Court of Appeal limits application of “fraud exception” in Order 14 summary judgment applications, while such exception is set to be abolished before the end of 2021

There were conflicting judicial opinions of first instance courts as to whether the exception in summary judgment applications under Order 14, rule 1(2)(b) of the Rules of the High Court (Cap. 4A) (Fraud Exception) covers actions in which the defendant is not alleged to be a party to the fraud, but where allegations of fraud are made against a third party.

In R. Stahl Inc. v AJ Development Ltd [2021] HKCA 1093, the Court of Appeal confirmed that the Fraud Exception does not apply to applications for summary judgment where the plaintiff’s claim is not based on an allegation of fraud, even if there is an allegation of fraud against a non-party.

In late August 2021, the Judiciary announced that the Fraud Exception will be abolished from December 2021, subject to completion of the legislative process.

Case Background

As a result of a cyber fraud, the plaintiff remitted over US$660,000 from the United States to an account (Account) of the defendant in Hong Kong, before part of the funds were transferred out of the Account. The defendant alleged that the Account had been fraudulently opened and operated by third parties and that the monies in the Account did not belong to the defendant.

At first instance, the judge refused to grant summary judgment on the ground of the Fraud Exception, but entered judgment on admissions in favour of the plaintiff in relation to the funds remaining in the Account, on the ground that the defendant had admitted that the remaining funds were not his money. The defendant appealed. The plaintiff cross appealed, contending that it was entitled to summary judgment for the entire sum deposited in the Account.

One of the key issues before the Court of Appeal was whether the Fraud Exception applies, notwithstanding that the plaintiff does not allege fraud on the part of the defendant.

Scope of Fraud Exception

Upon reviewing case authorities on this subject, Hon G Lam JA held that where allegations of fraud are made against a third party only, the defendant does not require the protection of the Fraud Exception for the following reasons. First, there is no slur against such defendant as would arise from a judgment in an action that included allegations of fraud against him. The defendant is not deprived of any opportunity to refute any charge of fraud against him, because there is none. Secondly, it is difficult to perceive any reason in principle which justifies excluding an action from Order 14 on the mere ground that it contains allegation of fraud against a third party. Thirdly, even if the action is not summarily determined but goes to trial, the third party will not take part and answer the allegations of fraud against him. Fourthly, it will deprive a plaintiff of the opportunity of utilising the summary procedures in cases where it might be clearly merited. 

The Court of Appeal concluded that the Fraud Exception does not apply to any action that includes an allegation of fraud but one that includes a claim based on an allegation of fraud.

On the facts, while the Fraud Exception did not apply, the Court of Appeal refused to grant summary judgment and gave the defendant unconditional leave to defend, since there were factual disputes such as whether the Account was actually opened by the defendant.

Proposed Abolishment of the “Fraud Exception”

On 20 August 2021, the Judiciary gazetted its proposed legislative amendments to the Rules of the High Court and District Court, which will effectively abolish the Fraud Exception. In its brief to the Legislative Council, the Judiciary stated that there is no practical need to retain the Fraud Exception rule since there is no right to trial by jury in a fraud case in Hong Kong.

Subject to completion of the legislative process, the abolishment will come into effect on 1 December 2021.

Commentary

These developments will expedite the plaintiff’s claims in straightforward frauds, without the need to take the case to trial. With the prevalence of cyber frauds these days, the removal of the Fraud Exception is welcomed, as victims of frauds may recover funds from fraudsters or recipients of funds more quickly.