Globenet Droid Ltd v. Hong Kong Hang Lung Electronic Company (A Firm)
Read the full judgment text of DCCJ 3288/2013 on BabelCite. This District Court judgment was delivered on 29 June 2016.
1. Cases of fraud by email have become frequent visitors to the courts. This is one of such cases. Very often, as in the present case, the cause of action in such cases is unjust enrichment on mistake (or referred to as “money had and received” in the old common law form of action: see Cheong Shing Ltd v Yu Kwan (2008) 11 HKCFAR 594 at §54 per Litton NPJ) and very often, the defence raised in response is change of position in good faith (also known as bona fide change of position). Faced with bo
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DCCJ 3288/2013 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION CIVIL ACTION NO 3288 OF 2013 ---------------------------------
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----------------------- JUDGMENT ----------------------- 1.Cases of fraud by email have become frequent visitors to the courts. This is one of such cases. Very often, as in the present case, the cause of action in such cases is unjust enrichment on mistake (or referred to as “money had and received” in the old common law form of action: see Cheong Shing Ltd v Yu Kwan (2008) 11 HKCFAR 594 at §54 per Litton NPJ) and very often, the defence raised in response is change of position in good faith (also known as bona fide change of position). Faced with both the plaintiff and the defendant as victims of the fraud, the court’s decision is not easy to make. No doubt, the court strives to reach a just resolution; and what is just has to be determined in accordance with legal principles distilled from the relevant authorities. This case provides a good opportunity to review the relevant authorities. 2.Before the review, I should set out the background. The evidence of the background of the present case is not very much challenged. BACKGROUND Witnesses 3.Mr Diallo Mohamed Ali (“Mr Ali”), a director of the plaintiff, testified for the plaintiff. Madam Lau Man San (“Madam Lau”), the sole proprietor of the defendant, and Mr Lambo Zou (“Mr Zou”), former employee of Shenzhen Zhuangzheng Electronic Technology Co Ltd (“Zhuangzheng”) (which established the defendant via Madam Lau), testified for the defendant. Their evidence is largely unchallenged, and I accept the following evidence in full as my fact-findings. Parties 4.At the material times, the plaintiff was a subsidiary branch of Unidif International Lda (“Unidif”), a company incorporated in Angola, Africa, and mainly engaged in purchasing alkaline batteries to be sold in Angola, Africa. It had an office at 13/F, Flat H1 Alpha House Nos 27-23, Nathan Road, Tsim Sha Tsui, Kowloon, Hong Kong (the “plaintiff’s office”), and had an email address [email protected]. The owner of Unidif and the plaintiff was one Mr Diallo Mohamed Diao (“Mr Diao”), and one of the directors of the plaintiff was one Mr Ali. The plaintiff had a bank account maintained with HSBC in Hong Kong. 5.The defendant was a sole proprietorship, registered with the Business Registration with an address of Flat E, 6th Floor, Far East Consortium Yuen Long Building, 29 Yuen Long On Lok Road, Yuen Long, New Territories, Hong Kong. It was established by Madam Lau for and on behalf of Zhuangzheng, a limited company incorporated in Mainland China which was a manufacturer of, inter alia, home video projectors and LCD monitors. It maintained a bank account with HSBC in Hong Kong (account no 0338-08866-838) (the “defendant’s HSBC bank account”). The address provided for the defendant’s HSBC account was Shop No 4, Ground Floor, Kam Wing Building, Shui Che Kwun Street, Yuen Long, New Territories, Hong Kong. The plaintiff’s dealing 6.By early 2013, Mr Diao and his brother Boubacar (“Boubacar”) had been looking for supply of batteries. They had come to know a company named Chung Pak Battery Works Ltd (“Chung Pak Battery”), and had been contacting it via a person purported to be “Nelson Zeng” using an email address [email protected] sometimes in the name of “[email protected]”, sometimes in the name of “Nelson Zeng”. Once or twice, “Nelson Zeng” also used the email address [email protected] in the name of “[email protected]. 7.Pausing here, I should explain how the email addresses and the owners of the email addresses show up in emails. In emails, in the senders and recipients’ details at the top, the names of the senders and recipients show up. Quite often, as in the case here, the email address itself will be shown in < > after the name. Thus, if a person by the name of “X” sends an email via [email protected], X will be shown as “X <[email protected]>”. “X” can be whatever the person likes to enter. This can be set to look like an email address, as what “Nelson Zeng” did. Here, the person purported to be “Nelson Zeng” was shown in the emails as “[email protected] <[email protected]>”, “[email protected]”, “Nelson Zeng <[email protected]>”, “[email protected] <[email protected]>” or “Nelson Zeng”. This is of course very confusing, and it obviously was the intention of the “Nelson Zeng” to confuse the readers of the email address into thinking that the person had an email address of a domain name “chungpak.com”, and that he was the true Nelson Zeng of the true Chung Pak Battery. 8.In February 2013, in the email correspondence between Mr Diao and Boubacar on the one hand and “Nelson Zeng” on the other, “Nelson Zeng” once told Mr Diao that any payment to be made to Chung Pak Battery should be made to a bank account of its affiliate company. What that account was is not clear from the evidence. 9.Having contacted Nelson Zeng, and apparently wanting to compare prices, in late May and June 2013, Mr Diao instructed Mr Ali to look for other suppliers for alkaline batteries. Eventually, they decided to revert to Chung Pak Battery and place orders with Chung Pak Battery. 10.Subsequently, Unidif sent to Chung Pak Battery samples of alkaline battery for confirmation by Chung Pak Battery whether they could manufacture alkaline batteries of the same specifications as the samples. Mr Diao also contacted Chung Pak Battery by phone and was told that the samples had reached them, and that they could manufacture such alkaline batteries. Then, by email with Nelson Zeng at [email protected], the plaintiff placed orders with Chung Pak Battery 744,960 pieces of AM3 2A alkaline batteries and 422,400 pieces of AM# 3A alkaline batteries in the respective sums of US$94,609.92 and US$53,644.80. These communications went well as they were made with the true Nelson Zeng and the true Chung Pak Battery. 11.Later in June 2013, Mr Ali received from “Nelson Zeng” a Proforma Invoice dated 20 June 2013 under the letter head of “Hong Kong Hang Lung Electronic Company” in English but “Chung Pak Battery Works Limited” in Chinese. The Proforma Invoice bore a company chop with “Hong Kong Hang Lung Electronic Company” in English but “Chung Pak Battery Works Limited” in Chinese. The amount under that Proforma Invoice was US$98,190.84 and the recipient bank account was the defendant’s HSBC bank account. 12.Subsequently, by an email of 25 June 2016 from the true Nelson Zeng, a Proforma Invoice under the letter head “Chung Pak Battery Works Limited” both in English and Chinese dated 25 June 2016 was sent to Boubacar, setting out the sums of US$94,609.92 and US$53,644.80 with an artwork charge of US$1,040.00, totalling US$149,294.72 and requesting the plaintiff to pay 70% deposit of the purchase price (approximately US$104,246.00). This Proforma Invoice bore the company chop of “Chung Pak Battery Works Limited” both in English and Chinese. The recipient bank account in this Proforma Invoice, however, was a bank account maintained with China Construction Bank (the “CCB Account”) in Hong Kong, not the defendant’s HSBC bank account. This Proforma Invoice was signed by the plaintiff and returned by email to the true Nelson Zeng. The plaintiff’s payment 13.On or around 4 July 2013, at the plaintiff’s office, Mr Ali made an online transfer of US$104,246.00 from the plaintiff’s bank account to the defendant’s HSBC bank account. In his oral testimony, when asked why Mr Ali would still transfer the money to the defendant’s HSBC bank account (the one specified in the Proforma Invoice of 20 June 2013) instead of the CCB account (the one specified in the Proforma Invoice of 25 June 2013), given that the latter one was more recent, Mr Ali explained that he still preferred the defendant’s HSBC bank account as set out previously because (1) as mentioned in paragraph 8 above, “Nelson Zeng” had told Mr Diao that Mr Diao had to make payment to Chung Pak Battery’s affiliate account; (2) the recipient bank account in the Proforma Invoice of 20 June 2016 was an HSBC account, being the defendant’s HSBC bank account; (3) thus, Mr Ali thought that he could still make payments into the defendant’s HSBC bank account; and (4) transfer from the plaintiff’s HSBC account to another HSBC account would save some bank charges. I accept his explanation – careless he was, the explanation is a logical one, and also inherently probable when considering that the plaintiff would not have any motive to transfer money to any unknown person for no purpose. The defendant’s dealing 14.As usual in cases of fraud by emails, the fraudster was dealing with both the plaintiff and the defendant. While “Nelson Zeng” was dealing with the plaintiff, in April 2013, Lambo Zou, then an employee of Zhuangzheng, received an email from a person named Robert Ford, inquiring about the products of Zhuangzheng and seeking quotations for his customers. Subsequently, in an email to Lambo Zou on 14 May 2013, Robert Ford wrote:-
15.It is not clear from the evidence when exactly the goods were ordered and when the purchase price was eventually agreed. It is, however, tolerably clear that prior to 5 July 2013, the defendant had agreed with Robert Ford that the purchase price of the goods of the defendants should be US$16,500.00. 16.On or around 5 July 2013, by email, Lambo Zou, having received the US$104,260.00 (actually paid by the plaintiff as mentioned in paragraph 13 above), asked Robert Ford,
17.On 9 July 2013, at the request of Robert Ford, who, according to Madam Lau’s oral testimony, told the defendant that he would need the money to purchase goods himself, a sum of RMB535,250.00 (equivalent of the excess of US$87,746.00) was transferred from the bank account of one Mr Lau Sang Ming of the defendant maintained with Industrial and Commercial Bank of China in the PRC, an account opened for and on behalf of Zhuangzheng, to the bank account of Col Luxuana maintained with Bank of China in the PRC. On 29 July 2013, a representative of Robert Ford took delivery of the goods, the purchase price of which was, as mentioned above, agreed to be US$16,500.00. 18.In his oral testimony, Mr Zou said that he felt Robert Ford’s payment was unusual, and thus he advised his boss to cancel the transaction with Robert Ford. Mr Zou also said that his boss discussed the matter with Madam Lau, who was in charge of the finance of Zhuangzheng, and his boss reverted within approximately 30 minutes to him saying that they did not think it necessary to cancel the transaction, but should follow Robert Ford’s instructions as to how to deal with the money. This evidence, though surfacing only in the oral testimony for the first time, is unchallenged, and I accept it, as (1) his evidence is consistent with Madam Lau’s that she thought there was no problem in the payment; and (2) more importantly, he is an independent witness as he longer works in the defendant. Discovery of mistaken payment and the plaintiff’s legal action 19.On 31 July 2013, at the plaintiff’s office, Mr Ali sent an email to Nelson Zeng attempting to contact Chung Pak Battery, but received no response. He then telephoned Chung Pak Battery, and one Mr Eddie Law answered the call, telling Mr Ali that all the email messages sent out from “Nelson Zeng” were not from Chung Pak Battery. Thereafter, Mr Diao and Mr Ali visited the office of Chung Pat Battery to make inquiries, and eventually discovered that they may have been defrauded by the emails. 20.As a result, the plaintiff has suffered loss and damage. 21.The plaintiff commenced the present action on 28 August 2013. As often in cases of email fraud, a pre-action Mareva injunction was obtained by the plaintiff on 16 August 2013 against the Defendant, and still is in force. THE PLAINTIFF’S CASE 22.The plaintiff claims the refund of US$104,246.00 on unjust enrichment on mistake. In the prayer of the Statement of Claim, it claims:-
23.The evidence of the background as set out above does not exactly tally with the facts pleaded in the Statement of Claim. Be that as it may, the essential fact pleaded still is that the plaintiff paid the US$104,246.00 to the defendant’s HSBC bank account in the mistaken belief that this account was for Chung Pat Battery and the payment into it was for the order of batteries placed with it. Whether this mistake, in the light of the evidence, is sufficient for the purpose of the plaintiff’s claim shall be discussed below. THE DEFENDANT’S DEFENCE 24.In addition to putting the plaintiff to strict proof, the defendant raises the defence of bona fide change of position. The defendant pleads in paragraph 14 of the Defence as follows:-
THE PLAINTIFF’S REPLY 25.In its reply, the plaintiff denies the defence, pleading at paragraph 6:-
26.Despite the trite requirement that any plea of knowledge has to be particularised, no particulars of actual knowledge and constructive knowledge have been provided. Unsurprisingly, there is also no evidence of any such knowledge as pleaded. Further, Ms Dorothy Cheung, acting for the plaintiff, fairly did not cross-examine the defendant’s witnesses in any way that would suggest any actual or constructive knowledge. Also, despite the claim of constructive trust in §(f) above, this is not a relief sought in the Statement of Claim, and Ms Cheung did not address me on this in her Opening and Closing Submissions. Thus, I will not deal with any of these here. ISSUES 27.In the circumstances, the issues before me are:-
UNJUST ENRICHMENT 28.Unjust enrichment is a common law cause of action. Once established, the plaintiff is entitled to the full repayment of the enrichment, subject to defence. The analytical framework for unjust enrichment has been adopted by the Court of Final Appeal in Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at §67 as follows:-
Enrichment at the expense of the plaintiff 29.It is common ground that the defendant was enriched by the plaintiff’s payment of US$104,246.00 to the defendant’s HSBC account on 4 July 2013, and the enrichment was at the plaintiff’s expense. 30.As to whether the enrichment was unjust, a plaintiff’s mistake that caused the enrichment on a “but for” test or in some cases on a “fundamental” or “dominant” test will suffice: Goff & Jones, The Law of Unjust Enrichment (8th ed), §§9-31 and 9-49 – 9-53. For the present purpose, I do not need to decide which test is appropriate, as the payment was made by the plaintiff under a mistake (induced by fraud) that the defendant’s HSBC bank account was for Chung Pak Battery and that the payment was thus made for the order placed with Chung Pak Battery. Clearly, such a mistake satisfies whichever causation tests to be adopted. In any event, the defendant raised no suggestion that the plaintiff made the payment question for some other reasons. ANY OPERATIVE MISTAKE? 31.Ms Candy Tang, acting for the defendant, contended that the mistake lacked the requisite qualities for the purpose of unjust enrichment. In particular, she contended that (1) the plaintiff had so much doubt that he assumed the risk that the defendant’s HSBC bank account was not for Chung Pak Battery so much so that the plaintiff and/or (2) the plaintiff was ignorant in that he simply did not address his mind on whether the defendant’s HSBC bank account was for Chung Pak Battery. Although this doubt and ignorance are not pleaded in the defence, as the burden falls on the plaintiff to prove a mistake of requisite qualities, if the evidence shows that the mistake lacked the requisite qualities, the plaintiff would fail his burden. Legal principles 32.A mistake need not be known to the payee. A mistake is not the same as ignorance, inadvertence, forgetfulness or misprediction, although sometimes they are not easily distinguishable from mistake. Further, ignorance, inadvertence and forgetfulness, though per se not operative mistakes, can lead to a false belief or assumption that is operative: Pitt v Holt [2013] 2 AC 108 at §§104-105, 108 & 114 per Lord Walker giving the unanimous judgment on behalf of the UK Supreme Court. The reason why mere ignorance, inadvertence or forgetfulness does not amount to an operative mistake is that “[i]f someone does not apply his mind to a point at all, it is difficult to say that there has been some real mistake about the point”: Pitt v Holt, supra, at §108. 33.Can a mistake be tainted by doubt? In Kleinwort Benson Ltd v Lincoln CC [1999] 2 AC 349, where the bank paid money to the local authority under an interest rate swap agreement, agreements similar to which were subsequently held to be ultra vires local authorities and were thus void, the bank claimed the money back on unjust enrichment on mistake. In that case, Lord Hope said at 410B-C:-
34.However broad this statement seems to be, Lord Hope subsequently in Deutsche Morgan Grengell Group plc v IRC [2007] 1 AC 558 explained at §59 that this statement is “capable of further refinement”, and that:-
35.What degree? In Martine Trade SA v Pioneer Freight Futures Co Ltd BVI [2010] 1 Lloyd’s Rep 631 (overruled by the English Court of Appeal in Lomas v JFB Firth Rixson Inc [2012] 2 Lloyd’s Rep 548 on points not concerning the present case here), having reviewed the relevant case law on “doubt” at §§62-75, Flaux J held at §76 that:-
36.As Flaux J came to this conclusion after the extensive review of the authorities, and for the reason stated by the learned authors of Goff & Jones, The Law of Unjust Enrichment (8th ed), supra, §9-21 (namely, the alternative approach of asking “whether the plaintiff would have acted as he did had he known the true facts for certain” is too broad and departs from what “mistake” is understood to mean), I adopt this “more likely than not” approach. 37.Even if there was mistake in the “more likely than not” sense, the existence of doubt may mean that the mistake was just one of the causes of the payment in question. “The greater the claimant’s doubts, the less likely it is that this hurdle will be satisfied, simply because it is more likely that there will be other reasons which caused him to act”: see Goff & Jones, The Law of Unjust Enrichment (8th ed), supra, §9-22. As mentioned above, this causation issue is not much an issue here. 38.In addition, in Deustsche Morgan Grenfell, supra, Lord Hoffmann, apparently in his attempt to rationalise most, if not all, private transactions and activities with reference to the concept of the “assumption of risk”, said at §26 that:
Thus, if it is shown that the payee assumed, or must be taken to have assumed, the risk that he is actually not liable to pay, the enrichment was not mistaken in the “unjust” sense. Although the learned authors of Goff & Jones, The Law of Unjust Enrichment (8th ed), supra suggested that this “assumption of risk” is unnecessary: §§9-27 – 9-30, recently, in Pitt v Holt, supra, Lord Walker, referring to Deutsche Morgan Grenfell, supra, regarded this requirement of assumption of risk as uncontroversial (Pitt v Holt, supra at §114). There is no authority in Hong Kong on this point, but I note that in the context of damages in contract law, the Court of Final Appeal (comprised of, inter alios, also Lord Walker NPJ) in Richly Bright International Ltd v De Monsa Investments Ltd (2015) 18 HKCFAR 232 adopted the requirement of “assumption of risk” proposed also by Lord Hoffmann. As a consistent thread running through the law regulating private transactions, and also on the theory that in their private activities, individuals consider and take risks, and are held responsible for the risks taken, I adopt this requirement of assumption of risk in the context of mistake in unjust enrichment. This requirement makes sense: for example, if there is a doubt that the bank account does not belong to the vendor, and if the payer is found to have assumed this risk even though he is still under a mistake on the “more likely than not” approach, I see no reason why the payer should not be held responsible for the risk he took. 39.I add, however, that in the usual course of things, where the payer think that it is highly likely (higher than “more likely than not”) that he has to pay, it may well follow that the risk that actually he does not have to pay must be so minimal or unrealistic for the payer to even address his mind on this risk, let alone assuming such risk. In such a situation, convincing evidence would be expected to prove otherwise. 40.Finally, when there exists a doubt, the plaintiff has to respond reasonably to his state of doubt. Failure to do so sometimes is regarded as waiver of inquiry. “Reasonably” here should not necessarily be determined with reference to the concept of negligence, but to the concept of good faith and whether the response has resolved the doubts: Goff & Jones, The Law of Unjust Enrichment (8th ed), supra, §§9-24 – 9-25. In my view, this requirement of “reasonable response” is intertwined with the “more likely than not” approach mentioned above. If upon such reasonable response, the initial doubts still remain such that the plaintiff comes to the conclusion that it is more likely than not that he does not have to pay, then there is no mistake. If upon the reasonable response, the initial doubts have been resolved such that the plaintiff comes to the conclusion that it is more likely than not that he has to pay, then there is mistake. 41.The requirement of “reasonable response” is also intertwined with the causation requirement mentioned above. The more the doubts are resolved upon reasonable response, the less the plaintiff is affected by other doubts and the more the plaintiff is affected by the mistake. 42.The requirement of “reasonable response” is as well intertwined with the assumption of risk. The logic is easy to follow: if despite the doubt over whether he has to pay, the payer did not reasonably respond to such doubt, the payer may be taken to have assumed the risk that he was actually not liable to pay. 43.In summary,
ANALYSIS OF FACTS AND FINDING OF MISTAKE 44.Ms Tang contended that the plaintiff was ignorant in that it did not address his mind at all to whether the defendant’s HSBC bank account was for Chung Pak Battery and thus there was no mistake. I disagree. However careless the plaintiff was, it is inherently improbable that the plaintiff would be so ignorant that as a purchaser, when paying the purchase price, he would not even address his mind on the identity of the holder of the bank account into which he was depositing the purchase price. On the contrary, I find that the plaintiff did address his mind on the identity. This finding is consistent with the plaintiff’s evidence that when making the payment into the defendant’s HSBC bank account, he was thinking that it was an affiliate’s account for Chung Pak Battery (see paragraph 13 above). Bearing in mind that the plaintiff simply did not have any motive for making any wrong payments, I accept this evidence. 45.Ms Tang contended that alternatively, the plaintiff had doubt whether the defendant’s HSBC bank account was for Chung Pak Battery but did not respond reasonably to such doubt by making inquiry with Chung Pak Battery and/or that the plaintiff assumed that risk that the defendant’s HSBC bank account was not for Chung Pak Battery. Ms Tang also invited me to infer that in February 2013, when “Nelson Zeng” was suggesting an affiliate bank account (see paragraph 8 above), it was yet another bank account. Again, I disagree, for the following reasons:-
46.In the circumstances, I find that in making the payment of the US$104,246.00 into the defendant’s HSBC bank account, the plaintiff laboured under a mistake of the requisite qualities for the purpose of unjust enrichment that the defendant’s HSBC bank account was for Chung Pak Battery and the payment was for the order placed by the plaintiff with Chung Pak Battery. BONA FIDE CHANGE OF POSITION 47.Having found an operative mistake for the purpose of unjust enrichment, I then have to determine whether the defendant can establish the defence of bona fide change of position (sometimes referred to as change of position in good faith). General principles: Lipkin Gorman 48.The starting point for discussion of the legal principles in relation to bona fide change of position is always the case decided by the House of Lords in Lipkin Gorman (A Firm) v Karpnale Ltd [1991] 2 AC 548. As the law in this area is developing, it is of paramount importance to appreciate the facts of the relevant cases rather than just citing the principles which have to be understood in the factual matrices of the cases. In Lipkin Gorman, Cass, a partner in the plaintiff firm of solicitors, was authorised to operate the firm’s client account at the bank. Unknown to other partners, Cass was a compulsive gambler. Without their knowledge, between March and November 1980, Cass withdrew cash from the client’s account by making out cheques for cash and sending the firm’s cashier to cash them. The cashier, despite knowing Cass’ motive, still handed the money to him. Cass used the money to fund his gambling at the defendant club, where the cash was exchanged for chips. Cass used the chips for gambling and refreshments at the club. The chips were currency within the club but were worthless outside the club and remained the property of the club. Unused chips and chips representing winnings could be exchanged for cash or a cheque drawn on the club’s bank. Cass then endorsed it and gave it to the club which, after some hesitation, accepted it in exchange for chips. In total, Cass acquired £323,222.14 from the client account. The solicitors commenced proceedings against the club on money had and received, a cause of action now subsumed under unjust enrichment. The club raised two defences: (1) the club was a bona fide purchaser for consideration in respect of the money received; and (2) the club had bona fide changed its position. 49.Lord Goff, delivering the lead judgment, found that there was no valuable consideration given at all when the money was exchanged for the chips, because the chips just represented the same value of the money and if Cass lost a bet, Cass would lose money; and if Cass won a bet, the club’s payment would in law be a gift to Cass: see 577C-G. His Lordship then considered the defence of bona fide change of position. In the oft-quoted passage, his Lordship said at 579F-581B,
Applying the aforesaid principle to that case, Lord Goff concluded that the solicitors firm was entitled to recover not fully but only to the extent of the money won by the club and lost by Cass in the amount of £150,960 only. 50.While Lord Goff in Lipkin Gorman left the defence of bona fide change of position to develop on a case by case basis, in a society of the rule of law, “the court must proceed on the basis of principle, not sympathy, in order that the defence of change of position should not ... ‘disintegrate into a case by case discretionary analysis of the individual facts, far removed from principle’”: see Scottish Equitable Plc v Derby [2001] 3 All ER 818 at §34 per Robert Walker LJ. The courts must bear in mind the rationale of the defence: to “strike a fair balance between the plaintiff’s interest in restitution and the defendant’s interest in making spending decisions freely without fear that a claim in unjust enrichment might later invalidate the assumptions that he makes about the means at his disposal”: see Goff & Jones, The Law of Unjust Enrichment, supra, §27-03. Degree of knowledge: Niru Battery 51.In relation to the degree of knowledge that would forfeit the defence, after a decade or so of development subsequent to Lipkin Gorman, in Niru Battery Manufacturing Co & anor v Milestone Trading Ltd & ors [2004] QB 985, the English Court of Appeal had a chance to expound what count as “lack of good faith” in the context of the defence. For the facts of that case, I can do no better than quoting the headnote summarising the salient facts of that case:-
52.The fourth defendant there appealed. In dismissing the appeal, Clarke LJ, delivering the lead judgment (to which Dame Elizabeth Butler-Sloss P agreed and Sedley LJ agreed in terms of reasoning), summarised at §§147-149 the general legal principles derived from Lipkin Gorman as follows:-
I pause here to note that these three paragraphs have recently been applied by Recorder Teresa Cheng SC in JS Microelectronics Ltd v Achhada, unreported, HCA 1202/2012, 23 March 2016 at §77. 53.Clarke LJ then proceeded to consider what is “good faith”. His Lordship started with the basic question: “whether it would be inequitable or unconscionable to deny restitution”, recognising that the principle in Lipkin Gorman involves “a balance between the interests of the payer and those of the payee” (see §§152-153). Drawing on the law of knowing receipt, his Lordship at §157 approved a statement from Nourse LJ in BCCI v Akindele [2001] Ch 437 at 456 for the law of bona fide change of position:-
54.Having held that dishonesty is not required to (although it will) defeat the defence of bona fide change of position, his Lordship then at §164 approved a statement by the judge below (Moore-Bick J) ([2002] 2 All ER (Comm) 705 at §135):-
55.I add a note that since the need to make inquiries arises from a duty of good faith, it follows that whether the inquiries would have prevented the change of position is irrelevant, as inquiries were required because of good faith, not because of any attempt to prevent further loss to the payer. Further, more fundamentally, bona fide change of position, by definition, is concerning a change of position. 56.Sedley LJ, with whom Dame Elizabeth Butler-Sloss P also agreed, also held at §180 that bad faith or dishonesty is not required to defeat the defence. His Lordship said at §187 that the defence “requires the donee to show that it acted on real or reasonably supposed facts justifying the payment away.” His Lordship, like Clarke LJ, also thought it appropriate to draw on the legal principles of knowing receipts in relation to the requisite knowledge for the defence. He agreed at §190 with the opinion of Lord Bingham and Lord Goff delivered on behalf of the Privy Council in Dextra Bank & Trust Co Ltd v Bank of Jamaica [2001] UKPC 50 that a balance of fault test (or known as relative fault) for bona fide change of position should be rejected and that mere negligence is not enough to defeat the defence. At the end of the judgment at §192, his Lordship succinctly set out what the true issue or policy consideration was:-
Change of position 57.In relation to change of position, causation is required. The test is “whether he entered into a transaction that he would have not entered into but for his enrichment”: see Goff & Jones, The Law of Unjust Enrichment, supra, §27-05; Scottish Equitable Plc v Derby, supra at §31 per Robert Walker LJ. Thus, if a defendant relied on expenditures as change of position, they cannot be expenditures in the ordinary course of things but have to be “extraordinary”: see Dextra Bank & Trust Co Ltd v Bank of Jamaica, supra at §38 per Lord Bingham and Lord Goff, although it is not necessary that the money expended was the money received: see Goff & Jones, The Law of Unjust Enrichment, supra, §27-25. Further, reliance is usually required: see Goff & Jones, The Law of Unjust Enrichment, supra, §27-27 – 27-28. 58.In respect of payment of debt and acquisition of assets, “in general it is not a detriment to pay off a debt which will have to be paid off sooner or later” unless the loan was a long term one on advantageous terms: see Scottish Equitable Plc v Derby, supra at §35 per Robert Walker LJ, because a defendant’s wealth remains the same when he pays off a debt. By the same token, in general, “[w]here a defendant buys an asset which remains in his hands at the time of the action, the defence is disallowed to the extent that he is still enriched”, unless it would be legally or practically impossible or cause significant difficulties in reversing the change, for example, the asset purchased with the enrichment is difficult to be re-sold and the defendant does not have other resources to repay the enrichment: see Goff & Jones, The Law of Unjust Enrichment, supra, §27-13 – 27-17. The same applies to services such that the defence is allowed only to the extent of the value of the services: Goff & Jones, The Law of Unjust Enrichment, supra, §27-19. Summary 59.In summary, the following legal principles in relation to the defence of bona fide change of position can be distilled:-
ANALYSIS OF FACTS FOR BONA FIDE CHANGE OF POSITION Paragraph 14(b) of the defence 60.It is logical to start with paragraph 14(b) of the defence, as the transaction there (namely, the payment out of the excess of US$87,746.00 (or RMB535,250.00) on 9 July 2013) occurred almost the earliest, which would have impact on paragraphs 14(a) and (c) of the defence (except for the evidence of only three payments out on 8 July 2013 in support of paragraph 14(c)) if the transaction was found to be not in good faith. Applying the above legal principles, as regards the payment out of the excess of US$87,746.00 (or RMB535,250.00) to the bank account under the name of Col Luxuana on 9 July 2013, I consider the following circumstances:-
61.Madam Lau, when giving evidence for the defendant, said that while she felt that the payment was unusual, she did not think that there was any problem or irregularity because (1) the money came from an HSBC account and to her, as HSBC would open an account for a client only upon stringent scrutiny, the fact that the money from HSBC eased her mind; (2) Robert Ford was able to produce a payment advice issued by HSBC showing the payer’s account number; and (3) the money came from Hong Kong but not, say, Africa. Given the above circumstances, I do not find that these three factors really eased her mind. As a matter of common sense, it is inherently improbable that a payee would think that there was no problem or no irregularity when a person known to the payee only recently pays him a large amount of money for no proper reason, despite inter HSBC accounts, and then quickly asks the payee to transfer out that money, again, in an unusual way and for a reason inconsistent with what that person has told the payee previously. Ms Tang’s contended that I would understand why the defendant did as it did if I would view the matter from the perspective of a PRC company and from a PRC businessperson who had not had experience of dealing with such an unusual payment and who would like to accommodate Robert Ford as a new customer as much as possible. Such contention is unacceptable. I disagree. I do not see why a PRC company, and/or a PRC businessperson, and/or a person who had not had experience of dealing with such an unusual payment, have to be taken as less common-sensical. The fact that Mr Zou, a PRC resident working in the PRC, advised cancelling the transaction speaks for itself. I also do not see why it would make any difference when the plaintiff would like to be more amenable to Robert Ford; this may explain why the defendant did as it did, but this does not detract any unusualness from the payment in and payment out. Therefore, I find that Madam Lau, at the time of the payment out of the excess, did think that the payment in and the payment out were unusual, problematic and irregular. 62.While not sufficient to make the defendant know all the facts that point to a mistake as in Niru’s case, the above circumstances should have caused a person to think that the excess payment to the defendant and/or the refund to a bank account of an unknown person may be infringing some others’ rights. The above circumstances, in my judgment, fall squarely within what Clarke LJ describe as “cases where the payee has grounds for believing that the payment may have been made by mistake, but cannot be sure”. “In such cases good faith may well dictate that an inquiry be made of the payer.” 63.However, the defendant did not make any sufficient inquiries. A general inquiry of “Why are you doing this way?” (see paragraph 16 above) was not sufficient. In any event, Robert Ford did not reply to this general inquiry, and the defendant did not urge any proper reply from Robert Ford. Further, specifically, it did not inquire why more than double had been paid into its account; it did not inquire about who Col Luxuana was; it did not inquire about why refund would be necessary if the money, as had been told, came from Robert Ford’s customers for future orders; or simply, it should have made an inquiry with the bank informing the bank of the circumstances of the payment. On such evidence, I find that the defendant should have made, but did not make any, sufficient inquiries in the circumstances. Thus, in respect of the payment out of the excess, there was no good faith. Paragraph 14(a) of the defence 64.The delivery of the goods took place on 29 July 2013 after the refund of the excess. As I found the defendant had grounds to believe that the payment may have been made by mistake, and since the goods were purchased with money from the very same payment, my finding that the defendant lacked good faith by failing to make the necessary inquiries should also cover the change of position by the delivery of goods for US$16,500.00. For the sake of completeness, lack of good faith also means that any attempt to run the defence of bona fide purchase for consideration would also fail. Paragraph 14(c) of the defence 65.Applying the legal principles (set out in paragraphs 57-58 above) in relation to what amounts to change of position, those matters set out in paragraph 14(c) of the defence and the evidence in support thereof cannot sustain any plea of change of position, as (1) there is no plea and evidence that those transactions were entered into as a result of the enrichment; (2) those transactions were expenditures and acquisition of assets in the ordinary course of business of the defendant; and (3) there was no change in the overall assets and liabilities of the defendant despite those transactions. In respect of (3), Ms Tang contended that but for the mistaken payment, the defendant would not have entered into the transactions for acquisition of raw materials for over US$140,000.00 on 8 July 2013 with the money from the defendant’s HSBC bank account. However, bearing in mind that there is no evidence that the raw materials could not be readily re-sold for cash and in any event there is no evidence that the defendant does not have other resources to repay the enrichment, Ms Tang’s such contention does not advance the defendant’s defence any further. 66.Before I leave the causation issue, I should say that during the examination-in-chief of Madam Lau, before asking, Ms Tang fairly applied to me for leave to ask Madam Lau questions about certain transactions in an attempt to elicit answers that those transactions would not have taken place but for the payment of the US$104,246.00. She contended that the good reasons required under Order 38 rule 2A(7) of the Rules of District Court (Cap 336H) were that (1) the answers were relevant; and (2) the answers were to address the question I raised at the beginning of the trial whether those transactions were caused by the payment. This causation issue should have been known to the defendant, and adducing evidence on causation at this late stage would highly prejudice the plaintiff’s right to a fair and adequate opportunity to investigate or verify, to say the least, by discovery or interrogatories. I did not think that there were any good reasons, and thus I refused Ms Tang’s application. 67.In any event, even assuming there were causation and change of position, as regards those transactions taking place after the payment of the excess the circumstances surrounding which I have found to fall squarely within what Clarke LJ describe as “cases where the payee has grounds for believing that the payment may have been made by mistake, but cannot be sure”, given my finding that the defendant failed to make any good faith inquiry, paragraph 14(c) still cannot amount to any bona fide change of position due to lack of good faith. As regards the payments out on 8 July 2013 totalling more than US$140,000.00 for the acquisition of raw materials, given the unusualness of the payment of such a substantial excess into the defendant’s HSBC bank account for no proper reason (see paragraph 60(1) – (3) above), I have no difficulty in finding that these payments were made also not in good faith. CONCLUSION AND ORDER 68.Having found that the defendant has failed to establish the defence of bona fide change of position or any part thereof, it must follow that the plaintiff should be able to recover US$104,246.00. 69.Thus, I order that the defendant do pay the plaintiff US$104,246.00 or its equivalent in Hong Kong Dollars, with interest thereon in accordance with sections 49 and 50 of the District Court Ordinance (Cap 336). I also make an order nisi that the defendant do pay the plaintiff costs of this action, to be taxed if not agreed, with certificate for counsel.
Ms Dorothy Cheung, instructed by Jal N Karbhari & Co, for the plaintiff Ms Candy Tang, instructed by Lam Fung & Co, for the defendant | |||||||||||||||||
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