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Justice Delayed is Justice Denied - Hong Kong court rules amended to make summary judgment available to victims of wire fraud

  • Hong Kong
  • Fraud and financial crime
  • Litigation and dispute management

03-12-2021

With effect from 1 December 2021, the “fraud exception rule” under the Hong Kong court rules was abolished thereby enabling a plaintiff in Hong Kong litigation to obtain summary judgment even if the claim is based on an allegation of fraud. The amendments mainly addressed the hardship and injustice to victims of wire fraud, where, despite clear evidence of fraud, the previous court rules still required a full trial (when the defendants/fraudsters would most probably be absent) where an allegation of fraud was made before judgment may be given. It resulted in victims of fraud avoiding pleading fraud or having to waste further time and incur further legal costs in order to recover what might remain in the fraudsters’ bank account that originally belonged to them. The Hong Kong position is now in line with that of England. Details of the technical amendments to the court rules can be found here and here.

Introduction

According to Hong Kong government statistics1the total number of computer crime cases has increased more than twofold from 5,567 in 2017 to 12,916 in 2020. In terms of financial losses suffered by the victims, it has increased from HK$1,393 million (about GBP134 million) in 2017 to HK$2,964 million (about GBP286 million) in 2020. Victims of computer crime or wire fraud who are “lucky” enough to discover the fraud quickly may be able to freeze the money sitting in the fraudsters’ bank accounts before it is transferred out of jurisdiction or withdrawn from the banking system. Even in such a situation, victims still need to commence legal action against the fraudsters or persons who knowingly received the money. Having obtained a Court judgment, victims are then able to seek a further Court order directing the relevant recipient bank to return the money to the victims.

In these circumstances, the victim will want such legal proceedings to be progressed as quickly and cheaply as possible. Typically, where the evidence in support of the claim is incontrovertible (as will usually be the case in a wire fraud), and it is expected that the defendant (fraudster or recipient bank account holder) will not appear or if they do appear will have no credible defence, the plaintiff may apply for summary judgment. By applying for summary judgment, the plaintiff may obtain judgment at an early stage in the proceedings without a full trial, thereby minimising costs and achieve recovery much more quickly than waiting for the result of a full trial. However, summary judgment is not available on claims based on an allegation of fraud. This is commonly known as the “fraud exception” rule. The “fraud exception rule” has therefore acted as a possible barrier to efficient judicial determination. In particular, where the plaintiff pleaded fraud and the claim was defended, irrespective of the merits of that defence, due to the unavailability of summary judgment, the claim would have to proceed to full trial, often more than a year after the proceedings were first commenced.

The “fraud exception rule” was abolished in England in June 1992. The English Courts had interpreted the “fraud exception” in a narrow way, to mean only fraud as defined in Derry v. Peek (1889) 14 App Cas 3372, namely, a false representation made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false. Therefore, lawyers in England at least had the possibility of helping victims to draft a claim in a way that did not fall within such narrow definition.

However, historically, the Hong Kong Courts adopted a wider interpretation of the “fraud exception” such that it was held to have been engaged not only in circumstances where a plaintiff made an allegation of dishonesty against a defendant but also in circumstances where the alleged fraudster was not a party to the proceedings. This caused practical difficulties recovering monies, even in circumstances where an allegation of fraud was not central to the claim.

Injustice to Victims of Fraud

A situation of this kind was before the Court in the case of Zimmer Sweden AB v. KPN Hong Kong Limited & Brand Trading Ltd CACV 172/20153.

The plaintiff in that case was a Swedish company headquartered in the U.S.A.. Its Finance Manager was deceived by a person posing as a senior executive of its parent company into transferring EUR487,000 (about HK$4.3 million / GBP414,000) to a bank account in Lithuania. The money was subsequently converted into US dollars and remitted to a bank account in Hong Kong under the name of the first defendant, and part of the money was then onward transferred to the bank account of the second defendant.

The plaintiff obtained a Mareva injunction from the Court freezing the money in the relevant bank accounts4. Legal action was commenced against the defendants to recover the sums from them.

The defendants’ position was that they received the money in good faith and under a genuine and honest belief that it was a payment for goods in a normal and ordinary business transaction. In reply, the plaintiff stated the following:

  • the London address given for the first defendant was a derelict building awaiting demolition;
  • the US supplier named by the defendants was a real estate agent which did not deal in the type of goods the first defendant had allegedly ordered from it;
  • the Israeli supplier named by the defendants did not sell the product, did not issue the invoice to the first defendant, and had declared the invoice to be fake;
  • there was no entity in Turkey that bore the name given by the defendants for the Turkish supplier;
  • no transactions took place between the owner of the Lithuanian bank account and the first defendant; and
  • it was denied that the first defendant received the funds as a bona fide purchaser for value and in good faith. No sales transactions took place between the three suppliers and the first defendant. Nor were there any sales transactions between the first defendant and owner of the Lithuanian bank account.

The plaintiff then applied for summary judgment contending that there was no serious defence or triable issue of fact or law. The first instance judge decided against the plaintiff and refused to grant summary judgment on the basis that the “fraud exception rule” was triggered5.

On appeal, the Court of Appeal upheld the judge’s decision. Clearly sympathetic towards the plaintiff, the Vice President of the Court of Appeal commented in the judgment that Hong Kong should review whether the fraud exception still sat well with the modern litigation landscape and expressly recommended the court rules be reviewed in this regard.

The result of the appeal meant the Court had no choice but to order costs to be paid by the plaintiff to the defendants in relation to the summary judgment application. Furthermore, it also meant the plaintiff had to continue prosecuting the matter to full trial. The fraud in that case took place in October 2013 and the plaintiff was still embroiled in litigation with the defendants when the judgment of the Court of Appeal was handed down nearly 27 months later in January 2016.

Conclusion

With the court rules now amended, victims of wire fraud in straight forward and uncontested cases may see the time required to recover money defrauded from them shortened to about 3 to 6 months. Victims who may previously have decided not to pursue otherwise meritorious cases partly because of the need to incur further and substantial time and costs may now be more confident to do so. The amendments are a welcome move to avoid in future the effective “denial” of justice to victims in cases were justice would otherwise have been severely delayed. Lastly, the amendments do not just benefit victims of wire fraud, but any victim of alleged fraud may now seek summary judgment in appropriate cases.


1 https://www.infosec.gov.hk/en/knowledge-centre/computer-related-crime

2 https://www.bailii.org/uk/cases/UKHL/1889/1.html

3 https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=102159&currpage=T

4 https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=92805

5 https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=98223