GREAT RICH TRADING LTD v. EASE FAITH LTD

HCA 512/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 512 OF 2014

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JUDGMENT

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1.  This case originally started life as a claim by the plaintiff for damages for breach of two contracts, dated respectively 20 April 2013 and 28 April 2013, alternatively for return of down-payments paid under the two contracts being unjust enrichment as a result of total failure of consideration on the part of the defendant.

2.  However, by the time of trial, the plaintiff’s claim had changed significantly in that the plaintiff no longer claimed any damages for breach of contract, and its only claim was for unjust enrichment, with the two contracts being pleaded as “background”.

3.  The reason for this change of tack is expressed to be the non-availability of any witnesses of fact on behalf of the plaintiff. The plaintiff’s written opening stating that:

“ P’s amendments are sensible and will save court’s time and costs because:

(a) The 3 persons with personal knowledge of the two sales contracts, formerly associated with P and its parent company … can no longer be reached for the purpose of giving evidence in these proceedings.

(b) The original sales contracts can no longer be located by P.”[1]

As will be seen, this is somewhat of an understatement.  The absence of any witness with personal knowledge of the facts alleged by the plaintiff, nor any contemporaneous document to evidence the alleged sales contracts proves fatal to the plaintiff’s claim.

The background

4.  The plaintiff is the wholly owned subsidiary of a listed company, China For You Group Company Limited, formerly known as China Packaging Group Co Limited (“China Packaging”).

5.  In 2013 up to about November of that year, which is the material time when the events which give rise to the present case occurred, Mr He Jian Hong (“HJH”) was the majority shareholder (of over 70% of the shares) of China Packaging, which he held through a company known as Able Success Asia Limited (“Able Success”) which he beneficially owned.

6.  HJH was one of the executive directors of China Packaging.  Another executive director of China Packaging was Zhang Zhantao (“Zhang”), who was the sole director of the plaintiff.

7.  Apart from being majority shareholder and therefore being able to control China Packaging, HJH had other businesses in the Mainland.  One of these businesses which he beneficially owned was Guangdong Smith Home Heavy Industrial Co Ltd (“GD Smith”).

8.  In May 2013, Lau Cheuk Pun (“Lau”), the financial controller of China Packaging and later company secretary of the plaintiff raised question with Chow Sau Keung (“Chow”) who was in charge of treasury of the plaintiff about the transfer of a total sum of $17,615,500 from the plaintiff’s bank accounts, requesting documents in support of the transfers.  Chow provided to Lau copies of two sales contracts.

9.  The 1^st sales contract dated 20 April 2013 was for the sale and purchase of timber from the defendant at a price of $25,260,000 with a delivery date of 30 June 2013.  The 2^nd sales contract was dated 28 April 2013 for the purchase of Transition+overrolling slabs at a price of $9,971,000 with the latest shipment date being 30 September 2013.  Both contracts provided for deposit/down payments, of $12,630,000 and $4,985,500 respectively.

10.  No goods were delivered under either of the two contracts.  The plaintiff issued letters demanding the return of the deposits/ downpayments. The defendant replied through its solicitors by letter dated 20 February 2014 denying having ever entered into the two contracts and that the two payments of $12,630,000 and $4,985,500 were repayment of outstanding sums due under Service Agreements between GD Smith and Guangdong Hongchang Import & Export Co Ltd (“Hongchang”), a company registered in Foshan, Guangdong.

11.  The writ was issued shortly after, and the original Statement of Claim was filed on 25 March 2014.

The plaintiff’s case

12.  The plaintiff’s pleaded case was originally for damages for breach of contract, relying on the two contracts.  However, by amendment of the Statement of Claim on 12 May 2015, the plaintiff deleted much of the plea in relation to the two contracts.  Without disavowing the two contracts, the focus of the claim is now reduced to return of the deposits/ downpayments as being money had and received or on the basis that the defendant had been unjustly enriched by receipt of the downpayments.

13.  Nevertheless, the two contracts remain central to the plaintiff’s case.  The payment of the two sums of $12,630,000 and $4,985,500 were pleaded to be pursuant to two contracts and not on account of any other reason.  Further, there is a plea that no delivery whatsoever had been made by the defendant in respect of both contracts.

14.  It is then pleaded that Lau “discovered” the transfers of the downpayments, and was told that Zhang approved and signed the two contracts on HJH’s direction and that no delivery whatsoever was made under the two contracts.

15.  It is then said that “For the reasons aforesaid” the plaintiff claims against the defendant for return of the downpayments as money had and received.

16.  The Amended Statement of Claim then goes on to say that there was a total failure of consideration in that the plaintiff received nothing in return for the downpayments, and further or alternatively that the defendant has been unjustly enriched because (a) the defendant received the money; (b) the enrichment is unjust and unconscionable because the defendant is not entitled to keep the downpayment; and (c) there is no defence or bar to the plaintiff’s claim.

17.  It will be obvious that the plaintiff’s claim is dependent on the existence of the contracts, because it is the plaintiff’s pleaded case that the two downpayments were paid pursuant to the contracts, the basis of the claim is that there has been a total failure of consideration in that no goods have been delivered under the two contracts.  The plea of unjust enrichment adds nothing to the plaintiff’s case—firstly, because as rightly pointed out by the defendant, the claim for money had and received upon total failure of consideration is now regarded as a restitutionary claim based upon principles of unjust enrichment (see Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at para 66).  Secondly, the plea of unjust enrichment is not put on any alternative factual basis—indeed, the plea that the enrichment was unjust because the defendant was not entitled to keep the downpayments can be said to be a somewhat circular plea.

18.  The plaintiff called Lau as its sole witness.  He explained that his knowledge of the two contracts came from what he was told by Zhang, namely that Zhang executed the two contracts on the instructions of HJH, that the unsigned contracts were sent by email from a Mr He Weinan of Hongchang to a Ms Zhi Zhuotao of GD Smith, who then passed them on to Zhang who signed them and then passed them onto someone else the identity of whom he did not recall.

19.  No contemporaneous documents to support the existence of the two sales contracts were produced.  The originals of the contracts purportedly signed by both parties (documents whose authenticity were disputed by the defendant from before the Writ was issued) were never produced. The closest to a contemporaneous document was a copy of minutes of the Audit Committee of China Packaging (the listed parent company of the plaintiff) held on 28 August 2013.  Reliance was placed upon a matter listed at paragraph 4.1(a) which apparently related to the downpayments.  The entry provided:

“ Other receivable recoverability — Ease Faith Limited

On 29 April 2013 and 3 May 2013, the Company paid the deposit to Ease Faith Limited of HK$12,630,000 and HK$4,985,690 respectively for purchasing Timber. However, the transaction had been cancelled and the goods already returned to Ease Faith Limited because of the quality problem.

Mr. He Jianhong, the Director of the Company, reported that the deposit is refundable.  The audit committee member requested to obtain the supporting document (e.g. request Ease Faith Limited to provide the document to the Company and state that Ease Faith Limited will refund the deposit to the Company and also provide the termination agreement) in order to make sure that there are no recoverability problem on such deposit.”

20.  Lau had no personal knowledge of the two contracts or how the downpayments came to be transferred to the defendant.  HJH was not called as a witness because he was incarcerated in the Mainland.  However, no such explanation applied to Zhang, or for that matter to Chow, the senior manager of the plaintiff who first supplied Lau with the copies of the two contracts.  In relation to Chow, he was said to have resigned from the plaintiff on 24 December 2014, and no explanation has been given as to what, if any, efforts had been made to request his assistance as a witness.  In relation to Zhang, it was pleaded in Amended Statement of Claim that he resigned as a director in March 2014 and could not be reached by the plaintiff to verify the matter as regards the two sales contracts after the defendant’s letter denying the same dated 20 February 2014.  In cross-examination, it was revealed that Lau saw Zhang as recently as early 2016, in Hong Kong at the Labour Department when Zhang was pursuing arrears of wages against the plaintiff.  Lau tried to explain why Zhang was not asked to be a witness, saying that according to his (Lau’s) knowledge, Zhang was still working in HJH’s company and he thought that there was a conflict of interest and that Zhang had expressed unwillingness to be a witness.

The defence case

21.  The defendant admits that the two sums of $12,630,000 and $4,985,500 respectively were transferred to the defendant’s bank account.  However, the defendant denies that it entered into the two contracts with the plaintiff, and says that the two contracts purported to be signed by the defendant are forgeries in that the signatures appended on the two contracts purporting to be of the defendant was not appended to the two contracts by the defendant or anyone authorized to sign on its behalf.

22.  The defendant says that the two sums were paid to the defendant because of dealings arising out of certain Import Agent Service Agreements between Hongchang and GD Smith.  Hongchang and the defendant were companies beneficially owned and controlled by Zhong Weiguo (“Zhong”) together with Li Shaoquan.  Hongchang acted as agent for GD Smith to purchase metal ore from overseas suppliers and import the same into the Mainland.  Hongchang would enter into agreements for the purchase of metals and arrange for payment to the suppliers in foreign currency, but would be reimbursed by companies controlled by HJH.  The reason for this arrangement was that GD Smith was lacking in funds to make payments to overseas suppliers, but companies controlled by HJH could secure or repay the monies in Hong Kong.

23.  The defendant says that at a meeting between HJH and Zhong at the Shunde office of Hongchang, an agreement was reached between HJH and Zhang on the one hand and Zhong on the other that the plaintiff or other companies controlled or beneficially owned by HJH would:

“… continuously repay and/or guarantee the oustanding and/or future sums due under the Service Agreeents in Hong Kong dollars … the Defendant [was nominated] to receive the said guarantee payments in Hong Kong. As such, the Plaintiff and the Defendant had entered into an agreement that the Plaintiff shall be responsible for repaying and/or guaranteeing and/or indemnifying the outstanding and/or future sums under the Service Agreements. (‘the Guarantee Agreement’)”

24.  Subsequently, Hongchang invoiced GD Smith for inter alia two sums which it incurred pursuant to a Nickel Service Agreement and a Copper Service Agreement.  This was converted from RMB to HKD by agreement made between HJH and Zhang on the one hand and Zhong on the other on 20 April 2013, and were the two sums which were subsequently transferred from the plaintiff to the defendant.

25.  Two written confirmations dated 25 April 2013 and 29 April 2013 were issued by GD Smith confirming that the plaintiff would pay the defendant the sum of $12,630,000 and $4,985,500 respectively to secure the obligation of GD Smith to repay sums due to Hongchang under the Nickel Service Agreement and the Copper Service Agreement.  (The authenticity of these two confirmations are disputed by the plaintiff.)

26.  The defendant then says in May 2013 (and later again in November 2013), the plaintiff provided copies of the two contracts which purported to show that the two sums transferred to the defendant were downpayments under contracts for the purchase of timber and steel, instead of being to secure payment for the Nickel Service Agreement and the Copper Service Agreement.  The plaintiff requested the defendant to sign on these contracts for the plaintiff’s accounting purposes, but the defendant refused.

27.  The defendant called two witnesses, Zhong and Wong Mei Ling Keiyen (“Wong”), the former manager of the defendant.

28.  Zhong gave his evidence in a forthright manner, and his testimony bore none of the hallmarks of someone who had carefully prepared his testimony prior to coming to court.  He was frank and did not hesitate to say, when asked about the agreement by the plaintiff to assist GD Smith to repay debts owed to Hangchong, that he (whether on behalf of the defendant or Hongchang) did not sign any agreement with the plaintiff.  This was pounced upon by Mr Cheung for the plaintiff who in a series of questions ended up putting to Zhong that HJH never said that any company (including the plaintiff) was to act as guarantor of debts owed to Zhong or his companies, that there was no guarantee.  Much has been made of this in the plaintiff’s closing submissions, to which I shall refer later on in this judgment.

29.  Overall, I consider that Zhong was an honest witness, and was doing his best to tell the truth.  Whilst there may have been some imperfections in his testimony, this is only to be expected and in no way diminishes the overall impression I formed of him as a witness.

30.  Despite the efforts of Mr Cheung in cross-examination, and contrary to what Mr Cheung submits, he has not contradicted himself nor has he flat out denied that there was no guarantee agreement between the plaintiff and the defendant.  In this regard, it is important to first of all consider the Re-Amended Defence and Zhong’s evidence in the appropriate context.

31.  In the Re-Amended Defence, the plea of the guarantee agreement is found at paragraph 6(e), the relevant parts of which are as follows:

“[HJH] and Mr.Zhang proposed, and Mr.Zhong agreed, to arrange the Plaintiff and other companies in Hong Kong under [HJH]’s control and/or beneficially owned by him to continuously repay and/or guarantee the outstanding and/or future sums due under the Service Agreements in Hong Kong dollars. At [HJH]’s request, Mr. Zhong nominated the Defendant to receive the saidguarantee payments in Hong Kong. As such, the Plaintiff and the Defendant had entered into an agreement that the Plaintiff shall be responsible for repaying and/or guaranteeing and/or indemnifying the outstanding and/or future sums under the Service Agreements (‘the Guarantee Agreement’)”

     (emphasis added)

32.  In his witness statement, Zhong described the agreement proposed by HJH as follows (at paragraph 15):

“[HJH] told us that on the other hand he and Mr. Zhang had finally acquired the control of China Packaging in Hong Kong, and that he would like to expand and connect the business of GD Smith with that of China Packaging …. [HJH] and Mr. Zhang proposed that he would arrange the Plaintiff, Able Success, and if necessary other companies in Hong Kong under their control and beneficially owned by them to jointly and severally repay and guarantee the outstanding and future sums due under the Service Agreements in Hong Kong.”

33.  In cross-examination, he said that he had not signed any agreement with the plaintiff, that he did not know which company HJH used to make the payment beforehand.  Mr Cheung relies inter alia on this to say that there was a departure from the defendant’s pleading and that somehow because at one of the meetings it was “more certain than not” that Zhang was not at the meeting, only Chow and one Wang Liang, and therefore the plaintiff was not bound.

34.  First of all, the presence or absence of Zhang at one of the meetings does not have a great effect on the matter.  The plaintiff was a wholly owned subsidiary of China Packaging, which was controlled by HJH.  More importantly, there is no dispute that Zhang took his instructions from HJH.  Further, the occasion when Zhang was apparently not present is not the only time when a guarantee was discussed, and Zhong’s evidence was that Zhang was present at (at least) one such meeting.

35.  Secondly, Zhong’s evidence when taken as a whole shows that if GD Smith had in fact made payment in RMB to Hongchang, the defendant would have returned the sums to the plaintiff.  This is consistent with the defendant’s pleaded case, that the plaintiff was “responsible for repaying and/or guaranteeing and/or indemnifying the outstanding and/or future sums”.

36.  Accordingly, I find no material inconsistency or departure from the pleadings in Zhong’s evidence.

37.  Wong’s evidence was mainly concerned with how the unsigned contracts were delivered to the defendant.  Her evidence was that she had been asked to go to the plaintiff’s office to deliver some documents to Chow, who then in return gave her four contracts signed by the plaintiff (but not by the defendant) who asked her to bring those four contracts back to the defendant. Upon return to the defendant’s office, she informed Zhong who told her to simply ignore those documents and there was no need to follow up on them.

38.  She nevertheless obtained soft copies of one of the contracts and made certain amendments to them.

39.  She was cross-examined at length on this point.  She explained that she was able to identify that the timber contract likely originated from Hongchang because of the reference numbers for the contract and she asked for a softcopy contract template from a staff of Hongchang so she could make amendments as necessary.  For the steel contract, she typed it out by hand.  Despite Zhong having said that she could ignore these contracts, she noticed that there were mistakes on the contracts, so she compared and made amendments saved on her own computer.  Much was made of a screen capture which showed the properties of the documents which Wong amended.  The properties page seemed to show that the steel contract document was created at 10:10:51 on 11 May 2013, and amended on 10:12:20 the same day, the suggestion being that it was impossible to have typed up the whole document within the space of 1 minute and 29 seconds.  A further point was made in this regard in final submissions that the timber contract appeared to have been 10:09:56, just 55 seconds before the steel contract was created.  The submission is made that it is ludicrous to suggest Wong could have typed up the whole steel contract within 55 seconds.

40.  This point is not made out.  Without expert evidence on the meaning of the metadata shown on the properties page, I simply cannot come to a conclusion one way or another on what the words “date created”(建立日期) and “date modified” (修改日期) mean.  It could well be that “date created” means the date and time when it was first saved instead of the date and time when a blank document is opened.

41.  I do not consider that Wong was in any way shaken in cross-examination, nor was any doubt cast on her credibility.

The problem in the plaintiff’s case

42.  The problem about the plaintiff’s case is that it is based purely on hearsay, not supported by any contemporaneous documentation, nor by the testimony of any witness who had personal knowledge of the matter.

43.  Whilst the absence of HJH can be accounted for, the explanation for the absence of Zhang is not acceptable.  Lau said that he had last seen Zhang in early 2016 but did not consider requesting him to be a witness because he thought that there was a conflict of interest as he believed Zhang was still working for HJH.  No further explanation is given as to why he held such a belief.  It is also inconsistent with the listing questionnaire filed on behalf of the plaintiff dated 20 October 2015, where it was stated that “the Plaintiff considers issuing a writ of subpoena against Zhang and Chow to give evidence at trial once the dates for trial are fixed”.

44.  No adequate explanation has been given whatsoever for the absence of Chow as a witness.  The unwillingness of Zhang to be a witness is not a sufficient explanation, given the absence of any efforts made to secure his attendance as a witness.

45.  In Li Sau Keung v Maxcredit Engineering Ltd [2004] 1 HKC 434 at 443, the Court of Appeal cited with approval the following passage: 

“ It is sufficient to say that in our opinion for the purposes of the present case the law may be stated to be that where a person without explanation fails to call as a witness a person who he might reasonably be expected to call, if that person’s evidence would be favourable to him, then, although the jury may not treat as evidence what they may as a matter of speculation think that that person would have said if he had been called as a witness, nevertheless it is open to the jury to infer that that person’s evidence would not have helped that party’s case; if the jury draw that inference, then they may properly take it into account against the party in question for two purposes, namely: (a) in deciding whether to accept any particular evidence, which has in fact been given, either for or against that party, and which relates to a matter with respect to which the person not called as a witness could have spoken; …”

46.  I consider that this passage is applicable to the present case.  There is simply no proper explanation for the failure to call Zhang or Chow.

47.  The only document from the plaintiff’s side which might arguably support its case is the minutes of meeting of the audit committee of China Packaging.  However, that document itself is not consistent with the plaintiff’s case.  The minutes record that the two sums were for purchasing timber, whereas the plaintiff’s case is that only one of the sums were for purchasing timber, the other being for purchasing steel.  Further, it also records that “the transaction had been cancelled and the goods returned to Ease Faith Limited because of the quality problem”.  This is inconsistent with the plaintiff’s case that there was no delivery at all.  These minutes do not support the plaintiff’s case but on the other hand undermines it.

48.  The lack of any contemporaneous documentation is itself disturbing.  The two alleged contracts are substantial ones, of a total value over HK$35 million.  No adequate explanation has been proffered as to why the original contracts are not available, the only explanation being that Zhang and Chow had not given them to Lau.  It is difficult to understand how this state of affairs could come about.  In a normal commercial situation, one would expect company documents, in particular original contracts, to be kept in the company files.  Further, the lack of any documentation leading to the contract, or following up on the contract also speaks volumes.  Contracts, especially of this size, rarely materialize without any sort of negotiation of which there would be some written or electronic record.  The lack of any documentation following up on the contracts, eg acknowledgment of receipt of payment, or requests therefor, is also strange.

49.  The defendant’s case, however, is adequately documented, from the Import Agent Service Agreements, down to confirmations from GD Smith concerning the security/guarantee arrangement.  In relation to the latter, the plaintiff disputes the authenticity of these two confirmations. However, as pointed out by the defendant, no notice of non-admission was served by the plaintiff in relation to these documents pursuant to Order 27, rule 4 of the Rules of the High Court.  Nor was any application made for release from the deemed admission of authenticity.  In any event, they were confirmed by Zhong in his witness statement which he adopted as his evidence in chief.

50.  The burden of proof is on the plaintiff.  The quality of the evidence tendered by the plaintiff on this central issue is so poor that I cannot be satisfied that the two contracts ever existed.  Comparison of the quality of the evidence tendered by the plaintiff with that of the defendant brings the matter into stark contrast.  On the one hand, the plaintiff’s case is dependent on oral hearsay, unable to be tested by cross-examination, with inadequate explanation for the absence of materialwitnesses, and the only contemporaneous document being contradictory to important parts of the plaintiff’s case.  On the other hand, the defendant’s case is supported by contemporaneous documentation, relevant witnesses were called to support its case and the evidence whether by way of testimony or as reflected in the documents is internally consistent.

51.  In making this finding, I have not ignored the plaintiff’s criticisms of Zhong’s testimony, in particular where he says that he did not have an agreement with the plaintiff.  However, if understood within the context of the defendant’s case as a whole, that the plaintiff was a company under HJH’s control which was tasked by HJH with the provision of security/indemnity for GD Smith’s obligations to Hongchang, I do not find that this detracts from the defendant’s case in any way.

52.  I have also considered the plaintiff’s submissions that the guarantee agreement(s) fail for lack of consideration.  In this regard, I accept the defendant’s submissions that detriment has been suffered by Hongchang and the defendant in that a revised deadline for payment by GD Smith of sums due under the respective Import Agent Service Agreements was provided in return for the security provided by the plaintiff.

53.  The plaintiff also raises the issue of mistake and lack of consent/want of authority.  The argument is that had the plaintiff known that the two sales contracts were not genuine contracts, it would not have made the payments, and in any event, Zhang had no authority to effect the payments to the defendant.  The point can be disposed of shortly — Zhang was the sole director of the plaintiff at the material time.  There can be no question of his authority.

Conclusion

54.  I find that the plaintiff has failed to prove its case on unjust enrichment, and accordingly dismiss the plaintiff’s claim.

55.  I make an order nisi that the costs of the action are to be paid by the plaintiff to the defendant, to be taxed if not agreed.