CHANG TIN DUK VICTOR v. LAM NGAI FUNG TONY

HCA 15778/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 15778 OF 1999

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J U D G M E N T

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1. This action arises out of an alleged oral contract made over the telephone between the Plaintiff and the Defendant at about 4:30 p.m. on 13 September 1999 whereby the Defendant agreed to sell 50 million shares in Celestial Asia Securities Holdings Ltd (Celestial) to the Plaintiff at 50 cents per share.

2. The Defendant does not dispute that there was a conversation between them in which the sale of 50 million shares at that price was discussed, but maintains that all he agreed to do was to contact a friend Mr Ken Khoo (the Managing Director of Celestial) and see if he was able to procure the shares at that price.

3. Both the Plaintiff and the Defendant are young men from families with substantial assets. They met while in High School in North America and became friends. After their education they returned to Hong Kong and would often to discuss business matters over the telephone or on social occasions, although until the incident which gave rise to this action there had never been any business dealings between them.

4. It is common ground that during the summer of 1999, there had been discussions between them regarding Celestial shares.

5. There is however a wide divergence between the Plaintiff and the Defendant as to the events which gave rise to this action.

The Plaintiff's Account

6. It is the Plaintiff's case that in the course of 1999 the defendant had told him that either he or his company, Warren Asset Management Ltd, had acquired a substantial holding of Celestial shares. The Defendant had urged him also to acquire Celestial shares but despite these conversations, the Plaintiff did not acquire any.

7. On 9 September 1999, the Defendant called him on the telephone. On this occasion, he informed the Plaintiff that there was to be a placement of 428 million new Celestial shares on the market and asked if the Plaintiff would be interested in buying 100-115 million shares at 49 cents per share. The Plaintiff said he was not interested. One reason for declining the offer was that he felt that the large new issue of shares might have the effect of depressing the share price.

8. After the close of trading on 13 September, which was the first day on which trading in Celestial shares had resumed after the issue of new shares, the Defendant called him. After informing him that his company, Warren Asset Management was holding around 350 million Celestial shares, he offered to sell him 100-150 million shares at 50 cents a share.

9. The shares had opened at 51 cents and closed at 55 cents that day, but it was the Plaintiff's evidence that it was not uncommon for a discount to be given in respect of block trading in a substantial amount of shares. The Plaintiff agreed to buy 50 million shares at 50 cents per share. The Defendant had agreed to transfer the shares the next day. They would come from account in which they were being held in Celestial Securities Ltd (CSL) by a procedure known as "crossing" to an account with a broker in the name of the Defendant. The Plaintiff told the Defendant that he intended to sell the shares in the market. The Defendant had said that he should not do so too obviously as he did not want those in Senior Management in Celestial to know.

10. A few minutes later after an initial conversation with Mr Jimmy Woo of HSBC, the Plaintiff notified that the Defendant that his receiving broker would be Wardley Securities Ltd (HSBC).

11. Before the market opened on 14 September, Mr Woo telephoned him to say that his superior would not allow HSBC to act as receiving broker for such a large number of shares on a newly opened account. The Plaintiff then made arrangements with Mr Jackie Pang of Lippo Securities Ltd ("Lippo") and notified the Defendant of the change of receiving broker. The Defendant had told him that the shares would be transferred at about 10:30 a.m.

12. The Plaintiff then started to issue instructions to brokers to sell the shares in tranches. During the course of the day, he contracted to sell 44 million of the shares through three brokers, Lippo (26m), HSBC (10m) and Henyep Securities Ltd (8m) ("Henyep"). The settlement date would be 16 September 1999.

13. The "crossing" transaction to Lippo promised by the Defendant did not occur at 10:30 a.m. or indeed at anytime that day. The Plaintiff was in contact with the Defendant who repeatedly assured him that the transaction would take place that day. At around 3:30 p.m., Jackie Pang of Lippo informed the Plaintiff that if the transaction did not occur by 3:55 p.m., he had been instructed by his superior to start buying back Celestial shares in the market. 4.834 million shares were bought back at higher prices as a result of this instruction.

14. There was a meeting at 4:00 p.m. between the Plaintiff, Jackie Pang of Lippo and Lippo's compliance officer at Lippo's offices. It was decided with the best way of ensuring that the settlement date for the shares sold by the Plaintiff would be met would be to use an alternative procedure known as "standing instructions" (i.e. that the Defendant should open an account with Lippo and the shares be directly transferred from his CSL account to his new Lippo account).

15. At Jackie Pang's request a meeting was arranged at the Defendant's office which took place sometime between 6:30 and 7:00 p.m. Documents to give effect to the "standing instructions" were prepared and taken to the meeting. At the meeting which Jackie Pang also attended, the Defendant promised that the shares would be transferred the following day. Jackie Pang directly asked the Defendant if he owned the shares and the Defendant confirmed that he did and indeed maintained that held a much larger holding of Celestial shares. The Defendant also signed an account opening document with Lippo and instructions to Lippo to transfer 50 million Celestial shares from his account to the Plaintiff's account. At this meeting, the Defendant after some initial reluctance also signed a letter dated 15 September, which he undertook to give to CSL, instructing them to transfer 50 million shares from his account in CSL to his Lippo account. A copy was left with the Plaintiff marked on the Defendant's insistence "for reference only". The Defendant refused to sign a letter acknowledging that he had agreed to sell 50 million Celestial shares at 50 cents. He said it was unnecessary to do so bearing in mind that he and the Plaintiff were friends and that he had signed the other documents.

16. By the close of the morning session on 15 September, the Defendant still had not transferred the shares. The Plaintiff attempted to mitigate his loss by instructing his brokers to buy back Celestial shares. Having done so, he was informed by Hong Kong Clearing (CCASS) that a forced buy back had to be performed by CCASS itself in order to conform with Stock Exchange Regulations. The shares bought back by the Plaintiff in the attempt to mitigate his loss were then sold at a profit.

17. The settlement date of 16 September for the 44m shares was extended to 17 September by reason of Typhoon York on 16 September .

18. No shares were ever delivered by the Defendant. It transpired that the Defendant did not have an account with CSL.

19. CCASS engaged in a formal buy back on the Plaintiff's behalf on 20 September.

The Plaintiff's Claim

20. The Plaintiff's claim falls into 3 parts. The first 2 parts relate to the 44 million shares the Plaintiff contracted to sell on 14 September.

21. The first part is for the sum of $823,308.80 in respect of the Plaintiff loss resulting from having relied on the Defendant's promise to transfer the shares. It represents the difference between the price at which he agreed to sell the 44 million shares, and the price he had to pay for buying back that number of shares as a result of the forced buy back, after giving credit for the profit he made as a result of buying back shares personally in an attempt to mitigate his loss and then reselling those shares. The Defendant does not dispute the calculation of this head of loss.

22. The second part of his claim is for the sum of $2,488,766.94 representing the Plaintiff's loss of profit on the 44 million shares (i.e. the difference between the price he had agreed to pay the Defendant for the shares and the price he would have obtained if the sales had gone through). Again the Defendant does not dispute the calculation of this figure.

23. The third head of claim relates to the balance of 6 million Celestial shares which the Plaintiff had not contracted to sell on 14 September. He claims for the difference between the purchase price at 50 cents agreed with the Defendant and the price he could have obtained for those shares. There is an issue between the parties as to the appropriate date which the court should look at in order to assess this loss.

The Defendant's Account

24. The Defendant's account was that while he had discussed Celestial shares with the Plaintiff, he had never told him that he or Warren Asset Management had acquired a substantial holding in that company.

25. He said that he had a telephone conversation with Mr Ken Khoo of Celestial whom he had known for about 7 months and with whom he was on "rather good terms" during the course of 9 September 1999. During the course of this conversation Khoo had asked him if he was interested in acquiring about 50m shares in the company from him at 50 cents per share. The Defendant had said he was interested but in view of the amount of money involved he had to consider how to finance it. Khoo had said he would try to see if he could get 50m shares.

26. Since he personally did not have the funds available and his father was not interested in the proposal, the Defendant had contacted the Plaintiff the same day. He explained that it would have been embarrassing to him if he had failed to raise the funds after he had expressed interest to Khoo. If he had introduced someone to the deal, he would have been able to acquire credibility in Khoo's eyes.

27. He asked the Plaintiff if he was interested in acquiring 50 million shares at 50 cents per share. The Plaintiff had said he was not interested as market might be flooded by Celestial shares which would effect the price.

28. On 13 September at around 4:30 p.m. after the close of the market he had called the Plaintiff and pointed out to him that his prediction had been wrong. Celestial shares had closed at 55 cents. During the conversation, the Plaintiff asked if the Defendant was still able to offer him 50 million shares at 50 cents per share. The Defendant had replied he did not know until he had asked his friend Ken Khoo with whom he was having dinner that evening. They had discussed how the shares would be transferred if they were available and it had been agreed that it would be done by "crossing" into the Plaintiff's account with HSBC.

29. The Defendant had had dinner with Ken Khoo the same evening. Khoo had informed him that the there was a good chance of obtaining the shares but since the shares price had risen he could not give an answer until the following morning 14 September.

30. Despite having tried to call Ken Khoo twice during the course of the morning of 14 September, the Defendant was unable to speak to him until 12:45 p.m.

31. In the meantime he had received two calls from the Plaintiff. In the first which was before 10 a.m. he told the Plaintiff that he did not know yet whether he could get the shares but would call him as soon as he had heard from Ken Khoo. The Plaintiff had told him that if he did his receiving broker would be Lippo rather than HSBC.

32. During the second call at around 11 a.m., the Plaintiff told him that he had sold 6-8 million Celestial shares. The Defendant asked him why he had not waited for confirmation that he could obtain these shares. He suggested that the Plaintiff stop selling the shares. The Plaintiff agreed.

33. At 12:45 p.m. Khoo returned the Defendant's call and told him that he had not yet been able to do anything about the shares, and told the Defendant to wait until later in the day. The Defendant had then informed the Plaintiff.

34. After the market closed that day, the Plaintiff had called and asked to see him.

35. The Plaintiff had come to his office with Jackie Pang of Lippo between 6:30 to 7:00 p.m. Jackie Pang had told the Defendant that the Plaintiff had some "small trouble" as he had sold shares short. The Plaintiff and Jackie Pang had wanted him to sign documents that they had brought with them. They were the documents to which the Plaintiff referred in his evidence. The Defendant had refused but had been eventually persuaded to do so on the basis that they would only be effective if the Defendant received the shares. The Defendant had however refused to sign a letter confirming an agreement to sell 50 million Celestial shares at 50 cents. He claimed the Jackie Pang and the Plaintiff were aware that he had not got the shares. He had expressly told Jackie Pang of this and had asked Jackie Pang whether the Plaintiff had not told him that he could only transfer the shares after he had received them from Ken Khoo. Jackie Pang had not replied. He had also told them that he did not have an account with CSL but had been persuaded to sign a letter of instruction to CSL on the basis that he could open an account with them if the shares were transferred to him. He had insisted that the words "for reference only" be written on the copy held by the Plaintiff to avoid any misunderstanding that he had the shares.

36. The Defendant said that on 15 September he had telephoned Ken Khoo between 11 a.m. and 1 p.m., when Ken Khoo had explained that he could not obtain the shares because of the rise in price. He had then telephoned the Plaintiff and informed him.

The issues

37. The principal issue for the court in this trial has been to assess the credibility of the opposing parties.

38. Having done so, I have no hesitation in preferring the evidence of the Plaintiff to that of the Defendant.

39. The Plaintiff called the 3 brokers to whom he had given instructions to sell Celestial shares, Jimmy Woo of HSBC, Jackie Pang of Lippo and Frank Yiu of Henyep. Although their evidence that they were told by the Plaintiff that he had entered into an agreement to buy Celestial shares is not evidence of the truth of that assertion, this evidence shows that the Plaintiff has consistently maintained his account since shortly after the conversation with the Defendant on the evening of 13 September.

40. I found each of the brokers credible witnesses and Jackie Pang a particularly impressive witness. I was satisfied that the instructions that the brokers were given by the Plaintiff to sell Celestial shares after the Plaintiff had agreed to buy them but before they were delivered did not, as far as the brokers were concerned, fall into the classification of short selling. I was satisfied that broker's evidence was not coloured by desire to protect themselves from criticism or by their relationship with the Plaintiff.

41. Of particular significance was Jackie Pang's evidence of the meeting at the Defendant's office in the evening of 14 September. I accepted his evidence that the Defendant had said nothing to suggest that the transfer of shares was conditional upon acquiring them from Mr Ken Khoo or indeed from anyone else. On the contrary, he had specifically asked the Defendant if he owned the shares and the Defendant had replied that he was holding a considerably greater quantity than the amount the Plaintiff had contracted to sell.

42. Both Jackie Pang and the Plaintiff were frank that the Defendant had refused to sign a letter formerly acknowledging that he had agreed to sell 50 million Celestial shares to the Plaintiff at 50 cents per share. I believed their account of the reason advanced by the Defendant for not signing this document, namely that the Plaintiff could trust him. I did not believe the Defendant's account of how he had been persuaded to sign the other documents which he actually did sign that day.

43. Bearing in mind his admission in evidence that he already believed that the Plaintiff was under the false impression that he had concluded a firm deal for the 50 million Celestial shares at 50 cents, I do not believe that the Defendant would have signed the documents at the meeting at his office on 14 September without having it recorded in writing what his position was. He did not.

44. I do not believe that an intelligent man, as the Plaintiff clearly is, would have embarked upon the sale of 44m shares unless he believed that he had a firm commitment from the Defendant to transfer those shares.

45. Nor do I believe that the Plaintiff would have engaged in the illegal short selling of these shares, which would not only have contravened the rules of the Stock Exchange but amounted to a criminal offence.

46. It would have been extraordinary if the Defendant's evidence of the conversation with the Plaintiff at about 11 a.m. was true that the Plaintiff should have subsequently disregarded what the Defendant said about not selling any more shares and gone on to sell a total of 44m shares that day.

47. The Plaintiff's Solicitor's letter of 17 September delivered to the Defendant the same day clearly stated the Plaintiff's position. I have no doubt that if the Defendant's position had been the one he now maintains he would have replied in writing saying so. He did not. I found his account of an alleged lunch time conversation with his Solicitor friend highly unlikely.

48. At first sight it might appear curious that the Defendant should make a contract to supply 50 million shares at a particular price when he had not acquired those shares. The evidence in this trial however suggests that the Defendant was a man anxious to give the impression that he was a very substantial businessman. One particular example is his reference to feeling embarrassed if he had not been able to buy the shares offered to him by Ken Khoo and the need to preserve his credibility with Ken Khoo. It may well be the case that the Defendant had spoken to Ken Khoo or someone else connected to Celestial and been offered the chance to acquire a very substantial proportion, if not, the total of quantity of 388 million Celestial shares available for placement. In order to maintain his image with the Plaintiff he had told him that he had already acquired these shares believing that he could acquire them without difficulty. He then agreed to sell 50 million of them to Defendant at 50 cents per share. It may well be that when difficulties arose in acquiring the shares, the Defendant found himself in a position where he could not inform the Plaintiff of his difficulties because of the earlier pretence that he already owned the shares.

49. I accept therefore that there was a concluded oral contract between the Plaintiff and the Defendant on 13 September that the Defendant would sell him 50 million Celestial shares at 50 cents per share to the Plaintiff.

50. I accept that the Defendant agreed that the transaction would occur the following day (14th) and would be performed by "crossing". The effect of that agreement was that the transfer of shares would have to occur within 2 working days following the 14th ("T plus 2"). If Typhoon York had not intervened on the 16th, the shares would have had to be transferred by close of business on 16 September. As a result of Typhoon York, the shares would have had to be delivered by close of business on 17 September.

51. While "crossing" had been agreed as the most convenient means of performing the contract, I find in the circumstances of the case that if the Defendant had transferred the shares in some other way within the period contemplated by "crossing" ("T plus 2") he would not have been in breach of contract.

52. This is significant in so far as the last head of the Plaintiff's claim is concerned. While a crossing transaction would have had to be initiated on 14 September, I do not accept that the Defendant was in breach of contract until the close of the business on 17 September when he failed to deliver the shares in some other way.

53. In my view, the close of business on 17 September is the date the breach occurred and that is the relevant time for quantifying the Plaintiff's loss. Since 6 million shares could not have been put on the market until the market opened again on 20 September, I find that the appropriate measure of the Plaintiff's loss in respect of the 6 million shares he had not agreed to sell on 14 September is the difference between the agreed price of 50 cents per share and the mean price on 20 September (i.e. 79 cents per share) ($1.74 million).

54. I order that the Defendant pay the Plaintiff damages in the sum of $12,465,075.00 (i.e. $8,236,308.80 + $2,488,766.94 + $1,740,000.00) plus interest thereon at 10.25% from the date of issue of the writ until today and thereafter judgment rate until payment.

55. I order that the Plaintiff's costs be taxed if not agreed and paid by the Defendant.