Nam Tai Electronics, Inc v. Pricewaterhouse Coopers
Read the full judgment text of CACV 99/2005 on BabelCite. This Court of Appeal judgment was delivered on 25 May 2006.
1. I agree with the judgment of Le Pichon JA.
Cited by 1 case
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cacv 99/2005 in the high court of the hong kong special administrative region court of appeal civil appeal no. 99 of 2005 (on appeal from HCA NO. 6783 of 2000) ______________________ BETWEEN
Before: Hon Rogers VP, Le Pichon and Cheung JJA in Court Date of Hearing: 25 May 2006 Date of Judgment: 25 May 2006 Date of Handing Down Reasons for Judgment: 7 June 2006 ___________________________ REASONS FOR JUDGMENT ___________________________ Hon Rogers VP: 1.I agree with the judgment of Le Pichon JA. Hon Le Pichon JA: 2.This was an appeal from the judgment of Waung J dated 3 February 2005 dismissing the plaintiff’s action for defamation and breach of confidence. At the conclusion of the appeal hearing, the appeal was dismissed, the court indicating that written reasons would be handed down later. Background 3.The plaintiff (“Nam Tai”) is a company listed on NASDAQ. The defendant PricewaterhouseCoopers (“PwC”) acted as Nam Tai’s auditors from 1989 until PwC resigned from that office on 26 November 1998. In September 1998, Nam Tai entered into a subscription agreement with Albatronics (Far East) Co Ltd (“Albatronics”) to subscribe for new shares in and acquire control of that company. Pursuant to the terms of an engagement letter dated 18 September 1998, PwC conducted a limited due diligence exercise in respect of Albatronics for Nam Tai and duly delivered a Limited Due Diligence Report (“the report”) to Nam Tai on 10 November 1998. 4.Remarks contained in the Executive Summary of the report included the following: “certain irregular business practices authorised by the directors”; “prior years’ published financial statements may have been deliberately materially misstated”; “the directors also appear to have deliberately misled their auditors and concealed material information from them”; “the company’s dealings are based on the personal relationships of the senior directors … conducted on an informal verbal basis where legal implications are uncertain”. All this led PwC to conclude that Albatronics was “technically insolvent”; that it was a “distressed company with significant losses and liquidity problems” and that “the integrity of the directors [was] in doubt ….” To say that the report was negative is perhaps an understatment. Nam Tai did not accept PwC’s recommendation and completed its acquisition of Albatronics on 1 December 1998. 5.By March 1999, a restructuring proposal for Albatronics had already been proposed. Sony which was a major creditor of Albatronics and a client of PwC sought advice from PwC in relation to that proposal. On 16 June 1999, PwC learned that the creditors had rejected the restructuring proposal and that Albatronics was to be placed in voluntary liquidation. An internal e-mail dated 16 June 1999 from a partner in PwC’s tax practice to partners in its liquidation practice recorded that:
6.On 26 June 1999 PwC learned that a meeting concerning Albatronics had taken place that day. An internal PwC e-mail dated 26 June 1999 recorded that:
7.Following that communication, PwC prepared a document entitled “Liquidation Capabilities Overview” (“the Overview”). The words complained of appeared in the section headed “History with [Nam Tai]”. Much of this document including those words came to be incorporated into PwC’s Liquidation Proposal for Albatronics (“the Proposal”). It is to be noted that although the Overview containing the words complained of was also distributed, it is not the subject of any complaint. 8.It would be convenient to reproduce here section 6 of the Proposal under the heading “Independence” in its entirety although the complaint is limited to paragraph 2 of that section:
9.The voluntary liquidation of Albatronics was announced on 30 June 1999. PwC was keen to be appointed liquidators of Albatronics. So were other accounting firms. The choice of liquidator was in the hands of the major creditors of Albatronics which included Sony (a major supplier of Albatronics and of Nam Tai) and a number of bank creditors. An internal PwC e-mail dated 6 July 1999 recorded an indication from one of the bank creditors that “Nam Tai, a major shareholder, strongly rejected (sic) to appoint PwC …”. 10.Shareholders’ and creditors’ meetings of Albatronics were scheduled for 20 August 1999 at which the appointment of the liquidator would be decided. On 17 August 1999, the Proposal was sent to Sony and its solicitors Clyde and Co. with a covering letter to the effect that PwC would have no objection to the recipient distributing the Proposal to other creditors should it be considered appropriate. Nam Tai received a copy of the Proposal from Clyde and Co. the following day. 11.The writ in this action was issued on 7 July 2000, claiming damages for breach of confidence. It was amended two months later to add a claim for defamation and for malicious falsehood, all stemming from paragraph 2 of the section on Independence in the Proposal. This appeal
12.It was Nam Tai’s pleaded case that paragraph 2 was defamatory of Nam Tai in that in their natural and ordinary meaning, the words in paragraph 2 meant and were understood to mean that Nam Tai had acted carelessly or negligently or recklessly or irresponsibly by proceeding with its subscription of Albatronics shares and disregarding the advice of its professional advisers and that the reasonable reader would understand the words as putting Nam Tai in a bad light, and tending to discredit Nam Tai. 13.In ascertaining the natural and ordinary meaning of the words complained of, the judge was cognisant of the need to put the relevant words into the correct context. At paragraph 27 of his judgment, the judge identified that context:
14.After reviewing the Proposal, the judge considered that its whole purpose was to demonstrate to the creditors the positive qualities of PwC so that it could be appointed liquidator and that as part of that effort, it became necessary for PwC to show the lack of any disqualifying qualities. That he found to be the incidental purpose of the Proposal. In paragraph 35 of his judgment, the judge set out reasons why he could not conclude that the words were defamatory of Nam Tai:
He concluded at paragraph 36 that “there was no second message in [p]aragraph 2 and the only message in [p]aragraph 2 is the same message which had been running throughout the whole Proposal, namely choose us as we are good and qualified and without any disability.” 15.Mr Griffiths SC who appeared for Nam Tai sought to impugn the correctness of paragraphs 35 (c) and (d) and 36. He submitted that the judge wrongly ignored the third sentence in paragraph 2, viz. “Nam Tai did not take our recommendation and proceeded to invest in Albatronics”. It was said that that was extraneous to the object of the whole Proposal and the judge went wrong because he had misled himself in allowing the major purpose to lead him to the conclusion that the third sentence buttressed that purpose. Mr Griffiths referred to Charleston v News Group Newspapers [1995] 2 AC 65 where Lord Bridge observed (at page 71F) that:
Mr Griffiths submitted that the judge erred in law in disregarding the inferential meaning to be derived from the third sentence in paragraph 2 and in holding (at paragraph 35 (d)) that in defamation law it is required for the court to find “only one single ‘right’ meaning” and therefore “[t]here [was] … no room for two parallel meanings or messages to be conveyed”. But the passage in Charleston relied on at page 71-72, in particular the citation from Diplock LJ’s judgment in Slim v Daily Telegraph Ltd [1968] 2 QB 157, far from showing that the judge’s approach was wrong in fact had the opposite effect. At page 173 D-E of Slim, Diplock LJ said:
16.As I understand it, Mr Griffiths’s real complaint was not that the judge had erred in law by applying the wrong legal principles but that he was plainly wrong in his findings as to the natural and ordinary meaning of the words. As to the correct approach of an appellate court on that issue, Mr Griffiths submitted that this court is in as good a position as the judge to form its own conclusions and that this court should not adopt the same approach as it would to findings of fact made by a judge. But that submission would not appear to be in line with the authorities. In Skuse v Granada Television Ltd [1996] EMLR 278, the statement of principle (approved by the Privy Council in Bonnick v Morris and others [2003] AC 300 at 307B) appears in the judgment of Sir Thomas Bingham MR (at page 287):
I would respectfully agree. 17.Accordingly this court should be slow to differ from the judge’s conclusion that the words used were not defamatory. Could it be said that the judge was plainly wrong? I think not. Not only did Mr Koo make allegations of a conflict of interest without identifying what the conflict was, he made known his objections to PwC to the major creditors of Albatronics in whose hands the choice of liquidator lay. PwC needed to address the unparticularised concerns raised by Nam Tai regarding PwC’s ability to act as independent liquidators of Albatronics by explaining its role in the due diligence conducted for Nam Tai in order to show the absence of any conflict. As the judge correctly identified, that was the context in which the words were used and it is to be noted that PwC did so using words that were devoid of any value judgment on the acquisition Albatronics. The conclusion the judge reached was plainly one that was open to him. In my view, Nam Tai’s challenge was not only misconceived but also lacked merit.
18.The issue is a narrow one, namely, whether PwC’s disclosure of the contents of its advice by stating that it recommended that Nam Tai not make the acquisition constituted a breach of the duty of confidence it owed Nam Tai. The other information imparted by paragraph 2, that is to say, that PwC had conducted due diligence for Nam Tai, that Nam Tai subsequently made the acquisition of Albatronics, were known to the creditors and did not constitute confidential information as was also the fact that Albatronics had gone into liquidation within about seven months of that acquisition. 19.Although Mr Griffiths submitted that “the duty to preserve confidentiality is unqualified”, citing Lord Millett in Bolkiah v KPMG [1999] 2 AC 222 at 235G, he did accept that a person may lawfully disclose a confidence to the extent that it is “necessary” or “fairly required” for the protection of his legitimate interests. See Toulson & Phipps on Confidentiality at 3-17. The only question therefore is whether PwC’s disclosure of its recommendation in the due diligence was “necessary” or “fairly required” given that Nam Tai had raised unparticularised concerns regarding PwC’s ability to act as independent liquidators of Albatronics. 20.The judge was of the view that PwC had a right to respond appropriately in the face of the attack of conflict of interest and that its response in paragraph 2 was within that right. At paragraph 50 of the judgment, the judge went on to say this:
21.It was initially suggested that what was stated by the judge in paragraph 50 had not been pleaded but in the face of paragraphs 14 (2) of the amended defence, that criticism was dropped. The remaining criticisms were that those matters had not been argued at trial and had not been borne out by the evidence. When asked to articulate what was said to give rise to the alleged conflict of interest, Mr Griffiths’s response was along the following lines: PwC having fulfilled its status as adviser to Nam Tai about Albatronics was seeking a different status, namely that of liquidator, in a case where Nam Tai would be a potential creditor. It was said that the two statuses are inimical because PwC having advised Nam Tai in relation to the financial health of Albatronics, for it then to go into the very subject of that inquiry in a different role would create a conflict with its previous role. I confess that I have considerable difficulty understanding the submission which I find opaque. 22.I cannot see that a conflict of interest necessarily arises should PwC be appointed liquidator simply because PwC had previously conducted due diligence on Albatronics for Nam Tai. In my view, it is the content of that advice that could give rise to a conflict. Given the facts mentioned in paragraph 18 which were public knowledge and therefore not confidential information, it would be natural to assume that PwC had given positive advice in relation to that acquisition. One might infer from that that PwC had not identified any significant concerns when carrying out the due diligence. But Nam Tai’s assertions of a conflict of interest must give rise to the implication that PwC had not done its due diligence work properly. Were PwC then to be appointed liquidator, it could be said that it might seek to justify or attack its earlier positive findings concerning Albatronics when its role as liquidator required it to act impartially. In that scenario, I can see that a conflict of interest would arise. 23.In order to dispel any notion of conflict arising, PwC was entitled to respond and its response had to address the unarticulated and therefore unintelligible accusation of conflict of interest. Given public knowledge that it had carried out due diligence on behalf of Nam Tai, that Nam Tai did make the acquisition of Albatronics and that Albatronics went into deep financial trouble shortly thereafter, it required nothing less than the disclosure that PwC had advised negatively. Had PwC gone further and disclosed details of its findings, Nam Tai might have been in a better position to complain. But that did not happen. PwC limited its disclosure to the minimum which was its negative recommendation. In my view, that disclosure was “fairly required” or “necessary” to meet the unparticularised allegations of conflict made against it. Whether, in the final analysis, the disclosure is to be regarded as a justifiable defence to the accusation or as something permissible because of waiver on the part of Nam Tai matters not. Hon Cheung JA: 24.I agree.
Mr John Griffiths SC & Mr Paul Shieh SC, instructed by Messrs Wilkinson & Grist, for the Plaintiff/Appellant Mr Joseph Fok SC & Mr Alexander Stock, instructed by Messrs Barlow Lyde & Gilbert, for the Defendant/Respondent Appeal allowed: see FACV1/2007 dated 31 January 2008 |
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