3D-GOLD JEWELLERY HOLDINGS LTD (In Liquidation) AND ANOTHER v. PRICEWATERHOUSE COOPERS (a firm)

HCCL 13/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 13 OF 2015

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J U D G M E N T

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INTRODUCTION

1. By Summons dated 5 February 2016, the defendant applies to strike out extensive portions of the plaintiffs’ Reply, with the offending parts of the Reply identified in the version of it appended to the Summons.

2. The defendant complains that the offending parts of the Reply are liable to be struck out in that they:

(1)   wrongfully plead inappropriate submissions, arguments and/or polemic;

(2)   are prolix and excessively repetitive of the case pleaded in the Statement of Claim and the case which is pleaded in the Reply itself;

(3)   wrongfully plead legal arguments;

(4)   needlessly plead immaterial and/or unnecessary matters, including the entirety or lengthy extracts from documents which have no particular materiality to the matters in issue and matters which are effectively requests for further and better particulars;

(5)   wrongfully plead evidence; and

(6)   needlessly plead extensive joinder of issue or non-admission.

NATURE OF THESE PROCEEDINGS

3. By these proceedings, the plaintiffs claim damages against the defendant, their former auditor for the financial years ending 31 March 2003 to 31 March 2008, for breaches of contract and duty of care in excess of HK$400 million (plus interest and costs).

4. The 1^st plaintiff is 3D-Gold Jewellery Holdings Limited (formerly known as Hang Fung Gold Technology Limited) (In Liquidation), a company incorporated in Bermuda that was listed on the Hong Kong Stock Exchange from 16 March 1999 to 9 July 2012.  The 2^nd plaintiff, Hang Fung Jewellery Company Limited is a wholly owned subsidiary of the 1^st plaintiff. The 1^st plaintiff and its subsidiaries and associated companies are collectively referred to as “the Group”.

5. The plaintiffs allege that the defendant negligently failed to identify the pervasive fraud perpetrated over the course of at least six audit years between 2003 and 2008 by senior members of the Group’s executive management (including the Executive Chairman, Deputy Chairwoman and CEO), involving a series of repeated and related false transactions which inflated the sales and assets of the Group.  The effect of the false trading scheme was to conceal that the Group was chronically loss-making and insolvent, near insolvent or of doubtful solvency, from at least 31 March 2003.  Had the defendant acted in accordance with its contractual and tortious duties, the plaintiffs say the false trading scheme would have been identified during the course of the audit of the Group’s financial statements for the year ended 31 March 2003 and losses in excess of HK$400 million averted in that year and subsequent years.

6. In a nutshell, it is the plaintiffs’ case that the serious and pervasive fraud perpetrated by the senior management of the Group should have been, but negligently and in breach of contract, was not identified by the defendant.

7. By its Defence and Counterclaim, the defendant does not admit the existence of the said false trading scheme, and denies that it was negligent in the conduct of the relevant audits.  The defendant also denies any causative link between its negligence (if any) and the loss suffered by the plaintiffs.

8. Further, the defendant’s Defence and Counterclaim sets out a number of elaborate non-liability defences to exclude or reduce liability to the plaintiffs.  Obviously, the defences so raised would have to be properly addressed in the plaintiffs’ Reply.

9. It must be said that both the Statement of Claim and the Defence and Counterclaim in this case (which are not subject to any striking out applications) are very lengthy documents. The Consolidated Statement of Claim runs to some 291 pages, and the Defence and Counterclaim is a 273-page document.

GENERAL PRINCIPLES ON PLEADINGS

10. The purpose of pleadings is to provide the opposing party with fair notice of the case to be met at trial.  Pleadings are not an end in themselves. [See: eg, British Airways Pension Trustees Ltd v Sir Robert McAlpine & Sons Ltd (1994) 45 ConLR 1 at 4-5 per Saville LJ and ADS v Wheelock Marden & Co Ltd [1994] 2 HKC 264 at 269E-270A per Bokhary JA (as he then was)]

11. Accordingly, “parties must not be too ready to find themselves embarrassed” and “the mere fact that a pleading contains some unnecessary matter is not sufficient ground for an application under this rule [ie Order 18, rule 19].  A statement will not be struck out merely because it is unnecessary, so long as it is otherwise harmless”. [See: Practice Note 18/19/9 of the Hong Kong Civil Procedure 2016 at page 452]

12. Particularly in the Commercial Court, the court will take a robust approach to pleadings and is not overly concerned with matters of strict form. [See: Practice Note 72/2/10 of the Hong Kong Civil Procedure 2016 at page 1335]

13. In a case involving complaints that a pleading was defective for matters of form, Rogers J (as he then was) summarised the court’s approach as follows in SFC v Mandarin Resources Corp Ltd [1997] 1 HKC 214 at 227B-E:

“…With a pleading as long and involved as this petition, it would be surprising that criticisms could not be made. What is important is to see for example whether an alleged defect causes the pleading to be unintelligible or a real embarrassment. It is trite that the parties should not be overly concerned to find themselves in difficulties caused by pleadings. The function of pleadings is to set the parameters for the enquiry at trial. When a pleading is challenged at the root of the enquiry should be a consideration as to whether the pleading fulfils that function in an acceptable manner. A practical approach should in my view be adopted in relation to pleadings… It is not the function of the court to tell parties how to plead. All the court can do is to stop parties pleading in a manner which is unacceptable.” (emphasis supplied)

14. Accordingly, on the application of the principles set out above, the court should indeed be slow to strike out any part of the Reply, in circumstances where the defendant does not contend that it will be prejudiced in the further conduct of its case by the form of the Reply.

THE DEFENDANT’S OBJECTIONS

15. The defendant has classified its complaints regarding the Reply into eight groups as follows, and I shall set out the parties’ respective arguments and give my view on them in turn.  The defendant accepts that the grouping will largely allow a common approach to be taken to matters of similar complaint.

(1)   Pleading improper submission/argument/polemic

16. In the material sections identified, the defendant complains that the plaintiffs have used the Reply to make argument and submissions, sometimes straying into polemic.  The defendant contends that this is obviously inappropriate.

17. The plaintiffs accept the trite proposition that a pleading should plead material facts and not submissions.  However, the plaintiffs assert that it is necessary, particularly in a complex case, for a party to plead clearly the conclusions that it will contend at trial that the court should draw from the material facts pleaded.  Such pleadings clarify the party’s case and cannot be objectionable.  I agree.

18. Further, I agree with the plaintiffs that the pleading of the Reply in this respect is consistent with and often responsive to the approach adopted by the defendant in the Defence, which consistently pleads the conclusions that the defendant seeks to draw from the pleaded facts, and makes passing comment and argument in relation to the Statement of Claim.

(2)   Repetition or summary of the Statement of Claim/Reply

19. Under this head, the defendant contends that if an allegation of fact is material to a claim, it must be pleaded in the Statement of Claim.  It does not need to be – and it should not be – pleaded in the Reply.  It certainly should not be repeated in the Reply.

20. On the other hand, the plaintiffs submit that in a complex case, to ensure that a pleading is as concise as possible, it is often appropriate to use cross-references and/or summarise part of another pleading.

21. For example, paragraph 60 of the Reply provides a summary of the plaintiffs’ case on negligence, which as submitted by the plaintiffs is a helpful summation of the key issues pleaded.  This also serves to ensure that the plaintiffs’ case is clear, as the Defence seeks to characterise the plaintiffs’ case on liability in its own way at paragraphs 89 to 90 thereof.

22. As to cross-referencing, in the Defence, the defendant repeats substantially the same defences in response to multiple allegations in the Statement of Claim.  In the Reply, rather than repeat the same response, cross references are used.  For example, in the Reply, the plaintiffs have set out one complete response to the “illegality defence” at paragraphs 5 to 10.  Rather than repeat this pleading every time that the defendant raises the same defence, the Reply simply cross-references these paragraphs.  The plaintiffs contend that this is an entirely clear and appropriate method of pleading.  It would be unnecessary and unhelpful to repeat the same text multiple times throughout the Reply.

23. The plaintiffs further contend that if all internal cross-references were struck out from the Reply, this would leave the Reply less clear and lead to the absurd situation where the plaintiffs would need to re-plead the same material response multiple times each time an allegation is repeated in the Defence.

24. Similarly, often the appropriate response to a matter pleaded in the Defence is an issue already pleaded in the Statement of Claim, although not necessarily in the same paragraph that the Defence is answering.  In those circumstances, a cross reference to the Statement of Claim has been used.

25. In short, I agree with the plaintiffs’ contentions under this head as set out above.  In my view, reading the document in the context of the Statement of Claim and the numerous issues raised in the Defence, the Reply fulfils its function in setting the parameters for the enquiry at trial in an acceptable manner.

(3)   Improper pleading of points of law

26. The defendant contends that there is a clear distinction between raising a point of law by a pleading (which is permitted) and pleading a point of law (which is not permitted).

27. On the other hand, the plaintiffs submit that, to the extent that points of law are pleaded in the Reply, these are responsive to legal defences pleaded in the Defence.  It is necessary and appropriate that the plaintiffs plead their response to these legal defences in the Reply. 

28. The plaintiffs give the example that at paragraphs 19 to 31 of the Defence, the “illegality defence” is pleaded at length.  The Reply responds to this by pleading the plaintiffs’ response in summary at paragraphs 5 to 10 of the Reply, and then addressing the defendant’s individual averments.  As noted above, this summary in the Reply is then cross-referenced as the plaintiffs’ response whenever the “illegality defence” is raised in the Defence.

29. Again, I agree with the plaintiffs’ submissions in this regard.  The Reply in this case does provide the opposing party with fair notice of the case to be met at trial.

(4)   Needless admission of the accuracy of quotation/transcription of documents

30. The defendant contends that it is simply unnecessary to waste time and space and costs in the Reply to admit that a document has been correctly quoted in the Defence.

31. In this regard, I agree with the plaintiffs that the admission of the accuracy of a quotation or transcription of a document is entirely appropriate in a pleading.

32. Further, even if the admission may not be necessary, it cannot be said that an unnecessary admission could possibly render a pleading embarrassing.

(5)   Needless pleading of the entirety of or lengthy extracts from documents

33. The defendant accepts that where the precise words of a document are material, they may be pleaded.  However, the defendant submits that the plaintiffs have simply set out lengthy passages where the effect or gist of the document could – and therefore should – have been pleaded.

34. On the other hand, the plaintiffs point out that the documents quoted in the Reply which are objected to by the defendant are pleadings of extracts from relevant audit standards or the defendant’s audit work-papers.

35. Order 18, rule 7(2) of the Rules of the High Court permits the pleading of the precise words of a document where the words are themselves material.

36. In this case, the plaintiffs assert that the precise wording of the relevant audit standards is relevant, rather than any gloss that the parties may wish to place upon those words.  In the circumstances, I agree that it is appropriate that the relevant parts of the standards are quoted in the Reply.

(6)   Improper pleading of evidence

37. The defendant contends that the section objected to is pleading evidence.  The defendant submits that this is simply against the rules.

38. The plaintiffs point out that this complaint relates only to sub-paragraphs 82.2.1 to 82.2.4 of the Reply.  On perusal of the same, I agree with the plaintiffs that the section complained of are appropriate particulars of the matters pleaded in paragraph 82.2 of the Reply.

(7)   Improper pleading of requests for further and better particulars

39. The defendant contends that the sections the subject of this complaint are not proper pleadings of material facts, but instead identify what should properly be requests for further and better particulars.

40. The plaintiffs accept that the Reply identifies various occasions where the Defence is lacking in particularity.

41. The plaintiffs have taken the approach that rather than making a premature application for further and better particulars, it is more economical to raise the issue in the Reply and await receipt of the defendant’s lay evidence, which is likely to provide the necessary particularity.

42. In any event and more importantly, the defendant has adopted the same approach in its Defence (see: eg, paragraphs 3, 59 and 64).  In the circumstances, I agree that the defendant can hardly complain of the approach adopted by the plaintiffs.

(8)   Needless pleading of joinder of issue or non-admission

43. The defendant complains that there are 578 occasions on which the wholly unnecessary joinder of issue or non-admission is pleaded in the Reply.  The defendant contends that there is an implied joinder on any part of the Defence to which no plea is raised in the plaintiffs’ Reply.

44. First of all, I am of the view that the defendant’s complaint in this regard is pedantic.  The question of whether or not there is an implied joinder of issue in a Reply of allegations not specifically traversed is of theoretical interest only: reference is made to the Practice Note in Hong Kong Civil Procedure 2016 cited above to the effect that the mere fact that a pleading contains some unnecessary matter is not sufficient ground for an application to strike out.

45. In any event, I agree with the plaintiffs that the defendant’s contention is incorrect.  An implied joinder of issue under Order 18, rule 14(1) of the Rules of the High Court only applies “If there is no reply to a defence”, in other words, if no Reply is served.  Order 18, rule 14(2)(b) specifically provides that a party may in his pleading expressly join issue on the next preceding pleading (ie a plaintiff may in his Reply expressly join issue with a defendant on its Defence, which operates as a non-admission of the relevant allegation of fact made in the Defence).  Moreover, if a Reply is served, then an express traverse of or an express joinder of issue on the Defence is necessary, as allegations that are not traversed will be deemed to be admitted under Order 18, rule 13(1).

CONCLUSION AND DISPOSITION

46. For the reasons stated above, the defendant’s complaints regarding the form of pleading in the Reply are without merit.  The Reply gives the defendant clear notice of the plaintiffs’ response to the various matters pleaded in the Defence.  In my view, the Reply fulfils its function in setting the parameters for the enquiry at trial in an acceptable manner.

47. Moreover, the defendant does not contend that the Reply will cause it any ongoing prejudice, or that it does not understand the Reply and is therefore embarrassed.

48. There is accordingly no basis to strike out any part of the Reply.  The defendant’s Summons to strike out the Reply is dismissed.

49. I make a costs order nisi that the defendant do pay to the 1^st and 2^nd plaintiffs the costs of the strike out application in any event, such costs to be taxed if not agreed.  The costs order nisi shall become absolute in the absence of application to vary within 14 days. 

50. Lastly, I thank counsel for their helpful assistance in this matter.