Cycle Links Co Ltd v. Chevalier Construction (Hong Kong) Ltd

HCCT 25/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 25 OF 2006

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BETWEEN 

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Before: Deputy High Court Judge To in Chambers (Open to Public)

Date of Hearing: 15 February 2007

Date of Decision: 8 March 2007

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D E C I S I O N

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Background

1.This is the Defendant’s application to strike out the Plaintiff’s Statement of Claim pursuant to Order 18 rule 19 of the Rules of the High Court on the ground that the action is frivolous, vexatious; and/or an abuse of the process of the Court, or alternatively for a determination of question of law under Order 14A of the Rules of the High Court.  The basis of the Order 18 application is that the cause of action which is sued upon is time barred and the point of law for determination under the Order 14A application is whether the action is statute-barred under the Limitation Ordinance, Cap 347.  Thus, essentially, the legal principles relevant to these two applications involve the same points of law.

2.The Defendant was the sub-contractor of a building project in Tseung Kwan O.  The Plaintiff was the Defendant’s sub-sub-contractor in respect of two sub-contracts (the “First Sub-Contract” and the “Second Sub-Contract”, collectively the “two Sub-Contracts”) under that building project.  The First Sub-Contract was completed in late 1997 while the Second Sub-Contract was completed in late 1998.  The contractual terms of the two Sub-Contracts were similar.  The two Sub-Contracts provided that 10% of the sub-contract sum was to be withheld by the Defendant as retention money, 50% of which shall be released to the Plaintiff one month after completion of the appropriate Sub-Contract and the balance shall be released to the Plaintiff within one month after the twelve month retention period has expired after completion of the appropriate Sub-Contract.  The Plaintiff issued a Writ of Summons (“the Action”) on 28 March 2006 claiming the balance of the retention money under the First and Second Sub-Contracts in the amounts of $1,417,292.65 and $372,682.36 respectively.  The Defendant raised the plea of limitation, pleading that the Plaintiff’s claims are time barred as more than six years have lapsed since the balance of the retention money under the First and Second Sub-Contracts was due to be paid, i.e. in early 1999 and early 2000 respectively.

3.In its Reply to the Defendant’s Defence and Counterclaim, the Plaintiff pleaded that its cause of action has accrued afresh within six years before the commencement of the Action on three grounds:

(1) that the retention money was not due until completion of all defects relating to the two Sub-Contracts;

(2) that the parties had entered into an oral agreement to settle all payments due under the two Sub-Contracts and Other Sub-Contracts by way of a global settlement and

(3) that the Defendant had acknowledged in writing the retention money withheld.

The law

4.The legal principles relevant to a striking out application under Order 18 rule 19 have been conveniently set out in paragraph 18/19/4 of the Hong Kong Civil Procedure 2007 as follows:

“It is only in plain and obvious cases that the court should exercise its summary powers to strike out the indorsement on any writ or any pleading under this rule.  There should be no trial upon affidavit.  Disputed facts were to be taken in favour of the party sought to be struck out.  Nor should the court decide difficult points of law in striking out proceedings.  The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out. …

The jurisdiction should not be exercised if it requires a minute and protracted examination of the documents and facts of the case in order to see whether the plaintiff really has a cause of action …”

5.For an application under Order 14A rule 1, the court may determine any question of law or construction of any document arising in any cause or matter where it appears to the court that such question is suitable for determination without a full trial of the action and such determination will finally determine the entire cause or matter or any claim or issue therein.  An issue is a disputed point of fact or law relied on by way of claim or defence.  Where there are conflicting allegations of facts, or issues of facts interwoven with the legal issues to be determined, Order 14A procedure is not appropriate: see paragraph 14A/2/4 of the Hong Kong Civil Procedure 2007.  Furthermore, such a question of law or construction which the court is asked to determine must be stated or formulated in clear, careful and precise terms.  In Dragages et Travavaux Publics (HK) Ltd v American Home Assurance Co [1999] HKEC 800, Godfrey JA said:     

“A question of law or construction which the court is asked to determine under Order 14A (“Disposal of Case on Point of Law”) of the Rules of the High Court should be stated or formulated in clear, careful and precise terms, so that there should be no difficulty or obscurity, still less any ambiguity, about what is the question that has to be determined; and this is all the more important since the determination of the question under Order 14A will be final: see the Supreme Court Practice 1999, Vol. 1 at 14/A/25.  The question framed in the present case fell, as it seems to me, short of these desiderata and this has led to difficulties in the court below and for this court.”

6.The issue or question of law which the Defendant sought determination is phrased in the following terms in paragraph 2 of the Defendant’s Summons dated 24 August 2006:

“Alternatively, the issue of whether the Plaintiff’s claim herein is statute-barred as pleaded by the Defendant in the Defence be determined by the Court pursuant to Order 14A, rule 1 of the Rules of the High Court as a question of law, and consequent thereupon for the Plaintiff’s claim herein be dismissed with costs to be paid by the Plaintiff.”

7.What is pleaded in paragraph 4 of the Defence and Counterclaim is that the “Plaintiff’s cause of action did not accrue within six years before the commencement of this action.”  If the parties’ pleadings consisted only of the Plaintiff’s Statement of Claim and the Defendant’s Defence, I would have thought that the question of law has been formulated with sufficient particularity.   However, in the Reply and Defence (“the Reply”) to the Defendant’s Defence and Counterclaim, the Plaintiff has raised three grounds why the Action has not been statute-barred.  In my view, there is a complete lack of particularity of the issue which the Defendant seeks to be determined.  There is no reference to the Plaintiff’s Reply or any particular limbs of the Reply for which the determination is sought.  Without any particularity, paragraph 2 of the Defendant’s Summons would be seeking a determination of all the issues raised in the Plaintiff’s Reply.  That effectively means a determination of the Action without a trial.  That could not be the case.  There are many disputed issues of fact.  It is inappropriate for me to make an Order 14A determination on any hypothetical case.  The question of law to be determined should have been framed with sufficient factual particulars including identification of the document which is sought to be construed and the material circumstances of which the court should take into account when construing the document.  In my view, the question framed in the Summons fell far of the desiderata in Dragages et Travavaux Publics (HK) Ltd v American Home Assurance Co.  I shall therefore refrain from making any determination under Order 14A of the Rules of the High Court.

Ground (1):  the retention money not due until completion of all defects

8.Mr Chung, counsel for the Plaintiff, argues that there is an implied term as a matter of trade practice that retention money will only be released to a contractor upon completion of all defects for which it is responsible.  He referred to a number of site memoranda from the Defendant requesting rectification works for the two Sub-Contracts, the latest of which was dated 27 March 2001.  Hence, he argues that the Writ of Summons was issued well within six years of the date of those site memoranda.  He submits that whether this implied term exists requires the examination of a host of disputed facts such as the existence and extent of trade practice and existence and effect of the conversation between Mr Yip of the Defendant and Mr Wong of the Plaintiff.  Accordingly, Mr Chung submits, this issue could only be resolved at trial and determination under Order 18 rule 19 or Order 14A is inappropriate.  Of course, I am entitled to bypass these difficulties in an Order 18 application by assuming all disputed facts in favour of the party whose Statement of Claim is sought to be struck out, i.e. the Plaintiff.

9.Mr Chung’s argument for the existence of the implied term is as follows.  The whole purpose of setting up a retention fund after completion of a building contract is to safeguard the main contractor’s interest and to provide an incentive to the contractor to rectify any defect for which it is responsible as soon as possible before it would be entitled to collect the balance of the retention money.  Mr Manzoni, counsel for the Defendant, has no dispute about the rationale for having a retention fund.  In fact, retention fund is a standard feature in construction contracts. 

10.Mr Chung then submits that the existence of the implied term is evidenced by Clause 6 of the two Sub-Contracts which are in identical terms and which provides as follows:

“If there are any necessary remedial, rectification or outstanding works founded during retention period, Party B [the Plaintiff] shall be responsible to complete those works, and all costs involved shall be borne by Party B.  If 7 days after receipt of Party A’s [the Defendant’s] notice, Party B shall fail to commence such remedial works, Party A may engage others to carry out such works, and all costs incurred to be deducted from retention money, any shortfall shall be borne by Party B.”

In my view, what is stipulated in Clause 6 is just a main contractor’s common law right of set-off and the parties chose to turn that right into a contractual right.  It does not support Mr Chung’s contention.  If indeed the parties had considered it necessary to turn a common law right into a contractual right, they would certainly have likewise stipulated the term which Mr Chung now seeks to imply.

11.Mr Chung draws support for the existence of the implied term by referring to the Defendant’s Defence and Counterclaim in which the Defendant pleaded that any sums due and payable to the Plaintiff under the two Sub-Contracts were subject to deductions on account of the Plaintiff’s defective work and to the Defendant’s case that all retention money due have been so set-off and extinguished by the Defendant’s claim for damages for defective work.  With respect, the Defendant was only relying on its undisputed common law right as well as contractual right under Clause 6 to set-off.  It does not evidence any implied term or trade practice.

12.As for trade practice, one may argue that in practice, whenever there is any dispute between a contractor and its sub-contractor, a contractor would usually withhold payment of retention money as a form of security and as an incentive for the sub-contractor to reach settlement or to await the resolution of dispute by litigation.  This is what a prudent contractor would usually do and it makes business sense, as very often a sub-contractor would have no asset to satisfy any judgment obtained.  But what contractors usually do to protect their interest can hardly be described as a custom and much less a mutual and consensual term which the parties would have said it goes without saying.

13.It is trite law that a term may only be implied based on the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that the transaction should have: see The Moorcock (1889) 14 PD 64.  A term may only be implied if it is necessary to give business efficacy to the transaction.  In the present case, the Defendant has an undoubted common law right of set-off and a contractual right to set-off under Clause 6.  There is no necessity for such a term to be implied and to do so would not give the transaction any more business efficacy than it already has. 

14.Furthermore, it is also trite law that a term may not be implied if it is inconsistent with an express term of the contract: see Chitty on Contracts, 29^th edn at para 13-023 and London Export Corporation Ltd v Jubilee Coffee Roasting Co Ltd [1958] 1 WLR 661 at 675.  The express term of the two Sub-Contracts provides that the balance of the retention money shall be released to the Plaintiff within one month of the end of the twelve month retention or defect liability period.  Under this express term of the two Sub-Contracts, the balance of the retention money was due in early 1999 in the case of the First Sub-Contract and in early 2000 in the case of the Second Sub-Contract.  Any term which has the effect of postponing the due date for release of the retention money must be so inconsistent with the express term that it could not have been implied under the Moorcock principle. The absurdity created by such an implied term could be readily demonstrated by considering the following scenario.  If the Plaintiff failed to rectify a defect within seven days after receiving notice of the defect from the Defendant, the Defendant would be entitled to retain the retention money indefinitely by deliberately refraining from rectifying the defect itself.  This could not have been the parties’ presumed intention. 

15.Thus, even assuming, for the purpose of the Order 18 application, that such a trade custom exists, it is excluded by the express term of the two Sub-Contracts as being inconsistent with their express term.  The term which the Plaintiff sought to imply by reason of trade custom simply could not be implied into the two Sub-Contracts as being inconsistent with their express term and as being unnecessary for the purpose of giving business efficacy to the two Sub-Contracts.  The Plaintiff’s case built on implied term must fail.  Accordingly, paragraphs 3(a), 5 to 12 of the Plaintiff’s Reply must be struck out as being frivolous.

Ground (2):  a verbal agreement to settle by way of a global settlement

16.In paragraphs 13 to 17 of its Reply, the Plaintiff pleaded that in early 2001, the parties agreed that the retention money due under the two Sub-Contracts would be dealt together with four other sub-contracts (the “Other Sub-Contracts”) entered into between the parties. The Plaintiff pleaded in paragraph 18 of the Reply that “the cause of the action for the retention money due under the First and Second Sub-Contracts accrued afresh by the Verbal Agreement in or about early 2001.”  In paragraph 19 of the Reply, the Plaintiff pleaded further and in the alternative that “the cause of action of the Action herein only accrues when the final accounts of the Other Sub-Contracts have been settled between the Plaintiff and the Defendant by which time any outstanding payment due from the Defendant to the Plaintiff or from the Plaintiff to the Defendant, as the case may be, under the First and Second Sub-Contracts and Other Sub-Contracts can be ascertained.”  The Plaintiff then averred that the draft final accounts in respect of the Other Sub-Contracts showed a positive balance due to the Plaintiff and the Defendant repudiated the Verbal Agreement by refusing to pay the retention money.  The Plaintiff pleaded that the cause of action of the Action accrued afresh in 2005 by reason of the repudiation of the Verbal Agreement.

17.I shall deal with the Plaintiff’s primary case as pleaded in paragraph 18 of the Reply first.  Mr Chung referred me to the case of Chuang Yue Chien Eugene v Ho Yau Kwong Kevin [2002] 4 HKC 245 and submits that the effect of the Verbal Agreement is to postpone the Defendant’s obligation to pay the retention money withheld under the First and Second Sub-Contracts until the final accounts of the Other Sub-Contracts were settled.  Mr Manzoni argues that this submission deviates from the Reply.  With respect, I do not agree.  Though the word “postpone” has not been used in paragraph 18 of the Reply, the pleading by the Plaintiff that the cause of action for the retention money accrued afresh by reason of this Verbal Agreement in or about early 2001 has the same effect.  It has always been assumed that the parties may by contract postpone the commencement of the limitation period by agreeing that the cause of action shall not accrue until some act or event occurs: see Chitty on Contracts, 29^th edn, paragraph 28-106.  I think this proposition is correct.  The defence of limitation has to be pleaded.  A party is not bound to rely on limitation as a defence if he does not wish to do so.  It must necessarily follow that the parties are free to agree to a limitation beyond that provided by the Limitation Ordinance and are equally free by agreement to postpone the commencement of the limitation period.  In Chuang Yue Chien Eugene v Ho Yau Kwong Kevin, Ma J, as he then was, accepted the above proposition as correct.  I see no reason to differ from that well considered view.

18.According to the Plaintiff’s pleading in the Reply, the General Manager of the Defendant agreed with Mr Wong of the Plaintiff that the retention money due under the two Sub-Contracts should be dealt together with the payment due to or from the parties under the Other Sub-Contracts, pursuant to Clause 36 of the two Sub-Contracts.  Clause 36 gave the Defendant a contractual right to set-off the retention money due to the Plaintiff under the two Sub-Contracts against payments due from the Plaintiff under any other sub-contracts.  The Defendant is not in a position to dispute the alleged Verbal Agreement.  There is no submission from the Defendant that the Verbal Agreement was not supported by consideration.  In my view, for the purpose of an Order 18 application, the Plaintiff has disclosed a valid cause of action based on the Defendant’s breach of the two Sub-Contracts and that the parties have by agreement postponed the due date for payment of the retention money such that the Plaintiff’s claim has not been extinguished by the Limitation Ordinance.

19.I now turn to the Plaintiff’s alternative case as pleaded in paragraph 19 of the Reply.  Mr Manzoni submits that if an agreement such as the one alleged exists, recovery of the money would have to be based on a wholly different cause of action from the one pleaded.  In other words, the Plaintiff would not be seeking the repayment of retention money under the two Sub-Contracts, but would be seeking repayment under the new Verbal Agreement.  He argues that that Verbal Agreement does not form part of this Action, is not the agreement being sued upon and the claim under the Verbal Agreement is entirely inconsistent with a claim under the two Sub-Contracts which are said to have been settled by the Verbal Agreement.  He argues that the global agreement, at best, is an agreement to agree and as the accounts in respect of the Other Sub-Contracts have not been finalised no money is yet due to the Plaintiff.  He further argues that it is extremely unlikely that such a new global agreement had been reached because two of the Other Sub-Contracts alleged were entered into between the Plaintiff and an associated company of the Defendant which is a third party.  I think this last limb of Mr Manzoni’s argument is of no assistance to the Defendant for in any event there were two of the Other Sub-Contracts in respect of which the Defendant could exercise its right of set-off pursuant to Clause 36.  As to whether it was likely that such a Verbal Agreement could have been reached, it is not a relevant consideration for the purpose of an Order 18 application.

20.Paragraphs 18 and 19 of the Reply distinguish between “cause of action for the retention money” and “cause of action of the Action”.  For myself, I am quite unable to discern the distinction between the two terms, I assume they must mean different causes of action.  While there can be no doubt that “cause of action for the retention money” must means cause of action arising from breach of the two Sub-Contracts, “cause of action of the Action” is quite incomprehensible to me and in the circumstances could only be referable to a cause of action as a result of breach of the Verbal Agreement.   If so, Mr Manzoni must be right.  The Plaintiff is pleading a new alternative case based on a different cause of action.  It is inappropriate to do so in the Reply without amending the Statement of Claim so as to give the Defendant an opportunity to plead to the new alternative case and for the issues to be identified.  If “cause of action of the Action” is referable to a cause of action arising otherwise than as a result of the breach of the two Sub-Contracts or the Verbal Agreement, it is embarrassing as being ambiguous and must also be struck out.  In the circumstances, this part of the Reply so far as it refers to the alternative cause of action only must be struck out, i.e. paragraphs 19, 24, 25 and 26.

Ground (3):  Defendant acknowledged withholding the retention money

21.In paragraphs 28 to 33 of its Reply, the Plaintiff relied on several written documents called “Audit Confirmation” delivered to the Plaintiff referring to retention money held by the Defendant in respect of the two Sub-Contracts.  The last of those Audit Confirmations was dated 25 May 2006.  It expressly stated that the amount of retention money due from the Defendant to the Plaintiff under the First and Second Sub-Contracts was $1,789,975.01, the exact amount as pleaded in the Statement of Claim.  Those Audit Confirmations were printed on paper with a heading, to use a neutral term, which is the same as the name of the Defendant company. They also bore the company stamp or chop of the Defendant.  The latest one dated 25 May 2006 reads as follow:

“As part of our auditor’s regular examination of our accounts, Messrs Deloitte Touche Tohmatsu of 26^th Floor, Wing On Centre, 111 Connaught Road Central, Hong Kong, wish to confirm the balance of you account with us as follows:

Balance at 31st March 2006	|	Due from you			|	Please refer to attachment
THIS IS NOT A REQUEST FOR	|	Due to you			|	Please refer to attachment
PAYMENT	|				|
If you agree with the above balance please confirm by			|
signing at the foot of this page and returning this confirmation			|
to our auditors in the enclosed reply paid (local only)			|
envelope.  If you are based outside Hong Kong, you may			|
fax this confirmation directly to Deloitte Touche Tohmatsu			|
on the above number			|
Please let our auditors have you confirmation of the			|
balance even if it has been settled since the above date.			|
Should you disagree with the balance, please provide Deloitte			|
Touche Tohmatsu and details of the difference on the reverse			|
of this confirmation.			|
Yours faithfully,			|
			|
(Defendant’s Company stamp or chop)			|
			|
.......................................................................			|

It is Mr Chung’s submission that by those Audit Confirmations, the Defendant acknowledged the claim within the meaning of section 23(3) of the Limitation Ordinance and that those Audit Confirmations meet the formal requirements of section 24(1) of the Limitation Ordinance in that they were in writing and signed by the Defendant who made the acknowledgement.

22.Mr Manzoni argues that according to the affirmation of Mr Wun filed on behalf of the Defendant, those Audit Confirmations were sent by the Defendant’s auditor and not by the Defendant and that this fact was not disputed by the Plaintiff.  Despite that, those Audit Confirmations bore the name of the Defendant, two of them bore the Defendant’s company chop; one bore the Defendant’s company stamp and a signature which purports to be an authorised signature of the Defendant.  From the words which I have highlighted on the audit Confirmations above, it is obvious that those Audit Confirmations were requests by the Defendant to the Plaintiff to confirm to its auditor the correctness of the amounts due to the Plaintiff as shown in the Defendant’s accounts in respect of the First and Second Sub-Contracts.  Thus, those Audit Confirmations or requests were issued by the Defendant to the Plaintiff.  In my view, it is immaterial who physically sent them.

23.Mr Chung referred me to the following dicta from the English Court of Appeal in Good Challenger Navegante SA v Metalexportimport SA (The “Good Challenger”) [2004] 1 Lloyd’s Rep 67 in page 72:

“As a matter of general principle, in my view a document is signed by the maker of it when his name or mark is attached to it in a manner which indicates, objectively, his approval of the contents.  How this is done will depend upon the nature and format of the document.  Thus in the case of a formal contract which prints the names of the parties and leaves a space under each name for the parties to write their names, the document will not have been signed by a party until he writes his name in the space provided.  Conversely, with a telex, where there is no such facility, the typed name of the sender at the end of the telex not only identifies the maker but leads to the inference that he has approved the contents: the typed name, therefore constitutes his signature.  Thus in my judgment each of the telexes relied on by the Claimant was singed by the sender typing in its name, or his name, at the foot of the document.”

On the strength of these dicta, Mr Chung submits that it is arguable that the Defendant’s chop and stamp indicated its approval of the content of the Audit Confirmations and constitutes its signature.  For reasons as will become apparent in my further analysis, I agree with that submission.  But, I do not think it necessary for Mr Chung to rely on the above dicta to make good his argument.  The Audit Confirmation dated 2 June 2005 is in writing and bore both the Defendant’s company stamp and a signature.  This one, at least, meets the formal requirement of section 24(1) of the Limitation Ordinance and is sufficient to start time from running afresh since 2 June 2005, provided that it constitutes acknowledgement of the claim.

24.Thus, the issue raised by this aspect of the Reply is whether on its true construction any of the Audit Confirmations constitutes an acknowledgement of the Plaintiff’s claim.  On the face of the Audit Confirmation, it was a written note issued by the Defendant seeking the Plaintiff’s confirmation that the debt stated therein was due from the Defendant to the Plaintiff.  It bore the Defendant’s stamp and signature and meets the formal requirements of section 24(1) of the Limitation Ordinance.  On these incontrovertible facts as well as on the evidence of the Plaintiff, it is at least arguable that the Audit Confirmation dated 2 June 2005 constitutes such an acknowledgement.  Based on the above dicta in The Good Challenger, it is also arguable that the other two confirmations with the Defendant’s chop, though without any signature, were also signed by the Defendant and constitute acknowledgement of the debt.  It is therefore not appropriate to strike out this part of the Reply on an Order 18 application. 

25.The question of construction of the Audit Confirmations is capable of constituting an issue for determination under Order 14A procedure.  The Defendant could have properly formulated a question of law for determination under Order 14A, namely, whether, on the facts as pleaded by the Plaintiff in the Reply and on its true construction, any of the Audit Confirmations constitutes an acknowledgement by the Defendant to the Plaintiff of the retention money due to the Plaintiff under the two Sub-Contracts.  But it did not, though at the hearing, Mr Manzoni’s argument is indeed presented along this line.  If I have to make a determination under Order 14A of the above question of law, I would approach it as follows.

26.As I have already analysed, even assuming that the Audit Confirmations were physically sent by the Defendant’s auditor, they were all issued by the Defendant.  Those Audit Confirmations contain the following important features.  They were requests by the Defendant to the Plaintiff to confirm to the Defendant’s auditor that the amounts due from the Defendant to the Plaintiff under the two Sub-Contracts as at a particular date were as stated in the attachments.  Mr Manzoni also draws my attention to the Chinese translation below the words “This is not a request for payment” which shows that the purpose of the Audit Confirmation was for auditing purpose only.  The Chinese translation reads “此信乃作對數之用，而非請求付款”.  I do not think the Chinese translation advances the Defendant’s argument any further.  In effect, the Defendant was saying by those Audit Confirmations to the Defendant, “my accounts show a debt of $1,789,975.01 owing to you under the two Sub-Contracts, will you confirm this is correct to my auditor for his auditing purpose?”  The Defendant then invited the Plaintiff to provide the Defendant’s auditor with details of any difference if the amount was disputed.  

27.Mr Manzoni’s first argument is that an auditor is not an agent of the company and cannot acknowledge a debt on behalf of the company.   He quoted the decision of In re Transplanters (Holding Company) Ltd [1958] 1 WLR 822.  In that case, two balance sheets of a company signed by its director and certified by the company’s auditor showed a debt owing to the director, which had been statute-barred.  The director argued that the balance sheets were within the time provided by the Limitation Act and constituted acknowledgment of the debt.  Wynn-Parry J held that an auditor of a company is, apart from any special contract, not an agent of the company, at any rate for the purpose of being able to bind the company by merely signing the normal certificate at the foot of the balance sheet.  Each case turns on its own facts.  In In re Transplanters (Holding Company) Ltd, the director relied on the confirmation by the company’s auditor.  Hence, the auditor’s authority as an agent of the company was at issue.  In the present case, as I have found, the Audit Confirmations were issued and signed by the Defendant.  They were not confirmations by the auditor and the auditor’s authority to bind the Defendant is not at issue.  In In re Transplanters (Holding Company) Ltd, Wynn-Parry J also held that as the director who signed the balance sheets was interested in the debt, the balance sheets could not constitute an acknowledgement.  It is therefore implicit that were the director not personally interested in the debt, his signature on behalf of the company on the company’s balance sheet could have constituted an acknowledgement within the meaning of the Limitation Act.  Those Audit Confirmations are no different from the balance sheets.   I do not think In re Transplanters (Holding Company) Ltd is of any assistance to the Defendant.

28.Mr Manzoni’s second argument is that the Defendant is a subsidiary of a public listed company in Hong Kong which is under a statutory obligation to have its and its subsidiary’s accounts audited annually by an independent auditor to confirm that the accounts reflect a true and fair picture of the financial position of the parent company.  Hence, he submits it would be a remarkable proposition if such audit confirmations could be an acknowledgement of debt for the purposes of section 23(3) of the Limitation Ordinance.  He said that such a proposition would effectively wipe out the essence of the Limitation Ordinance, because every listed company issues audit confirmations each year for every debt it carried on its books, irrespective of what view it takes as to the validity of that debt. 

29.Mr Manzoni’s argument based on the Defendant’s obligation to produce a true and fair picture of its financial position is a double blade argument which cuts equally deeply against the Defendant.  The Defendant kept its account which it intended to present to the public as a true and fair picture of its financial position.  With that intention, the Defendant invited the Plaintiff to confirm the debt with its auditor so that the auditor can so confirm to the public.  The Defendant invited the Plaintiff to provide particulars if the Plaintiff disputed the debt.  The Defendant must be taken to have uttered to the Plaintiff what was represented in the Audit Confirmation with seriousness.  If in the conduct of its business, the Defendant thought it was no longer obliged to pay that debt, it should have excluded the debt from its account, otherwise, its account would not be showing a true and fair picture of its financial position in that the Defendant’s financial position would have been understated.  By including the debt in its account and by asking the Plaintiff to confirm to its auditor so that the auditor can certify the Defendant’s accounts represent a true and fair picture, the Defendant must be taken to have acknowledged the debt.  Otherwise, it needed not to have sent the Audit Confirmation. 

30.As for Mr Manzoni’s argument that such a construction would be a remarkable proposition, I think the answer is it all depends on how the Defendant would conduct its affairs.  The limitation defence is not a very meritorious defence.  It has to be pleaded.  If the Defendant does not want time to start to run, it must take steps to avoid doing anything which might constitute an acknowledgement.  In In re Transplanters (Holding Company) Ltd, it was implicit that a statute-barred debt stated in the balance sheets could constitute an acknowledgment of the debt.  The Defendant’s Audit Confirmations are no different from the balance sheets.  The Defendant could have excluded the debt from its accounts and in fact it should if it considered the debt as no longer repayable.  It could have informed its auditor of the position and instructed the auditor to seek confirmation rather than seeking confirmation itself as it did in the present case.  In fact, it has become a practice for companies to write to their trading partners to inform them of the auditing progress and invite them to respond to confirmations sought by their auditors and leave it to its auditors to seek confirmation thereby avoiding any possible argument on acknowledgment under the Limitation Ordinance or for any other purpose.

31.For the above reasons, had the issue been properly framed as a question of law for determination under Order 14A, I would have found that the Audit Confirmations were sufficient acknowledgement of the debt under the two Sub-Contracts for the purpose of section 23(3) of the Limitation Ordinance and that they meet the formal requirement under section 24(1) as being in writing and signed by the Defendant.

Conclusion

32.In conclusion, I decline to make any determination under Order 14A as no proper question of law for determination has been raised.  As for the striking out application under Order 18 rule 19 of the Rules of the High Court, I order that paragraphs 3(a), 5 to 12, 19, 24, 25 and 26 of the Plaintiff’s Reply be struck out as being frivolous.  Save for the above, the Defendant’s Summons dated 24 August 2006 is dismissed.  Despite the partial striking out, I consider the Plaintiff as being substantially successful.  I therefore make a costs order nisi that the Defendant shall pay the Plaintiff’s costs, to be taxed if not agreed.

Mr Jerry Chung, instructed by Messrs Leung, Chan & Pang, for the Plaintiff

Mr Charles Manzoni, instructed by Messrs Sidley Austin, for the Defendant