Third Party Discovery in Email Fraud

Zenjoy Limited v Contex Group Co., Limited [2019] HKCFI 2049

In the recent case of Zenjoy Limited v Contex Group Co., Limited [2019] HKCFI 2049, the Hong Kong Court of First Instance (“CFI”) dismissed the Plaintiff’s application for third party discovery where the Plaintiff was a victim of fraud. In doing so, CFI examined the rules in relation to non-party discovery under section 42(1) of the High Court Ordinance (Cap. 4) (“HCO”) and order 24 rule 7A(2) of the Rules of the High Court (“RHC”).

Background

The Plaintiff’s (“P”) case is that it is a victim of email fraud. It owed a loan in the sum of US$539,261.39 (the “Sum”) to a lender company. On 18 March 2019, P received an email purportedly from the lender company instructing P to pay the Sum to the Defendant’s (“D”) account held with the third party (“D’s Account”). On 27 March 2019, P followed the email instructions and transferred the Sum.

P later discovered that the email was not sent by the lender company. On 24 July 2019, P commenced an action against D. P claimed, amongst others, the following reliefs:

a) A declaration that the Sum and its traceable proceeds at all time remains the P’s property and was received and held by D as its constructive trustee; and

b) A declaration that the D has been unjustly enriched in that Sum.

   (collectively, “Declaratory Reliefs”)

No acknowledgment of service had been filed by D. On 26 July 2019, P issued a Summons under section 42(1) of HCO and order 24 rule 7A(2) of RHC. P applied for disclosure order against a bank for all documents relating to all bank accounts of and connected with D in particular the D’s Account since 26 March 2019 (the “Application”). P asserted that the Application would enable P to identify the wrongdoer(s) and recover the funds. P also sought an order restraining the bank from parting with possession of, destroying, amending or removing any of the documents referred to in the Application (the “Restrain Order”).

Legal Principles

The principles for third-party discovery under section 42 of HCO and order 24 rule 7A(2) of RHC are set out in Waddington Ltd v Chan Chun Hoo Thomas (unrep., HCA 3291/2003, 7 May 2013)(“Waddington Case”). Deputy High Court Judge Lok (as he then was) gave the following guidance:

  1. it must be shown that the non-party is likely to have the documents in his possession, custody or power which are relevant to an issue arising out of a claim; 
  2. the test of relevance is the Peruvian Guano test; 
  3. it must be shown that the order must be necessary either for disposing fairly of the matters or for saving costs;
  4. the order sought must identify with precision the document, documents or categories of documents which are required to be disclosed; 
  5. even if satisfied with the above, the court still has to exercise its discretion, bearing in mind that disclosure orders against third parties are exceptional. It should not be used as a fishing exercise for documents nor speculative. It should not be oppressive to the witness, e.g. by the terms being too wide. It must identify the documents by means of a particular description and not a general description; 
  6. it will be oppressive if the order requires the third party to make fine judgments regarding the relevance of the documents; or if it requires him to undertake a search of an excessively large amount of documents; or if it does not specify the documents with reasonable particularity; and 
  7. the court may also in its discretion refuse to order disclosure of documents which are confidential.

CFI Decision

CFI noted that the three prerequisites for discovery, namely relevance, existence and possession of documents, applies to an application under order 24 rule 7A(2) of RHC. Such application is further subjected to the principles for non-party discovery set out in Waddington Case.

CFI accepted that the documents in question are in existence and that the third party has possession of the documents. The only issue is “relevance”. As stated in order 24 rule 7A(3)(b) of RHC, the document must be relevant to “an issue arising or likely to arise in the proceedings”.

This begs the question: What is an issue arising or likely to arise in the proceedings in the absence of any defence or dispute from D? Having considered the underlying objectives of RHC, the CFI considered that an issue arising out of a claim or action shall be a matter which the court has to make a finding in order to determine whether the relief sought will be granted to P.

Having regard the Declaratory Reliefs sought by P, CFI held that the documents sought in the Application are not necessary. Whether or not P may obtain the Declaratory Reliefs depends on how the Sum was paid to or received by D. The documents sought relates to the disposal of the Sum. The manner of disposal of the Sum is irrelevant to whether P is entitled to the Declaratory Reliefs.

Whilst the documents are likely to be relevant when P seeks to enforce the declaratory judgment sought, they are not relevant to the merits of P’s claim for Declaratory Reliefs. As the present application is not made in the context of Mareva injunction, the court shall not be concerned with preservation of assets. It would also be too early to consider documents required for enforcement of a judgment before the judgment has been obtained.

Accordingly, CFI dismissed P’s application on the basis that P failed to discharge its burden to satisfy the court that the discovery order sought is necessary either for disposing fairly of the cause or matter or for saving costs of these proceedings.

CFI further held that the Restrain Order sought was injunctive in nature. Neither section 42(1) of HCO nor order 24 rule 7A(2) of RHC empowered the court to make an order in terms of the Restrain Order against a third party.

Comments

In recent years, there has been an increase of claims in relation to email fraud. In those cases, one should consider applying for an injunction order and a banker’s disclosure order under section 21 of the Evidence Ordinance (Cap. 8) as soon as practicable. These applications would preserve the assets and realistically lead to the discovery of assets covered by the freezing injunctive order.

This case serves a useful reminder of the test applied by the court in third party discovery under section 42(1) of HCO and order 24 rule 7A(2) of RHC. Not only shall the documents sought exist and possess by the third party, they must also be relevant to an issue arising out of the claim or action. Bearing in mind that the burden lies with the applicant to satisfy the court that the discovery order sought is necessary, one should carefully consider the reliefs sought in the action before taking out an application for third party discovery.