Introduction
Notwithstanding heightened awareness of cyber-fraud, it is still common for individuals to be duped by fraudsters into remitting money to bank accounts in Hong Kong (and elsewhere of course) with the funds then being further dissipated by the fraudsters to put them beyond the reach of the victim.
If swift action is taken, the court in Hong Kong is very experienced in giving urgent assistance to grant an injunction to freeze the recipient account, hopefully before the funds have been dissipated beyond its reach.
After obtaining an injunction, the victim will of course want to proceed as quickly (and cheaply) as possible to actually get its money back. However, a long-standing provision in the Rules of the High Court (“RHC”) has sometimes caused difficulties, or cast doubt on whether the summary procedure (referred to in more detail below) is available for such cases.
A new development, by way of amendment to the RHC should alleviate those doubts.
That amendment is made by The Rules of the High Court (Amendment) Rules 2021 (the “Amendment Rules”)[1] which abolishes the so-called “fraud exception” to summary judgment. The Amendment Rules came into effect yesterday, 1 December 2021.
Background
Under Order 14, rule 1 of the RHC, the plaintiff in an action begun by writ may apply for summary judgment against the defendant on the ground that the defendant has no defence to a claim. Thus, where it is appropriate (for example, where the claim is straightforward) the summary procedure enables the plaintiff to obtain a judgment at an early stage of the proceedings without the need for a full trial, and hence minimising the time and costs of seeking relief, thus also saving valuable judicial resources when used appropriately.
However, prior to the Amendment Rules and pursuant to Order 14, rule 1(2)(b) of the RHC, the summary judgment procedure was not available in respect of “an action which includes a claim by the plaintiff based on an allegation of fraud” (the “Fraud Exception”). Pursuant to the Amendment Rules, rule 1(2)(b) is deleted from the RHC. Transitional provisions are also made to clarify that the old rules (namely, including the Fraud Exception) will apply in respect of any application for summary judgment that has been made before 1 December 2021.
Justification for changes and analysis
The Fraud Exception had existed in the equivalent procedural rules in England (upon which the RHC were originally based) but was abolished there in 1992.
There was considerable difference between the application of the rule in the English courts (prior to 1992) and in the Hong Kong courts. However, it has often been considered anomalous that the rule continues to form part of the RHC in Hong Kong. As remarked by the Hon Mr Justice Lam VP (as he then was) in the Court of Appeal case Zimmer Sweden AB v KPN Hong Kong Ltd [2], there is “considerable force in the argument that such an exception no longer sits well with the modern litigation landscape.”
This difference of approach in application of the rule is significant in that the English courts had interpreted the rule narrowly, to mean that it applied only to claims brought on the basis of a certain type of fraud[3]. The English court was concerned that this had led to claims being drafted in “artificial” or “contrived” terms[4]. On the other hand, the decisions of the Hong Kong court had developed along different lines, applying a broader interpretation, with the Fraud Exception not being restricted only to Derry v Peek claims. The more liberal approach adopted by the Hong Kong courts has been of use to victims of cyber-fraud as the courts have also permitted the summary judgment procedure to be used in such cases where the defendant (which is often the account-holder) is not itself accused of the fraud, albeit that the remittance to the account is the consequence of a fraud perpetrated by another party[5]. It could therefore be said that the anomaly that concerned the English court is less of a risk in Hong Kong even under the pre-existing rules, but it must be the case that the Amendment Rules remove doubts[6]. The change will of course apply not only to cyber-fraud cases but any case based on a claim involving allegations of fraud. One example would be claims by a company in liquidation against the company’s former directors for misappropriation of assets.
The implication of the Amendment Rules
Given the substantial differences between the application of the Fraud Exception by the English and the Hong Kong courts, it could be said that there was less need to abolish the rule here than was the case for abolition in England in 1992. However, as stated above, it is submitted that the learned Vice President in Zimmer was correct that it does not form part of the modern litigation landscape, and the abolition should remove doubts and, importantly, should reduce the time and money spent on proceedings where, as happens not infrequently, defendants raise the Fraud Exception in defence of otherwise straightforward claims that are ripe for summary judgment and the point has to be argued.
That said, the amendment to the rules should not be seen as opening a floodgate of successful summary judgment applications that would previously have failed. First, it must be remembered that where a claim is based on fraud, it must be pleaded with the “utmost particularity.”[7] If that cannot be done, it is difficult to see how a summary judgment application could succeed. Even where sufficient particulars can be pleaded at an early stage, and even with the Fraud Exception abolished as a procedural rule, certain of the sentiments behind it will no doubt be on the minds of judges being asked to give judgment on a summary basis (and thus without a full trial) in respect of such claims. As Kaplan J said in Skink Ltd (in liquidation) v Comtowell Ltd[8] when considering the purpose of the Fraud Exception itself: “…cases where the Court had to consider whether a person was guilty of fraud…have very serious consequences, and it could not have been thought right that persons should be condemned, as it were, unheard save on affidavit.” It may well be that this same sentiment will be sufficient in many cases to persuade the court that summary judgment should not be given, one of the tests to be applied being “the defence set up need only show that there is a triable issue or question or that for some other reason there ought to be a trial” (emphasis added). [9]
In any case where a party has been a victim of fraud, whether a fast moving cyber-fraud involving remittances of money induced by fraudsters, or other fraud claims (for example being discovered by liquidators or trustees in bankruptcy), a key is to move swiftly and ensure the claims, and relief sought, are properly formulated. It is therefore important to work with a law firm that has the team and know-how to handle these claims in a timely manner. Tanner De Witt has substantial experience in these areas through our , and practices and we are always on hand to help where we can.
Robin Darton
If you would like to discuss any of the matters raised in this article, please contact [email protected]
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
[1] LN 170 of 2021. Similar amendments will also be made to the District Court Rules by the Rules of the District Court (Amendment) (No. 2) Rules 2021(LN 171 of 2021).
[2] [2016] 1 HKLRD 1016
[3] Being so-called Derry v Peek fraud (from Derry v Peek (1889) 14 App Cas 337) – broadly, claims based on false representations being made knowingly, or recklessly.
[4] See Zimmer (ibid), paragraph 11.7 (being part of the Hong Kong Court of Appeal’s review of the position in England, based on the judgment of Nicholls JA in Newton Chemical Ltd and others v Arsenis [1989] 1 WLR 1297.)
[5] See our previous article: Legal update: Show me the money: specificity, credibility, and the fraud exception [Posted 31 October 2017]; and for a recent summary of such decisions (with approval), see the Court of Appeal’s decision in R. Stahl Inc. v AJ Development Limited [2021] HKCA 1093. Although that case demonstrates that there are still risks for victims of such fraud where the defendant asserts that the account itself was created by fraud.
[6] Another difference between English law and Hong Kong law in this regard is that the Fraud Exception was historically linked in England with the right to have a trial by jury in fraud cases, pursuant to the Administration of Justice (Miscellaneous Provisions) Act of 1933, but there is no such right under Hong Kong law (s.33A of the High Court Ordinance (Cap. 4))
[7] Per Bokhary JA (as he then was) in Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden & Co Ltd [1994] HKEC 667
[8] [1994] 2 HKLR 26, 37
[9] [2021] HKCFI 2593