REFCO INC v. TROIKA INVESTMENT LTD AND ANOTHER

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JUDGMENT

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Kempster, JA :

1. This is an appeal by the second defendants only from a reserved judgment of Liu J given on 15 February 1990 whereby he adjudged them, as well as the first defendants, liable to the plaintiffs in the sum of US$7,165,815.66 together with interest and dismissed the counter-claim of the first defendants. A Respondents' Notice was filed on 10 May 1990. We gave leave to amend it in the course of argument.

2. At all material times the plaintiffs, Refco Inc. ("Refco"), formerly called Ray. E Friedman & Co. and incorporated in accordance of the laws of the state of Illinois, were carrying on the business of commodity, futures and options brokers on the Chicago Mercantile and other commodity exchanges in the United States of America where they were clearing members. The first defendants, Troika Investment Ltd ("Troika") incorporated in accordance with the laws of Hong Kong and a subsidiary of the second defendants, were carrying on business as dealers in commodity and futures options on the Hong Kong Futures Exchange while the second defendants, Tai Fook Finance Co Ltd ("Tai Fook"), also incorporated in accordance with the laws of Hong Kong, were an investment holding company carrying on business here as money-lenders and dealers in foreign exchange. They were not licensed to trade in futures.

3. On or about 23 April 1981, as is common ground, Refco opened a commodity futures trading account in the name of Troika and agreed to accept and execute trade orders on margin from them and their customers, for whose debts Troika were to be liable, at its discretion subject to specific terms and conditions. As has been emphasised in argument this involved numerous formalities.

4. Although not finally pleaded until after the close of the concluding address made on behalf of Refco but found as a fact by the trial judge, at two meetings"which took place during the period January to the end of February 1983 Refco, by Thomas Meyers ("Meyers") their "Chief Financial Officer", agreed with Tai Fook, by Timothy Lam ("Lam"), to clear Tai Fook's trades whether or not effected through accounts in the name of their subsidiaries such as Troika on an omnibus basis for all US commodity exchanges for reward. The judge did not follow the suggestions made by Lord Irvine, for Refco, in his opening and closing addresses respectively that Lam had been acting also for Troika and that there had been a novation of the 1981  agreement to substitute Troika and Tai Fook for Troika alone as the parties unilaterally bound to Refco. It followed that Tai Fook, and only Tai Fook, were liable to Refco for any debts arising from the implementation of this agreement. No formalities were called for. Only after the alleged conclusion of this agreement whereby, apprised of their strong financial position and in the expectation of substantial business to be introduced by Tai Fook Refco conceded preferential commission rates, did any trades take place between Refco and Troika on the account opened in April 1981. Previously Troika had been employing other brokers in Chicago. Once the course of dealing had commenced Refco accepted and executed many such orders placed by Troika. Though questionably "commodities" they included the purchase and sale of contracts hinging on the performance of the "Standard and Poores 500 Index" of US stocks.

5. By close of trading on 16 October 1987 the account showed a debit balance of US$797,263.74 which, by the 19th of that month, had increased to US$4,500,000. That morning Refco sent a telex message to Troika requiring a margin payment of US$6,522,000, over and above the sums paid in response to earlier margin calls, to maintain the open position on the account. To this, by telex, Troika agreed but the payment was not forthcoming. During 19 and 20 October the debit balance in the account sustained a further increase as a result of which Refco liquidated all the open positions at the best prices available on 20 and 21 of the month. The overall net loss then shown on the account payable by Refco to the Chicago mercantile Exchange was US$7,165,815.66 being the amount, together with interest, which Troika and Tai Fook were adjudged respectively and severally liable to pay to Refco pursuant to the terms of the agreement of April 1981 and of that found to have been concluded during the period January - February 1983. It is to be inferred that the judge found the commission rates agreed in 1983 to have become part of the 1981 agreement by reason of the conduct of the parties thereto. As regards Tai Fook this is the finding which is challenged and which constitutes the nub of the appeal.

6. Since paragraph 16(b) of the Re-Re-Amended Points of Claim alleges that the underlying transactions were accepted pursuant to the 1983 agreement only I had difficulty in discerning how Refco could be thought entitled to judgment as against Troika until, in the course of argument, my brother Clough pointed out that in paragraphs 11, 17 and 27(a) of the pleading it is alleged that the transactions were also accepted pursuant to the 1981 agreement.

7. Proceedings were commenced against Troika in Illinois in October 1987; judgment being signed in default on 20 December 1989. The Hong Kong proceedings were commenced against Troika in November 1987 and Tai Fook added on 4 February 1988; following the issue by Troika of an application to stay the Hong Kong action. An affidavit sworn by Mr Carey in support of a mareva application, on the basis of information supplied by Mr Carcione ("Carcione") Refco's "Compliance Officer", showed an appreciation of Troika's lack of adequate resources but made no mention of Tai Fook as a potential defendant. After December 1989 Troika evinced no further interest and took no further part in the action.

8. By their substantive and supplementary Notices of Appeal Tai Fook claim that the learned judge misdirected himself and was wrong in law both in finding that an agreement had been concluded between them and Refco and also that loss and damage had been proved. Alternatively they deny that any such agreement rendered them liable for the debts of Troika as alleged in paragraph 13(a) of the Re-Re-Amended Points of Claim. The judge's exercise of his discretion to allow further amendment to the points of claim betwixt the stirrup and the ground and his approach to discovery in the action and to the evidence relative to quantum of damages are also challenged.

9. As background Tai Fook emphasise, among other matters, the obscurity of parts of the judgment and the protracted difficulties experienced by Refco in settling upon an arguable cause of action against them for the recovery of monies also claimed to be due from Troika; a process euphemistically described by Lord Irvine as "the evolution of the plaintiffs' case". In this regard it may suffice to refer to the judgment of this court in earlier Civil Appeals between the parties, being Nos 46 and 47 of 1988 (unreported), and to liken Refco's claims to a Hydra from which by the date of judgment all but one head, already identified as "the nub of the appeal", had effectively been lopped.

10. The documents show that on 6 April 1981, following earlier discussion, Refco, by Carcione, wrote to Tai Fook, by Lam, regarding the forms to be completed for the opening. of Troika's futures trading account. That letter reads :

They also wrote to Tai Fook, by Lam, on 31 January and 22 July 1983 "regarding a clearing arrangement between Tai Fook Finance Co Ltd and Refco Inc" and a Comex Gold order respectively and to Troika, by Lam, with reference to corporate authorisations on 8 August of that year. they wrote to Troika, by Lam, about gold and silver trades on 13 June 1984. For their part Tai Fook, by Lam, wrote to Refco about trading in London silver and tax matters on 7 July and 14 December 1983 respectively. It would therefore appear that the appearance of Lam, whom Mr Brodie, for Tai Fook, described as the conduit between all parties, as signatory or addressee of a communication rendered the identity of the party on whose behalf he signed or was addressed a question to be resolved by reference to the context.

11. All the formal documents for the account established in 1981 and activated in 1983 were completed in the name of Troika and it is common ground that they and not Tai Fook were the contracting parties in 1981. Every statement was addressed by Refco to Troika from whom tax details were required. Only Troika's board of directors passed or was entitled to pass a resolution authorising trade in commodity futures with Refco on margin.

12. An important document is a letter ostensibly written by Meyers, on behalf of Refco, to Lam, on behalf of Tai Fook, and dated 31 January 1983. According to Refco it constituted or evidenced an offer. It reads :

Provisional agreement had, apparently, been reached between Meyers and Lam on rates of commission in relation to clearing on an omnibus basis and reference is made to a voice-line in the name of Troika but shared with Tai Fook; all in circumstances where, as his testimony discloses, Meyers was unaware of the agreement for an account concluded between Refco and Troika in 1981. But, like Lam, his colleague Carcione, who had introduced him to Lam and, with Meyers, represented the governing mind of Refco and was also present at the antecedent meeting, was. By telex to Refco dated 7 March 1983 Troika relied upon the charge rates specified in the letter of 31 January.

13. By paragraph 12 of the Re-Re-Amended Points of Claim the oral agreement alleged as between Refco and Tai Fook is said to be partly contained in (sic) or evidenced also by telexes dated 25 and 26 February and 7 March 1983. All were sent by Troika to Refco for the attention of Carcione and related to the voice-circuit, to charges for computer input and to a supposed overcharge of commission on a gold contract. The last two telexes expressly referred to the letter of 31 January. There was nothing to suggest, as pleaded, that Troika were acting for or on behalf of Tai Fook. These documents were not relied upon by Refco in this court.

14. On 5 April 1983 Refco notified the Chicago Board of Trade and the Chicago Mercantile Exchange that they were opening an "omnibus" account for Troika. On 17 May they confirmed this information to the Exchange; stating that no other person controlled the trading of the account. All formalities permitting Troika's trades lawfully to be dealt with on the Exchanges were completed. Both the account cover sheet dated 21 April 1981 as well as that dated 23 February 1983 bore the number 20604, referred to the same bankers in New York and named Troika as the account-holders. The former is headed "New Account Cover Sheet" but on the latter document "New" is crossed out and the words "Per Leo Re-open" appear.

15. The critical passage in the oral evidence which, as far as liability is concerned, comprises only that of Meyers, is :

I have no reason to question the trial judge's acceptance of his veracity.

16. For Tai Fook it is submitted that even accepting the truth of Meyers' testimony the evidence compellingly suggests that the 1981 account was kept in suspense pending the negotiation and provisional agreement of commission rates in January 1983 between Refco, by Meyers and Carcione, the latter not being called, and Tai Fook by Lam, who was not called either. Thereafter the necessary formalities required by the US exchanges were completed and the account was activated. It is also submitted that albeit in conversation Meyers and Lam referred only to Tai Fook and the letter of 31 January was addressed to Lam on behalf of and referred to a clearing arrangement with Tai Fook, both Lam, and therefore Tai Fook, and Carcione, and therefore Refco, as is demonstrated by the documents which followed, understood that the principals to the agreement reached were Refco and Troika. In other words this agreement constituted no more than a variation of that concluded in April 1981 and its negotiation followed a like pattern.

17. For Refco it is pointed out that no such case was put to Meyers in cross-examination. Explicable as that may be on the footing that his evidence was at variance with Refco's claim as then pleaded the position was quite different at the late stage when leave was sought and granted further to re-amend the points of claim on the understanding that Refco would not oppose an application to call or recall witnesses. No application was then made by Mr. Brodie to enable him to make good any lacunae in his cross-examination or evidence and to recall Meyers or to call Lam in order so to do. Both Meyers and Lam were available in court.

18. While the effect of tactical decisions made in the course of a hearing may be to deprive an appellate court of evidence which it would welcome it can only act on the evidence it has. Despite the various cogent facts emphasised and arguments deployed on behalf of Tai Fook I am satisfied that the uncontradicted testimony of Meyers conclusively shows that, whether by novation or otherwise and whether Lam was acting only for Tai Fook or also for Troika or other subsidiaries, in early 1983 Refco agreed concessionary commission rates for, inter alios, Troika in consideration of the acceptance by Tai Fook of the liability of a principal in relation to its trades.

per Lord Denning MR In re Vandervell's Trusts (No. 2) (1974) 1 Ch 269 at pp 321 and 322. In substance the Master of the Rolls was repeating a passage which appears on page 9 of Bullen and Leake's Precedents of Pleadings 3rd Ed. The facts alleged in paragraph 12 of the Re-Re-Amended Points of Claim suffice to permit this conclusion. If I am right that an agreement was concluded between Refco and Tai Fook as principals it was not vitiated by subsequent variations in commission rates negotiated between, as I find, Refco, by Carcione, on the one side and Tai Fook and Troika, by Lam and Mr Yu, on the other.

19. Looking again at the documents, including those upon which Refco relied in their pleading, at what had transpired between the three relevant parties and to the requirements of business efficacy there might well, if the parties had not, as I have found, agreed upon a primary liability, have been sufficient material to allow the implication of a term in the clearing agreement concluded during 1983 rendering Tai Fook liable for Troika's debts to Refco as alleged in paragraph 13 of the Re-Re-Amended Points of Claim relied upon below. Since, however, this would involve the assumption of a secondary liability and therefore that of guarantors, which Refco eschew and may well be estopped from contending, I am precluded from making the alternative finding which they seek. I should add that at trial Refco elected not to proceed on a specific claim based on indemnity.

20. In the premises I find that, by the end of the hearing below, Refco's case against Tai Fook had finally and correctly evolved, been proved and adequately been pleaded. I therefore find that Liu J reached the correct conclusion on liability. Further, nothing said in this court persuades me that we can or should interfere with his exercise of discretion to allow late amendment of the plaintiffs' pleading which may well not strictly have been necessary.

21. The remaining matters calling for our consideration are Tai Fook's contentions that the sum adjudged due from them was not adequately proved and that the related discovery given by Refco was inadequate.

22. The calculation of the sum awarded began with the alleged debit balance of US$797,263.74 as at 16 October 1987. This was admitted and adopted by Troika, the account holder, in its Points of Defence, though Tai Fook made no admission. Evidence of the relevant computer records was adduced pursuant to sections 50 and 51 of the Evidence Ordinance (Cap 8). Like evidence was relied upon in relation to "print-outs" showing changes in the account from that date until its liquidation. Witnesses were called from Chicago, New York and Memphis to satisfy the statutory conditions for admissibility. On 17 October 1989 Refco had disclosed the daily and monthly statements rendered to Troika during the whole currency of the account since its activation in February 1983. With certain exceptions these statements, which related to a non-discretionary account, had never been challenged and, by clause 14 of "The Customers' Agreement" Troika, who would also have relied upon these documents to fulfil such obligations to their clients as arose under sections 45 and 45B of the Commodities Trading Ordinance (Cap 250) and generally, were deemed to have accepted their accuracy. The exceptions appear in a communication from Troika dated 20 October 1987. Insofar as those exceptions were pleaded by Troika by way of defence such pleas were subsequently abandoned by Tai Fook. At no stage did Tai Fook or Troika seek an order for the discovery of specific documents and it does not appear, in any event, that further discovery was required "for disposing fairly of the cause or matter or for saving costs" RSC Order 24 rule 8. I accept that in order to comply with their obligations under section 4 of and regulations 1.31 to 1.36 of Part I ("Record Keeping") of the General Regulations under the US Commodity Exchange Act Refco would have been obliged to maintain further records.

23. In the circumstances I cannot accept the contention made in the Notice of Appeal that "the computer print-outs were insufficient to discharge the onus of proof". Again I find that Liu J reached the correct conclusion.

24. I would dismiss this appeal.

Sir Derek Cons, V-P :

25. I agree with my Lord, and for the reasons that he has given, that the learned judge below came to the correct conclusions. I, too, would dismiss the appeal.

Clough, JA :

26. I was initially impressed by Mr Brodie's able arguments in support of the proposition that what transpired between Mr Meyers, on behalf of Refco, and Mr Lam, on behalf of Tai Fook, in January and February 1983 never went beyond mere negotiation and that the only subsequent contractual relationship was between Refco and Troika after Troika accepted the commission rates offered by Meyers in his letter to Lam, on behalf of Tai Fook, dated 31 January 1983. I am also mindful of the fact that this has been in many respects a limping action in the course of which Refco has been searching for a sound legal basis for its belated claim against Tai Fook. However, for the reasons given by my Lord Kempster I am in the end wholly persuaded that Liu J's decision was sound in law and makes commercial sense. I therefore agree that this appeal should be dismissed.