CHENG CHUNG KEUNG v. LIND ASIA LTD.

HCA 1430/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1430 OF 1998

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J U D G M E N T

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1. The defendant in these proceedings is a dealer in commodities, futures and options, is registered as such under the Commodity Trading Ordinance, Cap 250, and provides a service to its clients by executing their instructions to buy or sell various financial products, for which it receives a commission. These orders are executed, through their office in the USA, mainly on either the Chicago Mercantile Exchange during its main trading session, which is overnight Hong Kong time, or on its electronic trading session called Globex the rest of the time, with a short break between the two; the dealers in the Defendant's office work shifts round the clock.

2. The Plaintiff is a businessman with a candle manufacturing business whose offices are in Chai Wan and factory in Dongguan in mainland China.

3. Under an agreement in writing dated 23 September 1997, the Plaintiff became a customer of the Defendant. I will return in due course to other terms of the agreement, but at this stage suffice it to say that the agreement enabled him to open an account with the Defendant and place instructions by telephone or fax which would then be executed by the Defendant on his behalf, subject to him maintaining sufficient margin in credit with them. The Plaintiff also contends that the agreement provided for the Defendant to confirm executed orders, and says that the Defendant, through their Mr Eric Wong, who opened the Plaintiff's account, agreed to do so by fax or telephone.

4. The events which give rise to this action occurred on 27 and 28 October 1997 when the Plaintiff was at his factory in China. At about 10 a.m. on 27 October the Plaintiff placed an order to sell two December Standard and Poors (S&P) contracts at 935 to settle an open position of 945 from a purchase he had made on 24 October. This order was executed at about 1.45 p.m. and confirmed to him by fax. Meanwhile, at 12.41 p.m., the Plaintiff telephoned the Defendant and spoke to a lady we now know to be a Ms Au Yeung Shuk Yee, and placed an order to buy one December S&P future contract at 930.10. At 2.35 p.m. he telephoned the Defendant and again spoke to Ms Au Yeung and, after enquiring about market prices, placed a second order for December S&P at 930.10. I will refer to these, as they are referred to in the pleadings, as the 1st Instructions. As it later transpired, these orders were filled electronically at 8.55 p.m. Hong Kong time, and reported back to the Defendant at 9.29 p.m. However, there appears to have been no immediate attempt to report to the Plaintiff at that stage, the reasons for which I shall return to.

5. Having received no notification by fax that the orders were filled, the Plaintiff said that he telephoned to enquire on several occasions during the day and, receiving no information that they had, and believing that they had not, placed a number of further orders at about 10.30 p.m. (the 2nd Instructions), for two futures contracts and four options, which were also executed. That night the market conditions in the USA deteriorated rapidly causing the Chicago Mercantile Exchange to close early at 4.27 a.m., Hong Kong time. It also became apparent a call would have to be made upon the Plaintiff for further margin, but efforts by the Defendant to contact him were not successful until 9.06 a.m. on 28 October when he called the Defendant, and learned for the first time that the 1st Instructions had been executed and that he was being asked for further margin. The Defendant meanwhile, to protect their position, had closed out the futures contracts on Globex, but were unable to do so with the options until the main market opened that evening. In order to protect their position further, the Defendant purchased two options on the Plaintiff's account as a hedge against a continuing loss. The Plaintiff having failed to provide further margin, these and the original options were sold at about 2 a.m. on 29 October, leaving a debit balance on the Plaintiff's account of US$94,833.35 which the Defendant now counterclaims.

6. It is the Plaintiff's pleaded case that he is not liable for the orders executed as a result of the 1st Instructions, the Defendant having failed to notify him that the orders had been executed, and leading him to believe that they had not, and that, had he known that they had, he would not have given all of the 2nd Instructions. Further, he maintains that he has suffered damage as a result of their wrongful selling of his futures contracts at a loss, which would not have been necessary had the 1st Instructions not been executed, as he would still have had sufficient margin in his account.

7. The first issue here on the facts is what was the agreement between the parties on signing of the original agreement as to confirmation of executed orders.

8. Upon signing the agreement with the Defendant, the Plaintiff also completed a "client information sheet" giving details of his residential and business addresses in Hong Kong, and his home and Hong Kong office telephone numbers. It is not in dispute that he also gave Mr Wong, who attended him that day, either on that day or earlier when they had met, his business card showing his Hong Kong office fax number. The Plaintiff's contact details were then written on a card kept in a "Rolodex" for reference by the dealers, and this shows that the numbers included were his home and Hong Kong office telephone numbers, and a note to indicate fax confirmation should be sent to his Hong Kong office fax number.

9. The Plaintiff claims that he agreed with Mr Wong that there should not only be immediate fax confirmation of execution of orders, but that he also gave him the number of his mobile telephone in China. Neither of these contentions is however borne out by the evidence. As to confirmation of orders, it is not disputed by Mr Wong that the Plaintiff requested these by fax, and that he agreed that this would be done if circumstances and time allowed. Such an understanding was clearly not part of the contractual agreement between the parties, which was contained solely in the written agreement which in turn has an entire contract clause excluding variations except in writing. The only provision in the contract for information to be provided to the client is under clause 2 which requires the Defendant to deliver contract notes within the time limits prescribed by law, and statements of account on a monthly basis and otherwise upon the client's request. Although Mr Yu for the Plaintiff has sought to argue that confirmations of orders come within the definition of statement of account, or are otherwise covered by this clause, I regret that I can find nothing in the wording of it which allows of such an interpretation.

10. I also find that it is more likely than not that the numbers on the client information sheet, the Rolodex record and printed on the Plaintiff's card, were the only contact numbers available to them on 27 October. Mr Wong says that the numbers recorded on the back of the Plaintiff's card and those written on a separate piece of paper were taken down by him on 28 October during telephone calls during which the Plaintiff was complaining about the execution of the 1st Instructions. Were this not so, I would expect the further information as to contact numbers to be recorded with other such numbers on the client information sheet and the Rolodex, for use by the dealers.

11. If there was an agreement for confirmation as claimed by the Plaintiff, it is difficult to see precisely what it was. It cannot realistically have been for immediate notification, as a busy dealing office could not possibly guarantee it, and there is no evidence that previous confirmations had been other than as soon as convenient. There is indeed no evidence at all of any time limit for such notification and, as a matter of common sense, this cannot have been other than an understanding that notification would be made at some stage. As I have said, it cannot have been part of the contract entered into in writing, and, in the absence of any consideration, cannot have been a collateral contract. The Plaintiff had no more than confident expectation that he would be notified as soon as the Defendant was able to do so.

12. The next matter to consider is whether the Defendant made reasonable attempts to keep the Plaintiff informed of the status of his account, or misinformed him of the position.

13. It is not in dispute that there was no attempt to notify the Plaintiff of the execution of the 1st Instructions until 3.30 a.m. on 28 October. The reason given for this by Mr Dempsey of the Defendant is that the sudden fall in the US market created one of the busiest trading sessions that he had ever experienced, with many more clients than usual telephoning to enquire about prices, to see whether orders had been filled, and to place orders. It was only when he was going through the pile of orders as yet unreported to clients that he noted that the execution of the 1st Instructions was among them and immediately attempted to reach the Plaintiff at his home telephone number, from which there was no answer. At 4.30 a.m. on reviewing the day's business, he realised, not only that the Plaintiff may be close to a margin call, but that he may not be aware that the 1st Instructions had been executed, and again tried to contact him at his home number, and again failed until he was told by someone who answered the telephone there that the Plaintiff was in China, but refused to give the contact details there. Other attempts to contact him by telephone and fax failed until the Plaintiff himself rang the Defendant at 9.06 a.m. In the light of the circumstances prevailing that night in the Defendant's dealing room, and the understanding as to notification, I am satisfied that their failure to attempt to notify the Plaintiff earlier was not unreasonable.

14. The Plaintiff says that he telephoned the Defendant several times after placing the 1st Instructions to see whether the order had been executed and received no confirmation that it had. He claims he was thereby misled by the Defendant into believing that none of his orders had been executed on 27 October and had therefore lapsed. This does not, however, accord either with his own records of his telephone calls, or with the Defendant's transcripts of his calls, which, like all calls to their office, were recorded.

15. On the Plaintiff's record of calls made from his mobile telephone and from his office in China there is only one made after the time when the 1st Instructions had in fact been executed, and that was at a little before 10.18 p.m. according to his record, and at 10.25 p.m. according to the Defendant's. There is little doubt however that it is the same call, as there is no record in the Plaintiff's list of calls of any other about that time. The transcript shows that the Plaintiff did not make any enquiry at all about the 1st Instructions. Indeed, it is apparent that the person to whom he talked, a Mr Lam, had no information about the state of the Plaintiff's orders and had to ask him whether he had made any orders that day. The Plaintiff even then did not mention the 1st Instructions but only referred to the two he had settled earlier and said that he held no positions. Had he done so, I have no doubt that the form with the completed order noted on it would have been discovered then and the Plaintiff informed. However, not only did he not ask about it, he led Mr Lam to believe that he had not placed any other orders. Indeed, in none of his other telephone conversations earlier had he made any enquiry about the 1st Instructions, nor did he in his calls to the defendant at 12.11 a.m. and 12.47 a.m. on 28 October.

16. It is clear that the Plaintiff believed that all transactions and the current state of his account were instantly available on computer to any dealer he spoke to. This was equally clearly not the case. Transactions were recorded on paper, execution of orders and notification to the client was also recorded on the same paper. No doubt it was at some stage entered on a computerised record for the regular accounts to be prepared, but not at the point orders were given or executed. Indeed, as Mr Dempsey said in evidence, he had to do some calculations in the morning to see what the Plaintiff's margin requirements were, and even then only had a rough figure. So this too was not something readily apparent from a computer record. The fact that the Plaintiff was not aware of this cannot in any way be the fault of the Defendant, and I have to look at what they did in the light of their existing system, not a system which might have existed.

17. It is contended by Mr Yu for the Plaintiff further that the Defendant gave the Plaintiff to understand that he had sufficient margin in hand, by reference to the conversation with Mr Lam. While it is true that the Plaintiff asked at one point: "There isn't enough margin?", there was no specific reply to this question, and it is clear to me that the remark by Mr Lam later in that conversation to the effect that there was more room, or more funds available under the margin, was in reply to the Plaintiff's cancellation of two of the orders to effect this.

18. The Plaintiff did not then make a specific enquiry about his 1st Instructions, as is clear from the telephone transcripts, and the none of the staff of the Defendant led him to believe that any situation existed other than that which did. I can accordingly find no grounds for holding that there was default on the part of the Defendant, nor that the assumption by the Plaintiff that the 1st Instructions had not been carried out before the end of the Globex session was through either the actions of the Defendant or any failure of duty on their part to the Plaintiff.

19. In any event, there are two matters which cannot be disputed.

20. The first is that, even had the 1st Instructions not been executed, the Plaintiff would have been liable to a margin call, which, as a derivatives trader of some 17 years experience he could well have calculated for himself.

21. The second is that, had the Defendant sent a fax to the Plaintiff with a report of the execution of the 1st Instructions immediately after it was reported to them to the fax number they had, on his own evidence he would not have received it until the following morning. As I have already found, the only fax number the Defendant had was that of the Plaintiff's office. It may well have been picked up there by his colleague, but his evidence was that it would have been faxed to his office in Dongguan, even if it was late. However, the Plaintiff did not go to his office that night. He went out to a restaurant at some time between 8 and 9 p.m., before the order was reported executed to the Defendant, and made his telephone call from there at 10.25 p.m. with his mobile telephone. On leaving the restaurant he said he went straight to his quarters. He did not go to his office until after he had spoken to Mr Dempsey shortly after 9 a.m. He would therefore not have seen any confirmation had it been sent at any time after execution of the order was notified to the Defendant, and, having made no enquiries himself by telephone, could not have been affected by such lack of confirmation.

22. The Plaintiff therefore placed orders on his account by way of the 1st Instructions, these were carried out by the Defendant, and I can find no reason why, in the circumstances of this case, the Plaintiff should not be liable for them and their effect on his account.

23. The next matter raised by the pleadings is whether the Defendant was entitled to close out the Plaintiff's positions on the morning of 28 October and later that night, and to make purchases on the Plaintiff's account without his authority as a hedge against further losses until the rest of the positions could be closed out. In respect of this the Defendant pleads clause 15.1 and 15.2 of the client agreement. Clause 15.1 entitles the Defendant in certain circumstances to take actions clearly designed to protect their own position. They are, after all, only execution brokers, and the margin requirement is to cover any possible losses, without which they might be initially liable and in a position of having to pursue a defaulting client for the sum owed.

24. It is clear from the evidence of Mr Dempsey that the state of the market was such that, on the morning of 28 October, as they had not been able to contact the Plaintiff, who had not responded to their faxes sent earlier, action had to be taken to protect their position. The first thing to do was to sell the four futures contracts from the 1st and 2nd Instructions, which was done at 8.04 a.m. which stopped his account going deeper into deficit. As the options could not be settled until the open market session that evening, the Defendant then bought further options to set off against those in the Plaintiff's account to limit the loss should the market fall further, as it seemed likely to do.

25. Clause 15.1 of the agreement entitles the Defendant in particular to:

"(a) sell, buy or close out (without recourse) any or all Commodities, Futures Contracts, Options Contracts and/or other property held or carried for the Client or the Account ........... as LAL in its absolute discretion determines;"

LAL being the Defendant.

26. The circumstances under which this entitlement arises include, under sub-clause (i), the client's failure to provide margin when called upon to do so, and under (vii):

"(vii) the occurrence of any event which, in the sole opinion of LAL, might put in jeopardy LAL's rights with respect to the credit balance on the Account or any other rights of LAL under this Agreement or which may adversely affect the due performance of the Client's obligations under this Agreement,"

27. That there was an event which the Defendant considered put their position in jeopardy is apparent from the evidence of Mr Dempsey of the rapidly falling market and his inability to contact the Plaintiff to place them in funds. This alone entitled the Defendant to close out the futures contracts under the 1st and 2nd Instructions shortly after 8 a.m. and any remaining loss must be to the account of the Plaintiff.

28. From the Plaintiff's own evidence it is clear that he knew that he was liable for further margin on the morning of the 28 October, he knew that Mr Dempsey was requesting further margin and that he had mentioned the sum of US$60,000.00. He complains that he was not given a precise figure, yet he made no attempt to provide any sum at all, and admitted that he could not have done so immediately in any event. The Defendant, faced with a position with increasing losses and no further payment forthcoming from the Plaintiff, accordingly entered into further contracts to limit the anticipated loss. Mr Yu submits that the wording of clause 15.1 does not entitle them to do so, and that the words "held or carried for the Client or for the Account.." does not include "to be held...". In other words it does not permit them to buy or sell property not already in the account.

29. Such an interpretation would in my view make a nonsense of the intention of this clause. As I have said, the Defendant is a broker only, exposing itself to liabilities on behalf of clients, and the agreement is designed to protect them from those liabilities and enable them to take steps to limit their liability. To put such a narrow interpretation on this clause would to a large extent negate its effect, and be totally contrary to the intention of the rest of the agreement, which must be read as a whole. I cannot therefore agree with that submission and accordingly hold that the Defendant was entitled to take the action it did.

30. Further, it is clear from clause 24.1 of the agreement that the occurrence of the event under clause 15.1(vii) is an "Event of Default". Under clause 15.2 this results in all amounts owing to the Defendant by the client becoming immediately due and payable. Had the Defendant not taken the action it had, the amount due may well have become considerably greater, and they accordingly not only have a right, but a duty, to mitigate their loss by taking such steps as are reasonable in the circumstances. I again find that the actions of the Defendant were both justified and reasonable.

31. Trading in derivatives is, as Mr Harris for the Defendant has pointed out, a highly risky occupation. The Plaintiff knew of these risks and went into a falling market. It is unfortunate that he did so at a time when he was not in Hong Kong and had made insufficient arrangements for communication with his brokers, but he cannot now be heard to say that the losses he suffered were through any default of theirs, or that they were not entitled to take the steps they did. He has admitted this himself in a letter to the Defendant on 28 October, in which he says: "...I understand that it's your company's authority to settle my opening positions since I could not pay the margin call on time." This is in my view an accurate summary of the situation.

32. For these reasons the Plaintiff's claim will be dismissed and there will be judgment for the Defendant on its counterclaim. The evidence of Mr Dempsey, which I accept, is that the balance on the Plaintiff's account is a debit of US$94,833.35. Mr Harris has said that he is prepared for the sake of argument to concede a total of US$32.00 by way of commissions, which the Plaintiff did not accept, but which the Defendant still maintained were legitimate charges, and I will accordingly deduct this sum from the total.

33. There will accordingly be judgment for the Defendant for the sum of US$94,801.35 and an order nisi for costs to the Defendant to be taxed.