the case of misfortune not carelessness. It is significant that Li was in financial trouble long before 2nd June 1987. In April and, May of that year when working for his father he entered into ten jewel pawning transactions. These were all redeemed. I infer that he was not prepared to steal from his father, but that he had to steal his way out of his financial problems. He was therefore that very exceptional type of employee who joined with dishonest intent. He was also personable, capable and apparently conscientious. He worked his way into the confidence of his employers. It was I believe for his own protection and to gain time, that he set out to persuade and succeeded in persuading them, to allow him to conduct the monthly count

14. The employers internal security system failed to detect his theft and to that extent was shown to he, inadequate. It was not effective within three months to discover the activities of a deliberate and skilful thief. Many systems which many reasonable employers would regard as adequate until after such experience would suffer the same fate. I further think that any court should hesitate long before condemning any employers system without first clearly investigating and understanding the system, and secondly having evidence as to how and why a different system would have operated, and should have been installed by a hypothetical reasonable employer in that line of business. In summary I think this employer suffered the misfortune of being totally deceived by a clever personable rogue.

15. By contrast all the appellant pawnbrokers in the judges view took a commercial risk and turned a blind eye. I agree with this assessment. First diamonds in the quantities and of the type pawned could prima facie only be associated with a trader. Indeed it was asserted that this type of transaction was common with traders suffering cash flow problems. But despite this, no pawnbroker asked this young man of 25 a single question about his trade, the name, the address, his position, whether be was owner or employee, or anything at all. None did anything more than ask the usual questions which might be addressed to a typical domestic pawner e.g. home address and identity card Indeed they did little more that fulfill their obligations under section 21. Most asserted that trade pawns of this nature were not unusual, but failed to prove or document a single case. Each, on the basis of the thief's figure, advanced about one third of the wholesale cost.

16. In these circumstances and albeit by a different route I arrive at the same conclusion as the judge and would dismiss this appeal.

17. Finally I return to the question of procedure. It is a lamentable fact that in this case:-

(1) The sum at stake HK$1.2m was twenty times the ordinary maximum civil jurisdiction of a district judge.

(2) The outcome turned on allegations of carelessness which were never formulated in writing at all, and were first made in cross-examination. This makes the task both of the witness and of his representative extremely difficult.

(3.) No discovery was ordered or made, although on the owner's side the production of the falsified records would have enabled the court at least to have understood the system : and on the pawnbroker's side the existence of other trade transactions would have been settled in advance.

18. The first cause of this unhappy story is the mandatory effect of this section. The simple case the existence of the power given by the section is beneficial. Where there have been one or two simple unlawful pawns the matter may well be suitable for summary disposition. But the procedure is quite unsuitable in a complex case such as this. The enquiry here was not part of the criminal trial at all. It. invoived an entirely separate civil trial, which was tagged on to it with quite insufficient thought or preparation.

19. Further any findings of fault: or carelessness made against either owners or pawnbrokers could readily involve third parties, who fall outside the ambit of section 23. I have in mind for example insurers on either side. It might plainly be desirable for such third parties to be heard upon and bound by any findings of fact but it is far from clear that this could be brought about under this section. The English experience in this and kindred fields is not irrelevant. Generally speaking it is that in simple cases the existence of a power of summary disposition is useful but that in any case of complexity the parties should be left to pursue their remedies in the civil courts. For these reasons I would respectfully suggest that the mandatory provision of section 23 be reconsidered.

20. Under the present section, in any-case of substance or complexity I think the district fudge of his own motion should take positive steps to avoid the procedural imperfections which occurred in this case. I would suggest that he treat the section 23 application as if it were a civil suit separate and apart from the criminal proceedings before him, and one in which the District Court Civil Procedure Rules can properly be used. At the earliest moment he should then investigate the position with the parties : ascertain what allegations of fault or carelessness are proposed to be raised; and have those allegations committed to writing in the form either of pleadings or of formulation of issues. That step would then lead to the giving of any necessary directions for discovery.

Fuad, V.-P.:

21. I agree that the appeal should be dismissed. I entirely agree with all that Hunter, J.A. has Said.

Clough, J.A.

22. I also agree.

Fuad, V.-P.:

23. In handing down this judgment dismissing the appeal, we make an order nisi that the appellants shall pay the costs of the appeal.

(1) [1902] AC 325

(2) [1938] AC 287

(3) [1977] AC 890, 925

(4) [1933] AC 201

(5) [1968] 1 WLR 956

(6) [1974] HKLR 214

(7) No 168 of 1981

(8) [1961] 1 QB 31, 73