The recently reported judgment in Tang v Tokyo International Investment Ltd(1) is another reminder of the fraud exception to summary judgment in Hong Kong. The exception acts as a jurisdictional hurdle to the grant of summary judgment in a writ action where a plaintiff's claim is based on an allegation of fraud. "Fraud" for this purpose is construed widely and includes an allegation of dishonesty. The ambit of the fraud exception has been the subject of much criticism, especially given the prevalence of email and other similar frauds as a result of which misappropriated money finds its way into bank accounts in Hong Kong. Some first-instance courts, as in Tang, have granted summary judgment in cases involving misappropriated money where a plaintiff does not raise an allegation of fraud against a defendant and has sought only restitutionary relief. Some court decisions have not been consistent and in the current litigation environment it would make sense for the fraud exception to summary judgment to be abolished entirely. This does not mean that summary judgment would need to be granted in fraud cases. Removing the jurisdictional hurdle would leave it to first-instance judicial officers (judges and masters) to grant or refuse summary judgment using their discretion, based on the evidence.
"Summary judgment" is judgment without trial and, although not easy to obtain in practice (save for straightforward cases), is available as an option in civil disputes commenced by writ action subject to a few exceptions. One of the exceptions reads as follows:
(b) an action which includes a claim by the plaintiff based on an allegation of fraud.(2)
A couple of years ago, the relevant rules committees of the High Court and District Court considered whether to abolish the fraud exception and the outcome of that review is awaited (for further details please see "Review of fraud exception to summary judgment").
In the meantime, some plaintiffs are careful to ensure that they do not make allegations of dishonesty against defendants that have received their money, even where there is a clear fraud in the underlying circumstances. Rather, such plaintiffs base their claims solely on other claims such as restitution and the defendants' unjust enrichment. This way, some plaintiffs have been successful in avoiding the jurisdictional hurdle and obtaining summary judgment.
One such case is Tang. In Tang, the plaintiff lost money as a result of an investment scam whereby he was apparently tricked into paying large amounts of money in US dollars to various bank accounts, two tranches of which were received by the defendant's bank account in Hong Kong. The investment scam appears to have been carried out against the plaintiff by a third party. The defendant does not appear to have had any previous dealings with the plaintiff or any legitimate claim to the money.
The plaintiff's claim against the defendant was for the return of the misappropriated money in the defendant's bank account and was based on unjust enrichment and constructive trust – the plaintiff was careful not to plead dishonesty against the defendant. On the defendant acknowledging service of the plaintiff's writ and giving notice of its intention to defend, the plaintiff applied for summary judgment.
The judicial officer hearing the plaintiff's application granted summary judgment and that decision was upheld by a judge who dismissed the defendant's appeal. In short, the court considered that the defendant had no triable defence and, therefore, no legitimate right to the money.
The court's judgment on the defendant's appeal analysed the relevant case law regarding the ambit of the fraud exception. In particular, the judgment approved of those first-instance cases that had held that the fraud exception is not engaged where a plaintiff makes an allegation of dishonesty against a non-party (a fraudster) but not against the defendant (the recipient).
The court's judgment dismissing the plaintiff's appeal in Tang was an interesting and thorough review of recent cases. The judgment was also critical of some first-instance decisions, suggesting that they may have (among other things) misunderstood previous appellate court cases (for further details please see "Exception to fraud exception for summary judgment" and "Summary judgment and fraud exception").(3) The court's reasoning in Tang has recently been approved on appeal in another case in which the Court of Appeal considered that the language and purpose of the fraud exception is directed at a claim between the parties based on an allegation of fraud but does "not exclude any action that includes an allegation of fraud".(4)
The section of the judgment in Tang dealing with the relevant law dissected the legal principles that underpin the fraud exception and usefully attempted to explain how they should be applied in practice.
The outcome in the case is also underpinned by strong policy arguments. Like most jurisdictions that are international finance centres, Hong Kong is battling money laundering on several fronts. In the criminal courts, for example, prosecutions for dealing with the proceeds of crime are common and where there are convictions, custodial sentences follow. On the regulatory front, the lead markets regulator (the Securities and Futures Commission) has been very active in handing out sanctions against regulated entities that fail to comply with their anti-money laundering obligations – besides commencing regulatory proceedings against relevant responsible officers.
In the civil courts, claims for the return of money misappropriated as a result of deception, electronic and telephone frauds have been prevalent in the past few years and are on the rise. The abolition of the fraud exception would be an important symbolic step and would recognise that plaintiffs in these cases are victims of crimes involving the loss of potentially large amounts of money.
As a legislative amendment, a rule change should not be difficult – involving as it does a simple one-line deletion from the relevant High Court and District Court rules (subsidiary legislation), together with clarification of when the rule change takes effect. The rule change would apply only to summary judgment applications taken out after the rule change comes into effect and would give more chance for judicial officers to resolve cases earlier, in line with the underlying objectives of the court rules.(5) All things considered, the legislative process should be straightforward and able to proceed in the legislative council by negative vetting.(6) Such a rule change has support at the highest levels of the judiciary.(7)
For further information on this topic please contact Jonathan Crompton or Jacky Darsono at 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
(2) Rules of the High Court, Order 14, Rule 1(2)(b).
(3) Supra note 1, at paras 61 and 69.
(4) R Stahl Inc v AJ Development Ltd [2020] HKCFI 816 and [2021] HKCA 1093 (30 July 2021) at para 27(6).
(5) Supra note 4, [2021] HKCA 1093 at para 27(5).
(6) Interpretation and General Clauses Ordinance (Cap. 1), sections 34 and 35.
(7) Zimmer Sweden AB v KPN Hong Kong Ltd [2016] 1 HKLRD 1016, at para 1 (Court of Appeal, Lam V-P, as he then was).