RICHARDSON GREENSHIELDS OF CANADA (PACIFIC) LTD v. KEUNG CHAK KIU AND ANOTHER

High Court Commercial List No. 51 of 1988

HEADNOTE

Commercial Law - Futures Exchange - Statutory duty - whether breach of a duty, if one existed, would give rise to a civil action in damages. Tort- negligence - whether Futures Exchanges owes a duty of care to investors in the market.

1988, No. C.L.51

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. In this action, the Plaintiffs who are brokers sue the Defendant for something over half a million dollars, the balance of money owing on a trading account for the purchase and sale of Hang Seng Index Futures Contracts.

2. The Defendant has put forward several defences, one of which was that the transaction was unenforceable by virtue of the Gaming Acts. On November 17 of last year, I delivered judgment and rejected that defence which had been raised by him and many hundreds of other persons who had been speculating on the Hong Kong Futures Exchange.

3. The Defendant, apart from his defence, has served a third party notice against the Hong Kong Futures Exchange, saying that if he is held liable to the Plaintiffs for their claim, then the Futures Exchange should idemnify him, because it was due to their breach of the law, as he says, that has caused him this loss. The Defendant alleges in his third party claim that the Exchange owes a duty to all investors and traders in the market to operate and maintain the market in accordance with the Commodities Trading Ordinance and various rules and regulations; in particular, they owe a duty to keep the market open at all business hours and permit free trading and dealing; and instead they shut the market for five days and deprived the Defendant and many other hundreds of persons from closing their positions. That is the basis of the Defendant's claim. It raises an important matter, because it is common knowledge that after black Monday, as it has been called, both the Stock Exchange and Futures Exchange were shpt for five days, and this is a direct challenge to the legality of the Exchange's act at that time.

4. There are two preliminary matters. First of all, the summons, which has now been taken out by the third party, is to strike out the Defendant's claim on the basis that it discloses no reasonable cause of action known to the law. As far as my role in this summons is concerned, I should only strike out a claim which is wholly unsustainable. I am only permitted to look at the averments in the pleadings and I have to assume in favour of the Defendant various factual matters which are there set out.

5. Mr. Boyd, on behalf of the Exchange, submits that I must assume against him all the various factual matters which have put by the Defendant, even on that assumption, he says there is no reasonable cause of action. (I should point out that the Exchange disputes a number of those facts.) I am not permitted to look at any affidavit evidence, but I have examined the rules of the Futures Exchange which have been referred to in this claim.

6. The second matter is that the Defendant has until recently had the benefit of solicitors and leading and junior counsel. He now appears in person. He says he has not sufficient money to instruct new solicitors. I therefore have not had the benefit of counsel's, submissions in opposition to this application.

7. Nevertheless, Mr. Boyd in the usual high tradition of the English Bar has drawn to my attention arguments which might be in favour of the Defendant. Furthermore, although my task is to hold the balance fairly between the parties, I have been somewhat concerned that there are about a hundred and seventy other actions pending in my list where similar claims have been made against the Futures Exchange, and the sums of money involved amount to many million dollars. I have therefore given the greatest scrutiny not only to the claim as it has been pleaded, but as I have power to permit amendments to be made, I have also considered whether if this claim is unsustainable, any amendment can be made in order to cure that defect.

8. The Defendant's claim alleges that the third party owes a duty to him, this he says has been broken and he is therefore entitled to damages. He says that the third party is "required by law to provide and maintain a commodity market open to the public to trade in commodities"; that the market was shut on black Monday in October, 1987, and stayed shut for a further four days causing him financial loss. The Defendant does not identify in his claim what law this is, but the only possible legal obligation, a breach of which could give rise to an action in damages, is a breach of statutory duty. It is therefore necessary to analyse the provisions of the Commodities Trading Ordinance under which the Hong Kong Futures Exchange is established and operated.

9. Part II deals with the Trading Commission.

10. Section 13 of the Ordinance permits the Governor to issue a licence to establish and operate the commodity exchange, and this exchange has been so licensed.

11. The Governor must be satisfied that the company compiles with certain requirements; one of those under Section 13(3)(b) is that the company will (i) "maintain to the satisfaction of the Commission an adequate and properly equipped place of business"; and (ii) "provide and maintain commodity markets at places approved by the Commission".

12. Under Section 18, the Commission may revoke that licence, one of the grounds being that the Exchange Company has not complied with the requirements of Section 13(3).

13. Under Section 19, the Commission instead of revoking the licence is entitled to close the Exchange.

14. The Ordinance (Part VII) sets up a disciplinary committee to investigate allegations of misconduct, and where there has been misconduct, the Commission under Section 20 has power to close the Exchange for that reason.

15. Furthermore, under Section 21, the Governor has power to close the market himself for a period not exceeding five bank days, if he is of the opinion that the orderly transaction of trading is being or is likely to be prevented because "(a) an emergency or natural disaster has occurred in Hong Kong", or "(b) there exists an economic or financial crisis or any other circumstance whether in Hong Kong or elsewhere." So it can be seen from that Section that the Governor, because of the world stock market crash, himself could have directed that this Exchange be shut for a period not exceeding five bank days. I am told that the Governor did not and was not asked to invoke that provision - It was the Exchange itself which decided to shut pursuant to its own rules. Part IV of the Ordinance deals with the Registration of dealers and commodity trading advisors and representatives.

16. Sections 66 to 75 deal with the disciplinary committee; this is an important group of sections, because the disciplinary committee is appointed to enquire into allegations that either the exchange company, management committee or any member has been guilty of misconduct; misconduct is defined in Section 67(5); as meaning" (a) failure to comply with the requirements under this Ordinance"; "(c) any wilful contravention of the rules of the Exchange"; "(e) any act or omission relating to the operation of the Commodity Exchange or any commodity market which is likely to be prejudicial to the public interest". A person who is found guilty of misconduct may be disqualified, fined or reprimanded. It is clear therefore that the Hong Kong Futures Exchange, although it performs a service for the public, is essentially a private organisation. It is permitted to trade by, virtue of the licence which is granted, which may be revoked. It has no greater legal status than any other market which is franchised to carry on a particular business. The Ordinance gives the Exchange certain powers, but it is not under any statutory duty to operate a market at all, nor to keep it open all the time. There is a requirement to operate it in accordance with its own rules, but there is no legal obligation to keep it open. If for example, the Exchange was not kept open at regular times, then it may be that the Governor could take action and revoke the licence. When one looks at this Ordinance, there can be found no statutory duty as the Defendant alleges; that in itself would dispose of this case, but it is right that I should consider other legal matters assuming that there was some statutory duty or legal obligation as the third party claims.

17. I therefore now have to assume that there is some particular duty on the Exchange to operate it in the way the Defendant alleges in order to give rise to a civil action for damages for breach of duty. There are certain well-known principles which must be examined. Although the construction of each statute turns on its own words, certain general principles are normally involved in this examination.

18. First, the injury suffered must be within the ambit of the statute. This Defendant like many other people lost his money because he suffered trading losses on his trading account. The Commodities Trading ordinance was not passed to prevent that, but to prevent misconduct and to regulate those who operated within the market; it was also passed to criminalize certain practices.

19. Secondly, even were there some duty which this exchange owes to the Defendant, the duty must impose a liability to a civil action in damages. I have read various Sections of the Act which impose certain duties and they provide expressly for the consequences if they are broken. A failure to comply with the statutory "requirements" may lead to revocation of the licence : a specific remedy is provided for "misconduct". Nowhere can I find the provision of a civil remedy for these matters (see Cutler v. Wandsworth Stadium (1949) AC 398).

20. There are some duties which provide for criminal consequences for a breach; some breaches may be civil in nature, for example see Section 47(2). Some breaches are administrative which are found in section 18 onwards. If a statute is silent as regard a civil remedy for a breach, the judge must examine the scope and purpose of the statute. I have no doubt that on a fair reading of this Ordinance, no civil remedy lies for breaches of duty of the sort the Defendant alleges.

21. The third principle is that there must be non-fulfilment of the statutory duty. The main allegation of this Defendant and other Defendants is that the market was shut for four consecutive days contrary to Rule 601 and regulation 5025. These rules and regulations, which must be approved, do not have any statutory force. They are for the better regulation of the market and its members; all they do is to provide that if the power to operate the Exchange is exercised, then it shall be exercised in a particular way. It appears to me on a reading of the rules and regulations that the suspension of the market was in accordance with those rules. I therefore can find in this ordinance first no statutory duty as the defendant alleges, secondly no breach by the third party and thirdly note of the normal legal principles which could give rise to a civil action for damages

22. The defendant submits orally in front of me that he and others had been victimized by the closure of the market because they could not close their positions. Those who engage in financial speculation run the risk of losing their money. The October crash was one of those events unforeseen by the world markets and chaos was bound to occur unless the market themselves tried to regulate the position. This defendant may not realise that the whole operation of the Hang Seng Futures Contracts, which have proved to be so popular in Hong Kong, depends on the fixing of the index, so that the difference between the buying and selling prices will determine the loss or gain of the contract holder. Because the Hong Kong Stock Exchange was shut, there was no Hang Seng Index, and therefore the Futures Exchange could not operate in hang Sent Index Futures Contracts, as the price could not be fixed. Whilst I therefore sympathize with the defendant and others who lost money, they were not, in my judgment, the victims of the closure of the Futures Exchange, they were the victims of the world financial crash which affected among other markets the stock exchange. It is the closure of the stock exchange which effectively prevented the trading in Hang Seng Index Futures Contracts. The claim, however, by the Defendant is made against the Futures Exchange and nobody else. As I said earlier, I have considered whether there is any possibility of amending this claim. I can see none. Mr. Boyd has kindly provided me with some arguments as to whether or not a claim in negligence is capable of being made. Such a claim has never been formulated by the skilled lawyers who have been assisting the Defendant until recently. In my judgment there are a number of legal problems which would inhibit the formulation of such a claim.

23. First, a duty of care would have to be found. The third party had no direct dealing with the defendant. The Defendant was dealing at all times with his brokers who are Richardson Greenshields of Canada. The objects of the exchange company are to promote the interests of its members. No legal precedent can be found of any duty of care owed to investors, on the contrary, see the recent decision of the Privy Council in YUEN KUN-YEU v. Attorney General of ?Hong Kong (1988) 1AC 175.

24. Secondly, there would be compelling policy reasons against the existence of such a duty of care. For example, the regulation of a financial market at a time of economic pressure is difficult; a decision to suspend trading might have to be taken quickly and a fine judgment drawn between divergent interests. It would be quite wrong to inhibit the decision makers with the threat of legal suits. Some investors will say, as in this action, that the market should have stayed open; others might say, if a decision to remain open had been made, that the market should have closed.

25. Further, as the Ordinance has not imposed any statutory duty to investors when a decision to close is being considered and made, it would be strange that a common law duty would be superimposed upon the statutory framework (see Lord Keith in YUEN Kun-yuen at p. 195).

26. Thirdly, the Defendant's damage is as he says, the economic loss caused by a lost opportunity either to make a gain or to mitigate his loss. The essence of the defendant's case, as I understand it, is that because the market was shut he could not sell his contracts, so presumably he is saying that if he had sold, for example, on the Tuesday or the Wednesday, he might have made again as the market was plummetting, alternatively, he would be mitigating the loss that he had made. Whatever the position, that kind of damage has never been recognized by the courts as being legally recoverable. Such economic damage was not foreseeable to this particular Plaintiff - it must be foreseeable to an identified Plaintiff and not just to a member of an indeterminate class (see Clerk and Lindsell on Torts p. 385). I have only sketched the various insuperable problems in the formulation of a claim in negligence.

27. It is clear, therefore in my judgment, that the defendant's claim as put forward cannot be bettered in any way. The case of the defendant is bound to fail. It falls, therefore, within that category of claim which I may strike out as disclosing no reasonable cause of action and I therefore strike it out. Further, in view of the findings which I have made, it is right that this claim by the defendant against third party should be dismissed and I dismiss it.