Removing the fraud exception rule in summary judgment applications

On 20 August 2021, the Rules of the High Court (Amendment) Rules 2021 and the Rules of the District Court (Amendment) (No. 2) Rules 2021 (jointly “Amendment Rules”) were tabled to the Legislative Council on 25 August 2021 for negative vetting and will come into effect on 1 December 2021.

Once the Amendment Rules are in effect, the “fraud exception” rule will be removed in Hong Kong.

Summary Judgment and "Fraud Exception"

Pursuant to Order 14 rules 1 and 5 of the Rules of the High Court and Rules of the District Court, a plaintiff may apply for Summary Judgment against the defendant:- i.e. obtaining judgment at an early stage, and without the need for spending time and costs on a full trial, on the basis that the defendant has no defence.

Summary Judgment is however not available on claims based on an allegation of fraud. This is commonly known as the “fraud exception” rule.

In Zimmer Sweden AB v. KPN Hong Kong Limited and Brand Trading Ltd [2016] 1 HKLRD 1016; the Court of Appeal questioned the “fraud exception” rule’s continued existence. Following on from this decision, the Judiciary proceeded to look into the Court’s comments, with the aim of enhancing the summary judgment regime and interests of parties to litigation.

The Judiciary listed out the following justifications in support of removing the “fraud exception” rule:

1. The “fraud exception” rule was historically linked with the right to have a trial by jury in fraud cases. There is however no right to trial by jury in fraud cases in Hong Kong. There is no practical need for the “fraud exception” rule to exist.
2. It is questionable whether, the justification of the vindication of a defendant at trial if he is alleged of fraud, warrants the deprivation of a plaintiff the right to seek summary judgment, even in cases where a defendant only puts forward a token defence and thus forcing (and very often deterring) the victim of a cyber fraud to incur all the time and costs to trial to get relief;
3. The removal of the “fraud exception” rule does not mean that summary judgment will automatically be granted in fraud cases. Summary Judgment may still be resisted by a defendant who has serious defences or there are triable issues of fact or law;
4. The Court noted in Zimmer that the “fraud exception” rule could not be justified in Hong Kong’s modern litigation environment; and
5. In any event, the English Courts have abrogated the counterpart of the “fraud exception” rule since 1992.

Conclusion:

The number of cyber fraud cases has unfortunately continued to grow in recent years. Whilst most cyber fraud claims proceed in Court unopposed, for the few cases that are opposed and defended, the Amendment Rules will provide a quicker access to justice and short cut to relief for cyber fraud victims by abolishing the “fraud exception” rule.

The abolition of the “fraud exception” rule is no doubt a welcoming development to victims of cyber fraud.

Author:

Anthony Marrin is a consultant at H.Y. Leung & Co LLP, where he specializes in litigation and dispute resolution and has experience in international fraud and asset tracing, shareholders' disputes, contractual disputes, trusts and enforcement of foreign judgments in Hong Kong. 

About H.Y. Leung & Co. LLP:

H. Y. Leung & Co., LLP is a Hong Kong law firm founded by Mr. Alexander H.Y. Leung in 2014. The firm has rapidly grown in size since its inception, with over 27 lawyers specializing in a wide range of practice areas. H. Y. Leung & Co., LLP has a highly experienced and skilled team of lawyers providing practical and commercial legal advice tailored to its clients’ needs at competitive rates. The firm serves local and international clients, including major MNCs and China State Owned Enterprises.

About Alliott Global Alliance:

Founded in 1979, and with 200 member firms in 85 countries Alliott Global Alliance is an international alliance of independent, law, accounting, and specialist advisory firms, working across the world Together as One.

Each of our members share a common goal: to learn and share knowledge, resources, and opportunities to make the world smaller and their businesses stronger.

We work with a spirit of generosity and openness — so that together, we can continue to fulfil our ambitions, gain greater experience, and drive mutual success.

Alliott Global Alliance is expanding fast, and the alliance has its sights set firmly on growing its legal and accounting membership to 100 countries. Opportunities are available to independent professional firms in specific countries in Africa, but also in Europe, China, the ASEAN region, Australasia, the Gulf Cooperation Council region, Central and South America and in North America. For information about membership in the APAC region, contact Damien McMenamin (damien@alliottglobal.com), Chief Growth Officer.