GOLDSTOCK INTERNATIONAL HOLDING LIMITED v. IO SIO HONG

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J U D G M E N T

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The Claim and Counterclaim

1. The Plaintiff claims the sum of $104,344, with interest, from the Defendant as money due to the Plaintiff under an agreement dated 6 October 1987 under which the Defendant engaged the Plaintiff as his broker in respect of the purchase and sale of commodities and securities.

2. The Defendant defends the claim, and counterclaims, on the basis that the employee of the plaintiff with whom he dealt was not properly registered under the Commodities Trading Ordinance (Chapter 250)("the Ordinance") and, by reason of section 26(6) of the Ordinance, he is entitled to rescind the contract and recover the sum of $60,000 and some cheques paid thereunder.

The Facts

3. Evidence was led before me from Mr. Johnson Chart and Mr. Thomas Lau, Mr. Chan's superior in the Plaintiff company. No evidence was presented on behalf of the Defendant.

4. Other than in one respect, which I will deal with later, the facts were not contested.

5. The Plaintiff is a dealer in terms of the Ordinance and properly registered as such.

6. Mr. Johnson Chan, the employee of the Plaintiff with whom the Defendant had all his dealings, worked for the Plaintiff in 1982 and 1983. During this time, he was registered as a dealer's representative under section 28 of the Ordinance. He left this employment, but returned in July 1986. Because he had incurred a conviction for some petty gambling offence, Mr. Chan saw fit not seek re-registration as a dealer's representative, and he remained unregistered in any capacity under the Ordinance during the relevant times.

7. Mr. Chan was authorised by the Plaintiff to seek out customers, to offer contracts to them such as the one entered into with the Defendant, to receive buy and sell orders from those customers, to relay those orders to the trading floor for execution and to liquidate the accounts of customers when appropriate.

8. In October 1987, Mr. Chan was introduced to the Defendant and he was instrumental in the Defendant entering into the agreement of 6 October 1987 with the Plaintiff engaging the Plaintiff as his broker to deal in commodities and securities. On 6 October, pursuant to this contract, the Defendant paid $30,000 to the Plaintiff as a margin to cover his transactions. This margin entitled the Defendant to trade in two units of Hang Seng Index Futures ("HSIF").

9. On 15 October, the Defendant gave instructions to Mr. Chan to purchase two units of October HSIF. Mr. Chan transmitted this instruction to the trading floor and the order was executed at a price of 3932.

10. The next day, on the instructions of the Defendant, Mr. Chan implemented a buy order for two units of November HSIF at 3911 and a sell order for the same units at 3936. The buy order for the two units of October HSIF remained outstanding.

11. On 19 October, the Hong Kong stock market crashed. Mr. Chan contacted the Defendant, told him that his potential loss was great and asked for a further payment of $30,000 to cover the margin. This payment was made. Mr. Chan suggested to the Defendant that he should consider closing his position, but the Defendant declined to do so.

12. The market closed at 3529 for four days and re-opened with the market at 2989.

13. During the closure, Mr, Chan contacted the Defendant and advised him that the market would fall considerably when it re-opened. He advised that the Defendant close his position. The Defendant said that he would rather wait and see.

14. When the market opened, Mr. Chan again spoke to the Defendant and told him that he would either have to increase his margin or liquidate. The Defendant did not want to do either. He asked for more time, to wait and see, Mr. Chan said that he would speak to his superior, Mr. Thomas Lau, about this. Mr. Lau would not agree, and Mr. Chan told the Defendant this. Mr. Chan told the Defendant that he would have to liquidate and the Defendant agreed. The two October units were sold at 2270, leaving the Defendant's account with the Plaintiff $104,344 in debit. Mr. Chan saw the Defendant some days later and obtained from him five post-dated cheques to cover this indebtedness.

15. The only fact contested is whether, in fact, it was the Defendant's two October units that were sold at 2270. Mr. Chan says so. There is no evidence to the contrary and there is no reason why I should disbelieve him. The documents support his assertion. I find that the Defendant's units were sold at 2270, and that, subject to the defences in law argued, the Defendant is indebted to the Plaintiff in the sum of $104,344.

The Defence

16. Mr. Reyes, for the Defendant, argues that the Plaintiff cannot recover on the contract of 6 October with the Defendant because it was a futures contract which the Defendant was entitled to rescind under section 26(6) of the Ordinance. Alternatively, he argues that the contract is otherwise prohibited by the Ordinance, is illegal and, therefore, void. The alternative argument is not raised by the pleadings, but Miss Sze Kin, who appears for the Plaintiff, makes no point of this.

17. A defence of frustration raised in the pleadings was abandoned before me.

18. Mr. Reyes points to three provisions of the Ordinance which, he says, supply the relief the Defendant seeks; section 26(1), as read with section 26(6), section 26(2) and Section 28.

Section 26(1) as read with Section 26(6)

19. Section 26(1) of the Ordinance reads as follows -

"(1) subject to subsections (2), (3) and (4), no person, whether as principal or agent, shall -

(a) carry on a business of trading in commodity futures contract; or

(b) hold himself out as carrying on such a business,

unless such person is registered as a dealer under this Ordinance."

20. Subsections (2), (3) and (4) of section 26 are not relevant to this argument.

21. Section 26(6) says -

"(6) Any futures contract made by any person, whether as principal or agent, who is required to be registered under subsection (1) and who is not registered as so required, may be rescinded by any other party to the contract who, upon doing so, shall be entitled to recovery of any money or other thing he may have paid or-delivered under the contract."

22. A "futures contract" is defined in section 2 of the Ordinance in the following terms -

"futures contract" means either -

(a)a contract executed on a commodity exchange the effect of which is -

23. A "commodity" is defined to include "Hang Seng index futures contracts", which makes the definition of "futures contract" in this respect somewhat circular. A "commodity exchange" is not defined, but "Commodity Exchange" means the commodity exchange established and operated by the Exchange Company under Part III of the Ordinance.

24. On the fact of it, it is difficult to see how these provisions can apply to the situation before me.

25. In the first place, the contract of 6 October, which is the only transaction relied upon in seeking to show that section 26(1) is applicable, was clearly entered into by the Plaintiff, which is a registered dealer. The contract says, in undeniable terms, that the Plaintiff and the Defendant are the parties, and Mr. Reyes does not attempt to dispute this. At no relevant stage did Mr. Chan carry on a business of trading in commodity futures contracts, or hold himself out as doing so. He was a more employee of the Plaintiff, and the Defendant knew this. The phrase "whether as principal or agent" in section 26(1) relates forward in the section to the reference to the carrying on of the business, and means that this might be done as principal (on his own account) or agent (for others). This phrase does not mean, in my judgment, that a person who acts as an agent, such as an employee within a business of the kind described must be registered as a dealer. If this were so, there would be little scope for dealer's representatives who are required to be registered under section 28(1).

26. Secondly, I do not think it can be said that the agreement of 6 October is a "futures contract" as envisaged by section 26(6), so that it is voidable at the option of the Defendant. It simply does not fit the definition of this concept given by the Ordinance. Clearly, the ordinance sees a futures contract as the speculative contract on the exchange, not the agreement with the dealer to open an account to enable the customer to enter into these speculative contracts.

27. As to the first point, in order to demonstrate that Mr. Chan was carrying on a business of trading in commodity futures contracts, Mr_. Reyes points to the definition of "trading in commodity futures contracts" in section 2 of the Ordinance. This reads -

""trading in commodity futures contracts", in relation to any person (whether acting as principal or agent), means making or offering to make an agreement with any other person in Hong Kong, or inducing or attempting to induce any other person in Hong Kong to enter into or offer to enter into a futures contract."

28. It is difficult to make sense of the first part of this definition, which seems, read literally without regard to the purpose and policy of the Ordinance, to cover any agreement, whether or not it relates to a futures contract. Clearly, the legislature did not contemplate that entering into an agreement to buy a loaf of bread should be regarded as trading in commodity futures contracts. I must make it intelligible in the context, and the only way to do this is to road "agreement" as meaning an agreement in the nature of a commodity futures contract. Mr. Chan did not, it seems to me, whether as principal or agent, make or offer to make an agreement in the nature of a commodity futures contract with the Defendant. Indeed, I do not know how it is possible for an agent acting for a disclosed principal to make an agreement.

29. Mr. Reyes, by implication, accepts this and relies on the second part of the definition. He says that Mr. Chan induced the Defendant to enter into a futures contract. But did he? The only contract that it could be said Mr. Chan induced the Defendant to enter into was the agreement of 6 October, which, I have already found, is not a futures contract. It was not suggested to Mr. Chan that he had in any way induced or attempted to induce the Defendant to enter into or offer to enter into a futures contract. On the evidence, the Defendant's decisions to enter the market and speculate on futures contracts were entirely his own.

30. Accordingly, I conclude that section 26(1) does not apply to the situation before me, and, even if it did, that section 26(6) does not allow the Defendant to avoid the agreement of 6 October.

Section 26(2)

31. The next section relied upon by Mr. Reyes is section 26(2) of the Ordinance. This reads -

"26(2) No corporation that is a dealer shall carry on business as a dealer unless every director or employee who is accredited to the corporation is registered as a dealer under this Ordinance."

32. Before considering any consequences of a breach of this provision, it is necessary to consider whether it applies to the situation before me. It is argued that it does because Mr. Chan is an employee who is accredited to the Plaintiff, and he is admittedly not registered as a dealer.

33. The first question on that arises from this provision relates to the meaning of the phrase "is accredited to". Mr. Reyes points to section 2(2) as the guide to its meaning. This subsection says -

"(2) For the purposes of this Ordinance, a director or employee of a corporation, or a partner or employee of a firm, shall be deemed to be accredited to the corporation or firm, as the case may be, if he is, in his capacity as such director, partner or employee, duly authorised by the corporation or firm to act for or on behalf of that corporation or firm for the purpose of trading in commodity futures contracts, or as a dealer or commodity trading adviser, as the case may be."

34. The words "trading in commodity futures" crop up again here, and I have already recited the provision that defines this phrase.

35. Was Mr. Chan authorised by the Plaintiff to act for or its behalf for the purposes of trading in commodity futures contracts or as a dealer? It is not suggested that the aspect of a commodity trading adviser comes into the equation.

36. On the evidence, there is no reason at all to think that Mr. Chan was authorised by the Plaintiff to act for it, or on its behalf - Whatever difference there may be in these two concepts - for the purpose of trading in commodity futures contracts. On the contrary, it is clear to me that his function was to pull customers in so that they, not the Plaintiff, would take the risk of trading in this speculative market. My impression of the evidence is that the Plaintiff itself, as far as the transactions with the Defendant are concerned, did not, perhaps very wisely, trade in futures. It acted as the Defendant's broker to allow him to trade therein if he wished.

37. In case I am wrong in this conclusion, I should consider what consequences would flow from a finding that section 23(2) has been contravened. The same question arises in connection with a consideration of section 26(1) and section 28(2), and it would be convenient to deal with these aspects of the case together, and I will do so later.

Section 28(2)

38. Lastly, Mr. Reyes relies on section 28(2) of the Ordinance. This provision reads -

"28(1) No person shall perform for a dealer any of the functions of a dealer within the meaning of section 26 (ocher than work ordinarily performed by an accountant, clerk or cashier) for remuneration by way of salary, commission or otherwise -

(a) in the case of a person (not being a dealer) who is an employee of, or acts for or by arrangement with, a dealer who is an individual;

(b) in the case of a person (not being a dealer) who is an employee of a corporation that is a dealer; or

(c) in the case of a person (not being a dealer) who is an employee of a firm that is a dealer,

unless such person is registered as a dealer's representative under this Ordinance."

39. Miss Sze Kin concede that this provision applies to the situation before me, although I must say that, in my mind, this is not beyond doubt. Shipped of its non-essentials, this sub-section prohibits a non-dealer, non-registered remunerated employee of a corporation from performing "any of the functions of a dealer within the meaning of section 26". Clearly, Mr. Chan falls within the class of persons prohibited, but did he perform any of the functions of a dealer as so defined?

40. What are the functions of a dealer within the meaning of section 26? This section does not, in terms, define the functions of a dealer. One must find them by a process of construction or deduction. From section 26, one can infer only that the functions of a dealer are to carry on a business of trading in commodity futures contracts, or to hold himself out as doing so. On the evidence, I find it hard to conclude that Mr. Chan, for the Plaintiff, carried on such a business, or held himself out as doing so. He may well have assisted the Plaintiff in doing these things, although, as far as the transactions featuring in this case are concerned, I doubt if even this could be said. It was the Defendant who did the trading, and there is no evidence that he did this with the Plaintiff. As to Mr. Chan giving assistance, section 28 does not speak of assisting the dealer or someone else to perform the functions concerned. On the wording of the section, a person brings himself within its terms only by performing those functions himself.

41. However, I may be interpreting this one of many difficult provisions of this Ordinance too strictly. Perhaps Miss Sze Kin has a greater insight than I have of what the legislature is trying to say. Certainly, if a dealer's representative does not need to be registered to do what Mr. Chan was doing, it is difficult to imagine the purpose of this requirement of registration. So, not without some reluctance, I will assume that Mr. Chan should have been registered under section 28 in order to do lawfully the things he did.

42. I have made some express and implied criticisms of the wording of the Ordinance. I do not direct these at the draftsman, I know from my own experience how defective instructions, unnecessary pressures of time, too many fingers in the pie and the democratic consultative and legislative processes can play havoc with a draftsman's carefully nurtured and constructed scheme.

The Consequences of Non-registration

43. So what is the effect of the fact that Mr. Chan was not registered, if he was required to be so under section 26(1), section 26(2) or section 28(2)?

44. Mr. Reyes has referred me to the case of Phoenix General Insurance Co. of Greece v. Administratia Asigurarilor de Stat [1986] Vol. 2 Lloyd's Law Reports 552. This case sets out conveniently the law on the status of transactions that are expressly or impliedly prohibited by statute.

45. I must assume, for the purposes of this exercise, that the contract of 6 October, which the Defendant seeks to rescind or have found unenforceable, is a futures contract. If it is not a futures contract, I can find no reason at all why the Ordinance should be concerned with it. The purpose of the Ordinance is to control trading in commodity futures contracts, not agreements such as that of 6 October, which facilitate trading by members of the public on the exchange.

46. If the agreement of 6 October is a futures contract, is it expressly or impliedly prohibited by the Ordinance? The express prohibitions are against carrying on business as a dealer, and this may be said to imply a prohibition imposed on the dealer against entering into futures contracts in the course of carrying on that business. There is no prohibition imposed on anyone else. Accordingly, it may be argued that the Plaintiff was prohibited, but not the Defendant. This situation is the one described by Kerr L.J. at page 570 of the Phoenix case -

"...where a statute merely prohibits one party from entering into a contract without authority, and/or imposes a penalty upon him if he does so (i.e. a unilateral prohibition) it does not follow that the contract itself is impliedly prohibited so as to render it illegal and void. Whether or not the statute has this effect depends on considerations of public policy in the light of the mischief which the statute is designed to prevent, its language, scope and purpose, and other relevant considerations."

47. So, in the end result, it is a matter of ascertaining the intention of the legislature. Fortunately, in this case, I have a very positive indication that the legislature applied its mind to this s problem. Section 26(6) is the strongest possible guide to the fact that, in the case of futures contracts affected by suction 26(1), the legislature decided that the contracts would not be void, but voidable at the election of the non-dealer. This provision is aloe, in my judgment, a powerful indication that, in the case of contracts other than those affected by section 26(1), the legislature decided that they would be neither void nor voidable. I say this because it is inconceivable that the legislature would make express provision in the one case, intend that the same or a more radical result should flow from another case, but male no provision in respect of that other case.

48. The Court of Appeal of Hong Kong in Chintung Commodities Ltd. v. Cheng Ah-hung, Civil Appeal No. 106 of 1955, so decided in a case in which it was argued that a contravention of section 45A (which requires that a contract note containing certain details be made out by a dealer) resulted in the contract being tainted with illegality. After referring to section 26(6), Cons, J.A. (as he then was) said -

"Several other sections in the Ordinance also provide for fines and imprisonment of varying amounts upon breach of the requirements therein laid down, including section 45A, yet none other provides for rescission or for recovery of monies already paid.

Section 45A is a section which was added some four years after the Ordinance was originally introduced. It must therefore have been designed to meet some specific need which the Legislature had observed to be required. Nevertheless it cannot be considered in isolation, and in the light of the express provision in section 26(6) I feel compelled to assume that the Legislature did not intend a similar result to follow from failure to comply with other provisions of the Ordinance."

49. The reasoning applied to section 45A must apply a fortiori to section 26(2) and section 28(2), which were considered by the legislature at the same time as section 26(6) and which, unlike section 45A, concern essentially the same topic of registration.

50. There was some argument before me as to whether the dicta quoted above was obiter. It does not matter. With respect, I agree with it, and would have reached the same conclusion in any event.

51. Accordingly, if section 26(1) ant section 26(6) applied to the agreement of 6 October, I would hold that the agreement was voidable but net void, and if sections 26(2) or section 28(2) applied to that agreement, I would hold that this did not affect its enforceability.

Judgment

52. I conclude, for the reasons that I have given, that the agreement of 6 October is not unenforceable by the Plaintiff. It follows that the Plaintiff is entitled to be paid the sum of $104,344. The agreement provides for interest on the debit balance of the Defendant's account at the rate of 2% per calendar month. Accordingly, I grant judgment against the Defendant in the sum of $104,344, with interest thereon from 26 October 1987 at the rate of 2% per calendar month, and costs of suit.