Read the full judgment text of CACV 000177/1995 on BabelCite. This Court of Appeal judgment was delivered on 28 February 1996 before Litton VP, Mayo JA, P. Chan J.
Negligent mis-statement – Auditors' duty of care to non-shareholders – Application to strike out statement of claim – Whether plaintiff pleaded sufficient facts to bring case within Caparo Industries v. Dickman – Defendants were joint auditors of Texxon Industries Ltd and Chino Industries Ltd – Defendants conducted a special eight-month audit ending 30 November 1987 yielding combined profits of HK$8.761m, which became the benchmark for put/call options in the Subscription and Shareholders Agreement dated 24 June 1988 between the 2nd plaintiff Simister and the vendor Mr Koon – Agreement also contained a price adjustment mechanism under Schedule 2 keyed to the audited combined profits for year ending 31 March 1988 – Defendants signed unqualified audit reports on 28 April 1989 showing combined profits of HK$11.885m, exceeding the benchmark and within the Schedule 2 range, thereby neutralising both the price adjustment and the put option – Plaintiff claimed the profits were illusory and the reports misleading, losing the opportunity to recover approximately HK$32.635m under Schedule 2 and HK$24.6m under the Clause 11.1 put option – Application to strike out under Order 18 rule 19(1)(a) of the Rules of the Supreme Court – Whether plaintiff needed to plead auditors' subjective intention or whether knowledge of likely reliance was sufficient – Voluntary assumption of responsibility as a test of liability rejected following Lord Griffiths in Smith v. Eric S. Bush – Whether absence of a formal 'certification' under Clause 11.1 defeats the claim – Held: on the facts as pleaded, the case fell within the broad principles stated by Lord Bridge in Caparo Industries v. Dickman [1990] 2 AC 605 at 620H-621B; over-refinement is inappropriate on a striking-out application – Defendants' exposure was limited to two identified persons (Koon and Simister) for a determinate amount, far removed from indeterminate liability to the world at large – A specific pleading of subjective intention was not necessary and intention could in any event be inferred – The fact that no formal certification was procured did not preclude a duty of care because the plaintiff relied on the audited accounts themselves, with no occasion to call for a certificate – Appeal allowed, order of 26 July 1995 discharged, leave to amend granted, and case remitted for trial as soon as possible – Costs of the appeal and below to be dealt with after further hearing.
Legal issues: Sufficiency of pleading to establish a special relationship/duty of care under Caparo v. Dickman · Whether the plaintiff must plead subjective intention that the defendant intended reliance · Effect of absence of formal 'certification' under Clause 11.1 of the shareholders' agreement
Outcome: Appeal allowed; statement of claim restored; leave to amend granted; case remitted for trial