CFA: innocent-misrepresentation rescission needs court order

The Court of Final Appeal has unanimously allowed the appeal in FACV5/2026 ([2026] HKCFA 32)JudiciaryJudiciary, judgment given on 13 October 2026, holding that rescission for innocent misrepresentation can only be effected by court orderJudiciary and that no proprietary claim against the knowing recipients of the money arose without oneJudiciary. The Court rejected both the argument that section 3(2) of the Misrepresentation Ordinance (Cap. 284) recognises rescission by election and the reliance on the Halley doctrine.Judiciary

ANZ Commodity Trading Pty Ltd financed ED&F Man Capital Markets Limited under back-to-back nickel repurchase contracts in December 2015, taking warehouse receipts for nickel stored in specified warehouses. In January 2017 MCM declined to repurchase because the receipts' authenticity was in doubt; they proved forgedJudiciary and passed no title to any nickel. Come Harvest Holdings and Mega Wealth, MCM's back-to-back counterparties, were found to be the fraudsters behind the forged receiptsJudiciary. Part of ANZ's purchase money, passed down the chain, ended up with three appellantsJudiciary who were not implicated in the fraudJudiciary but gave no consideration for itJudiciary.

ANZ commenced proceedings against the first appellant in May 2017, joining the second and third appellants later, and asserted a proprietary tracing claim in unjust enrichment and constructive trustJudiciary. Mimmie Chan J held the appellants unjustly enriched, the MCM-ANZ contracts rescinded, ANZ's beneficial interest intact, and the appellants constructive trustees; the Court of Appeal affirmed, adding that ANZ had implicitly rescinded by joining parties and that the contracts were void as instruments of fraud under Halley.

The Court of Final Appeal reversed on the rescission argument.Judiciary ANZ's case that it had rescinded the MCM-ANZ contracts by its own election for MCM's innocent misrepresentationJudiciary failedJudiciary: rescission on that ground requires a court orderJudiciary, and absent one no proprietary equitable claim to the sums received had vested in ANZJudiciary. With no effective rescission there was no basis to impose a constructive trustJudiciary, and nothing else in the case attracted equity's intervention. Section 3(2), which lets the court declare a contract subsisting and award damages in lieu of rescissionElegislation, presupposes rescission as a judicial act rather than acknowledging rescission by electionJudiciary; the Halley argument failed with itJudiciary.

The Court noted the artificiality caused by MCM's absence as a party — undisclosed settlement terms — and that ANZ's success would have exposed the appellants to a second proprietary claim by MCM. Chief Justice Cheung concurred, questioning whether, had rescission been effective, ANZ would have needed to establish the trust against MCM rather than only against the appellants once they knew of the rescission ground. Mr Justice Lam PJ concurred, observing ANZ's case had shifted entirely from fraud to innocent misrepresentation.

For practitioners, the ruling fixes the order of operations: a representee seeking to trace money into a volunteer's hands on innocent-misrepresentation grounds must first obtain the court's rescission orderJudiciary; election alone founds no proprietary claimJudiciary.

Legal basis: Misrepresentation Ordinance (Cap. 284), s 3(2) (argument rejected); rescission for innocent misrepresentation requires a court order.