TEXUNA INTERNATIONAL LTD. v. WOCOM COMMODITIES LTD.

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JUDGMENT

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Silke, J.A.:

1. This is an appeal from the judgment of Jackson-Lipkin J., dated the 24th May 1985, in which he found in favour of the Plaintiff, Texuna International Limited, - "Texuna" - in the sum of US$348,886.79 together with interest and costs.

History of the parties

2. In 1959, the father of Mr. Pramod Agarwal commenced business in Hong Kong trading under the name of Textiles Unique Agency. In 1979, Mr. Agarwal came to Hong Kong and effectively took over the running of that company.

3. On the 29th May 1981, Texuna was incorporated. Mr. Agarwal and his wife were directors and Mr. Agarwal controlled its activities. It was an international trader, importer, exporter and commercial agent.

4. The Defendant, Wocom Commodities Limited - "Commodities" - was part of the Wocom Group of Companies which in turn is affiliated with the Wing On Group. It consisted of, amongst others, Wocom Holding Limited, Wocom Limited, Wocom Securities Limited and Wocom Forex Limited. Commodities was incorporated on the 22nd March 1982. Its genesis being Wocom Limited which, in turn, had descended from Rudolph Wolff (H.K.) Limited who sold off its Hong Kong interests to Wocom. Rudolph Wolff is an international commodities dealer with offices in London and New York. The Wocom Group continued to use Rodolph Wolff as a broker.

5. The Wocom Group employed Mr. Rakesh Saxena. Mr. Saxena had been a director of G.S.P. Finance Limited which was incorporated on the 23rd May 1980. In September 1982, upon the incorporation of Wocom Forex Limited, Mr. Saxena was named as a director and shareholder. In January 1982, Mr. Saxena was registered as dealers representative for Wocom Securities Limited.

6. I can dispose now of one aspect of the hearing in the Court below which was, as the trial judge said, a "matter of high contention". That is the capacity in which Mr. Saxena was employed in  relation to Commodities. It is now accepted that nothing turns on the technicalities of his employment nor upon any distinction as between his being a servant or an agent. He was treated as the agent of the Wocom Group arid, as far as Commodities was concerned, dealt generally with Mr. Agarwal in that capacity By reason of documents signed by Mr. Agarwal when he commenced to deal with Commodities, Mr. Saxena was also Mr. Agarwal's attorney-in-fact.

The history of the pleadings

7. When the action came on for trial, the writ having been issued on the 1st June 1983, the Amended Statement of Claim contained fifteen paragraphs. The prayer was in the following terms:-

               "AND THE PLAINTIFF CLAIMS :-

8. Paragraphs 3 and 6 alleged that which were described as "Warranties and/or representations" and Which were false - paragraph 3 "the 1st warranties and/or representations" and paragraph 6 "the 2nd". Paragraph 9 made reference to a "3rd warranty and/or representation". As this is the only issue which, for reasons which will appear in a moment, now concerns us, I think it worth setting out in full:

9. At the commencement of and in the course of the trial, which took a total of 19 days, paragraphs 1 to 8 of the Amended Statement of Claim were abandoned and, in consequence, items (ii) to (v) of the prayer.

10. The words ''warranted and/or represented" remained as set out in paragraph 9 and the trial concluded while the trial judge still had for consideration contractual and tortious liability. Before us, Mr. Litton, who appears in this Court on Texuna's behalf, abandoned all contractual issues. With respect, a very proper abandonment. The matters pleaded in paragraph 9 could in no way amount to a warranty. We are now concerned solely with the tort of deceit.

11. The trial judge, as a result of that which had taken place, found the issues which lay for his consideration to be as follows:

The main issue for us is what was the size of the cloak of authority worn by Mr. Saxena and, should we hold against Commodities on that issue, mitigation and the quantification of the Plaintiff's loss. In the dying moments of the hearing Commodities sought leave to amend their Notice of Appeal, which application was not consented to by Mr. Litton but neither was it opposed by him, to raise in explicit terms the vexed question of the difference in the principles underlying an award of damages in  contract and in tort. The award here was reached on the contractual basis of loss of bargain. That, says Mr. Riberio who argued this ground, cannot stand as we are now concerned only with tort. The basis, shortly, should be the loss of the money out of the pocket of the person acting upon the fraudulent misrepresentation.

12. I shall come back to this at a later stage.

Factual background

13. Mr. Agarwal, in the course of his substantial trading activities, needed to purchase large quantities of foreign currency in order to pay his suppliers overseas. He used a number of banks and financial institutions for this purpose. Early in 1982, G.S.P. Finance Limited was added to the list, Mr. Agarwal having been introduced to Mr. Saxena about then. The volume of business conducted was, according to Mr. Agarwal, in the region of HK$10m.. In the late summer of 1982, Mr. Saxena became part of Wocom.

14. Before this transfer took place, Mr. Agarwal had instructed Mr. Saxena to buy Japanese yen. Mr. Saxena clearly wished to take the benefit of this business with him to Wocom. The Japanese yen contract was to be cancelled. There was a failure to do this. A loss of between US$60,000 and US$63,000 was occasioned. In 1983, at a time after all of the matters which led to this litigation had concluded, this loss was settled by Mr. Sutham of G.S.P. Finance Limited bearing the major proportion and Mr. Agarwal paying up US$23,000. I mention this in the general context of Mr. Agarwal's dealings with and belief in Mr. Saxena.

15. On the 3rd September 1982, Mr. Agarwal, for and on behalf of Texuna, opened an account with Commodities. He signed, for this purpose, a series of documents. These being a "General Agreement for Customers Accounts" (Exhibit 6) which appointed Commodities as broker for the purchase and sale of or as dealer in commodities and future interests and options; a "Mandate for Company Accounts, Commodity Futures and options transactions" (Exhibit 8); a "Name Confirmatory Letter" confirming the trading code name "Anjani" (Exhibit 2); a "Risk Disclosure Statement" (Exhibit 1); and a "trading Authorisation" limited to purchases and sales of commodities (Exhibit 4) which appointed Mr. Saxena as agent and attorney-in-fact of Texuna to buy and sell at any time at his discretion commodities, commodities futures or options on margin for Texuna's account and risk.

16. Mr. Agarwal said that he signed these without bothering to read their contents. They then came back to him so that the company chop could be placed upon them and he continued to ignore what they contained. The Trading Authorisation required a witness and the person provided was a Mr. Oza, the only other effective employee of the Texuna.

17. On the 9th September, Texuna transferred to Commodities ￡105,000 for which Mr. Agarwal received a receipt stating the amount to be "trading Deposit Account". Mr. Agarwal again paid no attention to this designation and says that he had thought at all times that the sum was merely a fixed deposit upon which he would receive interest. One month later, he withdrew from it the sum of ￡10,000. The remaining ￡95,000 was the subject of item (ii) in the original prayer.

18. Commodities then carried out fifteen speculative dealings to Texuna's account which dealings were effected by Mr. Saxena. This up to the 29th September when Mr. Saxena, signing himself as the Executive Director and Chief Dealer of Wocom Forex Limited, wrote to the private company textiles Unique, for the attention of Mr. Agarwal, sending him some Forex brochures. Between the 8th and the 13th October, Commodities carried out nine further speculative dealings effected by Mr. Saxena.

19. These dealings dealt with matters such as Canadian wheat, Euro currency and gold. None of these dealings was, according to Mr. Agarwal, authorised.

20. In evidence, Mr. Agarwal stated that neither he, his wife nor Texuna engaged in speculative trading it being against their principles. When he appreciated, sometime in early October, that unauthorised speculative dealings had been carried out on Texuna's behalf by the Defendant through the agency of Mr. Saxena, he saw the latter and reached an agreement with him on the 13th October that all the dealings prior to that date would be transferred into an account in the name of Mr. Agarwal personally. The yen deal was to remain in Texuna's account. Mr. Agarwal said that there was a further agreement between them that Mr. Saxena would not from thereon engage in any speculative trading on behalf of Texuna. Mr. Saxena had told Mr. Agarwal though his statement was not supported by any documentation, that he had managed to achieve an overall profit of some US$65,000 in the earlier speculations. Despite his abhorrence of speculation, Mr. Agarwal was prepared to allow Mr. Saxena to continue to trade for him personally provided that Mr. Agarwal's profit was not permitted to fall below US$25,000.

21. There were seven further speculative dealings on Texuna's account effected by Mr. Saxena after the 13th October. Mr. Agarwal said that if Mr. Saxena had not agreed to cease unauthorised trading he would have closed the account, asked for his deposit back and for the delivery of the ¥500 million - the yen deal still in Texuna account.

22. But that is all by way of background. The yen deal with which we are concerned came about thus. Mr. Agarwal needed to purchase in Japan polyurethane bags and slings for sale onwards to Korea. These items were to be used in Korea for the packing of cement. He needed to have in hand yen to subsidize the purchase. He entered into a contract with Commodities to purchase ¥500 million for delivery to Texuna in December 1982 and March 1983. These purchases were: on the 7th September 1982 10 lots each of ¥12.5 million bought at a rate of US$39.30 to ¥10,000; also on that day, 10 further lots each of ¥12.5 million at a rate of US$39.20 - those were to be the December deliveries; on the 8th September 1982, a further 10 lots of ¥12.5 million at a rate of US$39.30 and on the 10th September 1982 a final 10 lots of ¥12.5 million at a rate of US$39.05. These last two were the March deliveries. Thus, the ¥500 million deal.

23. Commodities, notoriously, fluctuate. Currency is a commodity and the yen did just that. All these contracts were open ones.

24. Each dealing was reported in writing to Mr. Agarwal within two or three days of the deal being made. Detailed monthly statements entitled "Statement of Open Positions" were sent to Mr. Agarwal also containing full details and making reference to the margins. While Mr. Agarwal was, for the purposes of his business, frequently in and out of Hong Kong, nevertheless, these documents were received by him. In general he did not read them prefering to ignore them in favour of that which he was told by Mr. Saxena.

25. Because of the fluctuations in the prices of the commodities, including the yen, margins were eroded and Commodities, who themselves trade on margin with Wolff in New York made, as they were entitled to do under the documentation signed by Mr. Agarwal, margin calls in order to secure their position. These calls are evidenced by internal documents of Commodities and were, on the evidence, made to Mr. saxena as Texuna's attorney-in-fact. They never went beyond Mr. Saxena for Mr. Agarwal was not aware of them and Mr. Oza, who was in Texuna's office at the relevant times stated in evidence that he never received them. Mr. Agarwal said that if they had been made to him he could have met them. Because they remained unanswered the yen positions taken up as between the 7th and the 10th September were closed out on the 2nd, 3rd and 5th of November 1982. When closed out, there was a loss of US$140,900. Documentation, showing these closures and the loss occasioned by them, was sent to Mr. Agarwal.

26. Mr. Agarwal had been away from Hong Kong from the 2nd to the 4th of November. On the 5th November, he had a meeting with Mr. Saxena in the latter's office for the purpose of taking Mr. Saxena's advice on the likely trend of yen as Mr. Agarwal was leaving for Japan on the next day to buy some more bags. It is noteworthy that at no time during that meeting did Mr. Saxena make any reference to the margin calls nor to the resulting closing out which had taken palace by then. Indeed Mr. Saxena suggested that the existing yen be sold off and be repurchased later at a more favourable rate, a suggestion not agreed to by Mr. Agarwal who was happy with the yen already purchased and which he thought he still had.

27. Mr. Agarwal left Hong Kong again and returned on the 10th November. He first became aware of the closeout and the loss on the 12th November. He was very angry, not surprisingly, and told Mr. Saxena so. Mr. Saxena informed Mr. Agarwal that the close-out was an error - the first direct lie - and informed him that the position had been rectified by the buying back of a similar quantity of yen - the second lie.

28. On the 19th November, Mr. Agarwal was again assured by Mr. Saxena, when the latter came to his office, that the yen position had been reinstated and at a rate of ¥274.50 per US$1 for ¥250 million and at 278 for the balance of ¥250 million for delivery as previously arranged in December and March. Mr. Agarwal pressed for the contract documents. He did not receive them. He says that had he not been told of this repurchase he would have bought yen himself and contemplated what action he would have taken against Wocom. At a later stage in his evidence Mr. Agarwal said bethought Wocom to bear the loss on the closed out contracts as the broker had made an error, that Saxena was being honest with him and that "the defendant had purchased at a better rate and the difference was being passed on to me."

29. On the 25th November, while in Tokyo, Mr. Agarwal checked with Texuna to see if the contracts he had been promised had come and found they had not. On the 26th November, Mr. Agarwal, now suspicious and still in Tokyo, had a telephone conversation with Mr. Saxena, which he taped, in the course of which Mr. Saxena confirmed the rates to which he had made reference on the 19th November. On the 29th November, now in Hong Kong, Mr. Agarwal continued to press for the contract documents and in early December was told by Mr. Saxena that the contracts were "under typing and would be sent the next day". He said that on 5th December he went to see Mr. Saxena who told him that in order to take physical delivery of the yen he would have to open an account with Wocom Forex Limited. He signed the necessary documentation and from dates on those it would seem that the visit was on the 1st not the 5th December.

30. There was another visit to Mr. Saxena on the 6th or 7th December and Mr. Saxena said that Commodities had agreed to everything and that Mr. Agarwal should be prepared to take physical delivery on the 13th December To this Mr. Agarwal agreed.

31. No contracts were received up to 13th December but arrangements had been made with his banker by Mr. Agarwal for the necessary us dollars.

32. Mr. Agarwal was unable to contact Mr. Saxena on the 13th December and was very unhappy indeed.

33. On the 14th, he wrote to Commodities complaining of that which was going on.

34. To this letter a reply was made on the 20th December. It seemed to me in the course of the argument that this was at cross-purposes with the query in Mr. Agarwal's letter of the 14th. It explained that the closing-out was due to lack of margin but made no reference to any re-purchase or reinstatement of position. It seems clear that when the author of the reply, Mr. Dilworth, Commodities executive director, checked his own documents he found only those of a similar nature to the ones sent out by his company to Mr. Agarwal which did not include documentation on the non-existent repurchase of yen.

35. It was only on the 21st December that Mr. Agarwal, having spoken to Mr. Dilworth, first became aware of the reason for the close out of his yen position and the falsity of Mr. Saxena's representation that yen had been repurchased.

36. In late December he again spoke to Mr. Dilworth and threatened to sue if the yen were not delivered to which Mr. Dilworth replied that they had better wait for Saxena to come back to Hong Kong to "settle the matter amicably". The result of this conversation, coupled with the fact that Mr. Saxena was saying one thing to Commodities and another to Mr. Agarwal, reinforces my view that the 20th December letter was written by Mr. Dilworth in complete ignorance of the representation made by Mr. Saxena and, more importantly, equal ignorance of Mr. Saxena's neglect to pass on the margin calls.

37. Between the 3rd and the 27th January 1983, Texuna bought replacement yen. The claim for US$348,886 is the extra costs occasioned to Texuna, by comparison with the prices at which Saxena claimed to have bought, in their providing themselves with the yen required for their business purposes, the yen having strengthened in the interval.

The issues

38. The trial judge came "firmly" to the conclusion that Mr. Agarwal was a reliable and truthful witness and "somebody whom I should believe." He formed a favourable impression of him, thought him to be naive "almost to the point of folly" but not untruthful. He also accepted the evidence of Mr. Dilworth on behalf of Commodities, though where there were conflicts as between Mr. Agarwal and Mr. Dilworth, he preferred the evidence, of Mr. Agarwal. The only other witnesses to give evidence were Mr. Oza for Texuna and a Mrs. Cheung for Commodities.

39. Mr. Saxena was not called although there was a statement of his admitted under the Hearsay Evidence Rules. As it became apparent Mr. Saxenaa was saying one thing to Mr. Agarwal in the taped conversation and another thing to Commodities, the judge, and very properly, placed no reliance of any kind on Mr. Saxena's evidence.

40. As a result of these findings on credibility, the judge said:

41. He went on to hold that the "warranty/representation" was actionable and that it was intended to be acted upon. Its purpose was to protect:

42. Having so found, the judge went on to consider the issue of agency. He though it to be a pure question of fact within established and accepted principles. He was satisfied that at material times, Saxena was not a servant of the Defendant. This is not a finding which now concerns us for Saxena clearly had actual authority from Commodities to enter into, generally, the documented transactions he did with Mr. Agarwal. The judge went on to express a proposition of law and again with this there is no contest:

I think the judge here to be using the word "implied" in the same sense as it is used by Spencer Bower "Actionable Misrepresentation" 3rd Edition para. 157.

43. Having considered the various incidences of Mr. Saxena's authority, the judge made his crucial finding:

44. At first blush, that elliptical statement of the law as applied to the facts in this case caused some difficulty. We need no longer concern ourselves with those difficulties for it is, in perhaps overly condensed form, an acceptable exposition of the law though the factual basis of its conclusion is challenged by Mr. Mills-Owens, with him Mr. Riberio, who appears in this Court for Commodities.

45. Mr. Litton's submissions are, if he will permit me to reduce them to a sentence without doing undue harm to their nature, that if Saxena had Commodities authority to do the things he said were being done were they true, then their falsity makes no difference to Commodities' liability for their consequence. The law as to the liability of a principal for his agent - or servant - for fraudulent misrepresentation is, if I may say so with respect, clearly and succinctly set out in the opinion of Lord Keith of Kinkel in Armagas Ltd. v. Mundogas S.A.⁽¹⁾. At page 1073, Lord Keith said:

That statement has as its derivation the words of Lord Holt in Hern v. Nichols⁽²⁾:

46. This statement was adopted by Willes J in Barwick v. English Joint Stock Bank⁽³⁾, a decision which was examined with great care in Lloyd v. Grace, Smith & Co.⁽⁴⁾. That last had, as one of the main points of its consideration, an expression used by Willes J. in the English Joint Stock Bank case where he said:

It was the misconstruction which had arisen of the emphasized words which was the reason for Lord Macnaghten's detailed consideration of the law of misrepresentation as it then stood. And indeed, as it now stands.

47. To return to Lord Keith in Armagas ⁽¹⁾. He continued:

While the facts in Armagas^(l) can be distinguished from those here in that the agent there was known not to be capable of entering into a three-year charter party while he did have authority to enter into other forms of charter party and to conclude the sale of a vessel. But in addition the House of Lords rejected the argument that a three year charter party was no more than an improper method of performing what he was employed to do.

48. It was held unanimously that the sale of a ship backed by a three-year charger party was a transaction of a wholly different character from a straight forward sale even if the charter party itself was not to be regarded as a transaction separate and distinct from the sale. It held that the principal was not vicariously liable for the agent's deceit. The tests of Lord Keith and, indeed, the reason why the principal was not held liable in Armagas⁽¹⁾ are particular apposite to this appeal.

49. The failure to pass on the margin calls, and the judge accepted Mr. Agarwal's evidence that they were not passed on, would clearly be an act outside the authority of Commodities' agent. Commodities' lifeblood was margins. It was essential for their own protection that margins be maintained, otherwise their losses, apart from any loss to the customers, would be incalculable and incapable of being contained. The closing out of the yen contracts stemmed directly from the lack of margin and this in turn resulted directly from the non-transference of the margin calls by Mr. Saxena. Mr. Saxena then tried to lie his way out. There was no Commodities' error. The buying back of the yen at a profit with the prior loss of US$140,000 being, as Mr. Agarwal thought it was, for Commodities' account and not his own could not be something which lay within Mr. Saxena's authority to inflict upon his principal.

50. It follows that Mr. Saxena was not expressly authorised to do what he purported to do. I cannot therefore accept the trial judge's finding to this effect and turn to consider the other elements described by Lord Keith and what the trial judge called "implied authority".

51. It seems to me that Mr. Agarwal was, at its lowest, misguided in placing reliance upon Mr. Saxena, given that person's previous history of a failure to cancel a yen contract with G.S.P. Finance Limited, his continuing to deal in speculative commodities despite directions not to do so, and his undocumented assertion of the profit of US$65,000. One would have thought that the lack of documentation to sustain Mr. Saxena' s buy back representation when in all the other dealings with Commodities, documentation had been provided within two days of a deal taking place would, of itself, have been enough to put any prudent businessman on notice that something was wrong. I prefer to rest my decision in this appeal on other aspects of the test set out by Lord Keith, I accept, of course, that those tests were not intended to be exhaustive.

52. No representation that Commodities made to Mr. Agarwal can be said to have extended beyond the usual course of dealing: namely that Mr. Saxena had their authority to make purchases and sales of the type evidenced by the documents, followed at once by documentary confirmation. Further seen in its context, the purchase alleged by Mr. Saxena was not of this type or within "this class" or "usual". The failure to convey the margin calls, the false representations as to the so called erroneous closing out and the repurchase at a profit, the avoidance of being sued or losing his job as Mr. Saxena's stated reason for telling that which he knew to be untrue to Mr. Agarwal, in my judgment, are acts of a completely different character to his normal duties and are not such as to fix his principal with liability.

53. I, therefore, cannot accept the trial judge's apparent finding that Mr. Saxena had implied authority. With respect to him in using the phrase "at all material times" I think he failed to put Mr. Saxena's conduct in context. It is also, with respect, the fallacy in the basic argument presented to us by Mr. Litton. One cannot treat that single act if it were true and thereby hold Commodities to be liable without considering why and in what circumstances that act took place. On this aspect of the appeal, I would therefore find for the Appellant.

Damages

54. In the light of the conclusions to which I have come upon the main aspect of this appeal, it is unnecessary to this decision to go on to consider the Additional Grounds of Appeal filed, as I have earlier said, in the dying moments of the hearing. It raises, however, an interesting point and in deference to the arguments produced, I shall briefly refer to it.

55. The additional ground bases itself upon the damages awarded by the trial judge being assessed on a contractual basis. This basis is no longer pursued by Texuna. It goes on that if Commodities be liable to Texuna for deceit, then the judge should have found, by applying the proper measure of damages, either (a) nominal damage or (b) damages in the sum of US$140,930 - this being the loss on the closed out yen contracts or (c) for US$198,270.20 - the difference between the cost of ¥500 million said to have been purchased to replace the closed out contracts at US$1,960,643.90 and the sum subsequently paid by Mr. Agarwal in January 1983 for the replacement yen at US$2,158,914.80 - (b) and (c) being both subject to arguments as to mitigation.

56. The difference between the tortious and the contractual measure of damages is expressed as follows in McGregor on Damages, 14th Edn. paragraph 1459:

This proposition is justified, and particularly the exclusion of any damages for loss of the bargain, by the decisions in McConnell v. Wright,⁽⁵⁾ particularly per Collins M.R., Doyle v. Olby (Ironmongers) Ltd. and Other,⁽⁶⁾ particularly per Lord Denning M.R. and Winn L.J., and Esso Petroleum Co. v. Mardon⁽⁷⁾ again per Lord Denning M.R..

57. McGregor at paragraph 1474 speaks of a situation similar to the one arising here, that is where the Plaintiff's change of position consequent upon the deceit is not the conclusion of a contract. The learned editor says that the terminology of "normal measure and consequential loss ceases to have relevance" and cites with approval the formulation of Lord Atkin in Clark v. Urquhart⁽⁸⁾ that "the measure of damages is to be based on the actual damage directly flowing from the fraudulent inducement.'". The award should be one which served to put the plaintiff into the position he would have been in if the representation had not been made to him.

58. A Plaintiff can recover expenses which he has incurred. He is entitled to have put back into his pocket money which he has lost as a result of the misrepresentation.

59. The attempt to apply these tests to the situation as it exists here is one in which l find considerable difficulty. Texuna's pleading makes no reference to any expenses as having been incurred and is really formulated on a purely contractual damage basis. The loss upon the closed out yen is certainly, in Mr. Agarwal's mind, a loss belonging solely to Commodities. It may well be that had it been necessary to decide the issue that I would have come to the view that the difference between the misrepresented purchase of yen and the actual later purchase treated as notional out of pocket costs would be the measure.

60. I think my brothers might well have come to the conclusion that damages for loss of the notional bargain are not recoverable in tort and that since this was the only basis pleaded, presented or developed at the trial, nothing more than nominal damages could now be awarded.

61. In the event, I would allow this appeal for the reasons given as to the main argument, set aside the judgment and enter judgment for Commodities.

(1)    [1986] 2 W.L.R. 1063
(2)    Cira (1700) 1 Salk. 289
(3)    (1867) L.R. 2 Ex. 259
(4)    [1912] A C. 716
(5)    [1903] 1 Ch. 546
(6)    [1969] 2 Q.B. 158
(7)    [1976] Q.B. 801
(8)    [1903] A.C. 28 at p.68

Macdougall J.:

62. I agree and there is nothing that I wish to add to that which has been said.

Hunter J.:

63. I also agree.