YUKIO TAKAHASHI AND ANOTHER v. CHENG ZHEN SHU AND OTHERS

HCA 2115/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2115 OF 2004

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J U D G M E N T

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1.  This case is concerned with the investment in the highway project between the Mainland cities of Wuhan and Xiaogang in Hubei Province (“Highway Project”).

2.  The 1^st plaintiff (through his company the 2^nd plaintiff) paid HK$60 million in relation to the Highway Project but had not received any rights or interests in it.  They are suing to recover this sum.

3.  Default judgment was entered against the 4^th defendant.  The 4^th defendant has been wound up by the Court.

4.  Settlement was reached between the plaintiffs and the 1^st defendant (and his company the 2^nd defendant) at the commencement of the trial. 

5.  The trial only concerned the 3rd defendant, and the plaintiffs are suing the 3rd defendant in restitution for HK$ 50 million received by the 3rd defendant through the 4th defendant, in turn the 1^st defendant from the plaintiffs.

6.  The 3^rd defendant asserted that it had repaid the 4^th defendant RMB￥31,954,906.50 being the balance of all moneys it received from the 4^th defendant plus moneys expended by the 4^th defendant in the Highway Project less set-off for private loans by the 3^rd defendant to the 4^th defendant.  Hence, it does not retain the HK$50 million.

Background

7.  The sums referred to in the documents are in RMB￥ whether stated or otherwise unless expressly stated to be in HK$.

8.  The 1^st plaintiff has previously lent money to the 1^st defendant through his two companies, Organized Associates Ltd and ETO Co Ltd.  In 1999, the two companies obtained judgments against the 1^st defendant in the total sum of about US$4.59 million.  Thereafter, the 1^st plaintiff further lent US$ 1 million to the 1^st defendant.  As at September 2003, the 1^st defendant owed the 1^st plaintiff and its associates about US$6.6 million.  As a result, 1^st defendant approached the 1^st plaintiff to invest in the Highway Project, so that the 1^st defendant might use part of the bank loan in the project to repay the 1^st plaintiff.

9.  The 3^rd defendant is the owner of the rights in the Highway Project through its subsidiary Wuhan Telford.  For the present purpose, there is no need to distinguish between the two entities.  The two major shareholders and directors of the 3^rd defendant are Messrs. Wong Chiu-wah (“Wong”) and Shum Ka-yee (“Shum”).

10.  On 26 August 2003, the Wuhan Municipal Transport Committee (“WTC”) and Wuhan Telford entered into the Construction and Management Agreement whereby Wuhan Telford became the investment proprietor of the Highway Project with operation for 30 years; the construction would be under the full responsibility of Wuhan Telford but Wuhan Telford would entrust the full authority of the construction with Highway Project Department of the Hubei Province with the details to be set out in the Construction Contract to be signed.

11.  The costs of the Highway was approximately RMB￥900 million, to be made up of 35% investment capital and 65% bank loans.  The construction was to start in early 2004, expected to be completed within 3 years.

12.  On 28 August 2003, the 3^rd and 4^th defendants entered into the Project Transfer Memorandum, and on 18 September 2003, they entered into the Preliminary Transfer Agreement.  The 4^th defendant acted through its director Mr. Song Jian-jun (“Song”).

13.  Under the Preliminary Transfer Agreement, the 4^th defendant shall pay the 3^rd defendant HK$5 million within 7 days; and the 4^th defendant shall pay the 3^rd defendant a transfer fee of RMB￥40 million (which would include the initial expenditure of deposit of RMB￥3 million paid to WTC, and surveying and design fee of RMB￥1.24 million) before 15 December 2003; the 4^th defendant shall make a capital investment of HK$200 million (including the 1^st instalment of HK$50 million) in full before 15 December 2003 and the 3^rd defendant warrants that after the conversion of HK$200 million into RMB￥, the amount shall be reimbursed to the 4^th defendant in full; in the event that the 4^th defendant fails to perform its obligations, the deposit of HK$5 million shall be forfeited as compensation, and if the 4^th defendant performs its obligation, HK$5 million shall be returned to the 4^th defendant in full.

14.  On 17 September 2003, Wuhan Telford was approved by the Hubei Province Development Planning Commission to undertake the Highway Project.

15.  On 23 September 2003, WTC and Wuhan Telford entered into the WTC Investment Agreement, which stated that Wuhan Telford would raise the fund, construct and operate the Highway and Wuhan Telford shall enter into another contract to fully entrust WTC with the responsibility for construction of the Highway (“Construction Contract”).

16.  On 23 September 2003, the 4^th defendant paid the 3^rd defendant HK$5 million, and the 3^rd defendant issued a receipt dated 23 September 2003 to the 4^th defendant.

17.  In October 2003, the 1^st defendant asked the 1^st plaintiff to invest in the Highway Project.  The 1^st plaintiff agreed to provide HK$10 million to enable the 2^nd defendant to obtain the transfer of the rights under the Highway Project. 

18.  On 8 October 2003, the 1^st plaintiff gave the 1^st defendant a cashier order for HK$10 million made payable to the 1^st defendant.  The 2^nd defendant provided to the 1^st plaintiff’s company, Eagle Spirit International Limited, an Acknowledgment of Receipt dated 8 October 2003 which stated that:

“… if our company could not obtain the [Highway Project] contract before 15 October 2003, we guarantee to return to your company HK$10 million.”

19.  On 15 October 2003, the 2^nd and 4^th defendants entered into the Transfer Agreement, which stated the 4^th defendant agreed to transfer the development and construction rights in the Highway Project to the 2^nd defendant; the 2^nd defendant would pay a transfer fee of HK$60 million (HK$20 million to be paid before December 2003 and HK$40 million to be paid before 30 June 2004); the 2^nd defendant agreed to pay the 4^th defendant the capital contribution of HK$ 50 million before 15 November 2003, and HK$150 million before 15 December 2003; and the 4^th defendant shall complete the business registration of the project company and the relevant legal documentation within 14 days upon the receipt of HK$50 million.

20.  On 16 October 2003, the 1^st plaintiff and the 1^st defendant met in Xiamen and signed a Summary of Conference which recorded that the parties had decided to invest in the Highway Project, and the total investment would be $884,430,000, with capital investment of 35% and the remaining 65% to be financed by bank loans by the project company, the 1^st defendant would invest $157,870,500 (51%) and the 1^st plaintiff would invest $151,679,500 (49%), both investments to be completed within 1 year; the 1^st plaintiff would first input the registered capital of $60 million before 15 November 2003 to activate the Highway Project and the $50 million should be used for the shareholding transfer from the 4^th defendant; the funding, payment and re-collection of the $150 million to be paid to the 3^rd defendant shall be made before 15 December; and the 1^st defendant undertook that after obtaining the $150 million for use, he would first reimburse HK$70 million borrowed from the 1^st plaintiff.

21.  On 23 October 2003, the 2^nd plaintiff paid a total of HK$50 million by way of 3 cashier orders made payable to the 3^rd defendant.  The 2^nd defendant issued a receipt dated 23 October 2003 to the 2^nd plaintiff for HK$60 million (including the $10 million paid before), stating the sum was for the capital investment of the Highway Project.

22.  The 4^th defendant issued an undated receipt to the 2^nd defendant for 3 cashier orders payable to the 3^rd defendant totaling HK$50 million, stating the sum was for the capital investment of the Highway Project.

23.  The 3^rd defendant issued a receipt dated 6 November 2003 for HK$ 50 million in payment of the capital investment of the Highway Project.

24.  On 23 October 2003, the 1^st defendant (as Chairman of the 2^nd defendant) and Song (as Chairman of the 4^th defendant) signed an Undertaking Agreement, which acknowledged the receipt of HK$50 million paid by the 2^nd defendant as investment capital by under the Transfer Agreement dated 15 October 2003.

25.  On 6 November 2003, the Wuhan Municipal Foreign Investment Office gave approval to the Hubei Han-Xiao Highway Construction and Management Co Ltd (“Han-Xiao”), a company to be set up for the Highway Project.

26.  On 11 November 2003, Han-Xiao was formally registered and formed with the 3^rd defendant as its 100% shareholder and the 1^st defendant as the enterprise legal representative.

27.  On 1 December 2003, the 3^rd and 4^th defendants entered into the Formal Agreement, which stated that the 4^th defendant had completed its duties under the Preliminary Transfer Agreement, and the 3^rd defendant had completed the formalities for the transfer of the project, and upon the signing of the Formal Agreement, the 3^rd defendant and Wuhan Telford would completely withdraw from the Project.

28.  On 2 December 2003, Shum (of the 3^rd defendant) and Song (of the 4^th defendant) signed a Checklist of Transfer from Han-Xiao to the 4^th defendant.  The checklist comprised of corporate, tax and foreign investment papers relating to the Highway Project and the company seals.

29.  The 3^rd defendant issued a receipt dated 2 December 2003 for the transfer fee of the Highway Project of RMB￥40 million to the 4^th defendant.

30.  On 10 February 2004, a meeting was held between Mr. Zhang Yi-fei (“Zhang”), staff member of the 1^st plaintiff, the 1^st defendant and Song.  A Summary of the Basic Situation signed by the participants recording that “our side” had honoured all agreements under the Summary of Conference but part of the capital investment was still not put in place.  Due to adjustment of the national financial policy in November 2003, the RMB￥120 million loan guaranteed by Wuhan Telford could not be used outside the project.  After the project company obtained the business licence, the registered capital was not put in place, and the plaintiff’s side and the 1^st defendant lacked enterprise legal representative status and could not enter into project management.  The transfer was basically completed and the RMB￥40 million transfer fee was paid.  On 24 December, WTC illegally entered into the Construction Contract of the Highway, but could not enter into operation because of the objection of “our side” .  The problems to be resolved were: the registered capital must be put in place before 25 February; to arrange with the bank for the placement of the corresponding complement capital and the use of the capital already entered into the account; to change the board of directors and the business licence and confirm the status of the enterprise legal representative.  The following points were suggested: the 1^st defendant to negotiate with the bank to withdraw RMB￥25 million from the capital stated in the account to repay part of the loan to the 1^st plaintiff; out of the investment capital of RMB￥310 million, the 1^st plaintiff owned 49% totaling RMB￥151.6795 million, and apart of the $60 million already placed, the remaining RMB￥91.6795 million would be put in by remittance before 25 February; the 1^st defendant undertook that his 51% share totaling RMB￥157,8705 million would be paid by cashier order before 30 June; the 1^st defendant had personally complained to Party Secretary Yu Zheng-sheng (of the Hubei Province) about the illegal contract of WTC; Song would arrange with the bank that the corresponding complement loan capital be put in place and the allocation of RMB￥25 million; upon the placement of registered capital, the board of directors would be reorganized, the capital be certified, and the business licence be changed and within 1 week.

31.  On 12 February 2004, the 1^st defendant wrote to Party Secretary Yu stating that he was the sole investor of Han-Xiao.  He complained that WTC demanded that the project company completely entrust WTC with the construction of the Highway, causing the enterprise legal representative unable to carry out its function, and the investor unable to complete the investment and control the time and quality of the construction.

32.  On 27 February 2004, Zhang wrote a letter addressed to the 1^st plaintiff reporting on situation of the Highway Project (“Project Report”).  The 1^st plaintiff disclosed the Report in discovery but denied ever reading it. 

33.  The Project Report stated it was written by the 1^st plaintiff’s staff based on what the 1^st defendant said, that on 16 October 2003, when considering the feasibility of the project, the two parties of the investment aimed to obtain the best result of the investment by capital deployment.  In practical terms, that was to use the tendering process to depress the construction costs by 15% in order to indemnify the transfer fee of the project.  However, WTC had already executed the Construction Contract on 24 December 2003.  Only upon the complaint to Party Secretary Yu did 1^st defendant find out that WTC was already entrusted with the construction of the Highway in the WTC Investment Agreement on 23 September 2003.  Since after the business registration, the registered capital was not put in place, WTC had already called for tender according to the timetable, to rely on the Party Secretary to alter the situation was already not quite possible.  Hence, it was no longer possible to carry out the idea of capital deployment through tendering, as a result the costs of investment would be raised to RMB￥960 million.  The 1^st defendant had already paid the transfer fee under the agreement for transfer as otherwise the 3^rd defendant would not guarantee the RMB￥120 million loan.  Because the status of the enterprise legal representative, change in the board of directors and establishment of financial management were unable to be rationalized, the management team was not established according to the Summary of Conference.  The 1^st defendant suggested cancellation of the investment project, and undertook the recovery of the capital of HK$60 million before 15 October, and to pay 10% compensation at the same time.  In order to continue with the project, the capital of RMB￥30 million should be put in place immediately, accumulating to RMB￥100 billion within a year, increasing to RMB$360 million (including RMB￥6,000 transfer ) with 2 years.

34.  On 16 February 2004, 3^rd defendant (including Wuhan Telford) and the 4^th defendants entered into the Re-purchase Agreement, which recited that the parties failed to reasonably sign the Construction Contract with WTC, causing major problem in the actual operation, and upon mutual consultation, the 4^th defendant agreed that the 3^rd defendant repurchase the Highway Project; the 3^rd defendant shall return to the 4^th defendant: the initial transfer fees of RMB￥35,760,000; and subject to proof, pay compensation of RMB￥2.4 million on losses incurred in the deployment of funds; pay one-off compensation of RMB￥7 million; to refund $12,338,867.18 paid by the 4^th defendant to the commanding unit of the Highway Project; and the 4^th defendant’s fee of $3,099,567.70.  The 3^rd defendant would take up the entire loan of RMB￥120 million.  The total sum repaid by the 3^rd defendant to the 4^th defendant would be RMB￥31,954,906.50, to be paid within 4 days of the signing of the agreement; and the 4^th defendant would return all the project related documents previously transferred (including items in the Checklist of Transfer) and the seals.

35.  The Re-purchase Agreement was endorsed by Song confirming that the 3^rd defendant had transferred RMB￥5 million on 17 February, and RMB￥26,954,906.50, repaying the 4^th defendant the total of RMB￥31,954,906.50, and the 3^rd defendant had fulfilled the above mentioned clause.

36.  Annexed to the Repurchase Agreement was the Han-Xiao Preliminary Expenditures Detailed Schedule dated 6 February 2004 and signed by Song (“Detailed Schedule”).  The Detailed Schedule listed items of expenditures totalling RMB￥86,838,434.88.  The Detailed schedule was endorsed with the statement that upon clarification by both parties the above expenditure were confirmed and the Detailed Schedule was an non-severable part of the Re-purchase Agreement.

37.  On 16 February 2004, Wuhan China Score (the 4^th defendant’s subsidiary) opened an account No. 01101301000968 with the Wuhan Municipal Village Credit Co-operative Society (Co-op Society A/c).  Song wrote a note requesting the 3^rd defendant to return RMB￥31,954,906.50 with interest to the Co-op Society A/c.

38.  A Return Slip for Cheque Delivery dated 17 February 2004 stating a cheque for RMB￥5 million drawn by Han-Xiao against its account with Wuhan Branch of the Shanghai Pudong Development Bank (“Pudong Bank”) in favour of Wuhan China Score’s Co-op Society A/c was stamped by the Pudong Bank.  However, the Return Slip stated that it is not proof of any entry into the account.

39.  Pudong Bank’s statement showed that RMB￥5 million were debited against Han-Xiao’s account with the bank on 18 February 2004 without the showing the recipient.

40.  A Return Slip for Cheque Delivery dated 19 February 2004 stating a cheque for RMB￥26,954,906.50 drawn by Wuhan Telford against its account with ICBC in favour of Wuhan China Score’s Co-op A/c was stamped by ICBC.  However, the Return Slip stated that it is not proof of any entry into the account.

41.  ICBC’s statement showed that RMB￥26,954,906.50 were debited against Wuhan Telford’s account with that bank on the same day with the name of the recipient left blank.

42.  On 23 February 2004, Wong signed a voucher for issue of a cheque for RMB￥10 million payable to the Wuhan Bridge and Road District (Illegible) Dressage for current purpose.

43.  Song issued a receipt dated 23 February 2004 to the 3^rd defendant for the transfer of RMB￥10 million as compensation.

44.  The 1^st defendant signed a Formal Receipt and Confirmation dated 25 February 2004, to Wuhan China Score (the 4^th defendant’s subsidiary) stating the refund of capital in the Highway Project in the sum of RMB￥54 million (being RMB￥29,500,000 and RMB￥1,570,000 being money for purchase of vehicles received previously, and the current remittance of RMB￥22,930,000 to Shenzhen Municipality Bao An District Shajing Town Shuang Long Building Materials Company (“Shajing Co’”) A/c 106010020002043 with the China Construction Bank, and thereafter the 2^nd defendant agreed to withdraw from the Highway Project and had no concern with the rights and debts in the project thereafter.

45.  The 1^st defendant admitted signing the receipt for RMB￥54 million, but denied receiving the sum at all.

46.  The 3^rd defendant is now the proprietor of the Highway Project. 

Settlement between the 1^st and 2^nd plaintiffs and the 1^st and 2^nd defendants

47.  On 9 April 2008, the 1^st and 2^nd plaintiffs and the 1^st and 2^nd defendants consented to a Tomlin Order staying the proceedings upon the 1^st and 2^nd defendants agreeing pay to the 1^st and 2^nd plaintiffs, Organized Associates and ETO HK$162,373,956 by instalments in full and final settlement of all liabilities owed by the 1^st defendant to the 2^nd plaintiff, and by the 1^st and 2^nd defendants to Organized Associates and ETO.

48.  Mr. Ng SC, for the 1^st and 2^nd plaintiff, informed the Court that the settlement included the claim of HK$50 million against the 1^st and 2^nd defendants.

49.  The 1^st and 2^nd defendants had only paid the 1^st instalment of HK$1 million, but had defaulted the 2^nd instalment of repayment due on 31 May 2008.  Judgment was entered against the 1^st and 2^nd defendants for the full sum of HK$162,373,956 less the HK$1 million paid.

Plaintiff’s case

50.  The latest Amended Statement of Claim averred that:

(1)     The plaintiffs paid HK$50 million by 3 cashier orders on the basis and belief that the rights in the Highway Project would be finally assigned to the 2^nd defendant and/or there was no factual practical or legal obstacle or impediment for such assignment to take place;

(2)     The plaintiffs were not informed of the WTC Agreement which provided for WTC to take over the construction of the Highway;

(3)     If the 3^rd defendant did not transfer the rights in the Highway Project, or alternatively, if it did purport to transfer the rights in the Highway Project to the 4^th defendant, the same were subsequently re-transferred back to the 3^rd defendant by reason of such factual, practical or legal impediment;

(4)     The 2^nd defendant was not assigned any rights in the Highway Project;

(5)     The plaintiffs did not obtain any rights in the Highway Project through the 2^nd defendant and:

(a)      the payment was made under a mistake in the basis and belief which were wrong;

(b)      there was total failure of consideration for the payment.

51.  Mr. Ng submitted that:

(1)     The HK$50 million was paid to the 3^rd defendant for the sole purpose of acquiring the rights in the Highway Project through the 2^nd defendant;

(2)     The 3^rd defendant received the 3 cashier orders and receipted HK$50 million as capital investment in the Highway Project;

(3)     There was impediment for the transfer in that:

(a)      the Re-purchase Agreement recited that the parties failed to reasonably sign the Construction Contract with WTC, causing major problem in the actual operation;

(b)      alternatively, defence evidence disclosed the unpleaded case that Song insisted on building the Highway in order to make some side profits but by agreement WTC had already reserved the right of construction at the outset;

(4)     The plaintiffs received nothing and the 3^rd defendant retained the HK$50 million at the expense of the plaintiffs;

(5)     It is unjust for the 3^rd defendant to retain the HK$50 million because it retained the rights in the Highway Project, and had no right to retain the money.

Defence case

52.  The latest Amended Defence of the 3^rd defendant averred that:

(1)     The 3^rd and 4^th defendants agreed to the re-transfer of the rights in the Highway Project and the 3^rd defendant had settled the HK$50 million with the 4^th defendant;

(2)     The plaintiffs are estopped from claiming against the 3^rd defendant by reason of having settled the claim of HK$50 million with the 1^st and 2^nd defendants.

53.  Mr. Mak, for the 3^rd defendant, submitted that:

(1)     The 3^rd defendant had returned HK$50 million to the 4^th defendant by payment of RMB￥31,954,906.50 after setting-off personal loans of RMB￥26 million and RMB￥3 million previously made to the 4^th defendant upon the re-purchase from the 4^th defendant;

(2)     The payment of RMB￥31,954,906.50 (or whatever amount agreed between the 3^rd and 4^th defendant) is good discharge of the obligation by the 3^rd defendant to the 4^th defendant for the re-transfer;

(3)     As a matter of evidence and commonsense, the true basis of the plaintiff’s payment was not the assignment of the rights under the Highway Project to the 2^nd defendant as pleaded but the 1^st defendant would hold 49% of the rights under the Highway Project on trust for the 1^st plaintiff as a silent investor;

(4)     The 1^st plaintiff’s contribution of the HK$60 million was not restricted to capital injection, but included payment of the transfer fee;

(5)     The payment of the HK$50 million was supported by the consideration of discharge of the debt owed by the 4^th defendant to the 3^rd defendant upon the transfer of the rights in the Highway Project, and the plaintiffs intended the 3^rd defendant to have the HK$50 million in any event as a discharge of the debt owed by the 4^th defendant to the 3^rd defendant;

(6)     Restitution based on total failure of consideration is excluded on the ground that the relevant payment was made pursuant to a contractual obligation;

(7)     In any event, the rights under the Highway Project included the appointment of the 1^st defendant as the enterprise legal representative of Han-Xiao;

(8)     The 1^st defendant would be a constructive trustee of the rights for the plaintiffs and no distinction should be drawn between the 1^st and 2^nd defendants;

(9)     Partial consideration passed under the transaction in that the 1^st defendant was made the enterprise legal representative of Han Xioa and had control of the Highway Project for 3 months;

(10)   As no partial failure of consideration is pleaded, there is no need to enquire into the sufficiency of the consideration;

(11)   The 3^rd defendant has changed its position in parting with the control of the Highway Project for 3 months;

(12)   There was no mistake of any specific fact on the part of the plaintiffs but only mispredictions as payment  was made voluntarily notwithstanding awareness of the numerous possible obstacles, impediments and risks:

(a)      the plaintiffs did not proceed because takeover of the Highway Project depended on availability of the RMB￥150 million loan and only RMB￥120 million could be borrowed and they did not want further commitment;

(b)      due to the change of national financial policy, the loan obtained was not available for any collateral purpose other than the Highway Project;

(c)     the plaintiffs and the 1^st and 2^nd defendants could no longer make the intended side profit through the construction of the Highway to recoup the transfer fee;

(13)   The plaintiffs did not exercise due diligence, and had they made the enquiries, they would have known that WTC was already entrusted with the construction of the Highway under the WTC Investment Agreement dated 23 September 2003;

(14)   The plaintiffs chose not to contract directly with the 3^rd defendant and was content with the series of back to back interlinking agreements and must be restricted to pursue its remedies against the immediate contracting party (i.e. the 1^st and 2^nd defendants) and it is unjust to order restitution against the 3^rd defendant which will have the effect of re-writing the contract and redistributing the risks (including the insolvency of the 4^th defendant);

(15)   It is unjust for the plaintiff to recover because of:

(a)      leapfrogging the series of claims ultimately by the 1^st and 2^nd defendants against the 4^th defendant and improvement of their position in the insolvency of the 4^th defendant;

(b)      double recovery as a result of the settlement with the 1^st and 2^nd defendants.

Relevant principles

54.  Goff & Jones on The Law of Restitution (7^th Ed., 2007), para. 1-015 stated:

“As yet there is in English law no general rule giving the plaintiff a right of recovery from a defendant who has been unjustly enriched at the plaintiff's expense.  A claimant must be able to point to an established ground of recovery.  Although it cannot be said that there is a free-standing claim of unjust enrichment in the sense that a Claimant can get away with pleading facts which he says leads to an enrichment which he says is unjust , it is recognised that the concept of unjust enrichment lies at the heart of all individual instances in which the law does give a right of recovery.  Unjust Enrichment is a unifying legal concept”.

55.  In Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79, 104D-G, Ribeiro PJ considered Lipkin Goreman (a firm) v Karpnale Ltd [1991] 2 AC 549 and Banque Financiere de la Cité v Parc (Battersea) Ltd & ors [1999] 1 AC 221 and stated that the common law cause of action for money had and received where consideration has totally failed is generally regarded as a species of claim for restitution based upon principles of unjust enrichment.  A useful framework involves asking 4 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?

56.  In Barclays Bank Ltd v WJ Simms (Southern) Ltd [1980] QB 677, 695-6, Robert Goff J (as His Lordship then was) stated the following simple principles from the authorities:

(1)     If a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact;

(2)     His claim may however fail if:

(a)      the payer intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend; or

(b)      the payment is made for good consideration, in particular if the money is paid to discharge, and does discharge, a debt owed to the payee by the payer or by a third party by whom he is authorized to discharge the debt; or

(c)      the payee has changed his position in good faith, or is deemed in law to have done so.

His Lordship added that the following propositions are inconsistent with the simple principle of recovery: (i) that to ground recovery, the mistake must have induced the payer to believe that he was liable to pay the money to the payee or his principal; and (ii) that to ground recovery, the mistake must have been “as between” the payer and the payee.  The requirement is no more than that the mistake must have caused the payment.

57.  A claim to recover money paid under a mistake is essentially different from a claim to avoid a contract for mistake.  To avoid a contract, the mistake must be basic enough to overcome the pressures favouring finality of contract, hence the condition in cases of mutual or shared mistake that the mistake must be fundamental (Goff & Jones para. 4-005).

58.  To succeed in an action to recover money paid under a mistake of fact, the plaintiff has to identify a payment by him to the defendant, a specific fact as to which the plaintiff was mistaken in making the payment, and a causal relationship between that mistake of fact and the payment of the money (Dextra Bank & Trust Co Ltd v Bank of Jamaica [2002] 1 ALL ER (Comm) 193, para. 28 per Lord Bingham of Cornhill and Lord Goff of Chieveley delivering the judgment of the Privy Council, citing Barclays v Simms ob. cit. at p. 694).

59.  The claimant will succeed if he can show that he would not have made the payment if he had not been mistaken (Papamichael v National Westminster Bank plc [2003] 1 Lloyd’s Rep 341 at para. 196 per HHJ Chamber QC sitting in the Commercial Court).

60.  A state of doubt is different from that of mistake.  A person who pays when in doubt takes the risk that he may be wrong, and that is so whether the issue is one of fact or one of law (Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, 410 per Lord Hope of Craighead).

61.  The real point is whether the person who made the payment took the risk that he might be wrong.  If he did, then he cannot recover the money (Deutche Morgan Grenfell Group plc v Inland Revenue Commissioner & ors [2007] 1 AC 558, 571 para. 26 per Lord Hoffman).

62.  It is of no materiality whether the payment under mistake was made directly or indirectly, personally or to an agent (Kerrison v Glyn Mills Currie & Co (1911) 17 Com Cas 41, 52 per Lord Shaw of Dunfermline).

63.  To claim the return of money paid on the ground of total failure consideration is not to vary the terms of the contract in any way.  The money was paid to secure performance, and if performance fails the inducement which brought about the payment is not fulfilled (Fibrosa Spoika Akcyjna v Fairbank Lawson Combe Barbour Ltd [1943] AC 32, 46-48 per Viscount Simon LC).

64.  Failure of consideration is not limited to non-performance of a contractual obligation, although it may include that.  The concept embraces payment for a purpose which has failed as, for example, where a condition has not been fulfilled, or a contemplated state of affairs has disappeared (Roxborough & ors v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516, 525 at para. 16 per Gleeson CJ, Gaudron & Hayne JJ).

65.  In essence, to say that a defendant has been unjustly enriched by the receipt of payment is to say that the defendant has no right to receive it.  If a defendant has a right to receive a payment, whether under a statute, in discharge of a liability owing to him or pursuant to a contract, a mistake by the plaintiff in making the payment does not convert the receipt into an unjust enrichment (David Securities Pty Ltd & ors v Commonwealth Bank of Australia (1991-92) 175 CLR 353, 392 per Brennan J).

66.  The law of restitution embodies specific defences which are concerned to protect the stability of closed transactions.  The defence of change of position is one such, the defences of compromise, and settlement of an honest claim (the scope of which is a matter of debate) are others (Kleinwort Benson v Lincoln CC ob. cit.  at p. 382G-H per Lord Goff).

67.  It is a defence to a claim to recover money paid under a mistake that the payee has adversely changed his position in reliance on the payment (see David Securities v Commonwealth Bank of Australia ob. cit. per Mason CJ, Deane, Toohey, Gaudron & McHugh JJ).

68.  Goff and Jones ibid. at para. 1-061 sets out the principal limits of the restitutionary claim:

(1)     the claimant conferred the benefit as a valid gift or in pursuance of a valid common law, equitable or statutory obligation which he owed to the defendant;

(2)     the claimant entered into a compromise or made a payment meaning to waive all inquiry into it;

(3)     the claimant conferred the benefit while performing an obligation (other than under compulsion of law) which he owed to a third party, or otherwise while acting voluntarily in his own self-interest;

(4)     the claimant acted officiously in conferring the benefit;

(5)     the defendant cannot be restored to his original position or is a bona fide purchaser;

(6)     public policy precludes restitution.

Issues

69.  The issues in the case are:

(1)     Whether the 3^rd defendant was enriched at the expense of the plaintiffs:

(a)      whether the 3^rd defendant has retuned or settled HK$50 million with the 4^th defendant; and

(b)      pertaining thereto, whether the 4^th defendant had repaid RM￥54 million to the 1^st defendant;

(2)     What was the intention of the 1^st plaintiff in paying the HK$50 million;

(3)     Whether mistake of facts or misprediction of risks on the part of the 1^st plaintiff;

(4)     Whether total failure of consideration;

(5)     Whether restitution excluded as payment pursuant to contractual obligation;

(6)     Whether restitution unjust by reason of subverting a contractual regime of allocation of risks;

(7)     Effect of the 4^th defendant’s winding up;

(8)     Effect of the settlement between the plaintiffs and the 1^st and 2^nd defendants.

70.  It is noted that the plaintiffs have only pleaded total failure of consideration but not partial-failure of consideration, and there is no plea of change position in good faith by the 3^rd defendant.

71.  During cross-examination of the defence witness, Mr. Lau Tat-choi (“Lau”), director of the 3^rd defendant, questions of whether the 3^rd and 4^th defendants were at arm’s length and whether the transfer and re-transfer were genuine were explored.  The plaintiffs did not plead any sham or fraud, and Mr. Mak objected to such allegations by the plaintiffs.  Mr. Ng indicated that he is merely putting the 3^rd defendant to strict proof on the return of the HKI$50 million, and there is no need to prove any sham as they are not an ingredient of unfair enrichment.  I shall cast aside any consideration of sham in the transfer and re-transfer.

Receipt for RMB￥54 million by the 1^st defendant

72.  The 3^rd defendant called the 1^st defendant purportedly to prove payment of RMB￥54 million by the 4^th defendant as evidenced by the receipt dated 25 February 2005 given by the 1^st defendant’s, as payment of the sum by the 4^th defendant to the 1^st defendant would suggest the repayment of RMB￥31,954,906.50 (as part of the HK$50 million) by the 3^rd defendant to the 4^th defendant.

73.  The 1^st defendant admitted that he signed the receipt dated 25 February 2004, but denied receipt of RMB￥54 million or any sum from the 4^th defendant.  The 1^st defendant said the sums of RMB￥29,500,000, RMB￥1,570,000 and RMB￥22,930,000 referred to in the receipt were remitted to Shajing Co, but he had nothing to do with it.  At any rate, the sums were since returned to the 4^th defendant. 

74.  The 1^st defendant said he signed the receipt for the protection of the 4^th defendant in the negotiation with the government, in order that the 4^th defendant would appear to have regained full rights over the Highway Project upon the withdrawal of the 1^st defendant.  He had discussed the matter with the 1^st plaintiff’s secretary and assistants, but he did not consider it was a matter requiring the approval of the 1^st plaintiff. 

75.  The starting point is the receipt for RMB￥54 million.  The receipt stated the sum was made up of RMB￥29,500,000 and RMB￥1,570,000 previously received, and the current remittance of RMB￥22,930,000 to the Shajing Co. 

76.  The 1^st defendant produced bank statements of the stated account of Shajing Co from November 2003 to April 2004 (Exh D6(1)-(4)).  They did not show the 1^st two sums referred to in the receipt.  There was a credit entry of RMB￥22,930,000 on 26 April 2004 but there is no corresponding debit of that amount.  Of course, there were payouts, but none traceable to the 1^st defendant.

77.  According to Lau, Shajing Co was an underground money changer.  Allegedly, the loans of RMB￥29 million made to the 4^th defendant were also remitted to the Shajing Co.  Quite naturally, the documents did not disclose the ultimate recipient(s).  There is no documentary evidence of cash flow to the 1^st and 2^nd defendant.  All depended on the connecting oral evidence.

78.  The other party to the receipt for RMB￥54 million was he 4^th defendant.  There was an unexplained compensation of RMB￥10 million to the 4^th defendant.  Surprisingly, this RMB￥10 million did not feature in the Re-Purchase Agreement and the annexed Detailed Schedule.  The 3^rd defendant was in contact with the 4^th defendant but the 4^th defendant was not called to give evidence. 

79.  The 1^st defendant was previously the partner of the 1^st plaintiff, but they were opposing parties in these proceedings, and had since settled the case.  The 3^rd defendant gave evidence adverse to the interest of the 3^rd defendant.  Objectively, any liability by the 3^rd defendant would be in the interest of the 1^st defendant.  Hence, I would not make an assessment simply on the basis that the 1^st defendant was called by the 3^rd defendant.

80.  All the circumstances support the 1^st defendant’s evidence that the documents did not mean what they stated.

81.  After due consideration, I accept the evidence of 1^st defendant that he never received RMB￥54 million from the 4^th defendant.  Hence, his evidence provides no clue to the assertion of the return of HK$50 million by the 3^rd defendant to the 4^th defendant.

Return of HK$50 million to the 4^th defendant

82.  The Re-Purchase Agreement stated that the 3^rd defendant shall repay the 4^th defendant the sum of RMB￥31,954,906.50 upon the re-transfer of the rights of the Highway Project.  The calculation of this sum of RMB￥31,954,906.50 was purportedly set out in the Detailed Schedule annexed to the Re-Purchase Agreement.  The Detailed Schedule is irreconcilable and Mr. Mak had tried to recast the calculations as follows:

Sums payable by the 3^rd defendant to 4^th defendant

83.  Lau said that under the Preliminary Transfer Agreement, the 3^rd defendant should pay the 4^th defendant capital contribution of HK$200 million (including the 1^st instalment of HK$50 million) on or before 15 December 2003, and the 3^rd defendant shall convert the same into RMB￥and reimburse the 4^th defendant in full.  Hence, after the 4^th defendant handed the 3 cashier orders for HK$50 million to the 3^rd defendant, the 3^rd defendant converted the same into RMB￥53.6 million and paid back the 4^th defendant. 

84.  The 4^th defendant should then pay the transfer fee of RMB￥40 million.  Since under the Preliminary Transfer Agreement, the 3^rd defendant agreed to be responsible for the payment of RMB￥3 million to WTC, and the survey and design fees of RMB￥1.24 million, they were deducted from the transfer fee.  Hence, the net transfer fee paid was RMB￥35,760,000, and that was the sum to be refunded. 

85.  On the other hand, there was a receipt for transfer fee of RMB￥40 million given by the 3^rd defendant to the 4^th defendant.  The accounting evidence and movement of funds is messy and irreconcilable.

86.  Lau said that the sum of RMB￥31,954,906.50 were paid to the 4^th defendant’s subsidiary Wuhan China Score by 2 cheques of RMB￥5 million and RMB￥26,954,906.50, and he produced the Return Slips for Cheque Delivery and relevant bank statements of the payers’ accounts in support.  The Return Slips stated Wuhan China Score as the payee but subject to the rider that the slips were no proof of any entry into the account.  The bank statements showed the relevant debits, but without showing the name of the payees (and in the case of the debit entry of RMB￥26,954,906.50, the name of the payee was left blank while names of the payees for other debit entries were stated).

87.  Lau said the 3^rd defendant had made private loans of RMB￥26 million and RMB￥3 million to the 4^th defendant/Song.  He said the 3^rd defendant remitted 3 sums of RMB￥10 million each totalling RMB￥30 million to Shajing Co between 18 to 20 November 2003 and those sums included the loan of RMB￥26 million.  He produced 3 remittance slips purportedly showing the remittances to the same bank account of Shajing Co (A/c 106010020002043) mentioned in the evidence the 1^st defendant.

88.  In the bank statement of the Shajing Co for the period 1 November 2003 to 1 January 2004 (Exh. D6(1)), the first entry on p.1 was dated 2 December 2002 and there is no record of the 3 remittances of RMB￥10 million each in November 2003.  It casts serious doubt on the alleged loans of RMB￥29 million, which in turn casts doubt on the Detailed Schedule and the Re-purchase Agreement.

89.  While still on the integrity of the Detailed Schedule, the accounting is convoluted and the calculations had to be recast according to acceptable accounting principles.  Even so, there is still a discrepancy of RMB￥356,471.62.  Discrepancy is not fatal if there is a satisfactory explanation to it.  However, Lau could not explain it.

90.  Nr. Ng submitted that Lau is not a credible and/or reliable witness:

(1)     He was not involved in the Highway Project, and his evidence was not based on personal knowledge but information gathered from Wong and Shum, and that became the basis for him to avoid an explanation whenever difficulties arose;

(2)     He ceased to be a director of the 3^rd defendant in December 2006 and was only re-appointed in March 2008 for the purpose of this litigation;

(3)     He was callous about the oath in that his verifying affidavit on discovery referred to versions of land tax documents in the Checklist for Transfer which only came into being later and he had to rectify the mistakes in-chief.

91.  Mr. Ng also queried why Wong or Shum did not give evidence.  Mr. Mak (who did not appeared at the Pre-Trial Review) seemed to be under the misapprehension that they were not called under the direction given at the PTR.  In fact, only Lau was put down as the defence witness, and counsel for the 3^rd defendant appearing at the PTR indicated adding Shum as defence witness.  When asked what Shum would add to the evidence of Lau, counsel said they would be speaking on the same matters.  In order to avoid repetition, counsel was put to a choice in calling either Lau or Shum and Lau was chosen.  Hence, Mr. Ng’s comment is valid.

92.  I agree that Lau is not a credible or reliable witness.  More so, the accounting and documentary evidence left a lot to be desired for.

93.  Under the Preliminary Transfer Agreement, the 3^rd defendant was supposed to received the transfer fee of RMB￥40 million and capital investment of HK$50 million (or RMB￥53.6 million).  But Lau said the 3^rd defendant had only received HK$55 million.  There is no satisfactory explanation as to failure to perform the supposed obligations according to the agreement. 

94.  I reject the assertion that the 3^rd defendant had repaid RMB￥53.6 million to the 4^th defendant after converting HK$50 million into RMB￥.  There is no accounting or banking document for the conversion and the payment back; and there is no credible explanation as to why that was done.  Hence, I also reject that the 4^th defendant had only paid RMB￥35,760,000.00 as the transfer fee.  There is also no evidence that the HK$5 million deposit has been returned.

95.  I reject the assertion that the 3^rd defendant had made private loans of RMB￥29 million to the 4^th defendant/Song.  Regardless of the validity of any set-off, there is no factual basis for any.  In any case, the private loans between the 3^rd and 4^th defendant cannot be taken into account in any restitutionary claim by the plaintiffs as they are unrelated to the Highway Project, lest it be unjust enrichment at the expense of the plaintiffs.

96.  I reject the assertion that the 3^rd defendant had repaid RMB￥31,954,906.50 to the 4^th defendant.  The documentary evidence is incomplete, and the connecting oral evidence of Lau is not credible.

97.  Hence, I reject the assertion that the 3^rd defendant had returned or settled the HK$50 million with the 4^th defendant.

98.  I find that HK$50 million is still retained by the 3^rd defendant at the expense of the plaintiffs.

Intention of the 1^st plaintiff

99.  The 1^st plaintiff said that he provided the HK$50 million on the basis and belief that the rights in the Highway Project would be finally assigned to the 2^nd defendant and/or there was no factual practical or legal obstacle or impediment for such assignment to take place upon representation of the 1^st defendant.

100.  Mr. Mak submitted that the plaintiffs conveniently introduced the so-called assignment to the 2^nd defendant in order to frame a failure in the purpose of the payment.  The 1^st plaintiff had chosen not to contract directly with the 3^rd defendant.  It is logical to conclude that he was content to remain a silent investor, and let the 1^st defendant come on the scene.  The 1^st defendant was appointed the enterprise legal representative of Han Xiao, and he would hold whatever the rights on behalf of the plaintiffs.

101.  As I see it, regardless of any motive of utilization of the bank loan for repayment of the previous debts and/or side profits through tendering the construction contract of the Highway, the 1^st plaintiff bargained for 49% of the rights in the Highway Project.  He asked his assistants to check the feasibility study and the agreements and approvals, and ensured the 3 cashier orders for HK$50 million were made out to the 3^rd defendant.  There can be no other conclusion but that the 1^st plaintiff paid the HK$50 million on the basis and the belief as stated, and intended to have the 49% stake in return in the holding entity (i.e. the 2^nd defendant according to the Summary of Conference agrred between the 1^st plaintiff and 1^st defendant ).

Mistake or misprediction

102.  Mr. Mak pointed out the distinction between mistake to a specific fact and misprediction as to the nature of the transaction which would come into existence. 

103.  He referred to Dextra Bank v Bank of Jamaica ob. cit. at para. 29, citing Birks’ An Introduction to the Law of Restitution (1985) p. 147:  

“The reason is that restitution for mistake rests on the fact that the plaintiff's judgment was vitiated in the matter of the transfer of wealth to the defendant.  A mistake as to the future, a misprediction, does not show that the plaintiff’s judgment was vitiated, only that as things turned out it was incorrectly exercised.  A prediction is an exercise of judgment.  To act on the basis of a prediction is to accept the risk of disappointment.  If you then complain of having been mistaken you are merely asking to be relieved of a risk knowingly run …

The safe course for one who does not want to bear the risk of disappointment which is inherent in predictions is to communicate with the recipient of the benefit in advance of finally committing it to him. He can then qualify his intent to give by imposing conditions, or sometimes by making a trust…”

104.  Mr. Mak submitted that the plaintiffs was not under any mistake but merely failed to predict:

(1)     The HK$150 million loan could not be obtained on time and only HK$120 million were borrowed;

(2)     Part of the loan could not be used to repay the 1^st defendant’s indebtedness to the 1^st plaintiff and associates due to a change in national financial policies;

(3)     Construction of the Highway was entrusted with WTC and side profits could not be made through sub-contracting.

105.  He also submitted that the 1^st plaintiff failed to exercise due diligence to find out about the WTC Investment Agreement.  In any case, investment in the Mainland is always subject to the fate of overriding government approval.  The 1^st plaintiff decided not to proceed in order not to be further committed after considering the Project Report.

106.  Mr. Ng submitted that a restitutionary claim based on mistake will not be denied just because there are risks inherently associated with making payment, so long as the plaintiff did not take the chance that he may or may not get what he hoped for in making the payment.

107.  As I see it, whatever requirement of government approval of business ventures in the Mainland, no reasonable investor in the position of the 1^st plaintiff would have expected total loss or forfeiture of the investment in the event of any non-approval.  In any case, the transfer fee was supposed to be refunded by the 3^rd defendant (notwithstanding my finding to the contrary on actual payment).  Hence, I find that the 1^st plaintiff never contemplated the risk of loss of the HK$50 million and/or he intended to confer it as a benefit on anyone in the event that rights in the Highway Project were not transferred to the 2^nd defendant.  There is no assumption of any such risk, and hence no misprediction.

108.  I do not believe the 1^st plaintiff never saw the Project Report.  Be that as it may, the report stated it was hearsay of what the 1^st defendant said, and there is no evidence to show the 1^st plaintiff shared the thinking.  The Re-purchase Agreement stated there was problem in the actual operation caused by the parties having failed to reasonably sign the Construction Contract with WTC.  The 1^st plaintiff was presented with the problem rather than it was of his own making.  He had performed his part on the injection of capital pro tanto and the fault did not lie with him. 

109.  As to the lack of due diligence on the part of the 1^st plaintiff, a mistake include sheer ignorance as well as positive but incorrect belief.  In Banque Financiere ob. cit. at p. 227G-H, Lord Steyn pointed out that restitution is not a fault-based remedy.  The carelessness of a mistaken payer does not by itself undermine the ground of restitution.

110.  In David Securities v Commonwealth Bank of Australia ob. cit. at p. 369, the judgment led by Mason CJ stated that a mistake not only signifies a positive belief in the existence of something which does not exist but also may include sheer ignorance of something relevant to the transaction in hand.

111.  A mistake is a mistake.  Whatever carelessness on the part of the 1^st plaintiff is no bar to restitution.

Total failure of consideration

112.  Mr. Mak submitted there was no total failure in consideration, and to the extent of any partial failure, there is no plea as such in the Statement of Claim.  The plaintiffs received consideration in that:

(1)     The transfer had taken place and the 3^rd defendant handed over to the 4^th defendant the corporate and tax papers and took up responsibility for the payment to WTC of RMB￥3 million and design fee of RMB￥1,241,742;

(2)     The 1^st defendant was made the enterprise legal person for 3 months and anything could have happened during that time;

(3)     No distinction should be drawn between the plaintiffs and the 1^st and 2^nd defendants.

113.  Mr. Mak referred to Musselwhite & anor v CH Musselwhite & Son Ltd & ors [1962] 1 Ch 964, 986 where Russell J cited Lysaght v Edwards (18200) 1 Jac & W 494, 503 on the doctrine of equitable conversion in that the moment there is a valid contract for sale of land the vendor becomes in equity a trustee for the purchaser of the estate sold and the beneficial ownership passes to the purchaser, the vendor having a right to the purchase money, a charge or lien on the estate for the security of that money, and a right to retain possession until the purchase money is paid, and similar considerations apply to a specifically enforceable contract for the sale of shares.

114.  Mr. Mak submitted that under the Summary of Conference, the 1^st plaintiff was akin to a purchaser and 1^st defendant a vendor of the shares in the 2^nd defendants holding the rights in the Highway Project.

115.  Mr. Ng submitted that consideration must be looked at from the perspective of the plaintiffs but not the 3^rd defendant.

116.  In David Securities v Commonwealth Bank of Australia ob. cit. at p. 382, the judgment led by Mason CJ stated:

“So, in the context of failure of consideration, the failure is judged from the perspective of the payer.  In Rover International Ltd v Cannon Film Ltd [1989] 1 WLR 912, 923; [1989] 3 All ER 423, 433, Kerr LJ stated:

‘The question whether there has been a total failure of consideration is not answered by considering whether there was any consideration sufficient to support a contract or purported contract.  The test is whether or not the party claiming total failure of consideration has in fact received any part of the benefit bargained for under the contract or purported contract.’”

117.  And in Roxborough v Rothmans ob. cit. at p. 525 para. 16 Gleeson CJ et al. stated that the concept of failure of consideration embraces the disappearance of a contemplated state of affairs, and as any relevant contemplation must be at the time of payment, and ipso facto, from the perspective of the payer.

118.  I agree that the consideration must be the one looked for by the payer at the time of payment.

119.  The 1^st plaintiff looked for the rights in the Highway Project.  The appointment of the 1^st defendant as the enterprise legal representative of Han Xiao is not equivalent to a transfer of the rights in the Highway Project.  Han Xiao was supposed to take over the rights from Wuhan Telford, but there is no evidence of any transfer as between them.  In any case, the rights of the Highway Project and the rights reverted to the 3^rd defendant the plaintiffs did not get anything he looked for.

Voluntary payment in performance of an obligation

120.  Mr. Mak submitted that an unjust enrichment claim will fail if the claimant conferred the benefit while performing an obligation which he owed to a third party, or otherwise while acting voluntarily in his own self-interest.

121.  A plaintiff’s payment is voluntary if he has known all the relevant circumstances and yet chosen to pay the defendant rather than to withhold payment (David Securities v Commonwealth Bank of Australia ob. cit. at p. 371 per Mason CJ et al.).

122.  Mr. Mak referred to Aiken v Short (1856) 1 H&N 210 cited in Barclays v Simms ob. cit. at p.687G-H.  The plaintiffs were bankers.  The bank was the transferee from one Carter of an inheritance to which Carter was supposedly entitled.  The plaintiffs paid £200 plus interest to the defendant in discharge of a debt owed by Carter to the defendant, which was secured by an equitable mortgage on Carter’s supposed inheritance.  It transpired that Carter had no inheritance, and the plaintiffs claimed to recover the money from the defendant as having been paid under a mistake of fact.  The Court of Exchequer held that the money was in those circumstances irrecoverable.  It was a crucial fact in the case that, the payment having been authorized by carter, it was effective to discharge the debt which was in fact owed by Carter to the defendant; the defendant therefore gave consideration for the payment which was, for that reason, irrecoverable.

123.  In Shanghai Tongji v Casil Clearing ob. cit., Ribeiro PJ referred to the decision of the Court of Appeal below that restitution based on total failure of consideration must be excluded on the ground that the relevant payment was made pursuant to a contractual obligation to do so (in para. 87) and said at para. 89 et seq.:

“89.   In dealing with this argument, care must be taken to distinguish between cases (i) where the plaintiff makes payment to the defendant pursuant to a subsisting contractual obligation owed by him to the defendant; and (ii) where the plaintiff makes payment to the defendant pursuant to a contractual obligation owed by the plaintiff to a third person.

90.    It is generally accepted that in relation to the first category, a restitutionary claim based on total failure of consideration is excluded during the subsistence of the contract …

…

It is true that, as Lord Goff (in Pan Ocean Shipping Ltd v Creditcorp Ltd (The Trident Beauty) [1994] 1 WLR 151 at p. 166) recognizes, there has been academic debate as to the viability and desirability of extending the principle to cover cases in the second category. Since publication of that dictum, the debate has, if anything, intensified … Difficult questions arise in this debate. One can readily understand the need for the established exclusionary principle, based as it is on a desire to prevent subversion of contracts subsisting between the person conferring and the person receiving the benefit under the contract. But on what, if any, grounds should a restitutionary claim be excluded against an unjustly enriched recipient who is not party to any contract pursuant to which the benefit was conferred? The third party recipient may or may not be party to a different contractual regime whereby he may have acquired the right to receive the benefit, but even if he is, it is by no means clear that allowing a restitutionary claim in such circumstances would necessarily be inconsistent with or involve ‘subverting’ that separate contract. Relevant defences may be available on the facts, making it highly debatable whether the established exclusionary principle should be so extended. There is, however, no necessity in the present case to grapple with these difficulties since the claim based on total failure of consideration fails in any event since there has been no such failure of consideration.”

124.  The present case is a tri partes instead of bi partes situation and falls within the second category described by Ribeiro PJ, and as his Lordship said, there is no reason to extend the exclusionary principle to it.

125.  In any event, there is no longer any subsisting contract between the plaintiffs and the 1^st and 2^nd defendant under which the HK$ 50 million was paid because the 3^rd defendant had taken back the Highway Project, and the contract between the plaintiffs and the 1^st and 2^nd defendant could no longer be performed and must have come to an end.

126.  Hence, I find that there is total failure of consideration for the payment of HK$50 million.

Regime of risks distribution

127.  Mr. Mak referred to Yew Sang Hong Ltd v Hong Kong Housing Authority CACV 346/2007(31 March 2008).  The Housing Authority (the defendant) engaged the main contractor (Dickson) and Yew Sang (the plaintiff) was a nominated sub-contractor and there was no direct contractual relationship between the Yew Sang and the Authority.  Dickson became insolvent and Yew Sang claimed the monies owed to it by Dickson directly from the Authority in restitution, trust and implied contract, seeking to get around the absence of privity.  Yew Sang’s claim was struck out as disclosing no reasonable cause of action.  Yew Sang appealed and its counsel (also Mr. Ng SC) argued that it was unjust to allow the Authority to enjoy the benefit it had indirectly obtained at the expense of Yew Sang.  Reyes J (who delivered the main judgement) stated that a plaintiff cannot normally obtain compensation for a benefit conferred on a third party as a result of the plaintiff performing an obligation owed to another otherwise than under compulsion of law.  Where parties have expressly or implied allocated risks amongst themselves through a network of back-to-back or interlinking agreements, the law of restitution will not without compelling reason interfere with that allocation.  For similar reason, the law of restitution will not normally cut across long-established statutory regimes regulating creditors’ rights against insolvent debtors.  Otherwise, the law of restitution may undermine the pari passu principle whereby unsecured creditors share rateably in the assets of an insolvent debtor.  To allow a creditor a restitutionary remedy in the interests of “doing justice” in a specific case would only lead to that creditor jumping the unsecured creditors and so bring about injustice in everyone else’s case (see paras. 10–13).  Where allowing restitution would subvert a contractual (or statutory) regime whereby risks have been allocated in a particular manner, restitution will be excluded as a mater of principle.  However, where no relevant regime of risk allocation cane be identified, there may well be scope for the grant of restitution.

128.  Here, the 1^st plaintiff was not given any opportunity of dealing with the 3^rd defendant, but he ensured the 3 cashier orders for HK$50 million were made out to the 3^rd defendant.  I do not find that the parties have expressly or implied allocated the risk of loss of the HK$50 million where the rights in the Highway Project were to remain with the 3^rd defendant in the circumstances of this case.  There is no compelling reason not to order restitution. 

4^th defendant’s insolvency

129.  Mr. Mak further referred to the Yew Sang case at para. 20 where Reyes J stated that the distinction of the 2 categories by Ribeiro PJ in Shanghai Tongji v Casil was not apparently dealing with a “leapfrogging” situation, where Yew Sang wishes to “leapfrog” over Dickson (the immediate enrichee of Yew Sang’s efforts) by suing the Authority (the indirect enrichee) which received the benefit conferred by Yew Sang on Dickson.  In Shanghai Tongji, Casil was the immediate enrichee of a benefit at Tongji’s expense.

130.  The fact is that Yew Sang never made any payment to the Authority.  In any case, I found that the 3^rd defendant had not repaid HK$50 million to the 4^th defendant.  The insolvency of the 4^th defendant does not make it unjust for any restitutionary claim by the plaintiffs against the 3^rd defendant.

Settlement with 1^st and 2^nd defendants

131.  Mr. Mak submitted that it is unjust for the plaintiffs to recover the HK$50 million from the 3^rd defendant as the sum has been included in the terms of settlement between the plaintiffs and the 1^st and 2^nd defendants.

132.  He referred to Foskett on The Law and Practice of Compromise (6^th Ed., 2005) at p. 132:

“Financial accounting involving other parties following a settlement

Where a claimant settles a claim against one or other of a number of parties against whom he is maintaining claims, he must generally bring into account the sums achieved from such a settlement if he is entitled to (and does) pursue to judgment any of the remaining parties to the action. In a case where a claimant has concurrent claims against more than one defendant, the whole amount recovered under a settlement with one must be brought into account in any claim against another. However, the question of how sums such as these are to be treated is not always straightforward.”

133.  In Townsend & anor v Stone Toms & Partners (a firm) (1984) 27 Build LR 26, the plaintiff appointed the defendant firm of architect to act in renovation.  The defendants prepared the plans and found a contractor.  The plaintiff was dissatisfied with the work and commenced proceedings against the architects for damages for defective design, failure to supervise the contractor and the plumbing consultant, and wrongful certification; against the contractor for damages for defective workmanship and alleged overpayment, and also against the plumbing consultant (claim discontinued).  The action against the contractor was compromised by acceptance of payment in.  The action against the architects was tried and the deputy official referee gave judgment and held that the architects’ liability in respect of the concurrent claims (for defective work) should be measured by the extent to which the value of the claims against the contractor might exceed the amount paid into court.  The plaintiff appealed on the grounds, inter alia, that the judge was incorrect in taking into account the payment into court.  The English Court of Appeal dismissed the appeal and held that the plaintiff had independent and separate causes of action against both the architect and the contractor, but could only recover the total damages suffered once.

134.  Mr. Ng submitted that:

(1)     The settlement gives rise to no estoppel as the facts do not fit in any types of estoppel known in law;

(2)     The principles of restitution do not preclude that the 3^rd defendant be ordered to disgorge what it has been unjustly enriched notwithstanding the plaintiffs may recoup something from the 1^st and 2^nd defendants.

135.  In Avon County Council v Howlett [1983] 1 WLR605, 620, Slade LJ stated the general principles on the defence of estoppel:

“Estoppel

I now turn to the defence of estoppel.  The following general propositions of law are to be found set out in Goff and Jones, The Law of Restitution, 2nd ed. (1978), pp. 554-555 (though I do not quote them verbatim). A Plaintiff will be estopped from asserting his claim to restitution if the following conditions are satisfied: (a) the plaintiff must generally have made a representation of fact which led the defendant to believe that he was entitled to treat the money as his own; (b) the defendant must have, bona fide and without notice of the plaintiff's claim, consequently changed his position; (c) the payment must not have been primarily caused by the fault of the defendant.”

136.  I do not see the settlement as any representation on the part of the plaintiffs inducing the 3^rd defendant to change its position.  Hence, I shall only consider whether there is any injustice in allowing restitution.

137.  Mr. Ng referred to Roxborough v Rothmans ob. cit. where the retailers had brought tobacco products from licensed wholesalers under a series of contracts on terms that the invoiced costs comprised the wholesale price and a further amount representing a licence fee imposed by State law.  The licence fee was held by the High Court Australia to be invalid as it was a duty of excise under the Commonwealth Constitution.  The retailers sued a wholesaler to recover the amount paid for the licence fee which the wholesaler had not remitted to the tax authority.  The High Court by a majority held, inter alia, that the amount was recoverable by the retailers notwithstanding that when they sold goods to their customers they had charged prices which covered the costs of the amount they sought to recover from the wholesaler (per Gleeson CJ, Gaudron, Gummow, Hayne & Callinan JJ, Kirby J dissenting); and an action for money had and received is not defeated simply because the plaintiff has recouped the outgoing from others (per Gleeson CJ, Gaudron, Gummow, Hayne JJ and semble Callinan J, Kirby J contra) .

138.  The judgment of Gleeson CJ and Gardron and Hayne JJ (paras. 25-26) referred to Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd (1994) 182 CLR 51 where stamp duty was overpaid by an insurance company by mistake.  The revenue authority was held liable to refund the overpayments, even though the amounts had been passed on to the policy holders.  That conclusion was reached on general restitutionary principles where Mason CJ said (at p. 75):

“Restitutionary relief, as it has developed to this point in our law, does not seek to provide compensation for loss.  Instead, it operates to restore to the plaintiff what has been transferred from the plaintiff to the defendant whereby the defendant has been unjustly enriched ...  The subtraction from the plaintiff's wealth enables one to say that the defendant's unjust enrichment has been ‘at the expense of the plaintiff’, notwithstanding that the plaintiff may recoup the outgoing by means of transactions with third parties”.

139.  Mr. Ng also referred to Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Inland Revenue Commissioners [2007] 3 WLR 354, where Lord Hope of Craighead said at para. 31 :

“A remedy in unjust enrichment is not a claim in damages … The essence of the claim is that the revenue was unjustly enriched because Sampra paid the tax when it did in the mistaken belief that it was obliged to do so when in fact it was being levied prematurely. So the revenue must give back to Sempra the whole of the benefit of enrichment which it obtained.   The process is one of subtraction, not compensation”.

140.  Mr. Mak sought to distinguish Roxborough v Rothmans:

(1)     The retailer had a contract with the wholesaler but the plaintiffs did not have any contract with the 3^rd defendant;

(2)     The wholesaler had the right to impose the incidence of tax on the retailer but the 3^rd defendant did not have any right against the plaintiffs;

(3)     It was unconscionable for the wholesaler to keep the money in so far a the tobacco were not sold;

(4)     It was unconscionable for the wholesaler to keep the payment when the retailer had to incur expenses (i.e. the tax) and risked not having any of the goods sold at all;

(5)     The retailer made payment under compulsion to discharge its burden of the tax, but the plaintiffs made voluntary payments in order to obtain the rights in the Highway Project.

141.  Mr. Ng replied as follows:

(1)     The contractual relationship in Roxborough v Rothmans is bi partes and the situation here is tri partes and falls within the second category described by Ribeiro PJ in Shanghai Tongji and the exclusion of restitution on payment made pursuant to contractual relationship does not extend to it;

(2)     The factors of incidence of tax and costs of goods unsold are specific to Roxborough v Rothmans and the factors here are different;

(3)     Payment made under compulsion of law is a separate ground in restitution and was not relied on in Roxborough v Rothmans where the grounds were mistake and total failure of consideration.

142.  I agree with Mr. Ng.  Here the plaintiffs paid HK$50 million for the rights in the Highway Project and the 3^rd defendant retained both the rights and the money.  I see nothing unconscionable to make the 3^rd defendant return the money which it has no right to retain.  No accounting needs to be given of the sum recovered from the 1^st and 2^nd defendants.

143.  At any rate, the plaintiffs have obtained a judgment against the 1^st and 2^nd defendants of HK$162 million but only $1 million were paid. 

144.  Mr. Ng referred to Cory Brothers & Co v The Owners of the Turkish Steamship “Mecca” [1897] AC 286 where the House of Lords held that when a debtor pays money on account to his creditor and makes no appropriation to particular items, the creditor has the right of appropriation and may exercise the right up to the last moment, by action or otherwise; the application of the money is governed, not by any rigid rule of law, but by the intention of the creditor, expressed, implied or presumed.  The rule in Clayton's Case (1816) 1 Mer. 585 does not apply to a case where there is no account current between the parties, nor where from an account rendered or other circumstances it appears that the creditor intended, not to make any appropriation, but to reserve the right.

145.  As the settlement included the HK$50 million and other debts owed by the 1^st and 2^nd defendants, the plaintiffs may exercise the right of appropriation to the other debts exceeding HK$1 million, and there need not be any accounting in relation to any alleged double recovery.

146.  In the premises, I hold that the settlement between the plaintiffs and the 1^st and 2^nd defendants does not exclude restitution.

Conclusion

147.  I hold that the 3^rd defendant should repay the sum of HK$50 million to the plaintiffs.

Interest

148.  I make the order nisi that the 3^rd defendant do pay interest at the judgment rate on the sum of HK$50 million from the date of the writ until judgment, thereafter at judgment rate until payment.

Costs

149.  I make the order nisi that subject to other order(s) of the Court, if any, the 3^rd defendant do pay costs of the action to the plaintiffs, to be taxed if not agreed.

150.  Lastly, I am indebted to counsel for their helpful submissions.