There are an increasing number of wire frauds occurring in Hong Kong. Victims usually seek to recover their funds by asking the police to freeze them (or by obtaining a court injunction freezing them) and commencing civil proceedings against the fraudster and recipient of the funds. If the fraudster does not contest the proceedings, the victim will usually be able to obtain default judgment.
The Fraud Exception
What if the defendant contests the proceedings? The victim will usually apply for summary judgment against the defendant i.e. judgment without a full trial and at an early stage of the proceedings, on the basis that the defendant has no defence, thereby enabling the victim to hopefully recover their funds as quickly as possible and minimise legal costs.
However, the summary judgment procedure is not available in respect of an action which includes a claim by the plaintiff based on an allegation of fraud, commonly known as the “fraud exception”. In a recent wire fraud case, the Court of Appeal established a number of guidelines for determining whether the fraud exception is engaged (Zimmer Sweden AB v KPN Hong Kong Limited & Another, CACV 172/2015).
In the Zimmer case, the Plaintiff, a Swedish company, claimed to have been deceived by a person posing as a senior executive of its parent company into transferring a sum of money to a Lithuanian bank account of an alleged fraudster. Part of the sum was remitted to the Hong Kong bank account of the 1st Defendant. The 1st Defendant subsequently transferred part of the remittance to the 2nd Defendant.
The Plaintiff claimed, among other things, (1) fraudulent misrepresentation and mistake as to the recipient’s identity, (2) a proprietary claim against the 1st Defendant, based on retention of title and (3) unjust enrichment and money had and received. The defence was that the 1st Defendant had received part of the sum in good faith and under a genuine and honest belief that it was paid in a normal and ordinary business transaction. In reply, the Plaintiff, in essence, alleged that the transaction was a sham.
Court of First Instance Ruling
The Court of First Instance dismissed the summary judgment application, holding that the fraud exception applied and the Plaintiff appealed to the Court of Appeal.
Court of Appeal’s Guidelines
The Court of Appeal examined a number of case authorities in relation to application of the fraud exception and set out the following guidelines to be followed by the Hong Kong courts:-
- The court should determine whether the fraud exception applies at the time when the application for summary judgment is heard. Therefore the court should examine not only the Statement of Claim, but also all relevant materials existing at the time of the hearing, including subsequent pleadings and affidavits.
- The relevant question is “does this action include a claim for which an allegation of fraud would have to be made by the plaintiff in order to establish or maintain that claim?” If the answer is affirmative, the fraud exception is engaged and the court has no jurisdiction to hear the summary judgment application, even if the plaintiff seeks to hive off that claim from another claim (e.g. for dishonoured cheque) for which summary judgment would have been available.
- In considering whether an allegation of fraud would have to be made to establish or maintain a claim, one must look at the substance, and not the mere form, of the plaintiff’s case. If all the factual constituents of fraud are alleged and relied upon, it does not matter whether the actual word “fraud” has been used or not.
- The court must consider whether those factual constituents of fraud are relied upon in order to establish or maintain a claim.
- The fraud exception would be engaged if the nature of the defence may be such that in rebuttal, the plaintiff would have to allege fraud.
- As to what is an allegation of fraud for the purpose of the fraud exception, the court is bound to adopt the wide/liberal meaning. The fraud exception would be engaged where what is alleged is an intentional or reckless dishonest act (or omission) done with the purpose of deceiving.
Court of Appeal Ruling
Applying the above guidelines, the Court of Appeal examined the pleadings and affidavits of both parties at the time of the summary judgment hearing and held that the fraud exception was rightly engaged because although the Statement of Claim did not contain a claim for damages for fraud and the claim against each Defendant was confined to money had and received, the substance of the Plaintiff’s claim was that the transaction in question was a scam The Court said that even if the Plaintiff had not asserted that the Defendants were parties to the fraud practised in Sweden to obtain the money, it had clearly asserted that the Defendants were parties to a fraud to keep the money transferred to them. The appeal was therefore dismissed and the Defendants were granted leave to defend the action.
In the subsequent case of Universal Capital Bank v Hongkong Heya Co., Limited, HCA 1211/2015, which was also a wire fraud case (the Plaintiff bank having been deceived by a fraudulent email into transferring a sum of money to a Hong Kong bank account), the Court distinguished the Zimmer case on its facts and held that the fraud exception did not apply.
In the Universal case, the Plaintiff argued that although their case was that the money had been taken from them by fraud, they did not need to, and did not allege fraud against the Defendant company, as that company was an innocent link in an otherwise fraudulent claim and the Plaintiff was prepared to confine its claim to one of unjust enrichment.
The Court accepted that as against the Defendant company, there was no allegation of fraud or dishonesty and so the fraud exception did not apply. It said:
- The underlying reason for the fraud exception is to prevent summary judgment in a case where serious allegations of fraud are made or implied against a party, so that such party may have an opportunity to answer the allegations. In this case, there was no need for such protection for the Defendant company, as no allegations of dishonesty or fraud were made against it.
- Although the movement of money was an obvious scam, the legal route taken by the Plaintiff to recover the money did not necessarily involve any party to that scam.
- Whilst the Hong Kong courts have adopted a fairly wide and liberal interpretation of “fraud” when considering whether the fraud exception applies, it should not be applied automatically merely because there are allegations of fraud or dishonesty in the bigger picture. The question is whether the underlying allegation of fraud (which did not exist here) on which the claim is based (not the case here) constitutes an allegation of fraud against the defendant.
- To say otherwise would take away from a plaintiff an opportunity to untilise summary judgment in cases where it might clearly be merited.
Having rejected the fraud exception, the court went on to consider the summary judgment application. Since the court found that the defences raised were “low in substance and suspicious” but could not be dismissed as “incredible” at this stage, it granted the Defendant leave to defend the action, but on the condition that it pay into court the amount claimed, pending trial or other resolution.
The Way Forward
The Zimmer case usefully clarifies the matters to be considered by the court when deciding whether the fraud exception applies in summary judgment applications and confirms that the courts interpret the fraud exception widely. However, one of the Court of Appeal judges questioned the fraud exception’s continued existence in the modern litigation landscape and recommended that the Rules Committee of the High Court and District Court review the appropriateness of keeping this exception in Hong Kong’s court rules. There is, therefore, the possibility that the exception will in future be abolished, as it was in England in 1992, making it easier for victims of frauds, such as wire frauds, to obtain judgments quickly and more cost-effectively, by way of summary judgment.