XCHRX TANRICH FUTURES LTD. v. LAM CHI BIN STANLEY

HCA 9844/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9844 OF 2000

____________

____________

_______________

D E C I S I O N

_______________

Background:

1. The plaintiff (TFL) is a company carrying on business of trading in commodity futures contracts. The defendant was the plaintiff's client who opened a trading account with the plaintiff pursuant to a client's agreement dated 28 March 2000 (hereinafter called "the Agreement"). The plaintiff alleged that certain payments by cheques made by the defendant in accordance with his obligation under the Agreement as initial margin were dishonoured. As a result, the plaintiff liquidated the defendant's account and actualised a loss in excess of $5 million, which the plaintiff seeks to recover by this action.

2. In the present application, the defendant seeks an order to stay the proceedings on the ground that the present dispute should be referred to arbitration in accordance with Clause 17 of the Agreement and, alternatively, to strike out the plaintiff's statement of claim. However, at the hearing, Mr Mak, for the defendant, concedes that as the plaintiff had subsequent to the issue of the statement of claim vetoed arbitration in accordance with Clause 17, the defendant can no longer seek an order to stay the proceedings. The application is therefore concerned only with striking out of the plaintiff's statement of claim.

Clause 17 is not a Scott v Avery arbitration clause:

3. Mr Mak refers to Clause 17 of the Agreement, which provides as follows:

"Any dispute between TFL and the Client shall be settled by arbitration in accordance with the provisions of the arbitration rules of the board of arbitration (if any) of the organized market or board of trade or exchange upon which the transaction giving rise to such dispute was effected or (without limitation to the foregoing) in any other arbitral forum, provided that TFL may at any time before the hearing of the arbitration give notice to the Client in writing that TFL veto either the arbitral forum or the arbitration of such dispute. The sole obligation of either TFL or the Client under any claim in court of law by the other shall be to pay such sum as may be awarded under arbitration pursuant to this clause, except where TFL shall be vetoed such arbitration. Any award resulting from such arbitration shall be final, and a judgment upon the award rendered may be entered in any court having jurisdiction." (my emphasis added)

4. He acknowledges that the clause contains a proviso that the plaintiff may at any time before the hearing of the arbitration veto either the arbitral forum or the arbitration but argues that before the veto is exercised, the position of the parties would be governed by that clause but as if the proviso were not there. By taking out the proviso, the clause reads: "Any dispute between TFL and the Client shall be settled by arbitration .... The sole obligation of either TFL or the Client under any claim in court of law by the other shall be to pay such sum as may be awarded under arbitration ...." Mr Mak submits that this clause is in effect a Scott v Avery arbitration clause, the effect of which is that the arbitration agreed upon by the parties is a condition precedent to the plaintiff's entitlement to claim in court. He therefore submits that the plaintiff's cause of action is incomplete unless and until the condition precedent is fulfilled, i.e. either upon the plaintiff vetoing arbitration or upon the plaintiff obtaining an arbitration award.

5. I think whether an arbitration or award is a condition precedent before a complete cause of action arises or a condition precedent to an action, or whether the agreement to refer disputes to arbitration is a collateral and independent agreement must be determined in each case by the construction of the particular contract, and the intention of the parties to be collected from the language used. The question is what has the parties covenanted.

6. In Scott v Avery (1856) 5 H.L.Cas 811, the conditions of the insurance policy so far as they related to the claim were that the sum to be paid to any insurer for loss should in the first instance be ascertained by a committee; but if a difference should arise between the insurer and the committee, "relative to the settling of any loss, or to a claim for average, or any other matter relating to the insurance," the difference was to be referred to arbitration. The condition contained a proviso that "no insurer who refuses to accept the amount settled by the committee shall be entitled to maintain any action at law or suit in equity on his policy," until the matter has been decided by the arbitrators, and "then only for such sum as the arbitrators shall award". The condition also made the obtaining of the decision of the arbitrators a condition precedent to the maintaining of an action. On these very unequivocal wordings, the conclusion of the House of Lords that arbitration was a condition precedent to an action was inevitable.

7. The same could not be said of Clause 17. The words "condition precedent" are not used. Despite the use of the word "shall" in the opening sentence, arbitration is not mandatory as the plaintiff may unilaterally veto either the arbitral forum or the entire arbitration process altogether. These features distinguish Clause 17 from the one used in Scott v Avery.

8. In ascertaining the intention of the parties, the court should examine the Agreement as a whole and ask itself what have the parties covenanted. In Scott v Avery the arbitration clause set down the basis of liability and the regime to making a claim. The liability was not for any loss but for adjusted loss determined by arbitration under the regime set up by that clause. In the present case, the Agreement is a futures and commodities trading agreement. Unlike the arbitration clause in Scott v Avery which set the basis of liability and the regime for determining the extent of that liability, Clause 17 provides a procedure for settling dispute only and that procedure is not mandatory but subject to unilateral revocation by the plaintiff. The basis of liability under the Agreement is to be found in Clause 2(c) which provides:

"The Client agrees that the Client shall be liable for all losses whether or not the account is liquidated and for any debts and deficiencies in the Client's accounts including all debts and deficiencies resulting from a liquidation of the Client's account."

I need to emphasise that the liability provided under Clause 2 (c) is not for "adjusted loss" but is for "all loses". This, in my view, is the single and most important distinguishing feature in the Agreement which distinguishes it from the one in Scott v Avery.

9. Having considered the distinguishing features referred to in the above paragraphs, I am driven to the conclusion that the intention of the parties to the Agreement is that the defendant shall be liable for all losses and not for such loss or adjusted loss as may be determined by a third party. The basis of liability is provided by Clause 2 (c), while Clause 17 sets up an arbitration procedure, binding only on the defendant but not on the plaintiff who is at liberty to veto the arbitration forum or the arbitration altogether. Thus in the present case, unlike Scott v Avery, arbitration or an arbitration award is not a condition precedent to an action. In my view, Clause 17 is a collateral agreement.

Cause of action is complete when loss was incurred:

10. The residual part of Mr Mak's argument is whether, despite my finding on Clause 17, the plaintiff has a complete cause of action at the time of issue of the writ which was three months before the plaintiff gave written notice in accordance with that clause to veto arbitration. He argues that the plaintiff has not and that the proceedings are a nullity and ought to be struck out as being frivolous, vexatious or otherwise an abuse of the process.

11. Cause of action have long been defined as meaning every fact which it would be necessary for the plaintiff to prove, if traversed, in order to support his right to the judgment of the Court (per Lord Esher, MR in Read v Brown [1888] 22 QBD 128 at 131.) In the present case, the basis of liability, as provided by Clause 2(c), is that the plaintiff suffered loss. Thus in my view, the material facts are that the plaintiff suffered loss as represented by the debit balance in the defendant's account, created as a result of the plaintiff having to close out the defendant's contract positions due to his lack of margin. The loss does not have to be quantified by any third party or by arbitration. As soon as a debit balance is created, a cause of action arises. As arbitration is not a condition precedent, whether the plaintiff has given written notice to veto arbitration before the issue of the writ of summons has no effect on the cause of action that has arisen.

Conclusion:

12. The sole basis of the defendant's application for striking out the plaintiff's statement of claim is the plaintiff's lack of a complete cause of action. In my view the plaintiff has demonstrated it has a good cause of action, or at least arguably so for the purpose of the present application. There being no other basis in support of the defendant's application to strike out, the defendant's application must be dismissed. I also make a cost order nisi that the defendant shall pay the plaintiff's costs.