Re Omni Secs Ltd (No 3)

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 14 October 1998
• Court: Grand Court (Cayman Islands)
• Date: 14 October 1998

Grand Court

(Smellie, C.J.)

IN THE MATTER OF OMNI SECURITIES LIMITED (No. 3)

R.H. Hildyard, Q.C. and D.T.J. McCahill for the plaintiff;

M.J. Brindle, Q.C. and N.R.L. Clifford, for the first to seventh, ninth and tenth defendants;

The eighth defendant did not appear and was not represented.

Cases cited:

(1) -Argentine Holdings (Cayman) Ltd. v. Buenos Aires Hotel Corp. S.A., 1997 CILR 90.

(2) -Bank of Credit & Commerce Intl. (Overseas) Ltd. v. Price Waterhouse, [1997] BCC 584; [1997] T.L.R. 60, considered.

(3) -Banque de Paris et des Pays-Bas (Suisse) S.A. v. de Naray, [1984] 1 Lloyd”s Rep. 21, dicta of Ackner, L.J. applied.

(4) -Barings PLC v. Coopers & Lybrand, [1997] 1 BCLC 427; [1997] BCC 498, considered.

(5) -Berg Sons & Co. Ltd. v. Adams, [1993] BCLC 1045; [1992] BCC 661, considered.

(6) -Caparo Indus. PLC v. Dickman, [1990] 2 A.C. 605; [1990] 1 All E.R. 568, applied.

(7) -Cribb v. Reed, 1997 CILR N–5, dicta of Patterson, Ag. J. applied.

(8) -Deloitte Haskins & Sells v. National Mutual Life Nominees Ltd., [1993] A.C. 774; [1993] 2 All E.R. 1015, considered.

(9) -Drummond-Jackson v. British Medical Assn., [1970] 1 W.L.R. 688; [1970] 1 All E.R. 1094.

(10) -Galoo Ltd. v. Bright Grahame Murray, [1994] 1 W.L.R. 1360; [1995] 1 All E.R. 16, applied.

(11) -Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., [1964] A.C. 465; [1963] 2 All E.R. 575.

(12) -Henderson v. Merrett Syndicates Ltd., [1995] 2 A.C. 145; [1994] 3 All E.R. 506, considered.

(13) -J.E.B. Fasteners Ltd. v. Marks Bloom & Co., [1983] 1 All E.R. 583, dicta of Donaldson, L.J. applied.

(14) -National Westminster Bank PLC v. Daniel, [1993] 1 W.L.R. 1453; [1994] 1 All E.R. 156, followed.

(15) -Smith v. Eric S. Bush, [1990] 1 A.C. 831; [1989] 2 All E.R. 514, dicta of Lord Griffiths applied.

(16) -Wenlock v. Moloney, [1965] 1 W.L.R. 1238; [1965] 2 All E.R. 871, dicta of Danckwerts, L.J. applied.

Legislation construed:

Grand Court Rules, O.14, r.12:

‘(1) Where in an action to which this rule applies a defence has been served by any defendant, that defendant may, on the ground that the plaintiff”s claim has no prospect of success or that the

plaintiff has no prospect of recovering more than nominal damages, apply to the Court for the plaintiff”s claim to be dismissed and judgment entered for that defendant.

(2) An application under this rule may not be made on the ground that part only of the plaintiff”s claim has no prospect of success or that a plaintiff has no prospect of recovering more than nominal damages in respect of part only of his claim.’

r.13(3): ‘A plaintiff may show cause against an application under rule 12 by-

(a) filing and serving a reply; or

(b) filing and serving an affidavit in reply.’

O.18, r.19(1): ‘The Court may at any stage of the proceedings order to be struck out or amended any pleading or the indorsement of any writ in the action, or anything in any pleading or in the indorsement, on the ground that-

(a) it discloses no reasonable cause of action or defence, as the case may be . . . .’

Civil Procedure-judgments and orders-summary judgment-defendant”s application-under Grand Court Rules, O.14, r.12, defendant to show plaintiff”s claim unsustainable-no dismissal if plaintiff shows more than faint possibility of success in at least part of claim-some assessment of plaintiff”s evidence filed under r.13 necessary

Companies-auditors-professional negligence-auditor liable for negligent misstatement if (a) issues report in knowledge recipient will rely on it, (b) recipient does so rely, and (c) economic loss results

The plaintiff company in liquidation brought an action for damages against the defendants for breach of contract and negligent misstatement.

The first defendant”s predecessor firm, DH&S (Cayman), was responsible for issuing the plaintiff”s audit reports. Its role was confined to signing financial statements and accounts which had been prepared on the basis of primary auditing and fieldwork by its affiliated firm, DH&S (Zurich), now D&T A.G., the eighth defendant. The other defendants were partners in DH&S (Cayman) and the existing Cayman firm, D&T (Cayman).

The plaintiff claimed that DH&S (Cayman) had failed to alert it to the fact that there were insufficient funds from which to meet payments made to its parent company as dividends, resulting eventually in its winding up.

All the defendants save D&T A.G. applied for the plaintiff”s claims to be dismissed and judgment entered in their favour under, inter alia, O.14, r.12 of the Grand Court Rules, on the basis that these claims had no prospect of success.

They submitted that (a) the plaintiff was required to show that it had a realistic prospect of success in order to proceed with its claims; (b) the court would need to examine the evidence to assess whether such a prospect existed; (c) the plaintiff had no tenable claim in contract, since it had no agreement with DH&S (Cayman) that the local firm would conduct the audit, and it had liaised with the Swiss firm regarding the preparation of the accounts; and (d) nor would it succeed in tort, since there was no evidence that it had relied on the audit or that such reliance had ultimately caused the company to be wound up.

The plaintiff submitted in reply that (a) since the defendants had to prove that its claims had no prospect of success, it need only show that there was a triable issue and that it had a chance of recovering more than nominal damages to defeat their application; (b) there was no need, for

this purpose, for the court to examine the evidence in support of its claims; (c) its contractual relationship with DH&S (Cayman) was evidenced by minutes of its board meetings referring to that firm”s appointment as auditor; and (d) having signed the unqualified audit report, DH&S (Cayman) had assumed professional responsibility for its contents and was liable to the plaintiff as the intended recipient who clearly intended to rely on the report.

Held, dismissing the application:

(1) Under O.14, r.12 of the Grand Court Rules, the defendants were required to show that the plaintiff”s claims were unsustainable in order to obtain their dismissal. However, in common with the test applicable to a plaintiff”s application under O.14, r.1, the qualification of reasonableness was implicit so that if the plaintiff could show more than a faint possibility of succeeding on at least part of its claim, the defendants” application would fail. To ascertain whether there was a fair and reasonable chance of success, and without usurping the function of the trial judge, the court would need to make some assessment of the evidence supporting the plaintiff”s claims as it would do in respect of an alleged defence upon an O.14, r.1 application. Indeed, this was the purpose of filing such evidence under r.13 (page 279, line 23 – page 280, line 40; page 291, lines 26–28).

(2) Whilst the evidence appeared to show no relationship of privity between DH&S (Cayman) and the plaintiff, the court could not conclude, on a summary basis, that this cause of action had no real prospect of success, since the plaintiff”s claim in contract relied on evidence of its board meetings, the significance of which could not be assessed without full discovery and the examination of witnesses. Accordingly, this claim would not be dismissed (page 284, lines 16–34; page 284, line 42 – page 285, line 4).

(3) The defendants would be liable for economic loss suffered by the plaintiff if it could be shown that they had issued the report containing negligent misstatements in the knowledge that the plaintiff would rely on it in its business dealings, that the plaintiff did in fact rely on it and that it suffered consequential detriment. Other tests of liability, involving proof of ‘a relationship of proximity’ or the ‘assumption of professional responsibility’ were merely different ways of expressing the requirement of knowledge of the recipient”s intended reliance. On a summary examination of the evidence, it seemed unlikely that the defendants, having issued an unqualified audit report on which the plaintiff would presumably wish to rely, would avoid liability because a sister firm had carried out the basic work. The inter-relationship of the firms would clearly be relevant to liability in tort, which could exist irrespective of liability in contract, and required further examination (page 281, line 25 – page 282, line 15; page 285, lines 21–37; page 286, lines 15–31; page 287, line 41 – page 288, line 28).

(4) The extent of this liability depended on the plaintiff”s proving that the breach of contract or negligence was the dominant or effective cause of its loss, and could not be assessed on a summary basis. It was likely that even if the plaintiff”s claim for losses resulting from continued trading in reliance on the audit did not succeed in full, it had a reasonable chance of obtaining damages for the alleged unlawful payment of dividends. Accordingly, the court would not dismiss this claim either (page 286, line 45 – page 287, line 13; page 290, lines 4–13; page 291, lines 9–24).

SMELLIE, C.J.: This is an application by the first to seventh, ninth
and tenth defendants (‘the applicants’) to dismiss the claims of the
25	plaintiffs. The individual applicants are, or were at material times,
partners within the first applicant, DH&S (Cayman) or its predecessor
firms. By a judgment delivered on August 16th, 1998 the application was
dismissed. These are the reasons for that judgment.
The application was made pursuant to the Grand Court Rules, O.18,
30	r.19 or alternatively O.14, r.12, but was based primarily upon O.14, r.12.
It relied primarily upon O.14, r.12 because the test-as postulated by the
applicants-which the plaintiff was required to meet under it was to show
a case which had a realistic prospect of success. Under O.18, r.19, by

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