WARDLEY-THOMSON LTD v. YIP KAM FAI

1987, No. A 6865

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. This is a case in which a broker sues his former client for $14,730,150.44 inclusive of interest up to the 1st November 1987 and costs. The defendant, a former client of the plaintiff broker, seeks to recover the balance of his margin deposit. The transactions involving the plaintiff and the defendant were many but they are not complicated. The matters had been so fully canvassed before me that I find myself in a comfortable position to be able to deliver judgment at the conclusion of  he helpful submissions from as well the defendant as from counsel for the plaintiff.

2. The defendant is a seasoned player in the Futures market. When he was promised a sizeable rebate per round turn contract, he left his former Futures broker for the plaintiff.   According to the defendant, the plaintiff let him down miserably. He feels aggreived and is dissatisfied. He has raised a number of complaints on which he resists the plaintiff's claim and raises his Counterclaim.

3. Quite a number of defences are no longer pursued. Mr Yip sets out in his final submissions the issues so clearly and at such a pace that I am able to record them verbatim. He divides his complaints into two limbs, A & B. The first is concerned with his alleged instructions to liquidate given to Mr Pang personally on the 16th October 1987. Limb B is founded on alleged misrepresentations to the effect that the plaintiff was a member of the Hong Kong Futures Exchange Limited. Various reasons have been advanced by the defendant as to why he claims he had been adversely affected. Primarily, the defendant complains that a member of the Hong Kong Futures Exchange Limited of which the plaintiff was not one, would have made an effort to serve the best interest of his clients. Indeed, Mr Yip, the defendant, relies heavily on Rule 430 of the Hong Kong Futures Exchange, whereby a member is enjoined to act in the best interest of his clients.

4. The defendant highlights, in particular, non-compliance with s.45A(2)(e) of the Commodities Trading Ordinance, a breach of which the plaintiff is said to have committed. The plaintiff is a dealer for the purposes of that Ordinance and as such it should disclose in the contract notes or statements of account to the defendant any agency for executing orders. Though a dealer within the meaning of the provisions of the Commodities Trading Ordinance, the plaintiff has never been a member of the Hong Kong Futures Exchange Limited. It has been trading in the Hang Seng Index Futures through its wholly-owned subsidiary, The Wardley Thomson Futures Hong Kong Limited which is a member of the Hong Kong Futures Exchange Limited.  S.45A (3) of the Commodities Trading Ordinance makes any such non-disclosure an offence liable on conviction to a fine of $10,000 and to imprisonment of 6 months. The plaintiff did not make the requisite disclosure. On that, the only point taken by the defendant would seem to be that if agency for orders execution had been made known to him, he would have been able to discover the plaintiff as a non-member of the Hong Kong Futures Exchange and taken his business elsewhere to James Capel Far East Futures Limited. James Capel would have acted in his best interest as the Exchange would keep "surveillance over the manner of trading of its members and monitor their professional integrity and reliability". The defendant is adamant that he would not then have suffered such a colossal loss. This conclusion is difficult to follow. However, s.45A(2)(e) would seem to be part and parcel of the Exchange membership complaint.

5. The defendant maintains that the staff of the plaintiff assured him that the plaintiff was a member of the Hong Kong Futures Exchange Limited. He claims that he would not have patronized the plaintiff had he known the truth. Moreover, because of such a misrepresentation of membership, all agreements he made with the plaintiff are said to be void and of no effect.

6. The defendant raises a new estoppel in his final submissions whilst leaving his pleaded estoppel unsupported. The new estoppel is one based on the alleged instructions to liquidate. After instructions to liquidate had allegedly been given to Mr Pang of the plaintiff on the 16th October 1987, according to the defendant in a call at about 3:45 p.m. Mr Pang explicitly confirmed these instructions with the information that all the defendant's position had been liquidated. The confirmation of liquidation allegedly from Mr Pang constitutes, so the defendant contends, an estoppel whereby the plaintiff is prevented from denying such alleged liquidation on the 16th. If such instructions had been given and disobeyed as alleged, the newly submitted estoppel, even if it is well founded, can only be redundant.

7. Other peripheral matters are raised in the defendant's final submissions, but I find it quite unnecessary to refer to them specifically. All these side issues will unfold themselves in the course of my judgment when the circumstances are more closely examined.

8. By the 16th October 1987, the defendant through the plaintiff had acquired 200 long October contracts. A sum of margin deposit was left with the plaintiff by the defendant. The market was declining markedly on the 16th. The defendant has referred this court to certain data whereby it can be seen that in the morning the market drop caused a loss of the defendant's margin deposit up to 25% or 60 points against his position and beyond. According to the defendant, in the morning, as a matter of fact his loss had reached 90 points. The market continued to fall in the afternoon until shortly before the close of the market. The defendant's primary case is : in a falling market, in the morning over 25% margin loss or 60 points against his position and in the afternoon, at one point, a loss of about a third of his margin deposit, he was anxious and in a telephone conversation with Mr Pang he allegedly instructed him to liquidate his position. Mr Pang, it is so alleged, was left in no doubt as to the nature of these instructions and at 3:45 in the afternoon, returned a call to the defendant with the confirmation that his instructions had been complied with, that is to say the defendant's position had been wholly liquidated. If the defendant's version is correct, after liquidation on the 16th October 1987, the defendant would still be left with a balance of some $2M in his margin deposit.

9. Mr Pang gave evidence before Mr Justice Barnett in another set of proceedings, as he confirmed it before me, as to his firm's regulatory format : when margin deposit loss reaches 25% in a continuing falling market, an effort would be made to contact a client for instructions. Mr Tommy Wong, the superior of Mr Pang, also confirmed that when margin loss hit 25% in a falling market, contact would be attempted until instructions were obtained. The tenor of their evidence, so the defendant argues, reveals a set practice that a 25% margin loss left unredressed in a continuing falling market would automatically trigger off a liquidation. Both Mr Pang and Mr Wong were adamant that a peremptory liquidation was not inflexible and that a decision to liquidate would depend on the company's relationship with a particular client and other factors such as his performance, status and financial capability. Moreover, Mr Pang told the Court that in the case of the defendant, personal contact was to be made through a pager number left by him.

10. The defendant invites this court to treat at least the evidence of Mr Tommy Wong as meaning that it is an inflexible practice, virtually a rule of the thumb to be blindly applied by the plaintiff company as a broker. I cannot, in the context of even the evidence of Mr Tommy Wong as it is fairly understood, accede to the invitation. It would be unbusiness like that once the margin deposit loss reaches 25%, a client's position is always to be peremptorily liquidated in a continuing falling market when a demand for replenishment is not met. I also do not accept, on the conflicting evidence, that the defendant was ever so given to understand. I find that it was merely a flexible guideline of the plaintiff for general application.

11. The plaintiff's case is  : as far as this particular defendant is concerned, the flexible rule was not followed. According to Mr Pang, in his endeavours to recollect what precisely transpired on the 16th October, he paged the defendant, but apart from his effort to page the defendant on that day, he cannot remember whether the defendant did make contact by returning his paged call. As I understood Mr Pang to say, paging a client in these circumstances was a measure he would normally have taken. The next personal contact between Mr Pang and the defendant, according to Mr Pang, fell on the 19th October. On that day, Mr Yip was requested to put in more margin deposit and Mr Yip allegedly agreed to do so in the afternoon. No additional margin deposit was forthcoming in the afternoon or at all. The next day, so Mr Pang told this Court, the defendant called and implored Mr Pang to seek indulgence from his superiors. so as to allow him to keep his position. Mr Pang did as instructed but his company was not prepared to grant any further indulgence to the defendant. Mr Pang said that he managed to get in touch with the defendant again on the 26th October with a suggestion that he should sell short October contracts in order to square some of his positions. As the plaintiff company was not willing to grant indulgence to the defendant to have his position maintained without additional margin deposit, that apparently seemed to be a sensible recommendation. Mr Pang testified that the defendant's response was less than enthusiastic and in fact passive. The defendant said : "O.K. do whatever you like but I can do nothing right now."

12. Under the documentation signed between the plaintiff and the defendant as broker and client, the plaintiff was entitled to call for extra margin deposit as required and enjoyed the sole discretion to close the defendant's position when it was not adequately supported by an appropriate margin deposit. Mr Pang told the court that until nearly the last stage of the episode, the defendant had displayed confidence in his position of 200 contracts. Futures market is known to be highly speculative. Without hindsight, it is almost impossible to say that the defendant's optimism was indefensible.

13. The market continued to fall and finally on the 28th October, the plaintiff disposed of 83 out of the 200 contracts in the defendant's position. The next day, the balance of 117 contracts were likewise liquidated, hence, the final debit balance in the defendant's account which forms the basis of the plaintiff's claim.

14. Even on that passive remark of the defendant on the 26th October, the plaintiff saw fit to cause to be sold short 43 October contracts. That remedial measure brought no financial comfort. The defendant suggested that these were sold short at "a bargain hunting level" and thereafter re-bought at an unacceptably high level incurring a loss of $235,303. The computation is accurate, but in a volatile market justification for the defendant's accusation or insinuation must be wanting. The loss arising from that transaction was part of the original claim of the plaintiff but it was abandoned at the inception of these proceedings. Consequently, the plaintiff's claim is now confined to the defendant's 200 contracts in his position sold on the 28th and 29th October 1987.

15. The defendant directs the Court's attention to his deductions that it was quite improbable for Mr Pang not to be able to recall the telephone conversations on the 16th October and that by his otherwise clear recollection of other occasions, Mr Pang must have much to conceal. The defendant emphasizes the implausibility of either a client, a broker not keeping in constant touch in a rapidly falling market or of a client's indifference in a situation such as that on the 16th October. After all, from the outset as stated in the Credit Application for the defendant, his account was "to be closely monitored". Moreover, the defendant traded an enormous number of contracts. Therefore, there was all the more reason for Mr Pang to continue to try to locate him on the 16th when the market was in retreat. He lost over a third of his margin deposit in the afternoon in a continuing falling market. The defendant argues that it was more likely than not for him to give instructions to liquidate as he allegedly did.

16. The defendant's version is that there were no less than 4 calls on the 16th October : first, a demand by Mr Pang for additional margin; secondly, later in time a returned paged call in which additional margin deposit was repeatedly demanded at a time when more than 90-100 points went against his position; thirdly, in the afternoon instructions were given to wholly liquidate his position; and lastly, Mr Pang's confirmation at about 3:45 p.m. that his instructions had been complied with.

17. I have summarised the plaintiff's case as given by Mr Pang, which seems to present a more acceptable picture than the one painted by the defendant. The defendant's version would have to be justified by his strained explanations for Mr Pang's call of the 19th and his own inaction in the face of failure to obey his instructions. In addition, the circumstances so ably analysed by counsel for my consideration make it crystal clear that it would have been most unlikely for the defendant's version to ring truth.

18. Statements of Account were regularly supplied by the plaintiff to the defendant. After some initial reluctance to own up to the receipt of those statement, the despatch and receipt of them are now acknowledged. The Statement of Account dated the 15th October 1987 at p.577, Vol.III of the Bundle of Documents gives the position of the defendant as at that date with 200 contracts outstanding and a margin deposit of $2,539,000. There is no Statement of Account for the 16th October. The defendant explains that because of Mr Pang's subsequent denial of having received any instructions to close his position on the 16th October when a further demand for margin was made on the 19th, he found it utterly useless to press Mr Pang for a statement for the 16th October, which ought to have reflected such instructions for liquidation. The explanation is, to say the least, unsatisfactory.

19. I turn next to the Statement of Account for the 19th October 1987 at p.578, again Vol. III of the Bundle of Documents. The defendant's position subsisted with still 200 contracts but a higher margin deposit of $3,181,715.54; an increase represented a permissible transfer effected on behalf of the defendant by the plaintiff from his other source.

20. As time went by with more documents, the situation had gradually become more evident, a situation so very strongly resisted by the defendant in these proceedings. A Statement of Account dated the 26th October 1987 at p.579 of the same volume shows an unchanged position of 200 contracts with a slightly less margin deposit of $3,175,007.65 after a deduction of interest charges. A further Statement of Account dated the 28th October 1987 at p.584 of the same volume reflects the sale of 83 contracts out of the defendant's position with his same margin deposit, then unabsorbed as shown in his account.

21. Before despatch of the further Statements of Account to the defendant, the plaintiff caused to be sent to him a letter of demand on the 28th October for $9,890,500. In the Statement of Account dated the 29th October 1987 at p.580 of the same Bundle, the remainder of 117 contracts of the defendant's position were closed with an ultimate debit balance against the defendant of $11,163,707. Lastly, a Statement of Account dated the 2nd November 1987 at p.588 of the same Bundle gives the original claim against the defendant of $14,967,983.49. In these last two Statements of Accounts, the entire margin deposit of the defendant was set off against losses and a claim for the net debit balance against the defendant was made.

22. Not only did the defendant not press for the 16th October Statement of Account for the strained explanation he gave, his initial claim against the plaintiff was put on a somewhat different basis : whilst the defendant's present Counterclaim is on the balance of his margin deposit less whatever total loss sustained on the 16th October, his initial claim ignored any liquidation on the 16th but went for the original margin deposit intact calculated at slightly over $3M. If the 200 contracts in his position had been liquidated as allegedly instructed on the 16th October, he would have been left with only $2,018,250. This claim, and not the claim for the initial margin deposit intact, now forms his Counterclaim. Only his Counterclaim and not his initial claim against the plaintiff on the basis of an intact margin deposit can be sustained by the defendant's allegation that he had instructed Mr Pang to liquidate his position on the 16th. It is difficult to understand why the defendant ever adopted such a stance as if the 16th October liquidation had never occurred. Even the defendant's present Counterclaim had not been canvassed in communication or correspondence until the filing of his Counterclaim on 18th January 1988. There had also been no complaint of failure to obey instructions made against the plaintiff before his first demand made on the 2nd November 1987, which was itself not for the present claim in the defendant's Counterclaim but for the original margin deposit intact of slightly over $3M.

23. Mr Chung in paragraph 30 of his written submissions mounts other attacks at the credibility of the defendant as well as the plansibility of his version. Rhetorically, I think, I may ask : need this Court go on in view of the all one way documents, almost conclusively pointing in the direction that the plaintiff's version and not the defendant's is to be believed? I find, despite the points drawn to my attention by the defendant in support of his contended probability that instructions had been given on the 16th October, that the version of Mr Pang is to be preferred and accepted.

24. Indeed Mr Pang was never given any instructions as alleged or at all by the defendant to close his account totally on the 16th. The silence and inaction on the part of the defendant, particularly in the light of all these documentary communications has left me with little alternative but to act on the evidence of Mr Pang in preference to his assertions as to what transpired between them as regards liquidation. It is quite unnecessary for me to deal with the newly raised estoppel in the defendant's final submissions. It is not pleaded. If instructions to liquidate had been given as alleged and if it were complemented by its proper ingredients, "estoppel" would still be otiose as a separate issue.

25. The defendant's further allegation is that Mr Pang and Mr Keung knowingly advised him that the plaintiff was a member of the Hong Kong Futures Exchange Limited. The defendant is bilingual and appears to be highly intelligent. He has served as an interpreter and in other capacity in the civil service. He was once a school teacher.  Whatever his past experience in Futures contracts was, he was a substantial player. There would have been nothing to gain for Mr Pang and Mr Keung to attempt to mislead a prospective big and valued client such as the defendant, just for the interview. A client of that stature could be expected to seek out the truth and the real status of the plaintiff in no time. He would be too important a long term client to risk losing by any misleading sales pitch.

26. The circumstances as presented to this Court provide no other incentive for a lie of that nature to be told.  It would appear more probable that the defendant was attracted by the modest commission offered by the plaintiff. Instead of $200 per one round turn contract, it was offered at the rate of $120. If there had been any need for the detailed background of the establishment to be given by Mr Pang and Mr Keung, there would have been no real warrant for any such misrepresentation to be made.

27. A member of the Hong Kong Futures Exchange, the Wardley Thomson Futures Hong Kong Ltd., is a wholly-owned subsidiary of the plaintiff. I have been explained why it was desirable for such a wholly-owned subsidiary to become a member of the Hong Kong Futures Exchange, and not for the plaintiff itself to be put up for membership. There were commercial and practical advantages to be taken into consideration. It was a planned operation of a reputable group, the scheme of which the plaintiff had no cause to suppress from the public or its clients.

28. The surrounding circumstances do not support the case of the defendant. But we have also the denial of Mr Pang as against the assertion of the defendant. Judged by quality of a witness, I hope I am not being unkind in saying that I have absolutely no hesitation in preferring the evidence of Mr Pang as against that of the defendant. I have had sufficient opportunities, circumstances permitting of course, to observe the demeanour and evaluate the evidence as given by both Mr Pang and the defendant. The defendant's demeanour and the quality of his evidence both leave much to be desired. I find that there was no misrepresentation made by the plaintiff through Mr Pang or Mr Keung to the defendant that the plaintiff was the member of the Hong Kong Futures Exchange.

29. Mr Pang did say in examination-in-chief that he knew the plaintiff was not a member of the Hong Kong Futures Exchange. However, in the protracted cross-examination, Mr Pang seemed to have been provoked into retaliating with a bare negative answer in protest or defiance when he was repeatedly tested on his knowledge as to the plaintiff's membership on the Hong Kong Futures Exchange. But on a fair understanding of his evidence, what Mr Pang meant under cross-examination was that he merely passed clients' orders to the Dealer's Desk in the plaintiff's office, which were in turn transmitted to the Trading Hail and consequently he had really no sound personal knowledge of and was himself quite unconcerned with the plaintiff's status.

30. At one time, to questions put by the defendant to the effect that Mr Keung and he, Mr Pang did misrepresent as to the plaintiff's membership on the Hong Kong Futures Exchange, Mr Pang is said to have responded merely that he did not remember. But that is not his full answer. In fact, he prefaced his answer by a categorical denial. His full answer was : "No. I am sorry that I can't remember, but definitely I won't nod my head when I talk to my clients."  In the context, the emphasis was that Mr Pang had no recollection of the precise conversation.

31. The defense witness, Mr Yip Kin-sun, corroborated the allegations of the defendant as to the misrepresentation of the plaintiff's membership on the Futures Exchange and the instructions given to the Account Executive, Mr Pang, to liquidate. As a witness, except for the unbelievably vivid recollection of the alleged given instructions with which he was hardly concerned, I can find little fault with Mr Yip Kin-sun. However, the documentary evidence I have mentioned runs counter to his assertion of having overheard the defendant giving instructions to liquidate his position in the afternoon of the 16th October. From the surrounding circumstances I have enumerated in conjunction with the evidence of Mr Pang, in the final analysis I also prefer not to act on Mr Yip Kin-sun's evidence that Mr Keung or Mr Pang made any misrepresentation as to the plaintiff's membership on the Futures Exchange.

32. Finally, I turn to examine the oblique reliance of the defendant on s.45A(2)(e) of the Commodities Trading Ordinance. As a trader, in the plaintiff's contract note or, in this case, Statement of Account, to the defendant as client, agency for the execution of contracts need be disclosed. That was not done. On the face of it, it would draw upon the plaintiff criminal sanctions provided by s.45A(3).  A contract note or Statement of Account as in this case, is a document evidencing or post-recording a transaction that has hitherto taken place. It does not seem to be or form part of the transaction itself. I am of the view that whatever was the personal shortfall on the part of the plaintiff under s.45A(2)(e) of the Commodities Trading Ordinance, the validity of the transactions done between the plaintiff and the defendant, from agreement to liquidation, would in no way be affected by it.  However, the defendant merely maintains that the deals between the plaintiff and himself were void by reason of the alleged misrepresentation as to membership. That allegation is unsound in law and unsupported by facts. In any case, I have found against the defendant on his alleged misrepresentation.

33. Save far s.45A(2)(e), none of the other pleaded non-observances of the Rules and Regulations of the Futures Exchange has been sought to be substantiated. No point is taken in the defendant's final submissions. The defendant explicitly confines himself to s.45A(2)(e).

34. The amount of the indebtedness incurred by the plaintiff in the circumstances has sought to be established through the staff of the plaintiff as exemplified in the calculations given in "P20". Including interests and other charges up to the 1st November 1987, the claim outstanding against the defendant stands at $14,730,151.44, the plaintiff's claim on the 43 short October contracts having been abandoned. It has not been shown that the liquidation of the defendant's position was otherwise either improper or negligent in the circumstances of this case. I find those calculations accurate and correct. I find the claim, to that extent, proved against the defendant.

35. Counsel for the plaintiff is co-operative enough to accept an average of 9% per annum by way of interest on the outstanding sum from the 2nd November 1987 to the date of   judgment. The rate of 9% per annum is, in my view, appropriate. Judgment interest is otherwise regulated by the Rules of Supreme Court. Needless for me to say that no part of the Counterclaim, which is continued to be maintained by the defendant in his final submissions, has been established. I give judgment against the defendant in favour of the plaintiff in the sum of $14,730,151.44 as claimed together with the interest I have indicated. Costs would follow the event, and the defendant is to pay the plaintiff's costs of these protracted proceedings. The defendant's Counterclaim is dismissed also with costs in favour of the plaintiff.