AKAI HOLDINGS LTD v. ERNST & YOUNG

HCCL 29/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 29 OF 2004

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J U D G M E N T

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The application

1. This is the defendant’s application, by summons dated 2 December 2005, seeking the disallowance and striking out of certain amendments to the writ herein, issued on 24 May 2004, which on 29 April 2005 had been renewed for a period of 6 months from that date.

2. The amendments in question had been made without leave by the plaintiff on 19 November 2005 pursuant to the provisions of Order 20, rule 1, RHC.

3. Although the summons canvassed the disallowance/strike out of two amendments as made, prior to the hearing of the application it was accepted by the defendant applicant that one of these amendments at least – that which I will call ‘the 1997 audit claim’ – was not susceptible to summary determination, and that this claim would have to be pleaded out and fought at trial.

4. This application to disallow and to strike out the remaining amendment – ‘the 1999 audit claim’ – nevertheless was pursued, and as events unfolded this element of the application was heard in two parts. 

5. The initial hearing took place on 29 May 2006, and was adjourned part heard in order to enable the plaintiff to formulate an amendment to its Points of Claim which, on any basis, would provide a defence to the present attack.

6. At the resumed hearing of this application on 18 August 2006, leading counsel for the plaintiff, Mr Yuen SC (who had not appeared at the initial hearing) invited the court to rule on the defendant’s summons in any event; although his primary stance was that the amendments as made were not disallowable in their existing form, ex abundante cautela he further asked for leave to amend the Points of Claim in terms of the draft amendment proffered by the addition of a new paragraph 551A.

7. On behalf of the defendant applicant, Mr Coleman SC had “nothing to say” about the additional application to amend, but firmly maintained the validity of the defendant’s original application to disallow/strike out the original amendments to the writ made without leave.

8. Mr Coleman accepted, I think, that in light of the proposed pleading amendment, the thrust of which was to raise a clear triable issue as to date of knowledge on the part of the plaintiff liquidators with regard to the accounting matters complained of, that his client would not be able to succeed at this stage upon the disallowance application as originally mounted, and that if such amendment to add paragraph 551A was to be granted, then this was an issue that should be pleaded out and decided at trial in normal course.

9. The practical effect of the plaintiff’s revised stance was, therefore, that the court now has been asked to decide the truncated application in its original form – notwithstanding that the contingent amendment application effectively removed any potential interlocutory ‘bite’ – in order not only to determine whether the issue of the date of knowledge on the part of the liquidators of the 1997 audit claim was required to be pursued at trial, but also to resolve the question of the costs of the defendant’s application, given that, as a matter of construction, the plaintiff does not accept that the defendant’s application was well-founded in any event.

The background

10. At this stage it may be useful to sketch in a little of the background to this application, and to a piece of litigation which, on present indications, is of very substantial size. 

11. Some idea of the scope of this case, which at bottom is a claim for negligence by the liquidators of Akai Holdings Ltd (‘Akai’) against the defendant, Ernst & Young, the erstwhile auditors of Akai, is gleaned from the fact that the existing Points of Claim run to some 457 pages, plus Appendix, the sum sought to be recovered in terms of consequential loss runs to the tens, if not hundreds, of millions, and that if this is to go to full trial, leading counsel provisionally estimates that it will take approximately one year of the time of the Commercial Court.

12. Pursuant to leave granted by the Judge in charge of the Companies Court, Madam Justice Kwan, on 21 May 2004, the writ in this action was issued in the Commercial List on 24 May 2004, and by order of this court, dated 29 May 2005, the validity of the writ as issued was extended for a period of 6 months, to 23 November 2005.

13. On 19 November 2005, that is, four days before the expiry of the as yet unserved writ, Akai amended the writ and the Indorsement of Claim without leave pursuant to the provisions of Order 20, rule 1 : it is whether one of these amendments at least now should be permitted to survive which remains the subject of this judgment.

14. In addition to excising a large number of defendants from the writ as originally issued, paragraph 1(1)(a) of the Indorsement of Claim, (together with similar amendments to paragraphs 1(1)(d) to (f)), was amended thus :

“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 31st January 1998 1997, 1998 and 1999 and thereafter (the ‘Accounts’); …..”

15. On 21 November 2005, the now Amended Writ of Summons, together with the 457 pages Points of Claim, finally was served on the defendant.

16. On 2 December 2005 the defendant took out the summons that presently is before the court.  By that summons the defendant sought an order that the addition to the indorsement of “1997” and of “and 1999” be disallowed and struck out.

17. In terms of the 1997 audit claim, it was asserted that when the writ was issued on 24 May 2004, that claims based on work performed by the defendant accountancy firm in 1997 already were time-barred as the defendant had completed its 1997 audit engagement for Akai by 12 May 1997; in terms of the 1999 audit claim it was asserted that the amendment concerning the financial year 31 January 1999 had introduced a new cause of action which was time-barred when the amendment was made, and did not arise from the same or substantially the same set of facts as originally pleaded.

18. Since the issue of the summons, the defendant has conceded that the limitation issue concerning the 1997 audit claim should be dealt with at a later stage, either at trial or by way of the hearing of a preliminary issue.

19. Thus it came to be that at the initial hearing of the application, only the 1999 claim remained in issue as the subject of disallowance/strike out, and the bulk of the substantive argument upon this issue was canvassed before the court on that occasion. 

20. However, at this initial hearing the suggestion, first mooted in the plaintiff’s skeleton argument, that even if the pleading in the Amended Writ relating to the 1999 audit was liable to be struck out, the pleading could be saved because the liquidators of Akai would seek leave to amend to state that the relevant limitation period had not expired by reason of the operation of section 31 of the Limitation Ordinance – a like point to that already raised, at paragraph 77 of the Points of Claim, in relation to the 1997 audit – was canvassed, the effect of which would be to render it unnecessary to deal with the defendant’s immediate objection, given that any such amendment would constitute a “complete answer” to the present application.

21. Thus, the hearing was adjourned with a direction that the plaintiff provide within 28 days a draft proposed amendment to the Points of Claim which went to the issue of the date of knowledge on the part of the liquidators within the context of the 1999 audit.

The draft contingent amendment

22. By its solicitor’s letter dated 20 June 2006, Akai set out a possible new paragraph 551A to the existing Points of Claim in the following terms :

“Akai first learned of the matters set out in paragraphs 339 to 551 above no later than 2003 when the Liquidators received copies of the documents referred to therein pursuant to an Order under Section 221 of the Companies Ordinance addressed to EYHK made on 23^rd October 2003”.

23. This letter also stated that Akai would only seek to have the pleading amended with the addition of paragraph 551A in the event that the strike out summons was not dismissed.

24. An accompanying invitation to withdraw the application was refused by the defendant in its solicitor’s letter of 27 June 2006.

Argument : the 1999 amendment

25. Against this background I turn, therefore, to the only substantive issue remaining for decision, namely whether the defendant is correct in its assertion that the Writ as originally issued did not include a claim in respect of the 1999 audit.

26. For the defendant applicant, Mr Coleman SC submitted that the requirement within the Rules of the High Court relating to indorsements was straightforward and clear.  Order 6, rule 2 states that such indorsement should be “a concise statement of the nature of the claim made”, whilst M/N 6/2/2 recites that it “must give sufficient information to enable the recipient to identify the occasion when the breach of contract or other wrong relied upon is alleged to have occurred.”

27. The obvious purpose of such a requirement, he said, was that a defendant to legal proceedings should, upon service of the writ, be left in no doubt precisely what claims were being mounted against him; furthermore, the underlying policy was that there must be finality in relation to claims arising from past events, as was reflected in the existence of the statutory limitation periods.

28. Mr Coleman argued that in construing the original, pre-amendment endorsement, it was important to bear the chronology of this litigation in mind, in particular that on 19 November 2005, just 4 days prior to the expiry of the writ, the amendment in question had been made; no explanation, he said, had been given why this had occurred, but on any view the purported inclusion of a claim in respect of the 1997 claim strongly indicated that those acting for Akai had come to the late realization that the original endorsement had not been sufficient to cover all the claims that Akai then had wished to make.

29. The fact that the amendment took the form of express reference to the 1997 audit and the 1999 audit itself represented a belated acknowledgment of the fact that ‘a concise summary’ of the nature of the audit claim must, at the minimum, make express reference to the particular audit year in respect of which the claim was made, he submitted, and the fact that the amendment as made also changed the word ‘year’ to ‘years’ further emphasized the fact that the 1999 audit was not covered by the original endorsement.

30. Looking at it in the round, said Mr Coleman, it was clear that the words ‘and thereafter’ had not been intended to cover the 1999 audit; in themselves, these words were so vague as to be meaningless, and if any meaning could be attributed to them, it had to be a meaning which in some way linked whatever was covered by them to the 1998 audit, which represented the original specific plea.

31. Nor was it clear that what had occurred had been a mistake rather than a change of heart, Mr Coleman submitted; there may well have been good reason for the Liquidators to have concluded at the outset, prior to the drawing of the Points of Claim, that the cost and expense of a claim in respect of the 1999 audit might outweigh any benefit to be derived from making a claim in respect of other than the 1998 audit.

32. Thus, it was evident, he said, that the original endorsement was “nowhere near clear enough” to cover a claim in respect of the 1999 audit : this was a new cause of action which could not be said to have arisen out of the same facts or substantially the same facts as the cause of action relating to the 1998 audit in respect of which relief already had been claimed, and if and in so far as the liquidators of Akai truly had intended to make a claim in respect of the 1999 audit, which he disputed, they only had themselves to blame for having failed to make a claim in respect of that audit year until 19 November 2005, by which time it was too late, the relevant limitation period having expired.

33. On behalf of the plaintiff, at the initial hearing of this application Mr Hunsworth contended that a plain reading of the words “and thereafter” clearly encompassed the 1999 audit, and that the addition of the words “and 1999” did not introduce any new cause of action, but simply added a degree of specificity to the complaint in the writ as originally issued.

34. He further argued that if the indorsement was held to be defective, that defect had been cured by service of the Points of Claim – see, for example, Hill v. Luton Corporation [1951] 2 KB 387 – and, in any event, if and in so far as the words “and 1999” are held to introduce a new cause of action, the plaintiff liquidators first had heard of these matters pleaded in respect of the 1999 audit no earlier than 2003, when the liquidators had received copies of documents pursuant to an Order under section 221 of the Companies Ordinance made on 23 October 2003, with the result that the limitation period was statutorily extended by virtue of the operation of section 31 of the Limitation Ordinance, and thus that the amendment to the writ had been made within time.

35. It was precisely this latter point – unpleaded at the time of the application and not raised until argument within this application – that had resulted in the adjournment of the first hearing pending a draft formulation of this plea; if this plea were to be substantiated, of course, this would constitute a self-contained defence to the defendant’s summons, in that in this circumstance the relevant limitation period would not have expired as a matter of law.

36. A similar drum was banged, to like effect, by Mr Yuen SC, who appeared on behalf of Akai at the resumed hearing of this application.

37. Mr Yuen’s primary submission was that the key question, namely whether the original endorsement included a claim in respect of the auditing work done by EHYK for the year ended 31 January 1999, was capable only of being answered in the alternative.  Any reasonable reader of the original formulation, he said, would have no difficulty in understanding it to mean a claim in respect of Akai’s audited accounts relating to the 1998 financial year and also in respect of subsequent years.

38. Mr Yuen submitted that the points made in the first hearing on behalf of the defendant did not withstand scrutiny, in particular reliance on the content of paragraph 4 of the 5^th affidavit of Nicholas Hill, which should not be read out of context, and that it was clear from the surrounding circumstances that the intention of the writ, as drawn and issued, was to preserve potential claims in respect of 1998 and subsequently.

39. He noted that Mr Hill had made it clear in the affidavit – which had been filed to explain to Kwan J why there then was an urgent need to issue a protective writ pending further investigations by the liquidators – that “the writ was issued so as to preserve claims against parties in respect of the publication of the audited financial statements of the Companies for the year ended 31 January 1998 and subsequent years…”, and that this affidavit had been filed before EYHK had taken out the summons to disallow, and thus there could be no question that in that affidavit Akai or the liquidators were attempting to be self-serving.

40. Mr Yuen SC said that there was nothing in the point that the amendment from “year” to “years” emphasized that the 1999 audit had not been covered by the original endorsement – this was simply a matter of linguistic amendment in recognition of the fact that 3 financial years now specifically were mentioned – and he again prayed in aid the decision of Devlin J in Hill v. Luton Corporation, op. cit., at 391-392 to the effect that a defective endorsement is curable by a properly drafted Statement of Claim, and in particular the celebrated dictum that “…the defendant cannot be expected to know his position before the writ is served; and it cannot make the slightest difference to him whether he learns of it then from one document or from two…”

41. Looked at in the round, said Mr Yuen, it was “as plain as a pikestaff” (to borrow a hackneyed judicial phrase) that the original endorsement of claim included claims in respect of the audit for the 1998 and 1999 financial years, and in any event service of the Points of Claim had put the matter beyond doubt.

Decision

42. It seems tolerably clear that the plaintiff has found itself in a bit of a pickle with the amendments to this endorsement of claim, but ironically it seems to me that this is not because of the addition of the words “and 1999” – the rectitude of which is the matter currently at issue – but because of the decision to add the 1997 audit claim, which on any basis does not appear to have been covered by the endorsement as initially drawn, and the validity of which amendment now is dependent upon the determination, at trial or preliminary issue, of the applicability to the facts of section 31 of the Limitation Ordinance.

43. I suspect, also, that it was only by reason of the addition of the 1997 claim that it was thought necessary further to add the words “and 1999”, on the basis that specificity begets specificity, and that it was difficult to particularize 1997 without being seen to do likewise for 1999.

44. The further difficulty arising, however, is that notwithstanding the amendments to the endorsement, the vital words “and thereafter”, on which the plaintiff depends so heavily for its argument as to the validity of the 1999 amendment, nevertheless remain on the face of the pleading as amended, which enables Mr Coleman to take the forensic point that this phrase cannot be taken to mean one thing before, and another after these amendments, it having never been suggested by anyone at any time that there is any claim extant against EHYK for work post-1999.

45. Be that as it may.  For present purposes I am prepared to draw a notional line through this presumably now otiose phrase, and to construe “and thereafter” within the original endorsement as implicitly including a claim for work done in the 1999 audit year; why this phrase was not excised at the time of the amendment I do not know.

46. It strikes me that this is not a conclusion permitting of greater exposition.  It is either right or it is wrong; as is so often the case with the construction of documents, this is essentially a matter of impression, and in construing the endorsement I have not been assisted by reference to surrounding affidavit evidence, worthy though that may be, nor do I think that in the circumstances the principle established in Hill v. Luton Corporation, op. cit., has the utility ascribed to it by those representing the plaintiff. 

47. In this connection it seems to me that the short (indeed, the very short) point at issue in this argument is whether the writ, as issued on 24 May 2004, was sufficient to stop time running as against the plaintiff in terms of any claim relating to the 1999 audit claim, and I fail to see the relevance of the fact that, when the writ was served on the defendant on 21 November 2005, some 18 months later, the accompanying Points of Claim had made the position abundantly clear regarding pursuit of the 1999 audit claim.

48. In a nutshell, as at the date of the issuance of this writ either this claim had been satisfactorily preserved, or it had not, and I do not see that the fact the defendant is told about it, in very great detail, a year and a half down the line has much to do with this primary and fundamental question.

49. In the event, I hold that the 1999 audit claim was preserved by the admittedly less than felicitous language used, and thus that the amendment “and 1999” be not disallowed and/or struck out, as the defendant now has sought.  As a matter of general principle, the Commercial Court is minded to view pleadings in robust fashion, and persuasively though Mr Coleman argued the point, ultimately I have not been attracted to it.  If I may say so, there are bigger fish to fry in this case.

Leave to amend

50. The foregoing conclusion, therefore, is sufficient to resolve that which this court has been asked to resolve in terms of the defendant’s summons, and if this decision be correct, and remains unaltered, no purpose will be served by the plaintiff amending its Points of Claim in terms of the draft paragraph 551A, which now has been placed before the court upon the plaintiff’s application so to amend.

51. However, if this matter were to go further, I should, I think, nevertheless proceed to give formal leave to amend in terms, with the usual consequential directions as to amendment and the costs thereof.

52. As was observed at the outset, at the end of the day little in practical terms will have been gained by having requested the court to make a decision on the 1999 amendment, save that it assists on the question of costs, and also, I suppose, some small portion of the forthcoming trial will be saved in that, if and in so far as this ruling remains extant, the court then will not have the task of deciding the merits of a section 31, Limitation Ordinance argument, at least in the context of the 1999 audit claim.

Order

53. Consequent upon the foregoing, therefore, I make the following Order :

i.        The defendant’s application by summons dated 2 December 2005 be dismissed.

ii.       In so far as may be necessary, the plaintiff do have leave to amend its Points of Claim in terms of the draft amendment submitted, and that in terms of any such amendment there be the usual directions as to leave to consequentially amend and as to the costs thereof.

Costs

54. In terms of costs, I make an order nisi that the plaintiff is to have the costs of and occasioned by the defendant’s application in any event, such costs to be taxed if not agreed, save that the costs of the hearing on 18 August 2006 are to be the defendant’s costs in the cause, to be taxed if not agreed.

55. I decline to certify the matter as fit for two counsel.

56. I have made a costs’ order nisi in these terms with regard to the adjourned hearing because in my view the adjournment, and hence the additional day’s hearing, essentially was rendered unnecessary in light of the plaintiff’s considered stance that the matter nevertheless should be decided on the basis of the argument as originally mounted (and which otherwise would have concluded at the initial hearing on 29 May 2006), and without prejudice to the issue of any contingent amendment for the purpose of a ‘section 31’ argument.

57. If there is any requirement for an inter partes hearing as to costs, I will entertain such argument at the next directions hearing to be appointed, which I apprehend will be contiguous to the filing of the Defence in this action.