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24 April 2018
In defending themselves against a claim for professional negligence brought by a former client, two law firms and the individual solicitor recently successfully applied to strike out the entire claim against them, with costs awarded on a more generous ('indemnity') basis.(1) The two related judgments are a salutary reminder of the need for a plaintiff to plead all material particulars, failing which there is a real prospect that their claim could be struck out as plainly defective. A plaintiff in these circumstances (as happened in this case) should not expect a court to allow amendments to cure an inherent defect in a claim. The two judgments – while at first instance – have caught the attention of the legal profession in Hong Kong and send a clear message that flawed claims against professional advisers are liable to early challenge and dismissal without trial.
The plaintiff was apparently a private investor and beneficial owner of (among other things) a British Virgin Islands company. In July 2011 the plaintiff retained the first defendant – a law firm – to apply for the variation of an order restraining him from dealing with moneys and investments in an account in the company's name. The plaintiff claimed for losses allegedly suffered as a result of legal advice given in relation to a series of applications to vary the restraining order.
The first and second defendants were separate law firms in Hong Kong and the third was the handling solicitor. He was a consultant with the first defendant until on or about July 29 2011 and a sole proprietor, then partner of the second defendant thereafter.
On or about July 29 2011 the second defendant was retained by the plaintiff to file an application to vary the restraining order. The court allowed certain variations and ordered or permitted the plaintiff to terminate or dispose of – or request the bank to terminate – certain investments held in the company's account within five trading days.
Apparently, following (among other things) the third defendant's advice to comply with the variation order or face potential contempt of court, the plaintiff arranged for the disposal of certain investments but later claimed that this was premature. The loss allegedly suffered by the plaintiff was a loss in the value of the investments.
The defendants applied to strike out the plaintiff's claim on the basis that it disclosed no reasonable cause of action. The issue for the court's determination was whether the plaintiff's statement of claim was inherently bad, such that it should be struck out.
In the first strike-out application the first defendant argued that, even on the plaintiff's pleaded case, it was no longer retained by the time the purported advice was given to him regarding the disposal of the company's investments. In this matter, dates proved to be important. On the basis of the plaintiff's pleaded case, either the first defendant was retained at the material time or it was not.
In the second strike-out application the second and third defendants (the second lawyers retained) argued that the plaintiff's claim was inherently bad because the alleged loss (if any) was that of the company's and the plaintiff's alleged loss (if any) was no more than, for example, a diminution in the value of his beneficial ownership in the company. As such, the company's loss was not his loss. In effect, the point raised was that the plaintiff had, on the facts, no standing to sue for the company's alleged loss.
The first defendant succeeded in striking out the entirety of the plaintiff's claim on the basis that by the time of the relevant application to vary the restraining order, it was no longer retained by the plaintiff. At the material time, the plaintiff had not placed reliance on purported advice given by the first defendant (even assuming, for the sake of argument, that the first defendant had breached a duty to the plaintiff as alleged). Therefore, the plaintiff could not establish a loss as a result of any purported advice given by the first defendant – his claim was inherently bad and should be struck out.
The court appears to have given short shrift to the plaintiff's attempt to distance himself from his own pleaded case by way of an amendment to omit reference to when the first defendant ceased to act for him:
"It remains for me to add that the explanation for the amendment is deplorable. The burden lies on the plaintiff to plead all the necessary elements for his own claim, and when the plaintiff signed the statement of truth, he should not sign it just assuming that some of the facts would not be disputed and thus there was no need for him to treat the statement of claim seriously. Equally deplorable is that on such assumption, he thought that he could then come back later to say that actually he did not mean to verify all the facts therein."(2)
The second and third defendants succeeded in striking out the entirety of the plaintiff's claim on the sole ground that the claim was for "reflective loss" and not permitted in law. Essentially, this became a pleading (drafting) point. In order to get around the prohibition on the plaintiff (as beneficial owner) claiming reflective loss, he had to plead material facts to disapply the prohibition. For the purposes of determining the strike-out application, it was arguable that the company had its own claim against the second and third defendants and, in the absence of any pleading otherwise, the court was unwilling to leave this as a point for determination at trial. Therefore, the claim against the second and third defendants disclosed no reasonable cause of action. The point is made in the judgment:
"In the present case, one of the necessary elements for a viable claim for reflective loss is the justification for disapplication of the principle prohibiting such claim. Not having pleaded all these elements, in a striking out application, the plaintiff cannot be heard to say that despite the incomplete plea, it is the defendant's burden to satisfy the court that such unpleaded elements do not in fact exist."(3)
The judgment also includes an interesting review of the general principle prohibiting a claim for reflective loss and the prima facie arguments as to whether the second or third defendant owed a duty of care to the company itself. In essence, the plaintiff had no standing to bring a claim for the alleged loss and (as the court noted) appeared at one time to "wish to have the cake and eat it". On the one hand, he appeared to wish to make his own claim and, on the other, he had at one time sought to reserve the company's right to bring a claim – the sort of potential for double recovery that the principle prohibiting a claim for reflective loss is designed to prevent.(4) It was this sort of argument that led the court to make an order for costs on an enhanced basis against the plaintiff.
The defendants' applications to strike out the plaintiff's claim were successful. As a result, the claim was dismissed in its entirety.(5)
The two judgments are robust. While they are first-instance decisions, the outcome will be welcomed by professional advisers who find themselves on the receiving end of defective claims – particularly those involving allegations that they failed to carry out a client's instructions, or of wide-ranging omissions (eg, a failure to advise properly).
The judgments ought to serve as a reminder to plaintiffs that the material particulars of a claim must be pleaded and a failure to do so may invite an early application for dismissal with costs consequences.
Further, inherent contradictions in a plaintiff's claim (as highlighted by the first defendant's strike-out application) provide useful grounds for challenge by a defendant's lawyers – for example, dates tend not to lie and, in this case, they demonstrated an inherent defect in the plaintiff's own claim against the first defendant.(6)
Both strike-out applications succeeded on the basis that the plaintiff's claim disclosed no reasonable cause of action. However, the second judgment also refers to the plaintiff's claim as an "abuse of process" (hence the order for indemnity costs against the plaintiff), although this does not appear to have been the formal basis on which the second and third defendants applied to strike out the plaintiff's claim.(7)
For further information on this topic please contact Jessica Wong or David Smyth at RPC by telephone (+852 2216 7000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
(6) Supra note 2. Such defects will not necessarily be cured by an application to amend. In this case, the explanation for the amendment was described as "deplorable". Given that pleadings must be verified by a "statement of truth", such judicial criticism should serve as a reminder to all parties. It is a serious matter if a party makes a false statement in a document verified by a statement of truth without an honest belief in its truth.
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