CITI FUNDS CORPORATE SERVICES LTD v. DEUTSCHE BANK AKTIENGESELLSCHAFT

HCMP 1871/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1871 OF 2010

____________

_____________

D E C I S I O N

_____________

Introduction

1.  This is the plaintiff’s application (by way of originating summons) for the disclosure of specific documents.  It rests on two bases:-

(a)  a duty to so disclose by reason of an implied term of the contract between the plaintiff and the defendant;

(b)  pre-action discovery pursuant to s. 41, High Court Ordinance (Cap. 4) and RHC Ord. 24 r. 7A.

2.  In short, I find no substance in either or the two bases and therefore dismiss this action.  The reasons are as follows.

Background

3.  The background leading to this action (summarized below) is largely taken from the affirmations filed on the plaintiff’s behalf.

4.  The plaintiff is in effect an investment vehicle of one Mr Kirpalani (for convenience, and unless otherwise stated below, “the plaintiff” shall include a reference to him).

5.  In 1991, the plaintiff was already acquainted with a female staff of the defendant before she joined the defendant.  An advisory investment account was opened with the defendant in July 2006 (after she joined the defendant).  The plaintiff described the account as:-

“In early 1999 … the Plaintiff … [opened] an account … [The] funds were invested in bonds and blue chip equities, following [the female staff’s] advice …

In mid 2006, [the female staff] took up employment with the Defendant … The Plaintiff’s entire portfolio … was transferred … to the Defendant.

I was happy to accept and rely on whatever [the female staff] told me … I had repeatedly emphasized … over the years that the funds held by the Plaintiff represented my retirement funds, and they could not be subject to any risk. My objective in investing was only to earn a modest income from my retirement funds, through safe investments such as the bonds and blue chip equities that the Plaintiff invested [earlier].

Essentially, I left the Account more or less in [the female staff’s] hands and did not pay too much attention to it day-to-day … ” (para. 9(iii) and (iv), 12 and 13 thereof).

6.  As is now well-known, the global financial market was hard hit in the 2008-2009 period.  It appears from the affidavit evidence that the money value of the plaintiff’s portfolio was reduced from about US$5 million to about US$400,000 in November 2008 (the account was liquidated in October 2008).

Issues in This Application

7.  Apart from having been told that the loss arose primarily from financial products described to him as “FX Accumulators”, the plaintiff claims that he simply does not know what exactly happened with the account.

8.  Further, the plaintiff has not stated rhetorically what the cause(s) of action of an intended claim will be.  All that has been stated in his affirmation is:-

“… I had never been informed … that the funds in the Account had been invested in FX Accumulators or other complicated financial products of that sort, nor had I ever given consent …

… there is a likelihood that the Defendant has been either negligent in giving advice and/or information to the Plaintiff, and/or has made misrepresentations to the Plaintiff, which has led to the loss suffered by the Plaintiff” (para. 18 and 19 thereof).

9.  It is undisputed quite a few documents have already been provided to the plaintiff (they appear as hundreds of pages of copy documents in the hearing bundles).  These include the plaintiff account’s master agreement for foreign exchange trading and derivatives transactions, service agreement, account application, risk disclosure statement, master subscription agreement and monthly statements.

10.  The defendant argues that:-

(1)    there is no room for implying any contract term of disclosure as the plaintiff contends;

(2)    this action falls outside s. 41, Cap. 4 and Ord. 24 r. 7A because it is in essence a fishing expedition which is both unnecessary and oppressive.

Alleged Implied Term

11.  The plaintiff contends that the following term must be implied in the contract between the parties:-

“on the [plaintiff’s] request and upon payment of reasonable … fees, the [plaintiff] shall be provided with and the [defendant] shall provide copies of any and all documents and records within [its] possession, … that are material to understanding how the Account was managed and operated … ” (para. 11, plaintiff’s skeleton submission).

12.  The nature of the contract between the parties has to be borne in mind to determine if such a term (or similar terms) must be implied (it being common ground a contract term should only be implied if it is necessary to give business efficacy to the contract).

13.  According to the plaintiff, the contract was intended by the parties to be virtually risk-free.  It was to aim for a modest income through safe investments such as bonds and blue-chip stocks.  The common income from bonds would be interest payment(s) and that from stocks would be dividend payment(s).

14.  The word “risk” in an investment context is capable of various meanings.  The famous investor Warren Buffett said this about “risk”:-

“… we define risk, using dictionary terms, as ‘the possibility of loss or injury’.

Academics, however, like to define investment ‘risk’ differently, averring that it is the relative volatility of a stock or portfolio of stocks … as compared to that of a large universe of stocks” (Cunningham: The Essays of Warren Buffett (2008) 2nd Ed., p. 91).

As has been said in Shanghai Commercial Bank Ltd. v. Chang Yuan Ta Grant and Another, HCA 805 and 1996/2009 (21 April 2011):-

“… in relation to the investment risk involved … [a] lot depends on the objective of the investor, such as whether he is aiming purely for gains arising from … price volatility (rather than … capital gain), his risk attitude and whether he makes use of leveraging to enhance that expected gain” (para. 11 thereof).

The reference to “capital gain” above is to be replaced by “modest income” in this action. 

15.  Although the plaintiff has not expressly said so, it must also be his case that there should be no leveraging (or margin trading) in relation to his investment portfolio.

16.  Such being the nature of the parties’ contract, except to the extent set out in para. 17 to 19 below (matters which should already be known to the plaintiff or his advisers), one fails to see the need for the plaintiff to understand the precise details of the management and operation of his account.  This is because a virtually risk-free portfolio should be one which requires little explanation:-

(a)     the capital should be practically free from loss (especially loss caused by price volatility); borrowed money is therefore an inconsistent source of fund because it may result in forced liquidation;

(b)    it should require minimal active management; day-trading should not be the routine;

(c)     the portfolio’s assets should be held for a sustained time period with a view of obtaining money return primarily from their income.

17.  On the other hand, it is undisputed “FX Accumulators” refer to foreign exchange (or currency) accumulators, a kind of complex financial derivative.  It is also undisputed that kind of product is not “bonds” or “blue-chip equities”, is complex and its price movements are usually highly volatile.  A quick examination of the monthly statements also shows that margin trading was involved.

18.  In such circumstances, on the plaintiff’s case, any investment in “FX Accumulators” (with or without leveraging) would be an act exceeding the scope of the authority given by the plaintiff; in other words, a breach of the contract.

19.  The plaintiff has not stated if the defendant’s female staff has misled him into believing “FX Accumulators” were safe investments, similar in nature to bonds or blue-chip equities.  It would appear any such representation(s) would have been relied upon by him as constituting misrepresentation.

20.  In view of the above matters, it is difficult to understand why the plaintiff deposed:-

“Until the Plaintiff can have a complete picture of what happened with its own bank account, the Plaintiff simply cannot ascertain whether it has a valid claim against the Defendant or not” (para. 13, plaintiff’s 2^nd affirmation).

21.  Finally, the plaintiff claims (at least implicitly) that he has practically no knowledge about investment management (let alone the management of financial derivatives).  Thus, when he contends that there should be an implied term to enable him to understand how his account was managed and operated, logically this should mean the documents provided should enable his advisers to understand that matter.

22.  There is however no evidence regarding whether the documents already provided are well capable of achieving the last-mentioned purpose.

23.  Accordingly, I agree with the defendant’s argument summarized in para. 10(1) above.

S. 41, Cap. 4 and Ord. 24 r. 7A

24.  The relevant parts of s. 41(1), Cap. 4 provide:-

“On the application … of a person who appears to the Court of First Instance to be likely to be a party to subsequent proceedings in that Court in which a claim is likely to be made, the Court of First Instance shall … have power to order a person who appears to the Court of First Instance to be likely to be a party to the proceedings and to be likely to have or to have had in his possession, custody or power any documents which are directly relevant to an issue arising or likely to arise out of that claim … [to disclose and produce those documents]” (emphasis supplied).

25.  The relevant parts of Ord. 24 r. 7A(3) read:-

“A summons under paragraph (1) [pre-action disclosure application] ... shall be supported by an affidavit which must ... specify or describe the documents in respect of which the order is sought and show, if practicable by reference to any pleading ... intended to be served in the proceedings, that the documents are directly relevant to an issue arising or likely to arise in the proceedings and that the person against whom the order is sought is likely to have or have had them in his possession, custody or power” (emphasis supplied) (as modified by Ord. 24 r. 7A(3A)).

26.  Further, Ord. 24 r. 8(2) stipulates:-

“No order for the disclosure of documents shall be made under section 41 or 42 of the Ordinance, unless the Court is of opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs”.

27.  By reason of the matters set out above, the issue(s) likely to arise in the plaintiff’s intended action are unclear.  The extent of the relevance of the documents sought is therefore unknown.

28.  Further, in view that a substantial amount of documents have already been provided to the plaintiff, I agree with the defendant that this action bears the mark of a fishing expedition.  Necessity for these documents has not been adequately demonstrated.

29.  The defendant has also adduced evidence that the disclosure sought is oppressive in that, if it were ordered, substantial resources and expenses would be required for compliance.

Conclusion

30.  This action is dismissed.

Other Matters

31.  There is strictly no need to assess the merits of the plaintiff’s assertions.  However, this aspect has been touched upon in the parties’ submissions and affirmations.  In this connection, the defendant has produced extracts of the contemporaneous telephone recordings between the plaintiff and its staff (and the related transcript).

32.  Surprisingly, the plaintiff has shown no apparent difficulties in conversing with the defendant’s staff regarding foreign exchange derivative transactions.

Costs Order

33.  Costs should follow the event.  There will accordingly be a costs order that the costs of this action are to be paid by the plaintiff to the defendant.

34.  Summary assessment of costs appears to be a viable option.  Unless any of the parties objects (in which case written submissions should be lodged with court and served within 7 days from the date of this decision), I propose to do so.  Any objection to summary assessment of costs will be dealt with without further hearing.

35.  Unless the parties lodge with court and serve the above written submissions, the defendant should be at liberty to lodge with court and serve a statement of costs within 14 days from the date of this decision and the plaintiff should be at liberty to lodge with court and serve a statement of objections within 14 days thereafter.