XCHRX WAVEFRONT TRADING LTD. v. PO SANG BANK LTD.

1997 No. A3359

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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Introduction

1. These proceedings arise from a payment of US$40,000.00 which the Defendant ("the Bank") made to one of its customers. The Plaintiff claims that the money was its property. On the Plaintiff's application for summary judgment under Ord. 14, the master gave judgment for the Plaintiff. The Bank now appeals, contending that it should be granted unconditional leave to defend the action. Unless otherwise stated, all dates in this judgment are dates in 1994.

The facts

2. The facts can be shortly stated. Octagon Enterprises Ltd. ("Octagon") have an account at the Sheung Wan branch of the Bank. In September 1994, a sum of US$100,000.00 was paid into that account. On 12th November, the Plaintiff's solicitors wrote to the Bank. They claimed that the US$100,000.00 represented secret profits made by one of the Plaintiff's directors, and that the money belonged to the Plaintiff. They demanded the immediate payment to them of the US$100,000.00. The Bank declined to pay the money to them. Its position was that it would only do so if a court order required it to do so. Without a court order, it would not even freeze Octagon's account.

3. By 2nd December, the Bank had been served with a generally indorsed writ in the proceedings which the Plaintiff had commenced against the director in question, Octagon and the Bank. The indorsement identified the nature of the director's alleged breach of trust and fudiciary duty, which was said to have given rise to the Plaintiff's claim. However, a Statement of Claim had not been indorsed on the writ, and the Bank therefore did not have notice at that stage of the particulars of the director's alleged breach of trust and fudiciary duty. On the other hand, the Bank was being pressed by Octagon and Octagon's solicitors to pay US$40,000.00 of the US$100,000.00 to Octagon. Although it was open to the Bank - faced as it was with competing claims to the money - to issue an interpleader summons, the Bank decided to pay the US$40,000.00 to Octagon, and it did so on 2nd December.

The Bank's liability to the Plaintiff

4. Although negligence is pleaded as one of the causes of action against the Bank, that cause of action is not relied on - at any rate, at this stage in the litigation. The only basis on which the Bank is said to be liable to the Plaintiff for present purposes is breach of trust: the Bank is said to have acted with such a degree of complicity in the breach of trust and fudiciary duty of the director in question that the Bank should be held to be a constructive trustee liable to account to the Plaintiff. Whether the Bank is in fact liable under the principle of "accessory liability" redefined by the Privy Council in Royal Brunei Airlines v. Tan [1995] 2 AC 378 depends ultimately on whether the Bank acted dishonestly in paying the US$40,000.00 to Octagon.

5. But what constitutes dishonesty in these circumstances? In delivering the judgment of the Privy Council in the Royal Brunei Airlines case, Lord Nicholls addressed that question at some length. In particular, he said at p.389C-E:

"... in the context of the accessory liability principle acting dishonestly ... means simply not acting as an honest person would in the circumstances. That is an objective standard ... Honesty ... [has] a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time ... However, ... [t]he standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour."

Lord Nicholls went on to deal with the case where there is genuine doubt about whether a transaction is authorised or not, for example, where there are competing claims (such as here). He said at p.390F-H:

"The individual is expected to attain the standard which would be observed by an honest person placed in those circumstances. It is impossible to be more specific. Knox J. captured the flavour of this, in a case with a commercial setting, when he referred to a person who is 'guilty of commercially unacceptable conduct in the particular context involved' ... Acting in reckless disregard of others' rights or possible rights can be a tell-tale sign of dishonesty. An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise and the seriousness of the adverse consequences to the beneficiaries."

The application of these principles

6. I see the force of the argument of Mr. Erik Shum for the Plaintiff that in the circumstances which the Bank faced - namely, holding money which it knew to be the subject of competing claims - no honest person would have passed the money to one of the claimants to the exclusion of the other claimant, especially when the Bank did not ask the Plaintiff's solicitors for any further information about the Plaintiff's claim, and when the interpleader procedure provided an appropriate forum for determining the claimants' competing claims. In paying the US$40,000.00 to Octagon, the Bank was, says Mr. Shum, guilty of conduct which in the context can properly be characterised as commercially unacceptable.

7. However, I have decided that the Bank should nevertheless have leave to defend the action for three reasons. First, it is, I think, possible that at trial the court will conclude that the Bank's conduct did not fall below that expected of an honest person in the circumstances. Refusing to comply with a customer's instructions is an extreme step, not to be taken lightly by a bank. The Bank knew nothing at all about the allegations being made against the director in question, save for those referred to in the writ, and when it put the Plaintiff's claims to its customer, its customer flatly denied them. Although there is no evidence as to the advice which the Bank received from its solicitors, it is possible that the Bank was simply acting in accordance with the advice which it had received. And as Mr. Godfrey Lam for the Bank said, banks should not be expected to freeze a customer's account merely upon notice that someone was making a claim against the customer's money in the account. Commerce could not be conducted if that were the position. In those circumstances, it is not possible to exclude the possibility that the Bank will succeed at trial on the issue of dishonesty.

8. Secondly, whether the Bank acted dishonestly is not something which should be decided in summary proceedings under Ord. 14. Ord. 14 does not apply to actions which include a claim by a plaintiff based on an allegation of fraud. I appreciate that it was held in Tan Eng Guan v. Southland Co. Ltd. [1996] 2 HKC 100 that this exclusion is confined to actions based on a claim founded on fraud as strictly defined in Derry v. Peek (1889) 14 App. Cas. 337, namely a false representation made knowingly without belief in its truth. Accordingly, the exclusion does not relate to the present case. On the other hand, the rationale for the exclusion is that it is inappropriate for the court to decide in summary proceedings whether a defendant has been fraudulent. In my view, save in the clearest possible case, it is inappropriate for the court to decide in summary proceedings whether a defendant has been dishonest.

9. Thirdly, the Royal Brunei Airlines case effected a radical shift in the law. Dishonesty must now be established on the part of the bank alleged to be liable to account to a non-customer as a constructive trustee in the circumstances which have arisen in this case. Apart from a recent case heard by Cheung J. in which judgment has yet to be given, this is said to be the first time the courts in Hong Kong have had to consider the impact of the Royal Brunei Airlines case on the conduct of a bank. It would not have been appropriate for the working out of what constitutes dishonesty in those circumstances to be determined in a summary process. It is, I think, no answer to that for Mr. Shum to say that the primary facts in this case are not in dispute. The nature of the advice which the Bank received from its solicitors may well have to be explored at the trial of the action. But even if the primary facts are not in dispute, the fact remains that whether the Bank acted dishonestly in paying the US$40,000.00 to Octagon is an issue which calls for mature consideration in an evolving area of the law, rendering the issue not readily amenable to adjudication in a summary process.

Conclusion

10. For these reasons, I have taken a different view from that of the master, although in her defence I can see how a strong case can be mounted on the Plaintiff's behalf. Indeed, it may be that she was handicapped by the fact that for some reason the skeleton arguments which were lodged did not reach her before the commencement of the hearing. Be that as it may, though, this appeal must be allowed, the order of the master must be set aside, and the Bank must be granted unconditional leave to defend the action.