TIKEN LTD AND ANOTHER v. BRIERLEY INVESTMENTS LTD

HCCL 87/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.87 OF 2000

(formerly HCA 5776/2000)

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J U D G M E N T

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The applications

1. There are two applications before the court. By summons dated 13 November 2002 the defendant seeks specific discovery, and by summons dated 30 January 2003 the plaintiffs seek an 'unless' order requiring exchange of provisional experts' reports.

2. Clearly the latter application is dependent upon the outcome of the former.

The discovery application

3. As originally mounted, and somewhat unusually, the terms of the original application requested an order for "further discovery of documents referred to in the letter from Deacons to Herbert Smith dated 25 October 2002". The letter in question had reflected a request for documentation as sought by the defendant's expert, and the dominant reason for the adjournment of the application, after extensive argument had taken place, was to permit the defendant to reformulate its discovery request in more precise terms.

4. This it did upon the resumed hearing when Mr Shaw, who appeared throughout for the defendant, proffered to the court a schedule entitled 'List of specific discoverable documents'. During the course of the resumed hearing this schedule was amended, after observation by the court regarding the generality of the terminology employed, in a bid to enhance its specificity.

5. Accordingly, the application which the court ultimately was required to decide is one for specific discovery in terms of this schedule as amended. In final form this reads as follows :

"List of specific discoverable documents

1. Documents from the categories listed below making reference to the claim for $496,518,824.15 ('the claim'), mentioned in the TKJV schedule of income and expenditure attached to the letter from Deloitte Touche Tohmatsu to Tiken dated 25 June 1998 ('the schedule'), which were available to TKJV or Tiken/Paul Y at the date of preparation of the schedule and the recognition of the revenue from the claim in the 1996/7 period :

a) minutes of the meetings of TKJV management team;

b) minutes of TKJV board meetings;

c) internal TKJV project management reports;

d) minutes of board meetings of Tiken/Paul Y;

e) internal Tiken/Paul Y project management reports;

f) internal TKJV correspondence (including e-mails);

g) internal Tiken/Paul Y correspondence (including e-mails); and

h) correspondence between TKJV and Tiken/Paul Y (including e-mails);

2. Documents/correspondence between TKJV, Tiken/Paul Y and their professional advisers from the categories listed below in relation to the formulation and progress of the claim that were available to TKJV/Tiken/Paul Y at the date of preparation of the schedule making reference to the recognition of revenue from the claim in the 1996/7 period :

a) documents of/correspondence with James R Knowles (including e-mails);

b) documents of/correspondence with Masons (including e-mails);

c) documents of/correspondence with TKJV's auditors (including e-mails)."

6. The foregoing can only be understood within the factual context of a case which originally was listed for trial for seven days in September 2001, although these dates were vacated and progress thereafter has been subject to various interlocutory applications.

7. In outline, this litigation concerns a claim arising from an agreement dated 6 June 1994 whereby the plaintiffs purchased from the defendant shares in the Downer Group Limited, of which Downer and Company Ltd was a wholly-owned subsidiary. This latter company had entered a joint venture, the Ting Kau Contractors Joint Venture, which was awarded the design and construction contract for the Ting Kau Bridge and Approach Viaduct. Downer and Company Ltd had a 25% stake in the Ting Kau Joint Venture, and the present dispute has as its origin losses suffered by the Joint Venture for the period 1 April 1997-31 March 1998.

8. In broad terms, contractual provisions relating to the purchase by the plaintiffs of the Downer Group contained an underwriting mechanism by which losses suffered for any particular period on any contract then on foot concerning any member of the Group would be covered by the vendor, the defendant herein. That with which this court will be required to deal at trial is the plaintiffs' claim for the sum of HK$192,687,255.18, which is said to represent the pro-rated share attributable to Downer and Company Ltd, as a 25% member of the Ting Kau Joint Venture, relating to losses incurred on the Ting Kau Contract for 1997/1998.

9. The way in which the contractual machinery worked under the agreement for the sale and purchase of the shares in the Downer Group was that a 'Company's Certificate' relating to the amount of Gross Contract Income and Annual Cost for each Annual Period was to be issued to the vendor, who then would have 14 days in which to agree or to disagree with the information in this 'Comcert', as it has been described. In case of disagreement as to the figures therein, provision was made for either party to refer the dispute to an independent firm of accountants, which would then make a decision concerning such reference. In the event, however, the parties have opted for the court to referee this particular disagreement.

10. Reverting to the particular facts, on 27 June 1998 the 1st plaintiff sent a Company's Certificate to the defendant pursuant to clause 14.3A of the sale and purchase contract, certifying the Gross Contract Income (HK$692, 197,331.44) and Annual Cost (HK$1,462,946,352.16) for the Ting Kau Contract for the Annual Period commencing 1 April 1997, and further stating that the sum of HK$192,687,255.18 was due and owing from the defendant under the contract. This sum, of course, remains disputed and unpaid, hence the present litigation.

11. Attached to the Company's Certificate in question was a schedule indicating in tabular form the Income and Expenditure for the Ting Kau Contractors Joint Venture. It is to the content of part of this latter document that Mr Shaw primarily focuses on this application.

12. He points out that for the period 1/4/96 - 31/3/97 there is neither profit nor loss, income and expenditure balancing exactly at $0.00, whereas for the following annual period, 1/4/97 - 31/3/98 the Ting Kau Joint Venture is stated to have suffered a loss of HK$1,106,205,877.97. Integral within the figures relating to the two periods, he further notes, is the figure of HK$480,516,550.30, which is ascribed to income in the 96/97 period under the rubric 'Contract Claims Submitted in Annual Period', whereas in the following 97/98 annual period the like figure has been reversed and now is ascribed as expenditure under the heading '(iii) Reversal of Unsuccessful Claims in Prior Annual Period'. A footnoted asterisk attached to the figure ascribed to income reads :

"Contract claims actually submitted consolidated at HK$496,518,824.15. The amount recognized in the Accounts is restricted to HK$480,516,550.30."

13. This amount so recognized as income forms the key to the present discovery application. Mr Shaw says that these accounts "stink", that the attribution of the figure of HK$480 million as income as opposed to the submitted claim figure of HK$496 million clearly is arbitrary and designed to ensure an entirely flat result for 96/97, and the fact that the claim the subject of these entries was subsequently settled for HK$78 million odd testifies to the unreliability of the treatment of these figures. He says that as the result of such treatment there is an unnecessarily heavy loss for 97/98, and hence (I assume) an artificially inflated claim against his client, the defendant/vendor of the shares of the Downer Group.

14. Against this background, therefore, Mr Shaw seeks discovery in terms of the categories of documents set out above. In this connection he drew attention to the witness statement of Mr Hills, partner of Deloitte Touche Tohmatsu and audit partner on Downer, who had undertaken a review of the Company's Certificate in question, and who stated at paragraph 13.3 of this statement (subsequently verified by affidavit dated 19 March 2003) :

"There is an entry in respect of the reversal of unsuccessful claims in prior annual period in the sum of HK$480,516,550.30. The claims under the Ting Kau Bridge Contract submitted by the TKVJV against the Highways Department in the 1996/1997 Annual Period were valued at HK$496,518,824.15 by James R. Knowles (Hong Kong) Limited in their letter dated 13 November 1997. I accepted this figure. However, the amount of the claim recorded in 1996/97 in the appendix was restricted to HK$480,516,550.30 so as to produce neither a loss nor a profit in the Annual Period 1996/97."

15. It is on the basis of this extract, together with the relatively low settlement sum ultimately achieved for these claims, that Mr Shaw asserted an entitlement to question "the whole $480 million" and to seek discovery of documents underpinning recognition of this figure in the Company's Certificate, recognition which had allowed Mr Hills to conclude that $480 million should be characterized as income for the period 1996/97. In light of Mr Hills statement the entire sum of $480 million was suspect, he said, and in response to a query from the Bench Mr Shaw went so far as to accept that in this instance he wanted "to verify the auditor". In this context he asserted that the Joint Venture must have received advice as to the true value of these claims, and that the auditor must have seen such documents.

16. Mr Shieh on behalf of the plaintiffs strongly resisted this specific discovery application, maintaining that manifestly it was ill-founded. Whilst drawing the court's attention to the timetable of events in this case, however, he stopped short of suggesting that this application was no more than a delaying tactic on the part of the defendant.

17. In essence Mr Shieh's opposition was on two grounds. First, he submitted that although the resumed hearing of the application had witnessed the first attempt to narrow the categories of documentation sought, the yet further revised formulation suffered the like defect of imprecision, bearing in mind that this was an Order 24 rule 7 application and that the purpose thereof was precisely to identify the document required, and thus to relieve the responding party from any residual uncertainty as to compliance with any court order. In particular, he said, use of a term such as "making reference to" (in lieu of the original formulation of "which had a bearing on") did not assist, and that in any event the wide categories of documents sought demonstrated a patent desire to "fish".

18. I agree that this is valid criticism, even on the basis of the reformulation of the desired documents, although I do not make it the basis of my decision on this application; had I been of a contrary view of its merits, no doubt the list could have been yet further refined to meet this point.

19. Mr Shieh's substantive argument, however, in my view possessed considerable force. The categories of document sought could not be demonstrated to be relevant, he submitted, when viewed through the prism of the provisions within the share purchase contract which specified the pool of materials to which the experts could resort in determining the two crucial concepts of Gross Contract Income and Annual Cost for each Annual Period.

20. He referred to the contractual definitions of Gross Contract Income (at Clause 14.1(D)) and Annual Cost (Clause 14.1(A)), and pointed out that, by virtue of Clause 14.2(A), these two concepts were to be determined "by reference to the accounting records and ledgers of [Downer] and the subsidiaries used in preparing the audited consolidated accounts of [Downer] for each Annual Period ..."

21. In case of subsequent dispute which contractually was anticipated to be dealt with by an independent firm of chartered accountants (Clause 14.3(C)), albeit in this case now to be decided by this court the material specified in Clause 14.2(A) represented the 'pool' of relevant data to which reference was to be made by the tribunal seized with resolving the dispute. However, what was legitimately on the table in any such dispute resolution was not some form of 'appellate review' of the methodology/judgment used in the compilation of the relevant Company's Certificate which was what the defendant's expert clearly had in mind but to the contrary the experts were required to take a view solely on the basis of the contractually-prescribed documentation. Thus, said Mr Shieh, the key is what was used in the make-up of the Certificate, not that which in the opinion of another auditor could have been used.

22. In real terms, therefore, it was open to the experts in this case to see the documents as used by Downer's auditors in preparing the audited accounts, and to express an opinion as to what the appropriate figures should be, based upon the prescribed contractual definitions. But what was not to be permitted, said Mr Shieh, doubtless for good practical reason, was access to materials which had not been used by the auditor in arriving at his now-disputed conclusion; absent such constraint, he argued, the resolution of this dispute would, in effect, be turned into a massive construction dispute, with different aspects of this particular Ting Kau Bridge claim dissected and opinion expressed thereon as to its real value, an eventuality that Clause 14.2(A) precisely was designed to avoid.

23. I think that Mr Shieh is right. I do not consider that the contractual regime permits of the approach now adopted by the defendant, wherein Mr Shaw has mounted this application on the basis of his expert's view that it was necessary "to understand the progression of this claim and the reasons why the ultimate settlement was discounted so heavily" (letter to Deacons from PriceWaterhouseCoopers dated 25 October 2002). It seems to me that in this the court should be guided by that which the contract prescribes, and not by what a particular expert may wish to see if he were to have a free hand (or may have wished to see had he been Downer's auditor).

24. Returning therefore to the facts. There is no doubt in this case as to that which Mr Hills, the auditor, in fact has seen or as to the material upon which he has based his judgment qua auditor. He says so, both in his witness statement (see in particular paragraphs 7 and 19) and in his subsequent affidavit verifying that statement (see paragraphs 5-7); indeed he makes it clear that in the preparation of the audited accounts of Downer and its subsidiaries that he has not used the classes of documents referred to in Deacons letter of 25 October 2002 to Herbert Smith which forms the provenance of the present application. Equally, there is no doubt that already there has been disclosure to the defendant of all the documents that have been used in preparation of the audited accounts.

25. In a bid to counter Mr Shieh's primary argument regarding that which he termed the 'contractually defined pool of data', Mr Shaw makes two points. I deal with them in turn.

26. First, he says that this argument does not bite because, as is common ground, when the disputed Certificate and accompanying schedule were sent in 1998, the audited accounts of Downer for the equivalent period had not been finalized or signed off. On this factual issue he is of course correct, but I cannot see that this has any particular significance. That the accounts as audited were signed off is clear, and in any event the terms of Clause 14.2(A) refer only to the material as is used in preparation of the audited consolidated accounts; there is no suggestion that those accounts must have been signed off at the time the relevant calculations were made. So I do not consider that there is anything in this point.

27. The second argument advanced appears to have as its starting point the agreed experts' terms of reference in this case, paragraphs 4 and 5 of which require a determination of whether the Ting Kau JV Gross Contract Income exceeded the Annual Cost for the Annual Period 1998/99, and ask for an explanation of the difference between such figure and the figure of HK$151,427,708.63 pleaded in paragraph 18 of the Amended Defence.

28. At first blush the significance of this latter sum of HK$151 million odd is not easy to discern, not least because paragraph 18 of the present amended pleading represents that which remained after an unsuccessful attempt to amend to plead more widely (in the disallowed pleading paragraph 18 was formerly paragraph 18A), and it is no doubt due to this circumstance that paragraph 18 as it now stands refers to "the aforesaid sum of $151,427,708.63" notwithstanding lack of prior reference to such sum in the current document. Be that as it may. It is tolerably clear on the documents, and I accept, that the particular point sought to be made on the defendant's case with regard to this sum of $151.4 million which was the profit achieved by the Ting Kau JV in 1998/99 is the contention that such profit in a subsequent year ought be brought into account in calculation of the profit and loss position for the year of claim, that is 1997/98.

29. However, paragraph 18 of the present pleading, which avers that the plaintiff has failed to take this sum into account, specifically also alleges "breach of... the implied term pleaded in paragraph 8A above", the plea in paragraph 8A(a) being to the effect that any liability of the defendant to pay under the share purchase contract is conditional on the audited accounts of Downer "having been properly prepared and signed by the directors and auditors of Downer". And it is to this plea of 'proper preparation'of the audited accounts that Mr Shaw specifically directs the court's attention in justifying his attempt to go beyond the contractually prescribed pool of material and to obtain the discovery he now seeks.

30. Mr Shaw accepts that if and in so far as this argument does not get home, his application fails. For my part I cannot see that it can succeed. Paragraph 8A of the Amended Defence patently was not pleaded as the basis of a case alleging the impropriety of, or within, the auditing process no case has been mounted in this regard and the implied term prayed in aid (which in terms of paragraph 8A(a) is entirely unexceptional) seems to be aimed at underpinning a different point, namely that of the taking into account subsequent profits. In my view this plea as presently formulated cannot be employed to justify the widening of the contractually prescribed pool of material available for the experts' consideration, nor on the basis of the current pleading can it be used to justify a 'trawl' through the categories of material now sought with a view to showing, in the context of this $480 million claim, that the audited accounts had been improperly prepared/signed off; if permitted, this would seem to me to be clearly 'fishing' and to constitute a 'bootstraps' approach of significant dimension. As earlier observed, no doubt exists as to what Mr Hills did, and did not do in this case he says so in terms and in my view it is up to the experts now to look at the material involved in the audit and to formulate their views as to the correct figures to be attributed to Gross Contract Income and Annual Cost for the period in question.

31. It follows from the foregoing that in my judgment this application must be dismissed, and I so order. As to costs, ultimately there is nothing before me which justifies an order on the indemnity basis canvassed in the summons, and to be fair Mr Shieh did not press this. In my view the costs of the application should be to the plaintiffs in any event, to be taxed if not agreed. I so order.

The plaintiffs' application

32. In the circumstances it is clearly appropriate to proceed with this action without further delay. I am not minded to grant the 'unless' order sought by the plaintiff to compel exchange of provisional expert reports. It seems to me that the matter can be accommodated by ordering, as I now do, that provisional expert reports be exchanged within 28 days of the date hereof. I anticipate that there will be compliance with this not ungenerous deadline. The costs of this application, which in fact is no more than a procedural direction consequential upon dismissal of the defendant's discovery summons, are to be in the cause, to be taxed if not agreed.