UBS SECURITIES ASIA LTD v. MULTEC INTERNATIONAL HOLDINGS LTD

HCA 672/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 672 OF 2007

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J U D G M E N T

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1.  The plaintiff applied by summons for summary judgment against the defendant in respect of the Statement of Claim for the sum of $14,158,050.52 or in the alternative for an interim payment of that sum.  In fact the figure was reduced at the hearing, by the abandonment of a claim for borrowing costs, to a final figure of $14,15,754.75.  I gave summary judgment for this figure with interest and costs.  I now give reasons. 

2.  The plaintiff is a company dealing in securities and futures contracts and advising on securities.  The defendant is a BVI company controlled by two persons who live in Harbin, Heilongjiang Province, Ms Liu Jan and Mr Liu Yang. 

3.  The plaintiff was a sponsor of the initial public offering of shares in China Communications Ltd which commenced trading on the Hong Kong Stock Exchange in December 2006.  The plaintiff secured a placement of 6,765,000 shares for the defendant at a price of $4.60 per share.

4.  For the purpose of the share acquisition the defendant opened a securities trading account with the plaintiff on about 13 December 2006.  The relevant documents were signed by Liu Yang in China and by Liu Jian when she attended at the plaintiff’s offices on about that date.  The relationship was governed by terms and conditions which were approved by board resolution of the defendant on 13 December 2006 and executed by the defendant.  In particular Liu Yang signed a Client’s Acknowledgment Sheet acknowledging inter alia that the defendant had read and fully understood the terms and conditions. 

5.  The shares were allocated on 14 December 2006.  They were transferred to the HSBC as custodian.  Then on 18 December there was a series of e-mails between the parties.  By an e-mail sent from Liu Yang to the plaintiff’s Jason Yu the defendant instructed the sale of the shares and the plaintiff reported back at 10:46 a.m. that the order had been sold and completed at $6.2483 per share.  The defendant acknowledged this at 11.18 a.m.  A confirmation slip was sent out to the defendant by fax and post the same day.

6.  The sale consideration was $42,118,000.85.  This would, it appears, give the defendant a profit of about $11.15 million.  The defendant incurred an obligation to deliver the shares to the plaintiff for settlement two business days after the sale (“T+2”).  However, the shares were not delivered.

7.  On 22 December 2007 the defendant sold the shares through the HSBC and informed the plaintiff that it had done so.  The defendant did not deliver the shares to the plaintiff.  The plaintiff, having incurred the obligation to settle, borrowed shares in order to do so; it was apparently holding a pool of shares at this stage.  By a letter dated 3 January 2007 the plaintiff advised the defendant that it had done this and demanded delivery up of the shares which the defendant was obliged to deliver by 3:45 p.m. on 5 January failing which the plaintiff would buy in shares to mitigate its losses.  The shares were not delivered; the plaintiff bought shares on 8 January at the then market price of $8.6308, i.e. for a consideration of $56,195,502.00 to cover its settlement liability.

8.  The plaintiff’s claim is accordingly based on the difference between the price at which it bought shares on 8 January 2007, and the price for which it sold shares on 18 December 2006.

9.  There is, I think, no dispute that the defendant was under an obligation to deliver the shares it had bought to the plaintiff.  It defends on three grounds, one on liability and two on quantum.

Liability

10.  On liability Ms Liu says that although Raymond Zhang of the plaintiff told her that she must arrange for a brokerage or bank to hold the shares as custodian for the defendant, he did not explain that the defendant would have to do anything in particular thereafter.  She assumed that if the shares were to be sold, the plaintiff would obtain them from the bank.  There was some confusion on 22 December; she communicated with the plaintiff but did not get a clear explanation as to why the shares were still held by the bank and she also got inconsistent accounts as to whether there had been any communications between the plaintiff and the bank to complete the transaction.  She therefore agreed to a suggestion by the bank staff that the bank should sell the shares on the defendant’s behalf.  She then told the plaintiff that this had been done, but was told in turn that the defendant should buy shares and deliver them to the plaintiff but she did not understand the basis for this request.

11.  In summary she says that the plaintiff failed to advise the defendant of the procedures for settlement of share transactions when the account was opened, and later failed to give the defendant a timely explanation of what had happened to the shares.  The plaintiff acted in breach of its implied duties owed to the defendant and any losses suffered by it were the result of its own breaches and failures.

12.  I am not going to rehearse the principles on which Order 14 applications are to be decided; they are well known and not in dispute.  Suffice it to say that the defendant has to show a triable issue and must put up some kind of credible defence; the question is whether the defendant’s allegations are believable, not whether they are to be believed, and that is to be decided against the background of the undisputed or indisputable facts including contemporaneous documents. 

13.  I take into account Mr Wong’s arguments that the approaches made by telephone by Ms Liu to the plaintiff on 22 December suggest that her assertions are believable; she was chasing the matter up herself rather than the plaintiff chasing her.  I do not accept this. 

14.  The simple fact is that by 18 December the defendant knew perfectly well, because the plaintiff had told it so and it had acknowledged receipt of the information, that its shares had been sold.  Ms Liu admits the exchange of e-mails and that is the end of the matter.  By 22 December the defendant knew full well that its shares had been sold and that it could not sell them over again; or if it did, it would have to make them good.  The terms of the agreement make it clear that the defendant had to deliver the shares and the client’s acknowledgment sheet acknowledges that the defendant has understood the terms.

15.  The point is made that the documents were executed hastily and a staff declaration was not signed.  No more it was; but the declaration is to the effect that the client was given, and invited to read a risk disclosure statement, and in any event the client’s acknowledgment sheet acknowledges receipt of the risk disclosure statement and the invitation to read the same.  This is therefore a red herring.

16.  The point is also made that while Raymond Zhang affirms that he explained the procedures to Ms Liu, the plaintiff in a letter dated 11 January 2007 says that they were explained to a Ms Wana Na of the defendant.  That is so, but given that Ms Liu met Mr Zhang on 13 December and the advice is said to have been given to Ms Na on 14 December there is no contradiction. 

17.  It is also alleged that the trade confirmation slip was not received thought it was sent to the fax number the defendant gave.  However the validity of the contract was not dependent on the trade confirmation slip; Clause 2.3 of the written terms of the agreement allowed the plaintiff to rely on any communication in any form purporting to be made by the defendant.

18.  At the end of the day this is yet another variant on the defence of ignorance and it lies ill in the mouth of anyone dealing in this kind of money or money’s worth to profess that kind of ignorance.  It is an old, tired story and one which is not to be believed except in exceptional circumstances.  But more important is the fact that it is contradicted by other indisputable facts; the defendant well knew by 22 December that the plaintiff had sold its shares and it was not in a position to sell them over again.  It needs no great depth of sophistication to realise that.  So the defendant’s assertions are simply unbelievable.

19.  There is no defence on liability.  I turn to the defences on quantum.  In the first place it is said that the damages fall to be assessed at the date of the breach of contract which was T+2, i.e. 20 December 2006.  There is no explanation as to why the plaintiff puts the date of assessment at 8 January, when it knew of the breach as at 22 December and could have gone into the market to obtain replacement shares on 22, 27, 28 or 29 December.  In the second place it is argued that the plaintiff could and should have bought in shares to mitigate its loss any time after 20 December especially since it was holding the $42 million proceeds of sale.  A chart of the share prices for the period shows that if the plaintiff had done this, it could have got the shares much cheaper than the $8 dollars or more that it paid and so reduced the loss.  Either way, there is a triable issue on quantum and Order 14 is not appropriate.

Date of Assessment

20.  It is no doubt right that damages should normally be assessed at the date of the breach.  Here, the breach of contract consisted in the non-delivery of the shares.  No time was fixed by the agreement for delivery.  Although the defendant sold its shares through the bank on 22 December it was still open to it to purchase other shares and deliver them to the plaintiff, as was suggested to Ms Liu.  The sale of the shares through the bank did not in my view amount to an unequivocal repudiation on the defendant’s part.  There was never any unequivocal repudiation until the defendant failed to come up with the shares in response to the plaintiff’s demand letter of 3 January 2007.  I would therefore see the date of the breach as 5 January.  The shares were bought on the first trading day thereafter.

Mitigation

21.  Of course the plaintiff could have gone into the market on 20 December to buy shares to meet its and the defendant’s obligation to settle.  It is also true that the plaintiff could have used the proceeds of the sale to buy fresh shares after that; but what would have happened if the defendant had then bought shares and delivered them?  In mitigation a plaintiff is only required to act reasonably and the standard of reasonableness is not high in view of the fact that the defendant is an admitted wrongdoer.  See the dictum of Lord Macmillan in Banco de Portugal v Waterlow [1932] AC 452 at 506:

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The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not he held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken.”

Reasonableness is a question of fact, but all the facts are before me and I am in a position to make a decision on them and there is no need for a trial of this issue.  The plaintiff clearly acted reasonably.

Conclusion

22.  There are no triable issues on liability or quantum and the plaintiff is entitled to summary judgment.