Weavering v Ernst & Young

• Jurisdiction: Cayman Islands
• Judge: (Quin, J.)
• Judgment Date: 18 March 2014
• Date: 18 March 2014
• Court: Grand Court (Cayman Islands)

Grand Court, Financial Services Division

(Quin, J.)

WEAVERING MACRO FIXED INCOME FUND LIMITED

and

ERNST & YOUNG CHARTERED ACCOUNTANTS, ERNST & YOUNG LIMITED and ERNST & YOUNG

J. Thom, Q.C. and M. Makridakis for the plaintiff;

F. Fenwick, Q.C., M. Mulligan and B. Hobden for the defendant.

Cases cited:

(1) Battersby v. Anglo American Oil Co. Ltd., [1945] K.B. 23; [1944] 2 All E.R. 387, applied.

(2) Chappell v. Cooper, [1980] 1 W.L.R. 958; [1980] 2 All E.R. 463, applied.

(3) Heaven v. Road & Rail Wagons, [1965] 2 Q.B. 355; [1965] 2 W.L.R. 1249; [1965] 2 All E.R. 409, applied.

(4) Kleinwort Benson Ltd. v. Barbrak Ltd., The Myrto (No. 3), [1987] A.C. 597; [1987] 2 W.L.R. 1053; [1987] 2 All E.R. 289; [1987] 2 Lloyd”s Rep. 1; [1987] 1 FTLR 43, applied.

(5) Waddon v. Whitecroft Scovell Ltd., [1988] 1 W.L.R. 309; [1988] 1 All E.R. 996, applied.

Legislation construed:

Grand Court Rules, O.6, r.8: The relevant terms of this rule are set out at para. 40.

Civil Procedure-writ of summons-extension of validity-if extension of writ under GCR, O.6, r.8(2) deprives defendant of limitation defence, court to consider (a) whether good reason for extension to be granted and satisfactory reason for plaintiff”s failure to apply for extension while writ valid; and (b) whether court should exercise discretion to renew writ in all circumstances of case, including balance of hardship-may consider same factors in both stages of test

Civil Procedure-writ of summons-extension of validity-no restriction on what constitutes ‘good reason’ for granting extension, but harder to show good reason after longer delay-no extension if due to plaintiff”s desire to wait before serving writ; its carelessness; or difficulty tracing witnesses or evidence-saving of unnecessary costs and time without prejudice to defendants may be good reason unless plaintiff could have served writ on defendants and agreed for extension of time or applied for extension of proceedings

The official liquidators of an investment fund commenced an action for damages against its former auditors.

The plaintiff company retained the defendants as auditors between 2004 and 2007. Although they did not find any issue with its finances, the plaintiff entered into liquidation in 2009-allegedly because of a Ponzi scheme run by its Chief Operating Officer, which the plaintiff believed the defendants should have discovered when performing the audits. The parties entered into a number of standstill deeds, but the plaintiff later obtained a writ of summons against the defendants on the grounds that they had acted dishonestly, in breach of contract and/or negligently. The defendants alleged that this was in breach of the standstill deeds and brought proceedings in the Grand Court to have the writ dismissed. As the limitation period for the claim relating to the 2004 period was likely to expire before the defendants” challenge would be resolved, the plaintiff obtained a second writ for this claim in case the first writ was found to be invalid. It did not, however, serve this writ, which expired shortly before the Grand Court found that the standstill deeds had not been breached and

that the first writ was valid. The defendants applied for leave to appeal this decision but the limitation period for the 2004 claim expired before leave was granted. The plaintiff therefore made an ex parte application for the validity of the second writ to be extended under the Grand Court Rules, O.6, r.8(2).

The Grand Court (Quin, J.) granted the plaintiff”s application. The court found that as both the writ and the limitation period had expired, the extension would deprive the defendants of an accrued limitation defence. The plaintiff, however, had not served the writ in order to avoid incurring the costs of service and subsequent proceedings, as these would have been unnecessary if the first writ were ultimately found to be valid. There was therefore a good reason for the plaintiff not to have served the writ and, on the balance of hardship, it was preferable that the application be granted. The plaintiff subsequently served the writ on the defendants, which applied for the Grand Court”s order to be reversed and the writ to be struck out.

The defendants submitted that there was no good reason for the extension of the writ”s validity to have been granted. The plaintiff had made a conscious decision to allow the writ to expire and had not made any attempt to preserve its validity (e.g. by either agreeing with the defendants for an extension of time, or by serving the writ and applying to the court for a stay of proceedings). Accordingly, it should not now be entitled to extend it. Further, the plaintiff”s justification of saving costs and time was not well founded as it should have known that the defendants would appeal against any extension.

The plaintiff submitted in reply that the second writ was only a ‘protective measure’ and that it could not have known whether it was necessary to serve it until the dispute over the first writ had been settled. It would therefore have been wasteful to attempt to serve the second writ before that time. Whilst saving costs and time would not always be a good reason to extend the validity of the writ, the plaintiff”s delay was justified as it had saved excess costs without causing any prejudice to the defendants.

Held, striking out the writ:

(1) The writ”s validity should not have been extended. There were three main categories of cases in which an application for an extension could be made: (a) when the writ was still valid and before the limitation period had expired; (b) when the writ was still valid, but after the limitation period had expired; and (c) when both the writ and the limitation period had expired. In the first two categories, the plaintiff would still be able to serve the writ before its validity expired (subject to any difficulties with service) and so no limitation defence had been accrued. As both the second writ and the limitation period for its claim had expired, however, the defendants had accrued a limitation defence against the plaintiff”s claim. Further, the plaintiff had been under a duty to serve the writ promptly and an extension of its validity could only be granted if there

were a good reason for doing so (e.g. because there was a clear and finalized agreement between the parties that service be deferred; or because it was impossible to find, or serve, the defendants-particularly if they were avoiding service). Although there was no limit on what might constitute a good reason, it would be harder to show that there was good reason if service of the writ had been delayed for a longer period. As the defendants had acquired a limitation defence, the court would consider a two stage test before granting an extension under the Grand Court Rules, O.6, r.8(2): (a) whether there was a good reason for the extension to be granted and that there was a satisfactory reason for the plaintiff”s failure to apply for an extension of the writ whilst it had been valid; and (b) whether or not it would exercise its discretion to renew the writ in consideration of all of the circumstances of the case, including the balance of prejudice or hardship. These stages were not ‘watertight compartments’ and considerations could be relevant in both stages (paras. 42–43; para. 52; para. 57).

(2) The plaintiff had failed the first part of the two stage test. A failure to apply for an extension to the validity of the writ would not usually be found to be for good reason if it were due to the plaintiff”s desire to wait before serving the writ (e.g. because it wished to apply for legal aid, draft a statement of claim to serve with the writ, or because its trustees wished to make a Beddoe order); its carelessness; or its difficulty in tracing witnesses or evidence. Although the saving of unnecessary proceedings and costs without any prejudice to the defendants could constitute a good reason for granting an extension, the plaintiff”s actions had not actually saved any costs or prevented delays and, in fact, had actually increased them. Moreover, the plaintiff would have been able to preserve its claim without the risk of extra costs or delays by attempting to reach an agreement with the defendants for an extension of time in which to serve the claim or, if no agreement could be reached, serving the writ and then applying to the court for a stay of proceedings. There was therefore no good reason for the plaintiff”s failure to serve the writ whilst it was valid. Further, the plaintiff had failed to show that there was any satisfactory reason for its failure to renew the validity before the writ had expired. As an extension would deprive the defendants of their limitation defence, it would not be ordered unless there had been, e.g. a ‘very sharp practice’ by the defendants which deceived the plaintiff into inactivity, and no such justification had been shown (para. 43; paras. 52–53; paras. 58–62).

(3) The plaintiff had failed the second part of the two stage test. As it had not had a good reason not to serve the writ whilst it had been valid, there could not be any exceptional circumstances to justify depriving the defendants of their accrued limitation defence. Further, the statement of claim was very serious and claimed a considerable sum in damages; accordingly, the defendants were entitled to proceed on the basis that the second writ was not to be pursued once its initial period of validity

expired. The plaintiff therefore failed the balance of hardship test and it would be inappropriate for the court to order the extension (paras. 52–54; para. 62).

1 QUIN, J.:

Introduction

This is the hearing of the applicants/defendants” summons issued on January 9th, 2014 to set aside my ex parte order dated December 19th, 2013 extending the validity of the writ of summons, filed in these proceedings on May 7th, 2013, until January...