Sanctuary Systems Ltd v. Orient International Holdings Hong Kong Co Ltd and Another
Read the full judgment text of HCA 479/2010 on BabelCite. This High Court CFI judgment was delivered on 14 February 2014.
1. This is a claim for return of monies premised on the principles of Quistclose trust and agency.
Cites 4 cases
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HCA 479/2010 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 479 OF 2010 ______________
_______________ J U D G M E N T _______________ 1.This is a claim for return of monies premised on the principles of Quistclose trust and agency. THE LEGAL PRINCIPLES ON QUISCLOSE TRUST 2.The term “Quistclose trust” derives its name from the decision in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. Quistclose lent a sum to R Ltd for the purpose of paying a dividend that R Ltd had declared. The money was paid into a separate account with Barclays Bank, with a covering letter from R Ltd expressly confirming the agreement reached with the bank that the amount would only be used for the stated purpose. Before the dividend could be paid, R Ltd went into liquidation. Quistclose sued R Ltd and the bank. The House of Lords held that the money was held by R Ltd on trust for Quistclose and the bank had notice of the trust from the covering letter. If, for any reason, the dividend could not be paid, the money was to be returned to Quistclose and the bank could not use it to set off the indebtedness of R Ltd.
3.The principles have been followed by the Court of Appeal in Hong Kong in Typhoon 8 Research Ltd v. Seapower Resources International Ltd[2002] 2 HKLRD 660:
4.In the Typhoon 8 Research case, the Court of Appeal applied the principles to a rental deposit. There, the rental deposit was paid directly to the holding company (HC) of the landlord. It was also held that even assuming HC to be the landlord’s agent, it was not open to it to contend that, as agent, it was not subject to the same trust. This was because HC, who negotiated the lease, could not deny knowledge of the terms upon which the deposit was held. (para 21 of the judgment). 5.In Twinsectra Limited v Yardley & Ors [2002] 2 AC 164, Lord Millett (dissenting on a point immaterial to the present discussion) explained the necessary intention required of the lender and borrower:
6.In Fu Kong Inc v Hua Yun Da Group Ltd [2004] 3 HKLRD 87, A Cheung J (as he then was) extended the principles to an agent who acquired knowledge of the purpose of an advance only after he was sued. There, P (buyer) advanced money to D (agent for the seller) for the specific purpose of buying export quotas. The contract between P and the seller fell through and P demanded the seller to return the money. The seller denied ever receiving it. P sued D directly. D did not have knowledge of the purpose initially (paras 14, 29 of the judgment). A Cheung J held that at the latest when P filed an affirmation in that action, D acquired the requisite knowledge of the primary facts giving rise to the Quistclose trust, so as to fix D’s liability. THE PARTIES 7.The plaintiff (“SSL”) was a construction management company. It engaged Shanghai Cosco Construction Group Co. Ltd. (“Shanghai Cosco”) as the main contractor for the construction of SSL’s Palmyra Resort and Spa Project at Jamaica (“the Project”). The 1st defendant (“Orient HK”) was an associate of Orient International Holding Shanghai Foreign Trade Co. Ltd. (“Orient SHG”). Both Orient companies had a common largest shareholder, Orient International Holdings Co. Ltd. (“OIH”). 8.The 2nd defendant was an associate of Shanghai Cosco. It has a pending application for deregistration which has been withheld by the Companies Registry as a result of SSL’s claim. The 2nd defendant has not taken any steps to defend this action. 9.The flowchart below helpfully prepared by Mr Wou (counsel for Orient HK) shows the relationship of these entities. It can be seen that there were 3 material contracts governing different parties’ relationship. As between SSL and Shanghai Cosco, there was the Main Contract with 2 Amendments dated 7 August 2008 and 15 March 2009 respectively (“the 1st and 2nd Amendment” respectively). As between 上海中遠建設集團建築工程設計咨詢有限公司Cosco Consulting (acting on behalf of Shanghai Cosco[1]) and Orient SHG, there was a cooperation agreement dated 12 May 2009 (“the Co-opt Agreement”) for the latter to be the former’s export agent for the supply and export of certain equipment and materials for the Project. As between Orient SHG and Orient HK, there was a commercial cooperation agreementdated 1 January 2009 (“the CCA”). SSL disputes the existence of the Co-Opt Agreement and the CCA. AN OVERVIEW OF THE CASE 10.Out of concern towards delay in completion of the Project and mis-application of funds by Shanghai Cosco, SSL decided to transfer US$1,320,027 (“the Funds”) to a purported third party fund-holder, Orient SHG, for the purpose of paying for mechanical, electrical and plumbing equipment (“MEP equipment”) for the Project. As requested on invoices issued by Orient SHG, the Funds were transferred by SSL directly to Orient HK. Mr James Xu of Shanghai Cosco was authorized to give written instruction for disbursement of the Funds. 11.Orient HK paid out, amongst others, a sum of US$700,000 to the 2nd defendant on the instructions of Orient SHG, who in turn acted on the instructions of Mr James Xu. 12.SSL sues Orient HK as a Quistclose trustee where the only direct “contact” between them was the transfer of the Funds to Orient HK. The only letter between them was a demand letter 4 months later from SSL. Such was the foundation of SSL’s case against Orient HK. 13.SSL sues the 2nd defendant as a recipient of US$700,000 with knowledge of the breach of the Quistclose trust. 14.SSL was no stranger to litigation. There have been or are proceedings in Jamaica against Mr Constanzo and Mr Johnnie Wong for fraud, abandoning fiduciary duties and taking of bribes. There are also proceedings in Hong Kong, Canada, Cayman Islands and BVI for injunctions and interim reliefs. There are also proceedings in Hong Kong against one Mr Hua of Shanghai Cosco and Norwich Pharmacal proceedings for discovery of documents. However, there was incredibly absence of proceedings against Orient SHG anywhere in the world and there was no explanation for it. Rather, SSL blamed Orient HK for not bringing in Orient SHG for interpleader proceedings. 15.The core issues are:
The witnesses 16.Mr Trotta[2], Mr Deutsch[3], and Mr Pickell[4] gave evidence on behalf of SSL. They were all from the senior management. One cannot expect them to have very detailed memory of every event. 17.Mr Trotta was straightforward. He would not pretend to know something that he did not know or say something that he could not remember. He relied on Mr Constanzo (President of SSL until terminated in August 2009) and Mr Pickell in overseeing the Project and implementing instructions. Much of the information in his 1st witness statements was advice given to him (eg paras 56-58), his inferences or submission (eg paras 45, 50-53, 55, 70-72) or comments on the defence (eg paras 83 to 90, 92 to 97) which carried little weight. His 2nd witness statement was mostly repetitive of the 1st (eg paras 5, 6(1) and (2)), irrelevant to the issues (eg paras 6(3) to 8 which gave details of the breach of the Main Contract) or merely stated that he was not informed of something (eg the meeting of 24 June 2009 in paras 20, 23). The contents were not of great use. 18.There were instances where Mr Trotta’s evidence conflicted with that of Mr Pickell. For example, (i) Mr Pickell was said to have told him and Mr Deutsch that he had met with representatives from Orient SHG and could confirm that it was an independent state-owned company (eg Trotta-1st/para 33) when Mr Pickell’s own evidence was, which I accept, that he had never met representatives of Orient SHG until 1 October 2009. (ii) Mr Trotta also said that Mr Pickell told him that he had placed orders with the various suppliers in the PRC for the MEP equipment when in fact Mr Pickell has confirmed in evidence that he did not have contact with such suppliers. 19.I find that Mr Trotta has been honestly trying to tell the court the true picture. Nevertheless, I have to treat his evidence with caution as he might have erred in memory or had been misled by Mr Pickell. I accept Mr Trotta’s evidence to the extent of the background of Shanghai Cosco’s breach of the Main Contract, reliance on Mr Pickell’s reports in deciding and giving of instructions to Mr Pickell to engage a fund holder. 20.Mr Deutsch’s evidence corroborated Mr Trotta’s on the background as to why a fund holder was needed. His witness statement told a lot about what Mr Pickell reported to him. I prefer to rely on the direct evidence of Mr Pickell. I will only rely on Mr Deutsch’s evidence to the same extent as for Mr Trotta’s. 21.Mr Pickell reported to Mr Constanzo. He was supposed to be the person implementing the decision to engage a fund holder. His evidence was first-hand and should be accorded the greatest weight amongst all 3 witnesses of SSL. 22.Mr Pickell left in about September 2009 and had nothing more to do with the Project thereafter. Given the lapse of time since the relevant events happened in 2008/2009, he did not have exact memory and could only give an impression of what had happened. But he has not contradicted the contemporaneous documents. 23.When cross-examined as to why he left SSL, Mr Pickell declined to comment, saying that it was a matter between him and Mr Trotta. It transpired from the evidence that Mr Trotta has filed a criminal complaint in Shanghai alleging that Mr Pickell also took US$50,000 out of the US$700,000 transferred by Orient HK to D2. It was Mr Pickell who confessed to Mr Trotta the misappropriation of funds, not only of US$50,000 but US$300,000. Mr Pickell had repaid half. 24.Such information shows that Mr Pickell might have been an accomplice of people who had misapplied (to put it as mildly as possible) the funds under the Main Contract. He had motive not to tell Orient SHG and Orient HK to hold the money for the Purpose if he knew or expected that money from SSL would, partly, be going into his own pocket. But as Mr Pickell was not cross-examined on these aspects, I shall not rely on these to find against him on credibility. 25.There were, however, unsatisfactory aspects in Mr Pickell’s evidence, which I shall refer to under specific issues. Unless supported by contemporaneous documents or otherwise specified, I shall not rely on his evidence. 26.Five witnesses gave evidence on behalf of Orient HK. Mr Zhong Wei Min (General Manager) who signed the statement of truth on behalf of Orient HK did not give evidence. Rather, his assistant, Mr Zhang Min, did. Mr Zhang Min disagreed that he was put forward as a witness because he knew the least among all and for fear of exposing Mr Zhong. There was no evidence to suggest that Mr Zhang Min did not have first-hand knowledge of what happened with Orient HK, he being responsible for actual business operation. I accept his evidence. 27.The other witnesses were Mr Zheng Hongjie (Operations Manager), Mr Zeng Jianzhou (“Lawyer Zeng”), Ms Sherry Zou (Operations Manager), and Mr Chen Hao (Deputy General Manager of Orient SHG). 28.Mr Chen Hao’s 2nd supplemental witness statement contained mostly information learnt from Shanghai Cosco, comments on the Main Contract, hearsay and irrelevant evidence (eg paras 1-9, 11, 12), comments on legal effect of documents (eg para 11) and submissions (paras 14-15). I place little reliance on it. 29.The defence witnesses were all honest witnesses trying to tell the court what happened. Their evidence was consistent, logical and supported by contemporaneous documents. Unless otherwise specified, I accept their evidence as truthful and reliable. 30.Mr Suen criticizes Orient HK for not calling a number of persons of Shanghai Cosco, Cossco Development, Mr Johnnie Wong, directors of Orient HK and others who held senior positions in the parent company OIH and one Zhou Jun (周峻) who was the legal representative and general manager of Orient SHG affixing his personal seal on the Pro Forma Invoices. He submits that the court can draw adverse inference against a party who, without explanation, fails to call as a witness a person who he might reasonably be expected to call: Li Sau Keung v Maxcredit Engineering Ltd [2004] 1 HKC 434, 443G-444B. 31.Apart from Mr Johnnie Wong, these people would hardly have known about details of the deals between Orient SHG/Orient HK and Shanghai Cosco and made material impact on the case. Without disrespect, Mr Suen’s criticism reflects the unfocussed approach of SSL in the resolution of the core issues set out in para 15 above. CONTEMPORANEOUS DOCUMENTS 32.There was a lot of background material concerning the Main Contract and subjective intention or perception of each party. However, when it comes to imposition of a Quistclose trust, it is most important to look at the objective circumstances and contemporaneous documents. 33.There was late disclosure of documents (such as the Co-Opt Agreement, the Sales Contract between Shanghai Cosco and Orient SHG and the CCA). Despite the dispute on authenticity, I am satisfied that the Co-Opt Agreement was a genuine document as I fail to see why Orient SHG should have held Shanghai Cosco’s Funds on a gratuitous basis. I am also satisfied that the Sales Contract was genuine as governing the particular transactions. 34.The CCA was not mentioned in the 1st version of the defence. Despite the express plea in paragraph 3A of the re-re-amended reply that the CCA was only made known to SSL in discovery and despite having signed the statement of truth for the defence, Mr Zhong who had executed the CCA on behalf of Orient HK did not give evidence. 35.I am of the view that this is not fatal, because Mr Chen Hao of Orient SHG has confirmed the truthfulness of the CCA, which I accept. 36.Mr Suen then submits that there were unusual circumstances surrounding the CCA. The CCA was sealed but not signed. Orient HK obviously served other companies within its group. Yet it seemed that there had only been one CCA of its kind involving Orient SHG and Orient HK. Mr Zhang Min could not explain why it was necessary for the CCA to be entered into. Mr Chen Hao’s suggestion that Orient SHG did not enter into agreement with other associates because of this action was highly suspicious because the CCA was entered into on 1 January 2009 whereas the present dispute arose only in about August 2009. 37.Further, despite the fact that it was entitled to charge 3% commission under the CCA, Orient HK had not done so, as reflected in its ledger and the financial statement for the year ending 31 December 2009. Although the CCA was valid for only 2 years, it had never been renewed upon expiry. There had not been much business done under it. According to Mr Zhang Min, it was all because of the present dispute. 38.The audited financial statements of Orient HK for the financial year ended 31/12/2009 showed the closing balance of HK$3,931,959 as “amount due to a fellow subsidiary”. It tallied with the accounting ledger of Orient HK showing receipt of the Funds and the subsequent disbursements under the account of “Orient SHG current account”. There was no evidence of the auditor’s error or inadequacy, great weight should thus be put on the audited financial statements. They were all consistent with the terms under the CCA. 39.I find that the CCA was a genuine document. 40.Each side complains about the lack of discovery. For example, Mr Wou complains of the lack of discovery of the Main Contract, whereas Mr Suen complains of the failure of Orient HK to disclose documents between Shanghai Cosco and Orient SHG, such as those relating to how the Pro Forma Invoices were amended to their ultimate form. With respect to counsel, I do not consider the undisclosed documents to be of much relevance to the core issues. 41.Mr Suen also complains that though Orient HK had (through Orient SHG) asked for Shanghai Cosco’s assistance in making discovery of documents, Orient HK had not produced documents of any complaint made by Shanghai Cosco against SSL for alleged breach of contract or documents evidencing that the Funds represented money payable by SSL to Shanghai Cosco under the Amendments. Mr Suen invites this court to draw the inference that the documents, if produced, are against Orient HK. Without disrespect to Mr Suen, it has never been established that those documents existed and, even if existed, what their relevance was. 42.There were minutes concerning 2 meetings on 1 and 9 October respectively attended by, amongst others, representatives of SSL and Orient SHG. There was no serious dispute as to their admissibility and I accept the same as evidence. 43.Mr Suen submits that Orient SHG has attempted to “engineer” documents after disputes have arisen. For example the minutes of the meeting held on 1 October 2009 prepared by Lawyer Zeng was brief (for a 2-hour meeting) and was one-sided in favour of Orient SHG. Its contents must be false and squarely contradicted by the contemporaneous memorandum prepared by SSL’s PRC lawyers. 44.With respect, even though the minutes of Lawyer Zeng were one-sided, they were not necessarily false. They only reflect Lawyer Zeng’s perception of the effect of the meeting. They did not undermine his credibility and that of other defence witnesses. I do prefer and place more weight on the memorandum prepared by SSL’s lawyers as reflecting more of what was discussed at the meeting. I do bear in mind that those 2 meetings were after the event, clearly intended to sort out the matter and for SSL and Orient SHG to state their respective position and the memorandum was not signed by Orient SHG/ Orient HK. THE FACTUAL BACKGROUND 45.The following facts are not disputed or found by me to be true. Completion of the Project was delayed because Shanghai Cosco had misapplied funds, and failed to make proper payments to workers and suppliers. This is evidenced by eg (1) the letter from Zhongda (sub-contractor) complaining about Shanghai Cosco’s failure to pay wages and other project expenses such that Zhongda had to issue a work stoppage notice; (2) an email fromMr Pickell to the senior management of SSL dated 3 January 2009 recording the fact of his suggestion to Shanghai Cosco that SSL would not pay Shanghai Cosco directly because of past problems of misapplied funds; and his suggestion of putting funds in a joint escrow account to ensure that workers got paid. 46.With the departure of Zhongda, SSL was left without a supplier of MEP equipment. SSL had to step in and, amongst others, source such equipment. Mr Trotta and Mr Deutsch, directed Mr Pickell to find an independent fund-holder to pay suppliers directly in order to get the Main Contract going and to avoid misappropriation by Shanghai Cosco. 47.Mr James Xu of Shanghai Cosco suggested Orient SHG to Mr Pickell. It transpired that Orient SHG was informed by Shanghai Cosco that there was a sum due to Shanghai Cosco under the Main Contract, and that Shanghai Cosco had agreed with SSL that SSL should pay the Funds to the account of Orient SHG. That I find to be clearly a mis-statement to Orient SHG. Anyway, at the request of Shanghai Cosco, Orient SHG allowed the Funds to be transferred to Orient HK’s account at an extra commission of 3%. Orient SHG should follow the instructions of Shanghai Cosco in the use of the Funds. 48.SSL originally did not want to have a company introduced by Shanghai Cosco (whom they did not trust). However, Mr James Xu assured Mr Pickell that Orient SHG was a state-owned company. At the request of YinTao of Shanghai Cosco, Orient SHG prepared 5 Pro Forma Invoices. Yin Tao provided copies of the Pro Forma Invoices with matching Suppliers' Invoices (collectively “the Invoices”) to Mr Pickell. 49.Mr Pickell reported to Mr Trotta who approved the use of Orient SHG. No one in SSL saw fit to carry out due diligence on Orient SHG. Eventually, SSL transferred the Funds on 18 June 2009 to Orient HK, at the nomination of Orient SHG, and in turn, at the request of Shanghai Cosco. 50.Zhang Min of Orient HK wrote on the inward remittance advice from HSBC dated 18 June 2009: “外貿公司轉入, 用於代付”, clearly treating the Funds as coming from Orient SHG and not SSL. This inward remittance advice did refer to the Invoices of Orient SHG but no attempt had been made to get copies of them for verification. 51.Five days later, on 23 June 2009, Mr Johnnie Wong (the middleman who introduced Shanghai Cosco to enter into the Main Contract) emailed to Mr Constanzo in the following terms:
52.Later on the same day, Johnnie Wong sent a further email to Mr Constanzo in the following terms:
53.Mr Constanzo did prepare a letter (“the Constanzo Letter”) on that day addressed to Ms Sherry Zou of Orient SHG as per the draft email, with the substantive amendment underlined by me below:
54.Mr Constanzo sent the Constanzo Letter only to Johnnie Wong by email with this remark.
55.I accept the evidence of Ms Sherry Zou that the Constanzo Letter came by email from Mr Johnnie Wong to Mr James Xu, cc her. It did not contain attachments as that email merely referred to “the attached email & attached letter” but not any of the Invoices. Even if there had been attachments, there was no evidence of what those attachments were. 56.At about the same time, Ms Sherry Zou also received the request from Mr James Xu for US$700,000 cash for ready materials (“Mr James Xu’s request”). Ms Sherry Zou was unhappy because that would deprive Orient SHG of income from the Co-Opt Agreement. On the instructions of the Deputy General Manager Chen Hao, Lawyer Zeng sought clarification from Mr Constanzo. 57.On 24 June 2009, Lawyer Zeng emailed Mr Constanzo in the following terms, attaching James Xu’s request and made reference to the Constanzo Letter:
58.Mr Constanzo did not reply to this email but forwarded it to Mr Johnnie Wong with 10 question marks. 59.On 25 June 2009, Mr James Xu and Mr Johnnie Wong showed up at the office of Orient SHG and met with their Mr Chen Hao and Ms Sherry Zou. Mr Johnnie Wong produced a copy of the email from Mr Constanzo to him dated 23 June 2009 and claimed that he was the only one authorized to forward emails from Mr Constanzo and that the owner under the Main Contract would not recognize any party other than Shanghai Cosco or Mr Johnnie Wong. Mr Johnnie Wong produced the reply email of Mr Constanzo with the 10 question marks and stated that Mr Constanzo did not understand Lawyer Zeng’s email. Mr James Xu and Johnnie Wong expressly asked Orient SHG not to contact the owner in future and to follow only the instructions of Shanghai Cosco. 60.Upon a written undertaking of Shanghai Cosco and COSSCO Construction Development Co Ltd to Orient SHG (“the Undertaking”), Orient HK disbursed a total of US$915,428.32 out of the Funds (collectively “the disbursements”):
61.The MEP Equipment never arrived. SSL had to order replacement goods which it had paid for twice elsewhere. The Main Contract was terminated in writing on 3 November 2009. 62.Pending resolution of this dispute, on the instructions of Shanghai Cosco to Orient SHG and in turn to Orient HK, Orient HK is holding the balance of US$404,578.68 (“the Balance Fund”). SSL’s case 63.SSL’s pleaded case is that it was the “agreement and/or understanding of the plaintiff, Shanghai Cosco, Orient SHG and the suppliers” that SSL shall transfer the Funds to Orient HK for transfer to the suppliers. 64.According to Mr Trotta, he was told by Mr Pickell that the latter had met with representatives from Orient SHG and could confirm that it was a state owned company which had no connections with Shanghai Cosco. It was then that SSL placed trust and confidence on Orient SHG to hold the Funds for the specific purpose of purchasing MEP Equipment of the same value from designated PRC suppliers (“the Purpose”) as particularized in the Invoice. 65.SSL’s case is that the purchases were placed:
Under either limb, the transfer of the Funds by SSL to Orient HK was allegedly an advancement by SSL to Shanghai Cosco. 66.SSL alleges that Orient HK knew or had notice of the Purpose or that Orient SHG’s knowledge could be imputed to it. In any case, SSL contends that at the latest, by the time the statement of claim was served, Orient HK was fixed with notice: (paragraph 23(2) of the re-re-amended reply to defence of Orient HK) 67.SSL also alleges that the 2nd defendant, an associate of Shanghai Cosco, knew or had notice of the Purpose. 68.SSL seeks an account of the Funds, repayment of the Funds or such sum due on taking account; and damages for breach of the Quistclose trust. Orient HK’s case 69.Orient HK avers that the relationship between Shanghai Cosco and Orient SHG was governed by the Co-Opt Agreement and the Sales Contract dated 29 May 2009. Shanghai Cosco was responsible for purchasing. Orient SHG followed Shanghai Cosco’s instructions and offered export related services. It earned commission and tax rebate. It charged Shanghai Cosco an extra 3% for using its overseas bank account with Orient HK. Orient SHG did not know the Purpose. To it, the Funds belonged to Shanghai Cosco. 70.The relationship between Orient SHG and Orient HK was in turn governed by the CCA. Under the CCA, Orient SHG appointed Orient HK as agent to provide business consulting services and arrange for receipts and payments in foreign currency: clause 1. Orient HK was to receive 3% of the amount involved on a per task basis: clause 3. Orient HK was designated and notified by Orient SHG to receive the Funds on its behalf and make payment in accordance with its requests. Orient HK had no knowledge of the Purpose or dealings amongst SSL, Shanghai Cosco and Orient SHG. To Orient HK, the Funds belonged to Orient SHG. 71.I shall now analyze the issues. A. Was there an advance by SSL to Shanghai Cosco? 72.SSL’s primary case is that it was the purchaser (para 65(a) above). I agree with Mr Wou that if this is correct, SSL would have been performing an obligation to pay the 4 PRC suppliers. Under the law of restitution, A (SSL) cannot normally obtain compensation for a benefit conferred on a third party C (Orient HK) as a result of A performing an obligation to B (Shanghai Cosco) otherwise than under compulsion of law: Yew Sang Hong Ltd v Housing Authority [2008] 3 HKLRD 307, at 10. 73.The evidence, however, established the alternative case of SSL under paragraph 65(b) above. I say so, firstly, because the terms of the Main Contract did not oblige SSL to pay for the MEP Equipment:
In other words, SSL had no primary obligation, but only discretion, to pay the suppliers. 74.Secondly, when being shown SSL’s own Account Quick Report, all of SSL’s witnesses confirmed that the payments made by SSL to the suppliers could be charged back to Shanghai Cosco. 75.Thirdly, according to Mr Pickell and Mr Trotta, SSL did not have the contacts of the suppliers to do the purchasing. 76.Fourthly, there was no evidence that Orient SHG was in possession of any specification that would have enabled it to conduct purchase for and on behalf of SSL. 77.Fifthly, the invoices did not show SSL to be the purchaser:
78.Sixthly, the contemporaneous response of Mr Pickell showed that the payment was on behalf of Shanghai Cosco. In his email to Mr James Xu on 6 July 2009 to ascertain the status of the MEP Equipment, Mr Pickell stated that “we have paid for and on your behalf …” 79.Seventhly, prior to SSL’s demand letter on 19 August 2009, the emails from Shanghai Cosco confirmed that Orient SHG was Shanghai Cosco’s designated export agent who was not responsible for purchasing equipment and materials. See email from Mr James Xu to Mr Pickell dated 25/8/2009; and from Johnson to Mr Pickell dated 27 August 2009. 80.I find that Shanghai Cosco, and not SSL, was the purchaser of the MEP equipment in its own right with Orient SHG as its export agent. SSL was not discharging an obligation to Shanghai Cosco. It was merely making an advance of the Funds to Shanghai Cosco. The Funds had to be offset against the Main Contract sum. The answer to Issue A is in the affirmative. B. WAS THE ADVANCE FOR A SPECIFIC PURPOSE THAT WAS NOT INTENDED TO BE AT THE FREE DISPOSAL OF THE BORROWER? 81.Shanghai Cosco must have been aware of SSL’s distrust of it, otherwise they would not need to introduce Orient SHG to SSL and let Orient SHG hold funds for Shanghai Cosco. Nor would Johnnie Wong have asked for the Constanzo Letter in the draft terms. The Funds constituted the exact total of the amounts in the Invoices and Shanghai Cosco clearly knew that it could not have used the Funds for its own cashflow: Twinsectra, at para 73. 82.Mr Constanzo, Mr Johnnie Wong and Mr James Xu were in the best position to tell the court what happened but they had not given evidence. Mr Constanzo was terminated by Mr Trotta for fraud, bribery and misappropriation. There was no evidence of Mr Johnnie Wong being approached by any party to be a witness. Mr James Xu backed out by the time of trial, so his witness statements have not been considered. 83.Adverse inference should be drawn against Mr James Xu in his failing to be a witness. The answer to issue B is in the affirmative. C. WHETHERORIENT SHG KNEW THE PURPOSE? 84.The most important piece of evidence that SSL relies on as showing the knowledge of Orient SHG was the Constanzo Letter. The timing of this document was strange. Apparently, Mr Constanzo was content to transfer the Funds without anything in writing to bind Orient SHG, as his Letter came only 4 days after the transfer and only at the request of Mr Johnnie Wong! At that stage, all that SSL had, in connection with Orient SHG, were the copies of Pro Forma Invoices and Suppliers' Invoices. 85.Worse still, the Constanzo Letter put it within the power of Mr James Xu to give written instructions to Orient SHG for application of the Funds. 86.The reference to “the attached” in the Constanzo Letter should have alerted Ms Sherry Zou to ask what it was and she would likely have been told that they were the Invoices. In that case, she would have come to know the Purpose. The Invoices have been incorporated into the terms of the Constanzo Letter by reference. 87.However, Orient SHG did not accept the responsibility thrust upon it from an unknown source. It acted immediately to seek clarification. Unfortunately, Mr Chen Hao’s instructions were misunderstood by Lawyer Zeng, as the latter did not go about trying to clarify the identity of Mr Constanzo but acknowledged receipt of the Funds and asked for clearance to release US$700,000 to Shanghai Cosco. 88.If matters had stopped here, a Quistclose trust would probably have arisen to bind Orient SHG. But the fact was: there was no reply to Lawyer Zeng’s letter and Lawyer Zeng did not pursue further because Mr Chen Hao (erroneously in my view) thought that the matter was over. This was a puzzling stance to take but it did not undermine the fact that Orient SHG did not accept Mr Constanzo’s terms. 89.Pausing here, SSL never saw fit to communicate with Orient SHG directly despite:
Things were left to Mr Johnnie Wong and Mr James Xu. 90.Lawyer Zeng’s email was sent to Mr Constanzo alone and yet it fell into the hands of Mr Johnnie Wong. The meeting on the following day would have reinforced the view of Orient SHG that SSL authorized Mr James Xu to deal with the Funds. Ms Sherry Zou’s understanding that Orient SHG was just an export agent of Shanghai Cosco and had no relationship with SSL was consistent with what she heard from Mr James Xu and Mr Johnnie Wong at this meeting. In fact, according to Ms Sherry Zou’s unchallenged evidence, Orient SHG had not heard further from SSL until they received Mr Pickell’s demand letter dated 19 August 2009. Viewed objectively, there was no more inquiry that Orient SHG had to make to ascertain SSL’s intention. 91.That Orient SHG asked for the Undertaking was, in my view, an act of prudence to protect Orient SHG’s own position in case SSL changed its position as happened here. Mr Chen Hao had clearly testified, and I accept as true, that since Shanghai Cosco wanted Orient SHG to pay any party outside the Co-Opt Agreement, Shanghai Cosco must provide an original document, to which Mr James Xu agreed. 92.Further, on 21 July 2009, when Mr Constanzo emailed Shanghai Cosco, cc Mr Johnnie Wong, Mr Pickell and Mr Trotta, he questioned where the Funds had gone but Mr Constanzo never saw fit to question Orient SHG/Orient HK as to the whereabouts of the Funds. 93.Strangely, despite being charged by Mr Trotta with the mission to procure the missing MEP equipment and find a fund-holder, Mr Pickell had a stunning absence in the liaison with Orient SHG. The Constanzo Letter was not copied to him. He had not met anyone from Orient SHG until 1 October 2009. There were 6 letters to Orient SHG, all after transfer of the Funds. His first letters to Orient SHG were the demand letters dated 19 August 2009. Ms Sherry Zou introduced herself to Mr Pickell by email for the first time on 1 September 2009. 94.Furthermore, in issuing the demand letters, Mr Pickell still regarded Orient SHG as a “trading company” of each of the suppliers under the Pro Forma Invoices. No doubt Mr Trotta has explained in the witness box that what he meant by a “trading company” was “a shipping company”, ie one that verified shipping, goods and documents. However, I find it hard to accept that he or Mr Pickell would have confused the terms “trading company” and “export agent”. 95.On top of these, there was an aspect of Mr Pickell’s evidence that I find incredible. Mr Pickell’s evidence (confirmed by Mr Deutsch) was that Orient SHG was “under specific instructions only to release the funds once a representative from Orient SHG or SSL could verify at the port of departure that the materials from the various suppliers were ready to be shipped”. Who gave those specific instructions to Orient SHG was not specified. However, it was proved to be impossible for SSL to give those specific instructions. SSL simply had no representatives at the port of loading. They only had an interior designer based in Shanghai and even he, according to Mr Trotta, was no longer working for SSL at the time of the transfer of Funds. Moreover, the equipment or materials were too numerous to inspect. Mr Deutsch then changed his evidence to say that it was not physical inspection but inspection of the manifest or a sample of the equipment/materials. 96.On the evidence in this section, SSL simply had not communicated the Purpose to Orient SHG. Communication to Mr Johnnie Wong was insufficient as he did not appear to be the agent of Orient SHG. SSL’s trust in Mr Pickell to implement the decision to find an independent fund-holder was misplaced. Mr Constanzo, if he ever placed trust in Mr Johnnie Wong and Mr James Xu, also had his trust misplaced. 97.It follows that SSL is unable to prove the pleaded agreement or understanding (referred to in paragraph 63) with Orient SHG and still less with the suppliers. I find that Orient SHG did not have knowledge of the Purpose or the true arrangement between SSL and Shanghai Cosco at or about the time it received the Funds or made the disbursements. 98.However, the frustration of the settlor’s motives does not by itself cause the failure of the purpose of the trust: Twinsectra,at para 98. SSL may not have effectively taken steps to secure an agreement from Orient SHG or was aware of the existence of a trust. But the common intention of SSL and Shanghai Cosco was clear - that Shanghai Cosco was not to have free disposal of the Funds. Cosco SHG was under a fiduciary duty to SSL. It binds third parties: para 76 of Twinsectra. 99.What happened next changed the scene. SSL tried to ascertain the position of the Funds. By its demand letters, the meetings in October 2009 and, at the latest, the statement of claim, SSL has made known to Orient SHG the facts that gave rise to the Quistclose trust. The Main Contract was terminated. The MEP Equipment never arrived. As the Purpose was not served, SSL was indisputably entitled to recover the Funds from the resulting trustee, Shanghai Cosco. 100.The irresistible inference from failure of Mr James Xu to turn up as a defence witness at the last minute is that he could not justify asking Orient SHG/Orient HK to continue holding the Funds on behalf of Cosco SHG anymore. 101.Initially, like the agent in the Fu Kwong case, Orient SHG did not have knowledge of the Purpose. However, its knowledge was constituted before action and hence SSL is in a stronger position than the plaintiff there. SSL can sue Orient SHG as agent fund-holder directly: Typhoon 8 Research and Fu Kwong. 102.The existence of the Co-Opt Agreement and the Sales Contract does not affect my conclusion. Regardless of these agreements, Orient SHG has never asserted beneficial interest over the Funds. It fairly admitted holding the funds on behalf of Shanghai Cosco. 103.In a Quistclose trust position, the fund holder may be expected to take certain commercial steps on behalf of the borrower that involved remuneration and expenses (eg in Twinsectra and Fu Kwong). The fund holder may be able to recover loss and damage from the borrower under contract, but that does not prevent the fixing of the fund holder’s liability under the Quistclose trust principles. 104.Mr Wou submits that one element of Quistclose trust was that the fund holder had to agree to the arrangement, as what the bank did in the Barclays Bank v Quistclose. Here, neither Orient SHG nor Orient HK had agreed to any arrangement with SSL. 105.I do not think agreement was essential. The “agreement” of in the Barclays Bank v Quistclose case was but one way of showing that the bank had notice of the trust and had on that basis received the money. 106.I find that Orient SHG did not have knowledge of the Purpose when it received and disbursed the Funds. It acquired knowledge of the facts giving rise to the Quistclose trust, latest on being served with the statement of claim. D. WHETHER ORIENTHK KNEW THE PURPOSE? 107.There was nil communication between Orient HK and SSL until SSL’s demand letter. What was there to establish knowledge? 108.The case of SSL was that Orient HK was a nominated agent of Orient SHG to receive the Funds; that Orient HK was an associate of Orient SHG having a common parent OIH. It was to be “inferred” that Orient SHG would have communicated the terms of the pleaded agreement, the Invoices, the Constanzo Letter and the Purpose to Orient HK. Alternatively, the knowledge on the part of Orient SHG shall be imputed to Orient HK by virtue of its being Orient SHG’s associates. 109.Orient SHG and Oreint HK are separate legal entities. The facts in the preceding paragraph, in my view, could do little to enable inferences to be drawn or to impute knowledge as a matter of law. One can expect a multi-national corporate like OIH to have some common directors at the very top level but those people could hardly, in the absence of evidence, be shown to have knowledge of the Purpose of a specific deal. 110.Knowledge of an agent may be imputed to the principal, but no authority has been shown for the converse situation. 111.Ms Sherry Zou has already denied sending the Invoices to Orient HK. I find that Orient HK did not know the Purpose at or about the time it received the Funds or disbursed them. But it would have known the facts giving rise to the Quistclose trust from the demand letter or, at the latest, when the statement of claim was served. 112.Similarly, the CCA would not affect my conclusion. Orient SHG has no right to retain the Funds as against SSL. Orient HK as agent cannot have a greater right than Orient SHG. It does not affect any contractual claim that Orient HK might have against Orient SHG. E. WHETHER THE 2ND DEFENDANT KNEW THE PURPOSE 113.The payment to the 2nd defendant clearly fell outside the Purpose. The 2nd defendant would be liable for such unauthorized payment if it had knowledge of the trust. The plea of knowledge in paragraph 19 of the asoc is that Cosco SHG’s knowledge should be imputed to the 2nd defendant because:
114.I do not think the pleaded facts for imputing knowledge are legally sufficient. However, I note that in 2009, D2 was owned by Lome Holdings Limited (49%) and Chen Shi Chun (51%). According to the Business Vantage Account Opening Form, Mr James Xu was its authorized user and signatory and stated to be the principal shareholder with 100% ownership. Mr James Xu has chosen not to come and give evidence. The inference is that he is not able to justify his written instructions to Orient SHG to release US$700,000 to the 2nd defendant of which he owned 51%. The 2nd defendant must have knowledge of the Purpose through Mr James Xu and would have known that the 2nd defendant was not entitled to the payment as against SSL. QUANTUM OF FUNDS TO BE PAID BACK TO SSL 115.Orient HK has provided an account of the Funds supported by documents. I accept that it was a true set of accounts and that Orient HK had acted on the instructions of Orient SHG, who in turn acted on the instructions of Shanghai Cosco before Orient SHG/Orient HK had the requisite knowledge of the Purpose. 116.Specifically, with regard to the US$700,000 paid to the 2nd defendant, Orient SHG had asked SSL whether the money should be released. Not having barred Orient SHG from doing so, SSL cannot turn round to complain. 117.The tri-partite export agreement among Shanghai Cosco, Orient SHG and Shanghai Fengling was entered into, pursuant to Art.1 of the Co-Opt Agreement, on or around 4 August 2009 for the supply of MEP equipment. Mr Suen complains that since the supplier’s invoice and tri-partite agreement provided for payment of RMB 1.2m, there was no basis to pay a deposit of 30%. In any event, if the goods were not delivered the deposit should be refunded to SSL. 118.I disagree with Mr Suen. The arrangement between SSL and Shanghai Cosco did not prevent part payment to a supplier, so long as it was to purchase MEP Equipment. 119.The attendant costs and expenses were in connection with the purchase and I fail to see why they should not be treated as part of the proper application of the Funds. 120.Once part of the Funds had been applied in accordance with the written instructions of Mr James Xu, SSL’s interest was extinguished by overreaching. The Balance Funds should be returned to SSL: Snell’s Equity, 32nd ed, 25-035; Typhoon 8 Research, at para 19. SSL’s remedy for the disbursed funds would be against Shanghai Cosco for recovery of the loan: Barclays Bank v Quistclose Investment Ltd, pg 581G-582A. Findings 121.Cosco SHG has mis-stated to Orient SHG that the Funds represented monies owed to it by SSL. Applying the criteria for establishing Quistclose trust, I find that Shanghai Cosco, and not SSL, was the purchaser of the MEP equipment under the 5 formal invoices in its own right. SSL was not discharging an obligation to Shanghai Cosco. It had made an advance to Shanghai Cosco when it transferred the Funds to Orient SHG (through Orient HK). 122.The common intention of SSL and Shanghai Cosco was that the Funds were transferred for the Purpose and were not to be at the free disposal of Shanghai Cosco. 123.There was no agreement or understanding between SSL and Orient SHG as pleaded. Orient SHG was Shanghai Cosco’s export agent bound by the Co-Opt Agreement. It held the Funds to the order of Shanghai Cosco. 124.The relationship between Orient SHG and Orient HK was governed by the CCA. 125.Both Orient SHG and Orient HK did not have knowledge of the Purpose at or about the time of the transfer of the Funds and the disbursements. At the latest, when they were served with the statement of claim, they would have acquired knowledge of the Purpose and thus bound by the Quistclose trust. Since Cosco SHG had no right to retain the Funds when the Main Contract was terminated, none of its agents downstream, Orient SHG or Orient HK, could retain them either. 126.Looking at the flowchart, there were back-to-back contracts governing the relationship among SSL, Shanghai Cosco, Orient SHG and/or Orient HK. The situation was one of Orient SHG and Orient HK acting as bare trustees of the Funds, distinguishable from Yew Sang Hong, at paras 11-12, wherethe contracts allocated obligations and risks among those parties. 127.The Quistclose trust would have been overreached by payment in accordance with the Purpose and payment to the 2nd defendant without objection from SSL. Therefore, Orient SHG/ Orient HK should only account to SSL for the Balance Funds. 128.The 2nd defendant, who had no right to receive the US$700,000 and had knowledge of the Purpose through Mr James Xu, ought to return the US$700,000 and costs related to its transfer to SSL. Conclusion 129.I order that there be:
Costs 130.Costs should follow the event and be to SSL. This would include all costs reserved but not the costs of the summons dated 11 November 2013 for amendment to the asoc. I make an order nisi accordingly. 131.SSL has prayed in aid PRC law on agency. With respect, whether an agency relationship existed is a matter of fact and law. I have queried the need for expert evidence at the pre-trial review. Mr Suen has, very sensibly, not insisted on relying on the expert evidence at the trial and I have disregarded such evidence. Therefore, all costs of and occasioned by the adducing of expert evidence should be borne by SSL in any event, to be set off against the costs awarded to it. I make an order nisi accordingly. Other comments 132.The purpose of a witness statement is to set out the facts relevant to a case and not the witness’ own comments, inferences and submissions. Inferences and submissions should be left to counsel who are in a better position to do so. Inclusion of unnecessary materials lengthens a witness statement and leaves the court with the invidious task of having to sift out the winnow from the chaff. Cross-examination just to establish that certain contents in a witness statement were comments, inferences and submissions is equally unnecessary. There could have been an application to strike out those contents at, say, the PTR or earlier. The legal representatives of both parties ought to bear this in mind. 133.I thank Mr Suen and Mr Wou for their thorough preparation and assistance to the court.
Mr Jenkin Suen, instructed by Haldanes, for the plaintiff Mr Jean-Paul Wou, instructed by Deacons, for the 1st defendant The 2nd defendant was not represented and did not appear | |||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under HCA 479/2010