Zimmer Sweden Ab v. Kpn Hong Kong Ltd and Another

HCA 2264/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2264 OF 2013

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DECISION
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1.The plaintiff commenced this action in November 2013 alleging that:

(a) it was the victim of a telephone and e-mail fraud committed in October 2013 whereby about EUR977,000 was transferred as directed by the fraudster(s) (“the transferred sum”);

(b) part of the transferred sum was deposited into the bank accounts of the defendants (“the claimed sum”).

The causes of action pleaded are “unjust enrichment” and “money had and received” on the defendants’ part.

2.The defendants deny the claim, asserting in gist that the claimed sum represented payments they received from their ordinary trading business.

3.Further to commencing this action, the plaintiff took out an application for summary judgment in September 2014 (amended in December 2014).  An issue arose as to whether the application falls within or outside of RHC Ord 14, namely, whether it involves:

“an action which includes a claim by the plaintiff based on an allegation of fraud” (Ord 14 r 1(2)(b)).

If it does, then logically the summary judgment application would suffer from a procedural defect.

4.The defendants’ case that the “preliminary issue” ought to be decided in their favour can be summarized as follows.

5.In denying the defendants’ case that they were bona fide recipients for value of the claimed sum, the plaintiff would have to establish:

(1) two of the three suppliers averred to by the defendants did not sell to the defendants; the third supplier was fictitious;

(2) an invoice relied upon by the defendants is a forged document;

(3) the 1^st defendant has used a false address.

The essence of the plaintiff’s case is said to be that the defendants received the claimed sum for no consideration (and for no valid or legitimate reason) and not in good faith, and it is likely they received the same as parties connected to the fraud (para 10, Fewins affirmation (filed on the plaintiff’s behalf)).

6.The plaintiff disagrees and contends that no fraud allegation has been made against the defendants.

7.In order to properly decide the above dispute, it is crucial to ascertain whether the law ascribes to the word “fraud” a wide (or narrow) meaning for the purpose of Ord 14 r 1(1).  At the risk of over-simplification, the English authorities were inclined towards to a narrow meaning: Hong Kong Civil Procedure 2009, Vol 1, para 14/1/1:

“… The exclusion should be construed narrowly and is confined to an action based on fraud strictly defined … [It does not] include an action based on a resulting or constructive trust or for money had and received, even though fraud may have been the means by which the funds claimed came to be used” (emphasis supplied).

(partly restated in Hong Kong Civil Procedure 2015, Vol 1, para 14/1/1, pp 252-3)

On the other hand, the majority of the Hong Kong authorities were inclined towards a liberal meaning.

8.An authority which has binding effect on this court is the court of appeal’s decision in A-1 Business Ltd v Chau Cham Wong Patrick [2009] 5 HKLRD 579.  Because of its importance to the determination of the present dispute, a few words will be spent on the decision.

9.The plaintiff in the A-1 decision sued its directors for breach of fiduciary duties by misappropriating the plaintiff’s assets (including the transfer of a substantial sum from the plaintiff’s account to the personal account to reduce a personal loan).  The defendant denied the claim, asserting that the transfer was a dividend payment to directors.  The plaintiff refuted the assertion, and accused the defence as involving fabricated documents after the fact to create a fictitious declaration of dividend.

10.In dismissing the plaintiff’s appeal against the dismissal of its summary judgment application, the court of appeal decided that the plaintiff’s claim was caught by the “exclusion rule” (Ord 14 r 1(2)(b)).  The court opined that the rule should not be confined to actions in which there was a claim for damages for fraud, but also any action where there were underlying allegations on which the claim was based would constitute an allegation of fraud.

11.The court of appeal in the A-1 decision quoted from its earlier judgment in another appeal,  Pacific Electric Wire & Cable Co Ltd v Harmutty Ltd [2009] 3 HKLRD 94:

“… the rule is not confined to excluding actions in which one of the claims is a claim for damages for fraud, what is excluded is any action where there is a claim in respect of which the underlying allegations on which the claim is based constitute an allegation of fraud” (para 19 thereof).

12.In adopting and applying the above test, the court of appeal said the following in the A-1 decision:

“In order to establish that the transfer was a misappropriation of the plaintiff’s assets, the plaintiff clearly has to address the defence [that the transfer was for a legitimate purpose] and this clearly will involve an allegation of dishonesty on the part of the defendants … ” (para 15 thereof).

It should be noted the dishonesty in question was:

“… after the event falsification of documents to create a fictitious declaration of dividend from the plaintiff to A-One Investments which was used by A-One Investments to repay a loan obtained from the first defendant” (para 13 thereof, quoting from the first instance decision).

13.In this action, the reply avers:

“[Strauss Group Ltd, a supplier of the defendants] did not issue the invoice to [the 1^st defendant] and has declared the invoice [put forth as evidence of a trading transaction] is a fake …” (para 9 thereof).

The averment was elaborated in an affirmation filed by the plaintiff:

“… At page 12 of the exhibit is an email from the Finance Director of [Strauss Group Ltd] , Ronen Shamgar, stating that the invoice which [the 1^st defendant] alleges it was sent by [Strauss Group Ltd] was not issued by [Strauss Group Ltd]” (para 42, Jefferis 2^nd affirmation).

14.Thus, even if the other allegations of falsities referred to in para 5(1) and (3) above, the allegation of falsifying and uttering a forged document would mean at least this part of this action falls within the test set out, and the manner in which the test was applied, in the A-1 decision.

15.For the above reasons, I will decide the issue in the defendants’ favour.  Following from what was said in para 3 above, the summary judgment application should be dismissed accordingly.

16.The parties’ written submissions also mentioned various other points.  These have not been expressly set out or dealt with above.  This is so only because of the need to balance between the length of the decision and its comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.

17.The parties agree that the costs of this dispute should be the defendants’ if the issue is determined in their favour.  There will accordingly be a costs order that those costs be paid by the plaintiff to the defendants.

18.I consider summary assessment of costs to be appropriate.  The above costs shall thus be so assessed.  For this purpose:

(a) the defendants be at liberty to lodge with court and serve a statement of costs within 7 days from today;

(b) the plaintiff be at liberty to lodge with court and serve a statement of objections within 7 days thereafter.

Ms Phoebe Man, instructed by Stephenson Harwood, for the plaintiff

Mr Jonathan Chang, instructed by Hampton, Winter & Glynn, for the defendants