Wing Wah Love Technology Services Ltd v. Wong Ka Yan and Another

DCCJ 5989/2020

[2023] HKDC 340

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 5989 OF 2020

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JUDGMENT

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Introduction

1.At the trial before me, the defendants were absent. The writ herein was issued on 9 November 2020. Each of the defendants had filed an acknowledgement of service on 23 November 2020. The writ and the Statement of Claim was then amended on 1 April 2021 and the same were duly served on the 1^st and 2^nd defendants respectively on 19 April 2021 and 7 April 2021. No acknowledgment of service of the amended writ has been filed by any of the defendants, and neither of them had since taken any part in the proceedings.

2.The opening submissions of the plaintiff containing a reference to the trial date had been served on each of the defendants on 31 January 2023. Under such circumstances, I proceeded with the trial on 14 February 2023 in the absence of the defendants under Order 35 rule 1(2) of the Rules of the District Court, Cap 336H.

The plaintiff’s claim

3.The plaintiff is a company in Hong Kong carrying out research and development of electronic products and mobile applications for use by elderly citizens. It is a social enterprise contributing to a charitable organisation named Wing Wah Charity Foundation Limited (“WWCF”).

4.It is the plaintiff’s case that in mid-2018, it placed orders with a company named DB Enterprise Hong Kong Limited (“DB Enterprises”) for two batches of phones of the following models (“the Phones”):

(i)  The L248 model which is a traditional mobile phone with tracking features, and

(ii)  The P6 model which is a smartphone designed for elderly people with a tracking feature and simplified interactive features and internet connection.

5.According to the plaintiff, the Phones would be marketed at affordable prices to the benefit of the elderly and the families in need of them.

6.The negotiations for the placement of orders for the Phones were conducted between the plaintiff and the 1^st defendant. During the negotiations, beside informing the 1^st defendant of the intended market of the Phones, the plaintiff also told the 1^st defendant that the Phones needed to be water resistant, with specified certifications for each of the models to show that they are of merchantable quality. Such specifications were communicated to the 1^st defendant from around April to May 2018, who assured the plaintiff that he could supply the Phones through his company DB Enterprises. Against this backdrop, the 1^st defendant sent over quotations under the name of DB Enterprises to the plaintiff.

7.At the material times, the 1^st defendant held himself out to be a director of DB Enterprises and assured the plaintiff that DB Enterprises had the capacity to supply the Phones to the plaintiff (“the Representation”).

8.The plaintiff says that in reliance on the Representation, a purchase order was placed with DB Enterprises on 31 August 2018 for the Phones, consisting of 1,000 items of the L248 model and 1,000 items of the P6 model. The plaintiff was instructed by the 1^st defendant to pay a sum of RMB1,682,500 (equivalent to HK$2,020,261.88[1]) into an account held by a Mr Cheng (郑白杨) in Shenzhen with the Shenzhen China Merchant Bank as deposit for the Phones. This the plaintiff did on 31 August 2018.

9.Upon the instructions of the 1^st defendant, the plaintiff paid two further sums of HK$400,500 and HK$550,000 (totally HK$950,500) respectively on 22 May 2019 and 25 September 2019 into a bank account of the 2^nd defendant held with the OCBC Wing Hang Bank as the balance payable for the Phones. The 2^nd defendant is a company wholly owned by the 1^st defendant.

10.Between May and September 2019, the two models of the Phones were supplied to the plaintiff and the plaintiff started selling the same to end users. However, the plaintiff gradually received numerous complaints from customers regarding the quality of the Phones. Upon investigation by the plaintiff, it was discovered that the Phones did not have the requisite certifications. This was acknowledged by the 1^st defendant when he was confronted by the plaintiff. The Phones were found to be of unmerchantable quality and were rendered practically worthless. As a result, the Phones were recalled from the customers.

11.The plaintiff subsequently found that the Representation was false, as it was discovered that DB Enterprises did not exist, and was nothing more than a name used by the 1^st defendant and held out by him to be a company that could be used to supply the Phones to the plaintiff. It is the plaintiff’s case that the Representation was fraudulently made as the 1^st defendant knew that DB Enterprises was not a real company in existence at the material times.

12.On that basis, the plaintiff claims against the 1^st defendant for damages for fraudulent misrepresentation, being the HK$2,970,761.88 paid to the third parties on his instructions, and against the 2^nd defendant for the sum of HK$950,500 on the basis of knowing receipt and that the sum is held on constructive trust in favour of the plaintiff.

The plaintiff’s witness

13.In support of its claim, the plaintiff has called Ms Yeung Un San, who is a director of the plaintiff and Vice President of WWCF since March 2020, to testify on its behalf. According to Ms Yeung, WWCF is a charity that receives donations from the public and render public services. It does not carry out any commercial activities on its own. The plaintiff was incorporated on 7 December 2015 as a private company to carry out research and development of electronic products and phone applications. It has developed the relevant models of phones with tracking features to ensure that senior citizens suffering from dementia can be located in case they have lost their ways and wandered away from home.

14.As for the 1^st defendant, Ms Yeung told the court that he was initially introduced to representatives of the plaintiff at a charitable event as a person who dealt in such commodities

15.She further testified that in the course of dealing between the plaintiff, through its Project Manager, Mr Joey Yip and the 1^st defendant, a number of documents and emails were exchanged including, in particular, two emails dated 8 August 2018 from the 1^st defendant to the plaintiff, whereby the 1^st defendant made a number of representations regarding the certifications to be attached to the products, and the phone specifications for the two models of the Phones to be supplied, and a Confidentiality Agreement dated 3 April 2018 purportedly entered into between the plaintiff and DB Enterprises. These culminated in the delivery of two quotations dated 20 August and 27 August 2018 to the plaintiff for the two models of the Phones to be supplied. The quotations expressly stated that the Phones were to be sold by DB Enterprises to the plaintiff.

16.Under those circumstances, the plaintiff placed its order for the Phones with DB Enterprises under a purchase order dated 31 August 2018 for 1,000 units of the P6 model, and 1,000 units of the L248 model, inclusive of the related research and development certifications.

17.Payments for the purchase of the Phones were made by the plaintiff by two instalments as described above, totalling HK$2,970,761.88. The first instalment of RMB1,628,500 was made to the aforesaid Mr Cheng on the specific written instructions of DB Enterprises dated 29 August 2018 provided by the 1^st Defendant, and a receipt dated 31 August 2018 was subsequently issued to the plaintiff for the same and signed by the 1^st defendant on behalf of DB Enterprises. However, one can see that the round chop of one “Lindberg Enterprises Limited” was placed beside the signature.

18.Ms Yeung explained that as the P6 and L248 models of the Phones were intended to be tailor-made with the plaintiff’s logo imprinted on them, the plaintiff and the 1^st defendant had also entered into an agreement for the development of the moulds (模具開發協議) for the tailor-made phones with Lindberg Enterprises Limited on 13 September 2018.

19.As for the 2^nd instalment of the purchase payment, two invoices dated 4 August 2019 and 29 August 2019 were issued to the plaintiff by the 1^st defendant through the 2^nd defendant for the respective sums of HK$440,500 and HK$550,000. Further, it can be seen from the documentary evidence that by a letter dated 21 May 2019 issued under the name of DB Enterprises, the plaintiff was informed that the development of the P6 model and L248 model of the Phones had been completed, and the plaintiff was instructed to make payment of the aforesaid sum of HK$440,500 to the 2^nd defendant. The payments were then made on 22 May 2019 and 25 September 2019 respectively.

20.Ms Yeung went on to say that the L248 and P6 models of the Phones were delivered in May and September 2019 respectively. Trusting that the Phones were up to standard, they were posted on the plaintiff’s website for sale. However, the plaintiff started to receive numerous complaints from customers about defects in the Phones not long after the plaintiff began selling them. Eventually, the plaintiff had no choice but to recall the ones sold. According to Ms Yeung, before the recall, the plaintiff had sold 61 units of the L248 model and 17 units of the P6 model, and the failure rate of the Phones was found to be over 20%. The instances of complaints concerning the defects and various states of malfunctioning of the Phones have been recorded in two lists compiled by the plaintiff[2]. In view of such high defective or failure rate, Ms Yeung told the court that she conducted a review of the processes handled by the plaintiff’s Project Manager, Mr Joey Yip, and asked the 1^st defendant to provide the relevant certifications for the Phones. In the event, the 1^st defendant acknowledged that the Phones were not certified according to the agreed specifications. Upon further testing by the plaintiff, the plaintiff also found that the Phones were not water-proof. The Phones were thus rendered unusable and not of the agreed quality, or of merchantable quality.

21.The plaintiff also subsequently found out that DB Enterprises was not a registered company that was in existence at the material times, and was a only fictitious entity held out by the 1^st defendant for the purpose of entering into the sale and purchase agreement for the sale of the Phones to the plaintiff. The evidence shows that a limited company by the name of “db Enterprises Limited”, in which the 1^st or 2^nd defendant did not hold any shares or any office as a director or company secretary on the record, had been de-registered under section 751(3) of the Companies Ordinance, Cap 622 on 2 January 2015. In any event, the name of that company was different from the one held out by the 1^st defendant as DB Enterprises. It is Ms Yeung’s evidence, therefore, that the plaintiff had been defrauded by the 1^st defendant into making the sale and purchase agreement for the Phones with a fictitious entity, namely DB Enterprises.

Fraudulent misrepresentation - the applicable legal principles

22.Mr Chan for the plaintiff relies on the case of Xie Li Xin v Law Ka Yan Thompson, HCA 1476 of 2017, 30 May 2022; [2022] HKCFI 1591 at paras 183-184 where Wilson Chan J has summarised the applicable principles as follows:

“183. The elements for fraudulent misrepresentation, or the tort of deceit, are set out in Haifa International Finance Co Limited v Concord Strategic Investments Limited [2009] 4 HKLRD 29 at §15:

(1) There must be a representation of fact made by words or conduct.

(2) The representation must be made with knowledge that it is or may be false. It must be wilfully false, or at least made in the absence of any genuine belief that it is true.

(3) The representation must be made with the intention that it should be acted upon by the claimant, or by a class of persons which includes the claimant, in the manner which resulted in damage to him.

(4) It must be proved that the claimant has acted upon the false statement.

(5) It must be proved that the claimant suffered damage by so doing.

184. Representations are not limited to express words. As Toulson J (as he then was) explained in IFE Fund SA v Goldman Sachs International [2006] EWHC 2887 (Comm) at §50:

“50. In determining whether there has been an express representation, and to what effect, the court has to consider what a reasonable person would have understood from the words used in the context in which they were used. In determining what, if any, implied representation has been made, the court has to perform a similar task, except that it has to consider what a reasonable person would have inferred was being implicitly represented by the representor’s words and conduct in their context.” (emphasis added)”

23.Further, I have also considered whether section 13 of the Law Amendment and Reform (Consolidation) Ordinance, Cap 23 (“LARCO”) would apply in the present case to require the Representation, which is alleged to be fraudulently made, to be in writing before it is actionable upon. Section 13 provides:

“13. Action not maintainable on representations of character etc. unless in writing

No action shall be brought whereby to charge any person upon or by reason of any representation or assurance made or given concerning or relating to the character, conduct, credit, ability, trade or dealings of any person, to the intent or purpose that such other person may obtain credit, money or goods thereupon, unless such representation or assurance is made in writing, signed by the party to be charged therewith.”

24.The section was based on section 6 of the Statute of Frauds Amendment Act 1828[3], and it seems to be applicable to fraudulent misrepresentation only, that being the mischief identified by the various authorities (see, eg Banbury v Bank of Montreal [1918] AC 626 at 692-693; Nissei Sangyo America Ltd v Philip Lawrence Choy CACV 38 of 1991, 19 September 1991 (CA) at para 6).

25.The plaintiff’s claim is no doubt based on fraudulent misrepresentation or the tort of deceit, and the Representation certainly refers to the ability or the trade or dealings by DB Enterprises. On the face of it, the section 13 of LARCO would apply. However, I have a reservation on my part as to whether the reference to “the character, conduct, credit, ability, trade or dealings of any person” in that section can be referable to a person who is non-existent, ie DB Enterprises.

26.In any event, in my view, even if section 13 of LARCO is applicable, there is sufficient evidence in writing in this case referring to DB Enterprises that were signed by the 1^st defendant as set out above, which I shall not repeat.

Analysis

27.I accept the evidence of Ms Yeung given on behalf of the plaintiff. She appeared to be a sincere and reliable witness who gave up-front answers to questions asked during examination, including questions by the court as to the circumstances under which the plaintiff was first introduced to the 1^st Defendant, and the details concerning the recall of the Phones from customers.

28.In my view, this is clearly a case of fraudulent misrepresentation on the part of the 1^st defendant whereby the plaintiff was induced into believing that DB Enterprises was an existing company and had the ability to deliver the Phones according to the required specifications with the proper certifications. There is no question that the 1^st defendant, who was the one that put forward DB Enterprises to the plaintiff as the seller, had knowledge that it was a fictitious entity, and had intended the plaintiff to rely on the Representation.

29.As a result of the plaintiff’s reliance on the Representation, it had placed the relevant purchase orders with DB Enterprises and paid out a total of HK$2,970,761.88 in return for products that were eventually found to be useless. In the circumstances, the plaintiff has suffered damage as a result.

30.As for its claim against the 2^nd defendant, the plaintiff submits that it is liable to account for the sum of HK$950,500 on the basis of knowing receipt of that sum as funds belonging to the plaintiff, referring to Galleria (Hong Kong), Ltd (In compulsory liquidation) and Ano v DBS Bank Ltd, Hong Kong Branch, HCCL 4 of 2016, 1 August 2019; [2019] HKCFI 1877. The law relating to the relevant mental element on the part of the wrongdoer in a claim based on knowing receipt is settled, and is summarised by Anthony Chan J at paras 43-44[4]:

“43. There are legal issues in respect of the ingredients of these causes of action. However, each one of them requires the proof of a mental element on the part of the wrongdoer. It may be said that for knowing receipt the Ls are only required to prove that DBSHK’s knowledge was such that it would be unconscionable for it to be permitted to retain the benefit of the monies received (see Akai Holdings Ltd (in liq) v Kasikorn Bank PCL [2010] 3 HKC 153, CA, [205], [206] & [243] per Cheung JA). It may also be said that this cause of action has the lowest mental element threshold of the three.

44. On unconscionability, Mr Manzoni drew the court attention to the dicta of BCCI v Akindele [2001] Ch 437 at 455 D-G, where the English CA approved the words of Sir Robert Megarry V-C in In re Montagu’s Settlement Trusts [1987] Ch 264, 273, “[the recipient’s] conscience is sufficiently affected for it to be right to bind him by the obligations for a constructive trust”.”

31.I accept the plaintiff’s submissions in this regard. At the material times, the 2^nd defendant was a company solely owned by the 1^st defendant, who was also its sole director. Although he ceased to act as a director on 1 August 2020[5], he has remained to be the sole shareholder of the 2^nd defendant. The HK$950,500 was paid to the 2^nd defendant on the instructions given by the 1^st defendant to the plaintiff. In such circumstances, the facts of this case is one where the 1^st defendant’s state of knowledge is imputed to the 2^nd defendant, who ought to account for the sum on the basis of knowing receipt.

32.Based on the above analysis, I am satisfied that the plaintiff is entitled to judgment against the 1^st defendant for damages for fraudulent misrepresentation, and against the 2^nd defendant for knowing receipt of the said sum of HK$950,500. The plaintiff also claims for a declaration that the agreement said to be evidenced by the purchase order dated 31 August 2018 has been rescinded by reason of the misrepresentation. However, given the facts of this case and my ruling based on the same, it is clear that no valid contract or agreement had subsisted between the plaintiff and the fictitious entity DB Enterprises. In the circumstances, I do not find such a declaration to be an appropriate remedy in this case.

33.On another note, although the plaintiff has pleaded an alternative claim based on breach of contract and section 16 of the Sale of Goods Ordinance, Cap 26, in light of my ruling above, it is unnecessary for me to rule on the alternative claim. In fact, Mr Chan has indicated to the court at the end of the hearing that the plaintiff is basically solely relying on misrepresentation and knowing receipt.

Judgment

34.In the circumstances, I grant judgment in favour of the plaintiff as follows:

(1)  Judgment in the amount of HK$2,970,761.88 against the 1^st defendant;

(2)  A declaration that the 2^nd defendant holds the sum of HK$950,500 on constructive trust in favour of the plaintiff; and

(3)  An Order that the 2^nd defendant shall repay the sum of HK$950,500 to the plaintiff.

Costs

35.Costs should follow the event in the present case. I order that the defendants shall pay the plaintiff’s costs of the action, to be taxed if not agreed, with certificate for counsel.

36.Lastly, I would like to thank Mr Chan for his assistance.

Mr Sunny Chan, instructed by KC Ho & Fong for the plaintiff

The defendants were not represented and did not appear