UOB KAY HIAN FUTURES (HONG KONG) LTD v. LAI, LAWRENCE AND ANOTHER

HCA 1946/2011
[2018] HKCFI 95

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1946 OF 2011

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J U D G M E N T

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Introduction

1.  The plaintiff was a futures brokerage firm, the 1^st defendant (“Mr Lai”) an account executive employed by the plaintiff and the 2^nd defendant (“Mrs Horn”) a client with a futures trading account with the plaintiff.  The ultimate question in this action is who should bear the losses incurred in the trading of Nikkei 225 Index futures on Mrs Horn’s account between 11 and 15 March 2011 in the wake of the earthquake off the coast of Tōhoku, Japan on 11 March 2011.

The facts

2.  In this section I set out the facts most of which are uncontroversial.

3.  The plaintiff was a company licensed under the Securities and Futures Ordinance (Cap 571) to carry on dealing in futures.  Mr Lai joined the plaintiff and its associated company, UOB Kay Hian (Hong Kong) Ltd in December 2002 as an account executive, holding the title “Associate Director”.  Under the terms of a letter of agreement dated 13 November 2002 signed by him (“2002 Agreement”), he was entitled to a basic salary and 40% of the commission generated by him (beyond a certain amount), but he was also liable on a guarantee of the liabilities of his clients.  The validity and effect of this guarantee is a matter in dispute.

4.  Mrs Horn is Mr Lai’s sister.  She lives in South Africa, running a software company and a real estate agency there.  From around 2000, Mrs Horn had started some futures trading of her own using online trading systems for North American indices.  When Mr Lai visited her in South Africa in around May 2010, she agreed at his suggestion to open an account with the plaintiff, where he was working, to profit from trading in Asian index futures, and signed an agreement called “Futures Client Agreement” which incorporated an application form for opening an account and the terms of a document called “Client Agreement — Terms and Conditions”.

5.  On the basis of these documents, an account was opened with the plaintiff in Mrs Horn’s name for dealing in futures and options (“the Account”).  The account executive was Mr Lai.  The initial “trading limit” of HK$100,000 was increased in July 2010 to HK$4m; in September, to HK$6.5m; and in October, to HK$7.5m.  There were several temporary increases (each for a month) of the “trading limit” to various amounts between November 2010 and February 2011.  The last of these ad hoc increases was granted in February 2011 up to HK$17m, ending on 10 March 2011.  This limit referred to the fixed margin requirement for futures contracts.

6.  On 11 October 2010, when the Account was turned into a “house account” within the plaintiff’s system, Mr Lai was required to and did sign a further letter of agreement with the plaintiff relating to his liabilities for the Account (“2010 Agreement”). Again, its validity and effect is in dispute.

7.  From the time the Account was opened, there had been active trading of futures in it, including Nikkei 225 Index futures (traded in JPY at Singapore Exchange Ltd), Hang Seng Index futures (traded in HK$ at the Hong Kong Futures Exchange (“HKFE”)) and Japanese Yen futures (in US$).  The trading of Nikkei 225 Index futures was highly profitable for the Account between June 2010 and January 2011^[1] as a whole.  The realised profits and losses made for each month can be seen from the following table:

Month	Profit/Loss (JPY)	Profit/Loss (HK$)	Profit/Loss (US$)
Jun 2010	11,850,000	247,200	0
Jul 2010	45,602,500	85,600	26,250
Aug 2010	(33,650,000)	0	11,713
Sep 2010	40,425,000	0	(7,275)
Oct 2010	5,862,500	0	0
Nov 2010	10,125,000	(848,750)	0
Dec 2010	146,925,000	(728,550)	(12,250)
Jan 2011	(2,925,000)	5,328,850	0

8.  There was an initial capital deposit of HK$1.2m into the Account for the trading but this was withdrawn on 15 July 2010, there being sufficient profits by then to support further trading.  On 17 January and 1 March 2011 respectively, on the strength of the accumulated profits, Mrs Horn withdrew HK$8m and HK$7m from the Account.  Throughout this period of time Mrs Horn was Mr Lai’s key client.  Indeed, by March 2011, the Account was the only active one handled by Mr Lai.  Mr Lai also had a futures account with the plaintiff in his own name (opened in 2008), although it was inactive with a positive equity balance.

9.  Nikkei futures were traded on the Singapore Exchange. The plaintiff’s clients’ orders for trading in Nikkei futures were placed by telephone with a sister brokerage company in Singapore, called UOB Bullion & Futures Ltd (“UOBBF”).  Mr Lai was one of a select group of experienced account executives in the plaintiff who could place orders for clients with UOBBF, and a maximum daily trading limit of HK$10m applied to him.  At that time, UOBBF’s confirmation of the trade deals would only be received by the plaintiff later on, so that the information the plaintiff received could in the ordinary course lag behind by as much as 2 trading days.

10.  By 7 March 2011, Mr Lai had purchased and rolled over 420 Nikkei futures contracts for the Account.  The movement of the index by each point up or down would bring a gain or loss of 500 yen on each contract.  With 420 contracts for the Account, each point would mean 210,000 yen (equivalent to about HK$21,070).  That remained the Account’s exposure as at 11 March, when the index closed at 10,254. 

11.  All was well until the afternoon of 11 March, Friday, when a severe earthquake hit Japan at 14:46 (Japan time), followed by a tsunami and nuclear leakage.  As a consequence, the Nikkei index remained highly volatile in the following days. 

12.  In the morning of Monday, 14 March, a daily statement for the trading day of 11 March was emailed to the email address stated in the account opening form (“designated email address”), showing a margin call in the amount of JPY 65,311,997.  There were also telephone calls by the plaintiff’s employees to Mr Lai telling him the margin shortfall.  At 12:16pm, an employee in the plaintiff’s credit department, Rex Au, emailed Mr Lai a formal margin call on the Account, with a call amount of approximately HK$4.74m (based on closing prices of 11 March). 

13.  Mr Lai squared some of the Nikkei futures positions. At 1:59pm, he cross‑checked with the Credit Department, confirming that 180 lots of Nikkei futures remained outstanding on the Account.  He asked the Credit Department to work out the margin shortfall.  At 2:20pm he received a reply that the client should pay in roughly HK$2m.

14.  That afternoon, Mr Lai closed out the rest of the pre‑existing Nikkei futures positions in the Account (at points ranging from 9,470 to 9,990) but, perhaps in the hope of recouping the losses, opened 420 new Nikkei futures contracts for the Account.  Mr Lai also transferred HK$1m of his own money into the Account.

15.  Between the late afternoon (after 4:30pm) and evening of 14 March and the morning of 15 March (about 8:20am), Mr Lai bought another 420 new Nikkei futures contracts for the Account (300 on the 14^th and 120 on the 15^th), unknown to the plaintiff’s credit department at that moment in time.  By the morning of 15 March, there were therefore 840 open positions in Nikkei futures.  Unfortunately, the market did not rebound and they were to result in further losses.

16.  I need not find that Mr Lai had deliberately sought to conceal these trades from the plaintiff but I accept the evidence of Ms Tse, head of the plaintiff’s credit department, that she and senior management did not at that time know about the opening of the new positions.  I found her evidence generally credible even though she was at times a little overly defensive.  Mr Lai did not have to go through the plaintiff’s staff in order to trade in Nikkei futures, since he was himself one of the authorised persons to place orders with UOBBF in Singapore.  Taking out such a large number of new open positions at that time was highly risky and would have raised alarm with the plaintiff’s management if they had known about it.  It also seems likely that the risk officers in the credit department did not have knowledge either on 14 March.  The confirmation from UOBBF would only be received after a short delay.  The risk officers would not necessarily have known about the new trades before that unless they called UOBBF to check. Since they were making a margin call on the Account and urging Mr Lai to square the outstanding positions, it is unlikely that they would have stood idly by if they had known Mr Lai proceeded to take out such a large number of new open positions.  Nor did Mr Lai in his pleadings or statements assert that any specific person in the plaintiff knew about those new trades.  In my opinion, the defendants have failed to prove that any specific person in the plaintiff other than Mr Lai himself actually knew about the trades that day.

17.  On 15 March, at 8:28am, Mr Lai sent an email to Rex Au saying that his client would pay in HK$6.8m on 15 March and a further HK$12m on 16 March.  By then the true state of the Account was known to senior management.  At 8:48am, Rex Au told Mr Lai that no new positions could be opened before incoming funds were confirmed.  Eventually, the sum of HK$6.8m was paid in not on 15 March but on 16 March, and the sum of HK$12m was never deposited.

18.  Under pressure from the plaintiff, the Nikkei futures positions in the Account were all closed out by Mr Lai by 1:30pm on 15 March, at very substantial losses, wiping out any previous surplus in the Account which went into a large net deficit.  On 18 March, to cover the losses, the plaintiff caused a sum of HK$2.02m to be transferred into the Account from Mr Lai’s own account.

19.  By 21 March, the net debit balance of the Account was approximately HK$23.6m.  On that day, a solicitor from H L Wong & Co, as solicitors for Mr Lai and Mrs Horn, contacted Mr Mickey Lee, Deputy Managing Director of the plaintiff.  By a following email, Mr Lee asked the solicitors to advise when the debit balance would be paid.  On 22 March, the solicitors replied that their clients were:

“unable to settle the said outstanding balance in full but they are in the course of restructuring their financial positions and are trying to see if there is any possible resolution workable to both parties in resolving the whole matter”.

20.  A formal letter of demand was issued to Mrs Horn on 24 March, which was passed to her and Mr Lai by their solicitors.  Mr Lai began to be absent from work from 1 April 2011.

21.  As at 25 October 2011, the debit balance in the Account stood at HK$24,466,180.31.  The writ of summons was issued by the plaintiff on 14 November 2011 claiming this amount.

Provisions of the Futures Client Agreement

22.  The most significant provisions of the Futures Client Agreement for present purposes are as follows:

“11. Margin

11.1 The Client agrees to maintain such Initial Margin and/or Maintenance Margin in any and all Accounts the Client may at any time carry with the Broker. All Margin Requirements must be settled in cash. All Variation Adjustments and Interest Rate Cash Adjustments must also be paid by the Client in cash.

11.2 The Broker may make margin calls and demands for Variation Adjustments and Interest Rate Cash Adjustments to the Client either orally or in writing and may specify therein the period within which the margin call, or demands for Variation Adjustments and Interest Rate Cash Adjustments must be met. The Client agrees and undertakes to pay any margin calls, Variation Adjustments and Interest Rate Cash Adjustments made orally or in writing, immediately on demand or within the time specified (if any) by the Broker.

11.3 The Client further acknowledges and agrees that:

…

11.3.2 the Broker will not transact any Futures/Options Business for the Client until and unless the Broker has received from that Client sufficient cash to cover that Client’s expected trading liabilities, Initial Margin, Variation Adjustments and/or Interest Rate Cash Adjustments;

…

11.3.5 the Broker is obliged to report to the HKFE and the Commission particulars of all open positions in respect of which two successive margin calls, demands for Variation Adjustments and/or Interest Rate Cash Adjustments are not met within that period specified by the Broker.

…

11.6 In the event of a failure by the Client to meet margin calls and/or demands for Variation Adjustments and/or Interest Rate Cash Adjustments as specified in such calls and/or demands, the Broker shall be entitled to close out open positions including open positions taken out at different times without further demand or consent from the Client with absolute discretion to the Broker to choose which position(s) should be liquidated and in which order provided, however, notwithstanding any demand for margin, the Broker may at any time proceed in accordance with clause 13 of this Agreement. The Client agrees that in closing out the Client’s open position(s) the Broker owes no duty or obligation of whatsoever nature to the Client to minimize or eliminate the Client’s loss.

…

12. Margin Call Policy

12.1 Margin calls will be issued when the net equity in the Client’s account falls below the maintenance level.

Margin Call

12.2 The Broker, through the Account Executives, will notify the Client of the margin call amount and the time period to fulfil the margin requirement.

12.3 No new open position is allowed within the period of margin call.

12.4 The Client is required to meet the margin call within the time period by depositing cash and/or closing out an appropriate number of existing open positions. Otherwise the Broker has the sole discretion to restore the margin ratio by liquidating positions in the Client’s account.

12.5 Notwithstanding anything provided in clauses 11.2, 12.2 and 12.4 of this Agreement, whenever the Broker deems it advisable for its protection, the Broker has the right to shorten the time period to meet margin call and/or force liquidate positions immediately without prior notice to the Client. The Broker reserves the right to liquidate the positions at any time and at any prices. The net proceeds of any such liquidation shall be applied against the Client’s indebtedness to the Broker, and the Client shall remain responsible for any deficiency.

12.6 The Broker’s non‑action does not prejudice its claim on the Client.

……”

The plaintiff’s claims

23.  The plaintiff’s claim against Mrs Horn is simple.  It is based on the Futures Client Agreement, clauses 4.14, 5.4 and 13.5 of which provided that the client shall be liable to the plaintiff for any deficiency in the account.  The plaintiff claims the sum of HK$24,466,180.31 with interest under s 48 of the High Court Ordinance (Cap 4).

24.  The plaintiff’s claim against Mr Lai is for the same amount, based on the guarantee he gave in the letters of agreement but primarily the 2010 Agreement.  The 2002 Agreement provided:

“UOB Kay Hian Group includes all its subsidiaries. In consideration of the UOB Kay Hian Group providing securities and futures trading, margin financing facilities and/or other allowed financing facilities to any non‑institutional clients or institutional clients trading beyond approved limit, (1) you guarantee to discharge on demand by UOB Kay Hian Group from time to time the Clients’ Liabilities in relation to each client you serve; and (2) you agree as an additional and independent obligation that, if any of the Clients’ Liabilities of any client you serve are not recoverable from you under the guarantee above for any reason, you will be liable to UOB Kay Hian Group as a principal debtor by way of indemnity for the same amount as that for which it would have been liable had those Clients’ Liabilities been so recoverable and you will discharge that liabilities on demand by UOB Kay Hian Group from time to time.”

The 2010 Agreement provided:

“This is to confirm that you have agreed to serve Ms Horn and responsible [sic] for the obligations and liabilities to UOB Kay Hian Group of any kind and in any currency, whether present or future, actual or contingent and whether as principal or surety or incurred alone or jointly with another (and includes any purported obligation or liability of such client to UOB Kay Hian Group which if valid would be comprised in such obligations and liabilities) arising from any trades or transactions effected by this client through you.”

25.  According to the plaintiff, this kind of guarantee served as a check and balance on the account executive so that he would have a strong incentive to monitor the status of the client’s account.

The defences raised by Mrs Horn

26.  On behalf of Mrs Horn, it is accepted that Mr Lai was authorised by her to trade on her behalf, but she contends that she is not liable for the debit balance in the Account because the plaintiff had breached its duty to her and thereby caused her loss.  Essentially she complains the plaintiff wrongfully allowed the Account to trade and accepted orders to open new positions when margin calls remained unsatisfied, an applicable position limit was exceeded and the trading activities were manifestly inconsistently with her investment objective.  Specifically, the breaches alleged are that:

(1) In breach of clause 12.2, the plaintiff failed to notify Mrs Horn of the margin call of 14 March 2011.

(2) In breach of clause 12.3, the plaintiff continued to open new positions within the period of margin call.

(3) In breach of clause 11.3.2, the plaintiff continued to transact futures business for the Account without sufficient cash to cover Mrs Horn’s expected trading liabilities.

(4) In breach of clause 11.3.5, the plaintiff failed to report to the HKFE and SFC the open positions in the Account after 2 successive margin calls were not met.

(5) In breach of its duty to observe the regulations of HKFE, and in breach of Rule 617, the plaintiff failed to ensure the minimum margin requirements were satisfied in relation to the Account, and in breach of Rule 619, the plaintiff failed to notify the HKFE of the failed margin calls on the Account.

(6) In breach of an implied term, the plaintiff failed to contact Mrs Horn to confirm with her directly, when the trading in the Account was not consistent with her investment strategy.

(7) The plaintiff breached its duty of care to Mrs Horn (a) to ensure margin calls were delivered to her in a timely manner, (b) to monitor the volatile futures market and pay special attention to the exposure of the Account in extraordinary market fluctuations, (c) to monitor and enforce the position limit (of 400 futures contracts), trading limit and other limits on the Account, (d) to inform her timeously when the Account turned into sudden huge deficit, (e) to liquidate and close the Account when she could not satisfy margin calls, and (f) to abide by the HKFE and SFC regulations which were designed to protect her as an investor.

27.  It is contended that, without these breaches, the Account would not have turned into deficit.  Mrs Horn says that the debit balance was therefore “not valid” or that any liability on her part for the debit balance is extinguished by set‑off against her claim for the loss caused by the plaintiff’s breaches.  (There was a pleaded counterclaim in the same terms but it was provisionally struck out under RHC O 25 r 1C and never revived.)

The defences and counterclaim raised by Mr Lai

28.  Mr Lai contends that despite the 2002 Agreement and 2010 Agreement, he is not liable to the plaintiff because:

(1) The 2002 Agreement was not enforceable for want of certainty, intention or consideration.

(2) The 2010 Agreement was not a guarantee of the liabilities in respect of the Account.  If there was a liability of Mrs Horn outstanding, Mr Lai would be responsible to the extent he would get a poor performance appraisal, but would not be liable to make good any deficiency.

(3) The plaintiff breached:

(a) its duty of care to Mrs Horn (essentially as alleged by Mrs Horn);

(b) HKFE Rules 617 and 619 (essentially as alleged by Mrs Horn);

(c) an implied term of the 2002 Agreement (and of the 2010 Agreement if it constituted a guarantee), in that it failed to advise Mr Lai from time to time of his liabilities as guarantor for his clients.

29.  On a basis similar to that raised by Mrs Horn (see §27 above), Mr Lai says the debit balance was therefore “not valid” or extinguished by set‑off. 

30.  Further, Mr Lai claims that on 17 March 2011, the plaintiff unlawfully coerced or induced him to authorise the transfer of HK$2.02m from his own account with the plaintiff to the Account.  He says he agreed to the transfer based on his understanding that the plaintiff would comply with HKFE regulations, which it did not.  He seeks the return of the sum.

Discussion

Relationship of the defendants

31.  Before dealing with the defences raised by the defendants one by one, it is important to note the special circumstances of this case flowing from the relationship and private arrangement between the defendants, for in my view it is key to the proper analysis of the legal rights and obligations between the parties.

32.  As noted above, the defendants are brother and sister.  They agreed between themselves that all the statements of the Account should first be sent to Mr Lai, and he would verify them before passing them on to her.  Accordingly, in the client information statement for the opening of the Account, Mrs Horn gave as her correspondence address an email address which (unknown to other staff of the plaintiff) was Mr Lai’s private email address.

33.  For trading, Mr Lai would sometimes give her suggestions and recommendations and they would discuss them and later on he would tell her the results.  However, it is clear — as was expressly admitted in their witness statements — that Mr Lai was authorised by Mrs Horn to trade the Account at his sole discretion without obtaining her prior approval on the trades, though this was not known to others in the plaintiff.  It was stated in Mr Lai’s first witness statement, which he adopted as his evidence in chief:

“32. D2 had authorised me to trade on her behalf on my sole discretion for investment return.

33. With D2’s approval, I did not consult with D2 before I traded in the Account.”

Paragraphs 19 and 20 of Mrs Horn’s witness statement, also adopted as her evidence in chief, were mutatis mutandis the same.  Mrs Horn’s oral evidence confirmed that Mr Lai effectively had blanket authority.  In his oral evidence, Mr Lai sought to downplay the scope of his discretion, and explained that, generally, the trading was done after discussion with Mrs Horn in which she gave him “a bit of leeway” to make decisions in the light of market conditions.  I am sceptical about that evidence which seems to have been motivated more by concerns for potential breach of SFC rules for licensed persons.  In any event, irrespective of the extent of actual participation by Mrs Horn in the decision for each trade, there is no dispute raised in the pleadings that they were all her trades and properly attributed to the Account.

34.  Mr Lai did trade the Account using his “leeway” or discretion.  In particular, in March 2011, Mrs Horn was away from home — actually in a meditation sanctuary — between the 9^th and 17^th, with a mobile phone but without any Internet connection.  The trades during this period were done without her prior knowledge, but with her general authority.  She returned home to learn on the 18^th that there had been very substantial losses sustained in the Account.  It was no doubt a shock to her, but as Mr Lai kept telling her he would handle it, she left the matter to him.

35.  Mr Lai said it was an “open secret” within the plaintiff that Mrs Horn — the account holder — was his sister.  Whether that was so or not, there is nothing to suggest that any other person within the plaintiff knew that any of the trades done by Mr Lai for the Account were done at his own discretion without the specific knowledge of Mrs Horn.  Mrs Horn did not inform the plaintiff that Mr Lai was “Authorised Representative” (a specifically defined status in the Futures Client Agreement) even though he in fact operated with her actual authority.  Mr Lai admitted (in his 2^nd statement §29) that the plaintiff did not know about “the discretionary arrangement” between him and Mrs Horn.

36.  Whether or not it was the result of collaboration — and I note that certain passages in their pleadings and witness statements were materially identical — their defence in these proceedings is consistent one with the other.  Mrs Horn’s case is that she authorised Mr Lai to trade the Account on her behalf. Even though they complain that certain trades were done in contravention of specific provisions of the Futures Client Agreement, there is no pleading by either of them that any of the trading was or should be regarded as having been done without her authority or in excess of Mr Lai’s authority.  No trade has been disowned by her.  Nor is there any suggestion that Mr Lai himself breached any duty as private discretionary agent of Mrs Horn or was negligent or reckless in his trading decisions.  For present purposes, therefore, the trades must all be taken to have been desired by her and done with her actual authority — they were as good as if she had directly placed the order with the trader for each trade.

37.  As both defendants must have known, the plaintiff was not a fund manager or investment adviser, but an execution broker for futures trading.  The core service it provided to clients was to execute deals upon their instructions.  By the Futures Client Agreement (clause 4.1), the plaintiff agreed “to purchase, sell (including short sales) or otherwise deal with” futures contracts, on margin or otherwise, “for the Client’s Account in accordance with the oral or written instructions or orders of the Client …”, though clause 4.2 reserved to the plaintiff the right, at its discretion, to accept or reject any instructions or orders for the client’s account and to impose trading limits without assigning any reason therefor.

38.  The scope of the plaintiff’s services did not include giving investment advice or carrying out discretionary trading.  By employing him and by assigning him as the account executive for Mrs Horn, the plaintiff did not confer on Mr Lai any actual or ostensible authority to carry out discretionary trading for Mrs Horn.  In using Mr Lai’s private email address as the designated email address for the Account, and in authorising Mr Lai to trade the Account at his own discretion, Mrs Horn must in my view be taken to have appointed Mr Lai as her own agent for those purposes.  In so acting, Mr Lai was acting in his private capacity, as Mrs Horn’s brother and agent, not for and on behalf of the plaintiff.  When Mr Lai eventually carried out the physical exercise of placing orders with UOBBF, he could be said to be acting in his capacity as the plaintiff’s employee, but he was acting, as it were, on the express instructions of Mrs Horn given through himself as agent for the client.  This kind of double-aspect agency is well known to the law: see eg Cheng Kwok Fai v Mok Yiu Wah Peter [1990] 2 HKLR 440.

Crux of defendants’ complaints

39.  The defendants have raised quite a number of allegations of breach of contract or duty by the plaintiff, but the gist of their complaint is that Mr Lai should not have been permitted to open new positions in the late afternoon and evening of 14 March and in the morning of 15 March, and that the Account should have been liquidated earlier on 14 March instead.  It is unnecessary to examine in detail the spreadsheets put forward by Mr Lai in submissions to work out the various hypothetical consequences. As demonstrated by Mr Lynn, appearing for Mrs Horn, it is clear enough from the account statements that there would probably not have been a debit balance if Mr Lai had not opened any new Nikkei futures positions after 2:30pm on 14 March 2011. 

40.  Essentially, after the Account had suffered some relatively small losses on 11 March, Mr Lai took a bet by opening new positions on 14 and 15 March.  The real question is whether the plaintiff should be held liable for failing to prevent him from taking that gamble on his sister’s account and therefore responsible (to the exclusion of the defendants) for the losses in the Account.

Alleged failure to notify Mrs Horn of margin call

41.  Mrs Horn alleges that in breach of clause 12.2, she did not receive any margin call from the plaintiff directly or through Mr Lai on 14 March 2011.^[2]  I reject this allegation.  The daily statement for 11 March was sent to the designated email address in the morning of 14 March.  It stated a margin call of JPY 65.3m (equivalent to HK$6.15m) for the position in Nikkei futures and an overall margin deficit of HK$5.12m for the Account.  Even though there might in the industry be other ways of making a margin call, there is no reason why this did not amount to a margin call within the meaning of the contract between the parties here.

42.  This was followed by an email at 12:16pm on 14 March from Rex Au to Mr Lai, stating an overall margin call of HK$4.74m. Further, recorded conversations between Mr Lai and other employees of the plaintiff on 14 and 15 March show that Mr Lai, who was Mrs Horn’s fully authorised representative for trading the Account and the one in fact trading it, was fully informed of the margin requirement.

43.  There is also an allegation of breach of duty of care to ensure margin calls were delivered to Mrs Horn in a timely manner, though it was not seriously pursued at trial.  The margin call was made in the statement sent in the morning of the next working day (14 March) following the drop in the market on 11 March.  There is nothing to suggest that this was not a timely margin call.

44.  In any event, it is clear from the evidence including the recorded telephone conversations between Mr Lai and the other staff members of the plaintiff that he knew broadly of the position of the Account, even if not the precise amount of deficit at each moment.  The new Nikkei futures contracts Mr Lai decided to take up for the Account were not taken up in ignorance of the deficit position, but as a bet that the market would move in their favour.

Alleged breach in opening new positions within period of margin call

45.  It was provided in clause 12.3 of the Futures Client Agreement that no new open position was allowed within the period of margin call.  It was also the credit control policy of the plaintiff not to allow new position if there was any unsettled margin call.  Mr Lynn described it as a “cardinal” rule.  Mr Lai admitted he knew of this basic rule and policy.  It is a fact that new positions were opened for the Account between the afternoon of 14 March and the morning of 15 March 2011 when a margin call had not been fully settled. 

46.  Can the defendants complain that the plaintiff acted in breach?  In my judgment they cannot.  The plaintiff’s action in allowing the new open positions in Nikkei futures was done upon the defendants’ instruction.  If there was a breach of clause 12.3, it was as much a breach by the defendants.  More accurately, rather than saying both parties were in breach, the preferable analysis seems to me to be that the parties by mutual assent waived or varied that provision at least in relation to the trades in question.  The plaintiff had a right not to allow the new positions to be opened for the Account, but Mrs Horn, through Mr Lai as her discretionary trader, wanted and decided to buy those new open positions.  When Mr Lai then placed the orders with UOBBF, he, acting as the plaintiff’s employee, permitted that to happen.  Both parties agreed therefore not to abide by clause 12.3 in relation to those trades.  This in my opinion affords the plaintiff a complete defence.

Alleged breach in transacting business without sufficient cash to cover Mrs Horn’s expected trading liabilities

47.  The same analysis as in the preceding paragraph applies to the alleged breach of clause 11.3.2.

Alleged breach of duty of care by failing to liquidate and close the Account

48.  This plea fails both on the law and on the facts.  While the plaintiff had a power to liquidate and close the Account (see clauses 11.6, 12.4, 12.5 & 13.1.5 of the Futures Client Agreement), it was in my opinion a power conferred not for the client’s benefit but for the plaintiff’s purposes.  The plaintiff did not act in a fiduciary or advisory capacity towards Mrs Horn.  Clause 4.13 of the Futures Client Agreement provided:

“Each Contract shall be deemed to have been entered into by the Client in reliance only upon the Client’s own judgment and deliberations. Neither the Broker nor any of its employees or agents holds out itself as advising or having authority to advise the Client on the terms and conditions thereof or on any other matters connected with futures/options transactions. …”

49.  The plaintiff did not have the responsibility of deciding for her how as a prudent investor Mrs Horn should conduct herself.  If the state of the client’s account was such that the power had become available, but it was not exercised, then the plaintiff might find itself exposed to an increased credit risk as regards the client inasmuch as the plaintiff was itself liable as principal to the HKFE on the client’s transactions, but it does not mean the client, who chose to continue trading rather than close out her positions, is not liable for her trades.

50.  On 14 March 2011, while a margin call for HK$4.74m was made by noon, Mr Lai squared part of the open positions and HK$1m was deposited into the Account.  As far as the credit department was concerned (which was not aware of the new contracts purchased), the position of the Account had significantly improved.  The plaintiff was in my view entitled to decide in its discretion not to exercise the right to liquidate the Account.

51.  It is ironic that the defendants complain in this action that the plaintiff failed to force‑close the Nikkei futures positions in the Account.  As Mr Lai said in his evidence, he was complaining in the immediate aftermath about the plaintiff’s action in forcing the closure of the Nikkei futures positions on 15 March.  In fact, he asked the plaintiff to wait; he was “begging for time”; he was hoping the market would come back.  But the plaintiff told him: “If you don’t close it, we will do it for you.”  In his evidence, he said the plaintiff “should never have foreclosed”.

Alleged breach in failure to report to the HKFE and SFC

52.  Clause 11.3 specifies the matters that the client “acknowledges and agrees”.  The obligation referred to in clause 11.3.5 is an obligation of the plaintiff to the HKFE and the Commission to report to them (in the case of the former, under HKFE Rule 619).  It is not, in my view, an obligation owed to the client so as to found a complaint by the client in effect saying: “if you had performed your obligation to the HKFE or the SFC, you would have reported me to them, and they would not have allowed you to carry out any further trades for me, and I would have been prevented from placing those orders which proved disastrous”, which in my view lies ill in the client’s mouth.  The plaintiff as a broker was not under a duty to the client to supervise him so as to protect him from trading losses.  The client cannot rely on the plaintiff’s obligation to the authorities as a check on his own improvidence and to shift all responsibilities for his trades to the plaintiff.

Alleged breach of HKFE Rules 617 and 619

53.  The defendants allege that the plaintiff breached HKFE Rule 617 which provided that no “Exchange Participant” (such as the plaintiff) shall transact futures business for any client until and unless it has received from the client collateral adequate to cover that client’s minimum margin requirement.  The defendants also allege breach of Rule 619 which provided that Exchange Participants should monitor continuously their clients’ ability to meet any margin calls and should notify the HKFE if any Client has failed to meet two or more successive margin calls exceeding HK$150,000.

54.  However, the trades were not done on HKFE but on the Singapore exchange.  Clause 3.2 of the Futures Client Agreement provided:

“3.2 If the Client wishes to have Futures/Options, Business executed in markets other than those operated by the HKFE, in respect of transactions related to such Futures/Options Business, such transactions will be subject to the rules and regulations of those markets and not those of the HKFE, with the result that the Client may have a markedly different level and type of protection in relation to those transactions as compared to the level and type of protection afforded by the Rules, the Regulations and the Procedures.”

55.  Accordingly, irrespective of whether as between the HKFE and the plaintiff those rules actually applied in relation to the trades in question, they were as between the plaintiff and Mrs Horn not incorporated as part of their contract.  Indeed, their contract expressly stipulated that those rules were not to apply.  It follows that this complaint fails.

Alleged breach of implied term in failing to contact Mrs Horn directly when trading was not consistent with her investment strategy

56.  In the client information statement, under the heading of investment objective and strategy, Mrs Horn ticked the box “Investment” as opposed to “Hedging”, “Speculation” and “Others”.  It is alleged that it was an implied term of the Futures Client Agreement that the plaintiff would confirm with her directly, rather than rely on the account executive, when the trading activities in the Account were not consistent with an “investment” strategy, and that the opening of new positions on 14 and 15 March 2011 were manifestly inconsistent with the stated objective.^[3]

57.  This plea fails because, first, I am not satisfied that there was the alleged implied term in the contract.  The principles on the implication of terms are well established; see eg Tadjudin Sunny v Bank of America, National Association (unrep, CACV 12/2015, 20 May 2016) at §§37‑43.  The UK Supreme Court re‑visited the area in Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC 742, where Lord Neuberger, with whom Lord Sumption and Lord Hodge agreed, re‑affirmed the traditional approach (while offering 6 comments on the 5 conditions enunciated in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 283), and stated (at §31) that Lord Hoffmann’s observations in §§17‑27 of Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988

“should henceforth be treated as a characteristically inspired discussion rather than authoritative guidance on the law of implied terms”.

58.  More recently, in Ali v Petroleum Co of Trinidad and Tobago [2017] ICR 531, Lord Hughes, with whom the majority of the Privy Council agreed, said that the law has authoritatively been restated by the Supreme Court in Marks & Spencer plc and that:

“A term is to be implied only if it is necessary to make the contract work, and this it may be if (i) it is so obvious that it goes without saying (and the parties, although they did not, ex hypothesi, apply their minds to the point, would have rounded on the notional officious bystander to say, and with one voice, “Oh, of course”) and/or (ii) it is necessary to give the contract business efficacy. Usually the outcome of either approach will be the same.  The concept of necessity must not be watered down.  Necessity is not established by showing that the contract would be improved by the addition.  The fairness or equity of a suggested implied term is an essential but not a sufficient pre‑condition for inclusion.  And if there is an express term in the contract which is inconsistent with the proposed implied term, the latter cannot, by definition, meet these tests, since the parties have demonstrated that it is not their agreement.”

59.  I do not think the implied term contended for was necessary to make the contract work.  To the contrary, it is difficult to see how the contract could properly work if every time the account executive sought to place an order for the client, someone either in the trading department or otherwise would have to check the client’s investment strategy and objective, then form a value judgment as to whether the order was consistent with such strategy and objective, and, if not, bypass the account executive and try to contact the client directly.

60.  Secondly, Mrs Horn has in my view failed to establish that the new “buy” orders for Nikkei futures placed by Mr Lai on 14 and 15 March 2011 were manifestly inconsistent with her objective. “Investment” was a vague concept as a strategy and objective; it does not necessarily indicate a low risk approach.  Index futures itself is a high risk investment.  The risk disclosure statement that formed part of the agreement stated that one could easily lose a lot of money, beyond the margin one had to put up.

61.  Thirdly, it is not clear what, Mrs Horn alleges, would have happened if the plaintiff did seek to talk to her directly.  It could not have been for the purpose of ascertaining if the order was authorised, for there is no suggestion that it was not. 

Alleged breach of duty of care by failing to monitor market and pay attention to the exposure of the Account

62.  I do not think this allegation is made out.  I do not accept that in the absence of any special circumstance or arrangement, the plaintiff, as an execution broker, had a duty to monitor the market for the client.  It was ordinarily the client’s own responsibility to keep watch over his investments.  The broker might have an interest in monitoring the market and the Account to enforce its own rights as regards margin requirements and in order to comply with the requirements of the HKFE and other regulatory authorities, but not for the purpose of advising the client. 

63.  In any event, there was no lack of knowledge here.  Mr Lai was handling no other account at the time.  Throughout 11, 14 and 15 March 2011, Mr Lai — when making decisions as agent for Mrs Horn — only knew too well what was happening in the market and the effect it had on the Account.  He knew how many open positions there were, and kept a record of what deals he put through for the Account.  The losses were suffered because of the gamble he took, not because of lack of information.

Alleged breach of duty of care by failing to monitor and enforce the position limit (of 400 futures contracts) and trading and other limits on the Account

64.  The pleaded allegation is that there was a position limit of 400 futures contracts, and that the plaintiff wrongfully allowed that limit to be exceeded.^[4] This allegation fails because the defendants have in my view failed to establish that there was such a position limit in fact.

65.  There was a memorandum from the plaintiff to its Singapore sister company UOBBF in July 2010 stating that Mr Lai was authorised to place orders, but it only specified a “maximum daily trading limit” of HK$10m, not a position limit of any number of futures contracts. There was no “trade lot limit” applicable after 12 July 2010.  Nor is there any other evidence of such position limit apart from Mr Lai’s assertion, which is contradicted by the evidence of Ms Tse, which I prefer in this regard.  As a matter of fact, prior to March 2011 the position in the Account had from time to time exceeded 400 futures contracts.

66.  As admitted by Ms Tse, however, the trading did exceed the trading limit (applicable to the fixed margin requirement), even assuming the limit was HK$17m rather than HK$7.5m.  For the same reasons as stated in §46 above, I do not think that this resulted in liability on the part of the plaintiff to Mrs Horn.  The decision of Mr Lai to trade was attributable to her.  It was she therefore who wanted to trade beyond the applicable limit.

Alleged breach of duty of care by failing to inform her timeously when the Account turned into sudden huge deficit

67.  This plea in my view fails on the facts because, as stated above, Mr Lai, as the plaintiff’s agent, was well aware of the margin position.  When the market turned drastically down on 15 March 2011, Mr Lai was well aware of the consequences and the resultant deficit.  That was why he pleaded with the plaintiff not to close out all the positions but to wait.

68.  Insofar as it is contended that there was a duty to inform Mrs Horn personally, I reject it as being without legal basis.  In any event, when the “sudden huge deficit” appeared on 15 March 2011, it is not clear what it is said Mrs Horn could have done which would have averted the loss.

Enforceability of the 2002 and 2010 Agreements

69.  There was clearly consideration moving from the plaintiff.  But for the guarantee and indemnity in these agreements, the plaintiff would not have provided trading services and margin financing facilities to the clients served by Mr Lai.

70.  There was some suggestion in the evidence that an account executive would not without more be liable for any debit balance in a “house account” and that the Account was turned into a house account in October 2010. However, the 1^st defendant was specifically asked to sign the 2010 Agreement at the same time so that notwithstanding the Account became a house account, he would still be responsible.

71.  In my view the 2010 Agreement was clear and no issue of lack of certainty or intention could arise.  There is no reason why the agreement should not take effect in accordance with its terms.

Alleged breach of implied term of the 2002 Agreement and 2010 Agreement by failing to advise Mr Lai from time to time of his liabilities as guarantor

72.  Based on the principles applicable to the implication of terms in a contract as discussed in §§57‑58 above, I am unable to accept there was the implied term contended for.  Mr Lai as the account executive should have a fairly good idea of the state of the Account.  Anyhow there is nothing to suggest that he would have any difficulty in obtaining information about the Account if he wished to do so.  There is nothing unworkable without the alleged implied term which in any event was too imprecise.

73.  Further, Mr Lai was provided each day with a Client Margin Status Detail Report and an Online Client Margin Status Detail Report so that he was informed at least on a daily basis of the positions and liabilities of each of the clients he served, including Mrs Horn.

Mr Lai’s counterclaim

74.  In my judgment, Mr Lai has failed to make out his allegation that the plaintiff “unlawfully coerced or induced” him to transfer HK$2.02m to the Account on 18 March 2011.  There is no evidence of anything wrongful or unlawful done by the plaintiff to procure that payment.  In any event, given his liability to the plaintiff on the guarantee, it would be circuitous to set aside the credit of HK$2.02m only for the Account’s debit balance to be increased by the same amount.

Conclusion

75.  For the above reasons, the defences raised all fail.  The plaintiff is entitled to judgment.  Judgment will be entered for the plaintiff against both defendants jointly and severally in the sum of HK$24,466,180.31 together with interest from the date of the Writ of Summons to the date of this judgment at the usual rate of prime rate plus 1% per annum.  Thereafter interest accrues on the entire judgment sum at judgment rate.  Mr Lai’s counterclaim is dismissed.

76.  There will be an order nisi that the plaintiff is to have the costs of the action (including the counterclaims), to be taxed if not agreed.