Earlier this year, in Universal Capital Bank v Hong Kong Heya Co Ltd,(1) the High Court of Hong Kong confirmed that the 'fraud exception' to the jurisdiction to order summary judgment applied where the plaintiff's claim raised an allegation of dishonesty against the defendant. If the plaintiff's claim did not raise an allegation of dishonesty against the defendant, the fraud exception did not apply as against that defendant. In the recent case of Arrow ECS Norway AS v M Yang Trading Ltd,(2) the court appears to have recognised the difficulty that victims of email scams face in applying for summary judgment – its decision is an endorsement of the attempt in Universal Capital to limit the otherwise wide ambit of the fraud exception.
In Arrow ECS Norway unknown fraudsters siphoned off significant amounts of cash from the plaintiff's bank account by successfully impersonating executives within the plaintiff group of companies. A portion of the cash was somehow transferred to the defendant's bank account in Hong Kong. The plaintiff obtained an ex parte order freezing the defendant's bank account, the terms of which were continued by the court following an inter partes hearing. The plaintiff was careful to frame its claim based on the defendant's alleged unjust enrichment – namely, there was no legitimate reason for the defendant to have received the funds that it allegedly did as a result of the fraudsters' scam.
The plaintiff applied for summary judgment (ie, judgment without a full trial) against the defendant. The first hearing was scheduled for 30 minutes on September 22 2016. The defendant gave no indication as to whether it intended to challenge the plaintiff's application until two days before the first hearing, when the defendant's solicitors wrote to the plaintiff's solicitors requesting time to file evidence in opposition.
At the first hearing, the defendant's solicitors asked the court to adjourn the plaintiff's application on the basis that the defendant needed further time to file evidence in opposition. The defendant asked the court to treat the first hearing as (in effect) a 'call-over' hearing, when directions are usually given by the court. However, the defendant was unable to articulate the precise grounds on which it intended to oppose the plaintiff's application – therefore attracting some criticism from the court.
Ultimately, the court gave directions for the parties to file further evidence for the substantive hearing. However, interestingly, the court (of its own volition) held that the fraud exception was not engaged (applying Universal Capital). The court noted that in its formal pleaded case, the plaintiff had taken great care to avoid making an allegation of dishonesty against the defendant.
In arriving at this conclusion, the court acknowledged that the defendant had not presented its evidence in opposition to the plaintiff's application (for summary judgment); nor had it filed a formal defence. However, the court was of the view that the determination of the court's jurisdiction (and whether the fraud exception applied) was "an exceedingly short point", such that the defendant had more than sufficient time to prepare an argument on this issue before the first hearing. This appears to have been a salutary procedural lesson in itself. In effect, the defendant's inability to indicate a defence at the first hearing contributed to its failure to invoke the fraud exception in respect of the plaintiff's application.
In light of Arrow ECS Norway and Universal Capital, and where the context permits, victims of fraud intending to apply for summary judgment with respect to a particular defendant should be careful to plead their claim without alleging dishonesty against that defendant. This is by no means an easy task, given the wider meaning of the fraud exception to applications for summary judgment.(3) The nature of a defendant's defence and its legal submissions in reply to a plaintiff's application can give the impression that allegations of dishonesty are being made against the defendant – thereby invoking the fraud exception and taking away the court's jurisdiction to order summary judgment.
Importantly, in Arrow ECS Norway the plaintiff's claim was based on the defendant's alleged receipt of the funds and not on an allegation of dishonesty.
The outcome in Arrow ECS Norway is to be welcomed and is eminently fair. It exemplifies a judicial willingness to consider carefully the wide ambit of the fraud exception before deciding whether the court has jurisdiction to order summary judgment and, if so, how to exercise its discretion on the facts. In Arrow ECS Norway, while the court decided that the fraud exception to summary judgment did not apply, the defendant still has a chance to oppose the plaintiff's application on the facts. That said, if it transpires that the defendant has no legal entitlement to the funds that it allegedly received, the plaintiff should be entitled to judgment – it may transpire that the defendant has done little more than postpone the inevitable.
In a procedural context, Arrow ECS Norway also serves as a useful reminder to parties and their legal representatives that the court will not mechanically adjourn a contested interlocutory application at a call-over hearing for directions to be given.(4) Parties and their legal representatives should prepare for a call-over hearing appropriately and liaise with each other in advance on the directions for the conduct of the case. Failure to do so in a timely manner can prejudice a party's position.
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For further information on this topic please contact David Smyth or Sumarsono Darsono at Smyth &Co in association with RPC by telephone (+852 2216 7000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk
Endnotes
(1) [2016] 2 HKLRD 757. Also see re Edmon Trading Co Ltd, HCA 1331/2014, September 2 2016
(2) [2016] HKEC 2058, HCAL 239/2016, September 22 2016. The court was presided over by a High Court recorder. In some respects, the exception is not so much an exception to the fraud exception – rather, it is more a judicial application of the Rules of the High Court, Order 14, Rule 1(2)(b) (supra note 3).
(3) For further details please see "Summary judgment and fraud exception" and "Fraud exception to summary judgment – court's approach hardens".
(4) Supra note 2, at paragraph 5.
