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29 March 2016
In a judgment earlier this year, the Court of Appeal considered the ambit of the fraud exception to applications for summary judgment (judgment without trial) in Hong Kong. In a declaratory judgment in Zimmer Sweden AB v KPN Hong Kong Ltd, the Court of Appeal held that the fraud exception is construed widely.(1) Therefore, applications for summary judgment are barred if the plaintiff's claim raises an issue of fraud in the traditional sense (eg, knowingly or recklessly making a false representation), or in a wider sense – namely, a claim raising an underlying allegation of a dishonest act (or omission) intended to deceive. The Court of Appeal's judgment is consistent with previous appellate cases in Hong Kong, from which it did not consider appropriate to depart. However, one of the Court of Appeal judges has questioned the continued existence of the fraud exception in a modern era of electronic scams of the sort that allegedly occurred in Zimmer Sweden. For now, a well-resourced and determined party that is the victim of a scam should move quickly to retrieve lost funds (eg, obtaining injunctive relief to freeze assets in the hands of the perpetrator of the fraud or related third parties), but do so in the knowledge that any allegation of dishonesty raised against a defendant in obtaining interim injunctive relief is likely to be a bar to obtaining summary judgment.
The facts of Zimmer Sweden are all too common. The company lost a significant amount of money as a result of an alleged email scam resulting in funds being transmitted to an alleged fraudster's bank accounts in Eastern Europe and then onto the defendants' bank account in Hong Kong. The plaintiff obtained early injunctive relief to freeze some of the funds in the defendants' bank account and then proceeded to apply for summary judgment against them.(2)
The defendants argued that the funds were received pursuant to legitimate business transactions with various intermediaries and that they were not party to the alleged fraud. The plaintiff's case raised (among other things) allegations against the defendants that some of the transactions that they relied on were fake and a business document that they relied on was forged.
The plaintiff did not challenge the wide ambit of the fraud exception to applications for summary judgment. Rather, it argued that the exception was not engaged because it had not alleged fraud directly against the defendants – only as against the perpetrator of the alleged scam.
Order 14, Rule 1(2)(b) of the Rules of High Court prohibits an application for summary judgment in "an action which includes a claim by the plaintiff based on an allegation of fraud".(3)
At first instance, the judge had to decide as a preliminary issue whether the fraud exception was engaged.(4) Because the fraud exception applies in the wider sense in Hong Kong – such that it catches any allegation of dishonesty against a defendant – the judge decided that the plaintiff's claim had (in effect) raised allegations of fabrication against the defendants. These allegations amounted to allegations of dishonesty, such that summary judgment was barred.
In dismissing the plaintiff's appeal, the Court of Appeal took the opportunity to review previous appellate cases in Hong Kong in the past few years and to lay down some declaratory principles.(5) The upshot is that the Court of Appeal did not consider that its previous judgments were "plainly wrong". Therefore, the fraud exception to applications for summary judgment applies in the wider sense, so as (in effect) to catch claims based on an allegation of dishonesty against a defendant. In assessing whether a plaintiff's claim raises an allegation of dishonesty against a defendant, the court looked at all the relevant circumstances and not just the parties' pleaded case.(6)
The outcome of the Court of Appeal's judgment in Zimmer Sweden is no surprise. It does not appear that the plaintiff will bother with an application for permission to appeal to the Court of Final Appeal. This probably reflects the fact that, even if the courts had jurisdiction to hear the plaintiff's application for summary judgment (which they did not as a matter of law), summary judgment would be inappropriate given that the defendants' defence appears to raise some triable issues of fact based on the evidence.(7)
While the outcome in Zimmer Sweden may be frustrating for plaintiffs in a similar position and which suffer significant financial loss as a result of a scam, such plaintiffs that move quickly may be able to secure some form of interim protection until trial by obtaining injunctive relief in order to freeze money or assets said to represent their stolen funds. The test for obtaining such relief requires an applicant to show (among other things) a risk of dissipation of assets by a defendant. In practice, this will often involve allegations of dishonesty against a defendant in the wider sense, such that summary judgment will not be possible; however, this is usually a secondary consideration to restraining a defendant's use of assets belonging to a plaintiff.(8)
In the meantime, some will take heart from the call of one Court of Appeal judge for the relevant court rules committee in Hong Kong to review whether the fraud exception to summary judgment should be kept or done away with.(9) In some jurisdictions, the fraud exception has been abolished pursuant to an amendment to their court rules. That said, even in those jurisdictions, the reality is that summary judgment in respect of complex cases, involving allegations of fraud or dishonesty against a defendant that are defended, is very much the exception rather than the rule.(10)
For further information on this topic please contact Warren Ganesh or David Smyth at Smyth & Co in association with RPC by telephone (+852 2216 7000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(1) CACV 172/2015, January 11 2016.
(2) For example, HCA 2264/2013, May 2 2014.
(3) Rules of High Court, Order 14, Rule 1(2)(b).
(4) HCA 2264/2013, April 30 2015.
(5) Supra note 1, at paragraphs 18(1)-(6).
(6) Supra note 1, at paragraph 18(1).
(7) For example, see the failed application for permission to appeal to the Court of Final Appeal, in not dissimilar circumstances, in Pacific Electric Wire & Cable Co Ltd v Harmutty Ltd, FAMV Nos 28-33/2009, September 14 2009.
(8) In Universal Capital Bank v Hongkong Heya Co Ltd, HCA No 1211/2015, March 14 2016, the plaintiff's application for summary judgment was held not to infringe the fraud exception, because its claim had not made an allegation of fraud or dishonesty directly against the defendant. Rather than dismissing the plaintiff's application (as a matter of jurisdiction), the first-instance judge went on to consider it (as a matter of discretion) and, on the evidence before the court, granted the defendant permission to defend the proceedings to trial, subject to making a payment into court in the amount claimed by the plaintiff to have been received by the defendant as a result of an alleged scam by a third party. The judge distinguished the Court of Appeal's judgment in Zimmer Sweden, in which an allegation of dishonesty was found to have been made against the defendant. The result in Universal Capital Bank is interesting and also means that the plaintiff avoids having to pay costs compared with if its application for summary judgment had been dismissed.
(9) Supra note 1, paragraph 1.
(10) For example, under the English Civil Procedure Rules, summary judgment (Part 24) with respect to complex claims involving allegations of fraud that are defended is rare: Allied Dunbar Assurance Plc v CJ Ireland  EWCA Civ 1129; Fashion Gossip Ltd v Esprit Telecoms UK Ltd  EWCA Civ 233; JSC BTA Bank v Ablyazov  EWHC 3691 (Ch).
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