Read the full judgment text of HCA 2731/2016 on BabelCite. This Court of First Instance judgment was delivered on 17 January 2018 before Deputy High Court Judge Keith Yeung SC.
Civil procedure – default judgment – Order 19 rule 7 of the Rules of the High Court – email fraud – unjust enrichment – restitution – three-party case – 'at the expense of' test – direct transfer rule – sufficient causal nexus – interceptive subtraction – constructive trust – declaratory relief – discretionary power. The plaintiff, a Hong Kong leather trader, had no prior business dealings with the defendants. On 18 February and 28 March 2016, it delivered two lots of leather goods to its South Korean customer, Freedom Trading Co, Inc (FTC), in fulfillment of customer orders, expecting payment of US$33,177.60 and US$96,212.10. The 1st defendant wrongfully used the email account of a director of the plaintiff to instruct FTC to pay the 1st sum into the 1st defendant's account; the 2nd defendant similarly impersonated a related company of the plaintiff to redirect the 2nd sum into its own account. FTC complied with the fraudulent instructions, and the plaintiff was never paid. A writ of summons was issued on 19 October 2016 and amended on 12 October 2017; neither defendant filed an acknowledgement of service or defence. Held: judgment in default of acknowledgement of service and defence entered against both defendants. On the unjust enrichment claim, applying the four-question framework from Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 and Benedetti v Sawiris [2014] AC 938, the court found the defendants enriched, the enrichment unjust, and no defences applicable. The key question was whether the enrichment was at the plaintiff's expense in a three-party case where FTC, not the plaintiff, transferred the sums. Applying Menelaou v Bank of Cyprus plc [2016] AC 176 (followed by the Court of Appeal in Lee Yuk Shing v Dianoor International Limited (In Liquidation) CACV 185/2015), the court held that 'sufficient causal connection, in the sense of a sufficient nexus or link' between the plaintiff's loss and the defendants' enrichment is the operative test, and a rigid direct transfer rule is not required. Applying Lord Reed JSC's guidance in Investment Trust Companies v Revenue and Customs Commissioners [2017] 2 WLR 1200, the court found two reinforcing grounds: (a) the defendants' interception was equivalent to a sham intervening transaction, and (b) the plaintiff could trace an interest into the property defendants received from FTC. The 'interceptive subtraction' principle was also relied upon. On the constructive trust claim, applying Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, Michael Chen Kang Huang v Peter Lit Ma [2009] 6 HKC 191, and Mesirow Financial Administrative Corporation v Best Link Industrial Co Limited HCMP 1846/2015, equity imposes a constructive trust on the fraudulent recipients so that the sums are recoverable and traceable. As to the discretion to grant declaratory relief in default of defence, the court noted that while normally a declaration will not be made without a trial, particularly where fraud is alleged, the rule of practice gives way to the paramount duty of doing the fullest justice to the plaintiff, following Lai Wai Kuen v Wong Shau Kwong [2004] 4 HKC 528. Earlier fraud cases (Mesirow; Guaranty Bank and Trust Co v Zzzik Inc Limited HCA 1139/2016; Halliburton BV v Sheng Yi (HK) Trade Co Ltd HCA 1627/2016) supported granting such relief in the defendants' absence. Given the plaintiff's genuine need to protect against other creditors and the defendants' unexplained absence, the court exercised its discretion in favour of granting the declaration, constructive trust, and account. Judgment entered against both defendants for the two sums, with declarations of constructive trust, an account, and costs of the action and the application.
Legal issues: Whether default judgment should be granted under Order 19 rule 7 · Whether enrichment was at the plaintiff's expense in a three-party fraud case · Whether declaratory and constructive trust relief should be granted in default judgment
Outcome: Judgment in default of acknowledgement of service and defence entered against both defendants, together with costs of the action and the application.
Cited by 29 cases · Cites 4 cases