SINCERE SECURITIES LTD v. LI MOU TONG, VINCENT

cacv 54/2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 54 of 2005

(on appeal from HCA NO. 255 of 2001)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  This was an appeal from a judgment of Yam J.  The judgment was given on 23 December 2004 with the reasons for judgment given on 1 June 2005.  At the conclusion of the hearing of this appeal, this court allowed the amendment of the notice of appeal, which had been sought by a summons dated the 3 January 2006, but dismissed the appeal with costs with reasons to be given in writing which we now do.

Background

2.  The plaintiff is a stockbroking firm.  The defendant was first employed by the plaintiff’s predecessor, which was known as Tse’s Securities Ltd, as an account executive in October 1997.  The judge found that the defendant left the plaintiff’s employment at the latest by 15 December 2000 when he went to work for another company.

3.  In about October 2000 the defendant had introduced Best Group Ltd (“BGL”) to the plaintiff with a view to its becoming a client.  BGL had opened a margin trading account with the plaintiff and it purchased a parcel of shares of a company called Prosper eVision Ltd whose stock code was “979”.  On 28 December 2000, about a fortnight after the defendant had left the plaintiff, the “979” stock fell dramatically.  As a result there was a loss on the BGL account.  The statement of claim in this case puts the lot loss at $2,715,981.33.  The plaintiff succeeded in obtaining judgment for a sum slightly less than that and, although a sum of $1,402,286.44 was recovered, the plaintiff had to share that with another, apparently stockbroking, company in order to avoid litigation.

4.  In the meantime the leading figures of the plaintiff wasted no time in contacting the defendant and they called him over to their offices.  As a result they succeeded in obtaining 3 cheques totalling $2,650,000 from the defendant.  They also obtained his signature on a number of documents the first of which was a note of indemnity.  Later they induced him to sign a service agreement backdated to 1 December 1999.  That backdated service agreement contained clauses, which will be quoted below, whereby the defendant agreed to indemnify the plaintiff against all claims and losses that might be made as a result of the plaintiff dealing with any client introduced by the defendant.  It was the defendant’s case that he had been forced to sign the documents, including the back dated service agreement, and had been forced also to provide the cheques and these had all been obtained under duress.  That was the primary focus of the dispute in the court below.  It is sufficient to quote from the conclusions of the judge in paragraph 67 of the judgment:

“	(1)	The defendant had no previous written agency agreement with the plaintiff’s company.
	(2)	In particular there was no agency agreement signed after the plaintiff’s company has changed its name from Tse’s Securities to Sincere Securities.
	(3)	The agency agreement dated 1 December 1999 was backdated document signed in January 2001 by which time the defendant had already left the employment of the plaintiff.
	(4)	The defendant’s employment ended by 15 December 2000 and as such by 28 December 2000 when BGL’s account suffered a substantial loss because of the fall of the share price in 979, the defendant had already left the plaintiff’s employment.
		…
	(6)	The three cheques and the note of liability signed by the defendant were not supported by any consideration.
	(7)	In any event the cheques and note of liability and the backdated agency agreement were all signed under the duress exerted by the plaintiff.”

5.  Initially the appeal to this court was in respect of those findings.  The amended notice of appeal abandoned those points and there is now no appeal in respect of those findings.  The relevant findings which were the subject of this appeal were as follows:

“

(5)

The defendant is not responsible for the loss of BGL under the contract of employment with the plaintiff, nor under any custom of the trade “

This appeal

6.  On this appeal Mr Fung SC, who appeared on behalf of the plaintiff, sought to argue that the judge should have found that there were implied terms in the contract of employment of the defendant which were in the same terms as those contained in the backdated service agreement.  Those terms were as follows:

"

The Agent shall indemnify the Company and hold the Company harmless against all claims, costs, expenses and losses whatsoever which may be brought against or incurred or suffered by the Company by reason of or arising out of any transaction entered into by the Company or liability incurred by the Company in relation to business introduced or dealt with by the Agent.  …… Without prejudice to the generality of the other terms herein, the Agent shall be strictly liabile for all overloss or bad debts of the Company incurred by any client(s) introduced or handled by the Agent or dealing errors committed by the Agent or his/her delegates and the Agent shall be liable to make reparation in full and shall indemnify the Company against all costs and expenses that may be incurred by it in claiming against the relevant client(s) and/or the Agent.” (clause 10)

“

In consideration of the Company agreeing at the Agent’s request to open and continue to maintain the trading accounts of the clients which are introduced or handled by the Agent, the Agent irrevocably and unconditionally guarantees to the Company the due and punctual payment of all moneys and settlement of all liabilities and obligations which may at any time be owing or incurred or due to the Company by client(s) introduced or handled by the Agent or in relation to business or transaction introduced or dealt with by the Agent and undertakes to make such payment on behalf of the relevant client(s) on demand by the Company" (clause 11)

7.  It was said that those terms were to be implied in the contract between the plaintiff and the defendant either as a matter of business efficacy or alternatively as a matter of custom in the trade.

8.  The first point to be noted is that liability under the alleged implied terms would appear to be unlimited as regards the length of time for which the defendant would be responsible for the client’s dealings.  Indeed, on the wording of the provisions in the backdated contract, in particular clause 11, the defendant would seemingly be liable in respect of any dealing by the client after the defendant had left the employment of the plaintiff.  In the course of argument, Mr Fung abandoned the argument that the implied terms extended the defendant’s liability in respect of such matters.  Given the necessity that any implied term must be clear and precise the obvious difficulty lay in the way of the plaintiff pursuing an argument based on implied terms.

9.  More importantly, perhaps, was the fact that the evidence called by the plaintiff did not support the existence of implied terms, whether based on any custom in the trade or otherwise, to the effect argued for on behalf of the plaintiff.  In the course of his evidence, Mr Wong Yun Kuen, who was called as an expert witness on behalf of the plaintiff, referred to indemnity clauses being common in contracts signed by account executives.  He was then asked what the effect would be if the account executive had not signed an agreement he said:

"	Well, because there is no law or regulation by say SFC or the Stock Exchange saying that the AE has to be responsible.  So I would say that if the AE hasn't signed it or for some reason - one reason or the other has not signed it, then I would say that the brokerage firm might not, okay, be able to claim it"
	(Transcript p. 268)

10.  Mr Dickson Ho, who was called on behalf of the plaintiff, again made reference to indemnity clauses being commonly inserted in contracts with commission sharing account executives.  Hence far from establishing that it was the custom in the trade that account executives should provide an indemnity for their employing stockbrokers this was not established by the evidence in this case.  What was established is that some, and perhaps many, written contracts of employment might contain indemnity clauses.  That is a far cry from establishing that there is an unwritten custom in the trade.

11.  The other evidence which related to this matter of an implied term came from Mr Shum Chun Ying who referred to the requirement for settlement being on the second day after the trade (referred to as T + 2) and clients taking a position which they may or may not be able to honour.  He said that account executives were in a position where they could act irresponsibly if they were not under a personal liability to answer for the creditworthiness of clients which they introduced.  Not only might they collude with the client but they might also inflate any orders in order to increase their own commission.

12.  In this case the relevance of the T + 2 rule does not arise.  This is a case where the client was permitted margin by the broker and permitted to continue with that margin 14 days after the account executive had left the plaintiff’s employment.  Different considerations therefore arise.  The client had been allowed to trade on margin and that situation was permitted to continue well after the account executive had any control over the client’s dealing with the plaintiff.  In my view, the plaintiff had certainly not established that it should be held that there was an implied term in the contract between the plaintiff and the defendant either in the form as pleaded or in a form which would make the defendant liable for losses incurred as a result of a client being permitted to hold a margin position after the defendant had left the plaintiff company.

13.  Although the judge dealt with the matter of the implied term and custom in the trade in a very short manner, that was hardly surprising given the extent of the evidence in relation to the matters which are no longer in issue on this appeal.  The issue of implied terms and custom in the trade were almost insignificant in the trial of this action.  In those circumstances any criticism that the judge dealt with those matters in a very short way would not affect the outcome of this appeal.  I would also add that the outcome of this case depends very much on the evidence that was adduced at trial and the particular facts of this case.  The decision of this court in this case cannot be treated as a definitive analysis of the obligations of account executives owed to their stockbroking principals.

Hon Le Pichon JA:

14.  I agree.

Hon Sakhrani J:

15.  I also agree.