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CACV 316/2008
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF APPEAL
CIVIL APPEAL NO. 316 OF 2008
(ON APPEAL FROM HCA NO. 2115 OF 2004)
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| BETWEEN |
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YUKIO TAKAHASHI |
1st Plaintiff |
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SAN MARINO TRADING COMPANY LIMITED |
2nd Plaintiff |
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and |
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CHENG ZHEN SHU |
1st Defendant |
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CHINLUCK GROUP LIMITED |
2nd Defendant |
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TELFORD ROAD & BRIDGE INVESTMENTS COMPANY LIMITED |
3rd Defendant |
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CHINA SCORE INVESTMENT LIMITED |
4th Defendant |
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Before: Hon Tang VP, Le Pichon JA and Yuen JA in Court
Date of Hearing: 24 November 2009
Date of Judgment: 24 November 2009
Date of Reasons for Judgment: 6 January 2010
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REASONS FOR JUDGMENT
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Hon Tang VP:
Introduction
1.The facts in very broad outline.
2.The 3rd defendant had acquired the right to build and manage the Wuhan Xiaogang Highway for 30 years (“the Highway Project”). By a Preliminary Transfer Agreement dated 18 September 2003, the 3rd defendant agreed to transfer its right in the Highway Project to the 4th defendant, China Score, for, inter alia, a transfer fee of RMB40 million.
3.In turn, by an agreement dated 15 October 2003 the 4th defendant agreed to transfer its interests in the Highway Project to the 2nd defendant, Chinluck Group Limited (“Chinluck”) for HK$60 million. The 1st defendant, Cheng Zhen Shu is the chairman of the 2nd defendant.
4.The 1st plaintiff is a director and the major shareholder of the 2nd plaintiff. It is the plaintiffs’ case that the 1st and/or 2nd plaintiffs had agreed to invest in the Highway Project in a joint venture with the 2nd defendant. They relied on an investment agreement evidenced by a minutes of a meeting dated 16 October 2003. According to the minutes:
“(P1) shall first input a registered capital of $60,000,000.00 before 15th November 2003 to activate the Project.”
The parties also confirmed:
“… the terms set out in the Letter of Intent for Project Transfer and the Preliminary Transfer Agreement between (D3) and (D4), and in the Project Transfer Agreement between (D4) and (D2).”
“(D1) of Hong Kong’s Chinluck Group Limited (D2) shall invest $157,870,500.00 accounting for a shareholding of 51%, while (P1) of Japan’s Central Commonweal Corporation shall invest $151,679,500.00 accounting for a shareholding of 49%. Both investments will be made in the form of cash and are to be completed within one year.”
5.HK$50 million was paid by means of 3 cashier orders made payable to the 3rd defendant. There is no dispute that it was the 1st and/or 2nd plaintiffs who procured the cashier orders to be issued. It is the plaintiffs’ case that the cashier orders were made payable to the 3rd defendant because the plaintiffs wanted to be sure that the 3rd plaintiff would receive the HK$50 million payable by the 4th defendant to the 3rd defendant.
6.By a receipt signed by the 1st defendant dated 23 October 2003, the 2nd defendant acknowledged receipt of the cashier orders and an earlier sum of HK$10 million which was paid by or on behalf of the 1st and/or 2nd plaintiff as earnest fee to the 2nd defendant.
7.The evidence which appears to be uncontroversial is that the cashier orders were given by the plaintiffs to the 1st defendant who in turn gave them to a Mr Sung of the 4th defendant. Mr Lau of the 3rd defendant, then received them from Mr Sung. Mr Lau’s evidence is that he was never told that the 4th defendant was making payment on behalf of somebody else.
8.There is a receipt (undated) given by the 4th defendant to the 2nd defendant acknowledging receipt of the 3 bank drafts stating:
“The said HKD50,000,000.00 is the investment capital for the ‘Wuhan – Xiaogan Highway’ project according to the agreement made on 15th October 2003.”
9.There is a receipt dated 6 November 2003 from the 3rd defendant to the 4th defendant acknowledging receipt of HK$50 million. There is also a receipt dated 2 December 2003, the original in Chinese is barely legible but it appears that it acknowledged payment of the transfer fee of RMB40 million.
10.By a re-purchase agreement dated 16 February 2004 the 3rd defendant re-acquired from the 4th defendant the Highway Project. Apparently as a result of a settling of accounts, it was agreed in the re-purchase agreement that the 3rd defendant was liable to pay the 4th defendant RMB31,954,906.5 in full and final settlement. It was the 3rd defendant’s case that it had paid the 4th defendant the sum agreed to be paid. The learned trial judge, however, was not satisfied with the evidence of payment.
The Action
11.In this action, the plaintiffs’ claim against the 4th defendant was for $10 million and/or $50 million on the basis of unjust enrichment. Default judgment for $60 million was obtained by the plaintiffs against the 4th defendant on 6 May 2005. Upon the petition of the 1st and 2nd plaintiffs, the 4th defendant was ordered to be wound up on 7 December 2005.
12.At trial, the 1st and 2nd defendants agreed to settle their differences. A Tomlin Order was made on 9 April 2008 under which the 1st and 2nd defendants agreed to pay the plaintiffs and their associate companies HK$162,373,956 by instalments in full and final settlement of all liabilities owed by the 1st and 2nd defendants to the plaintiffs and their associates and a company called ETO. Only one instalment of HK$1 million has been paid and the 1st and 2nd defendants are in default. It appears that the sum of HK$162,373,956 included the HK$60 million paid by the plaintiffs to the 1st and/or 2nd defendant, as well as certain judgment debts pleaded in the re-re-re-amended statement of claim.
13.The trial continued against the 3rd defendant. The plaintiffs’ claim against the 3rd defendant was in restitution for the HK$50 million received by the 3rd defendant. Fung J found in favour of the plaintiffs and ordered the restitution of HK$50 million.
The appeal
14.We have allowed the 3rd defendant’s appeal and I now give my reasons for doing so.
15.The plaintiffs’ case, as explained by Mr Huggins SC, is that the plaintiffs had paid HK$50 million to the 3rd defendant with the concurrence of the 1st or 2nd defendants, and in that sense, they had paid the 3rd defendant in the course of performing a contractual obligation to the 2nd defendant, but not strictly pursuant to any contractual obligation to the 2nd defendant. Mr Huggins has rightly submitted that there was no contractual obligation on the plaintiffs to pay the money to the 3rd defendant. He accepted that:
“If D2 had said to Ps ‘Where is the $60m you owe us?’, Ps could have said ‘We have paid $50m of it to D3 in accordance with your agreement.”
16.But he went on to submit that that would not preclude a restitutionary claim by the plaintiffs against the 3rd defendant in the particular circumstances of this case where there was:
i. total failure of consideration in the relevant sense;
ii. no relevant contractual regime of risk distribution which would be subverted by a restitutionary claim by the plaintiffs against the 3rd defendant; and
iii. a material mistake on the part of the plaintiffs
17.With respect, Mr Huggins’ approach or analysis suffered from the fact that it:
“… proceeded from principles stated at a high level of abstraction …”
using the language of Gummow, Hayne, Crennan and Kiefel JJ in their joint judgment in Lumbers v W Cook Builders Pty Ltd (in liquidation), unreported, dated 18 June 2008, an unreported decision of the High Court of Australia. Also to paraphrase the words of Gleeson CJ in the same case at para. 45, in considering the plaintiffs’ restitutionary claim, the contractual relations, between the 3rd defendant and 4th defendant, between the 4th defendant and the 2nd defendant and, between the plaintiffs and the 2nd defendant, cannot be put to one side as an inconvenient distraction.
18.In Lumbers, the Lumbers entered into an oral agreement with W Cook & Sons Pty Ltd ("Sons") to build a house. However, most of the work required by the contract were performed not by Sons, but by W Cook Builders Pty Ltd (in Liquidation) ("Builders"). This change in the identity of the builder occurred without the knowledge or approval of the Lumbers. Builders and Sons were members of the same corporate group, but their shareholders and directors were not identical, and at some stage, for reasons that were not made clear in the evidence, their interests diverged.
19.The proceedings arose out of claims by Builders to be remunerated for its services. Sons had made no claim against the Lumbers. Builders’ claim against the Lumbers was based on contractual assignment, namely, that Builders were the assignee of Sons of the building contract or alternatively “Restitution – Unjust enrichment”. Builders’ claim against the Lumbers based on an assignment was dismissed in the South Australian Court and was not pursued to the High Court of Australia. The trial judge found that Builders had performed its work on the project not as an assignee of the benefit of the contract but as a subcontractor to Sons. The claim based on restitution / unjust enrichment failed at first instance but succeeded on appeal.
20.A majority in the Full Court of the Supreme Court of South Australia held in favour of Builders and as explained by Gleeson CJ, the majority identified the case as one:
“[39] … ‘where the service conferred incontrovertible benefit on the defendant, and it would be unconscionable for the defendant to keep the benefit of the service with paying a reasonable sum for it’. There are, they said, ‘three basic elements of unjust enrichment’, subject to any available defence. The first is that the defendant must receive a benefit. The second is that the benefit must be received at the plaintiff's expense. The third is that it would be unconscionable for the defendant to retain the benefit. They discussed ‘incontrovertible benefit’ and ‘free acceptance’.”
21.Gleeson CJ pointed out that there was a head contract between the Lumbers and Sons, and a subcontract between Sons and Builders. He said:
“[45] In considering Builders' restitutionary claim, the contractual relations between the Lumbers and Sons, and between Sons and Builders, cannot be put to one side as an inconvenient distraction. …
[46] So far as appears from the evidence, Builders had, and may still have, a viable claim against Sons. The claim was not defeated on the merits or otherwise in any relevant respect rendered worthless. Builders and Sons have their own separate creditors and members. The contractual arrangements that were made effected a certain allocation of risk; and there is no occasion to disturb or interfere with that allocation. On the contrary, there is every reason to respect it. There was no mistake or misunderstanding on the part of Builders. It was accepted on both sides in argument that in the ordinary case a building subcontractor does not have a restitutionary claim against a property owner, but must look for payment to the head contractor. That was said to be subject to exceptions, but the difficulty for Builders was to show that the case fell within any recognised exception or within general principles justifying a new exception.
[47] In Pan Ocean Shipping Co Ltd v Creditcorp Ltd, Lord Goff of Chieveley said:
‘I am of course well aware that writers on the law of restitution have been exploring the possibility that, in exceptional circumstances, a plaintiff may have a claim in restitution when he has conferred a benefit on the defendant in the course of performing an obligation to a third party (see, eg, Goff and Jones on the Law of Restitution, 4th ed (1993), pp 55 et seq, and (for a particular example) Burrows on the Law of Restitution, (1993) pp 271-272). But, quite apart from the fact that the existence of a remedy in restitution in such circumstances must still be regarded as a matter of debate, it is always recognised that serious difficulties arise if the law seeks to expand the law of restitution to redistribute risks for which provision has been made under an applicable contract.’”
22.The learned Chief Justice also explained that:
“[49] … Builders' services were not performed at the request of the Lumbers, but pursuant to a contract between Sons and Builders. …
……
[53] … Similarly, what was sought to be characterised as an ‘incontrovertible benefit’ was that which Sons had undertaken to provide for the Lumbers and for which the Lumbers had agreed to pay Sons. …”
23.As for the argument that the Lumbers had received a "windfall" and that it would be unconscionable of them to refuse to pay Builders for the work in question, he said if the Lumbers had been enriched, it was at the expense of Sons, who had not pursued any claim against the Lumbers.
24.In the joint judgment of Gummow, Hayne, Crennan and Kiefel JJ their lordships after stating that:
“[75] … The analysis undertaken by the majority in the Full Court proceeded from principles stated at a high level of abstraction …”
went on to say:
“[77] … When proper account is taken of the rights and obligations that existed between Sons and the Lumbers under their contract, the analysis made by the majority in the Full Court is shown to be flawed. The Lumbers are not shown to have received a ‘benefit’ at Builders' ‘expense’ which they ‘accepted’, and which it would be unconscionable for them to retain without payment. No less importantly, proper analysis of the legal relationships revealed by the evidence will illustrate the dangers inherent in ‘top-down reasoning’.
[78] The application of a framework for analysis expressed only at the level of abstraction adopted in this case, by reference to ‘benefit’, ‘expense’ and ‘acceptance’ coupled with considerations of unconscionability, creates a serious risk of producing a result that is discordant with accepted principle, thus creating a lack of coherence with other branches of the law. There are two reasons of particular relevance to this case why that is so. They may be identified by reference to two questions which, although expressed separately, will later be seen to intersect in several ways. First, does applying the posited framework for analysis to the facts of the present case extend the availability of recovery beyond the circumstances in which a claim for work and labour done (or money paid) for and at the request of the defendant would be available? Secondly, and no less importantly, how is the result of applying this framework for analysis consistent with the obligations relevant parties undertook by their contractual arrangements?
[79] The doing of work, or payment of money, for and at the request of another, are archetypal cases in which it may be said that a person receives a ‘benefit’ at the ‘expense’ of another which the recipient ‘accepts’ and which it would be unconscionable for the recipient to retain without payment. And as is well apparent from this Court's decision in Steele v Tardiani, an essential step in considering a claim in quantum meruit (or money paid) is to ask whether and how that claim fits with any particular contract the parties have made. It is essential to consider how the claim fits with contracts the parties have made because, as Lord Goff of Chieveley rightly warned in Pan Ocean Shipping Co Ltd v Creditcorp Ltd, ‘serious difficulties arise if the law seeks to expand the law of restitution to redistribute risks for which provision has been made under an applicable contract’. In a similar vein, in the Comments upon §29 of the proposed Restatement, (3d), ‘Restitution and Unjust Enrichment’, the Reporter says:
‘Even if restitution is the claimant's only recourse, a claim under this Section will be denied where the imposition of a liability in restitution would overturn an existing allocation of risk or limitation of liability previously established by contract.’
[80] Likewise, it is essential to consider whether the facts of the present case yield to analysis as a claim for work and labour done, or money paid, because where one party (in this case, Builders) seeks recompense from another (here the Lumbers) for some service done or benefit conferred by the first party for or on the other, the bare fact of conferral of the benefit or provision of the service does not suffice to establish an entitlement to recovery. As Bowen LJ said in Falcke v Scottish Imperial Insurance Company:
‘The general principle is, beyond all question, that work and labour done or money expended by one man to preserve or benefit the property of another do not according to English law create any lien upon the property saved or benefited, nor, even if standing alone, create any obligation to repay the expenditure. Liabilities are not to be forced upon people behind their backs any more than you can confer a benefit upon a man against his will.’ (emphasis added)
The principle is not unqualified. Bowen LJ identified salvage in maritime law as one qualification. Other cases, including other cases of necessitous intervention, may now be seen as further qualifications to the principle but it is not necessary to examine in this case how extensive are those further qualifications or what is their content. For the purposes of this case the critical observations to make are first that Builders' restitutionary claim does not yield to analysis as a claim for work and labour done or money paid and secondly, that Builders' restitutionary claim, if allowed, would redistribute not only the risks but also the rights and obligations for which provision was made by the contract the Lumbers made with Sons.”
……
The relevance of the contract between the Lumbers and Sons
[124] When account is taken of the contractual relationship between the Lumbers and Sons several observations may then be made.
[125] First, the Lumbers accepted no benefit at the expense of Builders which it would be unconscionable to retain. The Lumbers made a contract with Sons which either has been fully performed by both parties or has not. Sons made an arrangement or agreement with Builders which again has either been fully performed or it has not. If either the agreement between Sons and the Lumbers or the agreement or arrangement between Sons and Builders has not been fully performed (because all that is owed by one party to the other has not been paid) that is a matter between the parties to the relevant agreement. A failure of performance of either agreement is no reason to conclude that Builders should then have some claim against the Lumbers, parties with whom Builders has no contract.
[126] Because Builders had no dealings with the Lumbers, Builders has no claim against the Lumbers for the price of any work and labour Builders performed or for any money that Builders may have paid in relation to the construction. Builders has no such claim because it can point to no request by the Lumbers directed to Builders that Builders do any work it did or pay any money it did. Reference to whether the Lumbers ‘accepted’ any work that Builders did or ‘accepted’ the benefit of any money it paid is irrelevant. It is irrelevant because it distracts attention from the legal relationships between the three parties: the Lumbers, Sons and Builders. To now impose on the Lumbers an obligation to pay Builders would constitute a radical alteration of the bargains the parties struck and of the rights and obligations which each party thus assumed. There is no warrant for doing that.
[127] The second observation to be made is more general. It is that identification of the rights and obligations of the parties, in this as in any matter, requires close attention to the particular facts and circumstances of the case. Necessarily that requires close attention to what contractual or other obligations each owes to the other.”
25.I have quoted from this case at some length because it completely answers the plaintiffs’ claim. With respect, it also illuminates the fallacy of top-down reasoning and demonstrates the danger of concentrating on abstract analysis.
26.Mr Edward Chan SC leading for the 3rd defendant, also relied on Barclays Bank Ltd. v W. J. Simms Son & Cooke (Southern) Ltd [1980] QB 677 a decision of Robert Goff J (as he then was). The question in that case was:
“whether a bank, which overlooks its customer’s instructions to stop payment of a cheque in consequence pays the cheque on presentation can recover the money from the payee as having been paid under a mistake of fact.”
27.There, after a comprehensive survey of the relevant authorities, Robert Goff J said at page 695:
“From this formidable line of authority certain simple principles can, in my judgment, be deduced : (1) If a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact. (2) His claim may however fail if (a) the payer intends that the payee shall have the money at all events , whether the fact be true or false, or is deemed in law so to intend; or (b) the payment is made for good consideration , in particular if the money is paid to discharge, and does discharge, a debt owed to the payee (or a principal on whose behalf he is authorized to receive the payment) by the payer or by a third party by whom he is authorized to discharge the debt; or (c) the payee has changed his position in good faith , or is deemed in law to have done so.”
28.Robert Goff J held that the Bank was entitled to recover because the Bank fell within principle (1) and that (2)(b) did not apply because the Bank was not authorised by its customer (the principal and drawer of the cheque) to pay the cheque.
29.Mr Edward Chan SC submitted that the 3rd defendant was covered by principle 2(b) in that the $50 million was paid for good consideration by the 4th defendant pursuant to the Preliminary Transfer Agreement.
30.Barclays v Simms was approved by the Court of Appeal in Lloyds Bank Plc v Independent Insurance Ltd [2000] 1 QB 110. In Lloyds Bank, the defendant’s insurance company was owed premiums collected by one of its agents W Ltd who told the defendant that they would have the sum transferred by clearing house automatic payment system to the defendant’s bank account. A director of W Ltd paid in 3 cheques into the account of W Ltd. He told the bank’s branch manager that he would like the payment to the defendant made as soon as possible. The manager replied that payment could be made only after the cheques had cleared. Three days later, acting in the mistaken belief that all 3 cheques had cleared, the bank transferred £162,387.90 by CHAPS to the defendant’s account. In fact, the cheques had not cleared, leaving W Ltd’s account substantially overdrawn. The bank claimed restitution against the defendant. The judge gave judgment in favour of the bank on the basis that the payment was not authorized by the W Ltd. The Court of Appeal overruled the learned judge and held that the bank was acting within the authority granted to it by W Ltd where it made the payment to the defendant.
31.At page 125 of the report, Waller LJ dealt with the argument that principle 2(b) in Barclays v Simms is wrong, and said:
“… But clearly one of the points that lay at the root of Robert Goff J.’s reasoning in the Simms case [1980] Q.B. 677 was the recognition that restitution would not be ordered where the payment made under a mistake had in fact discharged an existing debt. If restitution could be ordered even where a debt was discharged, it would have been quite unnecessary to consider whether the bank in that case was acting within its authority. But Robert Goff J. recognised that if a payment by an agent (the bank in that case as in this) did discharge a debt, that would provide a payee with a defence to a restitutionary claim. That being fundamental to his reasoning it is inaccurate to suggest that his formulation of the principle expressing that view was obiter. It is clear furthermore that whether or not the payee in Aiken v. Short, 25 L.J.Ex. 321 had another arguable defence to the restitutionary remedy claimed (as Mr. Hapgood would argue), as Robert Goff J. showed, Pollock C.B., Platt B. and probably Martin B. (albeit he did not deliver a judgment) recognised that payment by an agent duly authorised to discharge the debt of the principal could not be recovered. The dictum of Lord Atkinson in the Kerrison case, 8] L.J.K.B. 465, 470, referred to in the Simms case [1980] Q.B. 677, 691, recognised the same proposition. It also seems to me that the proposition that if the debt was discharged the payee would have a defence to a restitutionary claim in fact simply applies basic principles relating to restitutionary remedies. There are, as I see it, two bases which support the fundamental proposition in restitutionary terms. First, arguably, where the debt has been discharged the payment has been made for good consideration, That is the basis expressed in Robert Goff J.'s formulation in Barclays Bank Ltd. v. W J Simms Son & Cooke (Southern) Ltd. [1980] Q.B. 677. Goff & Jones, The Law of Restitution, 4th ed., p. 134 could be said not to support that basis with wholehearted conviction. But the second basis does have Goff & Jones's support in the same paragraph. If a payment has discharged the debt, then unless an order to return the money reinstates the debt, the payee will have changed his position in no longer having a remedy against the debtor.”
32.Thorpe J agreed with Waller J.
33.Peter Gibson LJ said at page 132:
“My principal objection to Mr. Hapgood's contentions relates to his assertion that Independent has been unjustly enriched by the payment made to it by the bank. In my judgment that cannot be said of a payment made to discharge a debt, absent the special factors referred to by Robert Goff J. in his qualification of his proposition (b). In Kleinwort Benson Ltd. v. Lincoln City Council [1999] 2 A.C. 349, 407, Lord Hope of Craighead posed as the third of three questions raised by a claim for restitution of money paid under a mistake: ‘Did the payee have a right to receive the sum which was paid to him?’ He said [1999] 2 A.C. 349, 408:
‘The third question arises because the payee cannot be said to have been unjustly enriched if he was entitled to receive the sum paid to him. The payer may have been mistaken as to the grounds on which the sum was due to the payee, but his mistake will not provide a ground for its recovery if the payee can show that he was entitled to it on some other ground.’
So here. Independent was entitled to receive the sum paid to it in discharge of the debt owed to it by W.F. That, in my view, is not affected by the fact that the payment was made by the bank as W.F.'s agent.
I would add that I cannot accept that the defence of bona fide purchase has been overtaken by or subsumed in the defence of change of position. Both defences may coexist: see Lipkin Gorman v. Karpnale Ltd [1991] 2 A.C. 548. 580-581.
It is interesting to note that the conclusion that a payment made under a mistake but in discharge of a debt is irrecoverable is consistent with the American Law Institute, Restatement of the Law, Restitution (1937), to which Mr. Sumption took us. In section 33 it is stated that the holder of a cheque or other bill of exchange who, having paid value in good faith therefor, receives payment from the drawee without reason to know that the drawee is mistaken is under no duty of restitution to him although the drawee pays because of a mistaken belief that he has sufficient funds of the drawer. The commentary states that the payee is entitled to retain the money which he has received as a bona fide purchaser, and the illustrations given by way of typical cases include the payment by a bank of a cheque drawn on it by a customer who has insufficient funds to cover the cheque, the payment going to discharge a mortgage debt.”
34.In Lipkin Gorman v Karpnale Ltd, C, a partner in the plaintiff firm of solicitors, stole money from the firm and used the money to exchange for chips to gamble at the defendant’s club. The headnotes stated that on a claim for money had and received:
“an innocent recipient of stolen money was obliged to pay an equivalent sum to the true owner where he had not given full consideration for it and had thus been unjustly enriched at the expense of the true owner.”
35.In Lipkin Gorman v. Karpnale Ltd, the defence to a claim based on unjust enrichment by a defendant (a volunteer) who had changed his position was expressly acknowledged for the first time. per Lord Bridge at 558H. However, it is clear from the speeches in that case that a defendant who had given valuable consideration for the payment would have a defence to such a claim.
36.Although cash was exchanged for gaming chips before being wagered at the gaming tables, Lord Bridge said at 558G:
“The club was nevertheless a mere volunteer who gave no consideration for the stolen money.”
37.At 563 Lord Templeman said:
“In the present case the money was received by the club fairly and honestly but not upon a valuable and bona fide consideration”
38.Lord Goff said at 580:
“… The defence of change of position is akin to the defence of bona fide purchase; but we cannot simply say that bona fide purchase is a species of change of position. This is because change of position will only avail a defendant to the extent that his position has been changed; whereas, where bona fide purchase is invoked, no inquiry is made (in most cases) into the adequacy of the consideration: …”
39.Here, it cannot be disputed that the 3rd defendant was entitled to be paid the $50 million by the 4th defendant and there was good consideration for the payment. It was paid pursuant to the Preliminary Transfer Agreement and, as will be seen, that was followed by the Formal Agreement of 1 December 2003.
40.In Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd [2004] 7 HKCFAR 79, the Court of Final Appeal was concerned with a case where the plaintiff was a Mainland company with foreign trading rights. The facts are complicated and I take them from the head notes.
“P was a Mainland company that enjoyed foreign trading rights. D was a Hong Kong moneylender. P and D separately had dealings with a third party (the third party). The third party controlled a Mainland corporation (TP-MC) and a Hong Kong company (TP-HKC). D had previously lent monies to TP-HKC, and the third party, on behalf of TP-HKC, sought a further advance for TP-HKC on the basis this could be repaid by getting one of the third party's purchasers to open a letter of credit (the L/C) in D's favour. The third party then approached P: (a) showing a sales contract for beauty goods with S as the seller and the buyer unnamed; and (b) as TP-MC did not enjoy the foreign trading rights required to import these goods, arranged for P to import them on TP-MC's behalf (the entrustment agreement) and open a L/C in D's favour. P drew up a purchase agreement that, contrary to what P and the third party had agreed, specified P, instead of TP-MC, as the buyer. Without waiting for D to sign, P opened the L/C which was subject to the ICC Uniform Customs and Practice for Documentary Credits (1993 Revision). D presented the stipulated documents (the stipulated documents) and negotiated the credit through its own bank. The stipulated documents included a commercial invoice which, consistent with UCP 500, was on its face issued by D, the beneficiary, and made out in the name of P, the applicant, and specified the draft contract number. Up until this point, P and D had no contact with each other. It was subsequently discovered that rather than beauty equipment, goods of insignificant value had been shipped. P did not pursue the third party for payment but brought proceedings against D claiming that: (a) there was an implied contract of sale between itself and D that came into being upon D negotiating the L/C, and the commercial invoice only made sense as evidence of this; or (b) P had a restitutionary claim against D. D claimed it was no more than an intermediary finance house, having taken its beneficial interest under the L/C as part-repayment of the loan. The Court of Appeal found in favour of D. P appealed to the Court of Final Appeal.”
41.The Court of Final Appeal said in relation to the restitution claim that it was critical to identify and correctly categorize the transaction providing the basis for the enrichment for the purposes of identifying the relevant anticipated performance and ascertaining whether it had fully, totally failed. On the facts it held there had been no total failure of consideration. However, Ribeiro PJ went on to deal with the argument that a claim for restitution based on a total failure of consideration must be excluded on the fundamental ground that Shanghai Tongji made the relevant payment pursuant to a contractual obligation to do so. The argument was that since Shanghai Tongji caused payment of the LC proceeds to be made to Casil pursuant to a contractual obligation it owed to Shanghai Collina to do so, no restitutionary claim for those proceeds can in principle be maintained against Casil. As to that, Ribeiro PJ said:
“89. In dealing with this argument, care must be taken to distinguish between cases (i) where the plaintiff makes payment to the defendant pursuant to a subsisting contractual obligation owed by him to the defendant; and (ii) where the plaintiff makes payment to the defendant pursuant to a contractual obligation owed by the plaintiff to a third person.”
90. It is generally accepted that in relation to the first category, a restitutionary claim based on total failure of consideration is excluded during the subsistence of the contract: see e.g., Dimskal Shipping Co SA v International Transport Workers Federation (The Evia Luck) (No 2) [1992] 2 AC 152 at p.165; Pavey & Matthews Pty Ltd v Paul 162 CLR 221 at p.256.”
42.Ribeiro PJ did not regard Pan Ocean Shipping Ltd v Creditcorp Ltd (The Trident Beauty) [1994] 1 WLR 151, a decision of the House of Lords as falling within the second category. The facts in Pan Ocean, very briefly stated, are that Pan Ocean as charterer entered into a time charter with Trident, the vessel’s disponent owners. Creditcorp had provided finance to Trident and obtained an assignment of all receivables under the charterparty “free of all encumbrances and third party interests”. Notice of the assignment was given to Pan Ocean. The charterparty required Pan Ocean to pay charterhire 15 days in advance and provided for repayment e.g. where the vessel was off-hire. It also gave the charterer a lien on the ship for moneys paid in advance and not earned and required overpaid hire to be “returned at once”. Pan Ocean paid an instalment of advance charterhire to Creditcorp. Throughout the relevant period, Pan Ocean did not have the use of the vessel in circumstances under which Pan Ocean was entitled to be refunded. Trident failed to repay and was not worth suing. Pan Ocean sued Creditcorp in restitution.
43.Lord Goff said at 166 that the existence of a remedy in restitution where a plaintiff has conferred a benefit on the defendant in the course of performing an obligation to a third party “must still be regarded as a matter of debate”.
44.However, Lord Goff went on to say:
“… it is always recognized that serious difficulties arise if the law seeks to expand the law of restitution to redistribute risks for which provision has been made under an applicable contract. Moreover, it would in any event be unjust to do so in a case such as the present where the defendant, Creditcorp, is not the mere recipient, of a windfall but is an assignee who has purchased from Trident the right to receive the contractual debt which the plaintiff, Pan Ocean, is now seeking to recover from Creditcorp in restitution despite the facts that the relevant contract imposes on the assignor (Trident) an obligation of repayment in the circumstances in question, and that there is nothing in the assignment which even contemplates, still less imposes, any additional obligation on the assignee (Creditcorp) to repay. This is the point which, as I understand it, concerned Lord Justice Neill in the Court of Appeal, when he said that ‘Creditcorp were in a position analogous to that of a bona fide purchaser for value’: see [1993] 1 Lloyd's Rep. 443 at p. 449.”
45.Pan Ocean provided further support for the view that the plaintiffs have no claim in restitution against the 3rd defendant if the 3rd defendant was in a position analogous to that of a bona fide purchaser for value. Here, it cannot be said that the 3rd defendant was not in such an analogous position when it received the 3 cashier orders. That fact that subsequently, the 3rd defendant entered into a repurchase agreement makes no difference. It only means that one bona fide contract was replaced by another bona fide contract. The learned judge said in para. 71 of the judgment:
“71. … I shall cast aside any consideration of sham in the transfer and re-transfer.”
46.As noted above, Mr Adrian Huggins SC, accepted that if the 2nd defendant had said to the plaintiff “Where is the $60m you owe us?”. The plaintiffs could have said: “we have paid HK$50m of it to D3 in accordance with your agreement.” It is obvious that the $60 million paid by the plaintiffs to the 1st and/or 2nd defendant were made pursuant to the contractual arrangement between the plaintiffs and the 1st and 2nd defendants. In turn, I do not believe it can be disputed that the payment by the 2nd defendant to the 4th defendant, was made pursuant to the contract made between the 2nd defendant and the 4th defendant. Nor can it be disputed that the payment of the cashier orders to the 3rd defendant by the 4th defendant was made pursuant to the contract between the 3rd and 4th defendants.
47.For the above reasons, I was satisfied that the plaintiffs’ claim against the 3rd defendant must fail and I allowed the appeal.
48.In deference to the learned judge I go on to deal with the reasons he gave for coming to a different conclusion.
49.The learned judge was satisfied that there was a total failure of consideration, he said:
“119. The 1st plaintiff looked for the rights in the Highway Project. The appointment of the 1st defendant as the enterprise legal representative of Han Xiao is not equivalent to a transfer of the rights in the Highway Project. Han Xiao was supposed to take over the rights from Wuhan Telford, but there is no evidence of any transfer as between them. In any case, the rights of the Highway Project and the rights reverted to the 3rd defendant the plaintiffs did not get anything he looked for.”
50.On regime of risk allocation, the learned judge said:
“128. Here, the 1st plaintiff was not given any opportunity of dealing with the 3rd defendant, but he ensured the 3 cashier orders for HK$50 million were made out to the 3rd defendant. I do not find that the parties have expressly or implied allocated the risk of loss of the HK$50 million where the rights in the Highway Project were to remain with the 3rd defendant in the circumstances of this case. There is no compelling reason not to order restitution.”
51.On unconscionability the learned judge said:
“142. I agree with Mr. Ng. Here the plaintiffs paid HK$50 million for the rights in the Highway Project and the 3rd defendant retained both the rights and the money. I see nothing unconscionable to make the 3rd defendant return the money which it has no right to retain. No accounting needs to be given of the sum recovered from the 1st and 2nd defendants.”
52.The learned judge placed little importance on the contractual arrangement between the various parties, especially, the separate contracts between the 3rd and 4th defendant. He said:
“123. In Shanghai Tongji v Casil Clearing ob. cit., Ribeiro PJ referred to the decision of the Court of Appeal below that restitution based on total failure of consideration must be excluded on the ground that the relevant payment was made pursuant to a contractual obligation to do so (in para. 87) and said at para. 89 et seq.:
……
124. The present case is a tri partes instead of bi partes situation and falls within the second category described by Ribeiro PJ, and as his Lordship said, there is no reason to extend the exclusionary principle to it.
125. In any event, there is no longer any subsisting contract between the plaintiffs and the 1st and 2nd defendant under which the HK$ 50 million was paid because the 3rd defendant had taken back the Highway Project, and the contract between the plaintiffs and the 1st and 2nd defendant could no longer be performed and must have come to an end.
126. Hence, I find that there is total failure of consideration for the payment of HK$50 million.”
53.The learned judge also appeared to have relied on Yew Sang Hong Ltd v Hong Kong Housing Authority [2008] 3 HKLRD 307 for the proposition that:
“… Where allowing restitution would subvert a contractual (or statutory) regime whereby risks have been allocated in a particular manner, restitution will be excluded as matter of principle. However, where no relevant regime of risk allocation can be identified, there may well be scope for the grant of restitution. …”
Then he went to say in para. 128, quoted in para. 50 above,
“There is no compelling reason not to order restitution.”
54.Mr Huggins did not seek to support the learned judge’s view that restitution could be ordered against the 3rd defendant unless there was compelling reason not to do so. What Ribeiro PJ said was that:
“100. …Relevant defences may be available on the facts, making it highly debatable whether the established exclusionary principle should be so extended. There is, however, no necessity in the present case to grapple with these difficulties since the claim based on total failure of consideration fails in any event since there has been no such failure of consideration.”
55.One such relevant defence is that the 3rd defendant had given valuable consideration for such payment.
Further details
56.In order to properly deal with the learned judge’s reasons, I believe it is necessary to go further into the facts.
D3’s investment in the Highway Project
57.It is common ground that the 3rd defendant had acquired the right to construct and manage the Hubei Han-Xiao Highway (“Han-Xiao”) for 30 years. However, the way in which the 3rd defendant had acquired such right does not seem to have been fully explored at trial. Nor does it appear that all the documents relating to such acquisition had been produced. It may be that it does not matter how the right was acquired. It may, however, assist if I were to state my understanding from the documents. I begin with the Construction and Management Agreement made on 26 August 2003 between Wuhan Municipal Transport Committee (“WTC”) and Wuhan Telford Road and Bridge Company Limited (“Wuhan Telford”). Wuhan Telford is a wholly-owned subsidiary of the 3rd defendant, Telford Road & Bridge Investments Company Limited (“Telford”)[sy1] . The parties have proceeded on the basis that Wuhan Telford and Telford should be regarded as one entity.
58.The Construction and Management Agreement, however, also provided that:
“… As an entrusting party, (Telford) entrusted the Hubei Province Han Xiao Highway Works Project Department to take charge of the construction management work of this project. …”
59.In the Articles of Incorporation of “湖北汉孝高速公路建设经营有限公司” Hubei Han-Xiao Highway Construction and Operations Company Ltd (“Hubei Han-Xiao”) dated 28 October 2003, Article 1 stated that Telford had:
“… signed the ‘Hubei Han Xiao Highway investment agreement’ … with the Wuhan Transport Committee. In accordance with the provisions of the <Wholly Foreign-Owned Enterprise Law of the People’s Republic of China> … (Telford) has incorporated the wholly owned Han Xiao Highway Construction and Operations Company Limited in Wuhan City, Hubei. It shall construct, manage and operate Han Xiao Highway in accordance with (PRC laws).”
60.Telford was described as the investing party in Article 2. According to Article 7, the total investment of the company was HK$232 million and the registered capital was HK$92,800,000. The approved operation period of the company was 35 years (Article 47). See core bundle page 382.
61.There is also a Certificate of Approval for Establishment of Enterprises with Investment of Taiwan, Hong Kong, Macao and Overseas Chinese in the People’s Republic of China relating to Hubei Han-Xiao dated 6 October 2003. See core bundle page 408.
62.There is also a document described as “Reply Made by provincial Planning Committee concerning Feasibility Study (In Place of the Project Proposal) of Wuhan Xiaogang Highway Project dated 17 September 2003 addressed to the Provincial Transport Department which apparently gave approval for the construction of the highway. Para. 4 of the reply reads:
“4. Investment Estimation and Sources of Capital. The total invested sum of the project is estimated to be 884,430,000 yuan and Wuhan Telford Road & Bridge Management Limited is intended to be responsible for fund-raising, construction and operation. The sources of the capital are as follows: Capital of the Project 309,550,000 yuan, i.e. 35% of the total investment, to be raised by the project company; the remaining 574,880,000 yuan is Construction Capital, to be raised by the project company by applying loans from a bank in China, to which Hubei Branch of Industrial and Commercial Bank of China Limited is committed [ICBC E Letter No. [2003] 47]. It will collect tolls as investment return during the operation of the project. When the operation period is expired, the project and its amenities will be handed over to the Department of Transport gratis.”
63.It appears from the above documents that Telford’s investment in the Highway Project took the form of an investment in Hubei Han-Xiao, the project company. As I have said the trial proceeded on the basis that the 3rd defendant had acquired the right to invest in the Highway Project. The actual investment mechanism was apparently not considered to be important and had not been fully explored.
Contract between D3 and D4
64.By an agreement dated 28 August 2003,项目转让意向书 (Project Transfer Memorandum), Telford the 3rd defendant, agreed with the 4th defendant, China Score Investment Limited (“China Score”)[sy2], to transfer the highway project to China Score in return for a project transfer fee:
“2. … The actual amount of this fee and payment method are to be separately negotiated;”
65.That was followed, on 18 September 2003, by a Preliminary Transfer Agreement（转让初步协议）the terms of which are set out below.
“(1) Party B shall pay Party A HKD5,000,000.00 as a deposit within 7 days after the signing of this agreement.
(2) Party B shall pay Party A RMB40,000,000.000 as a transfer fee before 15th December (including the RMB3,000,000.00 deposit that Party A had already paid to Wuhan Transport Committee, the RMB1,240,000.00 fee for survey and design, as well as Party A's preliminary expenses).
(3) Party B shall make a capital investment of HKD200,000,000.00, the first instalment shall be HKD50,000,000.00, all payments to be paid in full before 15th December 2003. Party A shall warrant that after converting the HKD200,000,000.00 into RMB, the amount shall be reimbursed to Party B in full.
(4) In the event that Party B fails to perform the terms set out in Clauses (2) and (3) hereof as scheduled, Party A is entitled to forfeit Party B's deposit of HKD5,000,000.00 as compensation. If Party B performs the terms set out in Clauses (2) and (3) hereof as scheduled, Party A shall return to Party B the HKD5,000,000.00 in full.
(5) Upon Party B's performance of the above terms, Party A shall within 3 days complete the procedures for project transfer of the Han-Xiao Highway Project to Party B, and at the same time, transfer the government documents and essential banking documents to Party B, and assist Party B in carrying out the preliminary work. Upon completion of all of the above terms, a formal transfer agreement shall be signed. All agreements and legal documentation shall be completed in Hong Kong.”
66.I have set out the terms in full, because it is not clear how much was payable under the Preliminary Transfer Agreement by 15 December 2003. The deposit of $5 million had been duly paid and receipted. The language supports the view that the transfer fee of RMB 40 million (Clause (2)) as well as at least the first instalment of HK$50 million (if not the entire sum of HK$200 million) under clause (3) should be paid by 15 December 2003. The matter had not been fully explored at trial. Nor when asked, were counsel able to explain. It appears that the parties had proceeded on the basis, as the receipts referred to in para. 9 above suggest, that the transfer fee of RMB 40 million had been paid out of the 3 cashier orders of $50 million. I should add that although the transfer fee was stated to be RMB 40 million, it appears that the net transfer fee was RMB 35,760,000, which is arrived at by deducting the RMB 3 million and RMB 1,240,000 referred to in clause (2) from RMB40 million. See the repurchase agreement below. Anyway, the action had proceeded on the basis that the plaintiffs had paid a total of HK$60 million (inclusive of the 3 cashier orders) to the 1st and/or 2nd defendants as investment in the Highway Project and that the transfer fee payable to D3 by D4 had been paid by means of the cashier orders.
67.It is to be noted that para. (5) of the Preliminary Transfer Agreement, referred to “the procedures for project transfer”. But what those procedures were had not been explained.
68.On 1 December 2003, D3 and D4 signed the Formal Agreement for Han-Xiao Highway（漢孝高速公路正式協議）which provided as follows:
“I. Regarding the amount in foreign exchange and transfer fee for the Han-Xiao Highway Project, Party B has already completed its duties according .to the Preliminary Transfer Agreement and performed the relevant contents in the Preliminary Agreement.
II. Party A has, in accordance with the law already completed the relevant formalities for project transfer as stipulated in the Preliminary Transfer Agreement. Shareholders of Party A have legally registered the annex, and the annex of shareholder resolution regarding Hong Kong's Telford Road and Bridge Investments Company Limited's authorization for Wuhan's Telford Road and Bridge Management Company Limited for the Han-Xiao Highway Project.
Registration of the Han-Xiao Company was completed. The legal person has been changed and the relevant documents are ready (attachment [1]); relevant preliminary work of the bank and government papers are also ready (attachment [2]). The above shall be handed over to China Score upon the formal signing of this agreement.
III. Party B agrees to regard all relevant agreements and contracts signed by Party A concerning the Han-Xiao Project (including the "Han-Xiao Highway Project Construction and Management Contract" signed with the Municipal Transport Committee) as valid references, which Party B shall continue to observe and perform in subsequent work.
IV. To ensure the principles of stable transition and smooth handover as stated in the Preliminary Agreement, Telford would designate a senior manager to work with China Score Investments. Upon project completion and commissioning, such manager would return to Telford in order to facilitate a smooth progress for the Project. At the same time, Party A shall deploy its staff who participated in the preliminary work to work with Party B, who would interview such deployed staff and allocate job positions for them.
V. Upon completion of the above terms, both parties would have performed their duties and obligations and the entire transfer of Han-Xiao Highway Project would be complete. From the date of signing of this formal agreement, Telford Road and Bridge Investments Company Limited (including Wuhan Telford Road and Bridge Management Company Limited) shall formally withdraw from the Project. China Score shall formally perform its duties, including the liabilities, debts, interests generated by the Project thereafter; and the relevant legal matters in respect of various aspects of the Project shall be taken over and borne by China Score Investments Company Limited. Telford Road and Bridge Investments Company Limited and Wuhan Telford Road and Bridge Management Company Limited would both have no responsibilities about these matters.”
69.I believe “I” was an acknowledgment of the payment of the Transfer Fee. There was no mention whether the balance under the Transfer Agreement was paid or payable.
70.I believe the reference in “II” to “the Han-Xiao Company” was a reference to Hubei Han-Xiao. If so, that supports the view that the investment in the Highway Project would take the form of an investment in Hubei Han-Xiao. “II” also stated:
“(D3) has ‘completed the relevant formalities for project transfer as stipulated in the Preliminary Transfer Agreement’”.
71.It is not clear what these procedures were. “II” further stated that:
“The legal person has been changed …”
I note from “企業法人管業執照 – 湖北漢孝高速公路建設經營有限公司” (Corporation Legal Person Representative License) No. 0662076 that the 1st defendant had become the 法定代理人 (legal person) of Han-Xiao on 11 November 2003. The learned judge referred to this in para. 119 of the judgment and said that that:
“… is not the equivalent to a transfer of the rights in the Highway Project”.
72.Mr Huggins did not accept that the relevant formalities had been completed. But there was no relevant finding on it by the learned judge. Nor am I able to gather from the documents whether the formalities (whatever they might be) had been completed. I can only say that, as shown by the “Formal Agreement for Han-Xiao Highway” and the re-purchase agreement, the 3rd and 4th defendants had proceeded on the basis that they had been completed.
73.To complete the picture between the 3rd and 4th defendants, they entered into the repurchase agreement for the Han-Xiao Highway Project（漢孝高速公路項目回購協議）dated 16 February 2004, the translation of which reads:
“Owing to the fact that after the Han-Xiao Highway Project Transfer Agreement was signed on 1st December 2003, the parties failed to reasonably continue to sign the Construction Entrusting Contract for the Han-Xiao Highway with the Municipal Transport Committee in accordance with the ‘Hubei Han-Xiao Highway Investment Agreement’ signed between Party B and the Wuhan Transport Committee on 23rd September 2003, there were difficulties in the actual operation that followed and it became difficult to perform the duties required for the progress of the Project As such, in order to be responsible for the Project and to the parties, following further negotiations between Party A and Party B, Party A agreed that Party B shall repurchase the Han-Xiao Highway Project. In addition to conducting the repurchase according to all the conditions of the initial transfer, other matters have been specifically agreed as follows:
I. Party B shall return to Party A the initial project transfer fees of $35,760,000.00. At the same time, pursuant to relevant evidence and confirmation, Party B shall also pay Party A a one off compensation of RMB7,000,000.00 for the $2,400,000.00 loss it incurred in the deployment of funds, and refund the $12,338,867.18 that Party A had paid to the commanding unit of Han-Xiao and Party Ns fee of $3,099,567.7. All expenses paid by Party A after the loan from Industrial and Commerce Bank's Tuankou Branch were cleared and confirmed. Party B shall assume the 120,000,000.00 loan in full. Party B shall return Party A with a total of RMB331,954,906.5. Party B warrants to pay the amount in full within 4 working days after the signing of contract.
II. Party A shall return all project-related documents (including those listed in the Hubei Han-Xiao Highway Construction, Operation and Management Company Limited List of items handed over to China Score Investment Limited) and all the seals.
III. The original copy of the ‘Preliminary Transfer Agreement’ signed on 18th September 2003, the ‘Pledge’ signed on 25th October 2003 and the ‘Formal Agreement for the Han-Xiao Highway’ signed on 1st December 2003 shall be annulled immediately from the date of signing of this agreement. At the same time, all the agreement, contracts, documents, creditor's rights and debts (except for the 120,000,000.00 bank loan) entered into by Party A before or after this shall not concern Party B.
IV. Upon completion of the above terms, Party A shall formally withdraws from the operation of the Han-Xiao Highway Project, and Party B's repurchase of the Han-Xiao Highway Project shall be completed. All the creditor's rights, debts and legal relationship of China Score Investments Company Limited shall not concern Party B.”
74.It is common ground that the 3rd defendant has re-acquired its investment in the Highway Project.
Contract between D3 and D4
75.On 15 October 2003, the 4th defendant entered into the Transfer Agreement 協議書 with the 2nd defendant which provided:
“The parties have reached the following agreements regarding the matters of the Wuhan - Xiaogan Highway (hereinafter referred to as "the Project"):
I. Party A already owns the legal interests in the development and construction of the Project. Party A now agrees to transfer all the interests it owns in the Project to Party B or a person designated by Party B.
II. Party A agrees, upon this agreement coming into effect upon the signing by the parties' legal person representatives, to handover the original copy of the approval documents from the Hubei Provincial Development and Planning Committee, the-original copy of the financial corporate loan agreement, the project feasibility report and the relevant available documents of the Project.
III. Party B agrees, upon this agreement coming into effect upon the signing by the parties' legal person representatives, to pay Party A the amount of HKD5,000,000.00. The total fee for project transfer is HKD60,000,000.00. Party B agrees to pay HKD20,000,000.00 before December this year, while the remainder shall be fully paid in instalments before 30th June 2004.
IV. Party B agrees to pay Party A the Project's capital of HKD50,000,000.00 before 15th November. An additional HKD 150,000,000 shall be paid via Telford Road and Bridge Investments Company Limited before 15th December.
V. Upon receiving the first instalment of the $50,000,000.00, Party A shall complete transfer procedures within 14 days to a project company, with Party B as the legal person representative of the Project Company of business registration and relevant legal documents, while at the same time also completing the shareholding transfer between Hong Kong's China Score Investments Limited and Wuhan's China Score Road and Bridge Management Company Limited. Party A shall be liable for the debts and creditor's responsibilities before the transfer, while Party B shall become liable for the same after the transfer.
VI. Party A agrees to participate actively in assisting Party B in the project's work in Wuhan.
VII. Both parties agree that should the project turns out to be successful, Party B shall reserve an amount ofHKD20,000,000.00 for Party A as a special bonus.
VIII. This agreement is made in duplicate and shall become effective upon the signing and affix of seal by the-legal person representatives of the parties.”
76.The parties have proceeded from the basis that this was an effective and genuine agreement.
Contract between the plaintiffs and D1 and D2 (For the purpose of the appeal, I do not believe it is necessary to distinguish between the 1st and 2nd plaintiffs, nor the 1st defendant from the 2nd defendant.)
77.As already noted, plaintiffs had paid the 1st or 2nd defendants $60 million in respect of the Highway Project. $10 million was paid by a bank draft made payable to the 1st defendant. The payer was Eagle Spirit International Ltd, a company controlled by the plaintiffs. The receipt was signed by the 1st defendant as chairman of the 2nd defendant and stated:
“If our company is unable to acquire the contract for the ‘Wuhan Highway’ Project before 15th October 2003, we guarantee to return the amount of (HK$10,000,000) to your company immediately.”
78.On 16 October 2003, there was a meeting between the 1st plaintiff and the 1st defendant. The minutes of that meeting were relied on by the plaintiffs as evidence of a contract with the 1st or 2nd defendant (“the minutes”). The minutes read:
“In the afternoon of 16th October 2003, Mr. Yukio Takahashi, President of Japan's Central Commonweal Corporation, and Mr. Cheng Zhen Shu, Chairman of Hong Kong's Chinluck Group Limited, seriously and meticulously discussed and analysed the construction and investment issues of the Transport Project Ref: [2003]882 of Hubei Provincial Development and Planning Committee, namely "Regarding the Wuhan to Xiaogan Highway Project (Han-Xiao Highway)", and reviewed relevant documents and written approvals, project feasibility reports, justifications and the agreed transfer amongst project investing entities. The factuality of the Project has been confirmed and both parties decided to invest in the Project.
Specific discussion and opinions are listed below:
I. The proposed Wuhan to Xiaogan Highway has a length of 31.556 km, in which there are 26.056 km of two-way 4-lane and 5.5 km of two-way 6-lane carriageway. The total investment of the Project is $884,430,000.00, with a project capital of $309,550,000.00 (35% of total investment). The remainder of $574,880,000.00 shall be financed through banks by the project company.
The Project is expected to be constructed within 4 years’ time and the Project has a fee-charging period of 30 years. According to the capital structure of the Project, the Project capital of $309,550,000.00 shall become the registered capital of the Project’s investment company. Mr. Cheng Zhen Shu of Hong Kong’s Chinluck Group Limited shall invest $157,870,500.00, accounting for a shareholding of 51%, while Mr. Yukio Takahashi of Japan's Central Commonweal Corporation shall invest $151,679,500.00, accounting for a shareholding of 49%. Both investments will be made in the form of cash and are to be completed within one year.
II. Both parties consider that the key to the Project’s success relies on the full deployment of the strengths of each party. They confirmed that Mr. Yukio Takahashi shall first input a registered capital of $60,000,000.00 before 15th November 2003 to activate the Project. To establish the legal status as legal person in the Project's investment, Telford Road and Bridge Investments Company Limited and Hong Kong's China Score Investments Limited shall use $50,000,000.00 for shareholding transfer from Hong Kong's China Score Investments Limited and Wuhan China Score Road and Bridge Management Company Limited.
III. Both parties confirmed unanimously the terms set out in the Letter of Intent for Project Transfer and the Preliminary Transfer Agreement between Telford Road and Bridge Investments Company Limited and China Score Investments Limited and in the Project Transfer Agreement between China Score Investments Limited and Chinluck Group Limited. The funding, payment and reimbursement of the $150,000,000.00 to be paid to Telford Road and Bridge Investments Company Limited shall be made before 15th December.
IV. Mr. Takahashi agrees with Mr. Cheng Zhen Shu that the $150,000,000.00 funding acquired after the Project investment company obtains its legal person status shall first be used to reimburse the project investment over a period of 4 to 6 months. The Company shall designate Dong Youxin and Zhang Yifei to participate in the management of the investment company. Mr. Cheng Zhen Shu undertakes that after obtaining the $150,000,000.00 for use, he will first reimburse the HKD70,000,000.00 borrowed from Mr. Takahashi. Mr. Shu also undertakes the responsibilities for returning the capital of $50,000,000.00 plus $150,000,000.00 (i.e. $200,000,000.00 in total), while enjoying the right to use the remaining capital of the $150,000,000.00.
V. After establishing the project investment company, the following issues have to be noted and resolved.
(1) The circumvention of investment risk, especially the provision and operation of the $50,000,000.00.
(2) The raising of capital fund of $574,880,000.00 from banks.
(3) Financial management for capital financing after the investment company is established. Recruitment of the Chief Financial Officer.
(4) Planning and arrangement for the instalments maturity of the investment capital.
(5) Compliance and operation of the investment company.
(6) Selection of the structure for the investment company and its registration.
(7) The organization, establishment and confirmation of the organizing committee.
Encl: Written approval from the Provincial Development and Planning Committee
3 transfer agreements”
79.That was followed by the giving of the 3 cashier orders (payee D3) to the 1st defendant. The receipt dated 23 October 2003 was signed by the 1st defendant as chairman of the 2nd defendant and acknowledged receipt of HK$50,00,000 from the 2nd plaintiff. The receipt stated:
“The said sum (total: HKD50,000,000.00) together with the bank draft of (HSBC) in the amount of HKD10,000,000.00 received by our company on 8th October 2003, that is, HKD60,000,000.00 in total, are the capital invested by (D2) in the ‘Wuhan-Xiaogan Highway’ project.”
Unlike the receipt for the HK$10 million there was no guarantee to repay the $60 million.
80.It appears to be accepted that the 2nd defendant had paid $50 million (by the 3 cashier orders) to the 4th defendant pursuant to the agreement of 15 October 2003. Mr Huggins submitted that:
“… Ps paid the money in the expectation and for the purpose of receiving the transfer of the rights in the Project. That purpose and that expectation were not fulfilled. The relevant benefit which Ps paid the money to receive was the transfer of the rights in the Project, but Ps did not get that benefit.”
81.Thus, it is said that there was a total failure of consideration. It was also submitted that there was not a relevant regime in risk allocation in the various contracts. Mr Huggins submitted:
“18 Ps submit there was no relevant contractual allocation of risk of loss of the $50m in circumstances where the rights of the Highway Project remained with D3, and where the contracts effectively ceased to subsist.”
82.The $50 million was paid by the plaintiffs to the 2nd defendant pursuant to the contract between the plaintiffs and the 2nd defendant. Between the plaintiffs and the 2nd defendant, what were the risks? Those risks include, the risk of defalcation by the contractual parties to the chain contract beginning with the 2nd defendant, the 4th defendant, the 3rd defendant and lastly the 3rd defendant’s contractual counterpart, WTC. It is common ground that the plaintiff was aware that the 2nd defendant was involved in a chain contract.
83.There was also the risk of insolvency on the part of the various contractual parties in the chain.
84.The minutes at para. V(1) mentioned:
“(1) The circumvention of investment risk, especially the provision and operation of the $50,000,000.00.”
85.Presumably, that refers to the risk of the 2nd defendant paying the 4th defendant and the 4th defendant not paying the 3rd defendant. That was dealt with by making the cashier order payable to the 3rd defendant.
86.I cannot agree that there was a total failure of consideration in the plaintiffs’ contract with the 1st and/or 2nd defendant. The plaintiffs contracted to obtain a 49% interest in an investment company which presumably would invest in the Highway Project. Para. 1 of the minutes refers to the capital of “Project Investment Company”. If, say, as a result of a breach of contract by the 4th defendant or the 3rd defendant, the investment in the Highway Project became aborted, the plaintiffs’ position regarding the 1st and/or 2nd defendant must depend on the plaintiffs’ contract with them. If the 1st and/or 2nd defendant were in breach of the joint venture contract, the plaintiffs would have their remedies in contract. If the 1st and/or 2nd defendants were guilty of misrepresentation or had made warranties, no doubt there would be appropriate remedies. If the 1st and/or 2nd defendant had become insolvent, the plaintiffs would have their remedies in their insolvencies. If the investment had become aborted due to say, the 4th or 3rd defendant’s fault, then in the absence of any warranty or misrepresentation, the plaintiffs would have no remedy against the 1st and/or 2nd defendant. On the other hand, the “joint venture” (presumably via the 2nd defendant) would have a claim against the 4th defendant for breach of contract, if there was indeed any breach. And in turn, the 4th defendant, in turn against the 3rd defendant.
87.There is of course also the risk of insolvency of the other contractual parties. But the risk of insolvency and the consequence of insolvency is regulated by statutes.
88.In the course of submissions, I asked Mr Huggins whether it had been established that the 3rd defendant was in breach of the transfer agreement with the 4th defendant. He accepted that there was no finding that the 3rd defendant was in breach. The re-purchase agreement does not say so. Although Mr Huggins does not accept it, on the evidence, it appears that the 3rd and 4th defendants regarded the 3rd defendant to have done all that was within its power to transfer the Highway Project to the 4th defendant.
89.Mr Huggins mentioned a complaint relating to a contract for the construction of the highway. But there was no finding on the matter. In para. 58 above, I have noted that in the construction and management agreement Telford had:
“… entrusted the Hubei Province Han Xiao Highway Works Project Department to take charge of the construction management work of this project. …”
90.As I have said there was no finding that the 3rd defendant was in breach of its contract with the 4th defendant. But even if the 3rd defendant was in breach of contract, the 4th defendant would have been entitled to enforce its contract and if damages had been suffered, recovered damages against the 3rd defendant. In fact, the parties had chosen to enter into the re-purchase agreement under which they agreed presumably by way of a settled account, that the 3rd defendant was liable to pay the 4th defendant RMB31,954,906.5 in return for the re-transfer of the Highway Project.
91.The learned judge was totally unimpressed by Mr Lau, the only witness called on behalf of the 3rd defendant. He was not satisfied how the RMB 31,954,906.5 was arrived at. Nor that it had been paid.
92.The evidence of actual payment is strong. Had it been necessary to do so, I would have been prepared to disagree with the learned judge on payment.
93.But whether or not the RMB31,954,906.5 or any part of it had been paid, given that the re-purchase was not a sham, it does not matter. Between the 3rd and the 4th defendant, their relationship is governed by the repurchase agreement. Under the repurchase agreement, the 3rd defendant had to pay RMB31,54,906.5 to the 4th defendant, in return for the re-transfer. It is common ground that the retransfer has taken place. If no payment had been made, the 3rd defendant remained liable to pay the 4th defendant just as in Lumbers, the Lumbers remained liable to pay Sons. It cannot be said that the 3rd defendant has been unjustly enriched.
94.Mr Huggins submitted that the chain of contracts did not provide for allocation of risks in circumstances where the contract were in effect cancelled. He sought to distinguish Lumbers and Yew Sang Hong Ltd v Hong Kong Housing Authority [2008] 3 HKLRD 307 on the basis that there the various contracts provided for payments under the contracts and in performance of the contracts.
95.I do not believe the fact that the 3rd and 4th defendants had entered into a new agreement makes any difference. The re-purchase agreement was made to replace the transfer agreement. The parties’ relationships were always regulated by a contract, first, the transfer agreement and then the repurchase agreement. In Pan Ocean Lord Goff said because:
“...... as between shipowner and charterer, there is a contractual regime which legislates for the recovery of overpaid hire. It follows that, as a general rule, the law of restitution has no part to play in the matter; the existence of the agreed regime renders the imposition by the law of a remedy in restitution both unnecessary and inappropriate. …” page 164F.
96.In Yew Sang Hong Ltd v Hong Kong Housing Authority [2008] 3 HKLRD 307 (“Yew Sang Hong”), Reyes J in delivering the principal judgment of this Court said at 310, para. 10:
“Where parties have expressly or impliedly allocated risks among themselves through a network of back-to-back or interlinking agreements, the law of restitution will not without compelling reason interfere with that allocation. It is unwise to tinker with the parties' allocation because a revision of risks as between (say) A and B may bring about adverse consequences as between (say) B and C or others in the contractual network. Attempting to do justice between A and B alone may lead to injustice being done as between B and C.”
97.With respect, I agree.
Hon Le Pichon JA:
98.I agree with the judgment of Tang VP.
Hon Yuen JA:
99.I agree with the judgment of Tang VP.
| (Robert Tang) |
(Doreen Le Pichon) |
(Maria Yuen) |
| Vice-President |
Justice of Appeal |
Justice of Appeal |
Mr. Edward Chan SC, Mr. Andrew Mak, Mr. Paul Lam and Mr. Eric Chow, instructed by Messrs C.L. Chow & Macksion Chan, for the 3rd Defendant
Mr. Adrian Huggins SC, Mr. Peter Ng SC, Mr. Stewart Wong and Mr. George Hui, instructed by Messrs Chan & Cheng, for the Plaintiffs
Appeal by the 1st and 2nd Plaintiff to Court of Final Appeal dismissed. Please refer to FACV2/2010 dated 4 March 2011 |