CHINA EVERGRANDE GROUP (IN LIQUIDATION) v. PRICEWATERHOUSECOOPERS (A FIRM) AND OTHERS

HCA 548/2024

[2026] HKCFI 4845

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 548 OF 2024

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J U D G M E N T

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The Application

1.  This is an application by the 3^rd Defendant (“International”) by Summons filed on 30 September 2025 (the “Summons”) to strike out the Plaintiff’s Statement of Claim dated 11 March 2025 in its entirety as against International pursuant to RHC Order 18 rule 19 (1)(a), (b), (c) and (d) and/or the inherent jurisdiction of the court on grounds that it: -

(i)  discloses no reasonable cause of action;

(ii)  is scandalous, frivolous or vexatious;

(iii)  may prejudice, embarrass or delay the fair trial of the action; and/or

(iv)  is otherwise an abuse of the process of the court.

International also asks, for, inter alia, an order that the action against it be dismissed.

2.  The Plaintiff subsequently filed an Amended Statement of Claim (the “ASOC”) on 29 March 2026.  It was agreed by the parties that the subject of the strike-out application became the ASOC.

3.  International further indicated that for the purpose of this hearing, it was not relying on Order 18 rule 19 (1)(c).

4.  The 1^st and the 2^nd Defendants are not involved in this application.

The Parties

5.  The Plaintiff was incorporated in the Cayman Islands and, prior to its collapse, was one of the largest property developers in Mainland China.  Its principal operating subsidiary was Hengda Real Estate Group Co., Ltd. (“Hengda”), a company incorporated in the Mainland.  Its shares had been listed on the Main Board of the Hong Kong Stock Exchange since 2009.  According to the Plaintiff, at all material times, it adopted and pursued a strategy of massive growth funded by debt.

6.  On 29 January 2024, the Hong Kong court issued an order that the Plaintiff be wound up and that Edward Simon Middleton and Wing Sze Tiffany Wong (the “Liquidators”) of Alvarez & Marshall Asia Ltd. be appointed as joint and several liquidators of the Plaintiff.

7.  The 1^st Defendant is a professional services firm based in Hong Kong which provides audit and assurance, consulting, deals and tax advisory services.  It is registered with the Hong Kong Institute of Certified Public Accountants.

8.  The 2^nd Defendant is a professional services firm based in the Mainland which provides services similar to those provided by the 1^st Defendant.  It is registered with the Chinese Institute of Certified Public Accountants.

9.  International is a private company limited by guarantee incorporated in England.

10.  As their names suggest, all the three Defendants are companies under the umbrella name of “PRICEWATERHOUSECOOPERS” which is known as one of the “Big 4” international accountants’ groups or organizations in the world.  As to the exact relationship between the 1^st Defendant and the 2^nd Defendant on the one hand and International on the other hand, that is one of the issues between the parties.

The Background Facts

11.  At all material times since before 2016, the 1^st Defendant had been the auditor of the Plaintiff’s Group Consolidated Financial Statements.

12.  At all material times, the 2^nd Defendant had assisted the 1^st Defendant in its audit engagements with the Plaintiff.

13.  It is alleged by the Plaintiff that the 1^st and 2^nd Defendants had been negligent in carrying out the audits of the Plaintiff for the Financial Years 2017 to 2020 (“FY2017”, “FY2018”, “FY2019” and “FY2020”).

14.  It is further alleged that in reliance on the Group Consolidated Financial Statements for FY2017 to FY2020 which resulted from the audits carried out by the 1^st and 2^nd Defendants, the Plaintiff declared and paid dividends totaling RMB42.355 billion (about USD6.2333 billion) which were completely unjustified.

15.  Consequently, the Plaintiff suffered a huge loss.

16.  Hence, the Plaintiff claims damages against the 1^st and 2^nd Defendants in the total sum of about RMB57.937 billion (about USD8.5264 billion).

17.  As regards International, the Plaintiff alleges that it should also bear responsibility for the negligent conduct of the 1^st and 2^nd Defendants.  The Plaintiff, however, claims damages against International for only the sum of about RMB38.096 billion (about USD5.607 billion) for the reason that International was joined late and, hence, the Plaintiff cannot claim against it in respect of the Group Consolidated Financial Statement for FY2017 because the limitation period had expired.

The Plaintiff’s Pleaded Case Against International

18.  I now come to examine the parts of the ASOC which are directly relevant to International.  Since the strike-out application very substantially, if not entirely, depends on the question of whether what is pleaded in the ASOC regarding International can stand up in law, a number of the paragraphs in it will have to be set out in full below.

19.  In the ASOC, the parties are referred to as follows: -

(i)  the Plaintiff ----- “CEG”;

(ii)  the 1^st Defendant ----- “PwC HK”;

(iii)  the 2^nd Defendant ----- “PwC Zhong Tian”;

(iv)  the 1^st Defendant and the 2^nd Defendant collectively ----- “PwC HK/ZT”;

(v)  International ----- “PwC international”.

20.  Paragraphs 50 – 53 of the ASOC read as follows: -

“50. The Third Defendant (“PwC International”) is an English private company limited by guarantee.  It is a multinational professional services organization, of which PwC HK and PwC Zhong Tian are and were at all material times members.  It is responsible for the PricewaterhouseCoopers global brand under which the member firms operate, and for the maintenance of consistent standards for the benefit of PricewaterhouseCoopers clients across its network (“Network”), including the standards, resources, competence, independence and quality control of the audits conducted by Network members for their audit clients.  It focusses on key areas such as strategy, brand, and risk and quality, and develops and implements policies and initiatives to achieve a common and coordinated approach among individual member firms of the Network.

51. PwC International’s objects as set out in its Memorandum of Associations include the following:

51.1 to provide guidance in relation to, and assist in, the achievement of the vision, values and principles of the member firms of [PwC International] …..

51.2 to develop, and to promote and assist the development of, common standards, principles, strategies, policies, objectives, plans, projects, programmes, practices and systems to be applied by member firms ….. and to promote, monitor and assist the uniform application of such common standards, principles, strategies, policies, objectives, plans, projects, programmes, practices and systems,

51.3 to provide, or procure the provision of, services to member firms ….. (including service methodologies and tools, relationship management processes, know-how, training, quality assurance services, insurance, technology, management information, planning and budgeting processes);

51.4  on the request of, and in co-operation with, the PwC Business Trust, to do all things as is considered necessary or conducive to the promotion and protection (1) of the names “PricewaterhouseCoopers’ and “PwC” ….. and (ii) of the network between such member firms and Relevant Entities [.]

52.  In order to carry out its objectives, PwC International has the power amongst other things to place defaulting members of the Network under ‘supervised remediation’ and/or to impose new leadership on a member firm or geographical practice.

53.  At all material times until 30 June 2024, Mr Raymund Chao was the Chairman and Chief Executive Officer of the Network’s Asia Pacific and China (including both the Mainland and Hong Kong) businesses, a partner of PwC HK, a partner of PwC Zhong Tian and a member of the Global Board of PwC International.  As such, the knowledge of Mr Chao is to be attributed to each of the Defendants.”

[emphasis added]

21.  Paragraphs 57, 57A and 57B read as follows: -

“57. It is to be inferred that due to: -

57.1 the size, profile, level of indebtedness and growth strategy of CEG;

57.2 the level of fees which CEG, its subsidiaries and the family offices of Chairman Hui generated for PwC HK/ZT;

57.3 the significant adverse publicity and scrutiny of the reported financial performance of the Group since at least 2014 as set out at paragraph 114 below;

57.4 the perceived country risk of Mainland in general;

57.5 PwC HK’s industry exposure to the Mainland property development sector as the auditor of 7 of the top 10 Hong Kong listed Mainland property development companies by revenue in FY2017 to FY2020 as set out in Annexure 2;

57.6 The deterioration in the Mainland property market; and

57.7 The reputational risks to the PricewaterhouseCoopers brand globally, PwC International (whether through Mr Chao or others) at all material times: -

57.8 were or should have been closely involved in PwC HK’s decision in respect of each of FY2017 to FY2020 to accept CEG’s invitation to be re-appointed as CEG’s auditor;

57.9 reviewed or should have reviewed each of the Audits before sign off and/or PwC HK’s acceptance of re-appointment; and

57.10 regularly monitored and reviewed or should have regularly monitored and reviewed the audit function of PwC HK/ZT.

57A. Further to paragraphs 57.9 and 57.10 above, a review team comprising staff from member firms within the PwC Network undertook reviews of PwC HK/ZT’s audit function and the Audits.  In respect of the reviews of the FY2018 and FY2019 Audits, the review team collectively spent 41 days.  In respect of the FY2020 Audit, the review team collectively spent 118 days.

57B.  Given PwC International’s role and functions as pleaded above, and the fact that the reviews involved personnel from member firms within the PwC Network, it is to be inferred that PwC International caused to be performed, and assumed responsibility for, those reviews.”

[emphasis added]

22.  Paragraphs 81 – 84 of the ASOC read as follows: -

“H. ADMISSION BY THE DEFENDANTS IN RESPECT OF REGULATORY FINDINGS

H.1. Admissions by the Defendants

81. On 13 September 2024, PwC International and PwC Zhong Tian each issued a press release regarding two penalty decisions issued by the China Securities Regulatory Commission (“CSRC”) and the Ministry of Finance (“MoF”), both issued on 6 September 2024, which are summarized in paragraphs 85 to 104 below.

82. PwC International and PwC Zhong Tian each confirmed that PwC Zhong Tian “cooperated fully with its regulators, respects their decisions, and will fully comply with the administrative penalties”.  They also admitted in their statements respectively that PwC Zhong Tian’s audit work in respect of Hengda Real Estate “fell unacceptably below the standards [PwC International] expect of member firms of the PwC network” and “below [PwC Zhong Tian’s] own high standards and the standards [PwC Zhong Tian’s] stakeholders rightly expect of [PwC Zhong Tian]”.  They also set out the accountability and remedial actions which PwC Zhong Tian and its Governance Board had taken.

83. PwC International announced also that Hermione Hudson, PwC International’s Global Risk and Regulatory Leader and a member of its Global Leadership Team, had been appointed to serve as PwC China’s interim Territory Senior Partner and would relocate to the Mainland and/or Hong Kong from London once the steps required to effect her transfer had been completed.

84. Mohamed Kande, the Global Chair of PwC International, commented as follows:

‘The work performed by PwC Zhong Tian’s Hengda [Real Estate] audit team fell well below our high expectations and was completely unacceptable.  It is not representative of what we stand for as a network and there is no room for this at PwC.  That is why, following a thorough investigation, we ensured that actions were taken to hold those responsible to account and a comprehensive remediation programme will build a stronger PwC China firm for the future.’ ”

[emphasis added]

23.  Paragraphs 114 – 115 of the ASOC read as follows: -

“1.4. PwC International’s Duties

110. At all material times PwC International knew through at least Raymund Chao that: -

110.1 its member firms PwC HK and PwC Zhong Tian had been engaged to conduct the Audits because they were one of the large international networks of accountancy firms known as the “Big 4”, and had appropriate standards, principles, strategies, policies, objectives, plans, projects, programmes, practices, systems and quality assurance services to audit the consolidated financial statements of a listed group of companies of the size and complexity of the Group, with a substantial body of overseas investors;

110.2 the Mainland was perceived as having a high country risk;

110.3 CEG was the largest property developer in the Mainland with a strategy of achieving huge growth funded by debts;

110.4 There had been since 2014 significant adverse publicity and scrutiny of the reported financial performance of the Group as set out in paragraphs 113 and 114 below;

110.5 There had been a material deterioration in the Mainland property market from around 2018 onwards;

110.6 The decision whether to accept CEG’s offer of re-engagement as its auditor required careful consideration of all of the factors set out above, and posed potential reputational risks to the brand of PwC globally.

111. At all material times;

111.1 CEG was reliant upon PwC International to ensure that the audit services provided to CEG by PwC HK and PwC Zhong Tian were independent and compliant with the applicable HKSAs and the common audit standards which PwC International had developed and was responsible for monitoring;

111.2 CEG was reliant upon the accuracy and independence of the information communicated to CEG and its audit committee in the course of the Audits and by way of the audit reports to ensure that those concerned with its management or control had access to accurate and reliable financial information about the Group; and

111.3 it was at least reasonably foreseeable that CEG would suffer economic loss, if as a result of a failure of PwC International to comply with its duties (as set out in paragraphs 110 and 112), such information was untrue, lacking in independence and/or integrity, and/or the Audits were negligently performed.

112. PwC International owed a duty of care in tort to the Plaintiff to exercise reasonable care and skill in the monitoring and review of the Audits and PwC HK/ZT’s audit functions : -

112.1 to ensure that its members PwC HK and PwC Zhong Tian performed the Audits independently and in compliance with the HKSAs, and adhered to the common audit standards which it had developed;

112.2 to ensure that PwC HK and PwC Zhong Tian addressed properly any material deficiencies in audit quality standards in their offices including without limitation their independence;

112.3 by designing and implementing appropriately robust procedures and processes for its testing and review of PwC HK’s and PwC Zhong Tian’s audit functions including, without limitation, their independence; and

112.4 to uphold for the benefit of CEG as a PwC audit client, and the integrity of the capital market, PricewaterhouseCoopers’ brand and audit standards as a “Big 4” auditor.

 J.  PWC HK/ZT’S AND PWC INTERNATIONAL’S KNOWLEDGE

113.  As set out in paragraph 114 below, at all material times from around 2014 onwards PwC HK, PwC Zhong Tian and PwC International knew through at least Raymund Chao, Yeung Chor Ho, Chen Yuntao and Wu De’en that: -

113.1  there were well-publicised and well-researched allegations in the reports referred to below that the Group Consolidated Financial Statements were materially misstated, and had been materially misstated for a number of years;

113.2  there were serious issues raised as to the viability of the Group’s business model, its level of debt and the accuracy of its financial reporting;

113.3  there was an increasing oversupply in the Mainland property market in general and in 2^nd and 3^rd tier cities in particular;

113.4  the Mainland authorities had introduced a number of measures to deter speculation in residential property, which together with the oversupply caused a significant downturn in the Mainland property development sector; and

113.5  it was implausible that CEG could continue to record increasing revenues and profits in light of the factors identified above, and/or to overperform its rival property development companies;

114.  In particular, the Plaintiff refers to the following matters of which PwC HK, PwC Zhong Tian and PwC International had knowledge through at least Raymund Chao, Yeung Chor Ho, Chen Yuntao and Wu De’en:

114.1  On 13 January 2914, J Capital published a report on the Group in which it concluded, amongst other things; that:

114.1.1  CEG had had negative operating cashflows every year of its existence;

114.1.2  CEG was dependent on debt financing to stay afloat, and had disguised debt as equity;

114.1.3  Pre-sales revenues had been diverted into land purchases, and a significant portion of sold units could not be delivered without new borrowings;

114.1.4 Its cash reserves were overstated; and

114.1.5  Having visited and photographed roughly half of CEG’s projects over a period of 18 months, at lease half of such projects had been halted or abandoned.

114.2  On 14 February 2014, J Capital published a second report on the Group, in which it queried why CEG had spent HKD1.7 billion in six days to buy back shares when the company was strapped for cash, with net gearing of 130%, excluding off balance sheet obligations.

114.3  On 14 March 2014, J Capital published a third report on the Group in which it suggested that CEG appeared to be “living in a whole different universe from other developers”, and that its reported sale were not being made to prospective occupants, but to institutions holding the units as security against repayment by CEG.

114.4  On 7 July 2014, J Capital published a fourth report on the Group in which it concluded that in 2014 CEG had been consistently reporting phenomenal sales growth that accorded neither with market conditions nor with the activity plainly visible to visitors to the projects.

114.5  On 8 July 2014, the International Monetary Fund released a report warning of an oversupply of real estate in ‘2^nd tier’ and ‘3^rd tier’ Mainland Chinese cities, and an overheating property market in Mainland China generally.

114.6  On 2 September 2015, J P Morgan published a report in which it concluded, amongst other things, that “Evergrande is tapping all sources of money to fund its expansion, but the business model is not sustainable, especially when land prices are on the rise.”

114.7  In or around the first quarter of 2016, Mr Yeung Chor Ho gave testimony to the Market Misconduct Tribunal as to allegations made by Citron Research on 21 June 2012 that (i) CEG was unable to pay its debts when they fell due, (ii) the liabilities of CEG exceeded the value of its assets and (iii) CEG had engaged in fraudulent accounting.

114.8  On 30 November 2016, GMT Research issued a 55-page report entitled “China Evergrande (3333 HK) Auditors Asleep”, in which it concluded amongst other things that:

114.8.1  The company was insolvent;

114.8.2  A write-down of around RMB25 billion (c. USD3.7 billion) was required in respect of its excess land reserves;

114.8.3  A write-down of around RMB21 billion (c. USD3.1 billion) was required in respect of its accumulation of unsold properties;

114.8.4  Overcapitalisation of interest expense by around RMB15 billion (c. USD2.2 billion);

114.8.5  A write-down of around RMB69 billion (c. USD10.2 billion) was required in respect of its empty investment properties;

114.8.6  A write-down of around RMB20 billion (c. USD3 billion) was required in respect of its abandoned hotels;

114.8.7  PwC HK/ZT had failed to ensure that the Group Consolidated Financial Statements presented a “true and fair view” of its financial position and performance.

114.9  In December 2016, a Central Economic Working Conference was held in Beijing at which the Mainland government announced that “houses are for living in, not for speculation”, and criticized the rise of housing presales and purchase of real estate for investment.

114.10 Following this announcement, the Mainland government implemented various measures to discourage speculation in the Mainland real estate market, including a ban in many cities on buying a second property for two to three years after purchase of a first property.

114.11 On 17 January 2017, GMT Research issued a newsletter under the heading “China Evergrande – Are its Auditors Asleep?”  In its newsletter, GMT Research reiterated that the write-offs set out in its report of 30 November 2016 were required, and concluded that:

114.11.1 CEG was insolvent;

114.11.2 CEG had remained afloat only by borrowing ever increasing amounts; an

114.11.3 Predicting when creditors will turn off the taps is impossible but, at some point, it will become too big to finance.

114.12 In October 2017, at the opening of the 19^th National Congress of the Chinese Communist Party, President Xi Jinping announced that the Mainland will maintain the principle that houses are for people to live in, not for speculation.

114.13 In August 2020, the Mainland government implemented the “Three Red Lines” policy for property developers, requiring property developers to maintain (1) a liability to assert ratio of less than 70%; (2) a net gearing ratio of less than 100%; and (3) cash to short-term debt ratio of more than 1x.  Under the policy, property developers’ adherence to the three red lines would affect their ability to access debt financing.  The policy was a move to address debt built-up in the real estate development sector.

114.14 The Plaintiff reserves the right to provide further particulars upon discovery.

115.  PwC HK/ZT were under a duty to take due account of their knowledge as set out above in the exercise of professional scepticism in the planning and conduct of the Audits, and PwC International was under a similar duty to ensure that the Audits had been conducted with an appropriate degree of professional scepticism.”

[emphasis added]

24.  In Section K of the ASOC, very detailed allegations of breaches of duty are set out against all the Defendants, especially the 1^st and 2^nd Defendants.  The relevant parts of Section K read as follows: -

“K. BREACHES OF DUTY BY PWC HK/ZT AND PWC INTERNATIONAL

116. Wrongly and in breach of its duties PwC HK/ZT were negligent in the planning and conduct of the Audits and in the formation of PwC HK’s audit opinions for FY2017 to FY2020.  By way of summary, PwC HK/ZT failed in respect of each of the Audits to : -

…………………………………………………………………………

118. Further or in the further alternative, PwC International wrongly and in breach of duty failed to exercise reasonable care and skill in reviewing the Audits and/or the audit functions of PwC HK/ZT so as to obtain the requisite degree of assurance that the Audits had been performed in compliance with the HKSAs, independently, in accordance with the common audit standards which it had developed and/or with an appropriate degree of professional scepticism.

119. In respect of the particulars of breach as set out in paragraphs 116 to 117 above and 121 to 162 below, each breach by PwC HK/ZT was caused and/or permitted by a breach by PwC International of its obligations as set out in paragraphs 112 and 118 above.

120. The Plaintiff will rely upon the admissions made by PwC International and/or PwC Zhong Tian set out at paragraphs 81 to 84 above.

PARTICULARS

K.1. Failures to act with independence and/or objectivity

121. At all material times wrongly and in reach of duty, PwC HK/ZT failed to act and PwC International failed to ensure that they acted independently and with objectivity in the performance of the Audits:

122. Pending discovery and interrogatories the Plaintiff relies upon the following facts and matters: -

………………………………………………………………………….

K.2. Failures in respect of the existence, carrying value, stage of development, legal title and ownership structure of the Group’s property development projects

123. …………………………………………………………………………..

124. Pending discovery and interrogatories and in addition to the facts and matters which were admitted by PwC International/PwC Zhong Tian and set out in paragraphs 81 to 84 above, the Plaintiff relies upon the following:

……………………………………………………………………………

K.7 PwC International’s failures in respect of reviews

162A.  Wrongly and in breach of the duties pleaded in paragraph 112 above, PwC International failed to exercise reasonable skill and care in reviewing the Audits and the audit functions of PwC HK/AZT during performance of the reviews pleaded in paragraphs 57A and 57B above, in each case failing to identify (and so to correct or have addressed and corrected) the serious deficiencies in the Audits and audit functions described above, thereby causing or permitting the breached by PwC HK/ZT.”

[emphasis added]

25.  Section L of the ASOC read as follows: -

“L. CAUSATION

163. Had PwC HK/ZT and/or PwC International complied with their duties, PwC HK would have reported to CEG’s audit committee no later than the date of the publication of the annual reports in each year that;

163.1 CEG had provided insufficient appropriate audit evidence to enable PwC HK to issue a clean audit opinion and significant further audit evidence was required of (i) the existence, carrying value of, stage of development of, and legal title and ownership structure to its properties under development (ii) revenue recognition, (iii) classification and valuation of investment properties, (iv) capitalization of interest and (v) going concern;

163.2  CEG had adopted and/or implemented inappropriate accounting policies and/or judgments and/or treatments in respect of (i) the timing of revenue recognition; (ii) the capitalization of interest; (iii) the treatment of commercial premises and car parking spaces as investment properties rather than inventory; (iv) the carrying value of PUD and CPHFS; (v) going concern; and (vi) the classification of unrestricted capital;

163.3  As a result, the Group Consolidated Financial Statements were materially misstated;

163.4  The opening balances in the Group Consolidated Financial Statements were unreliable and the previous year(s)’ Group Consolidated Financial Statements would need to be reconsidered and/or re-audited, and the previously issued clean audit opinion(s) would also have to be reconsidered;

163.5  There were material issues in respect of going concern and breach of banking and bondholder covenants;

163.6  The financial situation and liquidity of CEG and/or the Group did not allow for any dividends to be declared or paid;

163.7  As a result, PwC HK would not be able to verify and/or sign off on any statements as to the accuracy of CEG’s current or historical Group Consolidated Financial Statements whether in support of further fundraisings, or otherwise;

163.8  Appropriate announcements would have to be made to the relevant Stock Exchanges, and appropriate disclosures would have to be made to bondholders and all relevant bank and other creditors.

164.  In these circumstances, (1) PwC HK would have refused to sign the clean audit opinions; (2) PwC HK would have refused to sign any audit opinion and/or resigned, or agreed only to sign an adverse audit opinion or an audit opinion with disclaimers as to the matters set out in subparagraphs 163.1 to 163.5 above; (3) CEG could not lawfully and would not have declared or paid the dividends as set out in paragraph 43 above, or any dividends at all; and (4) CEG would not and could not have raised the sums that it raised by the debt fundraisings set out in paragraph 39 above, or raise any sums by way of further fundraisings, and would not have incurred the costs and interest expenses of the fundraisings set out in paragraph 40 above.

165.  Further, as a result of PwC HK/ZT’s breaches of duty and/or contract in the conduct of the Audits, the services rendered by PwC HK/ZT in each of those audit engagements were valueless.

166.  In relation to PwC HK/ZT, the declaration and payment of the dividends in reliance on the FY2017 to FY2020 Group Consolidated Financial Statements as set out in paragraph 43 above, the incurrence of the costs and interest expenses of the fundraisings as set out in paragraph 40 above and the audit fees set out in paragraph 63 above, were factually and legally caused by the breached of contract and/or duty by PwC HK/ZT.

167.  In relation to PwC International, the declaration and payment of the dividends in reliance on the FY2018 to FY2020 Group Consolidated Financial Statements, and the incurrence of the costs and interest expenses of the fundraisings in rows 6 to 21 set out in paragraph 40 above, were factually and legally caused by the breaches of duty of PwC International. 

[emphasis added]

26.  Section M of the ASOC reads as follows: -

“M. LOSS AND DAMAGE

168. In the premises the Plaintiff has suffered loss and damage, and claims damages as follows: -

168.1 As against the First and Second Defendants: -

168.1.1 in respect of the dividends paid in reliance upon the FY2017 to FY2020 Group Consolidated Financial Statements of RMB42.355 billion (c. USD6.2333 billion) as set out in paragraph 43 above;

168.1.2 in respect of the costs and interest expenses of the fundraisings RMB15.435 billion (c. USD2.2715 billion) as set out at paragraph 40 above;

168.1.3 in respect of the audit fees paid to PwC HK/ZT RMB147 million (c. USD21.6 million) as set out at paragraph 63 above;

168.2 As against the Third Defendant: -

168.2.1 in respect of the dividends paid in reliance upon the FY2018 to FY2020 Group Consolidated financial statements of RMB27.553 billion (c. USD4.055 billion), as set out in paragraph 43 above;

168.2.2 in respect of the costs and interest expenses of the fundraisings RMB10.543 billion (c. USD1.5516 billion), as set out in rows 6 to 21 of paragraph 40 above. “

27.  In the prayer, the Plaintiff claims, inter alia, “Damages for breach of contract and/or in tort to be assessed as aforesaid”.

28.  It is common ground between the Plaintiff and International that the claim against International is only in tort and not in contract.

The Factual Background

29.  In each of the years 2017, 2018, 2019 and 2020, the Plaintiff entered an Engagement Letter with the 1^st and the 2^nd Defendants for an audit of the consolidated financial statements of the Plaintiff and its subsidiaries (the “Plaintiff’s Group”) for the financial years in each of those calendar years.

30.  Pursuant to the audited accounts done by the 1^st and 2^nd Defendants, the Plaintiff issued its Annual Report for FY2017, FY2018, FY2019 and FY2020.

31.  On 31 March 2021, the Plaintiff issued its Annual Report for FY2020 which contained its Group Consolidated Financial Statements for FY2020 and an unqualified independent auditor’s report signed by the 1^st Defendant.

32.  On 15 October 2021, the former Financial Reporting Council (now known as the Accounting and Financial Reporting Council) announced that it had initiated (i) an inquiry into the Plaintiff’s financial statements for FY2020 and the interim financial statements for FY2021 and (ii) an investigation into the 1^st Defendant’s audit of the Plaintiff’s Group Consolidated Financial Statements in relation to FY2020.

33.  On 24 June 2022, a company by the name of Top Shine Global Ltd. issued a winding-up petition against the Plaintiff in the Hong Kong Court in respect of an unpaid debt amounting to HK$862 million.

34.  On 16 August 2023, the 1^st Defendant resigned as the Plaintiff’s Group auditor and was replaced by another company called Prism Hong Kong and Shanghai Ltd.

35.  On 16 August 2023, the Plaintiff published its Group Consolidated Financial Statements for FY2021, reversing RMB664 billion (about US$97.7 billion) of revenue which had been recognized in prior periods, reporting losses of RMB686 billion (about US$101 billion) and negative equity of RMB473 billion (about US$69.6 billion).

36.  On 29 January 2024, Madam Justice Linda Chan ordered the Plaintiff to be wound up.  In her Judgment which is reported at [2024] 1 HKLRD 1128, in paragraph 19, she stated as follows: -

“It is indisputable that the Company is grossly insolvent and is unable to pay its debts.   According to the 2023 Interim Report published by the Company on 26 September 2023, as at 30 June 2023, the Company had total assets of RMB1,743,997 million …………. while its total liabilities are RMB2,388,200 million.   The Company is balance sheet insolvent.”

37.  As pleaded in the ASOC and as mentioned above, the Plaintiff in these proceedings is suing the 1^st and the 2^nd Defendants for damages for breach of contract and in tort and International only for damages in tort in respect of FY2018, FY2019 and FY2020.

38.  It is common ground between the parties that there had never been any contract, communications or dealings between the Plaintiff and International at all material times.  Furthermore, International was not qualified to do any audit work in Hong Kong and had not been paid any remuneration in respect of the audits performed by the 1^st and 2^nd Defendants.

The Relevant Documents

A.  The 4 Engagement Letters

39.  The 4 Engagement Letters are in Chinese and in practically identical terms.  Since the parties have been referring to the copies of the translation by agreement, I will also do so.  It is to be noted that each Engagement Letter has annexed to it as Annex 1 which is known as the Terms of Business (the ‘TOB”).  Together they form a single contract between the 1^st and 2^nd Defendants of the one part and the Plaintiff of the other part.

40.  The following provisions in the Engagement Letter are relevant: -

(i)  Clause 1.1 reads as follows: -

“1. Objective of services

1.1  PwC Hong Kong will perform an audit of the consolidated financial statements of the Group in accordance with the Hong Kong Standards of Auditing issued by the Hong Kong Institute of Certified Public Accountants, and report PwC Hong Kong’s audit opinion on the consolidated financial statements to the Company’s shareholders.  PwC Zhong Tian will participate in assisting PwC Hong Kong in completing the audit together.”

(ii)  Clause 3.1 and the relevant part of Clause 3.3 read as follows: -

“3. Responsibilities of the auditor

3.1 PwC Hong Kong has a responsibility to report to the Company’s shareholders whether in PwC Hong Kong’s opinion the consolidated financial statements give a true and fair view of the financial position and financial performance of the Group in the financial year and whether they have been properly prepared in accordance with the disclosure requirements of the Companies Ordinance.

3.3 PwC Hong Kong has a professional responsibility to report if the consolidated financial statements do not comply in any material respect with the requirements of the Hong Kong Financial Reporting Standards, unless in its opinion the non-compliance is justified in the circumstances.  In determining whether or not the departure is justified, PwC Hong Kong considers:

……………………………………………………. .”

(iii)  Clause 11.4 reads as follows: -

“11.4 Governing Law

As stated in Clause 14 of the attached Terms of Business, this Contract shall be governed by Hong Kong law.”

41.  The following provisions in the TOB are relevant: -

(i)  The Introduction reads as follows: -

“Introduction – The engagement letter (“Engagement Letter”) signed by the client (“Party A”) and PwC entities (“Party B”) together constitute a service contract (the “Contract”) entered into between the two parties.”

(ii)  Clause 1.1 reads as follows: -

“1. Services provided by Party B

1.1  Scope – Party B will perform the Services described in the Engagement Letter with appropriate professional competence and care.”

(iii)  Clause 7 reads as follows: -

“7. Subcontractors (including other PwC entities)

7.1 Subcontractors – Party B may engage other PwC entities or subcontractors in the provision of the Services, but the provision of the Services remains Party B’s sole responsibility.   A PwC entity means an entity or partnership that is part of the PricewaterhouseCoopers global network (“PwC Entity”). Each PwC Entity is an individual and separate legal entity.

7.2 No claims against other PwC entities – Party A agrees not to claim against other PwC Entities for claims (including negligence) relating to the Services.  Other PwC Entities participating in the Services only act on behalf of Party B in communications with Party A.

7.3  Benefits under clause 7.2 – Clause 7.2 is agreed for the benefit of other PwC Entities.  Party A agrees that each other PwC Entity, as if it were a party to this Contract, may invoke Clause 7.2.  Each other PwC Entity relies on the protection of clause 7.2 to assist in the provision of the Services.  Party B accepts the benefits under clause 7.2 on their behalf.”

[emphasis added]

(iv)  Clause 14.2 reads as follows: -

“14. Dispute resolution

14.2  Governing Law and Jurisdiction – The laws of Hong Kong shall apply to this Contract.  The courts of Hong Kong shall have exclusive jurisdiction over any dispute, whether based on the Contract or not.”

B.   The Memorandum and Articles of Association of International

42.  Paragraph 3(a) of the Memorandum of Association (the “Memorandum”) (the objects clause) has been set out in paragraph 25 of the Affidavit of Brian William Gilchrist (“Mr Gilchrist”) of Messrs Gibson, Dunn & Crutcher, the solicitors acting for International, filed on 30 September 2025.  He says as follows: -

“25. PwC International’s objects are described in paragraph 3 of its Memorandum of Association.   Paragraph 3(a) is of particular relevance for present purposes. It provides that these objectives are:

‘(i) to provide guidance in relation to, and assist in, the achievement of the vision, values and principles of the member firms of [PwC International] including the co-ordination of the network …,

(ii) to develop, and to promote and assist the development of, common standards, principles, strategies, policies, objectives, plans, projects, programmes, practices and systems to be applied by member firms … in carrying out their businesses and to promote, monitor and assist the uniform application of such common standards, principles, strategies, policies, objectives, plans, projects, programmes, practices and systems.

(iii) to provide, or procure the provision of, services to member firms … (including service methodologies and tools, relationship management process, know-how, training, quality assurance services, insurance, technology, management information, planning and budgeting processes);

(iv) on the request of, and in co-operation with, the PwC Business Trust, to do all things as is considered necessary or conducive to the promotion and protection (i) of the names “PricewaterhouseCoopers” and “PwC” and the names and other practice rights of members firms … and (ii) of the network …;

(v) to provide guidance in relation to, and to promote, monitor and support and otherwise to strengthen and expand, the network …, and

(vi)   to do such other things as, in the opinion of the Board or the NLT (subject to their respective powers set out in the articles of association of [PwC International] or regulations made pursuant to such articles of association of [PwC International]), may facilitate or relate to the foregoing objects or any of them, including providing, or assisting in the provision of, advice or services to member firms … (but [PwC International] shall not itself carry on any trade or other activities with a view to profit or carry on any business or practice of accounting, auditing, tax advising or management consulting or other or related professions or businesses)’ (emphasis added).”

[emphasis added]

43.  The Articles of Association (the “Articles”) contain the following relevant provisions: -

(i)  Under Article 1, there are the following definitions: -

“‘Governance Board Chairman’ means the chairman of the Board (or such role under another title) appointed pursuant to the Regulations

‘Governmental Authority’ means any supra-national, national, federal, state, regional, provincial, municipal or local government, authority, agency, assembly or other body, court, central bank, or trade, public or professional or regulatory or taxing body

‘Member Firms’ means persons who are admitted from time to time as Member Firms pursuant to the Regulations and have not ceased to be Member Firms and ‘Member Firm’ means any of them as the case may require

‘Network Firms’ means persons, designated by the Board as Network Firms, who have entered into an agreement with the Company to be admitted as Network Firms (and ‘Network Firm’ means any of them as the case may require) and includes any entities which are subsidiaries of individual Network Firms or are otherwise associated or connected with such individual Network Firms

‘Network Leadership Team’ or ‘NLT’ means the body constituted as such in accordance with the Regulations”

44.  The relevant part of Article 5.1 of the Articles provides as follows: -

“5 Regulations

5.1 The Company may make and adopt regulations governing, and establishing the rights and obligations of, the Company, its members, officers and organs and committees, the Network Firms and other Relevant Entities in relation to, without limitation

(A) the admission of new members and of Network Firms;

(B) the resignation and expulsion of members, Network Firms and other Relevant Entities and automatic or other cessation of membership or status as Network Firms or other Relevant Entities,

(C) the rights and obligations of members, Network Firms and other Relevant Entities, including rights and obligations in consequence of or following cessation of membership or as Network Firms or as other Relevant Entities;

(D) the voting rights of and consents required from members and/or Network Firms,

(E) the standards, principles, strategies, policies, objectives, plans, projects, programmes, practices and systems to be observed and applied, and other obligations to be complied with, by Member Firms, Network Firms and other Relevant Entities including in relation to, without limitation, compensation, network clients (including the identification and designation of certain clients of the network of Member Firms as network clients) and election procedures and protocols,

(F) the eligibility for office, appointment, remuneration, incapacity, resignation, disqualification and removal, and the powers, responsibilities and proceedings of the Governance Board Chairman, the Chief Executive Officer (if any), committees and senior management of the Chief Executive Officer (if any), the Board Members, the Board, committees of the Board, the NLT, committees and the executive team of the NLT, members of the NLT, the Strategy Council, members of the Strategy Council, committees of the Strategy Council, the Senior Management and other officers and committees and organs of the Company (and regulations may in particular, without limitation, specify that particular individuals shall hold particular offices, and add to the powers, require, permit or prohibit the exercise of the delegation of particular powers to any committee consisting of one or more persons (who need not be Board Members) and also require, permit or prohibit the further sub-delegation of any such powers so delegated form any such committee to any other committee consisting of one or more persons (who need not be Board Members), and impose conditions upon the exercise of any power contained in these articles),

(G) the provision of services to Member Firms, Network Firms and other Relevant Entities:

(H)  the bestowing on Member Firms of titles or designations from time to time and the rights and obligations that accompany such titles or designations,”

[emphasis added]

RHC Order 18 rule 19(1) and (2)

45.  Order 18 rule 19(1) and (2) read as follows: -

“19. Striking out pleadings and indorsements (O. 189, r. 19)

(1) The Cout may, either of its own motion or on application, at any stage of the proceedings order to be struck out or amended any pleading or the indorsement of any writ in the action, or anything in any pleading or in the indorsement, on the ground that –

(a) It discloses no reasonable cause of action or defence, as the case may be; or

(b) It is scandalous, frivolous or vexatious; or

(c) It may prejudice, embarrass or delay the fair trial of the action; or

(d) It is otherwise an abuse of the process of the court;

And may order the action to be stayed or dismissed or judgment to be entered accordingly, as the case may be.

(2)  No evidence shall be admissible on an application under paragraph (1)(a).”

46.  As mentioned above, in this application, International is not relying on paragraph (c) of rule 19(1).

The Application based on Order 18 rule 19(1)(a)

47.  I deal first with International’s ground for its application based on Order 18 rule 19(1)(a).

48.  As expressly provided under rule 19(2), no evidence shall be admissible for this purpose.  Hence, one can only consider the point on the face of the pleading itself and nothing more.

49.  It is trite that in relation to this ground, all the facts pleaded in the subject pleading, in the present case the ASOC, must be assumed to be true.  On the other hand, a plaintiff cannot be allowed to put forward baseless assertions in the statement of claim and wish something useful may turn up at trial.  See Hon Fung v Frank Dominick [2023] HKCFI 245, [47].

50.  Despite the fact that the case only lasted one day, both sides have advanced numerous arguments and referred to a large number of cases.

A.   International’s Arguments

51.  In relation to the application under Order 18 rule 19(1)(a), first of all, Mr Handyside KC for International makes it clear that International does not challenge the primary facts alleged in the ASOC.  On the other hand, he bases his submission on what has not been pleaded by the Plaintiff in the ASOC.

52.  The submissions by International can be summarized as follows: -

(i)  The Plaintiff has not alleged that there were any communications or exchanges between it and International at any material time.

(ii)  In respect of the Plaintiff’s argument that the question of whether International had assumed a duty of care towards it as pleaded would depend on an intense examination of the facts at the trial after full discovery, International submits that nothing further will come forth on discovery by International and hence there should be no trial.

(iii)  Despite the criticism by the Plaintiff that International has not addressed the question of duty of care in a tripartite scenario, the legal principles which apply in a three-party situation are no different from those applicable in a two-party situation.

(iv)  Although the Plaintiff has submitted that duties of care owed by auditors and accountants is in a developing area of the law, that, in any event, has no application in the present case because International itself is neither an auditor nor an accountant firm.

(v)  There was a contractual relationship only between the Plaintiff and the 1^st and 2^nd Defendants but no contract between the Plaintiff and International which has not been pleaded.

(vi)  There is no pleading that International had received any remuneration in respect of the audits carried out by the 1^st and 2^nd Defendants and that is so in actual fact.

(vii)  In short, International’s submission is that when one looks at the clearly established principles and reads them with care and at what is and what is not alleged by the Plaintiff and the particulars of claim, the inevitable conclusion is that no duty of care was owed by International on the facts alleged and, hence, the claim against International should be struck out.

B.   The Plaintiff’s Arguments

53.  Mr Beltrami KC for the Plaintiff has advanced arguments which can be summarized as follows: -

(i)  The question of duty of care arising from the pleading is inherently fact sensitive and wholly unsuited for a strike-out.

(ii)  The duty of care which has been pleaded is based on International’s actual role and conduct, including its monitoring and participating in the audit processes of the 1^st and 2^nd Defendants and the audits themselves in the context of a very high-profile audit client.

(iii)  On the bases of the Memorandum and some of the other materials pleaded, International’s role as presented to the world is that it sits on top of the PricewaterhouseCoopers network structure with its responsibility for maintaining the brand name and the consistent standards attached to the same and do so for the benefit of all clients of PricewaterhouseCoopers clients, including the Plaintiff.  It therefore has a supervisory role over organizations in the network, including the 1^st and 2^nd Defendants.

(iv)  In connection to the above, International also has powers of “supervised remediation” over the network organizations, including the 1^st and 2^nd Defendants. Hence, it is very important that the internal documents of International, including its set standard, global regulations and its communications with the 1^st and 2^nd Defendants (if any) must be produced on discovery and to be examined at trial.  

(v)  It has also been pleaded that International had caused to be carried out the reviews of the audits done by the 1^st and 2^nd Defendants which reviews had lasted a total of 200 days.  Hence, the breach pleaded is in the nature of a commission as opposed to an omission.

(vi)  The knowledge of all the relevant facts on the part of International has been pleaded.

(vii)  Furthermore, the fact of reliance by the Plaintiff on International to ensure that the audit services provided were independent, compliant with the Hong Kong auditing standards and the common audit standards and to monitor the same has also been pleaded.

(viii)  Against the background that the Plaintiff is pursuing its claim by the Liquidators who do not have all the relevant documents, it is all the more important that there must be full discovery and the administration of interrogatories before the truth can be ascertained at trial.

(ix)  This case is in a developing area of the law in the sense that the courts have not made any decision on the scope of auditor liability within a supervisory framework such as that alleged against International in the present case.

C.   Discussion

54.  As mentioned above, the parties have referred to a large number of cases.  I do not intend to refer to all of them and will only refer to some of the more significant ones below.

55.  It should be noted that although those cases have been referred to by counsel in their argument relating to the application under Order 18 rule 19(1)(a), some of them are also relevant for the purpose of dealing with the application under rule 19(1)(b) and (d) and the inherent jurisdiction of the court.

(1)   Yue Xiu Finance Co., Ltd. v Dermot Agnew [1996] 1 HKLR 137

56.1  This case concerned a claim against joint auditors for negligent mis-statements and an application by the defendants to strike out the statement of claim under Order 18 rule 19(1)(a).  The 2^nd plaintiff acquired through a holding company the shares in two companies.  It and the vendor undertook to procure the services of the defendants as joint auditors to certify the combined profits of the said two companies.  Depending on the amount of the combined profits as ascertained by a special audit carried out by the defendants, either the 2^nd plaintiff would pay some money to the vendor or the vendor would pay some money to the 2^nd plaintiff.  The 2^nd plaintiff claimed that as a result of the negligent audit by the defendants, it had been misled to believe that it had no claim against the vendor.  The 2^nd plaintiff alleged that the defendants knew or ought to have known the purposes for the certification of the combined profits and that the 2^nd plaintiff would rely on the audited financial statements to determine whether or not to exercise its rights under certain put and call options in the shareholders’ agreement.  There was no contract between the 2^nd plaintiff and the defendants.

56.2  The judge at first instance held that the statement of claim did not disclose a reasonable cause of action because it failed to show a proximate relationship giving rise to a duty of care on the part of the defendants to the plaintiffs. The 2^nd plaintiff appealed.

56.3  In allowing the appeal and reversing the judge at first instance, Litton V-P (as he then was) said the following: -

(i)  At page 141 C – G: -

“The application to strike out

It must be emphasized that the judge was concerned in the court below only with an application to strike out the plaintiff’s claim under Order 18 rule 19(1)(a) of the Rules of the Supreme Court.   The precise nature of the relationship between the parties has not been ascertained by evidence. What the defendants were seeking to do, by their summons, was in effect to drive the plaintiff from the judgment seat.  This is a drastic remedy and it follows that no court should give effect to it unless it is satisfied that the legal basis of the claim is unarguable or almost incontestably bad: and, as Sir Thomas Bingham M.R. remarked in E (A minor)v. Dorset County Council [1994] 3 WLR 853 at 865, where the legal viability of the cause of action is sensitive to the facts, an order to strike out should not be made.

The legal basis of the claim

The foundation of the claim – a claim for purely economic loss – goes back to the decision of the House of Lords in Hedley Byrne v. Heller [1964] AC 465.  The principle has since been refined in many intervening cases.  There is in my judgment considerable danger in over-refinement, in an area of the law where the duty-situation is identified by such broad concepts as foreseeability, proximity and fairness: see Neill, L.J. in James McNaughton v. Hicks Anderson [1991] 2 QB 113 at 123H.  Attempt at refinement is particularly inappropriate in an application to strike out the claim before the true facts have been ascertained.  It would appear in reading the lengthy judgment of Cheung, J. that he had, in the course of the hearing, entertained elaborate submissions from counsel on the case law.”

[emphasis added]

(ii)  At page 143 F – J: -

“Here the judge seems to have adopted the voluntary assumption of responsibility by the defendants as the test of liability. ………………………… But, with respect, that plainly is the wrong test.  The judge is equating the special relationship in this branch of the law with contract, when the whole basis for the imposition of liability is that there is no contract.  As Lord Griffiths said in Smith v. Eric S. Bush [1990] 1 AC 831 at 862:

‘… I do not think that voluntary assumption of responsibility is a helpful or realistic test for liability.  It is true that reference is made in a number of the speeches in Hedley Byrne to the assumption of responsibility as a test of liability but it must be remembered that those speeches were made in the context of a case in which the central issue was whether a duty of care could arise when there had been an express disclaimer of responsibility for the accuracy of the advice. ……………………………………. The phrase ‘assumption of responsibility’ can only have any real meaning if it is understood as referring to the circumstances in which the law will deem the maker of the statement to have assumed responsibility to the person who acts upon the advice’.”

[emphasis added]

(iii)  At page 144 D – E: -

“What is pleaded in this case is that the defendants knew or should have known that the plaintiff would reply on their statements: para. 16 of the statement of claim.  That, plainly, is enough.   It was not necessary to go on to aver that the defendants so intended: subjective intention of this nature would be impossible to prove and can form no part of the legal requirement.  It does not appear in Lord Bridge’s formulation of the principle inCaparo Industries v. Dickman as I have quoted earlier, nor does it feature in Lord Oliver’s speech at 638-9.  If there is any valid distinction between knowledge on the part of the defendants and intention, then it is clear on a proper reading of the judgments in Caparo Industries v. Dickman that where the House of Lords referred to intention, their Lordships meant intention actual or inferred. Plainly, from the facts as pleaded in the statement of claim, intention can be inferred in this case.”

[emphasis added]

57.  As far as this court is concerned, that is a highly authoritative and instructive case on the point of striking out pleadings under Order 18 rule 19(1)(a) decided by a Hong Kong Court of Appeal consisting of two future Court of Final Appeal judges and argued by two counsel who were also future Court of Final Appeal judges, especially bearing in mind that Hong Kong law is specifically to be applied in this case.

58.  The following points can be extracted from that case: -

(i)  No court should strike out a pleading and drive the plaintiff from the judgment seat unless it is satisfied that the claim is unarguable or almost incontestably bad.

(ii)  Where the legal viability of the cause of action pleaded is sensitive to the facts, an order to strike out should not be made.

(iii)  What is known as the “threefold tests” of foreseeability, proximity and fairness are just broad concepts and should not be subject to the considerable danger of over-refinement.

(iv)  The voluntary assumption of responsibility by the defendants as the test of liability is the wrong test.  “The phrase ‘assumption of responsibility’ can only have any real meaning if it is understood as referring to the circumstances in which the law will deem the maker of the statement to have assumed responsibility to the person who acts upon the advice.”  Hence, it is the objective test which should be applied in all the factual circumstances.

(2)   Clerk & Lindsell on Torts (24^th ed 2023)

59.  In the course of the parties’ submissions, they have referred to three principles intermittently, namely, the threefold test, the assumption of responsibility test and the incremental approach.

60.  In Clerk & Lindsell on Torts, at paragraphs 7-113 and 7-114, some sort of caveat has been sounded for one reading the various cases.  Those paragraphs read as follows: -

“7-113 In the aftermath of Caparo, that case was widely believed to have introduced a general, three-stage test for identifying a duty of care in a novel situation, encompassing: (1) foreseeability of harm to the claimant; (2) proximity of relationship between claimant and defendant; and (3) whether imposing a duty would be fair, just and reasonable.  Since Robinson v Chief Constable of West Yorkshire, if not before, it has become apparent that this belief was mistaken.  However, the mistake has left scars in the case law that cannot be airbrushed out of the Law Reports.  Judgments from the quarter century between 1990 and 2015 are replete with assertions about 'proximity”, or its absence, and general discussion as to what might be “fair, just and reasonable”.

Multi-test approach  During the era when a three stage test was being used alongside a test based on assumption of responsibility, it appeared that both approaches had strengths.  Assumption of responsibility emphasized the analogy with contract whilst fairness allowed broader policy factors to be considered.  Rather than regarding the tests as rivals, an approach that sought to harness the strengths of both was adopted by Sir Brian Neill in BCCI (Overseas) Ltd v Price Waterhouse (No. 2).  After explaining that “the search for a principle or tests has followed three separate but parallel paths” (the threefold test stated by Lord Griffiths in Smith v Bush; the assumption of responsibility test; and the incremental approach recognized by Lord Bridge in Caparo), he commented that:

‘The fact that all these approaches have been used and approved by the House of Lords in recent years suggests:

(a)  That it may be useful to look at any new set of facts by using each of the three approaches in turn …

(b)  That if the facts are properly analysed and the policy considerations correctly evaluated the several approaches will yield the same result.’

This analysis presented the different approaches as mutually supportive rather than exclusive in their application.  Each was used to check the provisional conclusion reached by application of the other approaches.”

61.  The author seems to have echoed what Litton V-P has said about the threefold test and the assumption of responsibility test in the Yue Xiu case (supra).  In my view, it also appears to lend support to the “holistic view” approach which I shall refer to below.

(3)   Robinson v West Yorkshire Chief Constable [2018] AC 736

62.  In the Robinson case which is referred to in Clerk & Lindsell (supra), Lord Reed JSC set out his approach to the question of duty of care as follows: -

“26. ………………………………………………………………………..

Where the existence or non-existence of a duty of care has been established, a consideration of justice and reasonableness forms part of the basis on which the law has arrived at the relevant principles.   It is therefore unnecessary and inappropriate to reconsider whether the existence of the duty is fair, just and reasonable (subject to the possibility that this court may be invited to depart from an established line of authority).  Nor, a fortiori, can justice and reasonableness constitute a basis for discarding established principles and deciding each case according to what the court may regard as its broader merits. Such an approach would be a recipe for inconsistency and uncertainty, as Hobhouse LJ recognized in Perrett v Collins [1999] PNLR 77, 90-91:

‘It is a truism to say that any case must be decided taking into account the circumstances of the case, but where those circumstances comply with established categories of liability, a defendant should not be allowed to seek to escape from liability by appealing to some vaguer concept of justice or fairness; the law cannot be re-made for every case.  Indeed, the previous authorities have by necessary implication held that it is fair, just and reasonable at the plaintiff should recover in the situations falling within the principles they have applied.’

27. It is normally only in a novel type of case, where established principles do not provide an answer, that the courts need to go beyond those principles in order to decide whether a duty of care should be recognized.  Following the Caparo case, the characteristic approach of the common law in such situations is to develop incrementally and by analogy with established authority.  The drawing of an analogy depends on identifying the legally significant features of the situations with which the earlier authorities were concerned.  The courts also have to exercise judgement when deciding whether a duty of care should be recognized in a novel type of case.  It is the exercise of judgement in those circumstances that involves consideration of what is “fair, just and reasonable”. ………………………………..

29.  Properly understood, the Caparo case thus achieves a balance between legal certainty and justice. ……………………………………………”

63.  As explained in Clerk & Lindsell (supra), this would appear to be the new approach to the question of duty of care.

(4) & (5)  Two Hong Kong Court of Final Appeal cases

Luen Hing Fat Coating & Finishing Factory Ltd v Waan Chuen Ming (2011) 14 HKCFAR 14 and Dah Sing Insurance Service Ltd v Gill Gurlux Singh (2016) 19 HKCFAR 454

64.  It would be convenient now for me to refer to the above two Hong Kong cases to see what the state of the law in Hong Kong is.  This would have a bearing on dealing with the question of development of the law in Hong Kong which I shall elaborate upon below.

65.  In the Luen Hing Fat case (2011), the Court of Final Appeal, despite stating that it was taking a holistic view, still just applied the threefold test.

66.  In paragraphs 29 and 30 of the judgment of Bokhary PJ, he said as follows: -

“29. That reference to labels was echoed by Lord Walker of Gestingthorpe in Customs and Excise Commissioners v Barclays Bank Plc [2007] 1 AC 181. At p.209G he said that “the elements of the threefold test are labels” and that “their usefulness is limited”.  As to the extent of their usefulness, he had earlier (at E-F on the same page) expressed his agreement with Kirby J’s observations in Perre v Apand Pty Ltd (1999) 198 CLR 180, 284, that labels “help steer the mind through the task in hand”.

30.  Ultimately it is necessary to stand back and take a holistic view of foreseeability, proximity and the need to be satisfied that it would be fair, just and reasonable to impose a duty of care.  …………………………………….”

[emphasis added]

67.  In the Dah Sing case (2016), the approach of the court can be seen from paragraphs 17 – 20 of the judgment of Tang PJ as follows: -

“17. “Proximity” or “neighbourhood” are not the only relevant concepts in cases of omissions involving pure economic loss. The House of Lords in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 preferred the concept of “assumption of responsibility”.  Lord Goff of Chieveley said the concept of assumption of responsibility appeared, at 181:

… to have been adopted, in one form or another, by all of their Lordships in Hedley Byrne [1964] AC 465.

and that:

Furthermore, especially in a context concerned with a liability which may arise under a contract or in a situation “equivalent to contract,” it must be expected that an objective test will be applied when asking the question whether, in a particular case, responsibility should be held to have been assumed by the defendant to the plaintiff: see Caparo Industries Plc v Dickman [1990] 2 AC 605, 637, per Lord Oliver of Aylmerton.

18.  But, whether the applicable concept is “proximity”, “neighbourhood” or “assumption of responsibility”, Lord Hoffmann explained in Customs and Excise Commissioners v Barclays Bank plc [2007] 1 AC 181 at 198 and 199:

the answer does not depend upon what the defendant intended but, as in the case of contractual liability, upon what would reasonably be inferred from his conduct against the background of all the circumstances of the case.  The purpose of the inquiry is to establish whether there was, in relation to the loss in question, the necessary relationship (or “proximity”) between the parties and, as Lord Goff of Chieveley pointed out in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, 181, the existence of that relationship and the foreseeability of economic loss will make it unnecessary to undertake any further enquiry into whether it would be fair, just and reasonable to impose liability.

19.  Earlier at 190, Lord Bingham of Cornhill regarded an assumption of responsibility which is to be applied objectively:

as a sufficient but not a necessary condition of liability, a first test which, if answered positively, may obviate the need for further enquiry.

20.  In the present appeal, I prefer to approach the question of liability by considering whether, viewed objectively, Dah Sing could be said to have assumed the responsibility to report the cessation of his appointment or report his CPD credits.  The answer depends on what could be inferred from the circumstances of this case.  ……………………”

[emphasis added]

68.  Having made a comparison, I at least have some doubt as to whether the approaches by the Court of Final Appeal are uniform between themselves or are quite the same as that expressed by Lord Reed JSC in the Robinson case which, of course, was decided after the two Hong Kong cases.

(6)  Wong Chi Hung v Lo Wing Pun [2026] HKCFA 14

69.  At this juncture, it would be pertinent for me to refer to the very recent judgment by the Court of Final Appeal in the Wong Chi Hung case regarding the doctrine of stare decisis.  In the judgment of Cheung CJ (with which Ribeiro, Fok, Lam PJJ and Lord Hoffmann NPJ agreed), the learned Chief Justice restated and reaffirmed the correct position concerning the doctrine of precedent in civil cases in Hong Kong which can be summarized as follows: -

(1)  Only decisions of the Privy Council given before 1 July 1997 on appeal from Hong Kong are binding on Hong Kong courts, subject to any subsequent departure by the Court of Final Appeal.

(2)  Pre-1997 non-Hong Kong Privy Council decisions and decisions of the House of Lords are not binding. Since 1 July 1997, their persuasive weight depends upon their substance and merits, rather than upon their origin or source. The considered views of eminent jurists sitting in the apex court of the United Kingdom “will almost always repay careful attention and consideration”, but such decisions are not binding in Hong Kong.

(3)  The same is true of decisions (including those of the highest courts) of other common law jurisdictions, such as Australia, New Zealand, Canada and Singapore: they are frequently cited and may be highly persuasive, but they are not binding.  Article 84 of the Basic Law places all overseas common law authorities on the same footing and expressly permits reference to them, accordingly, no particular jurisdiction has any special status by reason of the provenance of its authorities.

(4)  It follows from Articles 8, 18(1) and 84 of the Basic Law that the common law applied in Hong Kong is the common law of Hong Kong and not that of England and Wales or of any other jurisdiction.

(5)  Since 1 July 1997, whether to follow or adopt an overseas authority would depend solely upon the judgment of the local court.  A judge at any level may decline to follow even a recent decision of the UK Supreme Court on a point not governed by binding local authority if, having considered the merits and relevant circumstances, he or she concludes that it should not be followed.  By “merits and relevant circumstances” is meant, among other things, the nature of the legal issue concerned, the soundness and persuasiveness of the reasoning, and the similarities and differences between Hong Kong and the overseas jurisdiction in question in terms of the relevant contexts, such as the constitutional, statutory, legal, social, economic, cultural, political or historical.

70.  The point, therefore, is that it is possible that there may be divergence of views between the Hong Kong courts and the courts in other jurisdictions, including the United Kingdom.

71.  Further, it is to be noted that only three major decisions by the Hong Kong courts, namely, the Yue Xiu case, the Luen Hing Fat case and the Dah Sing case (supra), on the principles regarding duty of care on the part of accountants/auditors have been cited by the parties.  Only the Yue Xiu case concerns a strike-out application.  As I see it, there has not yet been any definitive ruling by the Hong Kong courts on the principles to be applied in cases such as the present.  I take it that if there had been other similar cases, the parties would have brought them up in their submissions.

72.  Hence, there seems to be a relative dearth of authorities in Hong Kong.  This is relevant to the point of developing law in Hong Kong about which I shall discuss more below.

73.  I shall next examine some of the English cases cited by the parties.

(7)  Lungowe v Vedanta Resources plc [2020] AC 1045

74.  This case is relied on by the Plaintiff.

75.1  The claimants, Zambian citizens who lived in Zambia, brought claims in England in negligence against the defendants, a UK company and its Zambian subsidiary, alleging personal injury and economic loss caused by discharges from a Zambian copper mine which was owned and operated by the 2^nd defendant subsidiary.  The claimants got leave to serve claim forms on the second defendant in Zambia.  The defendants sought to challenge the jurisdiction of the English court.  In relation to that, the issue arose as to whether there was a “real issue” between the claimants and the 1^st defendant parent company.  The case reached the UK Supreme Court which dismissed the applications by the defendants and held, inter alia, as follows: -

“that the liability of parent companies in relation to the activities of their subsidiaries was to be determined on ordinary, general principles of the law of tort regarding the imposition of a duty of care and did not form a distinct category of liability in common law negligence; that, therefore, the question of whether there was a “real issue” between the claimants and the first defendant, within paragraph 3.1(3) of CPR Practice Direction 6B, so as to justify joining the second defendant, did not involve the determination of a novel issue of law and was suitable to be determined summarily; that, on the materials available, it was arguable that the first defendant had exercised a sufficient level of control over the activities of the second defendant so as to make the first defendant liable in negligence to the claimants; and that, accordingly, there was a “real issue” to be tried between the claimants and the first defendant.”

75.2  In the judgment of Lord Briggs JSC, he said as follows: -

  (i)  In paragraphs 43 – 44: -

“43. Summary judgment disputes arise typically, and real triable issue jurisdiction disputes arise invariably, at a very early stage in the proceedings.  In the context of a jurisdiction challenge the court will, typically, have only the claimant’s pleadings.  Proportionality effectively prohibits cross-examination and neither party will have had the benefit of disclosure of the opposing party’s documents, albeit that in exceptional circumstances a direction for limited specific disclosure may be given: see Rome v Punjab National Bank [1989] 2 All ER 136, 141, per Hirst J and Vava v Anglo American South Africa Ltd [2013] Bus LR D48; [2012] 2 CLC 684. No order for limited disclosure was sought or made in the present case.

44.  The extent to which the absence of disclosure of defendants’ documents may impede claimants in demonstrating a triable issue depends of course upon what are said to be the defects in its case.  In the present case the critical question is whether Vedanta sufficiently intervened in the management of the mine owned by its subsidiary KCM to have incurred, itself (rather than by vicarious liability), a common law duty of care to the claimants or (on the claimants’ expert evidence) a fault-based liability under the Zambian environmental, mining and public health legislation in connection with the escapes of toxic materials from the mine alleged to have caused the relevant harm.  The level of intervention in the management of the mine requisite to give rise to a duty of care upon Vedanta to persons living, farming and working in the vicinity is (as is agreed) a matter of Zambian law, but the question whether that level of intervention occurred in the present case is a pure question of fact.  I make no apology for having suggested during argument that it is blindingly obvious that the proof of that particular pudding would depend heavily upon the contents of documents internal to each of the defendant companies, and upon correspondence and other documents passing between them, currently unavailable to the claimants, but in due course disclosable.”

[emphasis added]

  (ii)  In paragraph 53: -

“53. Even where group-wide policies do not of themselves give rise to such a duty of care to third parties, they may do so if the parent does not merely proclaim them, but takes active steps, by training, supervision and enforcement, to see that they are implemented by relevant subsidiaries. Similarly, it seems to me that the parent may incur the relevant responsibility to third parties if, in published materials, it holds itself out as exercising that degree of supervision and control of its subsidiaries, even if it does not in fact do so. In such circumstances its very omission may constitute the abdication of a responsibility which it has publicly undertaken.”

[emphasis added]

  (iii)  In paragraph 55: -

“55. The essence of the claimants’ case against Vedanta is that it exercised a sufficiently high level of supervision and control of the activities at the mine, with sufficient knowledge of the propensity of those activities to cause toxic escapes into surrounding watercourses, as to incur a duty of care to the claimants.  In the lengthy particulars of claim (in which this allegation of duty of care, together with its particulars, occupied 13 pages) the claimants make copious reference, including quoted highlights, to material published by Vedanta in which it asserted its responsibility for the establishment of appropriate group-wide environmental control and sustainability standards, for their implementation throughout the group by training, and for their monitoring and enforcement. …………… ”

[emphasis added]

(8)  Okpabi v Royal Dutch plc [2021] 1 WLR 1294

76.  This case is also relied upon by the Plaintiff.

77.1  This case is very similar to the Lungowe case, except that the alleged contamination occurred in Nigeria and was concerned with petroleum.  It also concerned a first defendant parent company and a second defendant subsidiary company in Nigeria.  It was again a service out of the jurisdiction case and a challenge on the jurisdiction of the English court.

77.2  The Supreme Court basically followed the Lungowe case and found against the defendants.  It is sufficient just for the relevant parts of the holding to be set out: -

“Held, allowing the appeal, that where there was a jurisdiction challenge about whether the claim against the anchor defendant raised a triable issue, it was generally not appropriate for the defendant to dispute the facts alleged through evidence of its own save where the allegations of fact were demonstrably untrue or unsupportable; that in order to circumscribe the focus of the inquiry and to avoid problems of lack of proportionality, the court should concentrate on the particulars of claim and whether, on the basis that the facts there alleged were true, the cause of action asserted had a real prospect of success; that the court should not ignore reasonable grounds for believing that disclosure might materially add to or alter the evidence relevant to whether the claim had a real prospect of success; that instead of focusing on the pleaded case and whether that disclosed an arguable claim, the Court of Appeal had been drawn into conducting a mini trial that led it to making determinations in relation to contested factual evidence; that the claimants’ pleaded case, which had not been shown to be demonstrably untrue or unsupportable, together with the two internal documents and the real prospect of further relevant documentation emerging on disclosure, established that there were real issues to be tried; and that, accordingly, the action could proceed, subject to the parent company successfully challenging the English courts’ jurisdiction on other grounds it had raised. ……………………………

(i) …………………………………………………………..

(ii)  In considering any question of a parent company’s liability in relation to the activities of its subsidiaries the court is to be mindful that : (1) there is no general principle that the promulgation by a parent company of group wide policies or standards can never in itself give rise to a duty of care; (2) the issue is not one of control but the extent to which the parent did take over or share with the subsidiary the management of the relevant activity, which may or may not be demonstrated by the parent controlling the subsidiary; (3) there is no special doctrine in the law of tort of legal responsibility on the part of a parent company in relation to the activities of its subsidiary, vis-à-vis persons affected by those activities; and (4) nor does such a case amount to a novel and controversial new category of case for the recognition of a common law duty of care requiring an added level of rigorous analysis beyond that appropriate to any summary judgment application in a relatively complex case. ”

[emphasis added]

(9)  Electra Private Equity v KPMG [2000] BCC 368

78.  This case is again relied upon by the Plaintiff.

79.  It is to be noted that although this case also concerned an application to strike out under Order 18 rule 19 and the inherent jurisdiction of the court, the judge at first instance struck out the claim not on the basis that the pleading did not disclose a reasonable cause of action but on the basis that the plaintiff was bound to fail.  He was, however, reversed by the Court of Appeal.  What has been said by the Court of Appeal is, in my view, applicable to strike-out applications under Order 18 rule 19 on all grounds.

80.1  The facts of the case are as follows: -

In 1992 the plaintiff, a firm of venture capital fund managers, invested IR£10m in an Irish company which went into receivership 18 months later.  The plaintiff lost its investment and took proceedings against the first defendant, ‘KPMG’, which the plaintiff had instructed to investigate4 and report on the suitability of the investment, and against the company’s auditors, ‘SKC’, an Irish partnership and part of the KPMG international group.  The plaintiff’s case was that it relied on the company’s 1992 accounts and SKC’s unqualified report on them produced before the plaintiff made its investment, together with alleged assurances given direct by SKC to the plaintiff, and that to the plaintiff’s knowledge SKC also supplied information to KPMG for the purposes of its investigation and report.  Contrary to SKC’s unqualified audit report there were substantial deficiencies in the company’s accounting systems and controls.

80.2  In allowing the appeal in favour of the Plaintiff, Auld LJ said in his judgment as follows: -

(i)  On page 371 @F – G: -

“SKC’s case in outline is that Electra’s claim was bound to fail and that the facts alleged by Electra, even if true, did not give rise to any duty of care.  It acted throughout solely as auditor to Cambridge and that in such contact as it had with Electra or KPMG it did not assume a responsibility to Electra for the accuracy of its auditing or reporting on Cambridge’s accounts.  It did not know that Electra was relying on the accuracy of the accounts for the purpose of deciding whether to make the investment; it gave no assurances to Electra could rely on them when making that decision; and in giving such unaudited information as it did to KPMG it did not assume any responsibility to it or to Electra for its accuracy, in particular, it did not know what use KPMG would make of it or even that KPMG or Electra would rely on it.”

  (ii)  On pages 386 – 387: -

“It is trite law that the power to strike out a claim under RSC, O. 18, r. 19 or in the inherent jurisdiction of the court should only be exercised in ‘plain and obvious’ cases.  That is particularly so where there are issues as to material primary facts and the inferences to be drawn from them, and when there has been no discovery or oral evidence.  In such cases, as Mr Aldous submitted, to succeed in an application to strike out, a defendant must show that there is no realistic possibility of the plaintiff establishing a cause of action consistently with his pleading and the possible facts of the matter when they are known.  Certainly, a judge, on a strike-out application where the central issue is one of determination of a legal outcome by reference to as yet undetermined facts, should not attempt to try the case on the affidavits. ……………………………

However, the court should proceed with great caution in exercising its power of strike-out on such a factual basis when all the facts are not known to it, when they and the legal principle(s) turning on them are complex and the law, as here, is in a state of development.  It should only strike out a claim in a clear and obvious case.  Thus, in McDonald’s Corporation v Steel [1995] 3 All ER 615, Neill LJ, with whom Steyn and Peter Gibson L JJ agreed, said, at p. 623e-f, that the power to strike out was a Draconian remedy which should be employed only in clear and obvious cases where it was possible to say at the interlocutory stage and before full discovery that a particular allegation was incapable of proof.  In X v Bedfordshire County Council [1995] 2 AC 633, Sir Thomas Bingham MR also underlined the rigour of the limits of the strike-out jurisdiction in the following passages, at pp. 693E-694F, which were approved by Lord Browne-Wilkinson, at pp. 740H-741D, and the other members of the appellate committee when the matter reached the House of Lords:

‘It is clear that a statement of claim should not be struck out under R.S.C. Ord. 18. R. 19 as disclosing no reasonable cause of action save in clear and obvious cases, where the legal basis of the claim is unarguable or almost incontestably bad …

… I share the unease many judges have expressed at deciding questions of legal principle without knowing the full facts.  But applications of this kind are fought on ground of a plaintiff’s choosing, since he may generally be assumed to plead his best case, and there should be no risk of injustice to plaintiffs if orders to strike out are indeed made only in plain and obvious cases.  This must mean that where the legal viability of a cause of action is unclear (perhaps because the law is in a state of transition), or in any way sensitive to the facts, an order to strike out should not be made.  But if after argument the court can be properly persuaded that no matter what (within the reasonable bounds of the pleading) the actual facts the claim is bound to fail for want of a cause of action, I can see no reason why the parties should be required to prolong the proceedings before that decision is reached …’

Sir Thomas also stressed the particular difficulty – sensitivity to the facts – of striking out a claim as disclosing no reasonable cause of action where the issue is as to the existence of a duty of care. He said, at p. 694E, in terms which call to mind Sir Brian Neill’s list of relevant factors in BCCI v Price Waterhouse:

‘If it is clear, whether by statute or from previous authority, that the relationship between the parties is not or cannot be such as to give rise to a duty of care, then court can safely strike out the statement of claim. If, however, that is not clear, or the answer may depend on the exact relationship of the parties and what passed between them and what each knew, did or said at any time, or the court is unable safely to decide whether (on the facts pleaded) it is just and reasonable to impose a duty of care, then the case is not one in which a striking out order can be appropriate.’

Actions of negligence against auditors and other professional advisers engaged by a third party are a notable example of facts-sensitive cases where the law is still in a state of transition and in which courts should normally take particular care before determining the matter against the plaintiff before the full facts are known.”

[emphasis added]

(10)   JP SPC 4 v Royal Bank of Scotland International Ltd[2023] AC 461

81.  This is a case relied on by International.

82.  In this case, the claimants being two investment banks brought a claim against the defendant bank.  They sought to recover losses which they had allegedly suffered as a consequence of an alleged fraud perpetrated by a company and its owners by which money in the company’s accounts with the defendant which were beneficially owned by the claimants was passed out of those accounts for the benefit of the company’s owners or others.  The claimants contended that the bank owed them a duty of care in negligence to exercise reasonable care and skill since it knew, or ought to have known, that the monies in the company’s accounts were beneficially owned by the claimants.  The bank applied for summary judgment and/or for the claim to be struck out.  On appeal by the claimants to the UK Supreme Court which dismissed the appeal, it was held that: -

“On existing authority, the duty of care owed by a bank to refrain from executing a customer’s order if, and for so long as, the bank was put on inquiry in the sense that it had reasonable grounds for believing that the order was an attempt to defraud the customer did not extend beyond being a duty owed by the bank to its customer, which arose as an aspect of the bank’s implied contractual duty of care and co-extensive tortious duty of care; that there was no good reason for incrementally developing the tort of negligence beyond the well-established duty of care so as to impose on a bank an equivalent duty of care to a third party who was not a customer of the bank; that, in particular, the principle that a bank which was alleged to be assisting a breach of fiduciary duty was liable only if it was dishonest rather than negligent would be undermined if banks were to be treated as owing such a duty of care, since it would be tantamount to holding banks liable for having negligently assisted a breach of fiduciary duty; that, thus, there was nothing in principle or in authority to support the idea that the tortious duty of care owed by a bank to its customer to exercise reasonable care and skill could be extended across to a third party with whom the bank had no contractual relationship, even if the bank knew or ought to have known that the third party was the beneficial owner of the monies in the customer’s account; that, further, the first claimant had not pleaded any factual basis, and there was nothing in the assumed facts, upon which a duty of care based on an assumption of responsibility could be established, nor had the first claimant been able to identify any or any sufficient actual or prospective evidence which could establish such a duty; and that, accordingly, as a matter of law there was no basis on which the first claimant could establish that the defendant owed it a duty of care and there was no reason for the first claimant’s claim to proceed to trial because on the basis of the pleadings and the assumed facts it was bound to fail (post, paras44, 49, 57-58, 65, 68, 80, 84, 88-92, 97).”

83.  International mainly relies on the joint judgment of Lord Hamblen and Lord Burrows JJSC in paragraph 63 thereof which reads as follows: -

“63. As Lord Steyn explained in Williams v Natural Life at p 835F-G, the objective nature of the test means that it will generally be important to focus on exchanges which cross the line between the defendant and the claimant (or the group of persons of which the claimant is an identifiable member):

‘The touchstone of liability is not the state of mind of the defendant.  An objective test means that the primary focus must be on things said or done by the defendant or on his behalf in dealings with the plaintiff.  Obviously, the impact of what a defendant says or does must be judged in the light of the relevant contextual scene.  Subject to this qualification the primary focus must be on exchanges (in which term I include statements and conduct) which cross the line between the defendant and the plaintiff’.”

[emphasis added]

84.  As I see it, what has been said in the said paragraph 63 is obiter.  It is also to be noted that the phrase used is “it will generally be important”.  It therefore suggests that there may be exceptions.

85.  More importantly, as can be seen from the holding set out above, the relationship between a banker and its customer account holder is very special and well-established.  A banker owes a duty to its customer to handle the latter’s account as he may direct and it also owes to the customer a duty of confidence.  Such duties surpass any duty owed by the bank to others, except when there is fraud or criminality on the part of the customer.  Furthermore, the bank and its customer are actually on opposite sides, unlike in cases such as the present when the 1^st and 2^nd Defendants and International are in the same group or network and on the same side.  Hence, in my judgment, the JP SPC 4 case is distinguishable from the other cases referred to above.

Conclusion on the application under Order 18 rule 19(1)(a)

86.  In the abovementioned circumstances and on the legal principles set out in the cases referred to above, I have come to the conclusion that International must fail on its application under this limb.

87.  I have examined the ASOC carefully: -

(i)  Paragraph 50 pleads International’s responsibility of governance over and assistance to member firms in the PricewaterhouseCoopers Global Network, including the 1^st and 2^nd Defendants.

(ii)  Paragraph 51 pleads the relevant provisions in the Memorandum (a published document) which sets out the objects of International, which include monitoring and providing services to the said member firms.

(iii)  Paragraph 52 pleads the power of International to control the said member firms by placing “default members of the Network under ‘supervised remediation’ and/or to impose new leadership on a member firm or geographical practice”.  Such power appears to me to be a very strong and vigorous power.

(iv)  Paragraph 53 pleads the role of Mr Raymund Chao in and over all of the 1^st and 2^nd Defendants and International, showing the connection between all of them.

(v)  Paragraph 57 pleads the inferences to be drawn about the participation of International in the audits in question.

(vi)  Paragraphs 57A and 57B pleads further the participation and involvement of International in the said audits.

(vii)  Section H pleads the admissions of defaults by International and the 2^nd Defendant.  The question immediately arises as to why International would make such admissions if it had nothing to do with the default by the 1^st and 2^nd Defendants.

(viii)  Paragraph 111 pleads reliance by the Plaintiff on International.

(ix)  Paragraph 112 pleads the duty owed by International to the Plaintiff.

(x)  Section J pleads the knowledge on the part of International of the consequence of breach by the 1^st and 2^nd Defendants, namely, loss to the Plaintiff.

(xi)  Section K pleads breaches of duty on the part of the Defendants, including International.

(xii)  Section L pleads causation of loss and damage.

(xiii)  Section M pleads the loss and damage suffered.

(xiv)  The prayer contains the claim against International.

88.  In my judgment, all the necessary ingredients, including facts (which must be assumed to be true) and inferences have been pleaded.  On the authorities referred to above, it is at least arguable that, either applying the threefold test or the assumption of responsibility test or both, International did owe a duty of care to the Plaintiff.

89.  In the above circumstances, I cannot see how the cause of action against International as pleaded in the ASOC can be described as “unarguable or almost uncontestably bad”.

90.  Furthermore, I take the view that not all the facts are known and, hence, it is crucial that there should be discovery of documents and interrogatories administered, which I believe will throw more light on the case.  In such circumstances, the Plaintiff should not be driven from the judgment seat without a trial.

91.  Regarding the argument advanced by the Plaintiff that this case is in a developing area of the law in the sense that the courts have not made any decision on the scope of auditor liability within a supervisory framework such as that alleged against International in the present case, I do not agree.  I think it is just another variation under the general law of negligence in tort.

92.  On the other hand, for the reasons which I stated in paragraphs 70 – 72 above, I do think that in the context of Hong Kong law as enunciated by the Hong Kong courts in the cases referred to above, there is scope for saying that it is still in the process of development.  That is another reason why the Plaintiff’s claim should not be struck out on the ground that it discloses no reasonable cause of action.

The Application based on Order 18 rule 19(1)(b) and (d) and the Inherent Jurisdiction of the Court

93.  For this purpose, the court can look at the evidence filed by the parties.

94.  For the purpose of this application, three affidavits have been filed by the parties: -

(i)  the First Affidavit of Brian William Gilchrist filed on 30 September 2025 (“Gilchrist 1”);

(ii)  the Second Affidavit of Edward Simon Middleton (filed on 26 November 2025 (“Middleton 2”);

(iii)  the Second Affidavit of Brian William Gilchrist filed on 9 January 2026 (“Gilchrist 2”).

A.  Gilchrist 1

95.1  Mr Gilchrist is the solicitor having the conduct of this case on behalf of International.

95.2  In paragraph 4 of Gilchrist 1, he says as follows: -

“4. PwC International’s Application is largely a matter for argument and legal submission, and much of the relevant information is contained in publicly available documents.  I, therefore, make this affidavit on the basis of information contained in publicly available documents, which I identify below, and my own personal knowledge.  Where a statement is based on a publicly available document, I have cited the document accordingly.  Where a document is not identified as a source for a particular statement, I make that statement from facts within my own knowledge.  I confirm that all facts and matters set out in this affidavit are true to the best of my knowledge, information and belief. ………………………………………………. .”

[emphasis added]

95.3  In subsequent paragraphs, Mr Gilchrist goes on to refer to some of the facts: The Statement of Claim, the Audits, the Engagement Letters, the TOB, the PwC network, the description of International and the Memorandum, etc., all based on his reading of the public documents.  He then makes his commentary on what he has referred to and concludes by saying that on such basis the claim by the Plaintiff should be struck out.

96.  I find that Gilchrist 1 is very unusual in that, first of all, under normal circumstances, it should be a responsible member of a party to a litigation who should be making an affidavit in support of its application, as opposed to the party’s solicitor.  Furthermore, Mr Gilchrist does not even allege that the source of his knowledge, information and belief is his client but is derived from various public documents.  Further still, based on the Statement of Claim and such public documents, he makes his commentary and even submissions.

97.  Not surprisingly, Gilchrist 1 has drawn much criticism from the Plaintiff both in Middleton 2 and in the submissions of Mr Beltrami.

B.  Middleton 2

98.1  In paragraphs 7 – 10 of Middleton 2, Mr Middleton voices his criticism about the defects in Gilchrist 1.  He says: -

“7.  Mr Gilchrist sets out his understanding of PwC International’s role in Sections C to E of Gilchrist 1.  Curiously, this understanding is not based upon instructions from his client, PwC International, but upon information contained in the publicly available documents which Mr Gilchrist identifies and his “own personal knowledge” (the source of which he does not identify).  

8.  Mr Gilchrist nonetheless asserts in paragraph 12 of Gilchrist 1 that CEG misunderstands the nature, role and function of PwC International, and sets out his understanding of the role of PwC International based upon his reading of the publicly available documents to which he refers.  Nowhere in his affidavit does he explain what involvement PwC International in fact had with the Plaintiff and/or the audits of the Group Consolidated Financial Statements of the Plaintiff conducted by the 1^st and 2^nd Defendants (“PwC HK” and “PwC ZT”).

9.  Mr Gilchrist concludes at paragraphs 35, 36 and 44 of Gilchrist 1, based upon his reading of publicly available documents and his own unspecified personal knowledge, that PwC International’s role was purely internal within the PwC network and its risk management functions were limited to the strategic level.

10.  However, Mr Gilchrist’s review of the publicly available documentation to which he refers makes three key omissions, namely (a) PwC International’s professional indemnity insurance coverage; (b) PwC International’s role in monitoring its members; and (c) the powers of control which PwC International has over its members.  I shall consider each in turn.”

98.2  Mr Middleton then goes on to deal with the 3 matters referred to in paragraph 10 of Middleton 2.

98.3  In relation to International’s profession indemnity insurance coverage, Mr Middleton says as follows: -

“A. PWC INTERNATIONAL’S PROFESSIONAL INDEMNITY INSURANCE COVERAGE

11. Mr Gilchrist offers no explanation as to why PwC International’s financial statements for each of the years ended 30 June 2018 to 2020 referenced by Mr Gilchrist, record that PwC Internation has been “named as defendant in legal proceedings arising out of professional services claims (or groups of claims) related to services provided by certain member firms of the PricewaterhouseCoopers network”, and that it “has professional indemnity insurance that covers[its] costs of defence” for these claims which relate to services provided by its member firms (see Exhibit BWG-1, Tab 14 p.998, Tab 15 p.1001, and Tab 16 p.1004).

12. If, as Mr Gilchrist, asserts, the role of PwC International is purely internal, it is difficult to see why it would put in place professional indemnity insurance coverage, or how it finds itself in a position where in each of the 3 years concerned, it has been named as a defendant in legal proceedings.

13.  Mr Gilchrist offers no explanation of the nature of these legal proceedings or the basis upon which they are being defended.”

98.4  In relation to International’s role in monitoring its members, Mr Middleton says: -

“B. PWC INTERNATIONAL’S ROLE IN MONITORING ITS MEMEBTS

14.  Mr Gilchrist makes no mention of the fact that it is clear form PwC’s Global Annual Reviews that PwC International actively participates in (a) monitoring and overseeing compliance, quality and risk management by its members firms, including that in respect of its member firms’ audit engagements, and (b) assisting and monitoring its member firms in relation to any remediation action and plans required.”

He then goes on to extract various quotes from the relevant Global Annual Reviews and the 1^st Defendant’s Transparency Report for 2021 and draws his conclusion in paragraph 23 of Middleton 2 as follows: -

“23. Based on PwC HK”s 2019, 2020 and 2021 Transparency Reports (Tabs 1 to 3), the aforementioned Global Board, Network Leadership Team and Global Leadership Team are all governance bodies of PwC International.”

98.5  In relation to the powers of control which International has over its members, Mr Middleton goes on as follows: -

“C. THE POWERS OF CONTROL WHICH PWC INTERNATIONAL HAS OVER ITS MEMEBRS

24. Mr Gilchrist also fails to mention the extensive powers of control which PwC International has over its members.

25.  PwC International’s objectives and the parameters of its role and functions provided in its Memorandum and Articles of Association (Tab 12 of Exhibit BWG-1) grant PwC International a considerable degree of control over its member firms, in order to monitor and ensure its compliance with PwC’s standards, policies, objectives and practices.”

He then goes on to refer to provisions in the Memorandum and Articles.

98.6  In paragraphs 32 and 33 of Middleton 2, Mr Middleton further refers to extracts from the 2^nd Report issued by the Finance and Public Administration References Committee of the Australian Senate in March 2024 titled “PwC : The Cover-up Worsens the Crime.”  which mentioned various steps taken by International in relation to alleged acts of misconduct on the part of PwC Australia.

98.7  In paragraph 32.2 of Middleton 2, it is said: -

“32.2  Pursuant to its Memorandum of Association, PwC International had “considerable power over the network firms”.  The report noted that based on reporting from the Australian Financial Review, PwC International used “secretive network rules to put PwC Australia under its control”, used its powers to place PwC Australia under “supervised remediation”, and required PwC Australia to appoint a person it nominated as the CEO of PwC Australia. ([1.56]-[1.58]).”

[emphasis added]

98.8  In paragraphs 33 and 34 of Middleton 2, it is said: -

“33. PwC International has also exercised similar powers by effecting changes in PwC ZT’s management and staff following the administrative decisions made by the Mainland authorities in respect of PwC ZT’s audit of CEG’ principal subsidiary, Hengda Real Estate (see PwC International’s press release at Tab 21 of Exhibit BWG-1 and Section H.1 of the SOC).

34.  The limited publicly available information regarding PwC International’s responses to problems with PwC Australia and PwC ZT demonstrates that PwC International can have a much closer involvement in the affairs of its member firms than Mr Gilchrist suggests.”

C.  Gilchrist 2

99.  In Gilchrist 2, Mr Gilchrist responds to the points made by Mr Middleton on the three matters.  Again, in paragraph 4 thereof, he says: “I make this affidavit on the basis of information contained in publicly available documents and my own personal knowledge”.  He again does not say that the source of his knowledge, information and belief is his own lay client.

100.  Having considered the contents of Gilchrist 2, I am not convinced that they are good and sufficient answers to the points made in Middleton 2.

Clause 7 of the TOB

101.  International also makes the point that it can take the benefit of Clause 7 of the TOB which exempts it from liability to the Plaintiff.

102.  The heading in Clause 7 of the TOB is “Subcontractors (including other PwC entities)”.

103.  In my view, on the face of the heading, it is at least arguable that Clause 7 only applies to outside non-PwC subcontractors and subcontractors which are also PwC entities.  On all the materials before me, I think that it is very unlikely that International, being at the top of the PwC Global structure, can be described as a subcontractor of the 1^st Defendant or the 2^nd Defendant.

104.  In any event, there is an argument as to whether International comes within the definition of a “PwC entity”.

105.  In answer to International, the Plaintiff argues that, even if Clause 7 applies to International (which is not a party to the Engagement Letters or the TOB) and has the effect of giving it an exemption from liability, International has to bear the burden of showing that the exemption clause satisfies the test of reasonableness under the Control of Exemption Clauses Ordinance (Cap. 71).  Section 3(1) and (6) of that Ordinance provides as follows: -

“3. The ‘Reasonableness’ test

(1)  In relation to a contract term, the requirement of reasonableness for the purposes of this Ordinance and section 4 of the Misrepresentation Ordinance (Cap. 284) is satisfied only if the court or arbitrator determines that the term was a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.

(6)  It is for the person claiming that a contract term or notice satisfies the requirement of reasonableness to prove that it does.”

Section 7 of the Ordinance provides as follows: -

“7. Negligence liability

(2)  In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness.”

106.  In the case of Last Bus Ltd v Dawsongroup Bus & Coach Ltd. [2023] 4 WLR 80, in which the judge at first instance had ruled that a trial was not necessary to determine the question of reasonableness of an exemption clause under the Unfair Contract Terms Act 1977, the Court of Appeal reversed him.  In paragraph 53 of the judgment of Phillips LJ, he said: -

“53. A third error on the part of the Judge was, in my judgment, to hold that a trial was not necessary to determine the question of reasonableness.  Apart from the general point that such a fact-sensitive issue would ordinarily require a trial (although I do not say that the issue could never be determined on a summary basis), in this case there were obvious matters that required investigation.  The reasonableness of clause 5(b) fell to be considered in the full context of the tripartite arrangement with EvoBus, whereby Dawson purchased from EvoBus on terms unknown.  As Mr Benzie, for Dawson, conceded in argument, if Dawson had the right to an indemnity from EvoBus, that would potentially be relevant to the reasonableness of its own exclusion clause. I do not accept that the only factor relevant to reasonableness in this regard was Last Bus’s subjective understanding of whether it had a contract with EvoBus, if, indeed, that was a relevant factor at all.”

[emphasis added]

Conclusion

107.  I have already concluded above that International has failed in its application based on Order 18 rule 19(1)(a).

108.  In relation to the application under Order 18 rule 19(1)(b) and (d) and the inherent jurisdiction of the court, I also find against International for the following reasons: -

(i)  First, in respect of the evidence adduced by the parties on affidavit, there are obviously factual matters which need to be investigated and that, in my judgment, full discovery of documents and, possibly, interrogatories to be administered will greatly assist in throwing light on the case.

(ii)  Secondly, there are factual matters in dispute which should be explored by cross-examination at trial.

(iii)  Thirdly, insofar as International has adduced evidence (through Mr Gilchrist) with a view to showing that there is nothing to go to trial for, in my judgment, such evidence is inadequate and unsatisfactory for the reasons which I have stated earlier.

(iv)  Fourthly, the issue arising out of the said exemption clause and the test of reasonableness should be resolved at trial.

Disposition

109.  In all the circumstances, International’s Summons is dismissed.

Costs

110.  I cannot see why costs should not follow the event.

111.  The parties have asked for summary assessment of their costs.

112.  The Plaintiff has produced its Statement of Costs claiming a total sum of HK$3,336,709.  I find that such costs are reasonable and I approve the same for summary assessment.  I should mention, by way of comparison, that the Statement of Costs submitted by International for its costs is in the total sum of HK$8,208,728.31.

113.  In the result, I make an order nisi that International do pay to the Plaintiff the costs of and incidental to this application in the sum of $3,336,709.

114.  Last but not least, I thank counsel for their very detailed research and great assistance rendered to the court.