PHILLIP SECURITIES (HK) LTD. v. WONG WAI SHING

HCA11341/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO.A11341 OF 1997

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J U D G M E N T

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The Claim

1. The Plaintiff is a stockbroker. The Defendant was engaged by the Plaintiff as a dealer's representative between 1992 and 1996.

2. The Defendant introduced two clients to the Plaintiff, namely Ms Ng and Mr Leung, who opened accounts with the Plaintiff. The accounts were margin trading accounts. Transactions were carried out on the accounts, instructions were placed with the Defendant by Ms Ng and Mr Leung. Trading loss incurred on these two accounts and these two clients owe the Plaintiff substantial sums of money. Ms Ng owes the Plaintiff $3,890,876.36 and Mr Leung $545,130.21. The Plaintiff obtained judgment against both of them. The Plaintiff is seeking to recover the judgment sums together with interest and costs against the Defendant pursuant to the terms of an Agreement dated 1st December 1993 ("the Agreement") signed by the Defendant and the Plaintiff.

The Agreement

3. When the Defendant joined the Plaintiff in 1992, there was no written agreement between the parties regarding the terms of the engagement. Mr Lee Long Chin ("Mr Lee"), the Director of the Plaintiff, said that when the Defendant was engaged, he told him, among other things, that he would be responsible for the liability of the clients. It was, according to him, an industrial practice that the dealer's representatives would be so responsible. At that time the Plaintiff had about five dealer representatives.

4. In 1993, the Plaintiff was to expand its operation and hired more dealers. In order to standardize the operating procedure, the Plaintiff asked the dealer's representatives to sign the agreement. Mr Lee simply told the Defendant that the document was required to be signed by him and to be returned to the Plaintiff. The Defendant replied that he would want someone to look at the Agreement first before he would return to the Plaintiff. The document was eventually signed and returned by the Defendant.

5. The Defendant's case is that while he was doing trading he was asked by Mr Lee to sign the Agreement, and he denied that he had said he wanted someone else to study the document first. This was disputed by Mr Lee. The Defendant further denied that there was any oral agreement that he would be responsible for the debt of the clients.

Finding on the Agreement

6. As far as the signing of the Agreement is concerned, I accept Mr Lee's evidence. Mr Lee impressed me as a straightforward and truthful witness. When he could not recall something, he would say so immediately. There was no attempt to avoid answering questions or being evasive on the issues.

7. This is a straightforward finding of fact as to whose evidence is more credible. Mr Lee frankly admitted that he was not sure whether the date on the Agreement was already there when the Defendant was asked to sign and he could not recall whether the Defendant signed the document in the presence of the witness. This does not affect the credibility of his evidence or the validity of the Agreement. The document is not one that required to be witnessed. The issue is really whether the Defendant had signed the Agreement.

8. On the issue of credibility of the witnesses, I have to say that the Defendant is not a credible witness. As apparent from many of his answers, such as on the selling of shares, he was prepared to boldly assert something before making concessions later on.

Previous oral agreement

9. It has to be pointed out that neither in the Plaintiff's pleading nor in the witness statement of Mr Lee was there any suggestion of a previous oral agreement between the parties in which the Defendant was being held responsible for the liability of the clients. The Defendant denied that there was such an oral agreement.

10. I accept Mr Lee's evidence that there was indeed such an oral agreement. I accept the explanation given for such a practice was that some brokers were trading on their own but under the names of third parties. It would be unfair if they could get the profit and not held responsible for the loss. After all, they introduced the clients and they knew the background and credit-worthiness of their clients. But the question of the oral agreement is not something that is relevant to the issue before me. The Plaintiff's case is not based on the oral agreement but on the terms of the written agreement.

Oral evidence

11. In the cross-examination of Mr Lee and the evidence-in-chief of the Defendant, attempts were made to show that when the Defendant was asked to sign the Agreement, Mr Lee told him that it was in response to the investigation carried out by the Stock Exchange in relation to the transactions of a client. This was never pleaded in the Defence and Counterclaim or referred to in the Defendant's witness statement. The Defence simply pleads :

"6(a) that the Plaintiff had never explained to the Defendant whether prior to the signing of the Agreement or at any time thereafter, the contents of the Agreement or the reason for signing the same;

(b) notwithstanding the signing of the Agreement, the Plaintiff continued to engage the Defendant as a dealer's representative upon the terms pleaded in para.4 above and continued to pay the Defendant his commission due calculated at the rate pleaded in para.4(c) above."

The witness statement which was served as recently as January 1999 also contained no reference to the so-called investigation by the Stock Exchange. Paragraph 5 of the Defendant's witness statement stated that :

"When I first join to work at the Plaintiff's company, I was not required to sign any document or agreement in writing. On or about 1st December 1993 while I was still working in the Plaintiff's company, the Plaintiff wanted me to sign a written agreement alleging that it was a matter of formality but without explaining the content thereof to me. I signed the said agreement document in good faith."

There was no application to amend the Defence or serve supplemental witness statements. I ruled that such evidence was inadmissible, on the Plaintiff's application, when this matter was raised. I had similarly ruled that the oral evidence adduced by the Plaintiff in the evidence-in-chief of Mr Lee that there was previous set-off of debts of the clients against the Defendant's commissions to be inadmissible. This is a matter that was likewise neither pleaded nor raised in the witness statement.

Clauses 8 & 9

12. Despite the pleaded defence, it is not disputed that the terms of the Agreement impose an obligation on the Defendant to be responsible for the indebtedness of the clients towards the Plaintiff. Clauses 8 and 9 of the Agreement read :

"8. INDEMNITY

The Dealer's representative shall indemnify the Company and keep it indemnified against all damages, liabilities, actions, proceedings, judgements, costs (including legal costs on a solicitor-and-own client basis), claims, demands and any other losses of whatever nature that may be suffered or incurred by the Company in connection with or arising from securities transactions dealt by or through the Dealer's representative in the name of the Company (whether or not the same have been caused by or may relate to any fraud, deceit, negligence, misconduct, breach of contract or default on the part of the Dealer's representative or his/her agent or client").

9. GUARANTEE OF CLIENTS' ACCOUNT

9.1 Without prejudice to clause 8 the Dealer's representative will be fully and personally responsible for the collection of all amounts due from his/her clients and in any case wholly and fully responsible for all amounts due to any or all of them from such clients introduced by the Dealer's representative or his/her agents in relation to business transacted with any or all of them;

9.2 The Company reserves the right and absolute discretion to withhold payment to the Dealer's representative of any commission relating to transactions that have not been finalised and settled.

9.3 The Dealer's representative's liability under this guarantee shall be as that of a principal debtor and the Company and/or its affiliates and/or its clients may at its/their option hold the Company and/or its affiliates and/or its clients may at its/their option hold the Dealer's representative primarily responsible for liabilities incurred by clients introduced by the Dealer's representative or his/her agents in relation to business transacted with any or all of them.

......."

The fact that judgments had been entered against the clients does not affect the liability of the Defendant to indemnify the Plaintiff pursuant to Clauses 8 and 9.

13. There is no dispute that the transactions of Mr Leung and Ms Ng were dealt by or through the Defendant.

Non est factum

14. The Defence that is run by the Defendant is that of non est factum. It is clear from Saunders v. Anglia Building Society [1971] AC 1004 that the plea of non est factum could not be available to anyone who signed without taking the trouble to find out at least the general effect of the document. Nor could it be available to a person whose mistake was really a mistake as to the legal effect of the document. There must be a radical or fundamental difference between what he signed and what he thought he was signing : per Lord Reid.

15. There is no evidence of any misrepresentation by Mr Lee on the nature or content of the Agreement. In the absence of any misrepresentation, I cannot see how it can be said that what the Defendant signed was fundamentally different from what he thought it to be. It was said that he would never have signed the Agreement had he known that he would be liable for the debts of the customers. But the fact is that he did sign the document. The situation is exactly as what Lord Reid had observed.

16. I find the Defendant signed the document voluntarily. The Defendant is clearly well versed with business activities, he has been engaged in the securities trade for eleven years. He started in 1988. Prior to joining the Plaintiff, he had worked in two previous security companies. He is accepted to be one of the best dealer's representative for the Plaintiff in terms of business he brought in for the Plaintiff. According to his own case, the transactions he handled were well over hundred millions of dollars. The Defence of non est factum simply does not exist for the Defendant.

17. The Defence that the Defendant did not know of the existence of the terms of the Agreement that he was liable for the debts of the clients towards the Plaintiff is clearly and equally a false one. The Defendant in cross-examination, by his own admission, stated that there were previous occasions when his commissions payable by the Plaintiff were deducted because of the debts of the clients.

Consideration

18. It is also pleaded that there was no consideration for the Agreement. I have difficulties in understanding this Defence. The duty of the Defendant is a continuous one, new clients were brought in from time to time. Ms Ng was a client introduced by the Defendant in 1994 and 1996 and Mr Leung in 1996. The Defendant earned commissions from the business transactions on these two accounts.

19. The Plaintiff's case is simply that if the Defendant refused to sign the Agreement, then he would not be allowed to carry on with the work. Despite his performance, Mr Lee had no power to make an exception for him. It was the policy of the Plaintiff to have the Agreement signed by the dealer's representatives.

Indebtedness of the two clients

20. In cross-examination, it was questioned why the Plaintiff allowed Ms Ng and Mr Leung to exceed their margin limit. I accept Mr Lee's evidence that warnings had been given to the Defendant on the exposure of the risk. It was to the interest of the Plaintiff as well to ensure that the limits were observed because of the rules of the Hong Kong Stock Exchange. In any event, this aspect has no bearing to the dispute in question. The indebtedness of the two clients were accepted and I accept Mr Lee's evidence that partial repayment by them had been given credit already.

Commission

21. The Plaintiff accepts that a commission of $554,626.20 was due to the Defendant. Under Clause 9.2, the Plaintiff has the right to withhold payment to the dealer's representatives of any commission relating to transactions that have not been finalized and settled. However, there is no evidence that the commissions that were now due to the Defendant are related to the transactions of the two clients.

22. However, the Plaintiff's entitlement to withhold the commission is not disputed by the Defendant. Furthermore, Mr Lee who has been in the securities business in Hong Kong since 1987 is clearly in a position to give evidence on the trade usage of withholding the commission. His evidence on this has not been challenged. In any event, the commission is clearly extinguished by the claim of the Plaintiff against the Defendant.

Lien on the securities

23. The Defendant also has a personal margin account with the Plaintiff. There is a credit balance of $5,247.15 and a number of securities held by the Plaintiff as securities. The Defendant said that the value of these securities as of 23rd January 1998 was $4.7 million. The Plaintiff said that the current value is $990,000. One of the securities was a warrant which had been expired. Mr Lee accepted that the Defendant's solicitors had demanded the return of the securities but the Plaintiff had refused to release them.

24. The Plaintiff clearly has a lien on the securities. Brokers and bankers have a general lien on securities in their hands as between themselves and the customer for the balance due from the customer to the broker : In London and Globe Finance Corporation [1902] 2 Ch 416 at 420 per Buckley LJ .

25. It was said that the Defendant had asked the Plaintiff to sell the shares but was refused. I accept Mr Lee's evidence that the Defendant had never asked the Plaintiff to sell the shares. It is to the Plaintiff's interest to sell and recover the money as well. In June and July 1997, the securities were worth $6 million. However, the risk of selling at that stage was that if the shares were sold, the Plaintiff would be liable if the prices of the securities would continue to rise.

26. One of the securities held by the Plaintiff was a warrant that had expired in December 1998, it was argued that the Defendant could not have allowed the warrant to expire and he must have demanded the Plaintiff to sell the shares before. Despite his earlier evidence, the Defendant agreed in cross-examination that in 1998 he did not ask the Plaintiff to sell the shares. His explanation is that he had no choice in the matter because the Plaintiff was not taking his orders and he did not have an account executive with the Plaintiff to execute his order.

27. I think the Defendant knew he had a choice but instead he was only asking the Plaintiff to return the securities which the Plaintiff was entitled to refuse by reason of the lien. In any event, the Plaintiff had stated in the Reply served in January 1998 that the Defendant was and is free to instruct the Plaintiff to sell the securities subject to the condition that the proceeds be withheld for the purpose of settling the indebtedness. The Defendant has never followed up on the matter.

Other transaction on shares

28. There was also sale of shares in the Defendant's account between January and March 1997. Despite the Defendant's claim that he did not sell them, the evidence is clearly that because of his indebtedness to the Plaintiff under the margin account, the Plaintiff asked him either to pay up the money to cover the indebtedness or sell the shares to settle the indebtedness. The Defendant agreed to sell. I really cannot see how, in the circumstances, it can be said that the Defendant had no choice in the matter.

29. The evidence relating to the sale of shares is not put forward as a separate cause of action or defence that the Plaintiff might somehow be negligent. Mr Ho conceded that these are merely matters that go to the credibility of the witnesses.

Conclusion

30. In the end I find that the Plaintiff has established its case against the Defendant. Accordingly, the Plaintiff is entitled to the judgment claimed in the sum of $4,765,919.93 less the commission of $554,626.20. The parties have reached an agreement on the disposal of the shares. The parties agreed that the agreement is to be made an order of the Court. Subject to that the Counterclaim is dismissed. As to interest, the parties agree that the Plaintiff is to have interest on the judgment sum at prime rate plus 1% from the date of the writ to judgment and thereafter at judgment rate until payment. The Plaintiff is to have the costs of the action.