KAEFER A G v. WINFIELD MARINE SERVICES CO LTD

DCCJ 4320/2019

[2020] HKDC 487

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 4320 OF 2019

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BETWEEN

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DECISION

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Introduction

1.  Before me are two summonses taken out by the defendant and the plaintiff respectively:-

(a) By a summons dated 19 November 2019, the defendant sought security for costs against the plaintiff in the sum of HK$182,890; and

(b) By a summons dated 22 November 2019, the plaintiff sought an order that the defendant should file and serve a list of documents together with a verifying affidavit.

2.  In support of its application for security for costs, the defendant filed two Affirmations of Iu Muk Chun Anita on 19 November 2019 and 27 December 2019 respectively.  In opposition, the plaintiff filed the Affidavit of Stephan Thewalt on 13 December 2019 and the Second Affidavit of Simon Howard Baker 18 May 2020.  It is noted that the defendant objected the inclusion of the Second Affidavit of Simon Howard Baker.

3.  The plaintiff filed the first Affidavit of Simon Howard Baker on 29 November 2019 in support of its discovery application.  The defendant did not file any affidavit evidence in opposition.

4.  Pursuant to the Order made by Master Jacqueline Lee dated 2 December 2019, the two summonses were fixed to be heard together on 29 January 2020. However, due to the General Adjourned Period, the hearing was re-fixed for 23 June 2020.

5.  In these applications, the plaintiff was represented by Mr Toby Brown, and the defendant by Mr Ken Cheng.

6.  This is the decision of the Court.

The Plaintiff’s case

7.  The plaintiff, a company incorporated in Germany, is a victim of email scam.  On 16 April 2019, the plaintiff’s commercial director received emails purportedly sent by her boss (the sole shareholder of the plaintiff) directing her to transfer a sum of €987,026 to a Hong Kong company called Hong Kong Tangxin Trade Limited (“Tangxin”)[1]. The director duly did so, and the sum was transferred to Tangxin’s account with HSBC on 17 April 2019[2].

8.  The plaintiff subsequently discovered that the emails were forged[3]. The plaintiff claimed that the money so transferred to Tangxin was held by Tangxin as constructive trustee of the plaintiff[4].

9.  It was also found out that, on 17 April 2019, parts of the money ($785,889) sent to Tangxin was further transferred to the defendant’s account[5]. The plaintiff therefore instituted the present action to recover the said sum of money on the ground of money had and received and/or on the ground of unjust enrichment[6].

The Defendant’s case

10.  According to the defendant, its main business is selling fuel and diesel oil to vessels, fish boat, ships, etc[7].

11.  The defendant did not deny that it received the money from Tangxin[8], but averred that it had neither any knowledge regarding, nor any involvement in, the alleged fraud[9]. The defendant asserted that the transactions were bona fide, in that it received the money in the ordinary course of business, where the money was transferred to it in settlement of the purchase price for fuel charges rendered to 6 vessels (“the 6 Vessels”) between 15 April and 18 April 2019[10]. It was the defendant’s defence that its position had been changed.

The Plaintiff’s reply

12.  In its Reply, the plaintiff contended that the defendant had not changed its position because the 6 Vessels remained to be obliged to pay their purchase prices, the receipt of the money was not causative of the change of position (because five of the 6 Vessels were filled up prior to the receipt of the money), and there was no extraordinary expenditure incurred by the defendant[11].

Security for Costs

13.  I propose to deal with the defendant’s application for security for costs first.

Legal Principles

14.  Order 23 rule 1(1)(a) of the Rules of the District Court provides that where the plaintiff is ordinarily resident out of the jurisdiction, the court may order security for costs if having regard to all the circumstances of the case it is just to do so.  It is trite that the power to order security is discretionary and the court should have regard to all the circumstances of the case[12], and consider what was just[13]; but even if there is no inflexible or rigid rule, as a matter of discretion it is common that the court will require a foreign plaintiff to give security for costs because it is ordinarily just to do so[14].

15.  In considering all the circumstances, the court will have regard to the plaintiff’s prospect of success, but should not go into the merits in any detail unless it can be clearly demonstrated one way or another there is a high degree of probability of success[15], and the threshold is very high[16].

The Plaintiff is ordinary resident outside Hong Kong with no assets in Hong Kong

16.  In the present case, there is no dispute between the parties that the plaintiff is ordinary resident outside Hong Kong.

17.  In the Affidavit of Stephan Thewalt, it was deposed that the plaintiff had liquid cash reserves of €15,200,000 (equivalent to HK$131,173,429)[17]. Mr Cheng submitted that that evidence was not sufficient to resist an application for security for costs because of the volatile nature of liquid cash[18]. Be that as it may, there is no evidence that the plaintiff has any assets in Hong Kong.  I will therefore proceed on the basis that the plaintiff is an ordinary resident outside Hong Kong without any assets in Hong Kong. 

The Plaintiff’s grounds of opposition

18.  According to Mr Brown, the plaintiff opposes the application on two grounds:-

(1) There is a reciprocal enforcement procedure in place between Hong Kong and the Federal Republic of Germany; and

(2) The plaintiff has a genuine and strong case.

Mere Existence of Reciprocal Enforcement Procedure Is Not Sufficient

19.  The first ground can be dealt with briefly.  In my view, the mere fact that a reciprocal enforcement procedure is in place between Hong Kong and the Federal Republic of Germany is not sufficient to tip the balance against granting security in favour of the defendant.  The default position must be that a defendant would encounter difficulties in terms of time and costs to enforce a costs order against a plaintiff in a foreign jurisdiction.  While the defendant has the ultimate burden to satisfy the Court that security for costs should be granted in its favour, the plaintiff has the evidential burden to show that the defendant would encounter no, or little, difficulty in enforcing a Hong Kong judgment aboard.

20.  At the hearing, Mr Brown argued that the plaintiff’s burden was discharged by pointing out that there existed a reciprocal enforcement arrangement.  I do not agree.  As Mr Cheng pointed out, this would mean that any party residing in a country with reciprocal enforcement arrangement with Hong Kong would be immune from giving security for costs.  This must not be correct.

21.  In Lim Yi Shenn v Wong Yuen Yee[19], Recorder Horace Wong SC refused to grant a security for costs not just because there existed a reciprocal enforcement arrangement between Hong Kong and Singapore. Indeed, the learned Recorder inferred from the Foreign Judgments (Reciprocal Enforcement) Order that the procedure for enforcement of a Hong Kong judgment in Singapore would be substantially similar to that provided in the said order.  He also took judicial notice that Hong Kong and Singapore were both common law systems and that there was no difficulty in communicating with the Singaporean lawyers in English.  As the Court of Appeal said in Dracco Netherlands BV v Simba Toys Gmbh & Co Kg[20], even there was a reciprocal arrangement between Hong Kong and the Netherlands and the defendant did not adduce any evidence showing the difficulties of enforcement, it was premature for the Court to assume that there would be no difficulty in enforcing Hong Kong judgment in the Netherlands.

22.  Accordingly, I agree with Mr Cheng’s submissions that the reciprocal arrangement between Hong Kong and the Federal Republic of Germany alone would not be sufficient to reverse the default position that a foreign plaintiff would be generally required to give security for costs.  I am not persuaded that I should refuse granting security for the defendant’s costs just because there exists a reciprocal enforcement arrangement between Hong Kong and the Federal Republic of Germany.

23.  I now return to the merits of the plaintiff’s claim.

The Plaintiff’s Claim Has High Probability of Success

24.  The Courts have repeated said that it is not correct in principle to go into the merits of the parties’ case – the practice of going into the merits of the case in an application of this kind is even said to be deplored.  Nor is it appropriate to conduct a mini-trial based on affidavit evidence alone. Accordingly, the Court’s view on merits at this early stage is inevitably preliminary, or even instinctive.  Bearing these principles in mind, I propose to assess the plaintiff’s prospect of success by taking the parties’ pleadings at their face values.  It will be assumed that everything stated in the pleadings will eventually be proven as true; and I accept them as true for the present purpose.  I propose to evaluate the parties’ cases with reference to the pleadings only.  Accordingly, I shall not draw any adverse inference from the lack of documentary evidence in support[21], and will give the benefit of the doubt to a party when its character is attacked[22].

25.  In resisting the security for costs application, the plaintiff said that it had genuine and strong case.  As Mr Brown pointed out, victims of fraud has a claim in money had and received/unjust enrichment and may assert a proprietary claim against the recipients insofar as the fraudulently obtained funds are traceable into their hands, unless the recipients can establish the defence of bona fide purchaser of value without notice or change in position in good faith[23].

26.  In the Skeleton Submissions for the defendant, Mr Cheng criticized the plaintiff’s case on the basis that the alleged fraud was not supported by any documentary evidence.  This criticism prompted the plaintiff to file the 2^nd Affidavit of Simon Howard Baker, to which documents showing the transfer of money from the plaintiff to Tangxin were exhibited.  Mr Cheng opposed the filing of the said Affidavit on the basis that there was no leave of court allowing the plaintiff to do so.

27.  As I have mentioned, I will assess the merits of the parties’ case with reference to the pleadings only.  By adopting this approach, I am satisfied that, prima facie, the plaintiff has a genuine or bona fide claim against the defendant.

28.  But a genuine or bona fide claim is not enough to resist a security for costs application.  The plaintiff must establish that the claim is of high probability of success.  For the present purpose, the plaintiff’s probability of success is to be evaluated against the defendant’s defence.  The question before me is whether the defendant’s defence can “water down” the plaintiff’s claim. 

29.  Having considered the merits of the defendant’s case, I am satisfied that the plaintiff does have a very high probability of success.  I will explain why.

30.  First, the defendant pleaded that it had no knowledge regarding the email scam perpetrated on the plaintiff.  Accordingly, save and except pointing out the inherent inconsistency of the plaintiff’s case (which I presently do not see any), the defendant cannot adduce any direct evidence to challenge the genuineness of the plaintiff’s account of events.  Even if I ignore the documentary evidence exhibited to the 2^nd Affidavit of Simon Howard Baker, there is no basis for the defendant to challenge the plaintiff’s case as pleaded in the Statement of Claim.

31.  Secondly, the defendant did not give sufficient details in the Defence. The defendant only mentioned the name of Tangxin twice, in the context where the money was deposited from Tangxin to pay the fuel charges of the 6 Vessels. The defendant did not mention any prior dealings with Tangxin.   Nor was there any information regarding the relationship between Tangxin and the 6 Vessels. There were no particulars concerning the communication between the defendant and the owners of the 6 Vessels, and between the defendant and Tangxin.  There was no explanation on what basis the defendant formed its belief that the money was deposited by Tangxin was to settle the fuel charges rendered to the 6 Vessels[24]. Based on the defendant’s account adumbrated in the Defence, the payment seemed to be made by Tangxin out of blue.

32.  In such circumstances, I do no find that the defendant had condescend into sufficient particulars in resisting the plaintiff’s case.  Since the defendant has the ultimate burden in this application, I also do not accept the point made by Mr Cheng at the hearing that the deficiency of details may be made up in the subsequent discovery of documents and witness statements. 

33.  It is noted that this point is also relevant to the fourth point below, namely, whether the defendant had reasons to anticipate that Tangxin would pay the money on behalf of the 6 Vessels.

34.  Thirdly, the plaintiff pointed out in its Reply that the defendant’s position had not been changed because it could still chase the fuel charges after the owner or manager of the 6 Vessels.  Mr Cheng replied that there was no evidence that recovery of the fuel charges was indeed practicable[25]. With respect, I do not agree.  According to the Defence, the defendant’s business model was that it would provide fuels to the vessels and would receive the payment of the purchase price afterwards[26]. I have no doubt that there must be some mechanisms for the Defendant to chase the purchase price, otherwise the whole business model would make no commercial sense.  Mr Brown also pointed out at the hearing that the defendant was in an advantageous position because there were viable causes of action in rem against the 6 Vessels.  Mr Cheng made no opposition to that point.  If there are mechanisms to chase back the fuel charges from the 6 Vessels (and/or their owners or managers), it cannot be said that the defendant’s position had been changed.

35.  Fourthly, the plaintiff noted in its Reply that 5 out of 6 of the fuel charges incurred prior to the transfer of money from the plaintiff to Tangxin, and asserted that the receipt of funds was not causative of the change of position.  In the defendant’s Reply Submissions, Mr Cheng sought to resort to the doctrine of “anticipatory change of position”[27]. However, it was not the defendant’s case that, when it provided fuels to the 6 Vessels, it anticipated that the money would be paid by Tangxin.  At the hearing, Mr Cheng submitted that the defendant had anticipated that the money would be paid by an unknown person, and that unknown person had just happened to be Tangxin.  In my view, this cannot be causative of the change of position.

36.  Finally, and in my view most importantly, the defendant’s change of position defence is defective, in that it failed to plead the key element in the defence, namely, that, but for the payment made by Tangxin, the defendant would not have provided fuels to the 6 Vessels[28]. In the Defence, there was no causal link whatsoever between the provisions of fuels to the 6 Vessels (change of position) and the receipts of payment by Tangxin (enrichment) [29]. The causal link cannot be inferred because the provision of fuels happened prior to the receipts of payment.  In my view, this lack of causal link is fatal to the defendant’s change of position defence. 

37.  For the reasons as aforesaid, the defendant’s change of position defence appears to me to be a very weak one.  It does not undermine the plaintiff’s probability of success.  Judging from the pleadings as they stand, I am satisfied that the plaintiff’s probability of success is indeed very high.  At this stage, I do not find it just to order the plaintiff to give a security for the defendant’s costs in this action.

38.  Accordingly, I dismiss the defendant’s summons for security for costs.

Discovery Summons

39.  The defendant confirmed that it had no material opposition to the order sought in the plaintiff’s discovery summons.  Accordingly, I make an order in terms of the summons.

Costs

40.  Costs should follow the events.  In respect of the security for costs application, the defendant should pay the plaintiff’s costs.  According to the statement of costs (re security for costs), the plaintiff said it incurred a sum of $148,793.60.  I find there are some duplications of works in items C1, C2, and D1, and there are some rooms for reduction in item C3 (attendance on counsel).  By summary assessment, I fix the plaintiff’s costs at the sum of $105,000.

41.  I am not minded to make any costs order in respect of the plaintiff’s discovery summons.  Although I would not say that it was unreasonable for the plaintiff to take out the summons in the first place, it is clear that the summons served no practical purpose.  It was the defendant’s stance that it would serve the list of documents after the disposal of its application for the security for costs.  Mr Cheng also stated at the hearing that the defendant had already disclosed all relevant documents to the plaintiff prior to the commencement of the present action.  Accordingly, the plaintiff achieved no better position by taking out the discovery summons.  Having taken all these circumstances into account, I would make no order as to costs in respect of the plaintiff’s discovery summons.

Disposition

42.  In respect of the defendant’s summons filed herein on 19 November 2019, I make the following order:-

(a) The summons be dismissed; and

(b) The defendant shall pay the plaintiff’s costs of the summons, summarily assessed at $105,000, payable forthwith.

43.  In respect of the plaintiff’s summons filed herein on 22 November 2019, I make the following order:-

(a) The defendant do serve and file its List of Documents within 7 days from the date hereof;

(b) The defendant do verify its List of Documents by filing and serving an affirmation of Iu Muk Chun Anita or any other officer of the defendant competent to do so at the same time as filing and serving its List of Documents; and

(c) There be no order as to costs in respect of the summons.