GRAND EXPRESS LTD AND ANOTHER v. FUNG KANG TRANSPORTATION & COURIER LTD AND OTHERS

DCCJ 1734/2013

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1734 OF 2013

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JUDGMENT

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Introduction

1. The plaintiffs claim damages against the defendants on grounds of conspiracy to defraud by overcharging them in sum of $1,270,579.34 (“the Total Sum”) for services not rendered by the 1^st and 2^nd defendants during the period from 2006 to 2009.  The plaintiffs’ claim is quantified at $340,011.62, being interest payment at 7.75% per annum of the Total Sum incurred from their overdraft facilities.  

Background/undisputed facts

2. The plaintiffs were companies carrying on business as air and sea freight forwarders.  The 2^nd plaintiff was a sister company of the 1^st plaintiff which had operated in the same business address and was managed by the same team of staff.  The plaintiffs are divided into departments, air freight forwarder, sea freight forwarder, accounts and administration.  Chow Kit Sing, Kenneth (“Kenneth”) was in charge of the general operations of the plaintiffs, his younger brother, Chow Yuk Sing, David (“David”) was in charge of the accounts department; Pamela Yeung (“Pamela”), an accounting supervisor, was his assistant.

3. At the material time, the 3^rd defendant was employed by the 1^st plaintiff as an air operation director.  The 3^rd defendant joined the 1^st plaintiff as a delivery worker in 1984, for his good performance, he was promoted gradually through the ranks and eventually as an air operation director.  He was in charge of the air freight forwarder department. He further took up duties to manage the business of the 2^nd plaintiff.  The 3^rd  defendant was also allotted 9.091% shareholding of the 1^st plaintiff.  After 27 years of service with the plaintiffs, the 3^rd defendant resigned on 31 August 2012, he then transferred his shares of the 1^st plaintiff to David on 31 October 2012.

4. The 3^rd and 4^th defendants are husband and wife.  They married in 2001.  

5. The 1^st and 2^nd defendants were incorporated in May 2000 and April 2004 respectively (collectively referred to as “Fung Kang”), they carried on business in transportation, logistic and godown industries.  The 3^rd and 5^th defendants are shareholders and directors of the 1^st defendant since its incorporation. In April 2004, the 3^rd defendant retired from directorship and transferred his shares in the 1^st defendant to the 4^th defendant.  The 4^th and 5^th defendants were shareholders and directors of the 2^nd defendant since its incorporation.

6. The 5^th defendant has provided local transportation/delivery services for the plaintiffs since 1992.  As at 2000, when the 1^st defendant was incorporated, the plaintiffs engaged the 1^st defendant for same services, it had become the major local transportation service provider of the plaintiffs, which had taken up around 90% of the plaintiffs’ orders. The rest of the plaintiffs’ orders were shared either by their own driver, Chan Ka Fai (“Chan”), driving a self-owned lorry with registration number JT 8257 or some other local transportation companies.

7. In or about 2011, the plaintiffs began to engage the 2^nd defendant for its godown and storage services.

8. Fung Kang will issue invoices to the plaintiffs for payment of services rendered on a monthly basis.  During 2006 to 2009, the 3^rd defendant was responsible for submitting Fung Kang’s invoices to the plaintiffs for payment.  It is usual practice that the 3^rd defendant will first submit the invoices to Kenneth for approval, before they reach the accounts department for actual payment.

9. In or about October 2009, upon complaint by Chan, Pamela reviewed Fung Kang’s invoices for the period from April to May 2009, she found Fung Kang has charged the plaintiffs for some miscellaneous items not chargeable by the plaintiffs and services rendered by Chan or other transportation companies. She reported the incident to Kenneth immediately.  Kenneth then instructed Pamela to cross check all other invoices issued by Fung Kang.  The cross checking exercise was only completed in June 2012, almost 3 years after the discovery of the incident, it took such a long time because there were significant number of boxes of documents to be perused.  During the 3-year period, Pamela gradually calculated the sum overcharged by Fung Kang.  The aggregate sum overcharged by Fung Kang was finalized at $1,270,579.34, the Total Sum.

10. Without challenging the quantum, Fung Kang agreed to refund the Total Sum to the plaintiffs.  As Fung Kang continued to provide services to the plaintiffs, the overpaid amount was refunded by way of setting off against from the current invoices issued by Fung Kang on a monthly basis.  The setting off exercise continued for more than 2 years.

11. On 1 December 2009, Kenneth, David, Pamela and the 3^rd defendant held a meeting, as evidenced in a minutes dated the same day, to discuss the implementation of a new system of placing orders to local transportation companies, inter alia, with the 1^st and 2^nd defendants.  It was agreed, whenever an order to be placed by the plaintiffs, they will issue an order form to the transportation company itself with 2 duplicates for the record of the plaintiffs’ air freight forwarding department and the accounts department.

12. By way of a letter dated 12 September 2012 (after the resignation of the 3^rd defendant), the plaintiffs informed the defendants that $792,399.64 has been repaid.  In or about November 2012, the plaintiffs verified the outstanding sum yet to be set off was $471,191.76.  

13. On 25 February 2013, the 1^st defendant paid up the remaining outstanding amount of $88,317.81 to the plaintiffs by way of cheque.  The Total Sum was fully repaid.

The plaintiffs claim and the defence

14. Notwithstanding the parties have almost approached completion of the setting off exercise, in or about November 2011, the plaintiff raised their claim on interest as damages against the 1^st and 2^nd  defendants. It was followed up with a formal letter dated 3 January 2012.  The plaintiffs alleged the defendants had conspired to injure them and had suffered loss and damage.  But for the overpayment, the plaintiffs could have reduced the debit amount in their overdraft facilities and thus they could have incurred less interest.  The defendant shall be liable to the extra costs of interest incurred. The plaintiffs opted for an interest rate of 7.75% per annum in quantifying the sum of interest claimed.  The aggregate interest was calculated at $340,011.62 (“the Interest”)[1].

15. The defendants denied they have conspired to injure the plaintiffs. The overcharging incident was due to the plaintiffs’ ineffective internal controls, insufficient segregation of duties and inadequate records of services rendered by the plaintiffs’ service providers.

16. On admission of the defendants that they have overcharged the plaintiffs, the 1^st and 2^nd defendants shall repay the Total Sum to the plaintiffs by way of setting off the sum against the current invoices to be presented to the plaintiffs for payment.  The 1^st and 2^nd defendants will issue credit note to the plaintiffs for record.  The setting off exercise evidenced a full and final settlement between the parties, the plaintiffs are not entitled to claim Interest against the defendants and was estopped from doing so.

The issues

17. The issues to be determined are:-

(i) whether the defendants have acted in concert and had conspired with each other to injure the plaintiffs, and had caused the plaintiff to suffer loss and damage;

(ii) if so, are the plaintiffs entitled to claim Interest as damages flow from the conspiracy, and if so, whether the rate of 7.75% per annum is justified;

(iii) regardless the determination in (i) above, whether there was a full and final settlement of the dispute between the plaintiffs and Fung Kang; and whether the plaintiffs shall be debarred and or estopped from claiming the Interest from the defendants.

Evidence

18. The plaintiffs called Kenneth, David and Pamela as their witnesses; the 3^rd, 4^th and 5^th defendants testified for the defendants.  All witnesses adopted their witness statements as evidence.

Factual findings - analysis

19. There is not much dispute on evidence related to the background and history of the parties.  This is not a case where the entire evidence of the parties could have been accepted or rejected, but rather determination of the following areas of factual dispute on a balance of probabilities: (i) the system of issuing Fung Kang’s invoices; (ii) how the setting off exercise of the Total Sum came into being; and (iii) how did the parties carry out the setting off exercise.

Issue (i)

20. The system of issuing Fung Kang’s invoice has been long established since its incorporation in 2000.  Kenneth testified because he was unfamiliar with how the invoices were issued, he relied on the 3^rd defendant to vet Fung Kang’s invoices before placing them before him for approval.

21. The 3^rd defendant explained it was due to ineffective internal control system and inadequate records of the 1^st and 2^nd plaintiffs.  He said, staff of Fung Kang paid frequent visits to the plaintiffs to copy the particulars of works. To facilitate the staff of Fung Kang, the plaintiffs placed all work orders in a box marked “Fung Kang” in their office, staff of Fung Kang came up to take record of the work orders, and then to issue invoices to the plaintiffs in accordance with their record.  The 4^th defendant, who was in charge of the general operation of Fung Kang admitted they did not maintain a systematic way to charge their clients.  As most of the orders were placed by phone, the drivers or delivery staffs will perform the tasks and noted down the particulars of work done by themselves.  In most cases, the hard copies of the delivery notes will be kept by their clients, staff of Fung Kang has to rely on their own records to issue monthly invoices. 

22. The 5^th defendant was not responsible for issuing invoices to any of Fung Kang’s clients.

23. During cross examination of the 3^rd to 5^th defendants, there are not much to be challenged by the plaintiffs of their usual practice of issuing invoices.  I accept this was the way that Fung Kang has practiced in issuing invoices to the plaintiffs.

Issue (ii)

24. As the overcharging incident emerged, I accept the 3^rd defendant was the first to know and had agreed instantly agreed to refund by way of making credit to the current amount to be charged by the defendants. 

25. With regard to setting off exercise of other amount, David denied the 4^th defendant and himself had come to an agreement to have set off the overpayment by way of an “invoice-by-invoice” method.  The 4^th defendant maintained such arrangement had been agreed in sometime in 2009. 

26. By conduct of the parties, it is absurd if no agreement has been reached.  The setting off exercise was not a one-off incident.  The evidence showed it has been carried out continuously and smoothly for almost 3 years.  The 1^st and 2^nd defendants submitted credit notes to the plaintiffs for each and every demand note.  The staff of the accounts departments of both parties must have reached a consensus on the details.  As the 4^th defendant and David are both supervisors of the accounts departments, it is more probable than not there was an agreement to set off the overpayment against the sum of the currents invoices of the 1^st and 2^nd defendants on a monthly basis.  I accept the 4^th defendant’s evidence that she has reached an agreement with David with regard to the settlement of the dispute by way of setting off as mentioned.

Issue (iii)

27. It is indisputable that the arrangement to set off the overcharged amount was carried out.  All the invoices, credit notes were issued and recorded throughout the exercise.  I accept Pamela’s evidence that the sum set off from current bills were made on a monthly basis.  I accept, as Pamela has testified, the amount to be set off depends on how much the overcharged amount was verified.  At the beginning, the plaintiffs have set off a substantive amount of Fung Kang’s current bill against the verified overpayment, the 3^rd defendant had once requested to set off the overcharged amount for each month against one month’s invoice only.  The plaintiffs agreed.  I accept this is how the setting off exercise has been carried out.  

Conspiracy to defraud

28. The plaintiffs bear the burden to prove conspiracy to injury.  Both parties agreed the legal principles are well established.  In Tempra Virginia Pida v Compass Technology Co Ltd [2010] 2 HKLRD 537, Ma CJHC (as then he was) summarized the law in relation to conspiracy as follows:-

“Conspiracy to injury: the law

13. The law need only be briefly dealt with. As stated above, the tort of conspiracy to injure is an economic tort. Essentially, the tort consists of a conspiracy to injure the plaintiffs resulting in (usually, if not invariably) pecuniary damage.

14. There are two types of conspiracy to injure:-

(1) First, there is the conspiracy to injure the plaintiff using lawful means. Here, a requisite element of the tort is the predominant motive to injure: see Lonrho Plc v Fayed and Others [1992] 1 AC 448, at 464B‑C, 465C, 465H‑466A.

(2) The second type of conspiracy is the conspiracy to injure by the use of unlawful means. Here, the mental element is not the predominant motive to injure the plaintiff, merely an intention to do so: see Lonrho Plc v Fayed and Others at 465C, 465H‑466A. This is a lower requirement of intention, but it is still “needed” to found the cause of action: see Revenue and Customs Commissioners v Total Network SL [2008] AC 1174, at 1249A‑C (paragraph 82).

15. Mr ST Jat, SC and Ms Lau (for the 1st defendant) pointed out in their Skeleton Arguments that intention is not synonymous with foresight: OBG Ltd and another v Allan and others [2008] AC 1, at 35E‑G (paragraph 62). Quite simply, what one foresees as a consequence of one’s actions may not necessarily be the intention, although I daresay it is sometimes evidence of it.

……

17. As a matter of pleading, a case based on conspiracy, must contain the following elements:-

(1) The agreement between two or more persons. The means of carrying out the agreement, whether lawful or unlawful, must be set out.

(2) The intention to injure the plaintiff, whether predominant (in the case of a lawful means conspiracy) or merely an intention to injure (in the case of an unlawful means conspiracy).

(3) The acts that were carried out pursuant to the agreement and the stated intention.

(4) The damage caused to the plaintiff.

See : Bullen & Leake & Jacob’s Precedents of Pleadings (16th edition) Vol 2 at paragraph 51‑02.”

29. The plaintiffs’ submitted, the defendants’ act of conspiracy is evidenced by the practice of how Fung Kang’s invoices were issued and presented for payment.  Kenneth expressed his strong belief that it must be the 3^rd defendant who has misappropriated the particulars of the work orders of other service providers for Fung Kang to issue their monthly invoices, and have acted in concert with the other defendants to overcharge the plaintiffs.

30. The plaintiffs submitted the defendants’ acts fall within the 2^nd category of conspiracy, ie with unlawful acts.  The mental element is not a predominant motive to injure, but an intention to do so.  The only evidence the plaintiffs is, the 3^rd defendant, as the shareholder/director of the 1^st defendant during the period from 2000 to 2004, retrieved particulars of work orders of the plaintiffs’ driver and other transportation companies, to formulate fabricated items in Fung Kang’s invoices.  As a result of this practice, Fung Kang obtained payment from the plaintiffs which they are not entitled to.

31. The plaintiffs alleged the 3^rd defendant had concealed from them his wife, the 4^th defendant was a shareholder and a director of the 1^st defendant since 2004.  The plaintiff has only disclosed a staff record of the 3^rd defendant, submitted in April 2011, that the identity of the 4^th defendant has been revealed.  This might not be helpful because it does not say whether the 3^rd defendant has disclosed the same as early as 2001, when they married.  Nevertheless, the annual returns of the 1^st and 2^nd defendants are public documents, by no means could the 3^rd defendant hide this fact from the plaintiffs.  Kenneth explained, he would not have checked the annual returns of his business counterparts, especially he had trusted and relied on the 3^rd defendant for a long time.  I do not find there are deliberate concealment.  Should the 3^rd defendant intended to have concealed the fact that he was in a position to retrieve the particulars of other work orders, he need not to become a shareholder of the 1^st defendant (of which the information will go public).  He could have acted secretly with the other defendants to practice the alleged conspiracy.

32. Furthermore, the way that Fung Kang’s invoices were not issued with reference to copies of receipts of works done.  The 4^th defendant said the hard copies of receipts were kept by their clients, ie the plaintiffs.  The 1^st and 2^nd defendants may not have requisite records of the work done by a particular client.  The 3^rd defendant said, staff of Fung Kang often came to the plaintiffs’ office to retrieve items of work done, that was why the plaintiffs placed all Fung Kang’s work orders in a box marked with “Fung Kang”, and it is everyone’s knowledge that staff of Fung Kang will rely on the particulars work order to issue their monthly invoices.

33. The working systems of both the plaintiffs were not satisfactory.  The plaintiffs have an unsystematic way of documentation for years.  There is no evidence that the invoices contained in the “Fung Kang” box was kept in an orderly manner, it is not known whether the work orders could only be retrieved by authorized persons.  The meeting on 1 December 2009 was an indicator that such loose system has to be eradicated and be replaced by issuance of work orders with duplications for the accounts department and air freight department.  I find it was the plaintiffs’ system itself that have facilitated the Fung Kang to issue inaccurate invoices.

34. The plaintiffs’ evidence also supports my finding.  Kenneth was the person in charge of the overall operations of the plaintiffs.  He emphasized it was the 3^rd defendant’s responsibility to check the accuracy of Fung Kang’s invoices before submitting to him for approval.  Kenneth agreed, he did not check on the invoices, he merely acted as a rubber stamp and to initial on those invoices with further verification.

35. Neither did David, who was in charge of the accounts department, uphold a sound accounting practice.  During cross examination, he admitted, the staffs of the accounts department made no attempts to verify the accuracy of Fung Kang’s invoices.  It is indisputable that during the period from 2006 to 2009, no copies of work orders were kept by the accounts department for cross checking.  Pamela or other staff of the plaintiffs relied on Kenneth’s signature, a blank approval, for payment.  David further admitted during the same period, the accounts department made no attempt to do sample checking of the invoices, which David agreed that it could have done.  Quite unusual, the phenomenon of overcharging did not alert the auditors, who have compiled annual audited reports for the plaintiffs throughout the years.

36. As a staff of the plaintiffs, the 3^rd defendant was responsible for the actual operations of the air freight department.  He agreed he had forwarded invoices submitted by Fung Kang to Kenneth.  He explained he did not sign on the invoices because he has not verified the accuracy of the contents.  As his staffs were busy with the actual operations of the air freight department, neither did he delegate the task of verification to them.  I accept this is why a Fung Kang box was placed in the plaintiffs’ office, for Fung Kang’s staff to take record of the work done.

37. I also accept the 5^th defendant’s evidence that he was responsible to take care of the actual operation of the delivery and logistic business of the 1^st and 2^nd defendants.  He was not involved and was unfamiliar with the issuance of Fung Kang’s invoices.  This task was delegated to the 4^th defendant. 

38. It was more probable that the old system itself facilitatesd wrong entries in Fung Kang’s invoices, the plaintiffs had turned a blind eye in paying Fung Kang during the period from 2006 to 2009.  Although they were shareholders of the 1^st defendant at the material time, because the 3^rd to 5^th defendants themselves were responsible for different kinds of works,  they hardly know the actual tasks of the others.  

39. For the overpayment, it is indisputable that the plaintiffs were “injured” that they were deprived of using the funds overpaid to Fung Kang during the period, nonetheless, the plaintiffs could not establish the intention of the defendants who has acted unlawfully and in agreement to injure the plaintiffs.  It is more likely that the defendants themselves were negligent but not dishonest in overcharging the plaintiffs.  The plaintiffs lack clear and cogent evidence to discharge their burden of proof that the defendants have committed unlawful acts of issuing bogus claims as pleaded.

40. On this finding alone, the plaintiffs’ claim shall be dismissed.  In event I am wrong on this finding, for completeness sake, I shall deal other issues as follows.

Computation of interest

41. Mr R Leung, counsel for the defendants submitted, the plaintiffs could not prove their actual loss as a result of the conspiracy (or overpayment).  The plaintiffs are not entitled to the Interest as pleaded.  Nevertheless, should the defendants be held liable for damages for either the conspiracy or overpayment, in absence of alternative methods to calculate interest, the court should not award the Interest as pleaded, but to exercise its wide discretion to award loss of interest.  

42. In Feco Development Corporation v Bonny Forward Company Limited (HCA 1465 of 2005, 18 July 2012), Mr Recorder H Wong SC decided on the claim on interest for non-payment of debts as well as on other claims for breach of contract and in tort[2]:-

“77. The common law jurisdiction to award interest as damages is in addition to the Court’s statutory jurisdiction to award simple interest on debts and damages. The two jurisdictions are separate and should not be confused: see the judgments of Lord Nicholls and Lord Walker in Sempara Metals, supra at para 99 and 164. As is pointed out by the learned editors of McGregor on Damages, 18^th ed, at 15-067:-

“The recovery of interest at common law, now established, is entirely different, and separate, from the recovery of interest under statute.”

78. The claim for compound interest under the common law jurisdiction is hence a claim for interest as damages. As such, the party claiming such interest must prove loss. The ordinary rules such as the rule of remoteness of damages, the rule of the obligation to mitigate damage etc apply. While it is “always open to a claimant to plead and prove his actual interest losses caused by late payment of a debt”, “an unparticularised and unproved claim simply for damages will not suffice. General damages are not recoverable. The common law does not assume that delay in payment of a debt will of itself cause damage. Loss must be proved”: see, Sempara Metals, supra at para 94-96.”

43. Mr A Leung, counsel for the plaintiffs submitted, Kenneth testified, but for the overpayment, the plaintiffs were not required to utilize their general overdraft facilities for funds during the period from 2006 to 2009, interest could have avoided.  The plaintiff opted for a lesser rate of interest, 7.75% per annum, charged by one of their borrowing banks.

44. I do not agree.  It is clear that actual loss must be proved.  In Tempra Virginia Pida v Compass Technology Co Ltd [2010] 2 HKLRD 537 Ma CJHC (as then he was), summarized as follows[3]

16. Damage to the plaintiff is an essential ingredient of the tort of conspiracy: see Clerk & Lindsell on Torts  (19th edition) at paragraph 25‑137; McGregor on Damages (18th edition) at paragraph 40‑023.  The tortious basis of damages has, of course, as its starting point, the principle that the innocent party should be put, in monetary terms, in the same position as he would have been if the wrong had not been committed : see McGregor on Damages at paragraphs 1‑022 and 19‑003.  This is of course just a starting point in that, in any given case, the court will have to examine other aspects such as causation in order to reach a conclusion as to whether or not the damages claimed can be awarded.”  [emphasis added]

45. To put the plaintiffs in the same position as they would have been if the wrong had not been committed.  I am not satisfied that the plaintiffs evidence could prove, on balance, the actual loss and damage that the plaintiffs have suffered.  This is not a case where the Total Sum was overpaid at one time, where the plaintiffs were being deprived of  the disposal the same amount in a particular point of time.  The funds were overpaid month by month, gradually for a period of almost 4 years.  It could not have said that the plaintiffs resorted to their overdraft facilities solely for this reason.

46. Secondly, the plaintiffs merely relied on various bank statements to substantiate actual loss.  I hold the view that it is insufficient.  The reason being, as revealed in the bank statements, the 1^st plaintiffs maintained a substantial general debit in their overdraftfacilities during the period from 30 January 2007 – 31 January 2012[4].  I am not provided with evidence, including but not limiting to financial records to prove the plaintiffs’ necessity, having been deprived of using around few hundred thousand dollars per month, had driven them to huge borrowings during that time.  Nothing in Kenneth and David’s evidence explains the financial conditions of the plaintiffs justified the said loan.

47. Thirdly, the plaintiffs’ choice of interest rate at 7.75% per annum is arbitrary. 

48. For the foregoing reasons, I am not satisfied the plaintiffs can prove on balance, their actual loss suffered from the overpayment to defendants.

Full and final settlement

49. This is a distinct topic.  Irrespective of whether the defendants have conspired to injure the plaintiffs, had there been a full and final settlement between the parties, it will bring an end to the dispute.  The tortious claim plays no part because it has subsumed in the settlement, a contract between the parties.  

50. The plaintiffs submitted no full and final settlement has ever been reached.  It has never been raised during the setting off exercise, and it was merely on repayment on the overcharging of the Total Sum, not the claim on the tort. They are still entitled to claim interest as damages even when the setting off exercise has almost completed. 

51. The defendants said the dispute has been fully settled, the burden rests with them to prove.  

52. The legal principles of compromise is not disputed: Chitty on Contracts, 31^st edition, Vol 1, at §22-013 summarizes the law on compromise as follows:-

“Where a claim is asserted by one party which is disputed by the other, they may agree to compromise their dispute on terms mutually agreed between them. Once a valid compromise has been reached, it is not open to the party against whom the claim is made to avoid the compromise on the ground that the claim was in fact invalid, provided that the claim was made in good faith and was reasonably believed to be valid by the party asserting it. Conversely, the claimant cannot avoid the compromise on the ground that there was in fact no defence to the claim, provided that the other party bona fide and reasonably believed that he had a good defence either as to liability or as to amount. In order to establish a valid compromise, it must be shown that there has been an agreement (accord) which is complete and certain in its terms, and that consideration (satisfaction) has been given or promised in return for the promised or actual forbearance to pursue the claim. It is a good defence to an action for breach of contract to show that the cause of action has been validly compromised.” (emphasis added)

53. The following passages from The Law and Practice of Compromise with Precedents, 7^th edition, atpages 39 – 46 are directly pertinent to the present context:-

“(1) ‘Where it is plain that a material element in the negotiations remains unresolved, the court is likely to hold that no concluded agreement has been achieved because a material term has not been agreed’: (§3-50).

(2) ‘Where the parties’ agreement is expressed in terms that are too vague to be enforced, the court will decline to hold that a sufficiently certain agreement has been reached’: (§3-51).

(3) ‘It is quite possible for the parties expressly to compromise a particular element or elements in their dispute without coming to an overall settlement.  This in no way results in the particular compromise being regarded as incomplete.  In accident cases involving personal injury, for example, the parties not infrequently agree an apportionment of liability, the assessment of damages being left to the court. Where the question arises as to what was compromised the question is one of construction of the parties’ agreement’:  (§3-65).”

54. At time when the 3^rd defendant was being confronted with the overpayment for the first time in 2009, he admitted instantly and had agreed to refund by way of setting off Fung Kang’s charges in April and May 2009.  This might be considered as a distinct incident. However, as it progressed when more overpayment was found, there came an agreement between the 4^th defendant and David that any further overpayment should be set off in the same way.  The defendants have always been co-operative without challenging the overpayment amount.  The accounts department of both parties participated with accord, and the setting off exercise was carried out smoothly by way of an “invoice by invoice” method.  It is more likely than not there had been a settlement agreement on repaying the overpayment.

55. I also accept the 3^rd, 4^th and 5^th defendant’s evidence with a view to maintain the business relationship with the plaintiffs, the overpayment complaint was admitted without challenging the amount.

56. The A Leung submitted, making part payment to an existing debt is no consideration.  He relied on The Law and Practice of Compromise with Precedents,  6^th edition, at §3-13, page 20:-

“It should be recalled in this context that, in general terms, an agreement to accept part payment of a debt or liquidated demand is not binding because no consideration is furnished by the debtor. This would seem to be so even if, as a matter of fact, the creditor is content to avoid the process of litigation with a view to securing the money indisputedly due to him. If, however, the debtor gives something other than mere part payment of the debt, for example he pays at a different time or place or in a different currency, sufficient consideration is furnished. There are, furthermore, a number of exceptions to the general rule expressed above and the doctrine of equitable estoppel may intervene to protect the debtor.” [Emphasis added]”

The conduct of the defendants, in the outset, was not mere part payment of an existing debt. The repayment was set off monthly by an “invoice-by-invoice” method, this is something more than part payment. It is obvious (and also in the witness statement of David) that the settlement arrangement is made to avoid litigation, with consideration.

57. Mr A Leung submitted, the correspondence of the defendants suggested there was an absence of full and final settlement in 2009.  The defendants sent a draft letter to the plaintiff via an email dated 28 December 2012 that by acceptance of the final sum of $88,317.81 as “full settlement” and “final agreement”; solicitors for the defendants wrote to the plaintiffs’ solicitors on divers date after the said email, offering the acceptance of $88,317.81 be full and final settlement of the dispute.  I do not agree.  No claim on interest was raised by the plaintiffs during the entire setting off exercise, the very first demand was raised in November 2011 and a formal demand was raised in the plaintiff’s letter dated 3 January 2013.  I note the relationship of the parties deteriorated by 2012, when the 3^rd defendant resigned. It is not surprising that the defendants, having been alerted to the fact that the plaintiff is going to raise a claim on interest, to have reinstated the terms of the full and final settlement agreement in their letters.

58. Applying the abovementioned principles, I am satisfied that that a contract has been reached, the defendants’ offer to settle by the setting off exercise, acceptance by the plaintiffs, with a consideration to avoid litigation.  The settlement agreement has been duly performed.

Estoppel by convention

59. The defendants pleaded the plaintiffs are estopped from claiming interest, by submitting the plaintiffs are estopped by convention in a manner that both parties have a shared assumption that the overpayment should be settled by setting off only, without other conditions.

60. The principles relating to estoppel by convention are well established and were recently considered by the Court of Appeal in 何靜敏 v 陳輝煌  CACV 269/2013 (unreported, 11 April 2014).  According to Au J (with whom Cheung CJHC and Lam VP agreed) at §42 and 44:-

“42. The principles relating to estoppel by convention are well established: when the parties have acted in their relationship upon the common assumption that the given state of facts or law is to be accepted between them as true, it would be unfair on one for the other to resile from the agreed assumption. See: Spencer and Bower Estoppel by Representation (4^th ed), VIII.2.1.

43. It is also trite that, as stated by Ribeiro PJ in Unruh v Seeberger (2007) 10 HKCFAR 31 (at paragraphs 133 and 150), three elements must be satisfied for an estoppel by convention to be raised:

“133. As the statements of principle make clear, the parties must enter into some legal relationship on the basis of an assumption that is shared by or common to them both. The commonality of the assumption is what marks out estoppel by convention as a distinct form of estoppel.

…

150. Two further elements must be established for constituting an estoppel by convention. First, there must be an attempt by one party to depart from the common assumption which departure would be unjust because of ‘the part taken by him in occasioning its adoption by the other party’. Secondly, the other party would suffer detriment arising out of his having entered into the relevant transaction on the basis of the common assumption ‘if the opposite party were afterwards allowed to set up right against him inconsistent with the assumption’ when abandoning the common assumption.” (emphasis added)

44. Thus, the party seeking to rely on estoppel by convention has to show that:

(1) The parties must enter into some legal relationship on the basis of a common or shared assumption;

(2) It is unjust for a party to depart away from the said assumption; and

(3) The other party would suffer prejudice.”

61. In the Court of Final Appeal decision of First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd and Another(2012) 15 HKCFAR 569, Lord Collins NPJ, in citing the judgment of Ribeiro PJ from Unruh v Seeberger (2007) 10 HKCFAR 31, summarised the essential elements of an estoppel by convention as follows at §79:-

“(1) The parties entered into some transaction or legal relationship on the basis of an assumption that was shared by or common to them both, and it was the element of commonality of the assumption that marked out estoppel by convention as a distinct form of estoppels[133];

(2) It must be shown that assumption was communicated between the parties and acted upon, and there must be some mutually manifest conduct by the parties [135];

(3) There was no necessity for the parties to believe that the assumed state of affairs was true, nor was there any necessity for the parties to have been mistaken [136];

(4) What is important is for them to act in the belief, manifested by words or conduct, that they are both proceeding with the transaction on the basis of the same shared assumption [137];

(5) The contents of the common assumption must be sufficiently certain to enable the court to give effect to it [138];

(6) Estoppelby convention is concerned with a common assumption relied upon as a basis upon which the persons sharing such assumptions enter into a transaction or legal relationship [142]; and

(7) There must be an attempt by one party to depart from the common assumption which departure would be unjust because of the part taken by him in occasioning its adoption by the other party, and the other party would suffer detriment arising out of his having entered into the relevant transaction on the basis of the common assumption if the opposite party were afterwards allowed to set up rights inconsistent with the assumption [150].”

62. The facts of this case fall squarely into the essentials of estoppel by convention.  It started off with the overpayment, shared assumption of the repayment of the Total Sum, it was communicated by either the 3^rd defendant in May 2009 or the 4^th defendant with David in the same year.  The repayment proceeded by way of monthly “invoice-by-invoice” setting off method.  No evidence be found that either party was mistaken.  It was clear that all parties did not query of the mechanism, and the setting off exercise was evidenced by their manifest conduct for almost 3 years.  The common assumption must be that, the dispute will cease after the Total Sum has been repaid. Blatantly, the plaintiffs attempted to depart from the common assumption in November 2012, after the setting off has been carried out for almost 3 years, by demanding the defendants to compensate them with interest, I find this departure is obviously unjust to the defendants they would suffer detriment.  The defendants should not be allowed to set up the right of enjoying interest arising from the overpayment during the years from 2006 – 2009.

63. The plaintiffs attempted to argue, had there been a common assumption, by (i) letters from the defendants inviting the plaintiff to sign and confirm the last payment of $88,317.81 as full and final settlement; (ii) letters from their solicitors on divers date after January 2013 to the same effect, the defendants have resiled from the common assumption, and that the defendants are not allowed to rely on the doctrine of estoppel.  My analysis would be the same as paragraph 57 above.  The reason being, the issue of claim on interest has never been raised by the plaintiffs prior to the two letters, I do not hold the view that the defendants themselves initiated the issue on interest, but the plaintiffs.

64. Mr A Leung further submitted, the Total Sum cannot be ascertained until late 2012, the plaintiffs are not in a position to raise the claim of interest, and that the parties could not have agreed to the settlement agreement.  As a result, mere silence and/or inactivity of the plaintiff is not sufficient for the defendants to establish shared assumption.  I do not agree.  As both Kenneth and David were unaware of the claim of interest of the Total Sum at time of agreeing the setting off exercise, it could not have qualified mere silence or inactivity of both parties. It is because one should have the knowledge of the issue, ie the claim of interest, before they have acted “silently” or be “inactivated”.

Mitigation of loss

65. More importantly, the plaintiffs controlled the time of setting off.  Upon admission of the defendants, the plaintiffs shouldered the task of cross checking.  Kenneth admitted, he did not set a deadline for Pamela to complete the task.  Pamela testified, although she had done it with her best endeavour, it had taken almost 3 years to complete the entire verification. The defendants assumed a passive role since 2009, they merely waited for the plaintiffs’ notice to issue credit note in whatever amount on a monthly basis.

66. Furthermore, the defendants were being deprived of an opportunity to mitigate the loss of the plaintiffs.  Pamela testified, at the beginning, she set off the whole amount from Fung Kang’s invoice for the current month, it was only on the 3^rd defendant’s request, the plaintiffs set off a lesser amount, month by month from the overpayment.  Had the defendants been alerted to the claim of interest, they could have chosen to set off the overpayment speedily or to upfront the payment to the plaintiffs.  It is not justified for the plaintiffs to have raised a claim on interest when the outstanding amount of the overpayment has almost been repaid.

67. With the foregoing reasons, I am driven to the conclusion that, in light of the settlement agreement, the plaintiffs should be estopped to claim Interest from the defendants.

Conclusion

68. In summary, I conclude the defendants did not conspired to defraud the plaintiffs by overcharging them during the period from 2006 – 2009.  The dispute of overpayment was settled by way of agreement between the parties by adopting an “invoice-by-invoice” setting off method on a monthly basis. The setting off exercise has been duly performed and completed in 25 February 2013.  The plaintiffs are thus estopped from claiming the defendants damages in terms of the Interest of the Total Sum. I therefore dismiss the plaintiffs’ claim.  

69. No special features in case warrant a departure of the general rule that costs should follow the event.  I make an order nisi that the 1^st and 2^nd plaintiffs do pay the costs of the 1^st to 5^th defendants of this action, with certificates of counsel, to be taxed if not agreed. The costs order nisi shall become absolute within 14 days in absence of application to vary.