Practice Update – “Fraud Exception” to Summary Judgment Abolished

What Happened?

A couple of years ago, the High Court and District Court Rules Committees began a review of whether the “fraud exception” to summary judgment should be abolished.

RHC/RDC Order 14 (“Summary Judgment”), rule 1(2), provides that –

“… this rule applies to every action begun by writ other than –

(b) an action which includes a claim by the plaintiff based on an allegation of fraud” (the “fraud exception”).

The abolition of the fraud exception was anticipated after a Vice-President of the Court of Appeal stated in Zimmer Sweden AB v KPN Hong Kong Ltd [2016] 1 HKLRD 1016 (at paragraph 1):

“For my part, I can see considerable force in the argument that such an exception no longer sits well with the modern litigation landscape”.

That “modern litigation landscape” includes a significant rise in electronic and telephone frauds, as a result of which large amounts of misappropriated money have found their way into bank accounts in Hong Kong (among other places) and claimant victims have had to make reports to the relevant law enforcement agencies and commence civil claims to seek redress. This phenomenon has also been seen in other jurisdictions and international finance centres. The fraud exception has been criticised as being out of date and as obstructive to victims’ efforts to seek swift redress in the courts.

On 20 August 2021 an amendment rule was published in the government gazette announcing that the fraud exception will be abolished with respect to applications for summary judgment in the High Court and District Court made on or after 1 December 2021.

In the Meantime

The recent Court of Appeal judgment in R. Stahl Inc. v AJ Development Ltd [2021] HKCA 1093, brought welcome clarification of the ambit of the fraud exception (while it lasts) – in particular, with respect to two related questions:

Is there an “allegation of fraud” on the part of the defendant?

  • This is determined by reference to all the relevant court documents. A claim is “based on an allegation of fraud” where an allegation of fraud would have to be made by a plaintiff in order to establish the claim.
  • Where a plaintiff makes a claim against the defendant which is based on an allegation of fraud, the plaintiff cannot get around the exception by relying upon other causes of action not based on fraud.

Does the fraud exception apply where there is an “allegation of fraud” but not on the part of the defendant?

  • The short answer is – “No”. The fraud exception is not engaged where (for example) a plaintiff makes an allegation of dishonesty against a non-party (a fraudster) but not against the defendant (the recipient of the plaintiff’s money).
  • In R. Stahl Inc. v AJ Development Ltd, the Court of Appeal stated (at paragraph 27(6)):

“The rule does not exclude any action that includes an allegation of fraud but one that includes a claim based on an allegation of fraud.  This suggests it is a matter between the parties” (note the emphasis).

What Next?

The amendment rule (for the High Court and the District Court) was tabled at the Legislative Council on 25 August 2021 for negative vetting and comes into operation on 1 December 2021.

Some Comment

Given the Court of Appeal’s clarification in R. Stahl Inc. v AJ Development Ltd, the amendment rule retains a more symbolic importance in many cases, but is no less significant for that. The Court of Appeal’s judgment specifically disapproves of any first instance decisions that sought to extend the fraud exception to any claim that included an allegation of dishonesty irrespective of whether the allegation was aimed at a non-party.

The fraud of exception is not (and should never have been) engaged where a plaintiff makes an allegation of dishonesty against a non-party (a fraudster) and, for example, limits their claims against the defendant to claims for restitution.

The Rules Committees have come to what we consider to be the right conclusion. The rule change is entirely consistent with the fight against modern day crime – an endeavour that requires a robust response, by the regulators, law enforcement agencies and the criminal and civil courts combined. The change actually empowers the court to address issues related to fraud, by removing the prohibition on parties applying for summary judgment where a fraud is alleged against the defendant.

Finally, the Judiciary’s Press Release dated 20 August 2021 announcing the amendment rule was suitably judicious, stating that (in the penultimate paragraph):

“The legislative amendments would enhance the summary judgment regime and align with evolving legal practice in the interests of the parties in a litigation.”

RPC, Partner

Jonathan is a Partner of RPC, advising clients in litigation before national courts, in arbitrations and in direct settlement negotiations.

He helps clients navigate complex cross-border disputes, specialising in litigation and investigations involving the financial services industry. He also has extensive experience representing licensed corporations and individuals in investigations by the Securities and Futures Commission.

Associate Solicitor, RPC