Hong Kong Court of Appeal Looks to English and Australian Case Law on the Test for Setting Aside Judgments Obtained by Fraud

Mark Giddings and India Short

The Hong Kong Court of Appeal in Mayer Corp Development International Ltd v Alliance Financial Intelligence Ltd [2019] HKCA 777 (Mayer v Alliance) has addressed the principles applicable to setting aside judgments obtained by fraud. In doing so the Court of Appeal has  considered for the first time the recent English Supreme Court decision in Takhar v Gracefield [2019] 2 WLR 984 (Takhar v Gracefield) and the Australian High Court decision in Clone Pty Ltd v Players Pty Ltd (in liq) (2018) 353 ALR 24 (Clone v Players) (for commentary on those cases see our previous blog posts here and here).

Mayer v Alliance involved an appeal against a decision striking out a claim for disclosing no reasonable cause of action. In earlier proceedings Mayer, a company incorporated in the BVI, had alleged that 200 million shares that it held in a Hong Kong company were sold without its authorisation contrary to the terms of a share custodian agreement. At trial the 1st to 3rd defendants disclaimed knowledge of the agreement. The trial judge held that the agreement was forged and found against Mayer. Mayer then unsuccessfully appealed to the Court of Appeal and the Court of Final Appeal, in the course of which Mayer was denied permission to adduce reports from a handwriting expert as to the authenticity of the signed agreement.

Having exhausted its rights of appeal, Mayer commenced fresh proceedings to set aside the trial judgment as well as the appeal judgments. Mayer alleged that the evidence in the expert reports showed that the signed agreement was genuine. This meant that the 1st to 3rd defendants had presented a case at trial that was dishonest and untrue. The 4th and 5th defendants had adopted that dishonest case. The respondents applied to strike out the fresh proceedings, arguing that the expert reports were inadmissible because Mayer had not exercised reasonable diligence in obtaining them and they were insufficiently material in any event.

Reasonable diligence requirement

At first instance, Mimmie Chan J held that she was bound by the Hong Kong Court of Appeal’s decision in Johnson Electric International Ltd v Bel Global Resources Holdings Ltd [2014] 5 HKC 504, which followed Ladd v Marshall [1954] 1 WLR 1489 in requiring that a party introducing fresh evidence on appeal must establish that it could not have obtained the evidence by the exercise of reasonable diligence at the time of the original trial. Mimmie Chan J held that this principle was not limited to appeals but also applied to fresh actions challenging a judgment obtained by fraud. Her Honour found on the facts that Mayer would not be able to meet the reasonable diligence requirement.

In considering this issue, the Court of Appeal had regard to Clone v Players and Takhar v Gracefield, each of which rejected the imposition of a reasonable diligence requirement in fresh actions to set aside judgments fraudulently obtained. The Court of Appeal concluded that (at [70]):

In light of the latest decisions of the High Court of Australia and the UK Supreme Court, it is clearly inappropriate in this striking out application to determine that the reasonable diligence requirement must be met by Mayer to set aside a judgment where new evidence is deployed to establish the fraud that had been raised in the earlier proceedings unsuccessfully.

Thus, the Hong Kong Court of Appeal thought that it was arguable that the reasonable diligence requirement only applied where the challenge to the judgment fraudulently obtained was by way appeal, and not where the challenge was by way of a fresh action.

Materiality

It was common ground between the parties that to set aside a judgment obtained by fraud in a fresh action the new evidence must satisfy the materiality requirement set out by Aikens LJ in Royal Bank of Scotland Plc v Highland Financial Partners LP [2013] 1 CLC 596. The Hong Kong Court of Appeal summarised the test as being whether the alleged “conscious and deliberate dishonesty was causative of the impugned judgment of [the trial judge] and formed an operative cause of his decision” (at [79]). Applying that test, the Court of Appeal found that the absence of the expert evidence as to the authenticity of the signature on the share custodian agreement was an operative cause and that it would therefore be inappropriate to strike out the action (at [82]-[83]).

Adoption of fraud

Mayer contended that it was open to the Court of Appeal to set aside the judgments in relation to all of the defendants because they had either presented a fraudulent case themselves or had adopted the fraudulent case of their co-defendants. At first instance, Mimmie Chan J had held that there was no pleading and no evidence indicating that the 4th and 5th defendants should be attributed with the dishonesty of 1st to 3rd defendants. Mayer argued that it was not necessary to show attribution. Rather, applying Cinpres Gas Injunction Ltd v Melea Ltd [2008] Bus LR 1157, it was sufficient to show that the 4th and 5th defendants had adopted the evidence of their co-defendants because they had shared a “common foe” against whom they had a “completely intermixed cause” (at [43]). The Court of Appeal expressed reservations about whether this reasoning could be reconciled with the authorities on attribution (at [59]), but held that Mayer’s case was not untenable and that the trial judge had erred in striking out the claim (at [61]):

I would disagree with the judge and hold that it is not plain and obvious the legal position taken by Mayer is untenable. Even if this question is to be looked at as a matter of fact and degree, I do not think the facts and circumstances are so compelling that Mayer’s contention is plainly not sustainable.

Having rejected each of the bases for striking out Mayer’s claim, the Court of Appeal has paved the way for the Hong Kong Court of First Instance to hear Mayer’s challenge to the judgments alleged to have been obtained by fraud.

Significance

This case was the first opportunity for the Hong Kong Court of Appeal to consider the effect of the decisions in Takhar v Gracefield and Clone v Players. Although it only needed to be satisfied to the standard required for Mayer to defend against the strike out of its claim, the Court of Appeal accepted that those decisions are of potential application in Hong Kong. Mayer’s challenge to the impugned judgments is now set to be heard by the Hong Kong Court of First Instance. It is likely that Hong Kong will follow England and Australia in rejecting the need for a party alleging fraud in a fresh action to show that it could not have discovered evidence of the fraud at the time of the original trial by the exercise of reasonable diligence.

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