Introduction

In the case of UPS Parcel Delivery Service Limited v Huaqi Import & Export Co., Limited and Others [2022] HKCU 4663, the Court of First Instance (the “Court”) considered the liability of more “remote” layers recipients of fraud proceeds arising from an email fraud. The Court recognized that there are situations where although the parties have not dealt directly with one another, the defendant has nevertheless received a benefit from the claimant, and the claimant has incurred a loss through the provision of that benefit.

Background

This case concerns an email fraud whereby the Plaintiff alleges that the first Defendant (“D1”) was the first layer recipient of a sum of US$1,575,000 whereas the second, third and fourth Defendants (“D2”, “D3” and “D4” respectively) were the second layer recipients of the sums of US$500,000, US$750,000 and US$250,000 respectively. Final Judgment was granted by the Court against D1. D2 and D3 never appeared in the proceedings.

The Plaintiff’s case

Pursuant to an Aircraft Charter Agreement entered into between UPS Worldwide Forwarding, Inc. (“UPS Worldwide”) and Western Global Airlines (“WGA”) dated 18 March 2020, UPS Worldwide was obliged to pay WGA the sum of US$1,575,000 (the “Sum”).

Per the request made in a number of fraudulent emails, the Plaintiff transferred the Sum to D1 on 25 March 2020 believing that the payment request was issued for and on behalf of WGA.

Over 26 March 2020 to 2 April 2020, D1 transferred US$1.5 million out of the Sum to D2, D3 and D4 as the “second layer” recipients of the Sum.

Unjust enrichment of D2 and D3

Citing Investment Trust Companies v Revenue & Customs Commissioners [2018] AC 275, the Court recognized that there may be situations where, while the parties have not dealt directly with one another, or with one another’s property, the defendant has nevertheless received a benefit from the claimant, and the claimant has incurred a loss through the provision of that benefit. One such situation is where an intervening transaction is found to be a sham. Since the sham is created precisely in order to conceal the connection between the claimant and the defendant, it is disregarded when deciding whether the latter was enriched at the former’s expense.

There Court also recognized that there were cases in which a set of co-ordinated transactions has been treated as forming a single scheme or transaction for the purpose of the ‘at the expense of’ inquiry, on the basis that to consider each individual transaction separately would be unrealistic.

In this case, given that the transfer between the Plaintiff and D1 on one hand and the transfers between D1 and D2 / D3 are closely related in time and that the pattern and coordination in the subsequent transfers clearly demonstrate that there was a systematic and orchestrated attempt to dissipate the money received by D1, the Court held that the situation is equivalent to a direct payment to D2 and D3, who had therefore been unjustly enriched. 

D4’s Defence

D4 allegedly engages in the business of sourcing and selling frozen meat and seafood throughout South East Asia. It admitted that it had received two sums of US$125,000 each on around 31 March 2020 and 1 April 2020 respectively (in the total sum of US$250,000) (the “D4 Sum”). D4 however argued that the D4 Sum was sale proceeds received from a client Polenectar (“Polenectar”) for sale of frozen pork. D4 and Polenectar did enter into a sale and purchase agreement (the “Polenectar SPA”), and D4 did deliver some frozen pork to Polenectar accordingly.

D4’s sole shareholder and director Mr. Zheng Min (“Zheng”) claimed that he did not have any knowledge or means to know about the alleged fraud nor did they had any previous dealings/business relationship with the Plaintiff or any of the other defendants.

The main factual issue for the Court to rule on D4’s defence is whether the two payments of USD125,000 were related to the alleged transaction with Polenectar. 

D4’s Evidence

For the purpose of proving its defence, D4 only called a manager Mr. Cheung Kim Hung (“Cheung”) as its witness. Cheung assists Zheng to oversee D4’s operation. Cheung gave, among others, the following evidence:

1.       Zheng assigned Cheung to give evidence because (i) Cheung is stationed in Hong Kong and (ii) Cheung had a good understanding of D4’s business by way of reading the company’s WeChat group messages;

2.       All sale and purchase contracts were signed by Zheng on behalf of D4;

3.       Zheng had never shown Cheung any record of communication between Zheng and Polenectar;

4.       After receiving the two payments totaling the D4 Sum, D4 did not receive any further payment from Polenectar even though approximately 40% of the total quantity of frozen pork ordered under the Polenectar SPA had been delivered. Zheng told Cheung that he did follow up the matter but Polenectar did not give any constructive reply; and

5.       Zheng told Cheung that D4 did not have any business relationship with D1, D2 and D3.

 

The Court considered that a lot of crucial evidence of Cheung were hearsay evidence. While hearsay evidence is admissible pursuant to section 47(1)(a) and (b) of the Evidence Ordinance, the Court went on to consider the weight to be attached to hearsay evidence in this case:

1.       It would have been reasonable and practicable for D4 to call Zheng as a witness;

2.       The only reasons which Cheung gave as to why Zheng did not come forward to give evidence (as mentioned above) were not good reasons at all;

3.       Since Zheng was the person responsible for the alleged transaction with Polenectar and he was allegedly the one who confirmed with Polenectar about the payments of the D4 Sum, it was reasonable to expect that he would explain these matters in Court.

 

In the light of the above circumstances, the Court in citing Tullett & Tokyo International Securities Ltd v APC Securities Co. Ltd. [2001] 2 HKLRD 356, decided that no weight should be attached to Cheung’s evidence. The Court also ruled that D4’s failure to produce Zheng as a witness and to disclose any internal WeChat group chat communication records to show what its staff had discussed about the follow-up work in relation to the Polenectar SPA after the alleged payments made by Polenectar or about any other discussion in relation to the Polenectar SPA was “extremely suspicious”.

Takeaway

Once a fraud victim has successfully established that some funds have been paid to a recipient, the burden of proof will then shift to the recipient to show that he has good reasons to receive such funds. Should D4 have called Zheng as a witness and successfully convinced the Court that the D4 Sum represented genuine proceeds of sale of frozen pork (and hence there was no “unjust enrichment”), D4 might be able to retain the D4 Sum.

 

 

 

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2022