JG8 LLC v. QUWU TRADING LTD AND ANOTHER

HCA 754/2022

[2023] HKCFI 2775

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 754 OF 2022

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DECISION

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A.  INTRODUCTION

1.  By summons filed on 6 January 2023 (“the Order 14 Summons”), the plaintiff applies for summary judgment against the 3^rd defendant which has admittedly received USD100,002.3 (“the D3 Sum”) from the 1^st defendant on 6 June 2022.

2.  The plaintiff’s case is that the 3^rd defendant is a second-tier recipient of funds paid by the plaintiff to the 1^st defendant which received a total of USD951,850 (“the D1 Sum”) on the same day (6 June 2022) when a part of it was transferred from the 1^st defendant’s bank account with the Bank of Communications (“D1’s Bank Account”) to the 3^rd defendant. It is alleged that the D1 Sum was paid by the plaintiff pursuant to an email fraud (“the Fraud”).

3.  The plaintiff further alleged that:

(1)  The 3^rd defendant is a party to the Fraud and a fraudulent recipient;

(2)  The conscience of the 3^rd defendant was affected by the service (on 5 August 2022) of a proprietary injunction order made against it dated 3 August 2022 and therefore it is unconscionable for the 3^rd defendant to retain the D3 Sum and/or its traceable proceeds;

(3)  In the premises, the 3^rd defendant holds the D3 Sum and/or its traceable proceeds on constructive trust for the benefit of the plaintiff;

(4)  The 3^rd defendant is liable to account to the plaintiff for the D3 Sum on the basis of knowing receipt;

(5)  The 3^rd defendant acted in breach of trust by failing and/or refusing to return to the plaintiff the D3 Sum;

(6)  The 3^rd defendant, having beneficially received the D3 Sum which originated from the plaintiff, was conferred upon a benefit by and at the expense of the plaintiff, and such benefit was unjust. There is no legitimate reason and/or commercial rationale for the plaintiff to benefit the 3^rd defendant;

(7)  The 3^rd defendant did not give good consideration for the D3 Sum;

(8)  In the premises, the plaintiff is entitled to restitution of unjust enrichment from the 3^rd defendant in the sum of the D3 Sum.[1]

B.  THE 3^RD DEFENDANT’S DEFENCE

4.  The 3^rd defendant’s defence may be summarised as follows.

5.  It is a company incorporated in Hong Kong in 2004 and has been engaged in active jewellery and pearl wholesale trading business since its incorporation.

6.  One of the 3^rd defendant’s long term customers is a mainland company trading under the names of “Y.Pin Jewellery”, “壹品珠寶”, and/or “諸暨市山下湖壹品珍珠商行” (諸暨市源緣圓珠寶有限公司). They have conducted business together for around 10 years with multiple business transactions.

7.  In around the last week of May 2022, Mr Shah (the sole shareholder and director of the 3^rd defendant) received a message via WeChat (“the WeChat Message”) from Mr Shih of Y.Pin who indicated interest in purchasing some pearls from the 3^rd defendant. The 3^rd defendant then sent photographs and videos of some pearls to Mr Shih for his reference.

8.  On around 1 June 2022, an agreement was reached for the 3^rd defendant to sell Y.Pin 2,837 momme of south sea pearls (“the Pearls”) at the price of USD100,002.3.

9.  An invoice dated 2 June 2022 (“the Invoice”) was then issued to Y.Pin for payment accordingly, which was paid by the 1^st defendant for and on behalf of Y.Pin on 6 June 2022.

10.  A few days later, a representative of Y.Pin collected the Pearls at the 3^rd defendant’s office in Tsim Sha Tsui. Prior to releasing the Pearls to the said representative, Mr Shah and Mr Shih had had a video call, so that (1) Mr Shah could confirm the said representative’s authority; and (2) Mr Shih could acknowledge receipt of the Pearls.

11.  In a gist, it is said that the D3 Sum represents the purchase price of the Pearls which the 3^rd defendant sold to Y.Pin (“the Pearls Transaction”). The 3^rd defendant was not part of the Fraud. While it is admitted that the plaintiff had no legitimate reason and/or commercial rationale to benefit the 3^rd defendant and that there was no prior relationship or business dealings between the plaintiff and the 3^rd defendant, the 3^rd defendant was a bona fide recipient of the D3 Sum without knowledge of the Fraud, and had provided valuable consideration for the same.

12.  Furthermore, the 3^rd defendant had changed its position to its detriment by reason of its release of the Pearls to Y.Pin.

13.  It is further averred that there is no breach of trust as the 3^rd defendant has never been a constructive trustee as alleged.

14.  The 3^rd defendant also explained that the Pearls Transaction was not evidenced by any written agreement entered into between the 3^rd defendant and Y.Pin because of the mutual trust between them.

C.  LEGAL PRINCIPLES OF ORDER 14

15.  The legal principles applicable to Order 14 applications are trite.

16.  In Li Chuen Kwai v. Po Lam Construction Development Limited (HCA 2376/2013, unreported, 24 September 2014), it was held that:

“12. As far as the defendant’s defence is concerned:

(1)  The defendant shoulders the burden to satisfy the court that he has a real or bona fide defence (ie that there are triable issues), or that there ought for some reason to be a trial of the plaintiff’s claim.

(2)  However, a complete defence need not be shown. The defence set up need only show that there is a triable issue or question or that for some other reason there ought to be a trial; and leave to defend ought to be given unless there is clearly no defence in law and no possibility of a real defence on the question of fact.

(3)  Although the mere assertion in an affidavit does not, ipso facto, provide leave to defend, the court will not embark upon a mini‑trial of the action on paper and leave to defend will be granted unless the defence raised is so incredible or so contradicted by contemporaneous documents or circumstances that it becomes clear that the defence is a sham.

(4)  The test is not whether the defendant’s assertions are to be believed, rather it is whether those assertions are believable, ie capable of being believed. If so, the defendant must have leave to defend.

(5)  Whether the defendant’s assertions are believable is a question that should be answered not by taking those assertions in isolation bur rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute.”

17.  In Ju Yan Di Embroidery Genesisy v Yau Wai Han [2015] 1 HKLRD 822, Cheung JA held that:

“14. It is well-established that the burden on the defendant in a summary judgment application is to show that he has a credible defence and he must condescend to give particulars of his defence. However, this does not mean that once the plaintiff invokes the application and irrespective of the strength of his case, the defendant bears all the burden of showing that there are triable issues in the case. This is because the starting point in a summary judgment application is that it should only be invoked when there is no defence to the claim. This means that the plaintiff must in the first place demonstrate that the defendant has indeed no defence. This requirement is further recognised in the procedural rules which mandate the plaintiff to state his belief in the verifying affidavit that there is no defence to the claim. This requirement must be kept in proper perspective when assessment is made of the strength of the application, otherwise there is a danger that the attention will be focused solely on what the defendant has said without consideration at the same time of the basic premise of the plaintiff’s claim or its inherent strength and weakness…”

18.  Cheung JA also had the following to say in Time Rich 08 Limited v DBE (HK) Limited & Others [2018] HKCA 404:

“[…] in deciding whether a plaintiff is entitled to summary judgment the relevant test is whether the defendant has raised credible triable issues. If there are, the matter should go to trial. If not, judgment should be entered against the defendants. In considering whether there are triable issues, the Court will not take the defence on its face value but test it against the evidence disclosed in the affidavit including matters such as contemporaneous documents, whether the alleged defence is inconsistent with the defence previously put forward or whether the defence is only recently raised despite opportunity being given to the defendant to respond earlier. The Court will also consider the inherent probability of the defence but what the Court should not do is to conduct a mini-trial on complicated factual issues : Paul Y Management Ltd v Eternal Unity Development Ltd (CACV 16/2008)” (at [5.2])

D.  DISCUSSION

19.  The 3^rd defendant’s counsel submitted that the only issue before this Court is whether it is reasonably arguable that the Pearls Transaction is a genuine transaction. While I accept that that must be one of the questions which this Court has to consider, I think that is not the only question. In my view, the 3^rd defendant also has to satisfy this Court that it is reasonably arguable that the D3 Sum was paid by reason of the Pearls Transaction.

20.  Having considered carefully the arguments made by counsel, I am satisfied that the 3^rd defendant has raised triable issues in relation to the questions above which should be tried at the trial. With greatest respect, this is a typical case in which the plaintiff is asking the Court to conduct a mini-trial on affidavits, which is plainly inappropriate.

21.  The followings are my reasons.

22.  First, although the plaintiff is unable to produce the WeChat Message, it cannot be denied that the Pearls Transaction is prima facie supported by the Invoice (see further below).

23.  Second, relying on the evidence of Mr Keung (director of the plaintiff), Mr Chiu for the plaintiff submitted that in the normal course of business of trading precious stones, one would expect documentations such as purchase orders, delivery notes, books and records and accounts, etc. would be kept, but the 3^rd defendant could not produce any document as such in support of the alleged Pearls Transaction. Even if the Court should give any weight to such evidence of Mr Keung (which I seriously doubt because he is engaged in the venture capital field and there is no evidence that he has any experience in the trading of pearls), it is the evidence of Mr Shah of the 3^rd defendant that given the history of cooperation between the 3^rd defendant and Y.Pin, no written contract had been signed, and, as mentioned above, the transaction is, at least on the face of it, supported by the Invoice. Apparently this is a matter which should only be resolved at the trial.

24.  In his reply submissions, Mr Chiu referred this Court to the cases of TTI Global Resources Hong Kong Ltd v Hongkong Myphone Technology Co., Limited & Others [2021] HKCFI 306 at [37] and John Joseph MC Gee v Nold (HK) Limited [2022] HKCFI 3598 at [32(3)], and submitted that:

“These authorities also show that the Court normally expects production of evidence from the party alleging to be in a legitimate trading business. Such evidence includes tax returns, business records showing purchases and sales, bank account statements evidencing turnover, inventory lists, documents showing active trading of goods, correspondence with clients and supplier, evidence on sourcing and selling of goods”

25.  In my view, the authorities cited do not support the above submission. In particular, in TTI Global Resources Hong Kong Ltd, DHCJ To actually stated at [37] that:

“The Defendants adduced no evidence about their business and demand for USD. What evidence to present is a matter for the parties. Such evidence does not go to the heart of the Defendants’ case. However, the Defendants as companies conducting genuine business with huge demand for USD is the basic building block of their defence. Given the weakness of their evidence, it would greatly boost the credibility of their case if the Defendants could adduce evidence of their business and turnover by adducing tax returns; business records showing purchases and sales; bank accounts evidencing their turnover, payments in and payments out, and very importantly, the payment out of USD to their Vietnamese wholesalers. Chou took so much pain to verify the legitimacy of the 1^st Defendant’s business and funds and how the Chens could secure their profits from the matching arrangements, but did nothing to prove the business of the 2^nd and 4^th Defendants. While absence of such evidence is not fatal, its presence would greatly enhance the credibility of the defence. The above observation should not be taken as this court drawing adverse inference for the Defendants’ failure to adduce such evidence.”

26.  I take this opportunity to remind practitioners that it is normally fruitless to refer to the Court’s comments in other cases which were made on the facts of those cases. Whether the defendant in a particular case can establish triable issues must depend on the facts of that particular case. No two cases have identical facts, and therefore the issues necessarily have to be considered on a case-by-case basis.

27.  Third, it was said that the 3^rd defendant had failed to proffer any explanation as to why it would receive a payment from the 1^st defendant for and on behalf of Y.Pin, especially when Mr Shah admitted that he did not know the 1^st defendant. It was further said that at the very least the 3^rd defendant should be put on constructive notice as to the proprietary of the payment from the 1^st defendant. On my part, I have difficulty to understand why the mere fact that a payment obligation is discharged by a third party would put the 3^rd defendant on constructive notice as such. In any event, it is clearly a matter which cannot be decided on affidavits. Further, insofar as it is Mr Chiu’s argument that the 3^rd defendant had acquired knowledge of the Fraud by reason of its receipt of the D3 Sum from a party which was a total stranger to the 3^rd defendant, this allegation is not pleaded in the Statement of Claim at all.[2]

28.  Fourth, Mr Chiu pointed to an undated payment advice[3] (“the Payment Advice”) produced by the 3^rd defendant and submitted that this piece of evidence is highly suspicious, because (1) it shows that a sum of USD100,002.6 (as opposed to USD100,002.3 (i.e. the amount of the D3 Sum)) was transferred to the 3^rd defendant’s account, and (2) the sum of USD100,002.6 was transferred from an account which is different from D1’s Bank Account. However, it is evident that there is another bank record (which shows that the sum of USD100,002.3 (i.e. the D3 Sum) was transferred from D1’s Bank Account to the 3^rd defendant (“the Bank Record”)) that supports the 3^rd defendant’s case, and according to the evidence of Mr Shah of the 3^rd defendant, both the Payment Advice and the Bank Record were sent by Mr Shih of Y.Pin to the 3^rd defendant as proof of payment for the Pearls Transaction. In the light of the Bank Record, I do not think the point on Payment Advice can take the plaintiff’s case further for the purpose of an Order 14 application. As to why Mr Shih would have sent the Payment Advice to the 3^rd defendant, that is a matter which cannot be further explored in this summary judgment procedure.

29.  Fifth, Mr Chiu also challenged the alleged mutual trust between Y.Pin and the 3^rd defendant. It was said that the alleged mutual trust would not have existed when they had just begun to do business with each other. While I agree that this may well be one of the matters which the Court has to take into account at the end of the day, this is not a matter which this Court can decide in a summary judgment application.

30.  Sixth, Mr Chiu has made a number of forensic points and sought to argue that the Invoice is a fabricated document. For example, the particulars of the pearls sold were not stated therein, the multiplication product of the unit price and the number of units (momme) is not equal to the total amount of purchase price, there is no handwritten remarks appearing on the Invoice as in the previous invoices issued by the 3^rd defendant to Y.Pin, etc. Without disrespect to counsel, I do not propose to deal with those points one by one. It suffices for me to say that these are clearly matters which should be considered at the trial, upon cross-examination of the 3^rd defendant’s witness(es), and it is clearly inappropriate for the Court to be asked to conduct a trial on affidavits and make a finding that the Invoice is a false document created only for the purpose of resisting the plaintiff’s claim herein.

31.  Furthermore, one should not lose sight of the following matters:

(1)  It appears that the 3^rd defendant indeed had a long trading relationship with Y.Pin which is supported by various invoices;

(2)  There is undisputed evidence that the 3^rd defendant had participated in the Hong Kong International Diamond, Gem & Pearl Show which was held in the Hong Kong Convention Centre from 1 March 2023 to 5 March 2023 as an exhibitor;

(3)  Even Mr Keung of the plaintiff accepted that the 3^rd defendant “may have some business presence in Hong Kong”[4].

32.  The above supports the 3^rd defendant’s case that it is at least reasonably arguable that the Pearls Transaction was a genuine transaction and the Invoice is not a fabricated/false document.

33.  Seventh, it was also argued that the 3^rd defendant had failed to descend upon particulars on its defence, for example, why Y.Pin would make use of D1’s Bank Account to make the relevant payment to the 3^rd defendant, and the identity of the representative who collected the pearls on behalf of Y.Pin. On my part, I do not accept that the failure on the part of the 3^rd defendant to cover these aspects of the case would be fatal in its opposition to this summary judgment application, as the 3^rd defendant had set out enough particulars of its defence for the purpose of this application.

34.  Eighth, the plaintiff initially argued that the 3^rd defendant’s conscience had been affected by its knowledge of the Fraud which was obtained upon its receipt of the injunction order granted in the present case in August 2022. However, I do not think this adds anything to the analysis above. If the 3^rd defendant indeed had no knowledge of the Fraud beforehand, and if the D3 Sum was paid for settling the purchase price under the Pearls Transaction, then the 3^rd defendant’s subsequent receipt of the injunction order could not salvage the plaintiff’s case because the 3^rd defendant had parted with the Pearls by then.

35.  Lastly, Mr Chiu submitted that although the defence of change in position was mentioned in the 3^rd defendant’s Amended Defence, no particulars had been provided, and there is no plea in respect of the causal connection between the enrichment and the change of position. Furthermore, Mr Shah had also failed to mention about the change of position defence in his Affirmation. Therefore, Mr Chiu argued that the defence of change of position should be rejected.

36.  With greatest respect, it is a bold submission to say that the 3^rd defendant has failed to give particulars on the alleged change of position as the 3^rd defendant has plainly done so: see paragraphs 4(g), 6, 12 and 13 of the Amended Defence. Pleadings are not a game of words. They serve the function of informing the other party and the Court the factual and legal issues in dispute, so that proper preparation for trial may be done and the trial may be conducted in a manner in compliance with the underlying objectives of the rules of court. On this matter, in fact, Mr Chiu has fairly accepted in Court that he has no difficulty in understanding what the 3^rd defendant’s case on change of position is about. That indeed highlights the fallacy of the plaintiff’s argument.

37.  The complaint that the change of position defence has not been mentioned in Mr Shah’s 2^nd Affirmation highlights the usual misunderstanding of the function of affidavits, which are only supposed to contain evidence rather than legal submissions. Unfortunately, despite the Court’s repeated reminders on this, some practitioners still tend to spend much time unnecessarily on drafting lengthy affidavits which are argumentative and include submissions which could have been made at the hearing anyway even if they were not contained in the affidavits.

ORDER

38.  By reasons of the aforesaid, I agree that the plaintiff’s application for summary judgment should not be acceded to.

39.  The next question is what order should be made in the light of the above conclusion.

40.  In the present case, by the time this Order 14 application was taken out on 6 January 2023, the 3^rd defendant has already filed its Defence[5].

41.  Although normally the Order 14 Summons should be dismissed in such circumstances, I am of the view that the matter is not as straight-forward as it first seems, because it was pleaded in the Defence that the payment made by Y.Pin was transferred from the 1^st defendant to the 3^rd defendant on 2 June 2022. Since the plaintiff’s case is that the D3 Sum was transferred on 6 June 2022, arguably the 3^rd defendant was pleading another transfer which had nothing to do with the plaintiff’s claim. As explained at [19] above, not only is the 3^rd defendant obliged to show a triable issue that the Pearls Transaction is a genuine one, it is also necessary for it to demonstrate that the D3 Sum was paid for the purpose of the Pearls Transaction.

42.  Furthermore, while the Invoice which the 3^rd defendant disclosed to the plaintiff through solicitors on 25 November 2022 showed that the chop of the buyer bore the name of “諸暨市山下湖壹品珍珠商行”, it was pleaded in the Defence that the Pearls Transaction was conducted with “諸暨市源緣圓珠寶有限公司”.

43.  Although these matters were clarified in the 2^nd Affirmation of Mr Shah which was filed on 17 April 2023 in opposition to this application, the Defence was not amended until 19 May 2023, when the date of payment of the D3 Sum was corrected and the names of “壹品珠寶” and “諸暨市山下湖壹品珍珠商行” were added as the alleged trading names of Y.Pin.

44.  In the light of the above circumstances, I consider that the Court should grant unconditional leave to the 3^rd defendant to defend the plaintiff’s claim rather than dismissing the Order 14 Summons.

COSTS

45.  Although unconditional leave to defend is granted, I am of the view that this is an appropriate case in which the plaintiff should be ordered to bear at least part of the costs of the Order 14 Summons, because it is apparent that the 3^rd defendant has raised triable issues in its affirmation in opposition.

46.  However, bearing in mind the rule that a defendant cannot rely on a defence which is not pleaded for the purpose of an Order 14 application (Kaefer A.G. v Winfield Marine Services Co. Ltd [2022] HKCA 807, at [30] – [32]), and the fact that some defects in the 3^rd defendant’s Defence were only rectified upon its filing of Amended Defence on 19 May 2023, I am of the view that the following costs order should be made:

(1)  The 3^rd defendant’s costs of the Order 14 Summons incurred after 2 June 2023 (i.e. 14 days after the filing of the Amended Defence – such 14 days’ period is in my view a reasonable period which should be given to the plaintiff to consider withdrawing the Order 14 Summons) shall be paid by the plaintiff to the 3^rd defendant;

(2)  Subject to the preceding sub-paragraph, the costs of the Order 14 Summons be in the cause.

47.  The 3^rd defendant’s aforesaid costs be summarily assessed at $73,600 and shall be paid by the plaintiff on or before 8 November 2023.

FURTHER CONDUCT OF THE ACTION

48.  Upon the request of the plaintiff, it had been directed that the plaintiff shall file and serve its Reply on or before 22 November 2023.

49.  Since default judgment has been granted against the 1^st defendant, and the claims against the 2^nd and 4^th defendants have been discontinued, the only outstanding claim yet to be resolved is the plaintiff’s claim for the D3 Sum against the 3^rd defendant, which is of a relatively small amount. Such outstanding claim is apparently within the jurisdiction of the District Court. Parties are urged to consider their way ahead including but not limited to the transfer of the action to the District Court as soon as practicable.