SANCTUARY SYSTEMS LTD v. ORIENT INTERNATIONAL HOLDINGS HONG KONG CO LTD AND ANOTHER

HCA 479/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 479 OF 2010

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DECISION

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1.  This is a summons of the plaintiff (“SSL”) for an order that the defendants do bear its costs in Norwich Pharmacal proceedings (“NP costs”).

BACKGROUND

2.  In HCMP No. 1674 of 2009 (“the NP Action”), SSL and its holding company (“PPL”) (collectively “Ps”) obtained, in 2009 and 2010, 3 Norwich Pharmacal Orders (“the NP Orders”) against banks, with corresponding Gagging Orders.  In the following analyses, when I refer to an NP Order, it shall include the corresponding Gagging Order.

3.  In gist, at the initial stage of the NP Action, Ps suspected one Mr Constanzo and a Mr Wong[1] of serious misconduct resulting in damages suffered by Ps.  Ps intended to commence proceedings in Jamaica against Mr Constanzo, his wife, Mr Wong and a company, based on breach of fiduciary duties, fraudulent misrepresentation, breach of contractual and breach of common law duties of care towards Ps.

4.  The 1^st NP Order was sought to enable Ps to ascertain the true identity of Mr Wong and entities controlled by him, and to trace the improper personal gains they obtained as a result of wrongdoing against Ps.  Information obtained pursuant to the 1^st NP Order identified D2 as recipient of monies.  Other entities had also been receiving various sums of money from Cossco Construction Development Co Ltd (“CosscoDevelopment”) and D2 in the present action.

5.  The 2^nd NP Order sought documents on bank accounts of Cossco Development and D2 for the purpose of obtaining details of payments made and received by those two companies, and to ascertain the extent of their involvement in the wrongdoings.

6.  The 3^rd NP Order was sought for the purpose of obtaining more information about other potential wrongdoers, in particular, documents of bank accounts relating to directors and/or shareholders of Cossco Development (including one James Xu) and/or D2.

7.  On 1 April 2010, SSL instituted the present action against the defendants, alleging that they held US$1.32m (“the Funds”) on behalf of SSL pursuant to a Quistclose trust.

8.  The 1^st defendant (“Orient HK”) filed a witness statement of James Xu who alleged, amongst others, that (a) Ps failed to make due payments for the Palmrya Project and (b) that US$700,000 of the Funds had been used to make payments for the Project.

9.  On 29 May 2012, Ps obtained the permission of Reyes J in the NP Action to use documents obtained as a result of the 2^nd and 3^rd NP Orders in the present action (“the Leave Order”).  The purpose was to rebut James Xu’s allegations in the preceding paragraph.

10.  The Quistclose trust was found to be established after trial. Orient HK was ordered to return what was left in its hands (about 30% of the Funds) to SSL and the rest of the 70% remained the sole liability of D2.  See the judgment dated 14 February 2014 (“the judgment”).

11.  SSL seeks NP costs against the defendants in the present action.  The objections of Orient HK can be classified under 3 heads:

A.   No entitlement to recover NP costs;

B.   Improper procedure used; and

C.   Extent of recovery of NP costs objectionable.

12.  D2 has been served but failed to answer SSL’s summons.  All 3 grounds equally apply to D2. 

GROUNDS IN OBJECTION

A.  No entitlement to recover NP costs

13.  Norwich Pharmacal proceedings are often used to discover the identities of wrong doers and to investigate the flow of funds.  In A Co v B Co [2002] 3 HKLRD 111, at 116F-118C, Ma J (as he then was) stated that:

“The jurisdiction is a wide one. It is not restricted, as was at one time thought, to the disclosure of the names of wrongdoers only. In particular, where a plaintiff wishes to investigate the passage of monies in and out of bank accounts in aid of a tracing claim, discovery can be ordered of a bank’s books and documents …”

14.  The general principles on costs relating to Norwich Pharmacal orders have been stated in Totalise plc v The Motley Fool Ltd and anor [2001] EWCA Civ 1897, Aldous LJ, at §§29-30.

“29. … Norwich Pharmacal applications are not ordinary adversarial proceedings, where the general rule is that the unsuccessful party pays the costs of the successful party… In general, the costs incurred should be recovered from the wrongdoer than from an innocent party …

30. … In a normal case the applicant should be ordered to pay the costs of the party making the disclosure including the costs of making the disclosure.”

15.  Mr Wou, counsel for Orient HK, submits that given the terms of the Leave Order, the 1^st NP Order and the 2^nd and 3^rd Gagging Orders have no place in this action.  Further, there was no order as to costs in the 2nd and 3rd NP Orders.  Orient HK was not even a party to the NP Action.

16.  Lunn J (as he then was) did give leave to Ps to use documents discovered through the 1^st NP Order against any person. Accordingly, if it can be shown that documents obtained pursuant to the 1^st NP Order were used in the present action, SSL will be entitled, in principle, to seek costs against the defendants.  The Gagging Orders were accompanying orders necessary to protect SSL’s interests and to ensure that the objects of the NP Orders were not undermined.  They should accordingly be treated in the same way as the NP Orders.

17.  Further, given the principles in the Totalise case, it mattered not that the NP Orders did not reserve costs or that Orient HK was not named as a party to the NP Action.

18.  Ground A is not substantiated.

B.  Improper procedure used

19.  Mr Wou submits that the court should not make an order awarding costs against Orient HK who was not a party to the NP Action unless the court is satisfied that it is in the interests of justice to do so: section 52A(2) of the High Court Ordinance, Cap 4.  In addition, Orient HK must be joined as a party to the NP Action for the purpose of costs only: Order 62, rule 6A(1) of the Rules of the High Court.

20.  With respect to Mr Wou, I see no impropriety for SSL to seek an order for costs of the NP Action in the present action.  It is the trial judge who is in the best position to decide whether the documents discovered as a result of the NP Action (“the NP documents”) were relevant to the present action. I do not see the need for SSL to join Orient HK in the NP Action or to use separate proceedings to prove the costs incurred in the NP Action as “damages”. Ground B is not substantiated.

C.  Extent of recovery of costs of NP Action objectionable

C1.  Claim against Orient HK

21.  In deciding on the extent of liability of Orient HK for NP costs, I have taken into account the following factors:

22.  Firstly, it must always be remembered that costs (including NP costs) are always in the discretion of the court, to be exercised in accordance with proper notions of fairness and justice.  The applicant should put forth evidence to assist the court in deciding the liability and quantum of NP costs for which a defendant should be liable.

23.  Secondly, it has to be shown that the NP documents were relevant to one or more of the issues in the action of which the plaintiff was successful against a defendant.

24.  Only documents under the 2^nd and 3^rd NP Orders were used against Orient HK.  Mr Wou contends that those documents were not relevant or material to the finding of liability against Orient HK.  He pointed out that this court only referred to one document amongst the NP documents (paragraph 114 of the judgment).  This court also referred to the annual return of a company which was a public document that could be downloaded from the Companies Registry website at a nominal fee. 

25.  I do not agree.  It was Orient HK’s witness who made the allegations that required rebuttal evidence to show the purpose and destination of the Funds.  The fact that James Xu did not turn up at the trial could not be in the contemplation of SSL.  Had he turned up, he would have been cross-examined on the NP document.   I find relevance to be established.

26.  Thirdly, by its nature, Norwich Pharmacal proceedings are to assist a plaintiff to ascertain the identity of wrongdoers.  The fact that a defendant eventually held to be liable to the plaintiff was not identified as a wrongdoer in the Norwich Pharmacal proceedings should not be a bar to an order for NP costs against the defendant.  However, the failure to identify him there should alert the court to make enquiries as to the causation between the NP Action and the subsequent action against him.

27.  Here, it was 2 years after the present action was instituted that SSL sought the Leave Order.  On SSL’s own case, the need to use the NP documents against Orient HK was “responsive”, ie to answer James Xu’s allegations, quite unlike the usual situation where a plaintiff seeks a Norwich Pharmacal order to properly start an action (eg against D2).  I have doubts on the question of causation.

28.  Mr Suen, counsel for the plaintiff, submits that Orient HK was found to be “inextricably linked in the overall fraudulent scheme”.  That, with respect, was a misstatement.  Orient HK was never sued for fraud.  In particular, it was not found to be at fault in receiving the Funds or disbursing 70% of them.

29.  Fourthly, where there was only one wrongdoer identified in the Norwich Pharmacal application and he was sued with judgment against him, he should normally bear the NP costs.  But where there were multiple alleged wrongdoers with different degrees of involvement and culpability, and whose liabilities may not be joint and several, there is a need to avoid double recovery by the plaintiff and apportion costs amongst the wrongdoers.  For this purpose, the plaintiff needs to justify why he seeks full NP costs against only one defendant or a limited number of defendants.

30.  The NP Orders sought were wide-ranging in terms of the information sought, the wrongdoers involved and the amount involved was way beyond the amount claimed against the defendants. The added complication was that SSL launched proceedings in different jurisdictions:

(a)   Against, amongst others, Mr Constanzo and Mr Wong in Jamaica. 

(b)   Against one Mr Hua in HCA 242/2010, wherein SSL had obtained leave from the court in the NP Action to use NP documents.  The case against Mr Hua was settled. 

(c)   A criminal complaint in the Mainland against “Cosco entities” and their directors, for which SSL obtained permission from Reyes J to use the NP documents.  The complaint was not successful because the Mainland authorities considered that they had no jurisdiction.

31.  Mr Constanzo, Mr Wong, Mr Hua and the Cosco entities were some of the wrongdoers identified in the NP Action or pursuant to the NP Orders.  There had been related proceedings (paragraph 14 of the judgment).  However, SSL was completely silent as to whether NP costs were sought in any of them; if not, why not; who else was sued and whether or not the NP documents were used against them.

32.  To ask Orient HK to bear all costs of the NP Action is wholly unjust and oppressive but it is impossible for the court to apportion costs.  SSL has not even assured the court that there would not be double recovery.  In any case, SSL could not be trusted even if it had, for it had concealed, at the trial, the fact that it had recovered part of the US$700,000 claimed from its own wittness (paragraph 23 of the judgment).

33.  Fifthly, even in the same action with more than one wrongdoer, the court may have to apportion the NP costs to do justice between the parties.

34.  Mr Suen submits that there should be no difference in treatment between the 2 defendants since they were found to be wrongdoers in very similar circumstances in the action. 

35.  I disagree.  Whilst NP documents were relevant to the present action, the 2 defendants were found liable for different amounts owing to different issues.  Mr Wou points out that the judgment had referred to one document which caused a finding to be made against D2, not Orient HK (paragraphs 114 and 128 of the judgment).  Accordingly, there should be difference in treatment of costs between Orient HK and D2.

36.  Sixthly, notwithstanding an authority to the contrary, I am of the view that it is not necessary to establish that a wrongdoer ought to foresee that steps by way of investigation and discovery are likely to result from their wrongs  against the plaintiff. 

37.  The “foreseeability test” was referred to in Morton-Norwich Products Inc and ors v Intercen Ltd (No.2) [1981] FSR 337. There, the plaintiffs took prior “discovery action” which identified the defendant as tortfeasors. They sought costs of the discovery action as “damages” in an action on concealed fraud.  Graham J held (at pp 349-350) that the defendants (infringers of patents) or reasonable people in their position should have realized that the expense of investigation and discovery of the full facts was highly likely to result from the commission of their torts.  It would justify the court in holding that the costs of the discovery action would be recoverable and would satisfy the test of remoteness not only in an action for tort but also in one for breach of contract.  It was a loss which should have been in the contemplation of the defendants and was foreseeable in the relevant sense.  See also Hong Kong Civil Procedure 2015, Vol 1, para 24/2/1, relied on by Mr Wou.

38.  For myself, I have some reservation as to whether the foreseeability test is necessary.  Norwich Pharmacal applications are well-established practice in civil litigation.  The exercise may end up identifying eg an unexpected wrongdoer like D2 or an innocent recipient of funds like Orient HK. Whether such type of defendants should be liable for costs of the NP Action could not depend on their foresight as depicted by Graham J. 

39.  If I have to make a finding, I agree with Mr Wou that there could be no suggestion that Orient HK could or ought to foresee the NP Action taken by SSL. Orient HK had no direct contract with SSL.  It did not even know that it was holding money on Quistclose trust for SSL until service of the statement of claim.  However, it is not necessary to decide the validity of the foreseeability test as it is sufficient for me to rely on the other 6 factors under section C.

40.  Seventhly, the plaintiff who obtained a Norwich Pharmacal order is equally bound by the implied undertaking as to confidentiality in discovery unless he obtains the court’s permission to use the documents in other proceedings.  His costs in seeking such permission are recoverable from the relevant wrongdoer. 

41.  In summary, Orient HK should not be liable for the costs in relation to the 1^st NP Order anyway as those documents were not used against Orient HK.  Taking all circumstances into account, I hold that Orient HK is only liable for SSL’s costs of applying for the Leave Order.  Having regard to my decision dated 15 June 2015 (varying the costs order nisi), Orient HK shall bear only 30% of such costs.

C2.  Claim against D2

42.  D2 was identified as a wrongdoer pursuant to discovery under the 1^st NP Order.  The 2^nd and 3^rd NP Orders related to D2.  The Leave Order also applied to D2.

43.  As a matter of principle, D2 should be liable for the costs of seeking the 3 NP Orders but my comments in paragraphs 29-32 apply equally to D2. There is nothing on which this court can rely to fix liability for even a percentage of SSL’s costs.  I grant nominal costs to SSL at 20% of the NP costs for applications for the 1^st, 2^nd and 3^rd NP Orders.

44.  As regards the costs for the Leave Order, D2 should bear all the costs, of which 30% is joint and several with Orient HK.

COSTS

45.  In principle, costs of the summons follow the event and should be borne by the defendants.  However, I consider SSL’s application to be oppressive and opportunistic in expecting the full costs of the NP Action to be borne by the defendants.  Orient HK has been successful in knocking down the bulk of the NP costs.  Had SSL taken a more realistic and proportionate view of the whole circumstances, much of the costs and time of this summons could be saved.  I therefore make an order that there be no order as to costs as between SSL and Orient HK.  As for D2, it should bear 80% of SSL’s costs of this summons.

CONCLUSION

46.  I order as follows:

(1)   A nominal 20% of the NP costs for seeking the 3 NP Orders shall be borne by the 2^nd defendant.

(2)   30% of the costs of the plaintiff in seeking leave before Reyes J on 29 May 2012 in HCMP 1674 of 2009 shall be borne by the defendants jointly and severally and the rest solely by the 2^nd defendant.  Such costs shall be taxed if not agreed.

(3)   On a nisi basis, there be no order as to costs as between SSL and Orient HK for this summons. 

(4)   On a nisi basis, 80% of SSL’s costs of this summons shall be borne by the 2^nd defendant to be taxed if not agreed.

47.  I thank counsel for their assistance.

HCA 479/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 479 OF 2010

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J U D G M E N T

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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.

“There is surely no difficulty in recognizing the co-existence in one transaction of legal and equitable rights and remedies: when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose …: when the purpose has been carried out (i.e., the debt paid) the lender has his remedy against the borrower in debt: if the primary purpose cannot be carried out, the question arises if a secondary purpose (i.e., repayment to the lender) has been agreed, expressly or by implication: if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor’s assets) then there is the appropriate remedy for recovery of a loan.” (at pages 581G-582A)

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:

“18. Where a loan is made to a borrower for a specific purpose and the borrower is not free to apply the money for any other purpose, that arrangement gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce. See Quistclose Investments Ltd v Rolls Razor Ltd (in voluntary liquidation) [1970] AC 567. The nature of a Quistclose trust was the subject of detailed analysis by the House of Lords in the recent decision of Twinsectra Ltd v Yardley[2002] 2 WLR 802. For such a trust to arise, a settlor must possess the necessary intention to create the trust but his subjective intentions are irrelevant. If he entered into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them. …

19. Where a Quistclose trust arises, the money remains the property of the lender unless and until it is applied in accordance with his directions and insofar as it is not so applied, must be returned to him. The money is not at the free disposal of the borrower. …

It would appear that the duty to keep the money separate is an incident of a Quistclose trust should one arise from the circumstances rather than a pre-condition for the existence of such a trust. It is implicit from Lord Millett’s observations that he rejected the submission (at [70]) that ‘there must be something more, for example, a requirement that the money be paid into a segregated account’ before it is appropriate to infer that a trust had been created.”

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:

“73 A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A lender will often inquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but this is not enough to create a trust; once lent the money is at the free disposal of the borrower. Similarly payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cashflow. Commercial life would be impossible if this were not the case.

74 The question in every case is whether the parties intended the money to be at the free disposal of the recipient: In re Goldcorp Exchange Ltd [1995] 1 AC 74, 100 per Lord Mustill. His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose …”

…

76 ... Equity’s intervention is more principled than this. It is unconscionable for a man to obtain money on terms as to its application and then disregard the terms on which he received it. Such conduct goes beyond a mere breach of contract. As North J explained in Gibert v. Conard (1884) 54 LJ Ch 439, 440:

‘it is very well known law that if one person makes a payment to another for a certain purpose, and that person takes the money knowing that it is for that purpose, he must apply it to the purpose for which it was given. He may decline to take it if he likes; but if he chooses to accept the money tendered for a particular purpose, it is his duty, and there is a legal obligation on him, to apply it for that purpose.’

The duty is not contractual but fiduciary. It may exist despite the absence of any contract at all between the parties, as in Rose v. Rose (1986) 7 NSWLR 679; and it binds third parties as in the Quistclose case itself. The duty is fiduciary in character because a person who makes money available on terms that it is to be used for a particular purpose only and not for any other purpose thereby places his trust and confidence in the recipient to ensure that it is properly applied. This is a classic situation in which a fiduciary relationship arises, and since it arises in respect of a specific fund it gives rise to a trust.

...

98 ... The settlor’s motives must not be confused with the purpose of the trust; the frustration of the former does not by itself cause the failure of the latter. But if the borrower is treated as holding the money on a resulting trust for the lender but with power (or in some cases a duty) to carry out the lender’s revocable mandate, and the lender’s object in giving the mandate is frustrated, he is entitled to revoke the mandate and demand the return of money which never ceased to be his beneficially.

99 … There is clearly a wide range of situations in which the parties enter into a commercial arrangement which permits one party to have a limited use of the other’s money for a stated purpose, is not free to apply it for any other purpose, and must return it if for any reason the purpose cannot be carried out. …”

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 1^st 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 2^nd 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 2^nd 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 (“the1^st and 2^nd 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 2^nd 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 2^nd 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:

A. whether there was an advance by SSL to Shanghai Cosco;

B. whether the advance was for a specific purpose that was not intended to be at the free disposal of the borrower?

C. whether Orient SHG knew the purpose;

D. whether Orient HK knew the purpose ; and

E. whether the 2^nd defendant knew the purpose?

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 1^st 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 2^nd witness statement was mostly repetitive of the 1^st (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-1^st/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 2^nd 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 1^st 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:

“[Mr Constanzo], Cosco/James need a small favor from you.

Regarding the $1.32 mil you recently paid Orient International Holding for the MEP materials, because originally SSL didn’t sign a purchasing agreement with them and there was only the deal between COSCO and them to to (sic) the purchasing, according to their policy they need you to send them an (sic) simple email to state the purpose of this payment, so as to release the money from the HK account to their Shanghai company for related purchasing. As you were the one who signed the main Contract with COSCO, it is better that you send them this email, with the contents as follows, Plrease (sic) send me the draft first: (emphasis added)

[There then followed a draft email to one Miss Zou/Orient International Holdings Shanghai Foreign Trade Co.Ltd. ([email protected]) to be issued by Constanzo]”

52.  Later on the same day, Johnnie Wong sent a further email to Mr Constanzo in the following terms:

“I guess James/Cosco probably just want to make sure all the MEP purchase will go to the selected manufactures according to Cosco's (his) instruction to Oriental International before. And because they/Cosco is not the one wire the money to them …, so he just want you to help to put emphasis on it for them. It’s your decision that you want to consult with Larry [Pickell] or not. But they ask you to send the email by 7:00 pm today (your time) if you could. I know they are having a working meeting tomorrow (my time) …”

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:

“The USD$1.32 million our company, Sanctuary Systems Limited (The Palmyra Resort & Spa), wired you recently should be disbursed specifically for purchasing equipment and materials for the Palmyra Resort & Spa project. Please carry out the disbursements according to the written instructions from COSCO’s project manager, Mr. Xu Jianjun (James Xu) and in accordance with the attached.”

54.  Mr Constanzo sent the Constanzo Letter only to Johnnie Wong by email with this remark.

“Attached please find your request … I have not emailed this to anyone else such that you can forward it.”

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:

“With reference to the email concerning US$1.32 Million Wire Sent To You from Sanctuary Systems Limited dated June 23,2009, and a letter sent by Xu Jianjun (James Xu) who asked to wire transfer USD700,000.00 to their Hongkong account respectively.

We hereby confirm that our company in Hong Kong has already received USD1.32 Million.  Please confirm that you agree to release payment USD700,000.00, which is one of the said payment USD$1.32 Million, to the Hongkong account Xu Jianjun appointed and agree to release the balance payment $632,000 to our account in Shanghai.”

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”):

Cause	US$
The 2nd defendant	700,000.00
Handling fee charged by Orient SHG and Orient HK approved by Shanghai Cosco	52,800.00
Transport cost for lifts and various charges	4,150.00
Temporary controllers and accessories	26,076.00
Deposit to Shanghai Fengling (RMB 0.9m)	132,322.54
Bank charges	79.78
Commission to Orient HK	39,600.00
Commission to Orient SHG	13,200.00

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:

(a) By SSL with the suppliers through Shanghai Cosco as SSL’s agent and, in turn, with Orient SHG as export agent of Shanghai Cosco: paragraph 5 of the amended statement of claim (“asoc”); or

(b) By Shanghai Cosco in its own right as purchaser, through Orient SHG as its export agent: para 7 of the asoc.

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 2^nd 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:

(i) All of SSL’s witnesses confirmed that under the Main Contract, Shanghai Cosco was to deliver the Project on a turnkey basis for a fixed sum of US$92.5m, to cover, among others, labour, materials, equipment and services: Arts.1.1.3, 1.1.4 and 3.4 of the Main Contract.

(ii) Shanghai Cosco breached the 1^st Amendment to the Main Contract (see letter dated 10 October 2008 from Mr Pickell to Shanghai Cosco), which led to the 2^nd Amendment.

(iii) Under clause 2.8d of the 2^nd Amendment, Shanghai Cosco shall provide SSL with all the information regarding the intended purchase by Shanghai Cosco of the balance of the necessary equipment to complete the works.  If Shanghai Cosco were to make purchases according to its submitted purchase plans, Shanghai Cosco shall provide invoices and related documents to SSL within 5 days of purchasing in accordance with mutually agreed standards.

(iv) Under clause 2.9 of the 2^nd Amendment, Shanghai Cosco agreed to allow SSL to make direct payment to Shanghai Cosco’s suppliers for any liabilities incurred by Shanghai Cosco as a result of its performance of the project works, which payments remain unpaid 5 days after payment was due and demanded of Shanghai Cosco by such suppliers.

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:

(i) According to Ms Sherry Zou, apart from Orient SHG being the seller, everything in the Pro Forma Invoices could be changed, and the name of the buyer, the owner, terms of payment and specifications had actually been changed.  Even Mr Trotta said, under cross-examination, that the terms of payment did not bind SSL who had not signed on the Pro Forma Invoices. 

(ii) In the formal invoices, Shanghai Cosco and Orient SHG were the only parties, with SSL named as the “owner”. 

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:

(i) Having Ms Sherry Zou’s email address;

(ii) Being invited by Mr Johnnie Wong to do so; and

(iii) Mr Constanzo was the only person to whom Lawyer Zeng’s email was addressed and Lawyer Zeng specifically told SSL that it did not sign a purchasing agreement with Orient SHG.

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 2^ND DEFENDANT KNEW THE PURPOSE

113.  The payment to the 2^nd defendant clearly fell outside the Purpose. The 2^nd 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 2^nd defendant because:

(i) The 2^nd defendant was Cosco SHG’s associate;

(ii) The 2^nd defendant was nominated by Shanghai Cosco to act as its agent to receive US$700,000 out of the Funds; 

(iii) It was to be “inferred” that Orient SHG would have communicated the terms of the agreement, the Invoices and/or the Purpose to the 2^nd defendant; and

(iv) In addition, SSL relies on the fact that the General Manager of Shanghai Cosco (Mr Chen Shi Chun) was a common shareholder of Shanghai Cosco (as to 38%) and the 2^nd defendant (as to 51%).  He was also a director of the 2^nd defendant. 

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 2^nd defendant of which he owned 51%.  The 2^nd defendant must have knowledge of the Purpose through Mr James Xu and would have known that the 2^nd 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 2^nd 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, 32^nd 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 2^nd defendant without objection from SSL.  Therefore, Orient SHG/ Orient HK should only account to SSL for the Balance Funds.

128.  The 2^nd 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:

(1) A declaration that the Balance Funds of US$404,578.68 are held by the 1^st defendant on a Quistclose trust in favour of the plaintiff;

(2) An order of full account by the 1^st defendant of the Balance Funds and payment of the amount found due to the plaintiff;

(3) An order of full account by the 2^nd defendant in respect of US$700,000 paid to it out of the Fundsand costs related to the transfer to it; and payment of the amount found due to the plaintiff;

(4) Damages for breach of the Quistclose trust and/or the fiduciary duties; and

(5) Interest at judgment rate from 1 April 2010 (date of writ) to the date of payment.

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.

(Queeny Au-Yeung) Judge of the Court of First Instance High Court

HCA 479/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 479 OF 2010

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R U L I N G

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1.  The first amendment concerns paragraph 9. The opening words of paragraph 9 refer to the 1st defendant knowing or had notice that the funds were paid by the plaintiff to it pursuant to the Purpose. It is a case based on actual notice.

2.  The proposed amendment is premised on the averment that D1 “should have made reasonable enquires with Orient Shanghai and upon which became aware of” certain matters.  This is not a situation of actual notice.  It is not clear from the newly pleaded case how D1 should have that duty to make reasonable enquiries.

3.  The second proposed amendment arose after D1 has filed the opening submission.  It is a new cause of action based on restitution.  There is no reason put forward by the plaintiff for the delay in making this proposed amendment, notwithstanding that the plaintiff has had prior opportunities to do so. 

4.  The fact is that Mr Wou has not pointed to any aspect of facts which he needs to plead to his defence.  Even so, it is inappropriate to say in haste that there is absolutely no need for D1 to plead facts in reply and the whole thing is only a matter of law.

5.  The trial has started and the first witness is due to be called.  It distracts defence counsel’s attention from proper management of his case if he is required to consider what further amendments are required to meet a case that he has not prepared to meet today.  One of the plaintiff’s witnesses has to leave latest by the end of tomorrow.  I do not consider it fair to any party for defence counsel to start cross-examination today and put forth his amended case only some time later in the course of the trial.

6.  On top of all this, the second amendment, in particular, concerning restitution, covers the position of D2 as well, but D2 is absent today and does not have prior notice of these amendments. 

7.  Considering all the circumstances, I am of the view that the application for amendment should not be allowed and I dismiss the summons.

Mr Jenkin Suen, instructed by Haldanes, for the plaintiff

Mr Jean-Paul Wou, instructed by Deacons, for the 1^st defendant

The 2^nd defendant was not represented and did not appear

HCA 479/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 479 OF 2010

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BETWEEN

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D E C I S I O N

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Introduction

1.  This is the 1^st defendant’s third application for security for costs.

2.  Pursuant to 2 orders of Masters, the plaintiff has paid 2 sums totaling HK$1,570,000 into court as security for the 1^st defendant’s costs up to and including the completion of trial (due to start on 12 November 2013). The 1^st defendant now seeks further security in the sum of HK$1,653,400 (or its latest written offer of HK$1,200,000). 

3.  The plaintiff does not dispute liability to give security but has made 2 open offers in the sum of $430,000 and $500,000 respectively.  They were not accepted by the 1^st defendant.

Change of circumstances

4.  This court does have jurisdiction to make a further order for security despite the fact that the previous order was said to cover the completion of trial.  The court will look for, among others, any change of circumstances since the last order for security has been made.

5.  I accept that there has been material change of circumstances in the 19 months since the last order for security made by Master Kwang on 28 November 2011.  The change came as a result of an order on 28 May 2012, on the plaintiff’s application, granting leave to adduce expert evidence on Mainland law.  Pursuant to this order, 3 more factual witnesses are to be called and 8 witness statements or supplemental witness statements are adduced.  There was substantial increase in the amount of work done for this litigation.   The length of trial was increased from 8 to 10 days (ie by 25%).  I accept that there is cause for increasing the quantum of security.

Quantum of further security

6.  The 2^nd additional skeleton bill of costs of the 1^st defendant in fact includes the estimates of costs placed before Master Kwang.  That is an incorrect approach.  As the learned Master has already exercised his discretion based on those prior estimates, it is not for me to revisit those estimates in the present application.  Accordingly I will only take into account the additional costs arising since Master Kwang’s order.

7.  The bulk of the latest bill concerns the fees of senior counsel.  Master Kwang has expressed his view that this case did not warrant the engagement of senior counsel, but of course if there is justification at this stage I can depart from his view in the present application. 

8.  Mr Wou for the 1^st defendant submits that the expert evidence justifies the engagement of senior counsel.  Without disrespect, notwithstanding that the parties have introduced expert evidence pursuant to a master’s order, the pleadings as they stand do not disclose any issue that requires expert evidence.  Even if (as Mr Suen, counsel for the plaintiff, has indicated) the pleadings are to be amended along the lines of the expert evidence already adduced, I can hardly see how the issue disclosed in the expert reports justifies senior counsel to be engaged.  (I say this without prejudice to the grant of certificate for 2 counsel after trial, if a party can justify it then.)

9.  Further, the expert reports only referred to a few articles in the Mainland legislation, eg in the PRC Civil Code, Contract Law, Foreign Trading Law.  The rest of the reports was the experts’ application of those articles to the facts of the case (effectively submission which counsel should be responsible for).  It may thus not even justify cross-examination of the expert witnesses.

10.  I cannot see any justification for allowing for costs of senior counsel.  I do note, however, that the order for expert evidence came as a result of the plaintiff’s application, which was opposed by the 1^st defendant. Accordingly, the 1^st defendant should not be prejudiced in terms of its application for security for costs.

11.  The change in circumstances in this case would not have justified imposing a further security order that is 105% (or 76% by the latest offer) of the amount already paid in as security.  What the court should order the plaintiff to pay is reasonable security and not indemnity for costs.

12.  Taking all circumstances into account, I order that the plaintiff do provide security in the sum of $430,000 to the 1^st defendant by way of payment into court within 21 days failing which all further proceedings be stayed.  This will bring the total amount of security up to $2,000,000. Whether in itself or looked at in totality, the further security appeared to be reasonable.

Costs

13.  Despite having erred in its approach to quantum, I have no doubt that the 1^st defendant has taken out this application in good faith.  The parties have also, in my view, genuinely entered into discussion as to the quantum of further security.  The affirmations generated by this application are reasonable.  The plaintiff has offered to pay $430,000 into court as early as 16 May 2013.  If accepted, that would have disposed of the matter at the call-over hearing.

14.  The costs claimed by the plaintiff are reasonable.  I make an order nisi that the plaintiff shall have the costs of this application, including costs reserved on 29 May 2013, summarily assessed in the sum of $35,000.

15.  I thank counsel and Mr Leung for their assistance.