Overseas Trust Bank Ltd v. Coopers & Lybrand (A Firm) and Others

CACV000109/1989

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Coram: Fuad, V.-P., Power & Macdougall, JJ.A.

Dates of hearing: 5, 6 and 7 December 1989

Date of judgment handed down: 15 December 1989

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J U D G M E N T

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Fuad, V.-P.:

1. This is an appeal by the First Third Parties in this action against two decisions made by Nazareth, J., respectively on 14th and 16th June 1989, in an Application to strike out the Third Party proceedings instituted against them by the, defendants. The Plaintiff in the action is the Overseas Trust Bank Limited ("OTB"), a company incorporated in Hong Kong and listed since October 1972 on the Far East Stock Exchange in Hong Kong. The 1st Defendant is a firm named Coopers & Lybrand ("C & L") and the 2nd and 3rd Defendants are partners of C & L. The First Third Parties are eight gentlemen practising as a firm sunder the name Peat, Marwick, Mitchell & Co. ("PMM"). Others are involved in the action as Second Third Parties but this appeal does not concern them.

2. At all material times OTB carried on business as bankers licensed under the Banking Ordinance. At one time OTB had 43 branches in Hong Kong as well as branches in Macau, London, Sri Lanka, San Francisco and Bahrain. They also carried on business through 11 subsidiaries. As everyone who was in Hong Kong at the relevant time remembers, OTB collapsed in 1985 and had to be rescued by the Hong Kong Government. They were acquired by the Government under the Overseas Trust Bank (Acquisition) Ordinance, 1965. Before OTB was acquired by the Government C & L were their auditors.

3. On 10th October 1986 OTB issued a writ against C & L and a Statement of Claim was served on the same day. The version of the Statement of Claim which was before the judge was a Re-amended Statement of Claim dated 17th Play 1989. OTB claimed damages against C & L for breach of contract in auditing OTB's accounts for the financial years ending 30th June 1981, 1982 and 1983.

4. On 28th March 1987, C & L issued a Third Party Notice against PMM in the usual from. They gave notice that contrary to their case, they were held to be liable to OTB they were entitled to contribution from PMM in respect of the claim and/or to recover damages from PMM on the grounds that any loss claimed to have been suffered by OTB was caused or contributed to by PMM's breach both of their contract with OTB and of their duties in tort to OTB and/or C & L in connection with PMM's audit of the accounts of the Bahrain branch of OTB for the years ending 31st December 1980, 1981 and 1982.

5. C & L served their Defence and Counterclaim on 30th March 1987. OTB served a reply and Defence to the Counterclaim on 12th June 1987 and the close of pleadings took place on 26th June 1987.

6. On 26th June 1987 C & L obtained leave, ex parte, to issue and serve their Third Party Notice on PMM in an amended form and this was duly served on 16th July 1987. On 12th October 1987 Third Party directions were given. There was nothing unusual about these directions inter alia, PMM were given liberty to appear and take such part in the trial of the main action as the judge directed, and they were to be bound by the result. PMM's liability to C & L was to be tried subsequent to the main action.

7. The First Third Party Statement of Claim was served on 5th November 1987 and PMM served their Defence on 15th February 1988. The close of pleadings in the First Third Party action was on 31st march 1988, and further Third Party directions were given on 11th April 1988. The parties then served various lists of documents upon each other, and on 21st May 1988 PMM consented to the application made by OTB to fix the trial, of the action to commence in September 1989, after amendments to some of the pleadings, the provision of Further and Better Particulars, and the service of Supplementary Lists of Documents. On 1st February 1989, PMM confirmed their consent to a trial date beginning in January 1991.

8. It was on 1st March 1989 that PMM served the summons out of which this appeal arises. The summons sought an order from the Court that the Third Party Statement of Claim 1against PMM should be struck out and the Third Party proceedings dismissed on the grounds that the Third Party Statement of Claim was frivolous and vexatious and constituted an abuse of the process of the Court because C & L had no reasonable evidence or grounds on which to support the material allegations made therein against PMM and/or that the Third Party Statement of Claim disclosed no reasonable cause of action against PMM.

9. Further Third Party directions were given on 3rd March 19891 and on 31st March 1989 an affidavit sworn by a Mr. Anthony Isaacs in support of PMM's strike out application was served on C & L. In June, an affidavit sworn by Mr. Michael Pugh on behalf of C & L in answer to Mr. Isaacs's affidavit was served on PMM. The hearing of the strike out summons came before Nazareth, J. on 12th June 1989. The judge gave two rulings, as we have seen, on 14th and 16th June 1989.

10. With that brief chronology, I turn to review the Re-amended Statement of Claim in the main action against C & L. OTB pleaded that in the Annual Reports of the OTB group (which included the profit and loss account and balance sheet for OTB and its group) for each of the financial years ending 30th June 1981, 1982 and 1983, C & L had reported that the accounts gave a true and fair view of the state of affairs of OTB and its group and of the profit of OTB and its group for the years in question and that the notes to the accounts included the following statement:

"Provision is made against loans and advances to the extent which the directors consider to be doubtful. The loans and advances in the balance sheet are stated net of such provisions."

11. Various figures are extracted from the accounts and ledgers of OTB for those three years. Among these figures are to be found the net profit shown for each year after tax, extraordinary items and inner reserve transfers. The net profit shown for the year ending June 1981 was over $122 million; for the year ending June 1982 over $118 million and for the year ending June 1983 over $98 million. OTB say that for those years adequate provision had not been made, for in reality assets were considerably overstated and in each of those years there had been a loss of such a size that OTB, by 1981 was seriously weakened, in 1982 virtually insolvent and in 1983 actually insolvent. Thus the accounts did not give a true and fair view of OTB's state of affairs for those years.

12. OTB's case as summarised and later expanded in the Re-amended Statement of Claim, is that contrary to what C & L had reported, OTB's accounts for the three years in question did not give a true and fair view of its state of affairs and the reason why OTB had been progressively so seriously weakened, virtually insolvent or actually insolvent was that the conduct and operation of its banking business, and in particular of its lending activities, had been imprudent.

13. OTB averred that C & L had been in breach of contract in those three years for had they properly performed their contractual duties when they undertook the annual audit work they would have discovered the extent and seriousness of such imprudence and/or that OTB's provisions against bad and doubtful loans were inadequate and that its management's assessment of the recoverability of loans could not be relied upon. C & L would then have recommended substantial additional provisions and/or would have qualified their audit reports accordingly.

14. It is also stated that had C & L qualified their audit reports from October 1981 or thereabouts and/or from October 1982 or thereabouts and/or from October 1903 or thereabouts the business of OTB would not have continued to be conducted imprudently and, in particular, the imprudent and irrecoverable loans made thereafter would not have been made.

15. The duties and functions of C & L are then pleaded and it is averred it was an implied term of their contracts as auditors that OTB would perform their duties and functions with reasonable care and skill.

16. Then the pleading continues that for the reasons set out in some 40 paragraphs OTB's system of internal control was grossly defective and inadequate and its lending business was carried on imprudently. OTB go on to plead that as a result of the deficiencies in the system of internal controls and its portfolio loans and advances and the failure of OTB's audited accounts to show any adequate provision for bad and doubtful debts, OTB's business was at all material times conducted imprudently and its profit and the financial position were grossly mis-stated. Thus OTB continued to grant facilities and to make further commitments to existing borrowers or did not seek to recover or obtain additional security for existing loans and facilities and granted facilities to new borrowers. Such lending was imprudent, it is said, by reason of the deficiencies earlier set out in the pleading. It is further asserted that OTB continued to lend to a small number of "connected" borrowers, and to borrowers related to OTB's directors and managers, amounts which were in total excessive in proportion to the overall value of OTB and/or the size of its overall portfolio of loans and advances.

17. It is then averred that from their Management Letters, extracts from which are set out earlier in the pleading it was clear that C & L were aware of most of the deficiencies pleaded and, possessing the knowledge which C & L had or should have had about the deficiencies, a prudent auditor would have realised that it was unsafe to rely for audit purposes on OTB's internal systems of control and that the audit therefore presented special problems. A prudent auditor, it is said, would have conducted the audit on that basis and, in particular, in order to assess the value of the loan portfolio and in order to determine whether OTB's management had made appropriate provisions, it would have carried out a proper loan review; and the requirements of a proper loan review are then averred. It is then said that if a proper loan review had been carried out C & L would have realised that OTB's lending business was being conducted imprudently; that its management's assessment of the recoverability of loans could not be relied upon; and/or that OTB's proposed provisions against bad and doubtful loans were inadequate. C & L would have concluded that unless full or proper provisions were made or loan balances were reduced or repaid, or adequate security was obtained, and/or satisfactory information was provided they should have reported accordingly. All this they failed to do.

18. The Re-amended Statement of Claim then avers that had C & L acted in the manner pleaded the seriousness of OTB's financial situation would have come to the attention of the regulatory authorities and would have become public knowledge, with the result that OTB would have had no alternative but to operate the systems and policies of the bank under prudent management and OTB would in fact have so operated such systems and policies. Such prudent management would have ensured that OTB would not have made many of the advances it did make after various material times pleaded and would have taken steps to recover loans and advances which it had made and would have recovered more in respect thereof, than it has in fact recovered or would recover.

19. As a result of C & L's breach of contract it is pleaded that OTB has suffered the following loss and damage:

(i) all new advances to borrowers, which OTB would not have made had its business been conducted prudently, after October 1981 or 1982 or 1983;

(ii) all additional advances to existing borrowers, which OTB would not have made had its business been conducted prudently, after October 1981 or 1982 or 1983;

(iii) the loss of the opportunity to have made fuller recoveries of advances outstanding to existing borrowers, had OTB taken steps to reduce its exposure from October 1981 or 1982 or 1983.

20. It is also pleaded that for the years 1982 to 1985 a sum in excess of $213 million had been paid out in dividends on the basis that profits were achieved as set out, in the accounts. Since in reality OTB had made no profits and had no distributable reserves from 1981 onwards, OTB should not have, and would not have, declared or paid those or any dividends but would have retained such money and had the use and benefit of it; thus OTB had suffered further loss and damage in the amount of such dividends and interest thereon. Further, in respect of the relevant years, OTB had paid tax in Hong Kong and Macau amounting in all to something over $38.8 million, which sum was or might be irrecoverable. This tax had been paid on the basis that the profits were as set out in the accounts. Since OTB had made no profits during those years it would not have had to pay any tax and this loss had also been suffered by OTB. The pleading, concludes with a claim for damages for breach of contract, with interest.

21. I now turn to summarise the Statement of Claim in the Third Party proceedings against PMM. It is necessary first to recall that one of OTB's branches was in Bahrain. By the Third Party Statement of Claim, C & L pleads, inter alia, that PMM audited the annual accounts of the Bahrain branch of OTB under contracts made with them for the years ending 1980, 1981 and 1982. PMM knew or ought to have known that those accounts would or were likely to be relied upon by OTB and/or by its auditors, C & L, in preparing and/or auditing the accounts of OTB for the years ending 30th June 1981, 1982 and 1983. By virtue of these contracts and/or at common law PMM owed seven particularised duties to OTB and to C & L in carrying out their audit work. In relation to each of six borrowers whose names are set out in a schedule, it is averred that PMM failed to perform some or all of these duties. Detailed reasons are given in several paragraphs setting out why it is said that the system of internal control of the Bahrain branch of OTB was at all material times grossly defective and inadequate and its lending business was carried on imprudently.

22. It is then pleaded that negligently and in breach of the duties set out earlier, PMM had failed to detect or recognise many of the deficiencies in the system of internal controls of the Bahrain branch of OTB and in its lending business, and/or in the circumstances that PMM were or ought to have been aware of those deficiencies. Instead, PMM had:

(i) reported that the accounts gave a true and fair view of the financial position of the Bahrain branch of OTB for the years ending 31st December 1980, 1981 and 1982 and of the profits for those years;

(ii) reported or represented that proper provisions had been made in those accounts for doubtful loans and advances, and that loans and advances in the balance sheet were stated net of such provisions; and

(iii) failed to use reasonable skill and care in their audit of the Bahrain branch of OTB for those years.

23. It is then averred that C & L had relied on PMM's audits of the Bahrain branch of OTB for each of the years 1980, 1981 and 1982 and on the accounts of the Bahrain branch of OTB for those years, and had therefore reported that the accounts gave a true and fair view of the financial position for the relevant years, and that adequate provisions had been made in the accounts for doubtful loans and advances, and that loans and advances in the balance sheet were stated net of such provisions.

24. It is further pleaded that had PMM drawn the attention of OTB and/or C & L to the deficiencies pointed to and to the full extent of the deficiences, and had PMM reported that the accounts did not give a true and fair view of the financial position of the Bahrain branch of OTB, or had PMM reported that larger provisions were required to be made in the accounts for bad and doubtful loans and advances, or had PMM exercised proper skill and care in their audit of the Bahrain branch of OTB for those years, OTB would not have made the advances after October 1981 which were now irrecoverable, and would have taken steps to recover loans and advances which it had made and would have recovered more in respect thereof than it has in fact recovered or was likely to recover.

25. The Third Party Statement of Claim continues by averring that OTB had suffered loss and damage which loss consisted principally of the advances which OTB would not have made had its business been conducted prudently after October 1981 or 1982 or 1983. The particulars of the advances are set out in another schedule. OTB had suffered loss in respect, of dividends, amounting to over $213 million, which were paid out on the basis of the profits shown in OTB's accounts and also in respect of the tax that had been paid in Hong Kong and Macau for the years 1981 onwards which would not have been payable, had the accounts shown the true state of affairs. This amounted to over $39 million. Accordingly, it is said:

"If by reason of the above matters, the Defendants are liable to compensate OTB for the losses referred to ...... or any loss or damage then the Defendants are entitled to contribution, alternatively damages, from PMM in respect of such liability."

The pleading concludes:

"And the Defendants claim against PMM contribution, alternatively damages, in respect of any liability of the Defendants to OTB."

26. We have been told that in the morning of the first day of the hearing before Nazareth, J., which was 12th June 1989, the solicitors acting for C & L handed over to PMM's solicitors, informally, a proposed amended First Party Statement of Claim. This document is before us. No application has yet been made to amend the First Party Statement of Claim. I need only mention that apart from a very considerable number of amendments making fresh allegations of negligence or breach of duty, if the pleading is to be amended in the manner proposed, it would also contain an additional claim in the alternative of entitlement to an indemnity from PMM in respect of any liability found against C & L in favour of OTB.

27. The appeal against Nazareth, J.'s order was filed on 10th July 1989. We have before us a copy of a letter dated 17th November 1989 written by the solicitors acting for C & L to those acting for PMM. The letter says that it encloses an amended copy of the Statement of Claim in tile First Third Party proceedings, and that C & L intended to apply for leave to make the amendments shown on the enclosed pleading at the hearing of the pre-trial review set for January next year. The letter also states:

"For the purposes of the forthcoming hearing before the Court of Appeal, the enclosed pleading represents our clients case against your clients."

28. I will say nothing more about this document in the light of the order sought from this Court by the appellant. Had we ourselves been asked to consider the application by PMM to strike out the claim against them on its merits, it might have been appropriate to examine the proposed amendments.

29. The hearing of PMM's summons to strike out the Third Party proceedings against them was estimated to last about 10 days and, as we know, the hearing began on 12th June 1989. We are informed that on 13th June 1989, Mr. Cresswell, leading Counsel appearing for C & L, took a preliminary objection submitting that the judge should not read and consider the affidavits which had been filed and which were to be used in support of and against the summons, to strike out. The learned judge upheld his submission by the ruling he gave on the following day.

30. The judge noted that it was common ground that affidavit evidence could be admitted to snow that C & L had no reasonable ground or evidence to support the Third Party claim out he remarked that Mr. Creswell had complained that what PMM sought to do on Mr. Crystal's (who represented PMM) own admission was to get the Court to determine a question of fact, i.e. C & L's assertion of reliance upon PMM and to do that upon an extensive examination of evidence. The judge observed that Mr. Crystal had conceded, and indeed proclaimed, that he was seeking a minute and protracted examination of the documents and facts and had submitted that it was the duty of the Court to do this for it could not otherwise come to a proper conclusion.

31. The judge observed that the summary nature of the jurisdiction under 0.18, r.19 was well established and he quoted a passage from the judgment of Sellers, L.J. in Wenlock v, Maloney [1965] 1 WLR 1238 at p.1242.

"There have been cases where affidavits have been used to show that an action was vexatious or an abuse of the process of the court but not, as far as we have been informed, or as I know where it has involved the trial of the whole action when facts and issues had been raised were in dispute. To try the issues in this way is to usurp the function of the trial judge."

The judge also quoted what Danckwerts, L.J. had to say at p.1244:

"... This summary jurisdiction of the Court was never intended to be exercised by 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. To do that is to usurp the position of the trial judge, and to produce a trial of the case in chambers on affidavits only, without discovery and without oral evidence tested by cross-examination in the ordinary way. This seems to me to be an abuse of the inherent power, of the court and not a proper exercise of that power."

Noting that the Wenlock case was concerned with whether a plaintiff had a cause of action, the judge said that it well illustrated the summary nature of applications under 0.18, r.19 and remarked that in numerous other cases the nature of such applications had been expressed by reference to cases that were plain and obvious. The judge referred to o number of the leading cases.

32. He then noted the submission that had been made by Mr. Crystal, that the Court should exercise its discretion to admit affidavit evidence because otherwise there would be a monstrous denial of justice, for this was a case of abuse of process. The judge then cited a passage from Lord Diplock's speech in Hunter v. Chief Constable of the West Midlands [1982] AC 529, at p.536:

"This is a case about abuse of the process of the High Court. It concerns the inherent power which any court of justice must possess to prevent misuse of its procedure in a way which, although not inconsistent with the literal application of its procedural rules, would nevertheless be manifestly unfair to a party to litigation before it, or would otherwise wring the administration of justice into disrepute among right-thinking people. The circumstances in which abuse of process can arise are very varied those which gives rise to the instant appeal must surely be unique. It would in my view be most unwise if this House were to use this occasion to say anything that might be token as limiting to fixed categories the kinds of circumstances in which the court has a duty (I disavow the word discretion) to exercise this salutary power."

33. The judge went on to summarise Mr. Crystal's other submissions that C & L had simply sought to pass on to PMM their entire liability arising out of OTB's claim in respect of about 170 accounts despite the clear indications that only 6 of these accounts had been booked in Bahrain and dealt with by PMM. They represented an infinitesimal proportion of the aggregate losses that might arise. Mr. Crystal, he noted had pointed out that the enormous costs of defending the First Third Party action might exceed the contribution or damages claimed. The trial was to commence in January 1991 and was estimates to last a year. Only a fraction of that time was likely to be concerned with the First Third Party proceedings. Mr. Crystal had submitted that it would be monstrously unjust if PMM were not permitted to extricate themselves from the action now.

34. The judge then observed that he was not persuaded that it was manifestly unfair, nor was the degree of hardship or inconvenience, which all defendants had to endure in some degree, an abuse of process. Abuse lay in the procuring of that process by pleadings that were wholly imaginary, a myth or not bona, fide.

35. The judge next referred to Minories Finance Ltd. v. Arthur Yong [1989] 2 All ER 105 as pointing to the way in which the matter might be approached. He referred to what Saville, J. had to say at p. 109 and then observed that, he did not at that stage harbour doubts about the soundness of the First Third Party notice or for that matter the validity of the defendant's assertion of reliance, for the simple reason that he had not yet had any evidence on the matter. It was true that Mr. Crystal had pointed to what appeared to be serious deficiencies in the pleadings, mainly arising from C & L simply applying OTB's allegations against them to PMM. But it did not seer to him that these totally destroyed the Third Party claims, at any rate not in relation to at least sortie of the six accounts. Besides he had not yet heard the defendant's response to those submissions.

36. The learned judge then quoted front the speech of the Lord Chancellor, Lord Mackay, in Williams & Humbert Limited v. W.& H. Trade Marks (Jersey) Limited [1986] AC 368, at p.441:

"If on an application to strike out it appears that a prolonged and serious argument will be necessary there must at the least the a serious risk that the court time effort and expense devoted to it will be lost since the pleading in question may not be struck out and the whole matter will require to be considered anew at the trial. This consideration, as well as the context in which Order 18 rule 19 occurs and the authorities upon it, justifies a general rule that the judge should decline to proceed with the argument unless he not only considers it likely that he may reach the, conclusion that the pleading should be struck out, but also is satisfied that striking out will obviate the necessity for a trial or will so substantially cut down or simplify the trial as to make the risk of proceeding with the hearing sufficiently worth while."

37. I think I should quote verbatim the remainder of Nazareth, J's judgments:

" In the light of that further guidance given by Lord Mackay albeit in the context of the ground that there was no cause of action I would add that I do not at this stage find myself in a position to take the view that it is likely that I may reach the conclusion, that the pleadings should be struck out; that seeds to me to necessitate examination of the evidence and raises the question of the nature of the examination.

A circular situation threatens to present itself. How is the court to rule upon the introduction of affidavit evidence when that evidence nay have to be examined to determine that very question. But the real issue is somewhat different; it is whether a minute and protracted examination of that evidence will be necessary in determining whether it is plain and obvious that the pleading to be struck out is wholly imaginary, a myth or not bona fide, or even, as it is put in the summons, the defendants have no reasonable evidence or grounds on which to support their material allegations against the First Third Parties. It may have been necessary for the court to commence and proceed with its examination of that evidence in the knowledge that the application night have to be summarily dismissed if it emerged that a minute and protracted examination of evidence was involved. But fortuitously I find myself in a position in which Mr. Crystal has very properly conceded that a minute and protracted examination of affidavit evidence is involved. Some idea of its magnitude emerged in his outline of the back ground and the pleadings in the main and Third Party actions. Further indications are provided by the bulk of the pleadings, the main bulky volumes of exhibits (notwithstanding that it is said that it will only sue necessary to dip into dome of them). Also the fact that 10 days have been set aside for the hearing of this summons, and that even Mr. Crystal says it will take several days. In my view it is quite clear that a minute and protracted examination of the evidence will be required. As I have said I do not harbour doubts about the soundness of the pleadings in question moreover it seems to me that I shall have to usurp the function of the trial judge and make a finding of fact and that I would have to do so otherwise than in the summary manner contemplated in 0.18 r.19 proceedings, or the exceptional circumstances referred to by Lord Templeman and Lord Mackay in Williams & Humbert. Finally it does riot seem to the that I can properly intervene to prevent an abuse of the process of the court, since it is neither plain nor obvious that there has been an abuse of process, which, in the present context, depends upon the relevant pleading being wholly imaginary, a myth or not bona fide.

For all those reasons it follows that I must decline to embark upon examination of the evidence in pursuance of the first ground specified in the summons."

38. As I have mentioned earlier, Nazareth, J. gave another ruling, on 16th June 1989. I will address that first. An alternative ground upon which it was submitted on behalf of PMM that the Third Party proceedings against them should be struck out was based on the proper construction of various statutory provisions. It was submitted by Mr. Crystal that as a matter of law it was not seriously arguable that C & L's right to recover contribution from PMM under section 19 of the Law Amendment and Reform (Consolidation) Ordinance had survived the repeal of section 19(1) (c) by the Civil Liability (Contribution) Ordinance which came into force on 1st January 1985. In summary, C & L's complaint when the appeal was filed was that it was wrong in principle for the judge to have decided that C & L's alleged claim to contribution had survived the repeal of the provisions earlier mentioned instead of merely deciding whether the point was seriously arguable by C & L. No preliminary issue of law had been ordered to be tried under 0.33 and this Court was to be asked to set aside the judge's order so that if PMM did not succeed in striking out the whole of C & L's claims no issue estoppel could be said to arise between PMM and C & L as to whether C & L had a claim to contribution against PMM under section 19(1)(c) of the repealed Ordinance which survived its repeal.

39. In his judgment the learned judge discussed the relevant statutory provisions and the competing submissions, and expressed his views upon them. He concluded as follows:

"In the light of all the foregoing considerations, the better construction is that contended for by Mr. Cresswell, and it is in my view the proper and true construction."

40. It is true that the judge was speaking in positive terms but since earlier on in his judgment tie had said:

"Mr. Crystal submits that the short point for the court is : Can Coopers seriously contend that they had an accrued right to contribution under Section 19 of Larco by 31st December 1984?",

it may be that PMM were worrying unduly. However, what the precise effect of the judge's ruling was upon the further conduct of these proceedings, no longer falls for decision because a very sensible compromise was reached. Counsel were able to give undertakings which are recorded on the Court file. These resolve the clatter to the satisfaction of PMM and C & L.

41. PMM's main case in support of the summons to strike out the Third Party proceedings was that C & L's claim against them had not been made bona fide and was imaginary or a myth; C & L had no reasonable evidence or grounds support the material averments in their Third Party Statement of Claim - in particular there was no reasonable evidence or grounds to substantiate the assertion that C & L had relied on the work done by PMM; C & L's claim was vexatious because it made allegations of negligence and/or breach of duty in respect of 6 borrowers only and no loss was alleged to have been suffered in respect of 5 of these borrowers and yet in one of the schedules to the Third Party Statement of Claim, which contained its particulars of loss, C & L relied on 173 loans advanced by OTB Hong Kong and a further 42 loans advanced by Macau branch of OTB, as particulars of loss which it asserts are recoverable from PMM.

42. PMM say therefore that C & L have demonstrated that they are prepared to maintain a claim against diem which they know is not bona fide or which has no reasonable factual oasis, with the object, it must be, of keeping PMM in these proceedings because they see some potential advantage from this involvement. PMM also suggest that the reason why C & L took the preliminary point that the judge should neither read nor consider the evidence was, it had to be assumed, because they did not want their conduct in these proceedings, as it affected PMM, to be gone into before the trial in 1991. PMM maintain that this Court should not shut its eyes to what had obviously been happening in these proceedings: an abuse of tire process of the Court by C & L to their detriment.

43. Mr. Crystal's basic submission is that the judge would only have been in a position to determine PMM case on its merits in this striking out summons after reading and considering the evidence. He had no jurisdiction to decline to read evidence which was relevant and, as was conceded, admissible. It was common ground that where an application to strike out was based on any of the grounds in 0.18, r.19 (1) other than paragraph (a), evidence was admissible. Mr. Crystal submits that on this ground alone, PMM is entitled to succeed on the rain issue in the appeal and the summons should be remitted for hearing on the merits to the High Court. PMM is not asking this Court to determine the application on its merits.

44. In answer to all this, Mr. Cresswell begins by submitting that in considering the application to strike out it was relevant to take into account the late stage at which it had been made. He acknowledges that it is open to a party to apply to strike out a pleading at any stage of the proceedings out says that it is well established, as a matter of practice, treat such an application should be made promptly, and as a rule before the close of the pleadings. He points out that PMM's application was made long after the pleadings had peen closed and extensive discovery had taken place. Directions had peen, given including the directions, made on 12th October 1987 that PMM should take such part in the trial of the main action as the judge might direct and that they be hound by the result. Moreover, PMM 's solicitors had agreed to the application being made for the, the trial day to be fixed. In such circumstances, he submitted, it was far too late for PMM to seek to strike out the Third Party Statement of Claim. I do not think that it would be right for us to go into this question. Considerations of delay did not feature in the judge's decision. Further, there is no respondent's notice on the point.

45. Mr. Cresswell submitted that the judge had been well aware of the principles applicable in a striking out application which he had correctly summarised in his judgment. He argued that even if PMM had been able to establish that C & L had a weak case this would not justify striking out the Third Party Statement of Claim. The proper test to be applied, he suggests, was not whether or not C & L had "reasonable evidence or grounds" to support their claim but, as the cases showed, whether the claim was obviously unsustainable or obviously and almost incontestably bad. Mr. Cresswell emphasised that since the power to strike out pleadings was a matter of discretion it would only be in very extreme cases, or when the judge had gone wrong in principle, that an appellate court was free to interfere with the exercise of that discretion.

46. Mr. Cresswell reminds us that when the hearing began before the judge he was invited by PMM to consider affidavit evidence dealing in detail with C & L's Third Party claim against them. This was the affidavit sworn by Mr. Anthony Isaacs dated 29th March 1989 which ran to 46 pages with exhibits consisting of another 612 pages. He says that had this evidence been admitted it would then have been necessary to consider an affidavit in reply sworn on behalf of C & L by Mr. Michael Pugh dated 8th June 1989 amounting to 85 pages with exhibits running to 128 pages.

47. Mr. Cresswell contends that the authorities have clearly established that affidavit evidence should not be admitted where the only ground of the application to strike out is that the claim is one which is not likely to succeed or where a consideration of the evidence would necessitate a minute and protracted examination of the documents and facts of the case. He relies heavily on Wenlock v. Maloney [1965] 1 WLR 1238 which was a case where extensive affidavit evidence had been considered by the Master over a period of 4 days when hearing the application to strike out the Statement of Claim. The Master's decision was upheld by the Judge in Chambers but the Court of Appeal allowed the appeal, after having refused to look at the affidavits. He submitted that there is no authority for the proposition that the judge lacks jurisdiction to decline to read the evidence in the affidavits placed before him in proceedings of the kind we have here.

48. Mr. Cresswell also relied on the speeches of Lord Templeman and Lord Mackay in Williams & Humbert Limited v. W. & H. Trade Marks (Jersey) Limited [1986] AC 386. I have earlier set out the relevant part of Lord Mackay's speech. At. p.435H-463A Lord Templeman said:

"My Lords, if an application to strike out involves a prolonged and serious argument the judge should, as a general rule, decline to proceed with the argument unless he not only harbours doubts about the soundness of the pleading but, in addition, is satisfied that striking out will obviate the necessity for a trial or will substantially reduce the burden of preparing fort trial or the burden of the trial itself."

49. Among the other cases relied upon by Mr. Cresswell was Frogmore Estate Plc. v. Berger (26th October 1989). It had been cited to the judge and mentioned in his judgment. There the Vice Chancellor (Sir Nicholas Browne - Wilkinson) declined to entertain an attempt to strike out the plaintiff's claim on the ground, that it was vexatious or an abuse of the process of the Court where the hearing of the applicant's summons would have taken between 10 and 20 days and would have involved at least some investigation of the facts of the case. The plaintiffs were relying on a joint venture agreement alleged to have been made orally. The whole claim, save for 搊ne or two small points" hinged round that agreement. There were other causes of action pleaded but save for one, all the others depended on the existence of the agreement. It was sought to strike out part of the Statement of Claim on the ground, inter alia, that it could be demonstrated on the facts that no joint venture agreement had been reached and that therefore virtually the whole basis of the plaintiff's claim failed.

50. The Vice-Chancellor remarked that if the "merits summonses" went forward there was no doubt as to the principles the judge would have to apply - the principles set out at para. 18/19/3 of the White Book. He went on to say:

"Those principles are very well known to all practitioners in the field. The difficulty arises when one has to decide in what circumstances a judge should enter into a prolonged investigation of fact or law in order to discover whether the case before him is a plain and obvious case meriting summary dismissal. It will often be submitted in a complicated case that, although it may take time to understand the case, once that has been achieved it will become plain and obvious that the claim cannot succeed. The correct approach in dealing with that problem has recently been considered by the House of Lords in Williams & Humbert Ltd. v. W.H. Trade Marks (Jersey) Ltd. [1986] 1 A.C. 368."

He then cited the passages from the speeches of Lord Templeman and Lord Mackay which are set out above. He added:

"Therefore what I have to decide at this stage is whether the attempt to strike out the plaintiffs' case on the merits should be entertained at all. If it is to be entertained, the defendants have to demonstrate to me, first, that their application is likely to succeed; and, second, that it will either be decisive or appreciably simplify the eventual trial."

51. I will cite no more from the Vice-Chancellor's judgment save the following passage from the transcript at gage 16:

"In my judgment, the proper administration of justice requires the Court to limit, so far as is consistent with ultimate justice at the trial, the growth of these huge interlocutory applications involving investigation of the merits. In all out the clearest cases, the proper time for consideration of the merits of a case is at trial, after discovery and with oral evidence, not on interlocutory applications when tae full facts cannot be known and oral evidence cannot be heard. In my judgment, the time is approaching when, if these applications continue to be made, the correct order for costs will be an order for immediate taxation and payment of costs by the party responsible."

52. Returning to Nazareth, J.'s judgment, Mr. Cresswell submits that the judgment had surely been right in declining to embark upon an examination of the evidence when Leading Counsel for PMM had expressly stated that he was seeking to persuade him to determine a question of fact, that is to say the truth or otherwise of C & L's assertion of reliance upon PMM for the purposes of one of the causes of action, and that this would involve a minute and protracted examination of the facts. This was precisely the position addressed by the Vice-Chancellor who did not even allow the "merits summonses" to be entertained.

53. Mr. Cresswell also contends that there was no possible ground upon which the judge ought to have harboured doubts at the outset about the soundness of the pleading. It would therefore have been quite wrong for the judge to have entertained an attempt to strike out the pleading on the basis of the evidence, and he had been right to conclude that the proper occasion for going into the merits of the case was at the trial.

54. C & L say that their Third Party Statement of Claim reveals two distinct causes of action against PMM; the first cause of action is a claim by C & L for contribution from PMM under section 19(c) of the Law Amendment Reform (Consolidation) Ordinance. The second cause of action, quite independent of the first, is a claim for damages on the ground that if C & L are held liable to OTB such liability is a result, either wholly or in part, of breaches by PMM of a duty to C & L to exercise care and skill in auditing the accounts of the Bahrain branch of OTB.

55. Mr. Cresswell submits that the affidavit evidence of Mr. Isaacs which PMM sought to rely upon was directed to only one of these two causes of action, the second cause of action. PMM were alleging that Mr. Isaacs' affidavit demonstrated that C & L did not in fact rely upon PMM's audit of the accounts of the Bahrain branch of OTB, and that it was not reasonably foreseeable by PMM that C & L would so rely. Mr. Cresswell says that this is disputed, but even if these allegations where factually correct they had no relevance to C & L's other cause of action, that is to say the first cause of action have just referred to above. This was because C & L's claim for contribution from PMM was not founded upon any reliance by C & L on PMM nor upon any duty owed by PMM to C & L, but rather that that claim was founded upon the potential liability of C & L and PMM severally to OTB. Mr. Cresswell suggested that even if there were to be a protracted examination of the evidence at the interlocutory stage and even if the Court accepted the factual position as put foward by PMM, PMM would have to remain in the proceedings unless they were successful in striking out C & L's claim on the claim for contribution.

56. With very great respect to these contentions, I do not think that they can affect the conclusion we reach on the question whether or not the judge was right to refuse to consider the affidavit evidence proferred by PMM, and thus the result of this appeal.

57. In summary, Mr. Cresswell submits that what PMM had sought to do was to invite the Court to try the claim at an interlocutory hearing, on documentary evidence and then to strike out the Third Party claim on the basis that it was not likely to succeed.

58. The general principles for the exercise of the summary and coercive powers of the Court under 0.18, r.19 are well-known. However, it must be borne in mind that where an application is founded basically on an alleged abuse of the process of the Court (since 1962 aground contained in the rule whereas previously the inherent jurisdiction had to be prayed in aid) in appropriate cases the Court "has the duty to exercise this salutary power" .... "to prevent misuse of [the Court's] procedure" per Lord Diplock in Hunter v. Chief Constable, And in Metropolitan Bank v. Pooley (1885) 10 App. Cas. 210, Lord Blackburn when referring to the jurisdiction under the then O.XXV, r.4 observed ".... although it should not be lightly done, yet it way often be required by the very essence of justice to be done." In Reebok International Ltd and Others v. Laws Fashion Knitters Ltd and others, Civil Appeal 90 of 1989, 28th November 1989 (unreported), at p.14, I ventured to observe "if the claim ... was shown to be plainly groundless and unfounded then it was rightly struck outfox the Court will not allow its machinery to be used improperly and will prevent vexation and oppression to a party which should never have been impleaded in the action."

59. There can be no doubt, too, that the Editors of the white Book are on very sure ground when they say, in para. 18/19/2 "But in applications on any of the other grounds mentioned in the Rule [other than para.(1)(a) of the Rule] or where the inherent jurisdiction of the Court is invoked, affidavit evidence may be and ordinarily is used." This the judge acknowledged.

60. It will be recalled that the judge had observed that he did not harbour doubts about the soundness of the Third Party notice "for the simple reason that I have not yet had any evidence on the matter". But he had referred to what appeared to be "serious deficiencies in the pleadings" that had been pointed out to him "mainly arising from the defendants' simply applying the plaintiff's allegations against them to Peats."

61. With very great respect to the learned judge, I feel bound to express some surprise at the view he took about the Third Party claim on the face of the pleadings alone, a claim which Mr. Cresswell helpfully summarised and formulated in these terms:

"C & L are claiming damages and/or contribution in respect of their entire liability (if any) to OTB in the main action. In outline, C & L's case on damage is that, had tire additional specific provisions been made which ought to have peen crane in tire accounts of the Bahrain branch for each year and had these provisions been carried over into the accounts of OTB, OTB's results would have been substantially different and in those circumstances OTB would not have made the advances which it did in fact make and which are or are likely to be irrecoverable and/or C & L would not have reported as they did on the accounts of OTB."

62. As we have seen, C & L were seeking to pass onto PMM the whole of their liability arising out of OTB's claim, in respect of 173 accounts whereas it was common ground that only 6 of these accounts were booked through the Bahrain office of OTB, that PMM was only concerned with the Bahrain office of OTB and that OTB claim to have suffered loss in respect of only one of these accounts.

63. It seems to me that in these circumstances, owing to the unusual and possibly extravagant nature of this claim, PMM were entitled to seek to show the Court that it was one which should be struck out, not on the ground that the facts disclosed were improbable or that it was difficult to believe that they could be proved, (see per Lord Herschell in Lawrance v. Lord Norreys (1888) 39 Ch. D. 213 at 217) out on the ground that "the case has not a solid basis capable of proof ... the story told in the pleadings is a myth ... and has no solid foundation" (per Lord Herschell at p.220) and one where "the statement of claim presents tissue of improbabilities, which ought not to be sent to proof." (per Lord Watson, at p.222).

64. In my respectful view, had the judge approached the Third Party Statement of Claim with a more critical eye, and harboured the doubts about the basic soundness of the plea which I respectfully suggest should nave troubled him, the next stage of the Lord Tecnpleman's test in Williams and Humbert (at 2.435) would have been satisfied, because if the application had been successful it would have obviated the necessity of these Third Party proceedings, removed the burden upon PMM of preparing for a trial, (not due to be heard for a year or so, and likely to last a very long time) and prevented very considerable anxiety and expense.

65. I would mention here that in my opinion in Williams and Humbert, Lord Templeman and Lord Mackay were laying down the proper approach of the Court to applications under 0.18, r.19(1) (a) and not applications under the inherent jurisdiction or the other paragrapns of the sub-rule. This is apparent from Lord Templeman's reference at p.434 to para. (a) only and to the cases he selects and cites from on p.435. I do not believe that the Lord Chancellor was intending to differ from Lord Templeman.

66. In my view in Wenlock v. Maloney [1965] 1 WLR 1238 Sellers, L.J. was making it clear, at p. 1242, that 0.18, r.19(2) should not be allowed to be circumvented when the application to strike out was basically under r.19(1)(a), even though other paragraphs are purportedly relied upon, and the only ground put forward for the contention that the claim disclosed no reasonable cause of action is that it is not likely to succeed. Both he and Danckwerts, L.J. (at p.1243) refer to Lawrance v. Lord Norreys as falling into a different category.

67. The Rules of Court (and the unaffected inherent jurisdiction) allowed PMM's application to be made. PMM were entitled, and indeed bound, to file affidavit evidence to seek to demonstrate why the Third Party claim formulated, against then constituted an cause of the process of the Court. And yet the learned judge was persuaded that it was not necessary "to commence and proceed with [the] examination of that evidence" because "... Mr. Crystal has very properly conceded that a minute and protracted examination of affidavit evidence is involved." Can this be right? I do not believe that any authority has gone so far. If the judge himself has not read the affidavits, or glanced through them, I do not see now he could properly exercise his discretion without even being apprised of the issues raised by the affidavit evidence, and how it is sought to show that the proceedings are manifestly groundless. This need not take very long.

68. The judge also indicated that it seemed to him that "I shall have to usurp the function of the trial judge and make a finding of fact." With very great respect, I do not think that this is what PMM was asking him to do. As tile judge mentions in other parts of his judgment, PMM were seeking to snow that C & L's claim against them was "wholly imaginary, a myth or not bona fide."

69. It is right that the Courts should do all they can to discourage attempts to invoke 0.18, r.19 and the inherent jurisdiction when in reality a trial of the action on affidavits, where facts and issues are in dispute, is being sought. But for my part I find it impossible to hold, on the basis that he is told that "a minute and protracted examination of affidavit evidence is involved", that a judge is entitled to refuse even to consider affidavit evidence which is properly and responsibly adduced. With great respect to the judge who felt restrained by the authorities, as he read them, PMM are entitled to feel aggrieved. They may yet fail to stifle the proceedings instituted against them, but in my judgment what the judge did was not a proper exercise of discretion.

70. I would therefore allow the appeal and remit the summons taken out by PMM dated 28th February 1989 to the High Court for re-hearing.

Power, J.A. :

71. I agree.

Macdougall, J.A.:

72. I also agree.

Fuad, V.-P.:

73. As we indicated at the end of the hearing, we hoped to be able to make an order nisi as to costs when handing down these judgments. However, after further consideration we have reached the conclusion that we should make no order until the parties have been heard both as to costs and as to the precise form of the order to reflect our decision. The parties should consult with the Clerk of the Court to arrange a suitable date.

Representation:

Mr. M. Crystal, Q.C. and Mr. A.T. Reyes (Stephenson Harwood & Lo) for the Appellants.

Mr. P. Cresswell, Q.C., Miss A. Eu and Mr. A. Barma (Barlow Lyde & Gilbert) for the Respondents.