AKAI HOLDINGS LTD (IN COMPULSORY LIQUIDATION) v. ERNST & YOUNG (A HONG KONG FIRM)

cacv 384/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 384 of 2006

(on appeal from HCCL NO. 29 of 2004)

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REASONS FOR JUDGMENT

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Hon Le Pichon JA:

1.  This was an appeal from an order of Stone J made on 12 September 2006 dismissing the defendant’s application to set aside and disallow certain amendments made by the plaintiff to the writ of summons on 19 November 2005 without leave, pursuant to Order 20 rule 1.  At the conclusion of the hearing the appeal was dismissed with reasons to be handed down which we now do.

2.  The background facts are set out in paragraphs 10 to 24 of the judgment below.  In summary, the appeal arises out of an action in negligence by the liquidators of Akai Holdings Ltd (“Akai”) against the defendant, Ernst & Young, the auditors of Akai.  Leave to issue the writ was granted on 21 May 2004 and its validity was extended to 23 November 2005.  Four days prior to its expiry, on 19 November 2005, the writ (which had not yet been served) was amended without leave.  The substantive issue before the judge was whether one of those amendments should be struck out.

3.  The amendment in question relates to paragraph 1(1)(a) of the Indorsement of Claim which, as amended read:

“	(1)	Damages in respect of loss and damage suffered and/or equitable compensation and/or accounts of profits as a result of:-
		(a)	breaches of contracts made between the Plaintiffs and the 1st to 7th Defendants, pursuant to which the 1st to 7th Defendants acted as the auditors of the Plaintiffs, in the course of or in connection with the auditing and/or certification of the Plaintiff’s’-audited and other financial statements for the years ended 31 January 1998 1997, 1998 and 1999 and thereafter (the “Accounts”);”

Similar amendments were made to sub- paragraphs (d) to (f).

4.  On 21 November 2005, the Amended Writ together with the Points of Claim of some 457 pages was served on the defendant.  The defendant took out a summons shortly thereafter to strike out, inter alia, the addition to the indorsement of “and 1999”.

5.  The short point arising is whether the original indorsement was sufficiently wide to encompass a claim against the defendant in respect of the 1999 audit.  If it did not, the amendment to include the 1999 audit made on 19 November 2005 would be a new cause of action and, as the defendant’s audit report for the year ended 31 January 1999 was dated 26 June 1999, it would be time-barred as the limitation period would have expired on 26 June 2005.

6.  The judge concluded that the words “and thereafter” within the original indorsement implicitly included a claim for work done in the 1999 year and dismissed the application.  Nevertheless, he gave formal leave to amend the Points of Claim in terms of the draft paragraph 551A which raises a triable issue as to the date of knowledge on the part of the liquidators.

This appeal

7.  The original Indorsement of Claim read as follows:

“	(1)	Damages in respect of loss and damage suffered and/or equitable compensation and/or accounts of profits as a result of:-
		(a)	breaches of contracts made between the Plaintiffs and the 1st to 7th Defendants, pursuant to which the 1st to 7th Defendants acted as the auditors of the Plaintiffs, in the course of or in connection with the auditing and/or certification of the Plaintiffs’-audited and other financial statements for the year ended 31 January 1998 and thereafter (the “Accounts”);”

Mr Coleman SC who appeared for the defendant made the point that separate contracts existed for each of the audits carried out by the defendant and that the defendant was not involved with Akai’s audit for the year 2000 or subsequent years.  Much was made of the fact that the word “year” appeared in the singular.  It was submitted that had it been the intention to include more than one audit year, the plural form “years” would have been used.  Further, in view of the fact that the defendant was not concerned with any audit after 1999, the only candidate for any subsequent year could only be 1999 and not any other subsequent year and that nothing could have been simpler than to specify the year concerned.

8.  The point at issue is purely one of construction.  It is clear from the face of the original indorsement that the Akai’s claims related to more than a single contract: the claim was in respect of breaches of “contracts”.  It would follow that the claims concerned more than one audit year and, in my view, the words “and thereafter” would encompass claims in respect of subsequent years.  This fact seriously undermines the force of Mr Coleman’s submissions.  That the defendant ceased to be involved with audit reports for Akai for the year 2000 onwards so that those words could only refer to 1999 cannot affect their ambit.  Nor can any objection be taken to the use of those words rather than a specific reference to the 1999 audit.  Where the claim may be expressed in a number of ways, it becomes a matter for the pleader how he chooses to formulate the claim.  Indeed, an alternative formulation would be “since” a particular audit year.  Moreover, in the context, the use of the word “year” was grammatically correct.

9.  Then it was said that because the words “and thereafter” were retained in the pleading as amended, they cannot mean one thing before the amendment and another after the amendment.  But what is crucial is the meaning of those words in the original indorsement.  As is my view, they are capable of including a claim in respect of the 1999 audit and that is all that matters.  The fact that they were retained in the amended plea cannot affect or narrow the meaning of those words as used in the original plea.  Stone J treated those words in the amended plea as otiose and drew a notional line through them.

10.  Mr Yuen SC, who appeared for Akai, drew the court’s attention to the fact that although the last audit report prepared by the defendant was the 1999 audit, it did not mean that the defendant ceased to have any involvement thereafter.  As appears from § 59 of the 5^th affidavit of Mr Hill, in fact, the defendant prepared Information Memoranda dated 31 January 2000 and 27 April 2000 respectively, setting out unaudited figures for the six months to 31 July 1999 and 31 January 2000 respectively, as well as a Preliminary Information Memorandum dated 10 December 1999 which contained a profit and loss statement and balance sheet information.  Whilst, in the event, no claim has been made in the Points of Claim in respect of those matters, the fact is that those words could have supported such a claim.

Hon Sakhrani J:

11.  I agree.