LIANG HUNAN v. CREDIT SUISSE AG, HONG KONG BRANCH

HCA 415/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 415 OF 2011

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D E C I S I O N

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Introduction

1.  This is the defendant’s appeal against the Order of Master S Kwang dated 20 November 2013 granting leave to the plaintiff to amend the Writ and the Statement of Claim as per the Amended Statement of Claim (“ASOC”) since filed on 27 November 2013.

2.  As can be discerned from the defendant’s Notice of Appeal dated 3 December 2013, the defendant specifically objects to paragraphs 17A, 17B and 17C, paragraph (2A) of the Prayer for Relief and Annexure A of the Amended Statement of Claim.  The other amendments at paragraphs 6, 7, 12 and 13 are not being challenged by the defendant.

Background        

3.  The defendant is a foreign bank with a licensed branch in Hong Kong.  The plaintiff, a resident in Beijing, was a client of the defendant.

4.  In July 2002, the plaintiff opened an investment account with the defendant (“Account”).  From 2005 to October 2007, the plaintiff had traded in altogether 16 Knock-Out Discount Accumulator (“KODA”) transactions and made other investments through the Account. These KODA generated actual and notional profits for the plaintiff.

5.  In essence, a KODA transaction involves a series of pre‑ordered daily purchase of a fixed number of shares in a named company at a fixed price (normally at a discount of the sport reference price) over a specified period.  In relation to each of the subject transactions, the plaintiff was required to purchase twice the daily number of shares should the closing price of the relevant shares drop below the spot reference price (in other words the worse the shares performed the more shares the plaintiff had to buy).  There was also a “Knock-Out Event” to the effect that should the closing price rise above a specified level (105% of the sport reference price) the transaction would automatically terminate.

6.  The subject matter of this action relate to two KODA transactions entered into by the plaintiff and the defendant through the Account in October 2007 (“Disputed KODAs”). They related to the shares of two PRC incorporated companies listed on the Hong Kong Stock Exchange, namely, China Shipping Container Lines Co Ltd (“CSCL”) and China Molybdenum Co Ltd (“CM”).

7.  The plaintiff’s investments in the Disputed KODAs resulted in substantial losses and (following the plaintiff’s failure to provide further collateral) the defendant’s unwinding of the plaintiff’s positions in January 2008.

8.  The plaintiff commenced this action in March 2011.  In the original Statement of Claim, the plaintiff claimed losses arising out of the Disputed KODAs on the basis that: -

(1) the Disputed KODAs were not authorised by him, or were “incomplete” or “void for uncertainty”; and

(2) the defendant owed him various “Professional Duties” which the defendant had breached by not taking steps to ensure that the Disputed KODAs were suitable investments, or explaining to him the associated risks, etc.

9.  For the purpose of the present appeal, it is not necessary to consider the validity of the above grounds of complaint.

10.  The plaintiff’s further or alternative case, which he seeks to raise by way of amendments to the Statement of Claim, is that the Disputed KODAs were not binding on, or enforceable against, him, on the ground that performance of the transactions was illegal under the law of the place of performance.

(1) Paragraph 17A of the ASOC pleads that the Dispute KODAs “are invalid on the basis of illegal performance”.

(2) Paragraph 17B of the ASOC pleads that the performance of the Disputed KODAs “is unlawful under the laws of the People’s Republic of China where the Purported KODA Transactions had to be and has been performed”.

(3) Particulars of the allegedly applicable PRC laws (English translation of which appears in Annexure A thereto) and the alleged violations of those laws were given under paragraph 17B.

(4) Paragraph 17C of the ASOC pleads that the Disputed KODAs “necessitated in an endeavour to perform in the PRC some acts which were illegal under the laws of the PRC”.

11.  On 27 January 2014 (ie subsequent to the hearing before Master S Kwang in November 2013) the plaintiff filed and served voluntary particulars under paragraph 17C of the ASOC (“Voluntary Particulars”) of the acts which allegedly are and were at all material times illegal under the laws of the PRC.

12.  It is worth noting that the plaintiff’s application to amend was made in June 2013, more than two years since commencement of the action and well after pleadings have closed and discovery completed.  Further, the plaintiff’s claims relate only to the two Disputed KODAs.  He does not impugn any of the 16 previous KODAs, or the banking contract between himself and the defendant.

Relevant Legal Principles

13.  The general principles for granting leave to amend are set out in Hong Kong Civil Procedure 2014 at Practice Note 20/8/6.  In the absence of special reasons (for example, delay which would lead to an adjournment of a trial, amendments which would prejudice a limitation defence, or other injustice which could not be compensated by costs), generally all such amendments ought to be allowed “for the purpose of determining the real question in controversy between the parties to any proceedings”.  The court may have regard to the merits of the amendments only if the merits are readily apparent and are so apparent without prolonged investigation into the merits.  In this regard, the test is similar to that applied in a striking out application.

Discussion

14.  Mr Anderson Chow, SC (and with him Mr Jonathan Wong) for the plaintiff submitted that the following general principles are stated in Graeme Johnston, The Conflict of Laws in Hong Kong, 2^nd edition, at paragraph 5.012: -

(1) If the performance of the contract requires or necessarily involves conduct which is illegal under the laws of the place where it is required to be performed, then it will not be given effect regardless of its proper law (“second proposition”).

(2) Violations of foreign law in the actual performance of a contract may, even though not required or initially intended, lead to the unenforceability of the contract before a Hong Kong court, regardless of its proper law (“fourth proposition”).

15.  Mr Jat Sew-Tong, SC (and with him Ms Bonnie Cheng) for the defendant submitted that the case of Barros Mattos Junior v MacDaniels Ltd [2005] 1 WLR 247, the only case cited in support of the fourth proposition, did not in fact lay down any general principles regarding illegality of performance and is distinguishable on its facts.

16.  On my part, for the purpose of this appeal, I am not prepared to go so far as to hold that the plaintiff’s fourth proposition set out above is so obviously unsustainable as to constitute a ground for refusing the application to amend.  Having said that, it still behoves the plaintiff to show an arguable case that the acts pleaded in the ASOC and particularised in the Voluntary Particulars amounted to “actual performance” of the Disputed KODAs.

17.  In this regard, Mr Chow submitted that significant acts in the performance of the Disputed KODAs were carried out in the PRC.  For this purpose, the plaintiff has given in the Voluntary Particulars particulars of the act of performance in the PRC relied upon.

18.  In relation to the performance of the Disputed KODAs, the plaintiff drew the court’s attention in particular to paragraph 8 of the Voluntary Particulars.

(1) As regards the CSCL KODA transaction, the following acts were done in Beijing: -

(a) Provision of pre-confirmation trade notification on 25 October 2007;

(b) Provision of the relevant Product Flash (detailed term sheet) on 26 October 2007;

(c) Provision of a confirmation of terms on 5 November 2007; and

(d) Provision of various statements of investment (“SOIs”) between October and December 2007.

(2) As regards the CM KODA transaction, the following acts were done in Beijing: -

(a) Provision of the relevant Product Flash on 30 October 2007;

(b) Provision of pre-confirmation trade notification on 31 October 2007;

(c) Report on the performance of the CM KODA transaction on 2 November 2007;

(d) Provision of a confirmation of terms on 27 November 2007; and

(e) Provision of various SOIs between October and December 2007.

19.  Mr Chow went on to submit that the acts set out in paragraph 18 above were carried out in the ordinary course, and were part and parcel, of the performance of the Disputed KODAs between a bank (the defendant) and its customer (the plaintiff), and were not insignificant acts. According to the defendant’s own pleaded case, the provision of the pre-confirmation trade notifications, Product Flashes, confirmations of terms and SOIs, coupled with the absence of any objection by the plaintiff, carried important contractual implications (namely, that the details set out in those documents became conclusive evidence vis-à-vis the plaintiff and represented the plaintiff’s instructions).

20.  Hence, those acts cannot be dismissed as being insignificant and they must, at least arguably, have been carried out in performance of the Disputed KODAs.

21.  On the other hand, Mr Jat pointed out that the performance of the Disputed KODAs involved the buying by the plaintiff and the selling by the defendant of an agreed number of the underlying shares (which were listed on the Hong Kong Stock Exchange) on each trading day during the tenor at a pre-agreed price.  The cash settlement took place monthly, upon which the shares accumulated during the preceding month will be delivered to the plaintiff and held in the plaintiff’s Account maintained with the defendant, and the defendant would charge the total purchase price from the plaintiff’s Account.  All of these took place in Hong Kong.

22.  As regards the acts specifically relied upon by the plaintiff, Mr Jat succinctly replied to the point by submitting that the dispatch of pre‑confirmation trade notifications, Product Flashes, confirmations of terms and SOIs to the plaintiff was either made before the relevant KODA was even entered into; or after the same was already executed in Hong Kong; or at most, only went to the existence of the contract and its terms (but not in performance of the same).

23.  In my view, Mr Jat is plainly right in his analysis of the situation.  In the words of Mr Jat in his submissions in reply (with which I agree), the performance of a contract, in the context of the question of illegality, must refer to performance in discharge of the obligations created under the contract.  In other words, those obligations which if not performed would amount to a breach of the contract.  Thus analysed, the acts relied upon by the plaintiff can, at most, amount to acts incidental to the performance of the contract but not performance of the contract itself.

24.  Further, I agree with Mr Jat that in the present case there is no basis to contend that the Disputed KODAs necessitated performance in the PRC (ie falling within the second proposition).  The Disputed KODAs did not have to be and were not in fact performed in the PRC. They were executed and performed entirely in Hong Kong.

25.  In my view, the lack of merits of the plaintiff’s amendments to plead illegal performance is sufficiently apparent without prolonged investigation to enable the court to come to the view that the case pleaded by the amendments is obviously unsustainable and unarguably bad. 

Order

26.  For the reasons set out above, I would allow the defendant’s appeal and make the following orders:-

(1) The Order of Master S Kwang dated 20 November 2013 (save to the extent that leave was granted to the plaintiff to amend paragraphs 6, 7, 12 and 13 of the Statement of Claim) be set aside;

(2) Service of the Amended Statement of Claim by the plaintiff on the defendant on 27 November 2013 be set aside and, in lieu thereof, the plaintiff do file and serve an Amended Statement of Claim incorporating amendments to paragraphs 6, 7, 12 and 13 of the Statement of Claim within 7 days from the date of this order;

(3) The defendant do have leave to amend its Amended Defence consequential to the amendments in the Amended Statement of Claim (if so advised) within 28 days thereafter;

(4) Consequential to (1) and (2) above, the Voluntary Particulars of the Amended Statement of Claim filed by the plaintiff on 27 January 2014 be struck out; and

(5) The costs of and occasioned by the application below (including the costs of the hearing on 20 November 2013) and the costs of this appeal be paid by the plaintiff to the defendant (with a certificate for 2 counsel for the hearing on 15 April 2014).

27.  The above order as to costs is nisi and shall become absolute in the absence of any application within 14 days to vary the same.

28.  Lastly, I express my gratitude to counsel on both sides for their very helpful assistance in this matter.