NAM TAI ELECTRONICS, INC. v. PRICEWATERHOUSE COOPERS

FACV No. 1 of 2007

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

 FINAL APPEAL NO. 1 OF 2007 (Civil)

(ON APPEAL FROM CACV No. 99 of 2005)

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J U D G M E N T

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Chief Justice Li:

1.  I agree with the judgment of Mr Justice Ribeiro PJ.

Mr Justice Bokhary PJ:

2.  Disclosure of matters to which an obligation of confidentiality attaches can, at least in general, be justified by showing that the disclosure was fairly required in the pursuit or protection of a legitimate interest.  In the ordinary way, a firm of accountants would be pursuing a legitimate interest when seeking appointment as a liquidator.  And it would ordinarily be protecting that interest when endeavouring to meet a suggestion that it lacks the requisite impartiality.

3.  The present situation is somewhat out of the ordinary.  This is because the firm had earlier conducted a due diligence review on the company of which it later sought to be the liquidator.  I proceed on the assumption that the firm was nevertheless pursuing a legitimate interest when seeking appointment as the company’s liquidator.  But that assumption does not bring the firm success.  What it disclosed was that it had recommended against acquisition.  Its stance is that such disclosure was made in order to meet its former client’s suggestion to the effect that having conducted the due diligence review deprived it of the impartiality that a liquidator must have.  But that suggestion did not imply that it had recommended in favour of acquisition.  Nor does the question of its impartiality turn on whether its recommendation had been in favour of or against acquisition.  For these reasons and those more fully stated by Mr Justice Ribeiro PJ, I do not regard the disclosure as fairly required. 

4.  A sum of $100.00 is an appropriate one to represent damages which are nominal but not intended to be derisory.  As to the measure of damages and how costs should be dealt with, I agree with my brother Ribeiro.  So I, too, would allow the appeal in the terms which he proposes.

Mr Justice Chan PJ:

5.  I agree with the judgment of Mr Justice Ribeiro PJ.

Mr Justice Ribeiro PJ:

6.  The question which falls to be considered was formulated by the Appeal Committee as follows:

“	In what circumstances, and to what extent, may a duty of confidentiality be relaxed to allow a person subject to that duty to defend himself against an adverse allegation made against him by the person to whom that duty is owed?”

A. The parties

7.  The plaintiff (“Nam Tai”) is a company incorporated in the British Virgin Islands and listed on the NASDAQ, a securities exchange in the United States.  Nam Tai manufactures electronic products and supplies them to well known producers of electronic consumer goods.  It was founded by Mr Koo Ming Kown (“Mr Koo”) who is a director of Nam Tai and its senior executive officer.

8.  The defendant, (“PWC”) is a well-known firm of certified public accountants in Hong Kong.  It is associated with a large international network of accountancy firms trading under the same name.  From 1989 until November 1998, PWC acted as Nam Tai’s auditors.  Mr Robert Nield (“Mr Nield”) was the audit engagement and client relationship partner. 

B. The relationship between the parties

9.  Although the professional relationship between the parties had initially been close and cordial, it deteriorated and came to an end in late 1998.  In early 1999, further contentious issues arose between them.  For present purposes, there were three material facets to that relationship and its souring.

B.1 The audit relationship

10.  First, it appears that Nam Tai became dissatisfied with PWC as its auditors in the course of the audit for the year ended 31 December 1997.  There had been differences between them as to whether a tax refund from the Beijing authorities and whether the full amount of a debt plus interest, owed by a company called Tele-Art Inc (“Tele-Art”, discussed further below), could properly be recognized as receivables.  Mr Nield’s impression was that Mr Koo thought that PWC did not believe the representations Mr Koo had made.  He was somewhat surprised by Nam Tai’s attitude and recalled that he “was horrified” at how badly the audit clearance meeting on 11 March 1998 had gone.  At the end of April 1998, Nam Tai indicated that it was considering a change of auditors.  In the circumstances described below, PWC resigned as Nam Tai’s auditors on 26 November 1998.

B.2 The due diligence review

11.  The second facet of the relationship involved the due diligence review conducted by PWC in respect of a company called Albatronics (Far East) Co Ltd (“Albatronics”) on Nam Tai’s behalf between September and November 1998.  Albatronics was a Hong Kong listed company involved in trading and distributing electronic products, notably products manufactured by Sony, the well-known Japanese consumer electronics company.

12.  On 11 September 1998, Nam Tai had entered into an agreement (“the subscription agreement”) with Albatronics to take up 700 million new shares in that company for just over HK$70 million in cash, thereby acquiring a controlling interest.  Although Albatronics’s auditors, Deloitte Touche Tohmatsu, had given it an unqualified audit opinion for the year ended 31 March 1998, it is clear that by September 1998, Albatronics was in serious financial trouble and was being referred to as a “distressed” company.  Moreover, the directors had disclosed to Nam Tai that there were significant “unrecorded losses” which, as Nam Tai understood, meant that Albatronics’s stated net assets had to be reduced by about HK$250 million.  This was reflected in the terms of the subscription agreement which provided that there would be no liability for breach of warranty unless a breach resulted in the company’s consolidated net assets as at 31 July 1998 being reduced by more than HK$250 million. 

13.  Mr Koo’s evidence was that he believed that injection of the HK$70 million would enable Albatronics to trade itself out of its distressed condition provided that the creditors, consisting of a series of Japanese banks and suppliers including Sony, were prepared to continue providing support.  Because Nam Tai had ample surplus cash, Mr Koo was prepared to go ahead with the acquisition without any due diligence review.  However, he was, somewhat reluctantly, persuaded that such a review should take place and PWC was given the job. 

14.  The PWC engagement partner for the due diligence review was Mr Neal Stow.  Its main objective was to see if there were hidden liabilities exceeding the $250 million already disclosed.  The engagement letter dated 18 September 1998 which was signed by Mr Ed Chan, Nam Tai’s then Chief Financial Officer, made it clear that the review would be limited in scope, based mainly on internal management information and discussion with key staff of Albatronics.

15.  On 10 November 1998, PWC delivered its due diligence report.  It noted that Albatronics was “technically insolvent” and would be “dependent upon its bankers and Nam Tai to provide continued financial support”.  It indicated that a write down of net assets by a further HK$22 million beyond an acknowledged requirement for a write down of HK$240 million was needed.  Significantly, the report called into question the integrity of Albatronics’s management, suggesting that they had deliberately misled the company’s auditors, mis-stated its assets in a published circular and indulged in business practices which would be unacceptable for a US listed company subject to the Foreign Corrupt Practices Act.  The report questioned the wisdom of proceeding with the acquisition, stating:

“

We have not been instructed to advise you either as to the proposed transaction or the terms of the Circular.  However, in view of the advice which we understand that you have received from Johnson, Stokes and Master [a firm of solicitors], you may wish to consider with them and your financial advisors whether or not you wish to continue with the transaction on the current basis and whether or not you should seek to have the terms of the Circular and any announcement corrected.”

16.  Mr Koo was obviously well aware of the financial straits of Albatronics.  But he took strong exception to the report’s damning criticisms of that company’s management.  As Mr Nield reported on 26 November 1998, Mr Koo said that he disagreed with the review’s findings and asserted that there was “no evidence for saying their directors are thieves”.

17.  On the same day, PWC resigned as Nam Tai’s auditors.  It had decided that it could not remain Nam Tai’s auditors without also auditing Albatronics and were unwilling to assume the latter role in view of their concerns about the integrity of that company’s management.

18.  Nam Tai’s unhappiness with the due diligence report was reflected in a dispute regarding fees with Nam Tai denying Ed Chan’s authority to sign the engagement letter.  Eventually, PWC accepted payment of HK$500,000 in settlement of its bill for HK$1,245,264.75 with a view to bringing the matter to a close.

B.3 Litigation over the Tele-Art debt

19.  Thirdly, the differences concerning the Tele-Art debt took on a further dimension when they resulted in litigation.  Tele-Art was another BVI company listed on the NASDAQ.  It too fell into financial difficulties and was the subject of a judgment debt which Nam Tai acquired as assignee.  This was done in the context of some personal animosity between Mr Koo and Mr Elmer Yuen, Tele-Art’s founder.  Tele-Art’s principal asset in mid-1998 was a parcel of Nam Tai shares worth some US$5 million and Nam Tai believed that it could recover in full the acquired debt with interest by setting off those amounts against the Nam Tai shares held by Tele-Art. 

20.  On 17 July 1998, the BVI court made an order winding-up Tele-Art on Nam Tai’s petition and, at Nam Tai’s behest, appointed Mr David Hague (“Mr Hague”), a PWC partner introduced by Mr Nield, as liquidator.  Nam Tai then gave notice of an intended redemption of the shares held by Tele-Art as a set-off against Tele-Art’s debt.  However, the other principal creditor of Tele-Art was the Bank of China which claimed to have a charge over those shares.  Since an issue of priorities had evidently arisen between Nam Tai and the Bank of China, on 23 January 1999, Mr Hague obtained an injunction from the BVI court restraining Nam Tai from proceeding with its notice of redemption until that issue was determined. 

21.  Nam Tai countered on 25 February 1999 with an application to remove Mr Hague as Tele-Art’s liquidator, alleging that he was biased in the performance of his duties and had a conflict of interest, an allegation firmly denied by Mr Hague.  That application was dismissed by the BVI court on 4 September 2000.  Nam Tai’s appeal was dismissed by the BVI Court of Appeal on 19 January 2001 and, on 20 June 2001, leave to appeal to the Privy Council was refused.  However, that was not the end of the litigation since the priorities question still remained to be dealt with and Nam Tai had issued a fresh application for removal of Mr Hague on the ground of misconduct.  Further discussion of that litigation is unnecessary.

22.  It is against the background of the foregoing matters that the disclosure complained of was made.

C. The acquisition and liquidation of Albatronics

23.  As noted above, after 26 November 1998, Nam Tai was no longer a client of PWC, the relationship having ended with a degree of acrimony, at least as perceived by Nam Tai.  Notwithstanding PWC’s adverse recommendation, Nam Tai proceeded in December 1998 to complete its acquisition of a controlling interest in Albatronics in accordance with the subscription agreement.

24.  In the following six months or so, an attempt was made to re-structure Albatronics financially.  During this process, PWC assumed the role of advising Sony, one of the principal creditors.  According to Mr Koo, the needed support of the creditors was not forthcoming so that on 17 June 1999, the board of Albatronics announced that it had resolved to put the company into voluntary liquidation.

D. The bid for appointment as liquidator of Albatronics and the disclosure

25.  News of the decision to liquidate Albatronics was keenly received by the large accountancy firms in Hong Kong.  On 16 June 1999, the day before the public announcement was made, Mr Colin Farrell, a PWC partner who had been advising Sony on tax matters, sent an e-mail to senior members of the partnership stating:

“	FYI.  A Deloitte financial report on the break-up of the Albatronics group estimated the liquidation fees at HK$23m, so of potential financial interest.”

He added:

“	The potential perceived problem, I believe, is our old relationship with Nam Tai, the Albatronics group’s majority shareholders.”

26.  However, the PWC partners who would potentially be involved concluded that acting as liquidator of Albatronics would present no conflict of interest problems, principally on the footing that PWC had never had a professional relationship with Albatronics.  This conclusion was reached notwithstanding the recent problems in their relationship with Nam Tai which Mr Farrell had noted and despite their awareness that Nam Tai had expressed objections against their appointment.  Conscious of keen competition for the job from the other big firms, PWC launched a vigorous lobbying campaign aimed at convincing the creditors that PWC should be appointed.  In doing so, PWC decided to disclose what is acknowledged to have been confidential information concerning the due diligence review it had conducted for Nam Tai, which is what the present case is about.

27.  The disclosure came about as follows.  On 28 June 1999, PWC made a presentation to Sumitomo Bank using a document entitled “Liquidations Capabilities Overview” which was also circulated to the other bank creditors.  It stated:

“	In September 1998, PWC conducted due diligence for Nam Tai in respect of its potential acquisition in Albatronics.  We recommended that Nam Tai not make the acquisition.  Nam Tai did not take our recommendation and proceeded to invest in Albatronics.”

While it was publicly known that PWC had conducted a due diligence review and that Nam Tai had thereafter proceeded to make its investment in Albatronics, the fact that PWC had made a recommendation against the acquisition was not in the public domain and was clearly confidential. 

28.  Disclosure of that confidential advice was repeated in identical terms in a document headed “Liquidation Proposal of Albatronics” (“the Proposal”) which was sent to Sony’s solicitors on 17 August 1999 and distributed to the other creditors.  I shall refer to the disclosure of the confidential recommendation against proceeding with the acquisition as “the negative disclosure”. 

29.  PWC’s case is that the negative disclosure was justified since it was made in order to counter Nam Tai’s contention that PWC should not be appointed liquidator because PWC would have a conflict of interest in that role by reason of its prior involvement in the due diligence review.

E. The present proceedings

30.  The negative disclosure contained in the Proposal is the basis of Nam Tai’s action against PWC.  Initially, the claim was brought on the basis of malicious falsehood and libel.  Those causes of action have fallen away and the only live claim is one for breach of confidence. 

31.  As noted above, in answer to Nam Tai’s claim, PWC asserts that the negative disclosure was justified as a defensive response to Nam Tai’s objection to its appointment as liquidator.  PWC contends that a disclosure in such circumstances falls outside the scope of its duty of confidentiality and that no liability for breach of confidence ensues.

32.  That argument was accepted by Waung J at first instance[1] and also in the Court of Appeal (Rogers VP, Le Pichon and Cheung JJA).[2]  Its correctness is challenged on this appeal.

F. The legal principles

F.1 The duty of confidentiality

33.  It is common ground that PWC undertook a duty of confidentiality to Nam Tai regarding the information imparted to it in the due diligence review and in respect of the contents of the due diligence report. 

34.  Such a duty imposed an obligation on PWC not to communicate the information to a third party and not to misuse the confidential information, that is to say, not to make any use of it or to cause any use to be made of it by others otherwise than for Nam Tai’s benefit, unless with Nam Tai’s consent.[3]  It was a duty which survived termination of the client relationship and continued to bind PWC to preserve the confidentiality arising during the subsistence of that relationship.[4]  The court is astute to protect a former client’s confidences and will restrain conduct on the part of the confidant which exposes the former client to an avoidable risk of disclosure.[5]

F.2 Limits on the scope of the duty of confidentiality

35.  The present appeal concerns the limits of or qualifications to that duty.  In cases like the present, where the duty of confidentiality arises out of the parties’ contractual relationship, the starting-point is the influential decision of the English Court of Appeal in the Tournier case.[6]  In the context of a banker-customer contract, Bankes LJ identified the limits of the duty of confidentiality as follows:

“

On principle I think that the qualifications can be classified under four heads: (a) Where disclosure is under compulsion by law; (b) where there is a duty to the public to disclose; (c) where the interests of the bank require disclosure; (d) where the disclosure is made by the express or implied consent of the customer.”[7]

36.  It is PWC’s case that the negative disclosure, being a defensive response to Mr Koo’s allegation that PWC should not be appointed liquidator of Albatronics because it would have a conflict of interest in that role, fell within either or both of the last two qualifications on the duty: as a disclosure properly required by PWC’s interests or as one made with Nam Tai’s express or implied consent.  I shall refer to these two heads of qualification as “the self-interest qualification” and “the consent qualification” respectively.

F.3 The consent qualification generally

37.  Subject to presently inapplicable exceptions, a party may obviously waive a right enjoyed under a contract.  The consent qualification is an example of such a waiver.  The waiver may be express or implied from the conduct of the confider.  It is a question of fact whether, viewed objectively, the confider has consented to disclosure and the duty of confidentiality has been waived.

38.  In Sunderland v Barclays Bank Ltd,[8] for instance, it was held that the conduct of the customer in handing the telephone to her husband who then demanded an explanation for the bank’s dishonouring of the customer’s cheque justified the bank manager in thinking that she had impliedly consented to the bank informing her husband of its reason for doing so, waiving confidentiality. 

39.  In Mann v Carnell,[9] a case involving legal professional privilege, the question of fact was approached by asking whether the conduct of the client was inconsistent with maintaining the confidentiality of the privileged communication.  In their joint judgment, the majority in the High Court of Australia stated:[10]

“

Legal professional privilege exists to protect the confidentiality of communications between lawyer and client. It is the client who is entitled to the benefit of such confidentiality, and who may relinquish that entitlement. It is inconsistency between the conduct of the client and maintenance of the confidentiality which effects a waiver of the privilege.”

Stressing the objective nature of this approach, their Honours added:

“

Waiver may be express or implied. Disputes as to implied waiver usually arise from the need to decide whether particular conduct is inconsistent with the maintenance of the confidentiality which the privilege is intended to protect. When an affirmative answer is given to such a question, it is sometimes said that waiver is ‘imputed by operation of law’.  This means that the law recognises the inconsistency and determines its consequences, even though such consequences may not reflect the subjective intention of the party who has lost the privilege.”[11]

40.  I would add that in cases of implied waiver the conduct must clearly convey the meaning of the waiver relied on.  As is pointed out by the editors of Chitty,[12] cases of waiver are analogous to cases of promissory estoppel where it is well-established that clear and unequivocal conduct founding the estoppel is required.  In Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd, [13] Lord Pearson drew the parallel in the following terms:

“

This is not an appropriate case for a general examination of the principle which is sometimes known as ‘promissory estoppel,’ though it is far removed from the familiar kind of estoppel by representation of fact and seems, at any rate in a case of this kind, to be more like a waiver of contractual rights.  In a case of this kind the alleged ‘representation’ or promise or assurance ought to be reasonably clear and definite both as to the terms of the contract which is being waived and as to the duration of the waiver.  It may be that the ‘representation’ or promise or assurance has to have at least as much precision as would be needed for a variation of the contract.”

41.  A disclosure made on the basis of a waiver is not permitted to exceed the scope of the waiver established.  Thus, in Lillicrap v Nalder & Son,[14] a case involving a suit against solicitors, Dillon LJ pointed out that the client’s waiver generally “can only extend to matters which are relevant to an issue in the proceedings and, privilege apart, admissible in evidence.  There is no waiver for a roving search into anything else in which the solicitor or any other solicitor may have happened to have acted for the clients.”  Similarly, in Paragon Finance plc v Freshfields,[15] a client suing its former solicitors for negligence in the handling of a transaction was held to have waived confidentiality regarding that firm, but not in respect of the solicitors subsequently instructed to pursue and settle the client’s claims arising out of that transaction against a third party.

F.4 The self-interest qualification generally

42.  As explained in Tournier and subsequent cases, the self-interest qualification is the reflection of an implied term permitting the confidant to disclose confidential information where such disclosure is necessary for the business efficacy of their ordinary contractual transactions. 

43.  Thus, in Tournier, Bankes LJ gave as an example of the self-interest qualification’s operation, a disclosure “where a bank issues a writ claiming payment of an overdraft stating on the face of the writ the amount of the overdraft”.[16]  Scrutton LJ also referred to the bank  “collecting or suing for an overdraft” and to making disclosure in its own interests “to an extent reasonable and proper for carrying on the business of the account, as in giving a reason for declining to honour cheques drawn or bills accepted by the customer, when there are insufficient assets”.[17]

44.  So viewed, the self-interest qualification is of limited scope.  This was the approach of the Court of Appeal in Chase Manhattan Bank NA v FDC Co Ltd,[18] where a bank with headquarters in New York and a branch in Hong Kong found itself sandwiched between, on the one hand, an order of a United States court compelling it to disclose information about accounts maintained by customers with the Hong Kong branch and, on the other, an injunction issued by the Hong Kong court preventing such disclosure.  Faced with the prospect of severe penalties if it failed to comply with the New York order, the bank would have considered it very much in its own interests to make the disclosure.  But, as Huggins VP pointed out, the information was not needed in the United States of America “in the ordinary course of banking business” but “solely for the purpose of its being disclosed to the United States’ Government”[19] so that the self-interest qualification, understood in the narrow sense discussed above, was held to be inapplicable.  Silke JA put it as follows:

“

While I fully accept that the financial implication of this and of the foreign proceedings, on the face of it, would suggest that it would be in the interests of the Bank to disclose and therefore to excuse them under a Tournier exception from the performance of their obligation, I do not read that exception to be in reality such cover.  It must mean in the interests of ordinary banking practice, such as when they find it necessary to sue upon an overdraft or matters of that kind.  The issues here are very much wider than those narrow interests of the Bank as I see them to be.” [20]

45.  However, developments in the law indicate that the self-interest qualification is now more liberally applied and regarded as extending beyond the narrow confines described above.  In particular, as discussed in the section which follows, it has been held to encompass a “self-defence exception” (to adopt the expression used by Professor Rosemary Pattenden in her valuable textbook discussion[21]) based upon a broader view of the requirements of business efficacy or of the terms which may be implied as a matter of law in the confidentiality context.

F.5 Disclosure in self-defence: litigation and disciplinary proceedings 

46.  It is well-established that a professional confidant is entitled to make a defensive disclosure in two situations.  The first of these is where legal proceedings are brought against him by the client (by which term I include a former client), for example, in an action for professional negligence.  The legal basis of this exception was explained in Paragon Finance plc v Freshfields[22] by Lord Bingham of Cornhill CJ in the following terms:

“

When a client sues a solicitor who has formerly acted for him, complaining that the solicitor has acted negligently, he invites the court to adjudicate on questions directly arising from the confidential relationship which formerly subsisted between them. Since court proceedings are public, the client brings that formerly confidential relationship into the public domain. He thereby waives any right to claim the protection of legal professional privilege in relation to any communication between them so far as necessary for the just determination of his claim; or, putting the same proposition in different terms, he releases the solicitor to that extent from the obligation of confidence by which he was formerly bound.  This is an implication of law, the rationale of which is plain.  A party cannot deliberately subject a relationship to public scrutiny and at the same time seek to preserve its confidentiality.  He cannot pick and choose, disclosing such incidents of the relationship as strengthen his claim for damages and concealing from forensic scrutiny such incidents as weaken it.  He cannot attack his former solicitor and deny the solicitor the use of materials relevant to his defence.”

47.  A similar approach had been adopted in the earlier case of Lillicrap v Nalder & Son,[23] where Dillon LJ approved May J’s formulation in the lower court which was as follows :

“	A client who sues his solicitor invites the court to adjudicate the dispute and thereby, in my judgment, waives privilege and confidence to the extent that is necessary to enable the court to do so fully and fairly in accordance with the law including the law of evidence.”

Similarly, Russell LJ stated :

“	...by bringing civil proceedings against his solicitor, a client impliedly waives privilege in respect of all matters which are relevant to the suit he pursues and, most particularly, where the disclosure of privileged matters is required to enable justice to be done.”[24]

48.  And in Nederlandse Reassurantie Groep Holding NV v Bacon & Woodrow,[25] in a passage approved in the Paragon case,[26] Colman J provided the following explanation of the Lillicrap decision :

“

The true analysis of what the courts are doing in such cases of so-called implied waiver of privilege is, in my judgment, to prevent the unfairness which would arise if the plaintiff were entitled to exclude from the court’s consideration evidence relevant to a defence by relying upon the privilege arising from the solicitor’s duty of confidence.  The client is thus precluded from both asserting that the solicitor has acted in breach of duty and thereby caused the client loss and, to make good that claim, opening up the confidential relationship between them and at the same time seeking to enforce against that same solicitor a duty of confidence arising from their professional relationship in circumstances where such enforcement would deprive the solicitor of the means of defending the claim.  It is fundamental to this principle that the confidence which privilege would otherwise protect arises by reason of the same professional relationship between the parties to the litigation.  The underlying unfairness which the principle aims to avoid arises because the claim is asserted and the professional relationship opened for investigation against the very party whose duty of confidence is the basis of the privilege.  It is against the unfairness of both opening the relationship by asserting the claim and seeking to enforce the duty of confidence owed by the defendant that the principle is directed.”[27]

49.  The rationale for recognizing a self-defence exception in litigation cases therefore has two aspects.  The first involves an application of the doctrine of implied waiver reflecting the consent qualification.  The client who brings an action complaining about the professional’s conduct in the course of their confidential relationship must know that this entails a public airing of the claim and the defence.  The client may therefore be taken to have consented to a waiver of confidentiality.  Secondly, in the cases cited, disclosure of the client’s confidences has been justified as an implicit requirement of fairness in the specific context of legal proceedings initiated by the confider, reflecting recognition of the confidant’s entitlement to protect its own interests in that context.  It may be noted that Lord Bingham CJ in the Paragon case[28] indicated that the term was an implication of law.  As we shall see, it has been suggested elsewhere[29] that the implication is made as a matter of business efficacy.

50.  The second category of cases where a self-defence exception is generally recognized involves professional disciplinary proceedings initiated against the confidant by the client.  R v Institute of Chartered Accountants of England and Wales, ex p Brindle,[30] is an instance.  While Hirst LJ pointed out that the duty of confidentiality owed to the client in such circumstances will often be overridden by compulsion of law (where the professional body has relevant statutory powers[31]) or may be justified as a disclosure in the public interest, his Lordship went on to say that, alternatively, the accountants against whom a complaint had been made “would be entitled to produce any such documents as were required to further their own defence” by virtue of the Tournier principles.  Although cases involving disciplinary proceedings do not appear to have received detailed analysis, it is my view that the approach adopted to defensive disclosures in litigation cases is equally applicable in the disciplinary context.

F.6 Disclosure in self-defence: litigation and complaints involving third parties

51.  It appears now to be accepted that a confidant who owes a duty of confidentiality to his client may be entitled to disclose information covered by that duty in order to defend himself in legal proceedings brought by a third party.  Similarly, it appears to be accepted that such disclosure may be permissible in disciplinary proceedings initiated against a professional confidant, not by the client, but by a third party.  As such proceedings are not brought by the client to whom the duty is owed, disclosure in these cases cannot be justified on the basis of a waiver by the client.  Justification, applying Tournier principles, rests on the self-interest qualification applied in the context of “self-defence”. 

52.  Thus, in Tournier itself, Atkin LJ stated:

“

...the bank have the right to disclose such information when, and to the extent to which it is reasonably necessary for the protection of the bank’s interests, either as against their customer or as against third parties in respect of transactions of the bank for or with their customer...”[32] (Italics supplied)

His Lordship accordingly recognized that in the context of the self-interest qualification, the implied term extends to permitting the bank to make such defensive disclosures where the third party’s attack arises “in respect of transactions of the bank for or with their customer”.  The fairness of such a rule is evident since the bank would be claiming the right to defend itself against potential liability to a third party which it attracted by virtue of its having processed the customer’s transactions: a course of action to which the customer may be taken impliedly to have agreed.

53.  In Hassneh Insurance v Mew,[33] Colman J held that the principle extends to permitting a disclosure made, not merely in “self-defence”, but in the enforcement of the confidant’s rights asserted against a third party.  Hassneh Insurance was a case where a reassurer’s disclaimer of liability was upheld against the reassured in confidential arbitration proceedings.  In consequence, the reassured sought to bring a claim against the placing brokers and wished to disclose the documents discovered in the arbitration as well as the award and reasons for the award in aid of that claim.  The reassurers objected and claimed injunctions against such disclosure.  Colman J held that confidentiality of the documents used in the arbitration had to be preserved but that the award and reasons could be used in the subsequent proceedings.  Basing himself on Tournier, Colman J’s reasoning was as follows:[34]

“

Implicit in all these formulations of the scope of the duty of confidence is that the bank should be able to disclose the information if to withhold it would or might prejudice the bank in the establishment or protection of its own legal rights vis-à-vis the customer or third parties. The essence of the matter is that it might need to disclose the information either as the foundation of a defence to a claim by a third party, or as the basis for a cause of action against a third party.

In my judgment, a similar qualification must be implied as a matter of business efficacy in the duty of confidence arising under an agreement to arbitrate.  If it is reasonably necessary for the establishment or protection of an arbitrating party’s legal rights vis-à-vis a third party, in the sense which I have described, that the award should be disclosed to that third party in order to found a defence or as the basis for a cause of action, so to disclose it would not be a breach of the duty of confidence.”

Colman J therefore justified this extension (in relation to disclosure of the award and reasons, but not the documents) on the basis of a term implied as a matter of business efficacy in the arbitration agreement between the original parties to the dispute.  As previously noted, Lord Bingham CJ’s approach in Paragon differed in that his Lordship approached the term as one implied by law.

54.  It is unnecessary, and may not be possible in the present state of the authorities, to attempt to resolve that difference.  The present appeal does not involve claims or complaints by or against third parties.  However, the “third party” cases are relevant as indicating that justified disclosures “in self-defence” outside the well-established categories of litigation or disciplinary proceedings brought by the client have come to be recognized as justifiable on the basis of the self-interest qualification.

F.7 Disclosure in self-defence: other cases

55.  Does the self-interest qualification reflected in a self-defence exception operate in a case like the present?  Nam Tai has not initiated any litigation or disciplinary proceedings against PWC.  It cannot therefore be taken to have thereby waived confidentiality.  Neither is PWC being sued or being made the subject of a disciplinary complaint by a third party, whether in connection with any transactions undertaken with or for Nam Tai or otherwise.  Nor is PWC seeking to establish its legal rights in litigation or equivalent proceedings against a third party. 

56.  What PWC asserts is an entitlement to make disclosure in “self-defence” by virtue of the fact that Nam Tai had communicated to the creditors its objection against PWC being appointed as liquidator of Albatronics, alleging that PWC’s prior involvement in the due diligence review meant that it would have a conflict of interest qua liquidator.  The negative disclosure is sought to be justified simply on the basis that a defensive response to that allegation was fairly required.  Given the principles discernible from the existing authorities, is such a self-defence exception capable of arising in such circumstances, and if so, subject to what conditions?

57.  Mr Joseph Fok SC,[35] who argued the appeal on PWC’s behalf with conspicuous ability, submits that there is no reason in principle why such an exception should not arise in the present case.  He contends that it can properly be founded on either or both of the consent and self-interest qualifications. 

58.  I would accept that a term permitting a defensive disclosure by the confidant when confronted with a hostile allegation made by the confider may in principle be implied as an aspect of the self-interest or consent qualifications in situations other than those established in the cases discussed above.    

59.  Mr Fok invited the Court to adopt Brennan J’s broad approach in Esso Australia Resources Ltd v Plowman.[36]  In discussing the Tournier principles and the decision in the Hassneh Insurance case,[37] his Honour stated:

“	I would imply an obligation of confidentiality as a matter of business efficacy but limit the implication by reason of the likelihood that one or other party would have reserved the right to disseminate otherwise confidential material in certain situations.”

In particular, Brennan J took one such situation to involve cases “where disclosure of the material is fairly required for the protection of the party’s legitimate interests.”[38]  Mr Fok submitted that such a term, implied in the present case, justifies PWC in making the negative disclosure.

60.  I would accept the implication of such a term in the present case in the context of a claim to make a disclosure in “self-defence”.  Nam Tai and PWC should be taken to have impliedly agreed (whether as a matter of business efficacy or by implication of law) that disclosure of otherwise confidential information may be made where such disclosure is fairly required for the protection – by which I include furtherance – of either party’s legitimate interests.  I shall refer to this term as “the defensive disclosure term”.  That, however, is not the end of the inquiry.  As is pointed out in the textbook by Toulson and Phipps:[39]

“	What is ‘fairly required’ and what are ‘legitimate interests’ will necessarily depend on the circumstances and nature of the relationship between the confider and confidant.”

61.  It can readily be seen that the requirements of the defensive disclosure term are met in the litigation and disciplinary proceedings cases discussed in Sections F.5 and F.6 above.  However, each disclosure which is said to be a defensive response needs to be individually scrutinized, asking whether it was made for the protection or in furtherance of the party’s legitimate interests and whether such disclosure was fairly required.

G. The principles applied

G.1 Was the negative disclosure made in furtherance of PWC’s legitimate interests?

62.  Sir John Swaine SC, appearing for Nam Tai, submitted that it was self-evident that PWC was fixed with confidential information gained in the due diligence review which it could not avoid misusing if it were to be appointed liquidator.  Accordingly, so the argument ran, PWC could not legitimately seek appointment and therefore could not justify the negative disclosure made in furtherance of its attempts at securing the same.

63.  I am unable to accept that argument.  Whether PWC would have been precluded from acting as liquidator by reason of confidential information acquired in conducting the due diligence review has not been explored.  As the creditors decided against appointing PWC in any event, there was never any cause to investigate that question and, in the absence of such investigation, the disqualification of PWC cannot simply be taken as self-evident. 

64.  PWC’s efforts at securing appointment as liquidator of Albatronics were undertaken as part of the firm’s ordinary professional activities and therefore, in my view, in pursuit of its legitimate interests.  The negative disclosure formed part of those efforts and is to be regarded, for the purposes of the defensive disclosure term, as having been made in furtherance of PWC’s legitimate interests.

G.2 Was the negative disclosure fairly required?

65.  It is in relation to this requirement of the defensive disclosure term that PWC encounters difficulties.  For PWC to show that the negative disclosure was fairly required as a defensive response to Nam Tai’s allegation of conflict of interest, it must first of all establish that, reasonably understood, the negative disclosure was actually a response to the allegation.  Whether that is made out must be considered both from the perspective of PWC and from the perspective of the creditors to whom Nam Tai communicated the allegation.  It must, in other words, have been reasonable for PWC to understand that it was being attacked in a manner which justified its particular response.  Equally, for that response consisting of the negative disclosure made to the creditors to be justified, it had to address Nam Tai’s allegation as it would reasonably have been understood by the creditors.

66.  If the negative disclosure constitutes a response to the allegation, it would then be necessary to ask: Was it necessary to make the negative disclosure or ought PWC reasonably to have taken other steps before resorting to the dissemination of confidential information?  Did the disclosure exceed what was fairly required by way of self-defence? 

G.2a From PWC’s perspective

67.  Whether PWC reasonably understood Nam Tai’s allegation to have a meaning which justified the making of the negative disclosure must be considered in the light of the circumstances of the parties’ relationship, known to them both.

68.  It is of course elementary and was no doubt appreciated as a practical matter by all concerned that a liquidator has a duty to act impartially.  As Sir W M James LJ stated in Gooch’s Case:[40]

“	...it is of the utmost importance that the liquidator should, as the officer of the Court, maintain an even and impartial hand between all the individuals whose interests are involved in the winding-up. He should have no leaning for or against any individual whatever.”

69.  Nam Tai’s allegation of conflict of interest was made against the background discussed in Sections B.1, B.2 and B.3 above, involving the souring and termination of their audit relationship; Mr Koo’s vehement disagreement with the findings of the due diligence review concerning the integrity of Albatronics’s management; his refusal to pay the fees in full; and the on-going BVI litigation between Nam Tai and Mr Hague, a PWC partner.  In that context, upon being told that PWC was seeking appointment as liquidator, it would hardly have been surprising if Nam Tai became concerned about PWC’s ability to act impartially as liquidator vis-à-vis itself and it would have been natural for PWC reasonably to interpret Nam Tai’s objection, expressed in terms of a potential conflict of interest, as reflecting such a concern.

70.  Indeed, there is little doubt that PWC did in fact realise that such anxiety might well have underlain Nam Tai’s allegation of conflict since it was at pains to address that possible concern in the Proposal.  In the section headed “Independence” it noted that Nam Tai “has raised concerns regarding our ability to act as independent Liquidators of Albatronics ... because of our previous dealing with it.”  The Proposal went on to tell the creditors about PWC’s resignation as Nam Tai’s auditors, about its conduct of the due diligence review (in the course of which it made the negative disclosure) and about the fact that there was on-going litigation with Nam Tai in connection with Tele-Art in the BVI.  It asserted that these three matters:

“	... do not in any way impair our independence in acting as Liquidator of Albatronics.  In fact the above confirms our true independence in this matter.”

71.  It is therefore evident that from PWC’s perspective, knowing that Nam Tai would have considered some bad blood to exist between the parties, Nam Tai’s allegation could reasonably be understood as expressing its anxiety about PWC’s potential lack of impartiality.  Concern about a possible tendency on PWC’s part to prefer the interests of others involved in the liquidation over the interests of Nam Tai may well have been expressed in terms of a potential conflict of interest.

72.  Moreover, given the damning remarks PWC had made in the due diligence report concerning the integrity of the management of Albatronics, remarks which Mr Koo had rejected, Nam Tai would naturally have been concerned that, if appointed liquidator, PWC would not assume the office with a fresh and open mind, but would be inclined to vindicate the condemnatory views it had already expressed.  This again may well have been seen by Nam Tai as giving rise to a potential conflict between PWC’s interest in upholding the assessment it had already made in the due diligence exercise and its duty to act as an impartial and open-minded liquidator.

73.  It is therefore my view that reasonably understood in the light of the parties’ mutual dealings, the content of Nam Tai’s allegation was not such as to justify a response in the terms of the negative disclosure.  The statement that PWC would have a conflict of interest if appointed was capable of bearing different meanings, some of which had nothing to do with PWC making either a positive or negative recommendation regarding Nam Tai’s acquisition of Albatronics.  Indeed, an allegation of conflict founded on a perceived impediment to PWC acting impartially as liquidator because of its possible preconceptions regarding past management misdeeds is an allegation which is wholly consistent with PWC having given a negative, and not a positive, recommendation.  So understood, it is a non sequitur to suggest that the disclosure that PWC had made a negative recommendation was a required response.

G.2b From the creditors’ perspective

74.  Nam Tai’s conflict of interest allegation was no less equivocal from the perspective of the creditors.  It was an opaque criticism and would not have suggested any particular objections to the creditors.  They could reasonably have thought that Nam Tai’s objection had something to do with PWC having been given confidential information for the due diligence review which would impede its carrying out the duties of liquidator, or that the objection was related to some dispute which had arisen in the course of the review with the same consequence, or they might simply have acknowledged that Nam Tai’s opposition was founded upon some undisclosed complaint, whether or not justified, to which they were not privy.  A complaint of such an equivocal character is incapable of justifying the negative disclosure which specifically addresses PWC’s recommendation against acquisition.  The negative disclosure might well have been justified as a response if Nam Tai had falsely alleged that PWC had positively recommended acquisition, but no such meaning can be attributed to the objection which Nam Tai in fact raised.

75.  Neither does waiver provide a basis for justified disclosure in such circumstances.  Its equivocal nature prevents Nam Tai’s objection from reasonably being understood to constitute an implied waiver of its right to confidentiality concerning PWC’s recommendations in the due diligence report.  As previously noted,[41] any waiver must be clear and definite and, for any particular disclosure to be justified, it must fall within the scope of the waiver relied upon.  Nam Tai’s allegation bears no such clarity and there is no basis for holding that the negative disclosure came within the compass of any waiver of confidentiality on Nam Tai’s part.

76.  Given this conclusion, the question whether the negative disclosure was fairly required to be made in the protection of PWC’s legitimate interests must be answered in the negative.  It is therefore unnecessary to go on to consider whether PWC ought reasonably to have resorted to other measures before plunging into a disclosure.  It should however be obvious that a disclosure of confidential information in the confidant’s own interests without the confider’s express consent is fraught with danger since reliance on implied consent or upon the self-interest qualification is likely to be susceptible to challenge and subject to a degree of uncertainty.

G.3 The view of the courts below

77.  I am accordingly, with respect, unable to agree with Waung J’s view that that Nam Tai’s allegation of conflict necessarily implies a general waiver of confidentiality connected with the work done by PWC in the due diligence review.[42]  Nor am I able to accept that the opaque objection “put the due diligence work ... into the public domain of the creditors” destroying the confidentiality of the report.[43]  While I would agree in principle with his Lordship’s statement that “it is only fair that the person who has [the] right of confidence does not abuse it by making an attack,”[44] I do not consider that Nam Tai’s objection can reasonably be understood to constitute such abuse.

78.  In the Court of Appeal, Le Pichon JA (with whom the other members of the Court agreed) considered this a case where the negative disclosure was fairly required or necessary as a matter of self-defence, stating:

“

In order to dispel any notion of conflict arising, PwC was entitled to respond and its response had to address the unarticulated and therefore unintelligible accusation of conflict of interest.  Given public knowledge that it had carried out due diligence on behalf of Nam Tai, that Nam Tai did make the acquisition of Albatronics and that Albatronics went into deep financial trouble shortly thereafter, it required nothing less than the disclosure that PwC had advised negatively.  Had PwC gone further and disclosed details of its findings, Nam Tai might have been in a better position to complain.  But that did not happen.  PwC limited its disclosure to the minimum which was its negative recommendation.  In my view, that disclosure was ‘fairly required’ or ‘necessary’ to meet the unparticularised allegations of conflict made against it.”[45]

79.  With respect to her Ladyship, if Nam Tai’s accusation of conflict of interest was “unarticulated and therefore unintelligible”, it is hard to see how the disclosure made by PWC regarding the particular recommendation made concerning acquisition of Albatronics can properly be regarded as a defensive response addressing the same.  The proposition may be tested as follows.  Suppose Nam Tai had simply said to the creditors: “We have had dealings with PWC in the past and we object to its appointment as liquidator.”  Surely it could not be said that by virtue of the lack of particularity in Nam Tai’s objection, PWC thereby became entitled to make disclosure of whatever confidential information it happened to believe might meet some unarticulated premise to Nam Tai’s statement. 

80.  But that is the effect of the passage cited above.  PWC had evidently worked out for itself that, given knowledge on the part of the creditors that it had done the due diligence review and that Nam Tai had thereafter proceeded with the acquisition, it was quite possible or even likely that the creditors would put two and two together and assume that Nam Tai had made the acquisition on the basis of a positive recommendation by PWC.  If that was their assumption then PWC could no doubt see that the creditors might object to its appointment as liquidator for fear of PWC seeking to sustain its positive recommendation and therefore possibly failing to pursue all available avenues for the recovery of assets.  On this line of reasoning, it was perfectly understandable that PWC would desire to make the disclosure that it had in fact made a negative recommendation.  However, such thinking represents PWC’s own projection of what the creditors might assume and how to dispel any such assumption.  It was not a response to anything said by Nam Tai, reasonably understood. 

81.  Mr Fok SC invited the Court to hold that so long as the negative disclosure represented a defensive response to one of several contentions possibly underlying Nam Tai’s allegation of conflict of interest, such disclosure ought to be regarded as justified.  I am unable to accept that submission.  A disclosure must be shown clearly and objectively to fall within either the consent or self-interest qualifications if it is to be justified.  To permit disclosures on the basis of what the confidant may believe, without clear objective justification, to underlie an opaque statement made by the confider would be unacceptably destructive of the protection afforded by the law to the former client’s confidences.  It cannot generally be the proper response to an unparticularised adverse allegation for the confidant to plunge at once into a disclosure of confidential information.  It is reasonable to expect him first to consider other options: to demand clarification or to take other steps aimed at challenging the adverse allegation without disseminating confidential information.

H. Conclusion and relief

82.  For the foregoing reasons I conclude that PWC’s making of the negative disclosure constituted a breach of the duty of confidentiality owed to Nam Tai as a former client.

83.  Sir John Swaine accepts that Nam Tai suffered no pecuniary loss in consequence and has not sought to support the claim for exemplary damages set out in Nam Tai’s pleadings.  In the circumstances, an award of nominal damages should be made.  I would accordingly allow the appeal and order PWC to pay to Nam Tai the sum of HK$100.00 by way of nominal damages.  I would direct that the parties be at liberty to file and serve submissions in writing as to the costs in this Court and below.  Such submissions should be filed and served as follows: by Nam Tai within 21 days of the date of this judgment and by PWC in response within 21 days thereafter. 

Mr Justice McHugh NPJ:

84.  I agree with the judgment of Mr Justice Ribeiro PJ.

Chief Justice Li:

85.  The Court unanimously allows the appeal and orders PWC to pay to Nam Tai the sum of $100.00 by way of nominal damages.  The Court makes the directions concerning the filing of submissions as to costs set out in the concluding paragraph of Mr Justice Ribeiro’s judgment.