Geneva Finance Ltd (Receiver and Manager Appointed) v BOYS
[2001] WASC 167
GENEVA FINANCE LTD (Receiver and Manager Appointed) -v- BOYS & ORS [2001] WASC 167
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2001] WASC 167 | |
| Case No: | CIV:1765/1993 | 18 JUNE 2001 | |
| Coram: | HASLUCK J | 27/06/01 | |
| 15 | Judgment Part: | 1 of 1 | |
| Result: | Application to strike out allowed | ||
| PDF Version |
| Parties: | GENEVA FINANCE LTD (Receiver and Manager Appointed) ALAN HAROLD BOYS RONALD GEORGE HOWARD DESMOND FRANK CRAWLEY ANTHONY HAYES DOUGLAS-BROWN ANTHONY HOWARD LEIBOWITZ KEVIN ERNEST JUDGE |
Catchwords: | Pleadings Rule concerning inconsistent pleadings Statement of claim alleging breaches of audit contract Defence denying contract Counterclaim based upon a similar audit contract Whether defendants can approbate and reprobate Counterclaim held to be embarrassing |
Legislation: | Fair Trading Act 1987 Supreme Court Rules, O 18 r 2, O20 r 11 Trade Practices Act 1974 |
Case References: | Astley & Ors v Austrust Ltd (1999) 161 ALR 155 Express Newspapers PLC v News (UK) Ltd & Ors [1990] 1 WLR 1320 Northern Territory Housing Commission v Territory Bricks Pty Ltd (1983) 71 FLR 273 The Peninsula and Oriental Steam Navigation Co v Britnell & Ors (1892) 18 VLR 580 Andrews v Nominal Defendant [1963] NSWR 359 Bowler & Anor v Hilda Pty Ltd & Ors (1998) ATPR 41-625 Dalgety Australia Ltd v Rubin, unreported; SCt of WA; Library No 5485; 24 August 1984 Daniels & Ors v Anderson & Ors (1995) 13 ACLC 614 Global Sportsman Pty Ltd & Anor v Mirror Newspapers Ltd & Anor (1984) ATPR 40-463 Heytesbury Holdings Pty Ltd v Kelly & Anor, unreported; SCt of WA; Library No 940735; 30 December 1994 Hughes v Gales (1995) 14 WAR 434 Kimberley Downs Pty Ltd v State of Western Australia, unreported; SCt of WA; Library No 6414; 25 August 1986 Knowles v Roberts (1888) 38 Ch D 263 Meckiff v Simpson [1968] VR 62 Millington v Loring (1880) 6 QB 190 Niven & Anor v Grant & Ors (1903) 29 VLR 102 Ron Hodgson (Trading) Pty Ltd v Belvedere Motors (Hurstville) Pty Ltd [1971] 1 NSWLR 472 San Sebastian Pty Ltd & Anor v Minister Administering the Environmental Planning and Assessment Act 1979 & Anor (1986) 162 CLR 340 T N Lucas Pty Ltd v Centrepoint Freeholds Pty Ltd (1984) 1 FCR 110 Thompson v Mastertouch TV Service Pty Ltd (No 1) (1977) 29 FLR 270 Truth About Motorways Pty Ltd v Macquarie Infrastructure Investments Ltd (1998) ATPR 41-633 Vickers v Mayne, unreported; SCt of WA; Library 980391; 17 July 1998 Wardley Australia Ltd & Anor v Western Australia (1992) 175 CLR 514 Wylie v The ANI Corp Ltd [2000] QCA 314 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
ALAN HAROLD BOYS
RONALD GEORGE HOWARD
DESMOND FRANK CRAWLEY
ANTHONY HAYES DOUGLAS-BROWN
First Defendant
ANTHONY HOWARD LEIBOWITZ
Second Defendant
KEVIN ERNEST JUDGE
Third Defendant
Catchwords:
Pleadings - Rule concerning inconsistent pleadings - Statement of claim alleging breaches of audit contract - Defence denying contract - Counterclaim based upon a similar audit contract - Whether defendants can approbate and reprobate - Counterclaim held to be embarrassing
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Legislation:
Fair Trading Act 1987
Supreme Court Rules, O 18 r 2, O20 r 11
Trade Practices Act 1974
Result:
Application to strike out allowed
Representation:
Counsel:
Plaintiff : Mr W S Martin QC & Mr P G Clifford
First Defendant : Mr B S Dodd & Mr J Garas
Second Defendant : Mr B S Dodd & Mr J Garas
Third Defendant : Mr B S Dodd & Mr J Garas
Solicitors:
Plaintiff : Tottle Christensen
First Defendant : Mallesons Stephen Jaques
Second Defendant : Mallesons Stephen Jaques
Third Defendant : Mallesons Stephen Jaques
Case(s) referred to in judgment(s):
Astley & Ors v Austrust Ltd (1999) 161 ALR 155
Express Newspapers PLC v News (UK) Ltd & Ors [1990] 1 WLR 1320
Northern Territory Housing Commission v Territory Bricks Pty Ltd (1983) 71 FLR 273
The Peninsula and Oriental Steam Navigation Co v Britnell & Ors (1892) 18 VLR 580
Case(s) also cited:
Andrews v Nominal Defendant [1963] NSWR 359
Bowler & Anor v Hilda Pty Ltd & Ors (1998) ATPR 41-625
Dalgety Australia Ltd v Rubin, unreported; SCt of WA; Library No 5485; 24 August 1984
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Daniels & Ors v Anderson & Ors (1995) 13 ACLC 614
Global Sportsman Pty Ltd & Anor v Mirror Newspapers Ltd & Anor (1984) ATPR 40-463
Heytesbury Holdings Pty Ltd v Kelly & Anor, unreported; SCt of WA; Library No 940735; 30 December 1994
Hughes v Gales (1995) 14 WAR 434
Kimberley Downs Pty Ltd v State of Western Australia, unreported; SCt of WA; Library No 6414; 25 August 1986
Knowles v Roberts (1888) 38 Ch D 263
Meckiff v Simpson [1968] VR 62
Millington v Loring (1880) 6 QB 190
Niven & Anor v Grant & Ors (1903) 29 VLR 102
Ron Hodgson (Trading) Pty Ltd v Belvedere Motors (Hurstville) Pty Ltd [1971] 1 NSWLR 472
San Sebastian Pty Ltd & Anor v Minister Administering the Environmental Planning and Assessment Act 1979 & Anor (1986) 162 CLR 340
T N Lucas Pty Ltd v Centrepoint Freeholds Pty Ltd (1984) 1 FCR 110
Thompson v Mastertouch TV Service Pty Ltd (No 1) (1977) 29 FLR 270
Truth About Motorways Pty Ltd v Macquarie Infrastructure Investments Ltd (1998) ATPR 41-633
Vickers v Mayne, unreported; SCt of WA; Library 980391; 17 July 1998
Wardley Australia Ltd & Anor v Western Australia (1992) 175 CLR 514
Wylie v The ANI Corp Ltd [2000] QCA 314
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1 HASLUCK J: This is an application by the plaintiff, Geneva Finance Ltd (Receiver and Manager Appointed), to strike out the defendants' counterclaim. I begin by noting that, having regard to the matters referred to in the affidavit of Andrew John Mason sworn 28 February 2001, the time limited for making the application will be extended in the manner proposed.
2 It will be useful to look briefly at the nature of the dispute between the parties.
3 The plaintiff was engaged in the business of raising money by the issue of debenture stock and lending the money so raised to borrowers. The defendants were partners carrying on the business of accountants under the firm name of Horwath and Horwath.
4 The plaintiff pleads in par 3 of its substituted amended statement of claim that by a contract concluded in or about April 1986 between the plaintiff and the defendant firm, the plaintiff agreed to appoint the defendants as its auditors. This contract is described in the claim as "the audit contract".
5 The plaintiff pleads in par 5 of the claim that there were express or, alternatively, implied terms of the audit contract that the defendant firm would conduct audits of the plaintiff company pursuant to and in accordance with the provisions of the Perpetual Trust deed and with reasonable standards of care, skill and diligence. Further, the defendant firm owed the plaintiff a duty of care to exercise reasonable standards of care, skill and diligence in the discharge of its duties.
6 The plaintiffs plead in par 9 of the claim that in order for the defendant firm to exercise reasonable standards of care, skill and diligence, they were required to and ought to have prepared an adequate audit plan based on a detailed knowledge of the plaintiff's business, obtained an understanding of the plaintiff's system of internal controls, prepared an adequate written audit programme setting forth the procedures that were required to implement the audit plan including steps to confirm the existence and accuracy of the loan balances.
7 The plaintiffs go on to say that the defendant firm prepared various reports in the years subsequent to the making of the audit contract. The plaintiffs say further that in breach of the audit contract the defendant firm ought to have but failed to conclude that the profit and loss account and the balance sheet of the plaintiff company did not give a true and fair view of the state of affairs of the plaintiff at various times in that the provision
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- for bad and doubtful debts was inadequate. Certain particulars are provided in that regard including an allegation that the defendant firm ought to have but failed to conclude that the profit and loss account and the balance sheet were such that the auditors could not form an unqualified opinion.
8 The plaintiffs say also that the defendant firm was in breach of its duty of care to exercise reasonable care, skill and diligence. Further, the work done by the defendant firm amounted to representations that the plaintiff was not in breach of the trust deed and that its financial statements were a true and fair statement of the plaintiff's financial position. The plaintiffs say that in making such representations, the defendant firm were engaged in conduct which was misleading or deceptive or likely to mislead or deceive, contrary to the provisions of the Fair Trading Act.
9 The defendants by their reamended defence and counterclaim dated 12 December 2000 do not admit the allegations set out in par 3 of the claim. It follows that they do not admit that the plaintiff agreed to appoint the defendant firm as its auditors by a contract concluded in or about April 1986. Further, the defendants deny the allegations in par 5 of the claim, that is to say, they deny that there were express or, alternatively, implied terms, of the audit contract that they would conduct audits in accordance with the trust deed and reasonable standards of care, skill and diligence. They go on to say that if, which is denied, there were terms as alleged, they complied with and/or fulfilled all express and implied terms at all material times.
10 As to par 9 of the claim, the defendants deny that the duties alleged arose and say that, if, which is denied, the duties alleged arose, the defendants fulfilled any and all such duties. The defendants deny that their reports amounted to representations of the kind alleged or that the plaintiff placed reliance upon the same in a manner which might give rise to liability under the Fair Trading Act.
11 It is against this background that one comes to the counterclaim.
12 The defendants plead at par 168 that, "If, as the plaintiff alleges in par 3 of the statement of claim, there was an audit contract, which is not admitted, then it was an implied term of the audit contract," that the plaintiff would attend to various matters including the keeping of such accounting records as would correctly record and explain the financial position of the plaintiff and the keeping of accounting records in such
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- manner as would enable the preparation from time to time of true and fair accounts of the plaintiff.
13 The defendants go on to say in par 169 that further, or in the alternative, the plaintiff intended and knew, or ought to have known, that the defendants would rely on documents and statements provided to them and would be induced by them, in carrying out any audits. Particulars of reliance include reference to the notion that the documents and information provided by the plaintiff caused the defendants to determine, inter alia, "the extent of inquiries and tests, and the level of materiality, required to perform their duties and form an opinion".
14 This approach is applied to various designated periods during which the defendants were carrying out work for the plaintiff. For example, the defendants plead in respect of the first period that the plaintiff represented that the period A loans were likely to be repaid to the plaintiff and that the provision for bad or doubtful debts specified in the relevant financial statements was adequate. The defendants say that they acted in reliance upon these representations and induced by them "determined, inter alia, the extent of inquiries and tests, and the level of materiality, required to perform their duties and form an opinion".
15 The defendants say further that "if" in all the circumstances, the defendants should have done any of the things that the plaintiff alleges were required of the defendants to discharge any actual duties determined by this Honourable Court to have been owed by the defendants to the plaintiff, and the plaintiff had not made the representations in question, then the defendants would have done all of the things necessary to discharge each and every actual duty owed by the defendants to the plaintiff.
16 The defendants say that further, or in the alternative, if, as the plaintiff alleges the period A loans were unlikely to be repaid and the provision for bad or doubtful debts was entirely inadequate, then the plaintiff breached the implied terms relied upon by the defendants in failing to keep accounting records which correctly recorded and explained the financial position of the plaintiff.
17 The defendants say also that if, as the plaintiff alleges, the period A loans were unlikely to be repaid and the provision for bad or doubtful debts was inadequate in breach of its duty of care, the plaintiff was negligent in making the period A representations.
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18 The defendants say that by reason of the matters set out in the counterclaim the defendants have suffered loss or damage and are likely to suffer further loss or damage. Particulars in that regard include reference to the amount of any judgment (including interest and costs) for the plaintiff against the defendants in the original action and the defendants' costs of defending the original action and prosecuting the counterclaim.
19 It will be apparent from this overview of the pleadings that in essence the plaintiff advances a claim for breach of the contract of audit on the ground that the auditors failed to identify that inadequate provision had been made for doubtful and bad debts. The defendants do not admit entry into the audit contract and thus do not concede that there was in fact an audit contract entered into. There is a denial of the terms which the plaintiff pleads were the terms of the audit contract accompanied by a plea that, in any event, if the terms were as alleged, they were complied with.
20 Put shortly, the defendants deny the terms of the contract, they deny that they were subject to duties of the kind alleged, but in each case the defendants plead in the alternative that they fulfilled their obligations. Significantly, however, the defendants do not say what they in fact did in relation to any of the audit activities in question. This is permissible in terms of a statement of defence to the claim but may have consequences for the proper scope of a counterclaim.
21 It is apparent that three causes of action are asserted in the counterclaim. The defendants say that if, which is denied, there was an audit contract, certain terms contended for by the defendants should be implied into it, this allegation being accompanied by a further assertion by the defendants that the plaintiff was in breach of the terms contended for by the defendants. In other words, as to the first cause of action, the general thrust of the counterclaim is breach of contract arising from implied terms.
22 The second cause of action is concerned with an allegation that the plaintiff owed to the defendants a duty of care because of the relationship between the parties and the plaintiff was in breach of the duty of care in regard to the provision of information and accounts to the defendants.
23 The third cause of action arises under the Trade Practices Act and consists of an allegation that the plaintiff provided information amounting to representations as to a certain state of financial affairs that was misleading and deceptive and upon which the defendants are said to have
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- relied to their detriment with the result that they are entitled to recover damages from the plaintiff.
24 Each of the causes of action proceeds from the premise that the plaintiff owed duties to the defendants with the consequences that the defendants did not do something they might otherwise have done, with the result that they are entitled to compensation. The amount of compensation is to be measured by reference to any liability for damages or legal costs imposed upon the defendants in respect of the claim being advanced by the plaintiff. An assumption underlying each of the causes of action is that the plaintiff's financial affairs were affected by the presence of irrecoverable loans and that these were the subject of inadequate provision or description in the financial information and statements provided by the plaintiff to the defendants.
25 It appeared to be common ground at the hearing before me that the structure of the defendants' pleading was affected by the decision of the High Court in Astley & Ors v Austrust Ltd (1999) 161 ALR 155. In that case the High Court held that an award of damages could not be reduced for a defendants' contributory negligence where the defendant is liable in contract. In other words, an alleged failure on the part of the plaintiff to take adequate care for its own protection was not a matter which could affect the contractual liability, if any, of the defendants.
26 The High Court indicated that reliance on an implied term in contract should not be defeated by the recognition of a concurrent obligation under the law of negligence. The contract defines the relationship of the parties. The contract should declare completely and exclusively what the legal rights and obligations are in the parties' contractual dealings.
27 The High Court went on to note that there are conceptual and practical differences between a cause of action in contract and a cause of action in negligence. The law of negligence should not necessarily have any say in regulating the relationship of the parties to the contract when the parties can bargain away or limit the terms of the contract as they choose. In the absence of some contractual term to the contrary, there was no reason of justice or sound legal policy which should prevent the claimant in that case from recovering all the damage that was causally connected to the solicitors' breach, even though the claimant contributed to the damage that it suffered.
28 Counsel for the plaintiff in the present case accepted that the scope and application of this ruling to the circumstances of the present case was
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- a matter which should properly be left to the trial of the action. He recognised, by implication, that by a skilfully drawn pleading it was open to the defendants to raise as a contested issue at the trial the question of whether the plaintiffs were wholly or partly responsible for the alleged loss as a consequence of various shortcomings in their own internal procedures and presentation of information to the auditors. Nonetheless, counsel for the plaintiff contended by the grounds of objection set out in the chamber summons relied upon by the plaintiff, and by his submissions at the hearing before me, that the defendants' counterclaim, as presently formulated, was defective in that it did not disclose a reasonable cause of action or, alternatively, it could prejudice, embarrass or delay the fair trial of the action.
29 The first proposition relied upon by counsel for the plaintiff was the precept that a party cannot approbate and reprobate, that is to say, in the context of the present proceedings, it was not open to the defendants to deny the existence of the audit contract relied upon by the plaintiff on the one hand and then, in a counterclaim, sue for damages for breach of a contract of audit containing implied terms different to the terms of the contract contended for by the plaintiff.
30 Counsel for the plaintiff placed reliance upon Express Newspapers PLC v News (UK) Ltd & Ors [1990] 1 WLR 1320. In that case the plaintiff published an article in its newspaper the Daily Express based on an exclusive interview. The first defendant published a report of the same story in its newspaper the Daily Star. The plaintiff brought an action for breach of copyright in respect of the report and was met with a defence that there was a press custom of adopting news stories appearing in other newspapers. The defendant also advanced a counterclaim that the plaintiff had published a story in one of its newspapers similar to an article published in the Daily Star.
31 The plaintiff obtained summary judgment on its claim with an order for an inquiry into damages. On the first defendant's claim for summary judgment on the counterclaim the Court held, in giving judgment for the defendant, that although the plaintiff had an arguable defence to the counterclaim in that it might establish the existence of a press custom of adoption of news stories, the plaintiff's resistance to judgment on the counterclaim was wholly inconsistent with its own claim that on legally indistinguishable facts there was no arguable defence to a claim for breach of copyright.
32 Browne-Wilkinson VC had this to say at page 1329:
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- "The fact is that if the defences now being put forward by the defendants in relation to the 'Daily Star' article are good defences to the Ogilvy case, they were and are equally good defences to the claim by the 'Daily Express' against 'Today' newspaper relating to the Bordes claim. I think that what Mr Montgomery describes as what is sauce for the goose is sauce for the gander has a rather narrower legal manifestation. There is a principle of law of general application that it is not possible to approbate and reprobate. That means you are not allowed to blow hot and cold in the attitude that you adopt. A man cannot adopt two inconsistent attitudes towards another: he must elect between them and, having elected to adopt one stance, cannot thereafter be permitted to go back and adopt an inconsistent stance.
To apply that general doctrine to the present case is, I accept, a novel extension. But, in my judgment, the principle is one of general application and if, as I think, justice so requires, there is no reason why it should not be applied in the present case."
33 The plaintiff also placed some reliance upon certain rules of pleadings. Order 18 r 2 of the Supreme Court Rules provides that a defendant who alleges that he has any claim against a plaintiff may, instead of bringing a separate action, make a counterclaim in respect of that matter. Order 18 r 2(2) provides that, "Rule 1 shall apply in relation to a counterclaim as if the counterclaim were a separate action and as if the person making the counterclaim were the plaintiff and the person against whom it is made a defendant." The relevant rule goes on to provide that a counterclaim may be proceeded with notwithstanding that judgment is given for the plaintiff in the action or that the action is stayed, discontinued or dismissed.
34 Order 20 r 11 deals with the question of "departure". It provides that a party shall not in any pleading make any allegation of fact, or raise any new ground of claim, inconsistent with a previous pleading of his.
35 It is apparent from the decided cases bearing upon these rules that a counterclaim is substantially a cross-action, not merely a defence to the plaintiff's claim. It must be of such a nature that the Court would have jurisdiction to entertain it as a separate action, and must be treated for all purposes as an independent action. If, after the defendant has pleaded a counterclaim, the action of the plaintiff is for any reason stayed, discontinued, or dismissed, the counterclaim may nevertheless be
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- proceeded with. Nonetheless, the issues of fact raised by the claim and counterclaim should as a rule be tried together as that was the defendant's object in pleading the counterclaim.
36 In their respective reviews of the decided cases at the hearing before me, counsel on both sides explored the implications of the rule against departure. Counsel for the defendants submitted that the rule against departure does not operate to prevent a defendant from pleading in a counterclaim matter inconsistent with what he has pleaded in his defence. Accordingly, a defendant may in his defence deny an agreement by the plaintiff, and, by counterclaim, allege that if there was such an agreement, the plaintiff committed a breach of it: The Peninsula and Oriental Steam Navigation Co v Britnell & Ors (1892) 18 VLR 580; Northern Territory Housing Commission v Territory Bricks Pty Ltd (1983) 71 FLR 273.
37 Counsel for the plaintiff, on the other hand, sought to distinguish cases of this kind from the situation in the present case and the rule enunciated in the Express Newspapers case. It might be permissible, pursuant to a plea in the alternative, to contend for different consequences if an agreement is found to exist, but such an approach cannot be translated to the circumstances of the present case where the defendants not only deny the existence of the agreement but also suggest that if an audit contract was entered into, then it contained implied terms that do not necessarily equate to the contractual terms contended for by the plaintiff. In such a case, the defendants could not approbate and reprobate.
38 Browne-Wilkinson VC described the application of the principle relied on by the plaintiff as being possibly an innovation, and it therefore seems to me that care must be exercised the application of that principle, especially in circumstances where the pleading in question is arguably embarrassing and may have to be repleaded in any event. It does seem to me, however, that the presence of the principle concerning approbation and reprobation does lend support to the plaintiff's contention that the counterclaim as presently formulated should be struck out as embarrassing and as one which may prejudice the fair trial of the action.
39 It is apparent from the rules of court and the decided cases that the counterclaim must be regarded as a separate and independent action. It is certainly true that in some cases where the tenor of the counterclaim is closely related to the facts and matters set out in the statement of defence, including admissions as to matters pleaded by the plaintiff, that the various documents can be read together so that the defendants are in a
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- position to rely upon a contact which is said to have been entered into by the parties by way of counterclaim.
40 In the present case, however, the defendants do not directly admit, even as a plea in the alternative, that there was an audit contract of the kind contended for by the plaintiff. They seem to acknowledge that audit activity did take place pursuant to contractual relations, but it is not entirely clear from the counterclaim, as presently formulated, as to what the exact nature of the audit contract is said to be on the defendants' case. Accordingly, I consider that the counterclaim in its present form is embarrassing and should be struck out.
41 Further, and in any event, being another criticism advanced by counsel for the plaintiff at the hearing before me, the counterclaim, as presently formulated, does not plead with sufficient clarity the material facts upon which the causes of action in the counterclaim are based.
42 This is borne out by an examination of par 168 of the counterclaim in which the defendants commence by saying that if, as the plaintiff alleges in par 3 of the statement of claim, there was an audit contract, which is not admitted, then it was an implied term of the audit contract that the plaintiff would keep such accounting records as would correctly explain the financial position of the plaintiff and keep its accounting records in such manner as would enable the preparation of true and fair accounts.
43 It is apparent from a plea in that form that the defendants are not necessarily conceding that they are speaking of the audit contract alleged by the plaintiff. The decided cases undoubtedly reveal that it is not necessarily inconsistent for a defendant to deny the existence of a contract or to take issue with an interpretation of a contract contended for by the plaintiff and then, as a plea in the alternative (in its counterclaim or otherwise) to assert that if the contract in question is found to exist, the true meaning and consequences of the agreement are not as contended for by the plaintiff. In the present case, however, in seeking to set up in their counterclaim causes of action supposedly arising from audit arrangements made with the plaintiff, the defendants have not pleaded material facts sufficient to amount to breaches of contract or breaches of obligations imposed by statute or common law.
44 If the defendants are not prepared to admit that an audit contract of the kind contended for by the plaintiff was made as alleged, then they are obliged to plead as material facts the circumstances relevant to the making of some other contract, including reference to when the contract in
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- question was entered into, the identity of the relevant parties, the nature of the consideration, and the terms of the contract. They are also obliged to plead the material facts that allegedly constitute a breach of the contract contended for by the defendants. The counterclaim in its present form is embarrassing because these matters are not made clear.
45 Similar criticisms can be advanced in respect of the defendants' position in its counterclaim concerning alleged breaches of duty by the plaintiff at common law. The defendants must set out affirmatively the facts and matters which are said to give rise to the alleged duties of care and to do so, by the pleading of material facts, in a manner which is sufficient to acquaint the plaintiff with the case to be met at trial. To my mind, it is not sufficient for the defendants to say in general terms that the plaintiff's procedures were inadequate or to allege that the plaintiff's practices influenced the kind of tests and inquiries conducted by the defendants in the course of an audit. If the underlying allegation goes essentially to the recoverability of amounts owing to the plaintiff, then material facts bearing upon that central factual issue should be pleaded.
46 Further, the defendants must plead material facts that establish that the alleged breaches by the plaintiff of the audit contract relied upon by the defendants caused the loss and damage complained of. In this case, the loss and damage complained of in the counterclaim relates to the loss that might be experienced by the defendants in the event of the plaintiff's claim against the defendants being successful. However, in circumstances where it seems that the terms of the contract relied upon by the plaintiff are said to be different from the terms being relied upon by the defendant, it becomes difficult to accept that the defendants' liability for breaches of the audit contract in the original contract arose by reason of, or were caused by, the breaches of the plaintiff pleaded by the defendants in the counterclaim. In other words, the material facts pleaded do not, on the face of the pleading, sufficiently establish a causal link between the breaches and the loss and damage pleaded in the counterclaim, bearing in mind that the counterclaim must be regarded as a separate and independent cause of action. To that extent also, the pleading is embarrassing and should be struck out. It may be that the necessary causal link can be set out in the course of repleading.
47 The plaintiff went on to suggest that there were various other features of the counterclaim in its present form which made the pleading both embarrassing and likely to prejudice or delay the fair trial of the action.
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48 The plaintiff said in regard to pars 172 to 182 of the counterclaim and the various facts and matters alleged in support of the defendants' claim for relief in respect of the period A representations that the case to be met was not made clear. The pleading suggested that the defendants intended to set up a case that the financial statements and information provided by the plaintiff disguised the underlying reality that the provision for bad or doubtful debts was not adequate and that many loans were not recoverable. It was not made clear, however, in what way the information provided amounted to a misrepresentation of the true situation and there was a lack of particularity as to what internal systems of the plaintiff were inadequate and as to what loans in particular were bad or doubtful. This lack of particularity made it difficult, if not impossible, for the plaintiff to understand the related allegation that because of the information provided by the plaintiff the defendants were influenced in some way to put in place a less comprehensive set of audit tests and inquiries.
49 I consider that the plaintiff's objection in regard to this aspect of the matter is persuasive and that the defendants' counterclaim in respect of the paragraphs in question is embarrassing accordingly and should be struck out, with leave to replead.
50 The plaintiff referred also to shortcomings in regard to the plea that the period A representations were false in that the plaintiff, by its agents or servants, Shillington or Jones, knew the representations were false, or made them with reckless disregard for whether they were true or false. In my view, the material facts in support of this allegation have not been pleaded sufficiently and the counterclaim is embarrassing in that regard also.
51 The plaintiff referred also to a plea of the kind exemplified by par 179 concerning the performance of "duties determined by this Honourable Court to have been owed by the defendants to the plaintiff". I consider that a plea in this form is embarrassing and should be struck out. The issue in that regard is related to the issues mentioned earlier concerning the obligation of the defendants to plead, albeit in the alternative, the exact form of the audit contract they contend for and the nature of the terms forming part of it.
Summary
52 For the reasons given earlier, I consider that the counterclaim as presently formulated is embarrassing in various respects and may
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- prejudice or delay the fair trial of the action. Accordingly, the counterclaim will be struck out, but with leave being allowed to the defendants to replead. I will hear from the parties as to the precise form of orders required to carry these rulings into effect.
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