XCHRX Inter Maritime Management Ltd. and Another v. Nicolas Peter Petroyannis

1988 No. A890

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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H E A D N O T E

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Practice and procedure - application for leave to amend Statement of Claim - whether claim is statute barred - whether claim to recover secret commission can be based on constructive trust - whether plaintiffs should be entitled to argue that Lister v Stubbs should no longer be followed.

Nature of a claim for an "indemnity" - whether time runs from date of breach of contract or date when plaintiff damnified.

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J U D G M E N T

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1. On 23rd April 1993, Master Jennings refused the plaintiffs leave to amend their Statement of Claim by adding in new paragraphs 12 A-F. He also refused leave to add two additional plaintiffs and two additional defendants to the writ. However, the Master did give leave to make the amendments contained in new paragraphs 14 A-C. Both sides are dissatisfied with this ruling and have appealed. The Master appears to have refused to give leave to amend to make a number of minor amendments which are not in fact in issue and there are other amendments which are consequential on the major amendments.

2. The writ was issued on 2nd February 1988 and the allegations against the defendant go back to 1985.

3. The 1st plaintiff is a company incorporated in Hong Kong which carries on business as, inter alia, ship broker. The 2nd plaintiff is a Swiss corporation carrying on a similar business. The proposed 3rd and 4th plaintiffs are Liberian Corporations carrying on the business of shipowner.

4. The defendant was employed by the 1st plaintiff as a ship broker from about October 1984. At all material times, the defendant acted as Director of Maritime Affairs of the 2nd plaintiff. It is asserted that the defendant owed various duties to both plaintiffs.

5. It is alleged that in breach of the defendants' duties owed to the plaintiffs, the defendant exploited his position to derive profits and/or bribes and/or secret commissions.

6. Paragraph 12 of the Statement of Claim pleads that in relation to a Charter Party of the M.V. Vesta, the defendant wrongfully received the sum of US$53,213 from the proposed 2nd and 3rd defendants.

7. Paragraphs 12 E-F seek to make allegations in respect of charterparties in relation to 2 vessels, the Noga and Jerom, which are owned by the proposed 3rd and 4th plaintiff. The allegation is that the defendant fixed these charterparties at below market rate and received payments from the 2nd and 3rd defendant in consideration therefor. 5 payments are particularised, the earliest of which is said to be on 14th May 1985.

8. Paragraph 12B alleges that the defendant intended to defraud the 3rd and 4th plaintiff by the terms he fixed in consideration of these payments. This rate was said to be substantially below market rate. The alleged shortfall was put at over $US2m in respect of each of the Noga and Jerom.

9. Paragraph 12E alleges a conspiracy between the defendants to defraud and to injure the 3rd and 4th plaintiff.

10. Mr. Scott for the plaintiffs submits that these amendments should be allowed. Firstly, he submits that the claim contained in these paragraphs is based on a constructive trust and there is no period of limitation referable to these claims (see s.20 Limitation Ordinance) Alternatively, he submits that the plaintiffs only had knowledge of these matters when they discovered these payments through certain Swiss proceedings. They took out their summons to amend on 14th October 1992 which is less than 6 years from April 1987 when they say they got this information. The plaintiffs rely also upon s.26 of the Limitation Ordinance.

11. Mr. Smith for the defendant points out that the charterparties for the Jerom and Noga were made on 18th March 1985. He submits that whether the plaintiffs' claim is in contract (for money had and received) or tort (fraud) or whether they are treated as claims for an account, the relevant period of limitation is in each case 6 years. He submits that the tortious claim must run from the date of the charterparty (18th March 1985) and in relation to the money had and received claim the cause of action dates from the date of payment and there is no suggestion that any payment was made after 20th June 1986.

12. Mr. Smith contends that the case of Lister v. Stubbs [1990] 45 Ch. D. 1 is authority for the proposition that when a secret commission or bribe is paid to an agent, the sum so paid is not held on trust for the principal. It is true that this case does support that proposition.

13. Mr. Scott, on the other hand, submits that Lister v Stubbs is out of touch with modern developments in the law of constructive trusts and he wishes to be able to argue that it should no longer be followed. It is a decision of a strong English Court of Appeal which is of strong persuasive authority, but not binding, on a Hong Kong Court. Further, Mr. Scott indicated that Lister v Stubbs was soon to be considered by the Privy Council on appeal by the Attorney General of Hong Kong from a decision of the Court of Appeal of New Zealand relating to certain assets of a corrupt former Government lawyer in Hong Kong. My enquiry has indicated that this appeal will be heard in October 1993.

14. Although the decision in Lister v Stubbs has some academic support, the great weight of opinion is hostile to the decision. I am grateful to Sir Peter Millett who spoke Orecently in Hong Kong on the topic of bribes and secret commissions. He stated in his conclusion:

"The decision in Lister v Stubbs cannot be supported as a matter of policy, principle or authority."

15. On page 4 of his written paper, he refers to a number of academics who have taken an adverse view of Lister v Stubbs. This list is not intended to be exhaustive but includes the following;

Underhill and Hayton: Law Relating to Trust and Trustees (14th Edition) 305;

Oakley: Constructive Trusts (2nd Edition) 56;

Goff and Jones: The Law of Restitution (3rd Edition) 657;

Pettit: Equity and a Law of Trust (6th Edition) 152;

Meagher, Gummow and Lehane: Equity Doctrines and Remedies (2nd Edition) para. 1322;

Sir Antony Mason (Writing extra-judicially): Essays in Equity (1985) page 246;

Finn: Fiduciary obligations (1977) para. 513.

16. The decision I have to make boils down to this. Should I refuse the plaintiffs' leave to amend on the basis that they cannot succeed on constructive trust because of Lister v Stubbs and are statute barred or should I give them leave to amend to give them an opportunity of arguing that Lister v Stubbs should no longer be followed and thus this claim can be based on a constructive trust.

17. Having considered this matter very carefully and without wishing to involve myself in a detailed analysis of the correctness of Lister v Stubbs and how matters have developed since 1890, I have concluded that I should give the plaintiffs leave to amend to enable them to have an opportunity of being able to argue the point. If later this year the Privy Council upholds Lister v Stubbs, then the defendants can make an application to this Court to have the constructive trust part of the claim struck out. If the Privy Council refuses to follow Lister v Stubbs and supports the constructive trust approach in circumstances such as this, then this case will have to be decided in the light of the law laid down by the Privy Council.

18. As there is no time bar, the claim being based on a trust, and as I think that the plaintiffs should be entitled to argue that Lister v Stubbs is incorrect and does not reflect modern developments in this area of the law, it follows that, in the exercise of my discretion, I should grant the plaintiffs leave to make the amendments sought in new paragraphs 12 A-E and the necessary consequential amendments arising therefrom. To that extent I allow the appeal.

19. Mr. Smith's second objection to the amendment, on the basis that I was with him on the constructive trust point, was that s.26, which provides that time does not run until the plaintiffs have discovered the fraud or concealment or could with reasonable diligence have discovered it, has no applications on the facts of this case. Basically, he submits that the allegation that the rates were fixed far below the average prevailing market rate is tantamount to saying that the plaintiffs should have realized this matter as soon as they saw the rates which must have been at about the time of the execution of the charterparties.

20. In view of my decision on the Lister v Stubbs point, I do not consider it necessary to go into the question whether the plaintiffs can bring themselves within s.26 of the Limitation Ordinance.

21. Mr. Smith's next point was that these amendments should be denied because they are not made in good faith and that I should not be satisfied as to the truth and substantiality of the amendments (See White Book 20/5 - 8/10 and 20/5 - 8/21).

22. In support of this proposition, Mr. Smith sets out a number of matters in paras. 21-28 of his very helpful first skeleton argument. I do not propose to repeat them in this judgment. Some of them are fairly strong forensic points such as the fact that the letters to and from the defendant concerning the termination of his employment do not sit very easily with the allegations which are now made. Further, Mr. Rappaport's role in the final stages of the negotiations leading to the 2 charterparties will require some careful consideration in the light of what is now alleged.

23. I have given all these points very careful consideration. Mr. Smith's submissions, as usual, were made in an economic and persuasive manner. However, I have come to the conclusion that I should exercise my discretion in favour of allowing these amendments and so to that extent I will allow this appeal. Many of the points made by Mr. Smith will still be relevant to the trial where they can be deployed to attack the plaintiff's case in respect of the claims under these 2 charterparties and the credibility of the claim overall. I just do not think it correct to shut out the plaintiffs from making this particular claim on the basis of allegations and counter allegations made in affidavits which have not yet been tested by cross-examination.

24. I now turn to consider the amendments thought to be made under para. 14A-C (and consequentially in part to para. 15).

25. It is alleged that the 1st defendant, in breach of his authority and duties as pleaded, on or about 14th June 1986, and without lawful authority, chartered on behalf of a client of the 1st and 2nd plaintiffs, namely, Petrotrade Inc. the Motor Vessel "Garden State" for the carriage of fuel oil from Scandinavia to Antwerp.

26. Apparently, Petrotrade objected to this on the ground that they had not authorised the charter and thus the 1st defendant was obliged to repudiate the charter with the consequence that the owners of the Garden State, on 4th March 1987, claimed against Petrotrade the sum of US$65,177.62 for loss and damage suffered as a result of the wrongful repudiation of the charterparty.

27. As a result of this, the 1st and 2nd plaintiffs became liable to indemnify Petrotrade in respect of the loss and damage which they had suffered and on 13th May 1991, the plaintiffs paid Petrotrade the sum of $229,595.27 to indemnify them against their loss.

28. This is the basis upon which the plaintiffs now seek to recover that sum against the 1st defendant and this is the claim sought to be made in para. 2 of the prayer to the Statement of Claim.

29. The issue is simple to state. Mr. Scott for the plaintiffs submits that time begins to run from 13th May 1991, the date upon which the plaintifs indemnified Petrotrade by paying them the sum of US$229,595.27.

30. Mr. Smith says "not so - time runs from the date that the 1st defendant acted in breach of his contract which is 14th June 1986". If the latter date is correct, then this amendment is sought to be made more than 6 years after that date.

31. Mr. Smith submits that the breach of contract occurred on 14th June 1986. As at that date, or at any time within the next 6 years, the plaintiffs could have commenced proceedings against the 1st defendant and their cause of action would have been complete. Damage is not an essential ingredient to a claim in contract as it is in tort.

The issue in reality is whether or not this is a claim that can truly be said to be a claim for an indemnity.

32. In Central Electricity Board v. Halifax Corporation [1963] AC 785 at 806 Lord Guest said;

"The date when a cause of action accrues may be said to be the date on which the plaintiff would be able to issue a Statement of Claim capable of stating every fact which, if traversed, it would be necessary for the plaintiff to prove, in order to support his right to judgment."

33. This statement echoes the words of Lord Esher M.R. in Coburn v Colledge [1897] 1 QB 702.

34. It is of course clear that in contract, the cause of action accrues when the breach occurs and it is irrelevant when the damage manifests itself save in cases of fraud or concealment. Mr. Smith submits that the plaintiffs could have commenced proceedings and even obtained a judgment with damages reserved or to be assessed. In support of this proposition, he referred me to Trans Trust v Danubian Trading [1952] 2 QB 297 where at 307 Denning L.J. said;

"If the liability of the sellers to a 3rd party was within the contemplation of the parties, but had not yet been assessed, then the proper cause for the judge was to reserve that head of damages. Judgment could be entered for the damages already ascertained, leaving the rest to be ascertained later by the same or another judge."

35. The issue as to the true meaning of the word "indemnity" was considered in some detail by Neill J. in Telfair Shippina v Inersea Carrier (The Caroline P) [1985] 1 WLR 553. Neill J.'s judgment is important as it analyses three different situations which are frequently said to give rise to a claim for an indemnity. As his judgment has been approved by the Court of Appeal in The Fanti [1989] 1 Lloyds Rep. 239 at 255 per Bingham L.J. and as there had been a divergence of first instance views on this topic, I feel it would be helpful if I set out the relevant passage from Neill J.'s judgment which appears at pages 566 and 567.

36. The learned judge said this;

" From a consideration of these cases and other authorities to which my attention was directed it seems to me that it is possible to identify at least three ways in which a person, A, who has become liable to B may be able to obtain redress from C.

The first way is by an action for damages for breach of contract (or warranty). In such a case A will be in a position to claim that the incurring of his liability to B flowed directly from an act of C which constituted a breach of a contract between A and C or of a warranty given by C to A. The damages will be assessed in accordance with Hadley v. Baxendale (1854) 9 Exch. 341 principles. The cause of action will date from the date of breach.

The second way is by a claim on an express indemnity. In such a case the extent of the indemnity and the time at which the cause of action arises will depend on the construction of the contract. If the indemnity is an indemnity against liability, as it was held to be in Bosma v Larsen [1966] 1 Lloyd's Rep. 22, the cause of action will come into existence when A incurs a liability to B. It may be that in certain circumstances a liability may be incurred for this purpose when the liability is still merely contingent: see Forster v Outred & Co. [1982] 1 W.L.R. 86. If, however, the indemnity is a general indemnity, as the relevant clause was held to be in R. & H. Green & Silley Weir Ltd. v. British Railways Board (Note) [1985] 1 W.L.R. 570, then time will not begin to run against A for the purpose of pursuing his indemnity against C until A's liability to B has been established and ascertained: see below. One may notice in passing that, as the arbitrator pointed out in his reasons, McNair J. did not deal separately with the words "or consequences" in the contractual indemnity in Bosma v. Larsen [1966] 1 Lloyd's Rep. 22.

The third way in which A may claim against C in respect of sums which he has had to pay to B is under an implied indemnity. As I understand the matter, such an implied indemnity would prima facie be a general indemnity of the kind recognised by the common law. The rules relating to what I have described as a general indemnity were explained by Fletcher Moulton L.J. in In re Richardson, Ex parte Governors of St. Thomas's Hospital [1911] 2 K.B. 705, 712:

"If, for instance, B. was bound to pay a sum to A. and C. was bound to indemnify B., ... then B. could not sue C. unless he could aver payment to A. It was the same thing whether it was a case of surety ship, indemnity, or contribution. In all cases before you could make a guarantor pay you must prove that you had actually paid the money. No better example of this could be given than the case of Collinge v. Heywood (1839) 9 A. & E. 633. That was a contract to indemnify a plaintiff against costs, and it was decided that the cause of action arose when he paid the costs, not when the costs were incurred or the attorney's bill was delivered to him; and it happened that it was a point of cardinal importance in that case to decide the moment when the cause of action arose, because it was a question there of the date from which the Statute of Limitations began to run. There the court applied the well-known common law principle that before you can avail yourself of your right of indemnity you must shew that you have paid the money ... the rule in Chancery was somewhat different, and yet, to my mind, it emphasizes the fundamental principle that you must have paid before you have a right to indemnity, because the remedy which equity gave was a declaration of a right. You could file a bill against the principal debtor to make him pay the debt so that you would not be called upon to pay it, and then you obtained a declaration that you were entitled to an indemnity. You could in certain cases have a fund set aside in order that you might be indemnified, to avoid the necessity of your having to pay and then to sue for the money you had paid, which perhaps would not repair your loss and credit even if it discharged the debt. But I do not think that equity ever compelled a surety to pay money to the person to whom he was surety before the latter had actually paid. He might be ordered to set a fund aside, but I do not think that he could be ordered to pay."

It seems clear, however, that even in equity time does not begin to run for the purposes of any limitation period until the liability of the person to be indemnified has been ascertained. I can see no satisfactory distinction on this point between claims on an indemnity and claims between sureties or trustees: cf. Wolmershausen v. Gullick [1893] 2 Ch. 514; Robinson v. Harkin [1896] 2 Ch. 415; Littlewood v. George Wimpey & Co. Ltd. and British Overseas Airways Corporation [1953] 2 Q.B. 501, 519."

37. Mr. Smith contends that the second and third types of indemnity have no application to the facts of this case. The second type is the express indemnity situation not relevant here. The third type is a species of implied indemnity which does not arise in contract, that is the equitable right of a trustee to be indemnified by his cestui que trust.

38. Mr. Smith submits that it is clear that the present case deals solely with Neill J.'s first situation and on that basis the cause of action runs from the date of breach and is thus clearly statute barred. In Neill J.'s analyses A would be the plaintiffs, B would be Petrotrade (who are liable to the owners of the Garden State) and C will be the 1st defendant.

39. Mr. Smith also relies on a statement of Megaw J. in Chandris v. Argo (1963) 2 Lloyds Rep. 64 at 74, where the learned judge said;

"Further, where the claim is for unliquidated damages, it is not a condition precedent - it is not a fact which must exist and be pleaded - that the plaintiff has quantified the amount of this claim; even if all facts existed at the date of the writ which will enable the proper amount of the claim to be determined... Such matters in a claim for unliquidated damages are matters of evidence, not pre-requisites of a cause of action..."

40. Mr. Smith concluded his submissions by contending that not only was the cause of action barred by section 4 of the Limitation Ordinance, but it did not arise out of the same facts as the cause of action pleaded in the Statement of Claim. Accordingly, he submits that I have no discretion but to refuse the amendment. No useful purpose would be served by the amendment and it should be refused (see Ketteman v Hansel [1987] AC 189).

41. How then does Mr. Scott seek to answer these powerful submissions? He submits that it is highly arguable that this case comes within the 3rd approach set out by Neill J. in the Caroline P. He submits that the position in law is not so clear as that stated by Mr. Smith and he submits that I should not now rule that the claim is hopeless but that I should allow this claim to go to trial where this issue can be ventilated in more detail.

42. Mr. Scott referred me to para. 1938 in Volume 1 of Chitty on Contract which, when dealing with this part of the law, states that the modern authorities are conflicting. However, although footnote 84 refers to the Caroline P, it does not refer to the approval given to Neill J.'s analysis by the Court of Appeal in the Fanti in 1989. I was also referred to a book by Mr. McGee on Limitation Periods where the question of indemnity contracts is discussed in some detail. At page 165 one finds the following passage;

"The judgment in Telfair Shipping Corporation v Intersea Carriers offers a detailed and convincing analysis of the problems of accrual of action in indemnity contracts."

43. Footnote 48 notes that Neill J.'s approach has been approved by the Court of Appeal in the Fanti without any detailed analysis of the issues involved. However, at page 164, the author recognises that the previous conflict of authorities has been analysed by Neill J. and a reconciliation suggested in what the author refers to as "the leading authority in this area... the Caroline P".

44. I cannot accept Mr. Scott's submission that I should allow the claim in relation to the Garden State to go to trial. I have considered the authorities cited by both parties and I find the analysis of Neill J. convincing. It seems clear to me that the plaintiffs' cause of action in relation to the Garden State charterparty was complete from the date that the 1st defendant committed the alleged breach of his contract of employment. The plaintiffs had six years thereafter in which to bring the claim and it seems to me that it is no answer to say that the damage, i.e. that which they had to pay Petrotrade - had not been quantified. I have already referred to Denning L.J.'s suggestion as to what should be done in circumstances similar to this. If the plaintiffs had commenced their proceedings within six years, I doubt that they would have had little difficulty in inviting Petrotrade and the owners of the Garden State to quantify their claims so that they could be claimed as damage suffered by the plaintiffs as a result of the 1st defendant's alleged breach.

45. In my judgment, the cause of action in this case clearly arose on the date when the 1st defendant chartered the Garden State without authority and in breach of his duties to the plaintiffs. The plaintiffs had six years from that date to commence this action and they have only themselves to blame for waiting until October 1992 to seek to include the Garden State claim in these proceedings.

46. I therefore allow the appeal against the Master's leave to amend to include the claim set out in para. 14A-C of the amended Statement of Claim.

47. The plaintiffs must now submit to me a new proposed amended Statement of Claim which complies with this judgment and I will give leave for that version to be substituted for the version the subject matter of this summons and appeal and I will then give leave for such amendments to be made. The amendments will take effect from the date that they were sought.

48. It also follows that I give leave to add the 3rd and 4th plaintiffs and the 2nd and 3rd defendants to the writ.

49. As for costs, both sides have achieved a measure of success in this appeal and cross-appeal and, in those circumstances, I think that the justice of the case requires that the plaintiffs should pay the 1st defendant the costs of and occasioned by the amendments but the costs of the hearing before me should be costs in cause. Costs before the Master should also be costs in cause. I therefore make this costs order nisi.