CREDIT ONE FINANCE LTD v. YEUNG KWOK CHI AND OTHERS

HCA 33/2016

[2020] HKCFI 2450

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 33 OF 2016

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J U D G M E N T

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1.  These proceedings arise out of a dispute over the validity of a power of attorney the execution of which was witnessed by a conveyancing clerk at a firm of solicitors, Messrs K. L. Leung & Co (“the Firm”), of which the 3rd defendant (“D3”) herein was the sole proprietor at the relevant time. On the face of the power of attorney, Leung Oi Kam (the 2nd defendant (“D2”) herein) appointed her son Yeung Kwok Chi (the 1st defendant (“D1”) herein) as her lawful attorney to carry out various acts in relation to a property. The power of attorney was then used by D1 to obtain two loans from Credit One Finance Limited, a licensed moneylender and the plaintiff (“P”) herein. In this action, P claims against D1 and D2 for the outstanding balance under the loans or alternatively for money under the law of unjust enrichment. P also claims against D3 in negligence and breach of duty in the event that the various loan documents executed by D1 and D2 are held to be invalid. This is the trial involving only P, D2 and D3.

A.  THE RELEVANT FACTUAL BACKGROUND

2.  The parties have helpfully prepared a statement of agreed facts and an agreed chronology (“Agreed Chronology”) which were provided to the Court before the trial.  The facts set out in this section are either derived from these agreed documents, or are undisputed or indisputable.

3.  At all material times:

(1)  P was and is a licensed money lender in Hong Kong under the Money Lenders Ordinance (Cap 163);

(2)  D1 is the son of D2;

(3)  D2 was and is the registered owner of a property known as Unit 4, 14th Floor, Block N (Hoi Lung Court), No 6 Nam Ning Street, Aberdeen Centre, Hong Kong (“the Property”);

(4)  D3 was:

(a)  a solicitor in Hong Kong and the sole proprietor of the Firm until 27 August 2016;

(b)  the employer of Mr Yum Wai Keung (“Mr Yum”);

(5)  Mr Yum was a conveyancing clerk at the Firm.

4.  On 14 April 2015, D1 telephoned and asked Mr Yum to prepare a power of attorney to enable him to assist his mother (D2) in handling the Property.

5.  On 15 April 2015,

(1)  D1 came to D3’s office together with a person purporting to be D2 and provided to Mr Yum a “letter of authority” in Chinese dated 15 April 2015 purportedly signed by D2 to authorise D1 to deal with matters concerning the Property (“15 April Authority Letter”);

(2)  Mr Yum prepared a power of attorney (“POA”) which was executed by the person purporting to be D2 in Mr Yum’s presence and which Mr Yum dated 15 April 2015;

(3)  D3 verified Mr Yum’s signature as witness on the POA.

6.  On 16 or 17 April 2015, P received a referral from an intermediary called Wallace that D1 and D2 wanted to borrow a loan in the sum of HK$1.2 million (“Initial Loan”) by mortgaging the Property.

7.  On 28 April 2015, Mr Lau Kam Wah, P’s Assistant General Manager, verbally enquired with D1 whether he would agree to certain conditions for the Initial Loan.  D1 verbally agreed to the conditions.

8.  On 28 April 2015,

(1)  D1 telephoned Mr Yum and said that he had applied to a finance company for a loan and requested D3’s assistance regarding processing the necessary loan documentation;

(2)  P sent a letter to P’s solicitors, Messrs Cheung & Choy (“C&C”), and D1 and D2 to confirm the granting of the Initial Loan to D1 and D2 on the security of the mortgage of the Property.

9.  On 29 April 2015,

(1)  C&C sent, inter alia, copies of the mortgage over the Property to D3 and requested, inter alia, a certified true copy of the HKID of D1 and D2, and the POA;

(2)  D1 executed for himself and purportedly on behalf of D2 two sets of loan application forms in relation to the Initial Loan at P’s office witnessed by Mr Lau Kam Wah.

10.  On 30 April 2015, D1 produced to Mr Yum another “letter of authority” dated 29 April 2015 in Chinese purportedly signed by D2 (“29 April Authority Letter”), which on its face appointed D3 as her representative to handle matters relating to the Property.

11.  Further, on 30 April 2015, D1 executed for himself and purportedly on behalf of D2 the following documents:

(1)  a written loan agreement dated 30 April 2015 (“Initial Loan Agreement”) between P (as the lender) and D1 and D2 (as the borrowers) for the Initial Loan at P’s office; and

(2)  a tripartite legal charge / mortgage over the Property dated 30 April 2015 (“Mortgage”) between P (as the mortgagee), D2 (as the mortgagor), and D1 and D2 (as the borrowers) at the Firm’s office.

12.  On 30 April 2015, D3 sent to C&C, inter alia, the Mortgage and other documents required by P in respect of the Initial Loan.

13.  On 30 April 2015, P through C&C issued a cheque for the sum of HK$1,171,450 (being the balance of the Initial Loan after deducting a sum of HK$28,550) in favour of D1 which was released to D1 through the Firm.  The cheque was cashed on the same day.

14.  According to P, save for a payment of HK$33,835 on 3 June 2015, no payments were made to P in accordance with the Initial Loan Agreement.

15.  On 13 August 2015, at P’s office, D1 executed for himself and purportedly on behalf of D2 a written loan agreement dated 13 August 2015 (“Loan Agreement”) between P (as the lender) and D1 and D2 (as the borrowers) for another loan of HK$2.3 million (“Loan”).

16.  On the same day, P released to D1 two crossed cheques drawn by P in favour of D2 in the sums of HK$450,000 and HK$563,224 (being the balance of the Loan after settling the outstanding balance of the Initial Loan).  Both cheques were subsequently deposited into the joint bank account of D1 and D2.

17.  Save that (1) HK$64,400 was repaid to P on 13 September 2015, and (2) HK$64,400 was repaid to P on 13 October 2015, no other payments were made to P in accordance with the Loan Agreement.

18.  On 7 January 2016, P commenced these proceedings against D1 and D2.  D3 was joined as an additional defendant on 1 February 2018.

B.  THE ISSUES FOR DETERMINATION

19.  The parties have agreed a list of issues for the Court’s determination at the trial.  In the light of the parties’ pleadings, I consider the agreed issues as appropriate.  The 10 agreed issues are as follows:

(1)  Whether D2 executed the POA.

(2)  Whether the POA conferred authority on D1 to act on behalf of D2 to enter into on her behalf (a) the Initial Loan Agreement; (b) the Mortgage and (c) the Loan Agreement.

(3)  If the answers to (1) and (2) above are no, whether each of the documents at (2) above represented or amounted to a valid and binding agreement.

(4)  Whether the Initial Loan Agreement and/or the Loan Agreement was in breach of sections 18, 20 and/or 22 of the Money Lenders Ordinance (Cap 163) (“MLO”).  If so, whether the Court ought to exercise its discretion under sections 18(3) and/or 22(2) of the MLO to enforce the Initial Loan Agreement and/or Loan Agreement.

(5)  Whether P is entitled to claim the outstanding balance of the loan under the Loan Agreement on the ground of money had and received.  In particular, whether the claim (if any) would be defeated by illegality and/or change of position.

(6)  Whether D3 owed P a duty to exercise reasonable skill and care in ensuring the proper execution of the POA and/or the Mortgage, including verifying:

(a)  it was D2 who executed the POA; and

(b)  D1 had proper authority to execute the Mortgage for and on behalf of D2.

If so, whether D3 has breached such duty and if so, whether his breach has caused P to suffer loss and damage.

(7)  Whether D3 represented to P that:

(a)  the POA was personally signed by D2;

(b)  the POA was a genuine and legally valid document;

(c)  D3 had instructions to act for both D1 and D2 in relation to the Mortgage;

(d)  D2 by the POA authorised D2 as her true and lawful attorney to act on her behalf on matters concerning the Property; and/or

(e)  the Mortgage was a genuine and legally valid document.

If so, whether such representations were false and made fraudulently or negligently by D3 to P; whether P relied on any of the alleged representations in entering into the Initial Loan Agreement, the Mortgage and/or the Loan Agreement; and if so, whether P sustained any consequential loss.

(8)  Whether D3 was authorised to act on behalf of D2 in respect of the Mortgage; and if not, whether D3 acted in breach of warranty of authority to P; and if so, whether P had relied on the warranty in entering into the Initial Loan Agreement, the Mortgage and/or the Loan Agreement.

(9)  Whether P is entitled to any relief from D1, D2 and D3.  If so, what should be the appropriate relief to be granted in favour of P against each of D1, D2 and D3, or any of them.

(10)   What should be the appropriate relief (if any) to be granted in favour of D2 against P in respect of her counterclaim.

C.  ISSUE 1: WHETHER D2 EXECUTED THE POA

20.  It is D2’s case that she did not attend the Firm’s office on 15 April 2015 and did not sign the POA on that day, or indeed any other documents that Mr Yum received. 

21.  The question of whether or not D2 executed the POA is essentially a question of fact to be determined principally by an assessment of D2’s credibility.  On D3’s case, there are two other persons who were present at the Firm’s office on 15 April 2015 together with D2: namely D1 and Mr Yum.  D1 did not attend the trial and therefore did not give evidence.  I put minimum weight on Mr Yum’s evidence as to whether it was D2 who executed the POA on 15 April 2015 because Mr Yum was not acquainted with D2 prior to that day and would not be able to tell definitively whether the woman she met on the day was indeed D2.

22.  In making my findings of fact in this case, I adopt the following general principles as to fact finding and assessment of credibility I set out in Hui Cheung Fai v Daiwa Development Ltd (unreported, HCA 1734/2009, 8 April 2014) at §§77-80:

“77. Generally speaking, contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility: Onassis v Vergottis [1968] 2 Lloyd’s Rep 403 at 431 (Lord Pearce) …

78. In deciding whether to accept a witness’s account, importance should also be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events: eg Lam Rogerio Sou Fung v Tan Soon Gin George (unreported, HCA 2576/2005, 5^th May 2011) §39 (Chu J).

79. In determining a witness’s credibility, I have also attached importance to the consistency of the witness’s evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence. The latter type of consistency is often tested by a comparison between the witness’ oral testimony and his or her witness statement.

80. I have cautioned myself against the dangers of too readily drawing conclusions about truthfulness and reliability solely or mainly from the appearance of witnesses: Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336 at §§36-37 (Bokhary PJ).

81. The practical approach to assessing credibility of witnesses in a case such as the present may have best been summarised by the words of Robert Goff LJ, as he then was, in The Ocean Frost [1985] 1 Lloyd’s Rep 1 at 57:

‘Speaking from my experience, I have found it essential in cases of fraud, when considering the credibility of witnesses, always to test their veracity by reference to the objective facts proved independently of their testimony, in particular by reference to the documents in the case, and also to pay particular regard to their motives and to the overall probabilities. It is frequently very difficult to tell whether a witness is telling the truth or not; and where there is a conflict of evidence such as there was in the present case, reference to the objective facts and documents, to the witnesses’ motives, and to the overall probabilities, can be of very great assistance to a Judge in ascertaining the truth.’

82. Whilst these words were spoken in the context of a fraud case, I believe they are applicable to any case where a witness’ credibility features prominently in the court’s determination…”

23.  On the whole, I regard D2’s evidence on the POA as straightforward and find her to be a credible witness.

(1)   She gave evidence that she had never signed the POA or the two Authority Letters, that she never authorised D1 to mortgage the Property or to use the Property as mortgage to obtain any loan, that she had never attended the Firm’s office or had contact with any staff of the Firm, and that she had never given her original or copy HKID card to D3 or his staff.  Such evidence remained largely consistent despite cross-examination by counsel for P and D3.  Although there were some slips in her cross-examination where she did not directly answer the questions, I did not think that she was trying to be evasive.  She is 86 years old and it is understandable that she might not have fully understood all the questions that were asked of her in cross-examination.  I reject D3’s criticisms of her evidence as set out in D3’s written closing submissions.

(2)   She also said in her witness statement that it has always been her wish to live in the Property until the day she passes away.  In the light of this (and there was no cross-examination to suggest otherwise), it seems to me to be inherently improbable that she would execute the POA to appoint D1 to do a variety of acts in relation to the Property, or authorise D1 to mortgage the Property for a loan.

(3)   It follows that I reject D3’s submission that D2 executed the POA and then knowingly allowed D1 to use the POA to borrow money for his own benefit.   

24.  Further, D2 has adduced handwriting expert evidence from Madam Lee Gek Kwee.  It was Madam Lee’s conclusion that the signatures on the POA and the two Authority Letters were not those of D2. Neither P nor D3 has adduced handwriting expert evidence to suggest otherwise. Madam Lee was not required to give oral evidence at the trial and her opinion evidence is therefore unchallenged.  In my view, I regard the handwriting evidence to corroborate D2’s case that she did not sign the POA or the two Authority Letters. 

25.  It is also right for me to record that P in its written closing submissions had accepted, after hearing and testing D2’s evidence at trial, that it is more likely than not that D2 did not sign the POA on 15 April 2015, and that D2 is a truthful witness.

26.  On Issue 1, I make the following findings of facts:

(1)  D2 did not attend the Firm’s office, and therefore did not sign the POA at the Firm’s office, on 15 April 2015.

(2)  D2 did not sign the 15 April Authority Letter, the 29 April Authority Letter, or the copy of D2’s HKID card with a purported signature of D2.

27.  It is also convenient for me at this juncture to make the other relevant factual findings on what I find to have taken place on 15 April 2015 at the Firm’s office, as well as the events that happened immediately before and after 15 April 2015.  In doing so, I also give my reasons as to why I dismissed P’s application to amend its Re-Re-Re-Amended Statement of Claim on the fourth day of the trial (on 11 June 2020).

(1)  On 14 April 2015, D1 telephoned Mr Yum and asked him to prepare a power of attorney to enable him to assist his mother (D2) in handling the Property.  This has been set out in paragraph 4 above and is derived from the Agreed Chronology.

(2)  On 15 April 2015, D1 came to D3’s office together with a person purporting to be D2 and provided to Mr Yum the 15 April Authority Letter.  This has been set out in paragraph 5 above and is derived from the Agreed Chronology.  Given that I have already found that D2 did not attend the Firm’s office on 15 April 2015, the person whom D1 accompanied at the Firm’s office on 15 April 2015 was not D2, but was an imposter pretending to be D2 (“the Imposter”).  The Imposter was introduced by D1 to Mr Yum as D1’s mother.

(3)  Mr Yum was informed by D1 and the Imposter that a power of attorney was required to give D1 the necessary authority to handle the Property.

(4)  There is a dispute between the parties as to whether D2’s original HKID card was produced to Mr Yum on 15 April 2015.  Mr Yum’s evidence was that the original HKID cards of both D1 and D2 were produced and presented to him on 15 April 2015.  However, P submitted that Mr Yum was not shown D2’s original HKID card on that occasion.  D2 submitted that there are two possibilities: (a) D1 had obtained D2’s original HKID card without her knowledge, which was then presented to Mr Yum on 15 April 2015, or (b) Mr Yum was only shown a copy of D2’s HKID card on 15 April 2015.  It was submitted by Mr Keith Lam, D2’s counsel, that it does not matter to D2 which possibility the Court finds for.

(5)  D2’s evidence was that her original HKID card would be kept either in a locked closet or in a locked drawer at the Property.  D2 explained in her evidence that D1 had a key to the Property and could freely gain access to it, and that the lock of her drawer is a very common lock.  She accepted both in her supplemental witness statement and in cross-examination that it was possible that D1 had obtained access to her original HKID card without her knowledge or approval.

(6)  Two matters were relied upon by P and D2 to suggest that no original HKID card of D2 was produced to Mr Yum on 15 April 2015.

(a)  The first was that in a taped conversation in June 2016 between D1 on the one hand, and D2 and another son of hers on the other, D1 said that he had given a photocopy of D2’s HKID card to a finance company.  Given that D1 did not give evidence at the trial and did not in the taped conversation deny giving D2’s original HKID card to D3, I do not regard D1’s statement in the taped conversation as sufficient to cast doubt on Mr Yum’s direct evidence on this issue. 

(b)  P and D2 also placed reliance on the existence of various photocopies of D2’s HKID card which have held by D3 at different times.  It was submitted that (i) the explanations given on behalf of D3 of the provenance of such copies are implausible, incredible and unbelievable, (ii) Mr Yum’s evidence that he was provided with D2’s original HKID card on 15 April 2015 should be rejected, and (iii) the Court should infer that Mr Yum was only given a copy of D2’s HKID card on that day.  Whilst I do have some reservations about Mr Yum’s evidence as to how D3 came to have each of the photocopies of D2’s HKID card, I am unable to accept the submissions of P and D2 that I should therefore completely reject Mr Yum’s evidence on all matters.  In particular, given that this appears to have been a run-of-the-mill transaction for D3 and Mr Yum and that the transaction happened more than 5 years ago when Mr Yum gave evidence in court, I can understand why D3 and Mr Yum were not able to recall or explain to the Court how D3 came to possess each of the various photocopies of D2’s HKID card.  I also reject P’s submissions that there was any fraudulent or reckless act on the part of D3 in dealing with the photocopies of D2’s HKID card at any time.

(7)  Having considered all the evidence and submissions, I find on a balance of probabilities that D2’s original HKID card was produced by D1 and the Imposter to Mr Yum on 15 April 2015.  I further find that after being provided with the original HKID card of D2, Mr Yum compared the photograph on D2’s HKID card with the Imposter’s face and was satisfied that the Imposter was D2.  Mr Yum also photocopied the original HKID cards of D1 and D2.

(8)  Mr Yum then conducted an online search of the Land Registry in relation to the Property and confirmed D2 to be the registered owner of the Property.  He also retrieved the assignment dated 24 May 1980 from the online search engine from which he obtained a description of the Property for the purpose of preparing the POA.  He then prepared the POA based on the Firm’s precedent.

(9)  Mr Yum went through the POA with the Imposter explaining the contents of each paragraph.  Afterwards, the Imposter intimated to Mr Yum that she understood the effect of the POA and executed it in Mr Yum’s presence.  Mr Yum also signed the POA as a witness to D1’s signature and the signature of the Imposter.  The POA was then dated 15 April 2015 by Mr Yum.

(10)  Mr Yum then took the executed POA to D3.  D3 confirmed with Mr Yum that (a) Mr Yum had checked the HKID cards of D1 and D2 and that D2 was the registered owner of the Property, (b) Mr Yum had explained the terms and effect of the POA, (c) the POA was executed in the presence of Mr Yum. After the confirmations were provided by Mr Yum, D3 signed on the POA to verify Mr Yum’s signature as witness.

(11)  Towards the end of Mr Yum’s cross-examination by Mr Jonathan Chang SC (appearing with Ms Esther Mak) acting for P on the fourth day of trial, a series of propositions were put to Mr Yum, one of which was that D1 did not accompany anyone to the Firm’s office on 15 April 2015.  If no one purporting to be D2 was present at the Firm’s office on 15 April 2015, it would mean, amongst other things, that (a) the POA was not executed by anyone purporting to be D2, (b) Mr Yum did not witness the execution of the POA by anyone purporting to be D2, and (c) Mr Yum did not interpret the contents of the POA to anyone purporting to be D2.  This would have amounted to a case of fraud against D3. The Court then stopped Mr Chang’s cross-examination and enquired with counsel the state of P’s pleading against D3 in the absence of Mr Yum.  This prompted P to bring an application to amend the Re-Re-Re-Amended Statement of Claim to include, amongst others, the allegations in (a), (b) and (c) above as particulars of fraud against D3.  After hearing submissions from counsel, I dismissed the application with costs to D3 with a certificate for 2 counsel, and indicated that my reasons would be set out in the judgment.  My reasons for dismissing the application were two-fold.  First, the application was made far too late and no good reason had been proffered by P for making such a late application. Second, this constituted a new case of fraud against D3 and was never suggested by P until its cross-examination; indeed, one of the proposed amendments was inconsistent with P’s Opening Submissions which stated that “[on] 15 April 2015, D1 attended D3’s office together with a woman purporting to be D2 …”. The mounting of such a new case would have caused substantial and material prejudice to D3.  If the proposed amendments were allowed, D3 would have to carry out a number of additional steps in the middle of the trial, including taking of instructions to properly deal with the new allegations, amending D3’s defence, and considering whether to adduce additional evidence to rebut the new allegations (such as calling new witness(es) to establish that D1 came to D3’s office on 15 April 2015 with someone else).   These matters would have in turn inevitably caused distractions to D3, and indeed the Court, during the trial.

D.  ISSUES 2 AND 3: WHETHER THE POA CONFERRED AUTHORITY ON D1 TO ACT FOR D2 TO ENTER INTO VARIOUS TRANSACTIONS AND WHETHER VARIOUS DOCUMENTS ARE VALID AGREEMENTS

28.  In the light of my finding that D2 did not execute the POA, it must follow that (1) the POA had no effect to confer any authority on D1 to act on behalf of D2 to enter into the Initial Loan Agreement, the Mortgage and the Loan Agreement on D2’s behalf, and (2) each of the Initial Loan Agreement, the Mortgage and the Loan Agreement is not a valid and binding agreement as between P and D2.

E.  ISSUE 4: WHETHER THE INITIAL LOAN AGREEMENT AND THE LOAN AGREEMENT WERE IN BREACH OF THE MLO

29.  The issues for the Court’s determination under Issue 4 are whether the Initial Loan Agreement and/or the Loan Agreement was in breach of sections 18, 20 and/or 22 of the MLO, and if so, whether the Court ought to exercise its discretion under sections 18(3) and/or 22(2) of the MLO to enforce the two agreements.   These issues arose because (1) P’s pleaded case is that the two agreements ought to be enforced despite non-compliance of the provisions in the MLO and (2) D2’s pleaded case is that she is not bound by the agreements and the Court should not in any event exercise its discretion to enforce the agreements as against her.

30.  In view of my decision that the Initial Loan Agreement and the Loan Agreements are not legally binding agreements as between P and D2, and the fact that P now accepts that the agreements are not binding on D2, it is no longer necessary for the Court to determine whether the agreements were in breach of the various provisions in the MLO, or whether the Court’s discretion should be exercised under the MLO to enforce them as against D2.

F.  ISSUES 5 AND 10: WHETHER P CAN CLAIM OUTSTANDING BALANCE ON GROUND OF MONEY HAD AND RECEIVED AND WHETHER D2 IS ENTITLED TO ANY RELIEF

31.  P also advances a claim in money had and received against D2 for HK$1,013,224 (together with interest thereon) paid under 2 cheques issued to D2 and credited to her joint bank account with D1.  There is no dispute that (1) a sum of HK$450,000 was deposited by cheque into a joint bank account of D1 and D2 with Standard Chartered Bank (“Joint Account”) on 14 August 2015, and (2) a sum of HK$563,224 was deposited by cheque into the Joint Account on 17 August 2015.

32.  D2 advances two main points to contend that she is not liable for the HK$1,013,224.  First, she says P is not entitled to run a restitutionary claim against her because it is not pleaded.  Further, she argues that because money was withdrawn from the Joint Account by D1 shortly after the payments by P without her knowledge, she was not enriched or should not be liable to repay because of a change of position.

F1.   The Pleading Objection

33.  In paragraph 31C of its Re-Re-Re-Amended Statement of Claim, P pleads “Further or alternatively, the Plaintiff claims the sum of $2,137,216.55 … as money had and received by the Defendants to the use of the Plaintiff …”.  As mentioned above, P now confines this claim against D2 to the sum of HK$1,013,224.

34.  In her Re-Re-Re-Re-Amended Defence and Counterclaim, D2’s response is, amongst other things, that (1) she denies having received any sum of money, (2) further or alternatively, her position has changed.

35.  D2 argues that paragraph 31C of P’s Statement of Claim does not set out the factual basis of its claim for money had and received, and therefore P cannot at trial pursue a general claim for money had and received against D2.

36.  P’s claim against D2 for HK$1,013,224 arises because P is unable, by reason of my conclusion that the Initial Loan Agreement and the Loan Agreements are not legally binding agreements as between P and D2, to sue in breach of contract to recover any money from D2.  Such a claim is based on the law of unjust enrichment.

37.  It is a principle in the law of unjust enrichment that restitutionary remedies cannot be awarded where their effect would be to subvert what the parties have agreed in a valid contract: see e.g. G Virgo, The Principles of the Law of Restitution (3rd ed, 2015) (“Virgo”) pp 133-134.  Therefore, for example, where a benefit is transferred to the defendant pursuant to a contractual obligation, the continued existence of the contract will usually defeat the restitutionary claim.  As Millett LJ said in Portman Building Society v Hamlyn Taylor Neck (a firm) [1998] 4 All ER 202 at 208d-e:

“The continuing validity of the transaction under which the money was paid to the firm is, in my judgment, fatal to the society's claim. The obligation to make restitution must flow from the ineffectiveness of the transaction under which the money was paid and not from a mistake or misrepresentation which induced it. It is fundamental that, where money is paid under a legally effective transaction, neither misrepresentation nor mistake vitiates consent or gives rise by itself to an obligation to make restitution.”

Similarly, in Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79, Ribeiro PJ at §92 said:

“While a contract continues to subsist between the parties, one party who makes a payment to the other party in accordance with his obligations under that contract cannot be allowed to mount a claim in restitution for the return of that sum since such a claim would be inconsistent with what the parties had agreed. It is in this sense that the contract would be “undermined” or, as Professor Birks puts it, that the restitutionary claim would “subvert bargains” (Birks, An Introduction to the Law of Restitution (1989 Rev ed.) p.47).”

38.  In the course of his closing submissions, Mr Lam acting for D2 queried the validity of P’s restitutionary claim because, he argued, the loan agreements between P and D1 remained valid and the sums of money received by D2 were paid pursuant to such loan agreements.  As I understand it, the argument is that P cannot pursue a restitutionary claim against D2 unless and until the loan agreements as between P and D1 are also discharged or set aside.  In my view, this is not a sound argument.  In this case, the principle set out in the previous paragraph would come into play if the contract between P and D2 still subsists: the law of unjust enrichment would be said to subvert what P and D2 have decided in that contract if P is permitted to pursue a restitutionary claim against D2 when their contract continues to exist.  However, given that the Initial Loan Agreement and the Loan Agreements are not legally binding agreements as between P and D2, I do not see any valid objection for P to pursue a restitutionary claim against D2. The “no subversion” principle does not in my view require P to discharge or set aside the contract as between P and D1 before P can make a restitutionary claim against D2.

39.  In my view, P has adequately and sufficiently pleaded a restitutionary claim against D2 in its Re-Re-Re-Amended Statement of Claim. 

(1)  The sum sought to be recovered from D2 is described by P in its pleading as “money had and received by [D2] to the use of the Plaintiff” and the claim is made on a basis further or alternative to the basis that has been pleaded in the earlier part of the pleading. 

(2)  Money had and received is a common law claim derived from the old form of action called indebitatus assumpsit, and is applicable where the plaintiff wishes to recover money which has been paid to the defendant.  It is now regarded as a common law restitutionary claim based on unjust enrichment: Westdeutsche Bank v Islington LBC [1996] AC 669 at 683B (Lord Goff) & 710E-G (Lord Browne-Wilkinson); Cheong Shing Ltd v Yu Kwan (2008) 11 HKCFAR 594 at §54 (Litton PJ). Similarly, a cause of action for money had and received where consideration has totally failed is now generally regarded as a species of claim for restitution based upon principles of unjust enrichment: Shanghai Tongji (above) at §66 (Ribeiro PJ).

(3)  By seeking to recover a sum of money from D2 as “money had and received” in its pleading on a basis different to that set out in the earlier part of the pleadings, P has in my view sufficiently informed D2 that it is making a restitutionary claim for specified sums of money against her.  Reading the Re-Re-Re-Amended Statement of Claim as a whole, it seems to me fairly clear that P’s restitutionary claim is advanced against D2 on the footing that P’s contractual claim against her fails. 

(4)  It is true that P’s pleading could be improved by spelling out the ground(s) for restitution as to why P says it is unjust for D2 to retain the money.  However, given the way in which P’s pleading would reasonably be read and understood by an objective person as described in the previous sub-paragraph, I do not regard the absence of reference to any “unjust factor” in P’s pleading to be fatal to its restitutionary claim as against D2.

40.  Indeed, it does not appear that D2 has been taken by surprise by P’s advancement of a restitutionary claim against her.  D2 has seen fit to amend her Defence and Counterclaim to include a defence of change of position, which is a well-established defence to a restitutionary claim.  As I understood it, I believe Mr Lam in his closing submission fairly accepted that D2 would not have conducted her defence differently even if P’s restitutionary claim has been pleaded in the way that Mr Lam says it should have been pleaded.

41.  For the above reasons, D2’s pleading objection fails.

42.  I do not wish this judgment to be understood as suggesting that a pleader can simply plead the phrase “money had and received by the defendant to the use of the plaintiff” in a pleading as a sufficient substitute for a properly pleaded claim in unjust enrichment.  The functions of pleadings include enabling each party to know the case he has to meet, ensuring that no one is taken by surprise at the trial, and enabling the court to focus on the specific matters in dispute which the parties themselves have raised by their pleadings.  The reason why D2’s pleading objection fails in this case is because I do not consider P’s pleading has undermined any of the functions of pleadings. 

43.  As the Chief Justice has said, pleadings impose a necessary discipline and are fundamental to enabling every procedural facet of the adversarial system to operate fairly: Sinoearn International Ltd v Hyundai-CCECC Joint Venture (2013) 16 HKCFAR 632 at §34.  In order to ensure that all the material facts in an unjust enrichment claim are pleaded, I share the views of the learned editors of Goff & Jones: The Law of Unjust Enrichment (9th ed, 2016) (“Goff & Jones”) at §1-36 that it is desirable for the plaintiffs to abandon the old language of the forms of action (e.g. “money had and received”) when pleading claims in unjust enrichment.  When pleading a claim in unjust enrichment, the plaintiff should state in his pleading the nature of the claim and the material facts on which he relies to support such a claim.  In Hong Kong, the courts have adopted the following analytical framework to determine the validity of the claim in unjust enrichment: (1) Was the defendant enriched? (2) Was the enrichment at the plaintiff’s expense?  (3) Was the enrichment unjust?  (4) Are any of the defences applicable? See Shanghai Tongji (above) at §67 (Ribeiro PJ) and Yukio Takahashi v Cheng Zhen Shu (2011) 14 HKCFAR 558 at §26 (Ribeiro PJ).  As a matter of good practice, it seems to me that a plaintiff should make clear in his pleading what material facts are being relied upon to establish that the defendant was enriched, that his enrichment was gained at the plaintiff’s expense, and that his enrichment is unjust.  These are the first three questions in Ribeiro PJ’s analytical framework.  The last question relates to the defences; the burden of proof lies on the defendant to establish the defences and the absence of which is not something that a plaintiff should ordinarily plead in a statement of claim.

F2.   The No Enrichment Point

44.  As mentioned earlier, it is common ground that a total sum of HK$1,013,224 was deposited into the Joint Account (of D1 and D2) in August 2015. 

45.  Enrichment requires the obtaining of a benefit. The questions of whether the defendant was enriched, and if so, to what extent, are tested at the date of receipt: Goff & Jones (above) §4-54; Benedetti v Sawiris [2014] AC 938 at §14 (Lord Clarke JSC).

46.  Money is the universal medium of exchange and by its receipt, the recipient is inevitably benefited: BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783 at 799F (Robert Goff J).   For the purpose of determining whether a benefit would constitute enrichment, the credit of one’s bank account is treated as an incontrovertible benefit because it is similar to a receipt of money: A Burrows, A Restatement of the English Law of Unjust Enrichment (2012) pp 41-42.

47.  Where a payment is made into a joint bank account, the benefit is received by the account holders.  In such a case, the law generally holds that all the account holders are jointly and severally enriched, with the result that a claim for the whole amount of the enrichment may lie against any or all of them.  See Goff & Jones (above) §4-64.

48.  Applying these principles, it seems to me that D2 was enriched by HK$1,013,224 by virtue of the two deposits of money into the Joint Account. 

49.  Mr Lam relied on the case of Stanbridge v Advanced Industrial Technology Corporation Ltd [2012] EWHC 1009 (Ch) to contend that D2 was not enriched. 

(1)  In Stanbridge, money was deposited into a joint account of husband and wife.  The wife contended that the money went through the joint account without her knowledge or permission and that the account was used as a pure conduit to pass money behind her back to a third party.  

(2)  In his judgment, HH Judge Dight stated that “as a matter of principle the court may refuse to order restitution by a joint account holder of monies siphoned through her account where she has not benefitted from them as a matter of fact and had no knowledge that her account was being used as a conduit by the other joint account holder” (§86). 

(3)  After noting that the wife’s change of position defence had been struck out (§87), the learned Judge stated that “in this case the advance was of no benefit to Mrs Stanbridge and she was not “enriched” by it … In my judgment it would be unjust to require Mrs Stanbridge to make restitution by repaying to AITC a sum equivalent to the advance monies.  AITC could have protected itself by making direct contact with Mrs Stanbridge at any stage prior to the drawdown of the advance and ensuring that she was aware of the transaction and checking whether she was a willing participant in it.  … In my judgment AITC took on the risk of Mrs Stanbridge’s ignorance of the transaction.” (§88) 

(4)  It is unclear to me whether the learned Judge’s decision that Mrs Stanbridge was not required to make restitution was based on the view that Mrs Stanbridge was not enriched, or there were other grounds for dismissing the restitutionary claim.  Insofar as the learned Judge held that a joint account holder would not as a matter of law be enriched for the purpose of a claim in unjust enrichment if money was deposited into the account and subsequently withdrawn without his or her knowledge, I would respectfully decline to follow such a view in this case in the light of the authorities cited above.

50.  For these reasons, D2’s contention that there was no enrichment on her part is rejected.

51.  In order for P to succeed to claim HK$1,013,224 from D2 in unjust enrichment, apart from establishing enrichment, it is also necessary for P to establish that (1) D2’s enrichment was at the expense of P and (2) the enrichment was unjust.  I consider that both of these requirements are also satisfied.

(1)  The total sum of HK$1,013,224 came from P.  I do not see any reason (and none has been suggested by D2) why D2’s enrichment of HK$1,013,224 was not at the expense of P.

(2)  The defendant’s enrichment is unjust if it is caused by a mistake of fact or law made by the plaintiff.  It is prima facie unjust for a recipient of money to retain the payment when, if the payer had known the true state of affairs, he would not have paid: see Kleinwort Benson Ltd v Lincoln CC [1999] 2 AC 349 at 399C-D (Lord Hoffmann). P submitted that it caused the payment of the total sum of HK$1,013,224 on the mistaken belief that the loan agreements as between P and D2 were valid and enforceable.  If P had known that the loan agreements as between P and D2 are not enforceable (as I have held), it seems to me that P would not have caused the payment of the total sum of HK$1,013,224. No submissions were made on behalf of D2 to contend that P was not labouring under a mistake when causing the payments.  In these circumstances, P can rely on mistake as the unjust factor to support its claim for HK$1,013,224.

F3.  The Change of Position Defence

F3a.  The undisputed facts and the parties’ submissions

52.  After the sum of HK$450,000 was deposited by cheque into the Joint Account on 14 August 2015, the same was transferred from the Joint Account to another account in D1’s sole name on 17 August 2015.  Similarly, after the sum of HK$563,224 was deposited by cheque into the Joint Account on 17 August 2015, HK$560,000 was transferred from the Joint Account to another account in D1’s sole name on 18 August 2015. A further HK$3,400 was withdrawn from the Joint Account in cash on 26 August 2015.  None of this was in dispute.

53.  D2 had no knowledge of the deposits into or withdrawals from the Joint Account made in August 2015.

54.  Mr Lam for D2 submitted that the defence of change of position would operate on these facts so that D2 would not be liable for a claim in unjust enrichment.

55.  On behalf of P, Mr Chang submitted that the defence of change of position has not been made out because D2 had no knowledge of the payments into her account and could not have relied on the payments to change her position.

56.  The only issue between the parties which requires the Court’s determination is whether it is necessary for a defendant to have relied on the enrichment before the change of position defence can operate.  This is purely a question of law. 

57.  In support of the operation of the change of position defence, Mr Lam principally relies on the English Court of Appeal’s decision in Scottish Equitable plc v Derby [2001] 3 All ER 818.  In that case, Robert Walker LJ at paragraphs 30 and 31 considered that the defence should be available where the defendant can prove a causal link between the receipt of the benefit and his change of position, and should “[extend] protection to (for instance) an innocent recipient of a payment which is later stolen from him…”.  Mr Lam also referred me to Goff & Jones (above) §§27-34 & 27-35 and A Burrows, The Law of Restitution (3rd ed, 2010) (“Burrows”) pp 528-530, in which the learned editors/author expressed the view that detrimental reliance should not always be a necessary ingredient of the change of position defence.

58.  In response, Mr Chang relies on several English decisions (namely Credit Suisse (Monaco) SA v Attar [2004] EWHC 374 (Comm); Streiner v Bank Leumi (UK) plc (unreported, 31 October 1985);  McDonald v Coys of Kensington [2004] EWCA Civ 47 and Rose v AIB Group (UK) plc [2003] 1 WLR 2791) and two High Court of Australia decisions (namely David Securities Pty v Commonwealth Bank of Australia (1992) 175 CLR 353 & Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd (2014) 253 CLR 560) to contend that the defence of change of position cannot operate without the defendant having relied on the validity of the receipt.

59.  I am acutely aware that the issue of whether reliance is always a necessary ingredient of the defence of change of position is one of the unresolved issues in the law of unjust enrichment.  To my understanding, this is the first time the issue has come before a Hong Kong court.  In seeking to resolve this fundamentally important point of law, I have found it necessary to consider how the defence of change of position has been developed in Hong Kong, how the courts in other jurisdictions have dealt with the issue, and how academics have suggested the issue should be resolved.  Accordingly, it has been necessary for me to consult some authorities and materials which have not been cited to me by counsel.    

F3b.  My views

60.  The defence of change of position (and the principle based on reversing unjust enrichment) were authoritatively accepted as part of English law by the House of Lords in Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548.  In his speech, Lord Goff at 580F described the defence as being “available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full”.  Since then, Hong Kong courts have followed the decision of Lipkin Gorman in terms of the recognition of the principle of unjust enrichment and the formulation of the defence of change of position.   

61.  Following a number of authorities including Lipkin Gorman, the Court of Final Appeal has accepted that a plaintiff has a right to restitution against a defendant who is unjustly enriched at the plaintiff’s expense and has adopted a framework for analysing a claim based on the principle of unjust enrichment by asking the 4 questions as mentioned earlier: Shanghai Tongji (above) at §§66-68 (Ribeiro PJ) and Yukio Takahashi (above) at §26 (Ribeiro PJ).

62.  More specifically, Hong Kong courts have repeatedly followed Lord Goff’s dictum that a defendant who seeks to rely on the change of position defence must demonstrate that his position has changed that it would be inequitable in all the circumstances to require him to make restitution, or to make restitution in full: e.g. So Kwok Yan v Ching Hong Yuen (unreported, HCSA 25/2000, 22 November 2001) §21(d) (DHCJ J Lam); Patel’s Wall Street Exchange Ltd v SK International [2005] 2 HKLRD 551 at 77 (Barma J); Grupo Pacifica Incorporada v Worldwide Marine Product Ltd (unreported, CACV 217/2015, 28 January 2016) §5.5 (Cheung JA); Liu Ke Mian Lorraine v De Xin Da Trading Co Ltd (unreported, HCMP 1481/2016, 30 September 2016) §20 (Chu JA).

63.  The fact that Lord Goff’s formulation of the change of position defence in Lipkin Gorman has hitherto been consistently followed in Hong Kong is, in my view, a reflection that Hong Kong courts have treated Lord Goff’s remarks as having the greatest persuasive effect: cf A Solicitor v The Law Society of Hong Kong (2008) 11 HKCFAR 117 at §17 (Li CJ).

64.  In Dextra Bank & Trust Co Ltd v Bank of Jamaica [2002] 1 All ER (Comm) 193, Lord Bingham and Lord Goff, delivering the judgment of the Privy Council, considered Lord Goff in Lipkin Gorman to have adopted “a broad approach based on practical justice, and to have avoided technicality” (§36), and described the defence of change of position as founded on “a principle of justice in respect of a benefit received by him in circumstances in which it would be inequitable to pursue that claim, or to pursue it in full” (§38).  These observations have also been followed by the Hong Kong courts: e.g. Patel’s Wall Street Exchange (above) at 77 (Barma J).

65.  The issue of whether reliance is a necessary ingredient of the defence of change of position arises most prominently in cases where the enrichment that the defendant has received has subsequently been lost, destroyed, stolen or depreciated in value.  In the present case, the issue arises because the total sum of HK$1,013,224 was paid into the Joint Account by P (which in my judgment would constitute D2’s enrichment) and was subsequently withdrawn by D1 (which would constitute a loss (and a change of position) on the part of D2).

66.  There is no dispute between P and D2 that it is necessary for a defendant to establish a causative link between the receipt of the benefit and his change of position.  As mentioned earlier, the only dispute is whether it is necessary for D2 to establish her reliance of the receipt before she is able to rely on the defence of change of position.

67.  D2 relies on Scottish Equitable plc v Derby and contends that a “but-for” test would suffice. The submission is that but for the receipt of the enrichment, D2’s position would not have changed.  This is a wider formulation of the test.  As pointed out by Professor Graham Virgo, the wide interpretation of causation can be established in one of two ways: (i) where it can be established that the defendant no longer retains the specific benefit which was received from the plaintiff, or (ii) where the defendant’s position has changed in other ways as result of his or her reliance on the validity of the receipt of the benefit from the plaintiff: Virgo p 683.  If the wider causation test is adopted, D2 would be able to satisfy it because she no longer retained the enrichment received from P when P commenced proceedings against her (i.e. (i) is established).

68.  P argues that causation should be interpreted in such a way so that the causation test is satisfied only where (ii) is established.  And because D2 did not know about the money that was paid into the Joint Account, P contends that she could not have relied on the validity of the receipts and therefore the causation test must fail.

69.  In deciding whether a defendant should be entitled to successfully rely on a defence of change of position, the fundamental issue is the justice or injustice of enforcing a restitutionary claim in respect of a benefit conferred: Dextra Bank (above) at §38 (Lord Bingham and Lord Goff).  But the courts must proceed on the basis of principle, and not sympathy, in order that the defence of change of position should not disintegrate into a case-by-case discretionary analysis of the justice of individual facts: Scottish Equitable (above) at §34 (Robert Walker LJ); Hua Rong Finance Ltd v Mega Capital Enterprises Ltd [2001] 3 HKLRD 623 at §29 (Rogers VP).  

70.  Having considered all the relevant circumstances in the present case, it seems to me that D2’s defence of change of position should succeed.

(1)  There is no question that D2’s position has been changed as a result of P’s payments of money into the Joint Account.  D2 no longer retains the enrichment received from P. 

(2)  The deposits into and the subsequent withdrawals from the Joint Account of the sums in question would not have taken place if P had not been labouring under a mistake in thinking that it was under an obligation to pay.  D2 has been disenriched in circumstances where her assets have been reduced by a loss for which she was not responsible and of which she had no knowledge.  As a matter of principle, it is difficult to see why D2 who acted in good faith throughout should be left unprotected where she received the benefit in these circumstances: Goff & Jones §27-35.  In making these observations, I am not seeking to introduce the concept of relative fault into the analysis, which I accept should not be done: Dextra Bank (above) at §45 (Lord Bingham and Lord Goff).  The remarks are made to illustrate the uncontroversial point that if D2 did not obtain the benefit from P in the first place, her position would not have changed for the worse.  In the words of Professor Andrew Burrows, it was P who “started the chain of events by first making the mistaken payment”: Burrows p 529.

(3)  In Scottish Equitable (above), Robert Walker LJ at §31 suggested that the appropriate test of causation was at least the “but for” test.  I respectfully agree with Mummery LJ’s remark that “[in] deciding whether the particular circumstances render it inequitable to require the recipient of an overpayment to make full restitution, the need for a sufficient causal link should not be narrowly applied”: Commerzbank AG v Price-Jones [2003] EWCA Civ 1663 at §43. It seems to me that the insistence of having reliance as a necessary ingredient of the change of position defence in all cases would be too rigid and inhibitive to the development of the defence, which would seem contrary to the sentiments expressed by Lord Goff in Lipkin Gorman as repeatedly followed by the Hong Kong courts.  I am satisfied that the “but for” causation test would be the appropriate test to be applied in this case.  Applying such a test, it is clear to me that D2’s position would not have changed but for the receipt of the money from P, and that there is a sufficient causative link between the receipt of the benefit by D2 and her change of position.

(4)  In these circumstances, I find it inequitable (a) to allow P to pursue its claim of HK$1,013,224 against D2 and (b) that D2 should be required to make restitution of the same.  Indeed, P has not relied on circumstances other than the fact that D2 did not rely on the receipt of the money to contend why the change of position defence should fail.

(5)  I note that my conclusion is consistent with the result in Hua Rong Finance Ltd v Mega Capital Enterprises Ltd [2001] 3 HKLRD 623.  In that case, the enrichment in question was stolen eight minutes after its receipt.  The Court of Appeal considered that the trial judge’s dismissal of the plaintiff’s claim in unjust enrichment was correct.  At §34, Rogers VP said:

“As noted above, the first defendant neither sought nor used the plaintiff’s money in any way nor did it retain or seek to retain the benefit of that money. The money remained only in the first defendant’s bank account for a very short period as part of the second defendant’s personal actions which amounted to fraud. The first defendant’s bank account was used, to the ignorance of the first defendant, as a conduit in the second defendant’s scheme.”

Although the point about the necessity of reliance was not argued in that case, in the light of the conclusion it made, it is conceivable that the Court of Appeal would not have insisted on having reliance as a necessary condition to the operation of the change of position defence if it had to decide on the point.

(6)  I also note that the views reached above are consistent with the conclusion of the New Zealand Court of Appeal in National Bank of New Zealand Ltd v Waitaki International Processing (NI) Ltd [1999] 2 NZLR 211.  In that case, the plaintiff bank mistakenly paid money to the defendant. The defendant had informed the plaintiff of the mistake and held the money under protest on the insistence of the plaintiff.  However, the money was subsequently invested and lost.  The New Zealand Court of Appeal considered that the defendant could rely on the non-statutory change of position defence put forward in Lipkin Gorman.    I find myself in respectful agreement with the observations made by Thomas J at p 229 where he said:

“… if money or property which has been paid or transferred to an innocent recipient is stolen, fraudulently misappropriated, lost or destroyed, there will be a change of circumstances which makes full restitution inequitable, but which will not have come about as a result of anything the recipient has done in reliance on the payment or transfer. Circumstances such as these obviously should be embraced within the concept.”

(7)  In coming to my conclusion, I have also considered the following authorities that P relies upon to support its submission that defendant’s reliance of the receipt is a necessary element in the operation of the defence of change of position.  For the reasons given below, I am not persuaded that I should follow them to conclude that D2 is not entitled to a defence of change of position in this case.

71.  Streiner v Bank Leumi (UK) plc (unreported, 31 October 1985)

(1)  In this case, the plaintiff had a bank account with the defendant but in fact held the account as nominee for her father.  The defendant knew that the father wanted to keep his money concealed from Maltese creditors but mistakenly transferred money from the plaintiff’s account to the father’s bank account in Malta.  Leggatt J held that the plaintiff’s claim for breach of mandate against the bank failed on the ground that there was no breach of mandate and that the plaintiff, as the father’s nominee, had suffered no loss. 

(2)  Nonetheless, the judge went on to consider the defendant’s contingent claim against the father in the third-party proceedings that the defendant paid the money under a mistake of fact.  To defend such a claim, the father sought to rely on the defence of change of position on the basis of what Robert Goff J said in Barclays Bank v WJ Simms Son & Cooke (Southern) Ltd [1980] QB 677.

(3)  Leggatt J did not accept that the father had changed his position in such a manner as to preclude recovery by the defendant.  He said:

“… in all the cases in which change of position has been treated as material, it has been a change on the faith or as a result of the payment, that is to say, the payment has caused or permitted the payee to act in a way in which he would not otherwise have acted had he not received it. The defence of change of position cannot operate without some form of reliance on the payment by the person whose position is said to have changed. It is not enough that without his knowledge, his position has been passively changed.”

(4)  What Leggatt J said about the defence of change of position was necessarily obiter.  More importantly, the case was decided before the landmark case of Lipkin Gorman.  In the light of the authoritative statement of principle from Lord Goff in Lipkin Gorman which has consistently been followed in Hong Kong, it seems preferable to me to continue following that broad principle as refined in subsequent cases, as opposed to any pre-Lipkin Gorman observations on the application of the change of position defence.

72.  Rose v AIB Group (UK) plc [2003] 1 WLR 2791

(1)  In this case, a company was wound up on the ground that it was unable to pay its debt.  At the time of the presentation of the winding up petition, the company’s accounts with its bank were overdrawn.  The bank’s right was secured by a legal charge over property belonging to the company’s sole director and shareholder.  The bank did not learn of the existence of the petition until it was advertised, by which time the company had paid off its debt in what the bank believed to be the ordinary course of business.  A liquidator was appointed upon the winding up of the company.  A few months later, the bank released the charge assuming that all the company’s liabilities to it had been validly discharged.  The liquidator then applied for declarations that the company’s payments to the bank and to another creditor from the date of the presentation of the petition were void under section 127 of the Insolvency Act 1986 and for orders that those amounts be repaid to the liquidator.  The bank resisted the application.  One of the grounds of opposition was that by releasing the charge, the bank had changed its position. The liquidator’s application was granted by Nicholas Warren QC sitting as a deputy High Court judge in the Chancery Division.

(2)  The learned judge rejected the defence of change of position on two alternative bases.  First, the defence was rejected because it was found that the bank’s change of position in releasing the charge had been made in reliance not on the initial validity of the credits to the overdrawn accounts, but in reliance on an assumption that the liquidator would not make a claim to assert their invalidity (§§55-56).  Alternatively, the defence failed because the bank had taken a risk that its assumption that no claim would be made was wrong and it could not complain when the risk became a reality (§58).

(3)  It seems to me that the learned judge rejected the change of position defence on the particular facts of the case.  As mentioned above, the wider causation test can be established in one of two ways (i.e. by applying either the loss of benefit test of causation or the detrimental reliance test of causation).  One of them is the defendant’s change of position as a result of his or her reliance on the validity of the receipt of the benefit from the plaintiff (i.e. the detrimental reliance test of causation).  In my view, the learned judge’s analyses of the causation aspect of the defence by reference to the bank’s reliance show that the court considered reliance to be necessary on the particular facts of that case.  Indeed, the learned judge appeared to recognise that it is sometimes not necessary for a defendant to show that he or she has changed the position on the faith of the validity of the receipt.  At §49, his Lordship said:

“The wide statement of the general principle of the change of position defence by Lord Goff includes a change brought about by the act of another (e.g. theft by a thief of the money paid).  The bank’s alleged change of position, in contrast, took place as a result of its own act in releasing the charge.  It therefore still needs to show that it changed its position “on the faith of the validity of the receipt”.”

73.  Credit Suisse (Monaco) SA v Attar [2004] EWHC 374 (Comm)

(1)  In this case, the plaintiff bank brought proceedings in relation to a misappropriated cheque and sought to recover the proceeds of the cheque from a husband and a wife.  The plaintiff claimed against the wife repayment of part of the proceeds of the cheque (£525,000) which was transferred into a bank account in the joint names of the couple.  The couple argued that by the time the plaintiff notified the husband of the fact that the cheque had been misappropriated, a variety of payments had been made which would not have been made had the husband known or believed that the plaintiff would seek to recover the proceeds of the cheque.  The couple was acting in person and the wife did not give evidence at the trial.  Gross J considered that it was unclear whether Monegasque or English law should be applicable to the plaintiff’s claim.  However, the learned judge did not find it necessary to resolve the issue as to which law applied because the defence of change of position would not have assisted the wife under either law.

(2)  Gross J at §98(i) referred to some of the legal principles on the change of position defence, including the need to establish some causal link between the mistaken receipt of the overpayment and the recipient’s change of position for the operation of the defence (referring to Scottish Equitable), and the proposition that the mere fact that the defendant has spent the money does not of itself render it inequitable that he should be called upon to repay, because the expenditure might in any event have been incurred by him in the ordinary course of things.  The learned judge then considered that the wife’s defence of change of position must fail under English law.  At §98(ii), Gross J said:

“To begin with, as already recorded, Mrs. Attar chose not to give evidence. The only evidence as to her state of mind came from Mr. Attar. According to his evidence, Mrs. Attar knew nothing of the cheque until after the 28th June, 2001, by which time it was known that there were difficulties in connection with it. Assuming that evidence to be true, it follows so far as Mrs. Attar is concerned and if her position is considered separately from that of Mr. Attar, that there is simply no causal link between the mistaken receipt of the cheque and any change of position on her part. For my part, I see no reason to question Mr. Attar’s evidence on this point. Accordingly, there is a fatal objection to any change of position defence being advanced by Mrs. Attar; any such defence would be doomed to fail at the first hurdle, by reason of the absence of a causal link.”

For the defence of change of position to succeed, the wife needed (on the authority of Scottish Equitable) to establish some causal link between the mistaken receipt of the overpayment and her change of position.  His Lordship considered that this causal link was not established.  This conclusion may be read as the learned judge saying that (a) reliance is necessary condition for the change of position defence and (b) the wife failed to establish reliance and accordingly failed to establish causation.  However, this seems to me to be reading too much into §98 of the judgment.  As recorded in the judgment, no evidence was adduced on behalf of the wife to show that she had changed her position as a result of the mistaken overpayment.  And it appears that it was on this basis that Gross J concluded the relevant causal link was not proved.   

(3)  The learned judge then proceeded to discuss the individual items of expenditure and concluded the defence was not available to each of them because of the particular facts of the case (§§98(iii) to 98(vi)).

(4)  For the reasons given above, it seems to me that Gross J rejected the wife’s reliance on the defence of change of position because of insufficient evidence from her and on the particular facts of this case.  Contrary to P’s submission, I do not think the case is authority for the proposition that a defendant cannot avail himself or herself of the defence of change of position when he or she unknowingly changed the position.

74.  Cressman v Coys of Kensington [2004] 1 WLR 2775

(1)  This case was concerned with a personalised registration mark of a car.  The plaintiffs instructed auctioneers to effect the sale of a car but to retain the right to its registration mark.  The auctioneers failed to apply for and obtain the right of retention of the mark before sale.  Under the relevant legislation, the purchaser was entitled to have the car registered in his own name with that mark.  The purchaser was informed that he was not entitled to the mark but he refused to relinquish possession of the car or the mark. He later claimed to have given the car to his partner and so been deprived of any benefit.  The plaintiffs sued the auctioneers seeking to recover their loss of the value of the registration mark.  Subsequently, the plaintiffs assigned to the auctioneers any causes of action they might have against the purchaser relating to the sale of the mark on terms that the auctioneers would hold anything recovered from him on trust for the plaintiffs in diminution of their claim.  The auctioneers then joined the purchaser as a defendant, settled the plaintiffs’ claim, and sought a contribution from the purchaser under the Civil Liability (Contribution) Act 1978.  The first instance judge found that the purchaser had been unjustly enriched by receiving a benefit in the form of a personalised registration mark, which he knew or ought to have known he was not entitled to have, and was ordered to pay 100% contribution under the 1978 Act. The purchaser appealed and his appeal was dismissed by the English Court of Appeal.

(2)  On the defence of change of position, the purchaser’s position was that he had changed his position and deprived himself of any benefit by giving the car with its mark to his partner.  When considering the issue, Mance LJ at §41 started by referring to the “wide view of the doctrine of change of position” reached by Robert Walker LJ in §30 of Scottish Equitable (above), namely that the doctrine “looks to a change of position, causally linked to the mistaken receipt, which makes it inequitable for the recipient to be required to make restitution”.  His Lordship assumed this to be the correct view and concluded that the defence would fail “having regard to the findings regarding the factual position”.  He said (at §41):

“By the time Mr McDonald gave the car away, he knew that there had been a mistaken failure to obtain any right of retention under the statutory scheme and that both the estate and Coys would be pursuing him to recover the mark or its value.  This negatives both any causal link and any inequity.  A gift away made in such circumstances cannot have been made in reliance on the validity of the original receipt of the mark and cannot be regarded as having been made “in good faith”, so there can be no defence of change of position …  Even if I had found that the gift to the partner took effect on the evening of 13th December 2000, I would also have considered that Mr McDonald was by then in possession of sufficient knowledge to exclude causal reliance and inequity or good faith …”

(3)  It appears that Mance LJ relied on two grounds to reject the defence of change of position defence: (a) the purchaser did not rely on the validity of the receipt of the mark when he gave the car away and (b) the purchaser did not act in “good faith”.  Insofar as the absence of reliance on the part of the purchaser was relied upon to reject the defence, it seems to me that his Lordship was doing no more than applying the detrimental reliance test of causation under the “wide view of the doctrine of change of position”. It is wrong for P to describe this case as the English court “[reverting] to applying the narrow model of the defence”.

75.  David Securities Pty v Commonwealth Bank of Australia (1992) 175 CLR 353

(1)  In this case, the High Court of Australia decided that the rule precluding recovery of a payment made under a mistake of law was not part of the common law in Australia.  The defence of change of position was raised for the first time in the High Court of Australia and the question of its application in that case was remitted to the Federal Court for determination (p 386).  However, at p 385, Mason CJ, Deane, Toohey, Gaudron and McHugh JJ said “the defence of change of position is relevant to the enrichment of the defendant precisely because its central element is that the defendant has acted to his or her detriment on the faith of the receipt” [emphasis in original].

(2)  It is apparent from the judgment of the High Court of Australia that the case was not concerned with the ambit of the defence of the change of position, or the test of causation of the defence.  Indeed, in Unjust Enrichment (2nd ed, 2016), Justice James Edelman and Professor Elise Bant stated:

“It might be doubted whether the High Court in David Securities intended to exclude all cases involving independent change of position [i.e. change of position arising from the actions of a third party or a natural event]. The facts of David Securities itself involved only a defendant-instigated change of position. It was unnecessary to consider the position of independent changes of position.”

(3)  As mentioned earlier, the Hong Kong courts have consistently followed the broad statement of principle of Lord Goff in Lipkin Gorman on the defence of change of position, which does not involve saying that reliance is always required for the operation of the defence.  I prefer to follow the same approach in this case. 

76.  Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd (2014) 253 CLR 560

(1)  In this case, a finance company (AFSL) made payments to suppliers of goods (H and E) who were trade creditors of one of AFSL’s customer (TCP).  AFSL was induced to make the payments by the fraud of a director of TCP. At TCP’s request, H and E applied the payments to the discharge of the TCP’s debts.  H withdrew a threat of legal action against TCP to enforce the debt and resumed trading with TCP.  B agreed to file consent orders setting aside default judgments supporting garnishee orders against TCP and its directors, and also resumed trading with TCP.  TCP went into liquidation.  AFSL demanded the repayment by H and B of the money it had paid to them by mistake.  It commenced proceedings claiming that H and B had been unjustly enriched by the payments.  H and B resisted the claims on the basis of their change of position.  They relied upon the fact that they had applied payments in discharge of TCP’s debts to them, that they had ceased pursuing the recovery of those debts and that they had continued to trade with TCP.  The High Court of Australia unanimously held that each of H and B was entitled to rely on the change of position defence and that it would be inequitable in the circumstances for H and B to be required to repay the amounts received.

(2)  P relies on §81 of the joint judgment of Hayne, Crennan, Kiefel, Bell and Keane JJ, who said:

“In David Securities, reference was made to what was said in Lipkin Gorman concerning the defence. It was observed that in Lipkin Gorman, Lord Bridge of Harwich, Lord Ackner and Lord Goff said that the defence should be recognised by English law but declined to define its scope. However, in David Securities the “central element” of the defence was identified as being “that the defendant has acted to his or her detriment on the faith of the receipt” (emphasis in original). Whether English cases subsequent to Lipkin Gorman have taken a wider view of the defence, one which eschews a requirement of detrimental reliance in favour of a mere causal link, cannot alter what was said in David Securities regarding the defence. Whether the conclusion reached in the English cases, including Lipkin Gorman, is different from that which would be reached by reference to equitable principles is a moot point. In any event, consistently with an inquiry as to whether it is unconscionable for the recipient to retain the moneys, it is necessary in cases such as the present to consider what was done by the recipient in reliance upon the receipt.”

(3)  This passage may be read to support the view that reliance is always required for the defence of change of position to operate.  Similar sentiments were expressed by Gageler J at §142 where his Honour said “[it] might well be, for example, that no defence to an action for restitution of money paid under a mistake is available to a recipient who is no longer enriched at the time of the order because of an intervening theft”.

(4)  As mentioned earlier, given how Lord Goff’s broad statement of principle in Lipkin Gorman has been consistently applied by the Hong Kong courts, I would prefer to continue following that principle as refined in subsequent cases (such as Scottish Equitable) in the application of the defence of change of position.  Adopting this approach, I decline to hold that reliance is always necessary for the operation of the change of position defence.

(5)  Justice Edelman and Professor Bant have noted that the High Court of Australia has not yet been confronted directly the cases on “independent change of position” (i.e. change of position arising from the actions of a third party or a natural event).  They suggest that “it is difficult to see any reason of principle or policy which would prevent the High Court from adopting the English approach to recognise an independent change of position in cases such as loss, theft, or depreciation”: Unjust Enrichment (2nd ed, 2016) p 341. Similarly, in the circumstances of this case, I find it difficult to see any reason of principle or policy to deny D2 from being able to rely on the defence of change of position simply because D2 did not rely on the validity of the receipt when her position was changed.

77.  For all of these reasons, D2’s change of position defence succeeds, and P’s claim for HK$1,013,224 against D2 fails and is dismissed. 

F4.  D2’s Counterclaim against P

78.  It follows that D2’s counterclaim against P should succeed. 

G.  ISSUE 6: WHETHER D3 OWED TO P A DUTY TO ENSURE PROPER EXECUTION OF THE POA AND THE MORTGAGE

79.  I now turn to consider P’s claims against D3.  P has three broad claims against D3: (1) a claim in negligence and for breach of duty of care (Issue 6); (2) a claim in fraudulent and negligent misrepresentation (Issue 7) and (3) a claim for breach of warranty of authority (Issue 8).

80.  In advancing its negligence / breach of duty of care claim, P contends that D3 had assumed responsibility (and thereby owing a duty of care) to ensure the proper execution of the POA and the Mortgage, and that such a duty was breached which caused loss to P. 

81.  It is right to point out that D3 never purportedly acted for P as solicitors and there was no express retainer between them.  Mr Chang on behalf of P confirmed orally in his opening that P does not contend that there was an implied retainer between itself and D3. 

G1.  Duty of Care

82.  In its written closing submissions, P’s case that D3 had assumed responsibility to ensure the proper execution of the POA and the Mortgage was summarised in the following way.

(1)  By 28 April 2015, D3 was aware that the execution of the Mortgage on the strength of the POA was to provide security for a proposed loan by P to D1 and D2.

(2)  If the POA and the Mortgage became invalid and not binding on D2, the harm to P’s interest would be foreseeable.

(3)  D2’s execution of the Mortgage was solely premised on D1’s authority to act on her behalf under the POA.  D3’s duty to P therefore encompasses D3’s proper confirmation of the validity of the POA.

(4)  D3 knew that P would rely on D3 for the verification of D2’s signatures before agreeing to proceed with the loan transactions.

(5)  The loan transactions would not have proceeded had there not been effective security in place.

G1a.  The additional findings of fact

83.  In addition to the findings of fact made above, it is necessary for me to make additional findings of fact in relation to (1) what P did before releasing the Initial Loan and the Loan and (2) the dealings between P and D3, the evidence of some of which is disputed.

84.  As mentioned above, D1 and the Imposter attended D3’s offices on 15 April 2015 and the POA was executed by the Imposter in Mr Yum’s presence on the same day.  On 16 or 17 April 2015, P received a referral from an intermediary called Wallace that D1 and D2 wanted to borrow the Initial Loam (of HK$1.2 million) by mortgaging the Property (see also paragraph 6 above).

85.  The person in P who dealt with Wallace was Mr Lau Kam Wah (“Mr Lau”), P’s Assistant General Manager.  Mr Lau filed a witness statement in these proceedings for P on 6 June 2017.  Unfortunately, Mr Lau passed away in August 2018.  At the trial, P invited the court to treat Mr Lau’s witness statement as hearsay evidence and the other parties did not object to the same.  In making my findings, I have considered what Mr Lau stated in his witness statement as hearsay evidence and have attached appropriate weight to it given that D2 and D3 were unable to cross-examine Mr Lau at the trial.

86.  After Wallace made the referral to P, Mr Lau requested Wallace to send him various documents for consideration, including the POA.  On 22 April 2015, Mr Lau faxed to Ms Tsang Chun Man (“Ms Tsang”), a legal assistant at P’s solicitors (C&C), a copy of the POA.  Ms Tsang has filed two witness statements on behalf of P in these proceedings, one on 6 June 2017 (the same date when Mr Lam’s witness statement was filed) and one on 31 December 2018 (after Mr Lam’s death).  She also attended the trial and was cross-examined by D3.  According to Ms Tsang, Mr Lau told her that P had a client who wanted to obtain a mortgage loan by using a power of attorney, and asked her whether there were any terms in the POA authorising the attorney to sign a mortgage deed and receive the loan proceeds, to which she replied in the affirmative.  Because Ms Tsang only had a copy of the POA which was not drafted by C&C and that C&C had never met D2, C&C was unable to ascertain the authenticity of the POA.  Therefore, she asked Mr Lau to ascertain from D1 whether the Firm would be instructed to act for D1 and D2 in the mortgage loan transaction.  From the way in which these events were described in Ms Tsang’s second witness statement, I find that they all happened on around 22 April 2015.

87.  It seems that P was subsequently satisfied from D1 that the Firm would be acting for D1 and D2 in the mortgage transaction.  Accordingly, P carried out an assessment of the loan application and approved the Initial Loan based on the documents provided by Wallace.  On 28 April 2015, Mr Lau also obtained confirmation of the terms of the Initial Loan from D1 orally and asked D1 to sign the loan agreement at P’s office on 30 April 2015.  These events were described by Mr Lau in his witness statement and I have no reason to doubt the veracity of his description.  See also paragraph 7 above.

88.  D1 then (also on 28 April 2015) informed Mr Yum that he had applied to a finance company for a loan and that a representative of the finance company would contact the Firm regarding the application.  D1 requested the Firm to witness the execution of some documents for the transaction and Mr Yum agreed to provide assistance.  See also paragraph 8(1) above.

89.  By a fax sent to C&C at around 2:57pm on 28 April 2015, Mr Lau on behalf of P stated that P had agreed to provide general credit facilities to D1 and D2 on the security of a legal charge of the Property and instructed C&C, amongst other things, to arrange for the execution of the mortgage.  In the fax, P also told C&C that the transaction was expected to be completed on or before 29 April 2015.  Although the fax mentioned title investigation to be carried out by C&C, Ms Tsang said in cross-examination that she was orally instructed by P that C&C did not have to check the title of the Property or obtain title deeds for the transaction.  See also paragraph 8(2) above.

90.  There was a telephone call between Mr Yum of the Firm and Ms Tsang of C&C on 28 April 2015 regarding the mortgage loan transaction.  Ms Tsang in cross-examination accepted that the conversation took place after she had received the instruction fax from P on 28 April 2015 (i.e. after 2:57pm).  During the conversation, Ms Tsang mentioned that C&C had a copy of the POA.  Ms Tsang asked Mr Yum to confirm whether the POA was indeed signed by D2 to authorise D1 to deal with the Property, and Mr Yum answered in the affirmative.  I do not believe the reason for calling Mr Yum to seek confirmation was because Ms Tsang had doubts about the authenticity of the POA at the time (in the sense that she thought the POA might be forged).  Rather, Ms Tsang only had a copy of the POA and had never met D2, and it seems to me that she merely wanted to be sure of the provenance of the POA, and in particular to obtain some comfort from the person who witnessed the execution that the signatures that appeared on the POA were in fact appended thereto at the Firm’s office on a previous occasion.  This was why Ms Tsang spoke to Mr Yum on 28 April 2015.  I also find that this was how Mr Yum understood to be the purpose of Ms Tsang’s request for confirmation. 

91.  There is a dispute of evidence as to whether Ms Tsang in the telephone conversation on 28 April 2015 also sought confirmation from Mr Yum on whether D3 would handle the mortgage loan application on behalf of D1 and D2.  Ms Tsang’s evidence is that confirmation was given by Mr Yum but Mr Yum’s evidence is that he only confirmed that D3 had instructions to witness D1’s execution of the relevant documents.  Ms Tsang had already raised the issue of D1 and D2’s representation on around 22 April 2015 with Mr Lau (see above).  No explanation has been given as to why she would raise the issue again with Mr Yum on 28 April 2015, especially after P had instructed C&C to proceed with the mortgage transaction.  As a matter of inherent probabilities, I find that Ms Tsang did not seek such confirmation from Mr Yum during the 28 April 2015 conversation.

92.  Although Ms Tsang in her second witness statement stated that she subsequently reported to Mr Lau that D3 had confirmed that the POA was executed by D2 in favour of D1 to authorise him to handle matters regarding the Property, Ms Tsang’s evidence in cross-examination and re-examination was unclear on the issue.  Mr Lau also did not mention in his witness statement anything about such reporting back.  Mr Lam Kwok Wah (“Mr Lam”), the Chief Executive Officer of P, filed a witness statement on 31 December 2018 (after Mr Lau’s death).  In that statement, Mr Lam stated that Mr Lau had told him that C&C had received confirmation from D3 that D2 signed the POA in the presence of D3 and that D3 was going to handle the mortgage documents on behalf of D1 and D2.  Mr Lam attended the trial and repeated the statements in his oral testimony.  The issue of whether Ms Tsang reported the substance of the telephone conversation on 28 April 2015 back to Mr Lau did not feature in either Ms Tsang’s first witness statement or Mr Lau’s witness statement filed on 6 June 2017.  It only surfaced when P filed its second round of witness statements in December 2018.  Further, Ms Tsang’s oral testimony on this issue was unclear and Mr Lau was unable to attend the trial to give evidence.  In these circumstances, I am unable to simply accept Mr Lam’s evidence.  On a balance of probabilities, I find that the contents of the telephone conversation between Ms Tsang and Mr Yum on 28 April 2015 were not reported back to Mr Lau or P afterwards. 

93.  At around 2:57pm on 29 April 2015, Ms Tsang on behalf of C&C sent to the Firm and Mr Yum a letter enclosing a number of documents relating to the Initial Loan for execution.  See also paragraph 9(1) above.

94.  On 29 April 2015, D1 executed for himself and purportedly on behalf of D2 two sets of loan application forms in relation to the Initial Loan at P’s office witnessed by Mr Lau.  See also paragraph 9(2) above.

95.  At around 9:44am on 30 April 2015, P instructed a staff member to transfer a sum of HK$1,175,300 to CC’s bank account. 

96.  D1 also visited P’s office on 30 April 2015 and signed various documents (including the Initial Loan Agreement) on behalf of himself and purportedly on behalf of D2 after Mr Lau had explained them to D1. See also paragraph 11(1) above.

97.  After the visit to P’s office, D1 visited (also on 30 April 2015) the Firm’s office to sign the documents received under C&C’s letter dated 29 April 2015.  All of the documents (including the Mortgage) were signed by D1 on behalf of himself and purportedly on behalf of D2 after Mr Yum explained them to D1.  See also paragraph 11(2) above.

98.  Thereafter, Mr Yum on behalf of the Firm prepared a reply letter to C&C enclosing the various documents that D1 had signed and some additional documents and requesting C&C to draw a cheque for the Initial Loan in favour of D1.  In the afternoon of 30 April 2015, the Firm sent the reply letter together with its enclosures to C&C.  See also paragraph 12 above.

99.  On 30 April 2015, P through C&C issued a cheque for the sum of HK$1,171,450 (being the balance of the Initial Loan after deducting a sum of HK$28,550) in favour of D1 which was released to D1 through the Firm.  The cheque was cashed on the same day.  See also paragraph 13 above.

100.  As at 30 June 2015, P considered D1 and D2 to be in default of the Initial Loan Agreement and the Mortgage.  See also paragraph 14 above.

101.  Neither D3 nor the Firm was involved in any of the steps leading to the execution of the Loan Agreement between P and D1 and P’s release of further sums of money to D1 in August 2015.

G1b.  The relevant legal principles

102.  In determining whether a duty of care should be imposed on a defendant, it is necessary to take a holistic view of these overlapping issues: (1) whether the defendant’s acts or omissions might reasonably be foreseeable to cause harm to another person, (2) whether there exists between the defendant and the plaintiff a sufficient close relationship and (3) whether it is fair, just and reasonable to impose a duty of care on the defendant.  See Luen Hing Fat Coating & Finishing Factory Ltd v Waan Chuen Ming (2011) 14 HKCFAR 14 at §§29-37 (Bokhary PJ).

103.  There are many situations in which it has been clearly established that a duty of care is or is not owed: e.g. by motorists to other road users, by employers to employees etc.  In such cases, it is normally unnecessary and inappropriate to reconsider whether the existence of the duty is fair, just and reasonable.  However, in a novel type of case where established principles do not provide an answer, the courts need to go beyond those principles to decide whether a duty of care should be recognised.  And this is to adopt an incremental approach and by analogy with establish authority.  It is the exercise of judgment in the novel type of case that involves consideration of what is fair, just and reasonable. See Robinson v Chief Constable of West Yorkshire Police [2018] AC 736 at §§25-27 (Lord Reed JSC). 

104.  Another approach to determine whether a duty of care should be imposed on a defendant, particularly in relation to liability for negligent misstatements leading to pure economic loss, is based on the concept of voluntary assumption of responsibility derived from the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.   In Luen Hing Fat (above), Bokhary PJ at §23 described that the law as held in Hedley Byrne would “[impose] a duty of care when information is sought from and imparted by a party who is possessed of special skill, is trusted to exercise due care and knew or ought reasonably to have known that reliance was being placed on his skill and judgment”.  See also Yiu Chown Leung v Chow Wai Lam (2005) 8 HKCFAR 592 at §7 (Chan PJ).

105.  Whether a defendant has assumed responsibility is a legal inference to be drawn from his or her conduct against the background of all the circumstances of the case: Customs and Excise Commissioner v Barclays Bank plc [2007] 1 AC 181 at §36 (Lord Hoffmann), adopted by Lam VP in Chang Pui Yin v Bank of Singapore Ltd [2017] 4 HKLRD 458 at §35.

G1c.  Discussion on duty of care

106.  For the reasons given below, I do not consider D3 owed to P any duty of care to ensure the proper execution of the POA or the Mortgage.

107.  In this case, there was no formal or legal relationship between P and D3.  In April 2015, P had dealings with D3 through its agent, C&C, on a handful of occasions.   The first time when C&C directly dealt with D3 in relation to the relevant transactions was in the afternoon of 28 April 2015 when Ms Tsang spoke to Mr Yum on the telephone.  This took place after the POA had been executed.  As found above, when that telephone conversation took place, (1) Mr Yum knew that a representative of P would contact the Firm regarding D1’s application for a loan and that D1 required the Firm to witness the execution of some documents for that purpose, and (2) Ms Tsang wanted confirmation regarding the provenance of the POA from the person who witnessed the execution.  Having regard to the context of the telephone conversation, Mr Yum’s confirmation made during the call was no more than what one could see on the face of the POA.  Mr Yum was not applying any special skill for the assistance of P; he was merely making a factual confirmation that the signatures that appeared on the POA were really appended thereto at the Firm’s office on a previous occasion.  Specifically, it cannot fairly, justly or reasonably be said that Mr Yum’s confirmation made during the call would amount to an assurance that the POA had been properly executed by D2.  I note from its closing submissions that P relies on the conversation between Ms Tsang and Mr Yum on 28 April 2015 as the principal event to support the purported duty of care by D3 to P.  Having regard to all the circumstances, and in particular Mr Yum’s conduct, at the material times, I am not satisfied that D3 had assumed any responsibility to P to ensure the proper execution of the POA or to verify that it was D2 who executed the POA. 

108.  As mentioned above, copies of the Mortgage were sent by C&C to the Firm under C&C’s letter dated 29 April 2015. According to the letter, the copies of the Mortgage (and other documents) were sent to the Firm “for [the Firm’s] further handling”.  The Firm was also requested to inform C&C forthwith once the documents enclosed with the letter had been executed and to return them to C&C with some other documents.  As far as the Mortgage was concerned, nothing was said during the telephone conversation between Ms Tsang and Mr Yum on 28 April 2015, or in C&C’s letter dated 29 April 2015, that Mr Yum or D3 was expected to do anything other than to witness the execution of the Mortgage and to return the executed Mortgage to C&C.  In these circumstances, it cannot fairly or reasonably be said that D3 had assumed any responsibility to P to ensure the proper execution of the Mortgage, or to verify that D1 had the proper authority to execute the Mortgage for D2. 

109.  I find that D3 did not owe to P any duty of care to ensure the proper execution of the POA or the Mortgage.

G2.  Breach and Loss

110.  Given that no duty of care was owed by D3 to P, it follows that D3 was not in breach of any duty and that P’s loss and damage is not caused by any breach.

G3.  Conclusion on Issue 6

111.  For the above reasons, P’s claims in negligence against D3 fails.

H.  ISSUE 7: WHETHER THERE WERE ANY MISREPRESENTATIONS ON THE PART D3

112.  Although Issue 7 has been presented to the Court as encompassing both fraudulent and negligent misrepresentations, P has confined Issue 7 to a case of fraudulent misrepresentation in its written closing submissions given that its case of negligent misrepresentation has been subsumed in its submissions for Issue 6 in relation to its negligence claim against D3.

113.  P’s case on fraudulent misrepresentation against D3 is as follows.

(1)  During the telephone conversation on 28 April 2015, Mr Yum represented to P (through Ms Tsang) that the POA was personally signed by D2, and D3 was instructed to handle the mortgage loan on behalf of D1 and D2 (“the 28 April Representations”).

(2)  By a letter dated 30 April 2015, D3 further represented to P (through C&C) that D2 had validly authorised D1 to execute the documents attached to the letter on her behalf, and that D3 had authority to act for both D1 and D2 in the mortgage loan application (“the 30 April Representations”).

(3)  The above representations were false, and were made recklessly not caring whether they were true or false.

(4)  The representations were made by D3 with the intention that P would rely on them and be induced to advance the loan.

(5)  P has relied on the representations which has resulted in a loss to it.

H1.  The Representations

114.  The 28 April Representations:

(1)  I have already found that Ms Tsang did not seek confirmation from Mr Yum during the telephone conversation on 28 April 2015 on whether D3 would handle the mortgage loan application on behalf of D1 and D2. Accordingly, I also find that Mr Yum did not make any representation to Ms Tsang during that call that D3 was instructed to handle the mortgage loan on behalf of D1 and D2.

(2)  Although I have found that Ms Tsang did ask Mr Yum to confirm whether the POA was really signed by D2 to authorise D1 to deal the Property, and that Mr Yum answered in the affirmative, I am not satisfied that this means that Mr Yum had made a representation to Ms Tsang that the POA was personally signed by D2.

(3)  The interpretation of communications is always dependent on the context, and this is no less true for representations.  If, for example, the statement which is alleged to have been a misrepresentation was made by the defendant in answer to a question put by the plaintiff, it may be necessary to construe the question in order to ascertain the true meaning of the answer.  See J Cartwright Misrepresentation, Mistake and Non-Disclosure (5th ed, 2019) §3-07.

(4)  As mentioned above, having regard to the context of the telephone conversation on 28 April 2015, what Ms Tsang sought from Mr Yum was effectively a confirmation that the signatures that appeared on the POA were in fact appended thereto at the Firm’s office on a previous occasion.  And this was what Mr Yum confirmed during the telephone conversation.  Mr Yum did not confirm that the POA was personally signed by D2.  If P intended to obtain a guarantee or warranty from D3 that the POA was signed by D2 and not by anyone purporting to be D2 (i.e. a confirmation that D3 had already carried out a verification of D2’s identity at the time when the POA was executed), the question would have to be asked in more clear and unequivocal terms during the telephone conversation.   

(5)  For these reasons, I find that D3 did not make the 28 April Representations to C&C or P.

115.  The 30 April Representations:

(1)  In the letter dated 30 April 2015, D3 informed P that the Mortgage had been executed and enclosed with the letter a number of documents, including the executed Mortgage.

(2)  The documents enclosed with D3’s letter contained many statements.  P argues that because the documents referred to D having executed them “by her lawful attorney”, the mere fact of returning such documents to C&C constituted the making of a representation that D2 had validly authorised D1 to execute the documents on her behalf, and that D3 had authority to act for both D1 and D2 in the mortgage loan application.  I reject this argument.  The purpose of D3’s letter dated 30 April 2015 was to inform C&C that the Mortgage had been executed and to have various documents returned.  D3 was plainly not making any statement regarding the contents of the documents attached to the letter. 

(3)  In these circumstances, D3 did not make the 30 April Representations to C&C or P.

H2.  Other Elements

116.  Given that I have found that D3 did not make the 28 April Representations or the 30 April Representations to P, P’s claim for fraudulent representation against D3 fails and it is strictly unnecessary for me to say anything about the other elements of the claim.  I should, however, mention two other points.

(1)  First, as I have found above, (a) D2’s original HKID card was produced by D1 and the Imposter to Mr Yum on 15 April 2015, (b) after being provided with the original HKID card of D2, Mr Yum compared the photograph on D2’s HKID card with the Imposter’s face and was satisfied that the Imposter was D2, (c) Mr Yum thereafter photocopied the original HKID cards of D1 and D2.  Accordingly, I would have rejected P’s case of fraud against D3.

(2)  Further, given my finding above that the contents of the telephone conversation between Ms Tsang and Mr Yum on 28 April 2015 were not reported back to Mr Lau or P afterwards, P would have had difficulties in proving that it had relied on the 28 April Representations.

I.  ISSUE 8: WHETHER D3 ACTED IN BREACH OF WARRANTY OF AUTHORITY TO P

117.  In its closing submissions, P confined Issue 8 to the question of whether D3 acted in breach of warranty of authority to P.  P argues that the relevant warranties of authority were found in (1) the telephone call on 28 April 2015 where Mr Yum confirmed to Ms Tsang that D3 had instructions to act for D1 and D2 in relation to the Mortgage (“the First Warranty”), and (2) the letter dated 30 April 2015 from D3 to C&C where one of the documents attached to the letter included a statement that D3 was acting for the borrower and lender in an administrative capacity (“the Second Warranty”).

118.  As found above, Mr Yum did not confirm to Ms Tsang that D3 had instructions to act for D1 and D2 during the 28 April 2015 conversation.  It follows that D3 did not make the First Warranty.

119.  On a proper construction of the letter dated 30 April 2015 from D3 to C&C, it seems to me that all D3 did was to inform C&C that the Mortgage had been executed and to return the various documents to C&C.  There was no representation by D3 in the letter that D3 had authority to act for both D1 and D2 in the mortgage loan application.  Similarly, the letter cannot be construed to create a warranty by D3 in favour of P to the effect that D3 was acting for D2 in relation to the Mortgage.  I find that D3 also did not make the Second Warranty.

120.  In these circumstances, P’s claim for breach of warranty of authority against D3 also fails.

J.  ISSUE 9: WHETHER P IS ENTITLED TO ANY RELIEF

121.  For the reasons given above, I dismiss all the claims made by P against D2 and D3. 

122.  In its closing written submissions, P asked the Court to also enter judgment against D1.  However, there does not appear to be any evidence that proper service of the relevant court documents has been effected on D1 at any time.  I give P liberty to apply to put in further evidence in relation to the intended judgment against D1.

123.  I also make the following orders:

(1)  A declaration that each of (a) the Initial Loan Agreement, (b) the Loan Agreement, and (c) the Mortgage, is null, void and of no legal effect against D2.

(2)  An order that the registration of the Mortgage in the Land Registry be vacated.

(3)  An order nisi that the costs of D2 and D3 in these proceedings (including any reserved costs) be paid by P (with a certificate for two counsel for D3), to be taxed if not agreed.

(4)  The above costs order nisi shall be made absolute 14 days from the date of this judgment.