ANGELA RITA GARDNER v. GRANT THORNTON (a firm) AND ANOTHER

HCA 2348/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2348 OF 2009

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J U D G M E N T

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1.  This is an application by the 2nd defendant to set aside:

(i)          the order of Master Lung dated 24 December granting leave to the plaintiff to serve a concurrent writ on the 2nd defendant at its registered office in London;

(ii)         the service of the concurrent writ on the 2nd defendant; and

(iii)         the writ insofar as it relates to the 2nd defendant.

2.  The plaintiff is a local resident.  The 1st defendant is a firm of accountants practising in Hong Kong.  The 2nd defendant is a company incorporated in the United Kingdom and limited by guarantee.

3.  The plaintiff claims that tens of millions of her investment money had been misappropriated by a Mr Azedo.  She further claims that the 1st and 2nd defendants are vicariously liable for the misappropriations by Mr Azedo, as he had been in the employ of the 1st defendant at all material times up to March 2008 and then in the employ of the 2nd defendant until he disappeared in about September 2009.

The Plaintiff’s Case Against the 2nd Defendant

4.  The Statement of Claim pleaded in relation to the 2nd Defendant, the following:

“5. The 2nd Defendant is and was at all material times:-

(i) a company limited by guarantee incorporated in the United Kingdom with registered address at 338 Euston Road, 7th Floor, Regents Place, London; and

(ii) the international umbrella entity of a renowned global organization of accounting and consulting member firms providing tax, corporate, business, financial and other specialist advice.

6. Mr Gabriel Ricardo Dias-Azedo (‘Mr Azedo’):-

(i) was at all material times up to his retirement on 31st March 2008, a partner of the 1st Defendant holding the title of ‘Managing Partner’;

(ii) following his retirement from the 1st Defendant and from 1st April onwards, was a member of the Global Leadership Team of the 2nd Defendant holding the title of ‘Global Leader – Member Firm Development’; and

(iii) at all material times, whether in his position as Managing Partner of the 1st Defendant or member of the Global Leadership Team of the 2nd Defendant, worked from the office premises of the 1st Defendant, retaining the same business contact details including telephone number, facsimile number, and email address, as well as retaining the same personal assistant.

…

Investment Services

8. As Castlespring’s auditors, the 1st Defendant and Mr Azedo were aware that Castlespring was a profitable company and that the Plaintiff, as the sole beneficial shareholder, was the only person entitled to its profits.

9. In or around 1999, Mr Azedo advised the Plaintiff, that she should protect her wealth by placing her money with the 1st Defendant, for the 1st Defendant to manage and invest on her behalf. Mr Azedo further represented that he would personally, as the Managing Partner of the 1st Defendant, oversee and handle her investments with the 1st Defendant. In particular, Mr Azedo emphasized the international reputation of the 1st Defendant and the expertise of the 1st Defendant in a wide range of specialist advisory services.

10. Due to the trust and confidence the Plaintiff had in the 1st Defendant, and the position of Mr Azedo held therein, the Plaintiff accepted Mr Azedo’s advice and agreed to allow Mr Azedo, as Managing Partner of the 1st Defendant, to manage and invest her money. Mr Azedo assured the Plaintiff from time to time that he would earn satisfactory but safe returns from her money, sufficient to provide for the retirement of the Plaintiff (‘the Investment Services’).

11. In providing the Investment Services, Mr Azedo acted as trustee of any and all of the Plaintiff’s monies that he held or received from the Plaintiff for her investments.

12. Further and in any event, the 1st Defendant (and from 1st April 2008, the 2nd Defendant) and Mr Azedo owed the Plaintiff a fiduciary duty and/or a duty of care. That fiduciary duty and/or the duty of care owed by the 1st Defendant and Mr Azedo included a duty to safeguard the Plaintiff’s money; and to deal with it with diligence, honesty, in good faith and in the best interests of the Plaintiff. …

23. …

(iii) from December 2005, Mr Azedo started to provide the Plaintiff with statements of account regarding her investments regularly. From 27th July 2007 to 10th November 2007 and in 29th April 2008, the statements Mr Azedo provided to the Plaintiff were issued and signed by the 1st Defendant; and in 14th January 2008 and from 28th October 2008 to 30th July 2009, issued and signed by the 2nd Defendant; and

…

Investment Services was a Fraudulent Scheme of Mr Azedo

24. Around late September 2009, Mr Azedo disappeared. The whereabouts of Mr Azedo remain unknown to date.

25. Since the disappearance of Mr Azedo, the Plaintiff discovered that:-

…

(iv) due to a complaint made by one of the investors regarding a forged statement issued in the name of the 1st Defendant by Mr Azedo in 2008, the 1st Defendant and/or the 2nd Defendant started to investigate into the conduct of Mr Azedo in or around mid-2008. The Plaintiff avers that the 1st Defendant and/or the 2nd Defendant knew or ought to have known from the forged statement and/or their investigation that Mr Azedo had in the name of the 1st Defendant and/or 2nd Defendant deceived investors and/or beneficiaries and/or clients but had failed to take any action against Mr Azedo, thereby allowing Mr Azedo to make use of the names and other resources of the 1st and/or 2nd Defendant to further his fraud. The Plaintiff will, subject to discovery, plead further to this.

…

Liability of the 2nd Defendant

35. It is averred that Mr Azedo, in acting as a trustee for the Plaintiff under the Investment Services and/or in committing the acts of fraud as pleaded above, was from 1st April 2008 onwards:-

(i) acting in the ordinary course of his employment with the 2nd Defendant;

(ii) further or alternatively, acting with ostensible/apparent authority of the 2nd Defendant;

(iii) still further or alternatively, acting in close connection to the business and/or activities of the 2nd Defendant.

The 2nd Defendant is therefore vicariously liable for the acts of fraud committed by Mr Azedo to the same extent that Mr Azedo is liable to the Plaintiff.

36.     The 2nd Defendant is liable to account to the Plaintiff as trustee for the sums of HK$9.500,000.00 and US$1,085,640.00, being the total of the sums that the Plaintiff was defrauded of after the date of 1st April 2008, together with any investment gains thereon; or pay to the Plaintiff damages in the sums of HK$9,500,000.00 and US$1,085,640.00, plus the amount of any investment gains and/or interest thereon to be assessed.”

The Plaintiff’s Application for Service Out of Jurisdiction

5.  The plaintiff filed an affidavit on 21 December 2009 to apply ex parte for leave to issue a concurrent writ of summons against the 2nd defendant and to serve it on the 2nd defendant out of jurisdiction.  She repeated para 35 of her statement of claim in para 10 of her affidavit.  She said she had been advised by her legal advisers and verily believed that Mr Azedo in acting as a trustee for her with respect to her investments and/or in committing acts of fraud was:

1.  acting in the ordinary course of his employment with the 1st and/or 2nd defendant;

2. further or alternatively, acting with ostensible/apparent authority of the 1st and/or 2nd defendant;

3. still further or alternatively, acting in close connection to the business and/or activities of the 1st and/or 2nd defendant.

She therefore held the 1st and/or 2nd defendant vicariously liable for the acts committed by Mr Azedo to the same extent that Mr Azedo is liable to her.

6.  She further said in paras 12 and 13, among other things, that she had been advised by her legal advisers and verily believed that the 2nd defendant is a necessary and proper party to this action (Order 11, rule 1(c) of the RHC) and that the claim is founded on the tort of misappropriation of funds committed in Hong Kong for which the 2nd defendant is vicariously liable and Hong Kong is the forum of convenience (Order 11, rule 1(f)).

7.  Master Lung upon reading her affidavit granted her the leave on 24 December 2009. 

The 2nd Defendant’s Application to Set Aside

8.  The 2nd defendant filed an affidavit by a solicitor, Mr Tollan in support of its application to set aside.  Mr Tollan relied on para 6(6) of the Amended Defence of the 1st Defendant which referred to the 2nd defendant.  Para 6(6) of the Amended Defence of the 1st defendant pleaded:

“(6) The partners of the 1st Defendant are independent and separate from Grant Thornton International Limited, the 2nd Defendant company. The 2nd Defendant is a non-profit making umbrella organisation that co-ordinates and regulates global firm standards for its member firms, all of which are independent accountancy firms that practise in their respective countries under the name Grant Thornton. The 1st Defendant is one such firm, which is locally owned, operated and managed in Hong Kong. The 1st Defendant and 2nd Defendant are not in a partnership or an agency relationship. …”

9.  Mr Tollan also referred to the Statement of Claim and said that the sole cause of action against the 2nd defendant is vicarious liability for the acts of Mr Azedo and that is based on the allegations in para 35 of the Statement of Claim as referred to above.  He highlighted the lack of particulars for these allegations.

10.  Mr Tollan then repeated that the 2nd defendant is a not-for-profit, non-practising, international umbrella membership entity and organised as a private company limited by guarantee incorporated in England and Wales.  It does not provide services to clients and it has no clients.  The member firms, including the 1st defendant, are independently owned and managed around the world which provide accounting, tax and specialist business advice to private businesses and public entities.  Mr Azedo was the 1st defendant’s managing partner until 31 March 2008 and his consultancy agreement with the 1st defendant also ended on 30 September 2008.

11.  Mr Tollan also said that between late 2005 to 12 October 2009, Mr Azedo was a member of the Global Leadership Board at the 2nd defendant.  His latest title was “Global Leader – Member Firm Network”.  In this role, he was responsible for managing the relationship between the 2nd defendant and its member firms.  Mr Tollan learnt from the 2nd defendant’s Chief Legal Counsel, a Mr Kehoe that the scope of Mr Azedo’s duties in this role was solely business development of member firms and handling certain member firm issues.  His role did not extend to any services involving the giving of any accounting or other associated advice either to the member firms or clients.  Mr Azedo provided services to the 2nd defendant on the basis of a temporary secondment from the 1st defendant.

12.  Mr Tollan also said that there is no evidence on which the particulars in para 35 of the Statement of Claim can be made out. Hence, the plaintiff did not have a good cause of action against the 2nd defendant.  He also referred to the statements issued under the 2nd defendant’s letterhead as referred to in para 23(iii) of the Statement of Claim. He said that they cannot establish a cause action and are irrelevant.

The 2nd Defendant’s allegations of material non-disclosure

13.  Mr Tollan then alleged that the plaintiff had committed a number of material non-disclosures in her application for leave to issue a concurrent writ and to serve the same on the 2nd defendant.

14.  Before going into these allegations, I would refer to Wo Fung Paper Making Factory Ltd v Sappi Kraft (Pty) Ltd [1988] 2 HKLR 346 for Hunter JA’s observations at 356I to 357J on applications under Orders 11 and 12 and material non-disclosure:

“(5) There are two stages to the enquiry. The first is the ex parte stage under Order 11. I emphasise that it is ex parte on documents. The practice does not envisage oral submissions ever being made except at specific request. Order 11, rule 4(1) specifies what the supporting affidavit has to show. At that stage it seems to me that the court has to come to a provisional view (it being an ex parte application) on three matters. The first is whether the applicant shows a prima facie case. I read the speeches in Vitkoviceas accepting that that is the burden of that stage, it may be for the simple reason that when the court has only got one party's version before it, it can do very little more. That is how I read the speeches of Lord Simonds at p. 876, Lord Radcliffe at p. 884, Lord Tucker at p. 891. Secondly, it has to consider the sufficiency in law of the facts alleged: for example whether the applicant brings himself within any of the sub-rules and whether the facts alleged are sufficient prima facie to establish the cause of action alleged. Thirdly, the court has to consider the facts within the limited scope available. This really comes down to considering whether the facts are sufficiently asserted in an apparently credible manner. The matter was put in this way in a case in contract by Lord Buckmaster giving the opinion of the Privy Council in Hemelryck v. William Lyall Shipbuilding[1921] 1 AC 698 at p. 701. He said:

‘For the purpose of exercising the discretion which is conferred by the rules to be exercised [that is Order 11] it is sufficient if there appears reasonable evidence that a contract has been made.’

(6) The second stage which may or may not be reached, follows a proper application under Order 12, rule 8. Then the court has to consider all the evidence before it, and to determine in the light of that whether the plaintiff shows a good arguable case. That it is the test laid down in Vitkoviceat that stage. But the court’s position on fact and law is the same as it was at the ex parte stage. It cannot make any findings of fact. It can certainly consider the legal sufficiency of the facts, and whether there are legal holes or obvious failings in the plaintiff's case. It can in the words of Lord Goddard, C.J. in Malik v. National Bank of Czechoslovakia(1946) 176 LT 136 cited in Vitkoviceat p. 888, “if it can see by what appears on the affidavits that the case put up is a perfectly groundless one and one in which there is no substance at all, the court can refuse to give leave”. Similarly if the case is demurrable or nearly so. But that is about the limit of the court’s power and function on disputed facts under this jurisdiction. It follows that the existence of disputed facts is normally quite irrelevant to the question as to whether or not a good arguable case has been shown. Putting it in another way, the showing of a good arguable case does not postulate an Order 14 case, and is not negatived by the fact that good arguable defences may exist. The relevance of the dispute goes really to little more than the question of the suitability of the forum evidentially and it may be a factor to be brought in there. Otherwise normally speaking factual disputes are quite irrelevant.

I turn now to the two principles I conceive to be relevant, in relation to non-disclosure. First the court's power to discharge any order obtained ex parte for material non-disclosure is salutary and necessary. As one of the earlier cases shows, ex parte Polignac[1917] 1 KB 486, it is there for the court’s own protection. It is necessary to prevent its processes being abused. Secondly, there is another equally significant principle in this jurisdiction. This is to make sure that the court does not get itself in a position of what might be called “counter-abuse”: where this sort of point is regarded by litigants as “a very present help in trouble”; and where problems arise on the substance to resort to attack as the best method of defence.”

15.  The first allegation of material non-disclosure is the plaintiff’s failure to distinguish between the 2nd defendant’s activities as a global coordinating entity and the services provided by member firms like the 1st defendant.  Mr Tollan referred to the plaintiff’s reference to the 2nd defendant as an “umbrella” entity.  He criticized the reference as an insufficient explanation to the court of the role of the 2nd defendant and it did not explain that the 2nd defendant did not have a client facing operation.  There is, however, nothing that demonstrates the plaintiff’s awareness of the nature and role of the 2nd defendant.  She in fact said she had no knowledge of those matters in her reply affidavit.  I do not think she can be criticised for not disclosing something that she did not know. 

16.  The second allegation is the plaintiff’s failure to disclose that she had never been provided by the 1st or 2nd defendant any documentation like engagement letter, invoices for service or report showing that they had been engaged by her to provide professional services.  This, I think, is more a defence argument than a matter that should have been disclosed by the plaintiff.  The lack of such documentation alone cannot defeat the plaintiff’s claim against either defendant.

17.  The third allegation is the plaintiff’s failure to explain how the plaintiff could have believed that “investment advisory or trustee services” was within Mr Azedo’s title of “Global Leader – Member Firm Development” of the 2nd defendant and the duties thereof.  However, there is again no evidence showing that the plaintiff was aware of Mr Azedo’s duties in his role with the 2nd defendant.

18.  The next allegation is the plaintiff’s failure to identify the alleged irregularities in the statements purportedly issued by the 2nd defendant to her.  Mr Tollan said these were hallmarks of falsity that should have been disclosed to the court.  I again consider this more an argument for the defence than a matter that should have disclosed by the plaintiff.  The plaintiff has also said in her reply affidavit that she was not aware of the irregularities.

19.  Mr Tollan also referred to the fact that for the 10-year period covered by the alleged services of the 1st and 2nd defendants, the statements issued in the first six years did not bear any mark of either defendant and that suggested that it was Mr Azedo who served the plaintiff in his personal capacity.  This, I think, is again a defence argument.  There are statements purportedly issued by the 1st and 2nd defendants in the later years. The plaintiff is also relying on these statements to support her case.

20.  The last allegation is the plaintiff’s failure to disclose that she was a cousin and, until Mr Azedo’s disappearance, a very close personal friend of Mr Azedo.  This again is a defence argument.  I do not think its disclosure or otherwise would have affected the Master’s discretion in granting leave.

21.  On the whole, I do not think the 2nd defendant has made out a case of material non-disclosure against the plaintiff.

Submission of the 2nd Defendant

22.  Leading counsel for the 2nd defendant submitted that there is no serious issue to be tried in the claim against the 2nd defendant as the plaintiff has not got a good cause of action against the 2nd defendant.  What the plaintiff has pleaded in para 35 of her statement of claim is just “ritual incantation” of the rule for establishing vicarious liability and is not enough.  There must be evidence to make out the claim. 

23.  Regarding the claim based on Mr Azedo’s ordinary course of employment with the 2nd defendant, leading counsel said the plaintiff has not pleaded any facts to support her case that what Mr Azedo did in relation to her investment money was in the ordinary course of the employment.  Insofar as it could be discerned from the title of “Global Leader – Member Firm Development”, it is difficult to see how his duties in that role could provide the opportunity for the wrongs he did to the plaintiff.

24.  Regarding the claim based on the ostensible/apparent authority of the 2nd defendant, the plaintiff has also not pleaded any representation made or permitted to be made by the 2nd defendant that Mr Azedo had the authority from the 2nd defendant to do what he did that injured the plaintiff.

25.  For the third claim that Mr Azedo acted in close connection with the business or activities of the 2nd defendant, there is again no pleading of nature of Mr Azedo’s employment with the 2nd defendant and how did it have a close connection with what he did that injured the plaintiff. From the plaintiff’s affidavit evidence, she did not appear to know about the nature of the 2nd defendant’s activities.  Hence, her claim of vicarious liability of the 2nd defendant is speculative.

Submissions of the Plaintiff

26.  Counsel for the plaintiff referred to Ming Ah Insurance (HK) Ltd v Ritz-Carlton Ltd (2002) 5 HKCFAR 569 and submitted that the court should apply the “close connection test”.  The facts of this case are summarised in the headnote of report as follows:

“Two pedestrians were seriously injured as a result of E’s negligent driving of a limousine. E was employed as a doorman by H, a hotel. Part of his duties included acting as a ‘car jockey’. This involved moving cars, and sometimes limousines, that caused an obstruction in the hotel forecourt. Moving cars sometimes involved taking the car out of the forecourt and along the same route where the accident occurred. H hired limousines and their chauffeurs from a third party limousine service. A limousine would be moved only when its chauffeur was off duty. There developed a practice where employees would leave the hotel premises to collect food, sometimes by taxi, and sometimes by chauffeur-driven limousine. However, car jockeys were not authorised to drive limousines for the specific purpose of collecting food. The accident occurred when E, using keys left in his custody by an off-duty chauffeur, drove a bellboy in a limousine to collect food.”

The Court of Final Appeal held against the hotel on vicarious liability that:

“(1)     An employer was vicariously liable for an employee's unauthorised tortious act, if the employee’s tort was so closely connected with his employment that it would be fair and just to hold his employer vicariously liable.  This was the “close connection” criterion. It was the basic criterion for all cases of tort committed by an employee while engaged in an unauthorised act for his employer, whether the tort involved intentional wrongdoing or mere inadvertence.

(2)       Courts should openly confront the question of whether liability should lie against the employer, rather than obscuring the decision beneath semantic discussions of ‘scope of employment’ and ‘mode of conduct’.

(3)       The concept of employment must be viewed broadly when applying the “close connection” criterion.  The nature of the employment was not to be ascertained merely by attempting to tabulate the employee's duties.  It was necessary to stand back and see how the employer's activities were actually carried out and how that exposed the public to the risk of tortious harm caused by the employee.”

27.  Counsel further submitted that on the “close connection” test, unless the 2nd defendant can conclusively show that Mr Azedo had no representative, agent or employment connection with the 2nd defendant, then there are serious issues to be tried in the plaintiff’s claim for vicarious liability.

28.  Counsel further submitted that the 2nd defendant is a necessary and proper party in the action as the 1st defendant denies liability after 1 April 2008 on the ground that Mr Azedo had left its employment on that day, therefore there is an issue of for whom Mr Azedo was working from 1 April 2008. 

29.  Counsel also referred to the statements issued under the 2nd defendant’s letterhead to the plaintiff in support of the plaintiff’s claim against the 2nd defendant.

30.  Counsel further referred to the judgment of Recorder B Yu, SC in Ren Yun Liang & Ors v China Merchants Bank, HCA 1456/2005 at para 32 that the threshold for the defendant to show that there is no serious question to be tried is high.  It would be necessary for the defendant to demonstrate that the Statement of Claim ought to be struck out against the defendant on the grounds in O.18 r.19 of the Rules of the High Court.  Counsel also submitted that the Statement of Claim herein as against the 2nd defendant can survive a notional striking out.

31.  Counsel also referred to Mega v Archbishop of Birmingham & Anor [2010] 1 WLR 1441 where the English Court of Appeal upheld the claimant’s claim of vicarious liability against the defendant.  The facts of the case are also summarised in the headnote as follows:

“The claimant, who had learning difficulties and epilepsy, brought a claim against a Roman Catholic archdiocese for damages for personal injuries, alleging that he had been sexually abused as a child some 30 years earlier by a priest who lived and worked in the archdiocese. The claimant was not a Roman Catholic but had met the priest, who had special responsibility for youth work, through church discos which were open to all young people, and had done jobs for the priest, including in the presbytery where the priest lived and where some of the alleged abuse had taken place. … In its defence the archdiocese … denied … vicarious liability for the priest’s acts, although it admitted, for the purposes of the action only, that the priest had been an employee of the archdiocese.”

Lord Neuberger of Abbotsbury MR said in paras 43-48 and 52-53:

“43 Although I acknowledge the issue is not easy to resolve, I have reached a different conclusion from the judge. …, the issue, although very much fact-dependent, is ultimately one of law rather than of inference from facts, and at least in this case, the judge had no particular advantage over this court by his having seen live witnesses. Further, I consider that there is force in Ms Gumbel’s argument that the judge appears to have erred in principle by focusing on the actual motives of Father Clonan, and placing too much emphasis on the acts of abuse themselves.

44. The torfeasor was a Roman Catholic priest, and the claimant was not a Roman Catholic, and at no time had anything to do with the church itself (other than doing some cleaning work in the church once, which I regard as an irrelevant isolated incident). To that extent, the claimant’s case is clearly weaker than, or at least distinguishable from, that of the successful claimant in Lister’s case [2002] 1 AC 215, or of a Roman Catholic boy, such as M, who worked as an altar server at the church and was abused by Father Clonan. However, there are a number of factors, which, when taken together, persuade me that there was a sufficiently close connection between Father Clonan’s employment as priest at the church and the abuse which he inflicted on the claimant to render it fair and just to impose vicarious liability for the abuse on his employer, the archdiocese.

45. First, Father Clonan was normally dressed in clerical garb, and was so dressed, when he first met the claimant. At the very least, this factor at least sets the scene. A priest has a special role, which involves trust and responsibility in a more general way even than a teacher, a doctor, or a nurse. He is in a sense, never off duty; thus, he will normally be dressed in ‘uniform’ in public and not just when at his place of work. So, too, he has a degree of general moral authority which no other role enjoys; hence the title of ‘Father Chris’, by which Father Colonan was habitually known. It was his employment as a priest by the archdiocese which enabled him, indeed was intended to enable him, to hold himself out as having such a role and such authority.

46. Secondly, Father Clonan’s functions as a priest included a duty to evangelise, or ‘to bring the gospel to be known to other people … Roman Catholics and non-Roman Catholics’ to quote from the evidence of Monsignor Moran. As a result he was, as Monsignor Moran also accepted, ‘obliged to befriend non-Roman Catholics’, and ‘to gain and be worthy of their trust’. Accordingly, he was ostensibly performing his duty as a priest employed by the archdiocese by getting to know the claimant. The fact that he was getting to know the claimant for nefarious reasons is not really in point, any more than it assisted the school in Lister’s case [2002] 1 AC 215 that the warden may have been ‘grooming’ the claimant in that case: Father Clonan developed his relationship with the claimant under the cloak, or guise, of performing his pastoral duties.

47. Thirdly, given that the claimant was aged 12 or 13 when his association with Father Clonan started, it is significant that Father Clonan was given a special responsibility for youth work at the church. It underlines the point that, when getting to know, when effectively ‘grooming’, the claimant, Father Clonan was ostensibly carrying out one of his specifically assigned functions in the church.

48. Fourthly, Father Clonan was able to develop, and did develop, his relationship with the claimant by inviting him to a disco which was on church premises and which he organised as a priest at the church. Thus, the claimant was drawn in to the relationship through the medium of a church-organised function carried on in church premises by Father Clonan, a priest at the church. Fifthly, the relationship was further developed by Father Clonan getting the claimant to help clear up after discos. There is no evidence that the claimant was paid for this work, but it does appear that this work, on church premises at the request of a priest at the church, led to the claimant doing other work for Father Clonan. Thus, Father Clonan’s role as priest in the archdiocese gave him the status and opportunity to draw the claimant further into his sexually abusive orbit by ostensibly respectable means connected with his employment as a priest at the church.

…

52. I accept that the court should not be too ready to impose vicarious liability on a defendant. It is, after all, a type of liability for tort which involves no fault on the part of the defendant, and for that reason alone its application should be reasonably circumscribed. Further and more specifically, the deleterious effect on schools, and charities and social clubs aimed at the young, of too readily imposing such liability on employers for sexual abuse of children by their employees was rightly identified by the Canadian Supreme Court in Jacobi’s case 174 DLR (4th) 71, para 30. Thus, as emphasised in that case, the fact that the opportunity to commit abuse arises, as a result of the employment is not enough (paras 53-56), but, as I have sought to explain, there was much more here.

53. In Jacobi’s case, a para.79, the Canadian Supreme Court suggested that, in order to establish vicarious liability, a claimant must show that there was ‘a material increase in the risk of harm occurring in the sense that the employment significantly contributed to the occurrence of the harm’. It appears to me, for the reasons given, that requirement is satisfied.” (emphasis added)

Analyses and decision

32.  The plaintiff’s case against the 1st defendant is built on paras. 9 and 10 of the Statement of Claim.  Para 9 pleads that in around 1999, Mr Azedo advised the plaintiff that she should protect her wealth by placing her money with the 1st defendant for the 1st defendant to manage and invest on her behalf.  She did not say that her money was to be placed with Mr Azedo personally but it was to be placed with the 1st defendant.  In para 10, she pleaded that she had accepted Mr Azedo’s advice and agreed to allow Mr Azedo, as the 1st defendant’s managing partner to manage and invest her money.  Again, she allowed the management and investment of her money by the 1st defendant through Mr Azedo as its managing partner and not by Mr Azedo personally. 

33.  It is her case against the 1st defendant that all along Mr Azedo was purportedly acting as the agent of the 1st defendant in his dealings with her in relation to her investment money.  However, she did not plead how, when Mr Azedo ceased to be employed by the 1st defendant and began to be employed by the 2nd defendant, the role of the 1st defendant (which was a contractual one) in managing and investing her money was taken up by the 2nd defendant.  This is a gap in her case of how the 2nd defendant had become vicariously liable for the loss of her investment money.

34.  She also did not know the nature of the 2nd defendant’s activities save what she has pleaded in para 5(ii) of the Statement of Claim.  She pleaded in this paragraph that the 2nd defendant is an international umbrella entity of a renowned global organisation of accounting and consulting member firms providing tax, corporate business, financial and other specialist advice.  She has not challenged Mr Tollan’s evidence that the 2nd defendant is a private company limited by guarantee and is a not-for-profit, non-practising, international umbrella entity which does not provide services to clients and has no clients.  Given the nature of the 2nd defendant’s activities and Mr Azedo being its “Global Leader – Member Firm Development”, I cannot see how Mr Azedo’s dealings with the plaintiff’s investment money can be said to be in the ordinary course of his employment with the 2nd Defendant. 

35.  Though Mr Azedo’s employment with the 1st Defendant ceased on 31 March 2008, his fraud on the plaintiff continued.  However, it does not mean that there had to be another purported principal of Mr Azedo so as to facilitate the continuation of the claim of vicarious liability.  I do not think the 2nd defendant is a necessary or proper party in this action for this reason alone.

36.  The plaintiff’s next claim of vicarious liability against the 2nd defendant is that Mr Azedo, in committing his acts of fraud, was acting with the ostensible/apparent authority of the 2nd defendant.  However, I agree with the submission of leading counsel for the 2nd defendant that the plaintiff has not pleaded any representation made or permitted to be made by the 2nd defendant to the plaintiff that Mr Azedo had the authority from the 2nd defendant to do what he did in relation to the plaintiff’s investment money.  I also disagree with the submissions of counsel for the plaintiff that it is for the 2nd defendant to prove that Mr Azedo had no representative, agent or employment connection with the 2nd defendant.  That reverses the burden of proof.  This inadequacy in the Statement of Claim is connected to the inadequacy of how the 2nd defendant had assumed the alleged role of the 1st defendant when Mr Azedo ceased to be employed by the 1st defendant on 31 March 2008 as pointed out above. 

37.  Though there are investment statements under the letterhead of the 2nd defendant issued to the plaintiff, these statements are obviously false documents created by Mr Azedo to perpetrate his fraud on the plaintiff.  I do not think a fraudster’s unwarranted representation purportedly on behalf of the principal can bind the principal.  These statements do not assist the plaintiff in her claim against the 2nd defendant.

38.  Regarding the close connection test, leading counsel for the 2nd defendant has rightly pointed out that there is no pleading of the nature of Mr Azedo’s employment with the 2nd defendant or how did it have a close connection with Mr Azedo’s activities that injured the plaintiff. In the light of the nature of the 2nd defendant’s functions and activities, particularly that it has no client and does not provide service to any client, and Mr Azedo’s employment with it to carry out business development of member firms and handling member firm issues which did not extend to any service of giving accounting or associated advice to member firms or clients, I cannot see any connection between Mr Azedo’s employment with the 2nd defendant and his fraudulent activities in respect of the plaintiff’s investment money. 

39.  I also refer to the Megacase.  I cannot see how Mr Azedo’s employment by the 2nd defendant would have enabled Mr Azedo to hold himself out as having a role and authority on behalf of the 2nd defendant to handle the investment money of the plaintiff as the 2nd defendant has no client and does not provide such service to any client.  Mr Azedo was not ostensibly carrying out any of his duties/functions for the 2nd defendant when he dealt with the plaintiff’s money.  His employment with the 2nd defendant did not give him any status or opportunity to do so by ostensibly respectable means connected with the employment.  I do not think the plaintiff has shown that Mr Azedo’s employment with the 2nd defendant has significantly contributed to the occurrence of the harm occasioned by Mr Azedo to her.  Even if Mr Azedo should have lied to her about the nature of the 2nd defendant’s functions and/or of his employment with the 2nd defendant, the 2nd defendant would still not be affected by such lie.  I therefore do not think the 2nd defendant should be liable for Mr Azedo’s fraudulent acts.

40.  For the above reasons, I think the plaintiff’s claim against the 2nd defendant cannot survive a notional striking out.  I therefore set aside:

(i)              the service of the concurrent writ of summons on the 2nd defendant;

(ii)           the Master’s order granting leave to issue and serve the concurrent writ on the 2nd defendant; and

(iii)         the writ insofar as it relates to the 2nd defendant.

Costs

41.  Since the 2nd defendant has succeeded in this application, I also make a costs order nisi that the plaintiff do pay the 2nd defendant’s costs of this application to be taxed if not agreed. 

42.  On 10 March 2010, the Registrar dismissed the 2nd defendant’s application for the determination of a preliminary issue before the remainder of this application is dealt with.  I allowed the 2nd defendant’s appeal against the Registrar’s order on 13 April 2010, but left the incidence of the costs before the Registrar to be agreed by the parties or to be determined later. 

43.  The hearing on 10 March was mainly for giving directions for the disposal of this application.  That was why the Registrar assessed the costs for that hearing at HK$800.  The 2nd defendant has succeeded in the appeal against the dismissal of the application for determination of a preliminary issue.  It has also succeeded in the application itself.  I therefore make a costs order nisi that the plaintiff do pay the 2nd defendant the HK$800 costs for the hearing before the Registrar.

44.  Though the 2nd defendant succeeded in the application for determination of a preliminary issue, Master Kwang on 23 June 2010 decided the preliminary issue against it.  Master Kwang left the question of costs to be decided by me together with the costs of this application. Since the preliminary issue was decided against the 2nd defendant, I make a costs order nisi that it should pay the plaintiff the costs for that determination.

45.  Unless there is an application made within the next 14 days for variation of the above costs orders nisi, the parties shall fix a 9:30 a.m. hearing before me for summary assessment of these costs orders and the costs order I made on 13 April 2010.