Legal update: Show me the money: specificity, credibility, and the fraud exception

The last five years have seen a massive increase in cyber fraud in Hong Kong and a corresponding growth in cases being brought before the Hong Kong Courts to trace and recover the proceeds.

Fraud victims appreciate prompt recovery, but are often frustrated by ‘bona fide purchaser’ defences, which have the effect of stiffling claims. In circumstances where the victim’s claim is “based on an allegation of fraud”, the court has no jurisdiction to entertain a summary judgment application. The rationale for the fraud exception, is that allegations of fraud are both serious and highly fact dependent, and so in the interests of justice should be decided only with the benefit of full discovery and oral testimony at trial. Of course, in the present day the fraud exception runs contrary to the needs of those affected by it, and the Court of Appeal has recently acknowledged that it may not “sit well with the modern litigation landscape”: Zimmer Sweden CACV 172/2015, [2016] 1 HKLRD 1016.

A trio of recent first instance decisions, however, offers fresh hope to fraud victims. They suggest a judicial willingness to take a more pragmatic approach, in which the facts of alleged ‘bona fide purchaser’ defences are tested in more detail, and with some skepticism towards the often contrived evidence produced to support such defences. If followed, they will likely reduce the time and costs of fraud recovery actions in Hong Kong.

The three cases

(1) Universal Capital Bank v HongKong Heya Co, Limited [2016] 2 HKLRD 757 was a classic email fraud. The victim was deceived into paying €410,650 to an account in Hong Kong, which was then immediately converted to Hong Kong dollars and onward paid to a company account controlled by one Mr Yang. Yang claimed that he had agreed as a favour to a friend to remit renminbi to China in return for payment of an equivalent sum in Hong Kong dollars, so that his friend could avoid exchange rates. He told the Court that he believed the payment made to his company account by the victim was his friend’s money, and then remitted part of those monies to an account in China. He conceded however that he had no knowledge of where the monies he had received had come from (and had not seen fit to make enquiries).

The bank carefully pleaded its case as a proprietary claim against the company. It did not allege fraud. It was content to proceed on the basis that the company was an innocent bystander, notwithstanding that the source of funds were obviously the proceeds of a fraud. The Court held that whilst there was a “plain and obvious” fraud, it had not been perpetrated by the defendant company, and as the proprietary claim could proceed without need of proof of the underlying fraud, the fraud exception did not apply. Summary judgment would therefore have been granted on the proprietary claim, though in this instance the defendant had established a bare defence and was granted conditional leave to defend.

(2) In Laerdal Medical  Limited v Hong Kong Hoacheng International Trade Limited HCA 2193/2016, 21 June 2017, a medical care products company was deceived into paying €496,000 to the account of ‘Haocheng’. By contrast to Universal Capital Bank, Laerdal pleaded fraud, as well as unjust enrichment. Haocheng claimed that it believed that the monies were consideration for a delivery of shoes from a company that it traded with in China. It was not, however, able to explain a bank statement which showed that the monies had been paid by Laerdal, and not the shoe company. It accepted that it had no business relationship with Laerdal, and could not explain what it would do with the payment from the shoe company, were it to eventually arrive.

Deputy High Court Judge Saunders made two key findings. First, since Laerdal could succeed solely on its proprietary claim for unjust enrichment, without having to prove the attendant claim of fraud, the fraud exception did not apply. The Court therefore had jurisdiction to enter summary judgment. Second, on examination of the available evidence, it was clear that Haocheng’s defence was “hopeless”. Haocheng’s alleged contract was not with Laerdal, but was with the shoe company, against which it had an independent right to recover the consideration for the shoes. Further, the defendant’s own bank documents showed that the money was from the plaintiff. On any view Haocheng simply could not establish itself as a bona fide recipient of Laerdal’s money, as it had not provided consideration of any kind to Laerdal to justify its retention of the funds. In granting summary judgment the Court indicated that when assessing a bona fides claim it was encumbent on the Court to carefully consider all materials, including pleadings and affidavits, and in this instance banking documents and contracts. The fact that Haoheng had a right of recovery against its own customer was a significant factor in determining whether Haocheng’s ‘enrichment’ was in fact unjust.

(3) Ferrari North America, Inc v Changhon International Energy Co Limited and Others  HCA 862/2017, 29 June 2017. Ferrari were lured by an email fraud into paying US$6.7 million to an account in Hong Kong in the name of ‘Changon’, which was then immediately onward paid to a series of other defendants. One of them, a Hong Kong company called Hui Tong, appeared in opposition to the continuation of an Injunction Order, enjoining the sum it had received. Hui Tong alleged that it had agreed to buy frozen meat for a third party, “by a coincidence” for a sum identical to the amount paid to it by Changon. Hui Tong adduced invoices and other peripheral evidence in support of its case that it operated a genuine business, and argued that unless the Plaintiff could show that Hui Tong knew or had reasons to believe the monies received were not from its customer, the injunction should be discharged.

The Court scrutinised the evidence and noted several deficiencies with Hui Tong’s defence. First, the terms of the alleged sale were for full payment on delivery, and differed from Hui Tong’s usual business model, which was to require a 30% deposit. Secondly, Hui Tong’s usual business was to sell timber, rather than frozen meat. Thirdly, the account held a de minimis balance both before and after the funds were received and dissipated. The Court took judicial notice of the frequency with which internet fraud now occurs, and the regularity with which stolen monies are quickly matched to apparently legitimate transactions. The Court warned that such coincidences “cannot be ignored by the courts”. The paucity and inconsistencies of Hui Tong’s evidence were sufficient for the Court to infer a “suspicion of dishonesty”, which in turn permitted a finding that there was a real risk of dissipation of funds. The injunction was therefore continued.

A greater duty to explain oneself

These cases show that the fraud exception will no longer automatically activate because the facts of a case include fraud, and that if a claim can be proved succeed without need of proof of fraud, the fraud exception will not apply. The Universal Capital Bank and Laerdal cases show the courts undertaking a more scrupulous examination of the bona fides of recipients. It will no longer suffice for a recipient to simply show evidence of a contract: it will now need to show consideration passing between itself and the victim, and to explain why it should not otherwise seek recourse against its own contractual counterpart.

Although it did not concern the fraud exception the Ferrari case continues this theme. The Court was willing to investigate the allegation of fraud and after a careful consideration of all of the facts infer a “suspicion of dishonesty” to support the risk of dissipation.

These cases offer a common sense application of the common law, and show the courts adopting practical solutions to the problems noted by Mr Justice Lam VP in the Zimmer judgment. It is hoped that these authorities will stand the test of any appeal to the benefit of fraud victims in Hong Kong.

Jeff Lane

The above is not intended to be relied on as legal advice and specific legal advice should be sought at all times in relation to the above.

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Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.