MEGA SUCCESS RESOURCES LTD v. OCTAGON ENTERPRISES LTD AND OTHERS

HCA1476 /2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1476 OF 2010

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BETWEEN

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D E C I S I O N

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1.  There are two summonses. The first summons is issued by the 1st and 4th defendants to stay this action for arbitration to be held in London. Further, or alternatively, they seek to strike out the plaintiff’s claims which are based on fraud and fraudulent misrepresentations. The second summons is by the plaintiff seeking discovery by DBS Bank Limited of banking documents in the 1st defendant’s bank account.

Background

2.  The action is brought by the plaintiff pursuant to a contract for the sale of iron ore by the 1st defendant to the plaintiff and dated 31 March 2010.

3.  The plaintiff is a Hong Kong company.  The 1st defendant is also a Hong Kong company.  The 2nd and 3rd defendants are the 1st defendant’s shareholders and two of its three directors.  The 4th defendant is the third director of the 1st defendant.  The plaintiff says that the 1st defendant is owned, controlled and managed by the 1st, 2nd and 3rd defendants for the purpose of carrying out fraudulent acts against the plaintiff.  

4.  The 2nd defendant resides in Mexico.  The 3rd defendant resides in Germany.  Orders have been made for service of concurrent writs on them in their countries of residence.  The 4th defendant resides in Hong Kong.  The writ of summons has been served on the 1st and 4th defendants.

The statement of claim

5.  The plaintiff pleaded in the statement of claim that it had been approached by the 2nd and 3rd defendants in early 2010 in Beijing and was told by them that the 1st defendant would be able to supply the plaintiff with substantial quantities of iron ore from its mine in Mexico starting from May/June 2010.  The 2nd and 3rd defendants further represented to the plaintiff that the 1st defendant could produce and supply to the plaintiff 600,000 metric tonnes of iron ore from its mine in Mexico and ship the same in ten equal shipments, and complete the shipments in about the middle of 2011. 

6.  The 2nd and 3rd defendants further represented that the ore would have iron content or about 61.5 per cent, and not lower than 60 per cent, and the first 600,000 metric tonnes to be produced by the 1st defendant from its mine in El Saucito, Mexico would be supplied to the plaintiff exclusively.  The plaintiff, relying on these representations, entered into the said contract with the 1st defendant. 

7.  The 1st defendant, under the contract, had to supply the plaintiff 600,000 dry metric tonnes plus/minus 10 per cent of iron ore.   The price for the first shipment of 60,000 metric tonnes was agreed at US$50/MTFOB Mazanillo, Mexico. 

8.  The contract also provided a first right of refusal to the plaintiff for any further production from the 1st defendant’s operation in Mexico.  Delivery should commence at six weeks after signing of the contract, which was in mid-May 2010.  The 1st defendant guaranteed the ore to have iron content of no less than 61.5 per cent.  If the content is below 60 per cent, the plaintiff could reject the same.  All payments had to be by way of US dollars telegraphic transfer, and the down payment of US$1 million had to be paid within five days of the signing of the contract. 

9.  The plaintiff duly paid the 1st defendant US$1 million on 1 April 2010.  The plaintiff then pleaded that after the making of the contract, the 2nd and 3rd defendants repeatedly represented to and assured the plaintiff that the 1st defendant had commenced production.  The 2nd defendant also represented to the plaintiff that, by 22 July 2010, the 1st defendant had produced about 55,000 MTs of iron ore per the required standard with iron content over 60 per cent and that 27,000 MTs of them were stored in a yard near Mazanillo, Mexico.  The 2nd and 3rd defendants further represented that the ore stored in this yard was produced under the contract for delivery to the plaintiff.  Another 18,000 MTs of the 55,000 MTs were stored at the 1st defendant’s production plant at El Rosario. 

10.  However, the 2nd and 3rd defendants told the plaintiff that the 1st defendant needed operating capital and cash flow and required advance payment of 70 per cent of the value of the first shipment to avoid stoppage of its mining operation. 

11.  In reliance of these representations by the 2nd and 3rd defendants, the plaintiff paid the 1st defendant a total of US$2,944,991, including the US$1 million down payment.  The payments are evidenced by 13 promissory notes issued in favour of the plaintiff. 

12.  Despite the payments, the 2nd defendant, on about 22 July 2010, told the plaintiff that due to insufficient payment by the plaintiff, the 1st defendant was facing an urgent financial situation and had to sell the iron ore to a Dutch company called Trafigura Beheer  BV (“Trafigura”).

13.  The plaintiff then pleaded that the representations referred to above were untrue and fraudulently made by the 2nd and 3rd defendants.  The particulars of fraud given are that:

(a) 23,000 MTs of iron ore already produced had been sold to Trafigura despite continuing payments by the plaintiff at the requests of the 2nd and 3rd defendants;

(b) the 1st defendant had not delivered any ore to the plaintiff despite the representation that the 1st defendant could produce and supply to the plaintiff 600,000 MTs of ore and ship them to the plaintiff in ten equal shipments to complete in mid-2011;

(c) about 12,000 MTs of ore had iron content below 60 per cent and was contrary to the representations that the ore would have iron content of about 61.5 per cent, and not lower than 60 per cent;

(d) the first 55,000 MTs were sold to Trafigura contrary to the representations that the first 600,000 MTs would be supplied exclusively to the plaintiff and that there were 27,000 MTs stored in Mazanillo for shipment to the plaintiff;

(e) payments made by the plaintiff to the 1st defendant were used in matters unrelated to the 1st defendant’s operations and mining pursuant to the contract, and was contrary to the representation that the 1st defendant needed 70 per cent of the value of the first shipment as advance payment to avoid stoppage of the mining and production.

14.  The loss to the plaintiff resulting from the alleged fraudulent misrepresentations is the sum of US$2,944,911 paid to the 1st defendant.  The plaintiff further seeks and damages to be assessed. 

15.  The plaintiff further pleaded that the 1st, 2nd, 3rd and 4th defendants had conspired together in committing the fraud against the plaintiff.  The plaintiff pleaded that there was a combination and/or agreement between the four defendants, or two or more of them conspired together to injure the plaintiff with intent to defraud it into paying US$2,944,991 to the 1st defendant. 

16.  The particulars for the conspiracy are the same particulars pleaded for the fraudulent misrepresentations plus the facts that the 2nd and 3rd defendants owned all the shares of the 1st defendant, and that the 2nd, 3rd and 4th defendants are its directors who cause it to enter into the contract with the plaintiff. 

17.  There is a further claim of breach of contract against the 1st defendant as an alternative, and another claim of money had and received against the 1st, 2nd, 3rd and 4th defendants.

Mareva injunction

18.  The plaintiff has, on 13 October 2010, obtained a Mareva injunction against the 1st defendant, restraining it from disposing of its assets in Hong Kong up to US$2,944,911. 

The Law on Striking Out

19.  I will deal with the striking out part of the summons by the 1st and 4th defendants first.  I have been reminded by the parties that striking out is only for plain and obvious cases.  The claim must be obviously unsustainable that it must be impossible to proceed before it would be struck out.  On an application to strike out, the facts are taken in favour of the party sought to be struck out.  If the validity of the claim is fact sensitive, it should not be struck out.  If the application involves minute and protracted examination of the facts or prolonged and serious argument or determination of difficult question of law, then there should also not be striking out.  (See paragraph 18/19/4 of Hong Kong Civil Procedure 2011 (“HKCP2011”).)

The claim of fraud

20.  The rule for pleading fraud is well established.  I need only refer to paragraph 18/12/16 of HKCP2011:

“18/12/16 (15 Fraud) -An allegation of fraud must be pleaded distinctly and with the utmost particularity (per Bokhary JA in ADS v Wheelock Marden & Co. Ltd [1994] 2 HKC 264 at 270B-C), and it is not allowable to leave fraud to be inferred from the facts (Davy v Garrett (1878) 7 CHD 473 at 489.)

21.  The plaintiff has only pleaded that the representations were false and were made fraudulently by the 2nd and 3rd defendants.  There are no particulars that the 2nd and 3rd defendants knew that the representations were false when they made them; or that they had no intention to abide by them insofar as they were acts to be done by the 1st defendant; and that they made the representations dishonestly. 

22.  The plaintiff does not dispute the existence of the 55,000 MTs of iron ore.  It only pleaded that the 1st defendant had sold them to Trafigura contrary to the representation that the ore was exclusively produced under the contract for shipment to the plaintiff.  But this is merely an allegation of breach of contract. 

23.  The solicitors for the 1st and 4th defendants have, in fact, asked for particulars of fraud by a letter dated 8 November 2010, but they received no reply at all.  The contemporaneous documents also do not support a case of fraud.  There is also not a word in the statement of claim about the 4th defendant having made any of the alleged misrepresentations.

The claim of conspiracy

24.  Regarding conspiracy, there are also well established legal principles for pleading it.  I refer to Pido v Compass Technology Co. Ltd [2010] 2 HKLRD 537 at paragraph 17, where Ma CJHC, as he then was, said:

“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 a 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) Volume 2 at paragraph 51-02)”

25.  Mr Khaw, counsel for the 1st and 4th defendants, also referred to ADS v Wheelock Marden & Co Ltd [1994] 2 HKC 264 at 272(b) to (e), where Bokhary JA, as he then was, said:

“When it comes to a claim in the tort of conspiracy, what the pleader has to do in regard to pleading an overt act or overt acts is this. He has to plead at least one overt act which is the act of all the alleged conspirators or, failing that, a number of overt acts which include at least one act on the part of each conspirator. And the overt act or overt acts pleaded must be such as to show: (i) that the conspiratorial agreement alleged against the defendants had been entered into by each and every one of them; (ii) that the agreement, and not merely the intention of one person alone, was implemented; and (iii) that such implementation caused the damage complained of.

If the pleader fails to do that, then, depending on whether the failure is in respect of all the defendants or only some or one of them, then either the plea is liable to be struck out altogether or it is liable to be struck out as against some or one of the defendants.”

26.  The plaintiff has only pleaded that there was a combination and/or agreement between the 1st to 4th defendants, or any two or more of them to injure the plaintiff by defrauding it of the total sum paid to the 1st defendant.  There is, however, no particular of the agreement itself or the means to carry it out.  There is also no overt act pleaded on the part of the 1st or 4th defendant.  This pleading of a conspiracy is wholly defective.

The plaintiff’s arguments

27.  Mr Hingorani, counsel for the plaintiff, however submitted that once the plaintiff has pleaded “fraud”, there is no need for it to spell out the particulars.  I disagree with that.  Mr Hingorani further submitted that if the plaintiff has pleaded the defendants’ intention that the plaintiff should act on the misrepresentation, then there is no need to plead the defendant’s knowledge of falsity of the misrepresentation.  I also disagree. 

28.  Mr Hingorani further submitted that the defendants’ misrepresentation is that if the plaintiff should pay the money to the 1st defendant as requested, the 1st defendant would produce the iron ore and ship it to the plaintiff.  However, there is no pleading that the 2nd and 3rd defendants knew that the representation was false when they made it.

29.  Regarding conspiracy, Mr Hingorani submitted that it is often proved by circumstantial evidence.  That may be so, but that does not mean that the particulars of the agreement and overt acts need not or cannot be pleaded. 

30.  Mr Hingorani further submitted that the misrepresentations were made over a period of time, and the defendants had an agreement not to supply the iron ore to the plaintiff.  But this is just his assertion and not supported by the pleadings or the evidence.

Decision on striking out

31.  In the premises, I find that the claims of fraud and conspiracy are unsustainable.  Regarding the further claim of money had and received against the 1st, 2nd, 3rd and 4th defendants.  The case against the 2nd, 3rd and 4th defendants for this claim is based on the same allegations pleaded for the conspiracy claim.  This claim against the 4th defendant therefore fails for the same reasons that make the conspiracy claim unsustainable. 

32.  I therefore strike out paragraphs 17 to 24 of the statement of claim and the relief for damages for fraud.  The claim against the 4th defendant is also struck out as there is no more claim against him.

Decision on the application to stay

33.  I now deal with the application to stay by the 1st defendant.  The agreement between the plaintiff and the 1st defendant has an arbitration clause as follows:

“Dispute Resolution

Any dispute arising out of or in connection with this contract including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the rules of the London Court of International Arbitration, which Rules are deemed to be incorporated by reference into this clause. ... The award shall be final and binding and not subject to appeal.”

34.  The parties agree that if I should strike out the claims of fraud and conspiracy, the action should then be stayed and the dispute be resolved by arbitration in London as the dispute is fairly and squarely covered by the arbitration clause.

35.  However, I also wish to consider whether the dispute should be referred to arbitration if I should have allowed the claims of fraud and conspiracy to remain.  Mr Hingorani submitted that with the claim of fraud, I should exercise the power under section 26(2) of the Arbitration Ordinance, Cap. 341 and order that the arbitration agreement shall cease to have effect.  Section 26(2) provides:

“(2) Where an agreement between any parties provides that disputes which may arise in the future between them shall be referred to arbitration, and a dispute which so arises involves the question whether any such party has been guilty of fraud, the court shall, so far as may be necessary to enable that question to be determined by the Court, have power to order that the agreement shall cease to have effect and power to give leave to revoke the authority of any arbitrator or umpire appointed by or by virtue of the agreement.”

36.  This section is the same as section 24(2) of the Arbitration Act 1950 in England.  In Cunningham-Reid & Anor v Buchanan-Jardine [1988] 1WLR 678, Wolfe JA considered section 24(2) of the 1950 Act and said, at 687 C-D, that in circumstances where the party charging fraud is seeking to oppose a stay, a court’s normal approach will not be to accede to his arguments against a stay where the sole matter relied on is his charge of fraud. 

37.  Bingham LJ, in the same case, at 688, observed that Russell v Russell (1880) 14Ch. D. 471 had established that a party accused of fraud can ordinarily require trial in open court if a substantial case is made out against him.  However, if the party charging fraud should oppose a stay, the matter is one for the ordinary exercise of the court’s discretion if a prima facie or substantial case of fraud is made out. 

38.  Dillon LJ also said, at 691 E-F, that a stay will be refused almost as of course if the party charged with fraud wants to clear his name in open court.  But if the party charged with fraud is seeking arbitration, then even if there is a strong prima facie case of fraud in specific respects made out, that is not by itself enough to warrant refusing a stay. 

39.  These principles governing the application of section 26(2) have been summarised by Kwan J in Wan Chung Construction Co. Ltd v Lingnan University & Anor HCCT43/2001, at paragraph 7. 

40.  The plaintiff’s allegation of fraud and conspiracy in this case are very flimsy.  It is by no means a strong prima facie case.  I think if I had to exercise my discretion under section 26(2), I would have done it in the ordinary way and would have stayed the action in favour of arbitration.

41.  The last point made by the plaintiff is that the 4th defendant is not a party to the arbitration agreement and he cannot be forced to arbitrate.  Since the allegations of fraud against the 1st defendant are the same as those against the 4th defendant, if I should stay all the claims against the 1st defendant for arbitration, I would also stay the plaintiff’s claim against the 4th defendant pending arbitration (See Wan Chung paragraph 26 and Paladin Agricultural Limited & Anor v Excelsior Hotel (HK) Ltd [2001] 2 HKC 215 at 224B to 225A.)

Decision on the summons for discovery

42.  Since I have struck out the claims of fraud and conspiracy as against the 1st and 4th defendants, the claim of money had and received as against the 4th defendant and the action as against the 4th defendant and stayed the action as against the 1st defendant in favour or arbitration, the action will not proceed in this court.  There is therefore no point in ordering DBS Bank to make discovery of the banking documents of the 1st defendant in this action.  I therefore dismiss the plaintiff’s summons for discovery as well.

Costs order nisi

43.  Finally I make a cost order nisi that the plaintiff do pay the costs of both summonses to the 1st and 4th defendants, with certificate for counsel.  These costs will be assessed by me summarily at a 9.30 am hearing to be fixed outside the next 14 days, unless the parties can agree the amount in the meantime.  The costs are payable upon assessment or agreement being made on the amounts.