HONGKONG WINDMODE SPORTS EQUIPMENT CO LTD v. HK HAOLONG INDUSTRIAL LTD

DCCJ 1092/2024

[2024] HKDC 875

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1092 OF 2024

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JUDGMENT

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Introduction

1.  By summons filed on 19 April 2024 (“Summons”), the Plaintiff applies for final judgment in default of notice of intention to defend and in default of defence pursuant to Order 13 rule 6 and Order 19 rule 7 of the Rules of the District Court (Cap 336H, sub leg) (“RDC”). The Plaintiff seeks:-

(1)  A declaration that the Defendant holds the sum of USD54,794.00 paid on 17 October 2023 to the credit of the Defendant’s bank account held with the Bank of East Asia, Limited, together with the profits and proceeds thereof, on a constructive trust for the benefit of the Plaintiff;

(2)  The Defendant do pay the Plaintiff the sum of USD54,794.00 or its Hong Kong Dollar equivalent at the time of payment together with interest thereon at judgment rate from 27 February 2024 until payment; and

(3)  The costs of this application be paid by the Defendant to the Plaintiff.

The Pleaded Claim

2.  At all material times, the Plaintiff is and was a company incorporated in Hong Kong and carrying on the business of garment manufacturing. The Plaintiff would sometimes settle invoices from its suppliers by outward telegraphic transfer.

3.  On 17 October 2023, the Plaintiff intended to remit a sum of USD54,794.00 (“Sum”) through an outward telegraphic transfer from its Shanghai Commercial Bank Limited (“SCB”) bank account (“Plaintiff’s Account”) to a supplier, but inadvertently and mistakenly remitted the Sum to the Bank of East Asia, Limited (“BEA”) bank account of the Defendant (“Defendant’s Account”), a company incorporated in Hong Kong.

4.  The Plaintiff had no commercial or other purpose to transfer the Sum to the Defendant. At the same time, the Defendant must have known that it had no legitimate commercial or other purpose to receive the Sum, which was and still is money belonging to the Plaintiff.

5.  According to the Plaintiff, the Defendant is therefore liable for the Sum as constructive trustee.

6.  The Plaintiff has pleaded two additional/alternative causes of action, namely that:-

(1)  the Defendant was unjustly enriched by the Sum; and

(2)  the Sum represents money had and received by the Defendant for and to the use of the Plaintiff, and so the Plaintiff is entitled to immediate repayment of the Sum.

7.  As a result, the Plaintiff has suffered loss and damage in the sum of USD54,794.00.

8.  On 18 October 2023, upon the Plaintiff’s instruction, SCB issued a Request for Cancellation to BEA, requesting the Defendant for refund and/or return of the Sum to the Plaintiff. Subsequently, the Plaintiff made further requests and demands for the return of the Sum by, in particular, a letter dated 5 January 2024 issued by its solicitors.

9.  Nevertheless, the Defendant has failed and/or refused to return the Sum or part thereof.

10.  The Plaintiff claims:-

(1)  a declaration that the Defendant holds the Sum paid on 17 October 2023 to the credit of the Defendant’s Account, together with the profits and proceeds thereof, on a constructive trust for the benefit of the Plaintiff.

(2)  an order that the Defendant do pay to the Plaintiff the sum of USD54,794.00 or such other sums as the Court thinks fit.

(3)  interest pursuant to sections 49 and 50 of the District Court Ordinance (Cap 336) (“DCO”) on such sums and for such period as the Court deems fit and just.

(4)  Costs of this action.

Service

11.  The Writ of Summons was issued on 27 February 2024.

12.  On 28 February 2024, the Plaintiff’s solicitors served a copy of the Writ of Summons on the Defendant by leaving the same with a cover letter enclosed in a sealed envelope addressed to the Defendant at a unit of a commercial building in Kowloon (“Kowloon Address”), purportedly being the registered office of the Defendant, pursuant to section 827 of the Companies Ordinance (Cap 622) (“CO”).

13.  The Defendant did not file any Acknowledgment of Service of the Writ of Summons or Defence.

14.  On 18 April 2024, the Plaintiff’s solicitors served a copy of the Summons, together with a letter dated 18 April 2024 informing the Defendant to attend the hearing of the Summons on 2 May 2024, by sending the same by ordinary post in a sealed envelope duly prepaid and properly addressed to the Defendant at the Kowloon Address, purportedly being the registered office of the Defendant pursuant to section 827 of CO. The said letter to the Defendant and the Summons were not returned to the Plaintiff’s solicitors by the Post Office.

The Hearing

15.  The Summons was heard on 2 May 2024. The Defendant was absent. Ms Lau Patricia Hoi Ni for the Plaintiff confirmed that the Plaintiff sought also costs of the action. Leave was granted to the Plaintiff to amend the Summons by seeking also the costs of the action (“Amended Summons”). This Court also made an Order that the Amended Summons shall be disposed of on paper after the Plaintiff’s service of the Amended Summons and that Order on the Defendant, and the filing, on oath, of company search records showing the Defendant’s registered office on 28 February 2024 (date of service of Writ of Summons), 18 April 2024 (date of service of Summons) and the date of service of the Amended Summons and that Order.

16.  On 3 May 2024, a copy of the Amended Summons filed on 3 May 2024 was served on the Defendant by sending the same by ordinary post in a sealed envelope duly prepaid and properly addressed to the Kowloon Address. On 9 May 2024, a copy of the said Order filed on 9 May 2024 was served on the Defendant by ordinary post in a sealed envelope duly prepaid and properly addressed to the Kowloon Address. The Plaintiff has also filed an affirmation of service with company search records showing that the Kowloon Address has been the registered office of the Defendant.

17.  In the premises, this Court is satisfied that the Writ of Summons, the Summons, the Amended Summons and the said Order were properly served.

18.  Nonetheless, the Defendant did not respond to the Amended Summons or the said Order.

Legal Principles

19.  On an application for final judgment in default of defence pursuant to Order 19 rule 7 RDC, the court cannot receive any evidence but must give judgment according to the pleadings alone. The basis upon which final judgment can be obtained in default of defence is that of implied admission, ie the court will assume that the Statement of Claim has been impliedly admitted. See Hong Kong Civil Procedure 2024, Volume 1, rubric 19/2/1 and 19/7/11.

20.  It is not the normal practice of the court to grant a declaration without going to trial. This, however, is only a rule of practice (not a rule of law) which should not be followed when the plaintiff has a genuine need for the declaratory relief and justice would not be done if such relief were denied. The court will scrutinise the application carefully and will not hastily grant the relief sought. The declaratory relief should not be in terms wider than what the plaintiffs are entitled to and what is necessary to do justice to them. The court expects that maximum assistance will be provided. The court should not be expected to deal with the matter on a “do-it-yourself basis” and simply rubber-stamp the uncontested application. See, for example, Hong Kong Civil Procedure 2024, Volume 1, rubric 19/7/20.

Deliberation

21.  First, I consider the personal claim based on unjust enrichment.

22.  In Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79, the Court of Final Appeal (at paragraph 66 thereof) set out a useful framework for approaching a claim for restitution based upon principles of unjust enrichment by posing four questions:-

(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?

23.  Further, a 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 Zief Incorporated v Tekchandani Ajai Mohan (trading as D’Ziner Collections (Hong Kong)) and Others [2021] HKCFI 38, paragraph 23, citing Kleinwort Benson Ltd v Lincoln CC [1999] 2 AC 349.

24.  In my judgment, the Plaintiff has clearly pleaded a case of unjust enrichment. Obviously, the Defendant has been enriched with the Sum at the expense of the Plaintiff. The Defendant, having had no commercial dealing with the Plaintiff or other legitimate reason, was transferred the Sum due to the inadvertence or mistake of the Plaintiff. As SCB issued the Request for Cancellation to BEA on 18 October 2023, one would expect BEA to have notified the Defendant about the Plaintiff’s inadvertent or mistaken transfer of the Sum. Alternatively, by no later than the receipt of the letter issued by the Plaintiff’s solicitors on 5 January 2024, the Defendant acquired knowledge that the Plaintiff had transferred the Sum by inadvertence or mistake, and that it had no right or legitimate reason to keep the Sum. Nonetheless, the Defendant failed to repay the Sum to the Plaintiff. The Defendant’s enrichment was clearly unjust. The Defendant did not file any Defence and so no defence to unjust enrichment is raised, and in any event there does not appear to be any applicable defence.

25.  Next, I consider the claim of money had and received.

26.  The Plaintiff’s written submissions suggest that its claim of money had and received is simply a species of claim for unjust enrichment, citing the Court of Final Appeal’s decision of Shanghai Tongji (supra). In other words, the Plaintiff’s claim of money had and received is not independent of its claim based on unjust enrichment analysed above.

27.  Given my conclusion that the Defendant was unjustly enriched by the Sum at the expense of the Plaintiff, it is unnecessary to rule on the plea of money had and received. I say, obiter, that in Shanghai Tongji (supra), the Court of Final Appeal (at paragraph 66 thereof) referred to money had and received where consideration has totally failed [emphasis added] as a species of claim for restitution based upon principles of unjust enrichment. In the present case, the Plaintiff, while did not obtain any benefit from its inadvertent or mistaken transfer of the Sum to the Defendant, never anticipated any performance by the Defendant, with whom there was no commercial or other dealing. So, it does not seem appropriate to describe the Defendant’s enrichment as a total failure of consideration. Here, I respectfully agree with the observations of Recorder Eugene Fung SC in Zief Incorporated (supra), an email fraud case, at paragraphs 24 to 28 thereof:-

“24. P also relies on failure of consideration as an alternative ground for restitution.

25. “Consideration” in the context of a claim in unjust enrichment is different from that in the law of contract. “Consideration” for the purposes of the law of unjust enrichment does not mean the quid pro quo for there to be a binding contract as it is used in the law of contract. In the law of unjust enrichment, “consideration” refers to the condition which formed the basis of the plaintiff’s transfer to the defendant of the benefit in question. In Shanghai Tongji (above) §79, Ribeiro PJ referred to it as “the anticipated performance for which the money was paid, or the ‘basis or purpose’ of the payment”.

26. Where total failure of consideration is relied upon as the “unjust factor”, it is crucial to correctly identify and characterise the transaction providing the basis for the defendant’s enrichment, and it is only then can one identify the relevant anticipated performance and ascertain whether it has totally failed: see Shanghai Tongji (above) §80 (Ribeiro PJ).

27. In the law of unjust enrichment, the usual consideration that fails which gives rise to restitution is the promised counter-performance. If money was paid to secure performance and if performance fails, the inducement which brought about the payment is not fulfilled: see Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 at 48 (Viscount Simon LC); Shanghai Tongji (above) §79 (Ribeiro PJ).

28. In the present case, prior to the transfer of HK$3,120,000, P has never had any dealings with D4. P never anticipated any performance by D4. Although P did not obtain any benefit from the transfer of money, it does not seem appropriate to describe D4’s enrichment as a total failure of consideration. In any event, given that I have already concluded D4’s enrichment was unjust because of the mistaken belief that P was under, it is unnecessary for P to rely on total failure of consideration as an alternative ground for restitution.”

28.  Finally, I turn to the proprietary claim of constructive trust.

29.  A constructive trust arises by operation of law in a number of circumstances including where the defendant has received property unconscionably, such as where the defendant is aware that money had been paid by mistake. See Chitty on Contracts (35^th Edition), Volume 1, paragraph 33-178.

30.  A beneficiary of a trust is entitled to a continuing beneficial interest not merely in the trust property but in its traceable proceeds also, and his interest binds everyone who takes the property or its traceable proceeds except a bona fide purchaser for value without notice. See Foskett v McKeown (HL(E)) [2001] 1 AC 102, at 127F-G.

31.  In the context of fraud, even if the recipient was not a party to the fraud, if his state of knowledge is such as to make it unconscionable for him to retain the money, the defrauded claimant has a tracing remedy. Knowledge does not have to be acquired at the time of receipt, it can be acquired subsequently while the money is in the recipient’s hands. See Sonnex Packaging Nigeria Limited v HK Juyida Limited [2021] HKDC 297, paragraph 18 thereof, citing Guaranty Bank and Trust Company v ZZZIK Inc Limited HCA 1139/2016, unreported, 19 July 2016.

32.  A plaintiff who seeks a proprietary remedy must usually prove that the property to which he lays claim is still in the ownership of the defendant. The plaintiff has to show that the defendant has retained property in which the plaintiff can identify his or her proprietary interest. It is not possible to make a declaration of a trust over unidentified property. In particular, whether or not the plaintiff can assert its right in the remaining credit balance in the defendant’s bank account depends on a number of considerations including (but not limited to) whether or not there has been mixing of money in the defendant’s account, and whether the intermediate balance has fallen to or below zero. See JSP International S.R.O. v Alacrity Limited & Others [2022] HKCFI 977, paragraphs 31 to 33, cited in the Plaintiff’s authority Scandinavian Medical Solutions A/S v Runzhi Trading Co., Limited [2024] HKDC 21.

33.  The Plaintiff did not make any submission on the principles in the preceding paragraph to justify the grant of the declaration of proprietary constructive trust sought.

34.  I have concluded that the Defendant was unjustly enriched by the Sum at the expense of the Plaintiff. I am also satisfied that the Plaintiff has sufficiently pleaded that the Defendant had known the Plaintiff’s inadvertence or mistake and the fact that it had no commercial or legitimate reason in retaining the Sum. However, there is no plea that the Defendant has retained the Sum or any traceable proceeds thereof in which the Plaintiff can identify its proprietary interest. Neither is there any plea that there has been a credit balance in the Defendant’s Account since the Plaintiff’s transfer, or that such credit balance has not been mixed with other sums. This court cannot grant a declaration of trust over unidentified property.

35.  Moreover, I notice that the Plaintiff did not plead any remedy of tracing or account for profits or proceeds. Ms Lau also confirmed at the hearing that the Plaintiff was claiming the Sum only but not seeking an account for profits or proceeds. The present case is distinguishable from Scandinavian Medical Solutions A/S (supra) (an email fraud case in which an application for final judgment in default of acknowledge of service and in default of defence was made) where a declaration of constructive trust was granted on such terms that whether the plaintiff therein could eventually obtain any proprietary remedy over any specific asset of the defendant therein would depend on the result of the plaintiff’s tracing exercise. See paragraphs 10 to 17 thereof.

36.  In the premises, I decline to grant any declaration of constructive trust.

Relief

37.  By reason of the plea of unjust enrichment, I grant an order for the payment of USD54,754.00.

38.  Turning to interest, the Plaintiff has expressly pleaded interest pursuant to both sections 49 and 50 of DCO, ie both pre-judgment interest and post-judgment interest, and sought the same in the Summons.

39.  Insofar as pre-judgment interest is concerned, the Court of Final Appeal has recently summarised the relevant principles in PT Asuransi Tugu Pratama Indonesia TBK (formerly known as PT Tugu Pratama Indonesia) v Citibank N.A. [2023] HKCFA 25:-

(1)  Interest is awarded on a judgment sum as a way to compensate a successful plaintiff for being kept out of his money for a period of time. (paragraph 6 thereof)

(2)  The usual practice in Hong Kong, since at least 1984, is to award interest at a rate which represents the theoretical cost to the plaintiff of going into the commercial market to borrow the amount withheld. Traditionally, this rate has been taken to be 1% above the HSBC best lending rate, unless there is evidence in a particular case which makes the adoption of an alternative rate of interest appropriate for the pre-judgment period. (paragraph 6 thereof)

(3)  Where the judgment sum is denominated in US Dollars, the relevant HSBC best lending rate is HSBC’s US Dollar best lending rate. (paragraph 8 thereof)

40.  In my judgment, the Plaintiff has sufficiently pleaded that the Defendant acquired knowledge of the Plaintiff’s mistaken transfer of the Sum and that it had no legitimate commercial or other purpose to receive and keep the Sum. This is an appropriate case to award pre-judgment interest in order to compensate the Plaintiff for being kept out of the Sum. The Plaintiff seeks pre-judgment interest from 27 February 2024, and I so order. Further, in the absence of any evidence or submission justifying the adoption of judgment rate, I order that the pre-judgment interest rate shall be HSBC’s US Dollar best lending rate plus 1%.

41.  I grant also post-judgment interest at judgment rate.

42.  In relation to costs, having regard to all relevant circumstances including the factual matrix pleaded and accepted by this Court, and that the Plaintiff succeeds on the personal claim of unjust enrichment but not the proprietary claim of constructive trust, and that the Defendant should not be made responsible for the costs of the Amended Summons, I order that 70% of the Plaintiff’s costs of the action be paid by the Defendant, summarily assessed at HK$13,770.00. For the avoidance of doubt, the assessed sum has taken into account that only 70% of the Plaintiff’s costs be paid by the Defendant.

Disposition

43.  For reasons set out above, I order:-

(1)  the Defendant do pay the Plaintiff the sum of USD54,794.00 (“Judgment Sum”) or its Hong Kong Dollar equivalent at the time of payment.

(2)  the Defendant do pay the Plaintiff pre-judgment interest on the Judgment Sum at HSBC’s US Dollar best lending rate plus 1% from 27 February 2024 until the date of this Judgment.

(3)  the Defendant do pay the Plaintiff post-judgment interest on the Judgment Sum at judgment rate until the date of payment.

(4)  70% of the Plaintiff’s costs of this action including the costs of the Summons and all costs reserved be paid by the Defendant, summarily assessed at HK$13,770.00.