In Zimmer Sweden AB v. KPN Hong Kong Ltd and another (CACV 172/2015), the Court of Appeal relied on the long standing approach in Hong Kong in interpreting the "fraud exception" to a summary judgment application under Order 14 rule 1(2)(b) of the Rules of the High Court. The Court of Appeal held that the 'fraud exception' is interpreted widely in Hong Kong and, accordingly, the courts will refuse to consider an application for summary judgment where the action includes a claim based on an allegation of fraud even though there is no express claim for damages for fraud. In this judgment, the Court of Appeal helpfully set out guidelines for the courts to consider when evaluating whether or not a case falls within the "fraud exception". Also, interestingly, Hon Lam VP commented that the fraud exception perhaps no longer sits well with the modern litigation landscape in Hong Kong and that the appropriateness of keeping this exception as part of the Hong Kong rules ought to be reviewed.
The Plaintiff, a Swedish company, claimed that it was deceived by a person posing as a senior executive of its parent company into transferring funds to the Lithuanian bank account of a company known as Enara UAB, also known as Kosona ("Transfer"). The funds were subsequently remitted to the Hong Kong bank account of the 1st Defendant, part of which was then transferred to the Hong Kong bank account of the 2nd Defendant.
In its Statement of Claim, the Plaintiff contended that the Transfer was made as a result of fraudulent misrepresentations and/or mistake as to the identity of the recipient. The Defendants did not give any consideration for the Transfer and therefore the Plaintiff was entitled to a claim for restitution of the funds. The Defendants counter-argued, in their Defence, that the funds were paid by Kosona in consideration for certain goods sourced by the Defendants. It was received in "a normal and ordinary business transaction" and the defendants were "bona fide purchasers and/or have changed their positions in good faith".
In the Plaintiff's Reply to the Defence, the Plaintiff pleaded that the details provided by the Defendants in relation to the alleged transaction were either fake or untrue and that the alleged transaction had not taken place.
At first instance, the trial judge dismissed the Plaintiff's application for summary judgment on the ground that the application fell within the "fraud exception". The Plaintiff appealed the decision to the Court of Appeal.
In justifying the rationale behind adopting the wider interpretation of the "fraud exception" in Hong Kong, Hon Yuen JA commented on how the 'narrow' meaning adopted by the English courts (prior to the abolition of the 'fraud exception' in 1992) had led to an inconsistency in the English courts' approach to cases with an element of dishonesty or fraud. The effect, in England, of the narrow interpretation was that summary judgment was available for a particular type of cases with an element of fraud whilst not available for other types.
Having reviewed the Hong Kong authorities on point, Hon Yuen JA provided guidelines which the courts in Hong Kong should use when considering whether the "fraud exception" ought to apply:
- The Hong Kong courts should (i) determine whether the "fraud exception" applies at the time when the application for summary judgment is heard, and in doing so (ii) examine all relevant materials existing at the time of the hearing, including pleadings and affidavits filed after the making of the application.
- The question to be asked 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.
- In answering the question in (2) above, the Hong Kong courts must look at the substance, and not the mere form of the Plaintiff's case. For example, a claim may be founded without the plaintiff having to make an allegation of fraud but the nature of the defence may be such that in rebuttal the plaintiff would have to allege fraud (which was the case in Zimmer Sweden). In such a case, the fraud exception would be engaged.
Applying these principles, Hon Yuen JA found that although the Plaintiff's Statement of Claim did not contain a claim for damages for fraud, the Defendants' rebuttal that the funds were received as proceeds of sale in a bona fide transaction provided a complete defence. In order to maintain its case, the Plaintiff, in its Reply, essentially alleged that the transaction was a sham. Therefore, the substance of the Plaintiff's case, considered as a whole, contained allegations of fraud and fell within the "fraud exception". The Appeal was dismissed accordingly.
The case confirms the Hong Kong courts' long standing approach in interpreting the "fraud exception" widely to exclude any fraud-related cases from the summary judgment procedure. The rationale behind this approach has been that allegations of fraud have serious consequences and such matters would be inappropriate to determine in a summary judgment application. It is interesting to note, however, that Hon Lam VP opined that the "fraud exception" perhaps "no longer sits well with modern litigation landscape" in Hong Kong. As a result, the judiciary will recommend that the Rules Committee review the appropriateness of keeping this exception as part of the Hong Kong rules.
This recommendation comes at an opportune time. There have been a growing number of cyber fraud cases, with a similar fact pattern to Zimmer Sweden, which have resulted in losses for businesses who often find themselves unable to claim back the amounts they have lost because they need to wait till trial which would, ultimately, result in incurring legal costs higher than the claimed amount. In cases where the plaintiff is a medium-sized enterprise and chooses to go all the way to trial, there is likely to be significant disruption to the day to day running of the business because of the need to allocate resources to lengthy litigation.
It remains to be seen whether Hong Kong will, indeed, take a step forward to abolish the 'fraud exception' to make such (and other related) claims accessible to summary judgment, in effect increasing access to justice, cost-effectiveness and efficiency.