CHIU CHIT v. BANK OF CHINA (HONG KONG) LTD

 DCCJ 4041/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4041 OF 2007

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J U D G M E N T

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Background

1.  On 21 August 2009, I handed down Judgment in these proceedings, finding the Defendant ("BOC") liable to the extent of 30% in respect of its failure to make a remittance of US $25,000 by telegraphic transfer ("Remittance") on behalf of the Plaintiff ("Chiu"). The hearing on the assessment of the damages payable to Chiu in respect of BOC's negligence and breach of its contract with Chiu took place on 19 and 20 January 2010.

2.  The facts have been outlined in my earlier Judgment, which I shall not repeat. The definitions used in my Judgment of 21 August 2009 are adopted for this Judgment.

3.  Chiu claims that as a result of BOC's negligence and breach of contract, she sustained damages in the total sum of US $72,519.31, lost interest in the sum of US $2.71 and incurred charges for the failed Remittance in the sum of US $38.50. The damages of US $72,519.31 include the loss of US $35,436.60 Chiu suffered in her margin trading conducted on the TDA Account, and her estimated loss of profits in respect of such trading in the sum of US $37,082.71. Chiu claims that it was as a result of the failure of the Remittance that her TDA Account was liquidated or closed out, and that but for the liquidation of the TDA Account, she would not have sustained the trading losses of US $35,436.60, and if she had maintained her positions on the TDA Account, she would have made profits of US $37,082.71.

Issue

4.  The issue turns on whether the damages sought by Chiu are caused by BOC's breach of contract or negligence, and whether such damages are in law recoverable from BOC.

Legal principles

5.  Chiu's claims are based on both breach of contract and negligence. On the facts of this case, there is no material difference in terms of the damages recoverable, but I will deal first with the contractual claim.

Measure of damages in contract

6.  It is trite that the starting point in the measure of damages for breach of contract is that the claimant is entitled to be placed, so far as money can do it, in the same position as he would have been in had the contract being performed (McGregor on Damages, 18th Edition, paragraph 6-155). Hence, Chiu relies simply on the fact that if the Remittance had been successful, her TDA Account would not have been liquidated or closed out by TDA, and she would not have sustained her trading losses.

7.  However, it is also clear that the scope of protection afforded to a claimant is marked out by principles of remoteness, and the test of what was in the contemplation of the parties, because the law recognizes that otherwise, the general rule for the aforesaid starting point would, as Asquith L.J. put it in Victoria Laundry v. Newman [1949] 2 K.B. 528 CA at 539, "provide him [the claimant] with a complete indemnity for all losses de facto resulting from a particular breach, however improbable, however unpredictable". This was recognized as "too harsh a rule".

8.  The limitation on the damages recoverable is the classic rule set out in the celebrated case of Hadley v. Baxendale (1854) 9 Ex. 341:

" … the proper rule in such a case as the present is this: where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either as arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made were communicated by the claimants to the defendants and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, would only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in the case; and of this advantage it would be very unjust to deprive them."

9.  The rule in Hadley v. Baxendale was explained in Victoria Laundry v. Newman [1949] 2 K.B. 528 and later qualified in Czarnikow v. Koufos, The Heron II [1969] 1 A.C. 350.  In Czarnikow v. Koufos, The Heron II [1969] 1 A.C. 350, the English House of Lords accepted that the kinds of loss for which recovery is to be allowed are those which are not unlikely to result from breach (see paragraph 6-162 McGregor on Damages 18^th Edition). The learned author of McGregor on Damages suggests that “the type or kind of loss” was also the test used in The Achilleas [2009] 1 A.C. 61 for remoteness of damages.

10.  In the Hong Kong case of Paul Chen v. Marianna Chen (2002) 5 HKCFAR 297, the Court of Final Appeal in applying the rule in Hadley v. Baxendale emphasized that what is within the reasonable contemplation of the parties is a question of fact depending on the circumstances of the case and the information available to the parties at the relevant time, usually at the time of the contract.

11.  It cannot be disputed that at the time of Chiu's application for the Remittance, she had not made known to BOC the purpose of the Remittance. All that can seen from the Application was that the Remittance was to be made to a bank account in USA stated to be Chiu's. All that was disclosed by Chiu to BOC was that the Remittance was to be made “quite urgently”.

12.  The kind of damage for which recovery is now sought by Chiu is loss and profit caused by speculative trading in securities purchased or sold on "short" or "long" positions using margin facilities, taking the benefit or risk of the rise and fall of the market price of the securities held. As Counsel for BOC succinctly summarized it, it was high-risk investment profit and loss.

13.  On the evidence, I consider that on the information available to BOC at the relevant time of the Remittance, the possibility of US securities being held by Chiu on short positions and on margin facility being sold on her TDA Account as a result of the equity in her TDA Account falling below the contractual maintenance margin requirement of her account by reason of the failure of the Remittance, with the resultant loss due to the difference in the market price of the securities held by Chiu, was simply not within the reasonable contemplation of the parties.

14.  There is nothing to indicate to BOC that delay in the Remittance or failure to make the Remittance would cause Chiu to have her shares bought on her margin trading account to be liquidated, leading to losses suffered by Chiu.

15.  I cannot accept that BOC can be taken to know either that the Remittance is to maintain a high risk investment, or that in the ordinary or usual course, a failed remittance or delay in the Remittance would cause Chiu to have her short position in AAPL shares in her margin trading account to be liquidated or closed out, thereby sustaining loss due to the difference in the market price of the shares she had sold short and the market price of the shares purchased on the closing out. In my Judgment, in the absence of special knowledge, a party entering into a contract for making a remittance of funds cannot be supposed to contemplate that the kind of losses Chiu claims will generally happen in the ordinary course if a breach of contract occurs.

16.  Counsel for BOC relies on the case of Kpohraror v. Woolwich Building Society [1996] 4 All ER 119 to support the proposition that BOC should not be liable for either the trading loss or the loss of profit on Chiu's TDA Account. In Kpohraror, the English Court of Appeal dismissed as too remote the plaintiff's claim for loss of profits sustained as a result of the defendant bank's failure to honor the plaintiff's cheque to his supplier. The Court held that even if the bank had been told that the account was to be used for the plaintiff's trading activities, there was nothing to indicate that a cheque, even one drawn in favor of a goods wholesaler, was required for the purposes of international trade and would or might cause the loss of a transaction or a substantial trading profit for the plaintiff.

17.  In the case of Mulvenna v. Royal Bank of Scotland plc [2003] EWCA Civ 1112, an application was made to strike out a claim for damages for the loss of profits which the claimant said he would have made if the bank had complied with its agreement to provide him with funds for a property development. The English Court of Appeal held that even on the assumption that the bank knew of the purpose for which the funds were required and that it was foreseeable that he would suffer loss of profits if he did not receive them, the damages were not recoverable. Sir Anthony Evans said, at para 33:

" The authorities to which we were referred … demonstrate that the concepts of reasonable foreseeability is not a complete guide to the circumstances in which damages are recoverable as a matter of law. Even if the loss was reasonably foreseeable as a consequence of the breach of duty in question (or of contract, for the same principles apply), it may nevertheless be regarded as ‘too remote a consequence’ or as not a consequence at all, and the damages claim is disallowed. In effect, the chain of consequences is cut off as a matter of law, either because it is regarded as unreasonable to impose liability for that consequence of the breach (The Pegase [1981] 1 Lloyd’s Rep 175 per Robert Goff J), or because the scope of the duty is limited so as to exclude it (Banque Bruxelles Lambert SA v. Eagle Star Insurance Co Ltd [1997] AC 191), or because as a matter of common sense the breach cannot be said to have caused the loss, although it may have provided the opportunity for it to occur …"

18.  When the decision of Mulvenna was referred to in the case of Transfield Shipping Inc. v. Mercator Shipping Inc. [2009] 1 A.C. 61, Lord Hoffman referred to the justification for excluding liability for loss of profits in such a case, on the basis that the imposition of such a burden on the bank may be considered unjust because it is inconsistent with commercial practice for a bank to accept such a risk (at paragraph 20 of his judgment).

19.  Considering all these authorities, I agree with Counsel for BOC that Chiu's trading losses and her alleged loss of future profits are too remote to be recoverable. In the words of Sir Antony Evans, the failure or delay in the Remittance cannot as a matter of common sense be said to have caused Chiu's trading loss, which had in fact been sustained since she first sold AAPL shares short in February 2007 at US $86.20, although the delay in the Remittance may have provided the opportunity for Chiu's trading loss to occur or become realized.

20.  BOC further relies on the conditions of the contract governing the Remittance, namely Clause 12.3 of Part 1 of the Conditions for Services, which provides that BOC is not liable for any "indirect, special, incidental or consequential damages". I accept that the trading losses and loss of future profits on Chiu's TDA Account are indirect and consequential damages sustained as a result of the failure of the Remittance. Accordingly, under the express conditions by which Chiu agreed to be bound, BOC are not liable in respect of such losses.

Remoteness of damages in negligence

21.  The rules for assessing damages recoverable for negligence are not significantly different to those applicable in contract. In brief, the test of remoteness in the tort of negligence is that the defendant is liable only for damage of a kind which a reasonable man should have foreseen (Clerk & Lindsell on Torts, 19th Edition paragraph 2-119). There is no requirement that the defendant should see the precise manner in which the damage occurred, provided that it is within the general range of the risk created by his negligence.

22.  The learned editors of Clerk & Lindsell on Torts point out (at paragraph 2-143, 19th Edition) that in the tort of negligence, there is clearly a relationship between the remoteness of damage and the nature and scope of the defendant's duty of care:

"Since remoteness is concerned with setting the outer limits of the defendant's responsibility in circumstances where the damage has occurred in unusual or unanticipated ways, it makes no sense to attempt to identify those limits without also addressing the question of what consequences the duty of care imposed upon the defendant was designed to avoid."

23.  As I have found in my Judgment of 21 August 2009, BOC's duty as an ordinary prudent banker is to observe reasonable skill and care in executing Chiu's orders and instructions regarding the Remittance. Its duty is to take care to make the Remittance to Chiu's designated account. Its duty as a prudent and ordinary banker is not to advise Chiu on share trading, or on making a profit or avoiding losses on her investment.

24.  In respect of pure economic loss, the learned editors of Clerk & Lindsell on Torts also have the following comments (in paragraph 2-147, 19th Edition):

"It is arguable that the scope of duty test should be seen as the key element in the application of the remoteness principle to pure economic loss. What the defendant can reasonably contemplate as a consequence of his breach must depend upon the scope or purpose of his duty. If the risk of the particular kind of damage fell outside the purpose of the defendant's duty, then however foreseeable that risk in general terms, it would not fall within the reasonable contemplation of the defendant. Whether the scope of the duty is seen as an independent test or as the key element in the concept of remoteness, it has had a major impact in limiting tortious liability for pure economic loss."

25.   In view of the scope of BOC's duty in this case, the risk of the particular kind of Chiu's damage, i.e. loss and profit of trading in shares on margin, clearly falls outside the reasonable contemplation of BOC.  In my Judgment, the damages are too remote to be recoverable by Chiu against BOC in negligence.

26.   In any event, if I am wrong on the principles regarding the remoteness of the damages sought by Chiu, she is only entitled to be placed in the position she would have been in if the contract had been performed, or if the tort had not been committed. If the Remittance had been duly effected on 4 July 2007, the most that can be said is that Chiu's short position in APPL would not have been closed out, and she would not have sustained the loss of US $26,129.50 in relation to the AAPL shares. What further profit Chiu might have made, if any, as a result of any further fluctuation in the price of the AAPL shares after 6 July 2007 is much too remote to be recoverable from BOC as a result of any negligence or breach of contract on BOC's part in relation to the Remittance.

27.  Further, I am satisfied on the evidence that Chiu's closing out of her positions relating to the IPIN and IGLD shares were made as a result of her own investment decision made on 6 July 2007, and was not caused by the failure of or delay in the Remittance. When she closed her positions relating to the IPIN and IGLD shares on 6 July 2007, she had not yet made her telephone inquiry with BOC on 7 July 2007 when she learned that the Remittance had failed, but she already knew that TDA had sold the AAPL shares she had held short. Any profit or loss made as a result of Chiu's own decision regarding her IPIN and IGLD position was not caused by the failure of the Remittance.

Conclusion & Award

28.  I reject Chiu's claim in respect of her claim of damages.

29.  In respect of her claim for the bank charges for the failed Remittance, I accept that Chiu and Mr. Man of BOC had agreed on 9 July 2007 that a second remittance would be made by BOC on Chiu's behalf on 9 July 2007 and without any further charges, and that in exchange, Chiu agreed not to claim for a refund of the charges for the failed Remittance. Chiu's claim for US $38.50 is accordingly also rejected.

30.  I accept that Chiu is entitled to the loss of interest on the Remittance, agreed in the sum of US $2.71. However, since I have found that Chiu is 70% liable in respect of her own damages, the award for interest US $0.81 is negligible.

31.  Effectively, since Chiu's claim for damages has been ruled to be too remote to be recoverable, her claim against BOC has failed and the entire action has been futile. The costs order nisi in my Judgment of 21 August 2009 was varied, to be reserved until the conclusion of the hearing for Assessment of Damages. In view of the negligible damages awarded, the appropriate order for costs on both liability and quantum should be that Chiu should pay the costs of the entire action on both liability and quantum, to be taxed if not agreed with certificate for counsel in favor of BOC. I accordingly make such a costs order nisi, to be made absolute within 14 days.