The ‘Fraud Exception’ in Summary Judgment Applications: Zimmer, Universal and Arrow ECS Norway


The High Court and Court of Appeal have recently tackled the proper limits of the ‘fraud exception’ in the summary judgment procedure. Three cases in just over a year have established a working compromise, but may in the end have generated more heat than light. This article seeks to review the fraud exception in view of these recent judgments.

In Zimmer Sweden AB v KPN Hong Kong Limited & Another [CACV 172/2015] the Court of Appeal set down guidelines for the ‘fraud exception’ in the summary judgment procedure. Universal Capital Bank v Hong Kong Heya Co Ltd [HCA 1211/2015] (handed down in March this year) then distinguished Zimmer on the facts. The recent case of Arrow ECS Norway AS v M Yang Trading Ltd [2016] HKEC 2058 has been one of the first decisions to apply Universal Capital.

Judgment in Zimmer was handed down in the context of an increasing number of ‘wire frauds’ in Hong Kong. Victims of such frauds usually sought to recover funds by applying for a freezing order and seeking default judgment against the fraudster. This normally worked well. If (as in the majority of proceedings), the fraudster had no defence and did not answer the claim, default judgment would save time and costs.

Problems arose, however, where the defendant contested proceedings. Summary judgment was not available in respect of an action based on an allegation of fraud (pursuant to Order 14 of the Rules of the High Court). In England and Wales, the ‘fraud exception’ was abolished in 1992; in Hong Kong, it remained alive and well.

In the Zimmer case, a Swedish company claimed that a fraudster posing as a senior executive of its parent company transferred a large sum of money to his bank account. The ‘fraud exception’ was upheld, albeit subject to clarification. The Court of Appeal found that the real question to determine was ‘does this action include a claim for which an allegation of fraud would have been made by the plaintiff In order to establish or maintain that claim?’ If the action does include a claim of that nature, the court has no jurisdiction to hear the summary judgment application, even if the plaintiff seeks to distinguish that claim from other claims which do not allege fraud.

The Court directed that the substance as well as the form of the plaintiff’s case should be reviewed. If fraud was relied on as a matter of fact, whatever the language used in the plaintiff’s application, then summary judgment should be refused. The Court also found that liberal interpretation should be applied to what ‘fraud’ meant. The exception would arise where the allegation included an intentional or reckless dishonest act done with the purpose of deception.

The Universal case provided an important caveat. The plaintiff bank had been duped by an email and transferred a sum of money into the defendant’s bank account. The plaintiff sought to argue that whilst it had been a victim of fraud, it did not need to allege fraud against the defendant company in order to make a claim. It relied instead on a claim of unjust enrichment: something of a stretch on the facts of the case.

The Court accepted the submission and allowed the matter to be considered under the summary judgment procedure. The ‘underlying reason’ for the fraud exception was ‘to prevent summary judgment in a case where serious allegations of dishonesty are made or implied against a party… So that such a party may have an opportunity to answer the allegations’. In the Universal case, the Court found that although it was plain that the money was transferred as part of a fraud, the claim by the plaintiff did not rely on the fraud in form or in substance.

The court also found that whilst the upshot of Zimmer was to maintain a liberal interpretation of fraud, that did not mean that the exception should be applied ‘automatically’ merely because there is fraud lurking in the ‘bigger picture’.

The High Court handed down its judgment in Arrow ECS Norway on 22 September 2016. The case involved another Zimmer-style ‘wire fraud’ in which the defendant posed as a senior executive to siphon off large sums of money from the plaintiff’s bank account. The defendant had given no indication of whether the claim was disputed until two days before the hearing. The Court found, applying Universal, that whilst fraud lay at the heart of the transfer of money, the plaintiff had avoided relying on any allegation of dishonesty (using any language) against the defendant. The claim did not characterise the transaction as a fraud per se, the ‘fraud exception’ was avoided, and summary judgment was applied.

On the face of it, Universal and Arrow ECS Norway provide a get-out clause from the robust restatement of the ‘fraud exception’ in Zimmer. Plaintiffs can circumvent it as long as they come up with a separate valid claim and avoid any suggestion of fraud. In cases involving ‘wire frauds’, this is likely to be of real help. It is difficult to imagine a ‘wire fraud’ case in which a plaintiff has to rely on fraud alone. For defendants, the development of the caselaw is less helpful. The obvious strategy is to invite the Court to see the claim for what it really is. Careful drafting by plaintiffs, however, may make this a difficult submission in most cases.

The exception lives on, but Universal and ECS Norway have given plaintiffs a potential lifeline in seeking to avoid it.    

 

Robert Dacre