TRAVELEX HONG KONG LTD v. ETTORE NASSETTI (ASIA) LTD

HCA 499/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 499 OF 2004

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J U D G M E N T

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1.  This is a claim in damages for breaches of contract; the failure by the defendant to settle contracts for the exchange of currency on a forward date.  There is a defence and counterclaim of misrepresentation which induced the defendant to contract with the plaintiff as a result of which it has suffered loss.

The Background

2.  The plaintiff and defendant are companies incorporated and carrying on business in Hong Kong.

3.  The plaintiff trades in currencies including forward exchange dealing.  It is one of a group of companies, of similar name and trading, operating worldwide.

4.  The defendant sells ceramic machinery and other similar products in Europe and elsewhere.  A feature of its business is that most of its customers pay in euros, whilst its expenses are incurred in US dollars or otherwise currencies that are pegged to the US dollar.  Thus it can be vulnerable to variations in the Euro/USD rate between commitment to a sale and payment.

5.  With a view to hedging this risk the defendant’s Financial Controller, called Cathy Ho, discussed with staff members of the plaintiff buying forward US dollars using euros for consideration.

6.  These discussions advanced to a long telephone call made between Miss Ho and the plaintiff’s Head of Dealing Operations called Dennis Leung, on 28 April 2003.  This call was critical as I shall come to.  In line with common practice it was recorded. 

7.  On the following day the defendant became a customer of the plaintiff, by entering into an agreement with it to provide foreign exchange services (the Agreement).  The Agreement was in standard form and incorporated a number of conditions, some of which are pertinent.  I shall come to these shortly as well.

8.  A standard feature of a forward exchange contract is that the customer must forthwith pay into its account with the plaintiff a collateral deposit being a percentage of the amount being purchased.  That percentage rate is determined by negotiation and agreement.

The Claim

9.  Over the next few months the defendant entered into a number of forward exchange contracts, using euros to buy US dollars, which were settled on due date uneventfully.  However in respect of three transactions there was no settlement.  As to two of them the defendant was in default on due date.  In exercise of its rights under the Agreement the plaintiff purchased euros and settled the contracts.  In respect of the third which was yet to fall due, it exercised its right to liquidate that because of the defendant’s default and settled it also.  The deposit held being US$52,362 was insufficient to meet the difference between the cost of and proceeds of sale of the euros by US$386,938.  This is the amount sued for, together with interest and costs.

The Defence

10.  The defence is that the defendant entered into the Agreement and subsequent forward exchange contracts in reliance on a representation verbally made by Mr Leung to Miss Ho during the course of the telephone call of 28 April 2003 which was false; namely, that if in the intervening period between commitment and settlement the euro lost value against the USD, the defendant would have the option of not going ahead but would forfeit the deposit.  Because the defendant entered into the contract in reliance on this misinformation deliberately or carelessly imparted, it is not bound by the foreign exchange contracts it declined to settle; moreover, it has a claim to recover the deposit held by the plaintiff of US$52,362.

The Trial

11.  Prior to trial the defendant had been represented.  Its then solicitors were responsible for the pleadings and other various pretrial activities; this included the filing of witness statements made by Miss Ho and the director whose name the defendant bears, Mr Ettore Nassetti.

12.  Some seven weeks before the trial date the solicitors applied for and were granted leave to withdraw.  On the first day of trial Mr Nassetti stood up for the defendant.  He told me he wanted to apply for an adjournment because the defendant had been unable to engage alternative solicitors, and had run out of time to do so.  As a fallback he wanted to apply for leave to represent the defendant as a director.

13.  I told him that without leave he had no locus before me; further, that I did not have the jurisdiction to give him leave.  I stood the matter down for a day for him to pursue that course through the Registrar.

14.  The next day counsel appeared with instructions solely to apply for an adjournment.  Mr Nassetti had declined the opportunity to seek leave before the Registrar to represent the company.  Instead, he instructed solicitors, but only to argue for an adjournment of the trial; by then of course it was the second day of trial. 

15.  Having considered the arguments for and in favour of the application I exercised my discretion to decline it.  In the balancing exercise I paid heed to the matters referred to in the White Book at 35/3/1; in particular : “the extent to which the party applying for the adjournment had been responsible for creating the difficulty which had led to the application”.

16.  Following that ruling the defendant’s counsel and solicitors were given leave to withdraw and did so.  Thereafter no steps were taken by or on behalf of the defendant; the trial thus proceeded with the defendant playing no part.

The Evidence

17.  Dennis Leung, whom I have already mentioned is the plaintiff’s Head of Dealing Operations, gave evidence.

18.  Mr Leung told me that the particular service that the plaintiff was able to provide the defendant that would protect it from unfavourable market fluctuations is called a forward contract, by which it could sell its euros forward for US dollars at an agreed rate on a given date.  A variation of this is called an open forward contract.  This gives flexibility in that the customer if he wants may bring the settlement date forward to within, say, 30 days of the maturity date.  The customer pays for this flexibility by way of a slightly less favourable rate of exchange.

19.  He stressed that such a contract in either form is not speculative in that the customer knows at the outset how much in US dollars his euros will buy, regardless of what happens on the open market.  What might be regarded as adverse to the customer if say the currency he is buying falls in value could be described as a lost opportunity; the ability to buy at a better rate in the market.  But that is not the same as risking a loss. 

20.  The deposit required to be put up by the customer is not part of the deal.  It is security against the customer defaulting and requiring the plaintiff to have to go into the market to make good the transaction.

21.  Mr Leung went on to describe the transaction known as an ‘option’.  He said in that case, were the service to be available, the customer buys the right to complete the purchase of a given currency on a given date at a given rate.  The price of that option is fixed and paid up front and will be a percentage of the purchase price were the deal to proceed.  But the customer does not have to complete; if he elects not to, no doubt because of an adverse market swing, he need not.  But he cannot recover the premium paid.  Mr Leung stressed that whilst some members of the group of Travelex companies might offer this product, the plaintiff does not.  It is speculative in nature and the plaintiff does not do speculation.

22.  He also described the transaction known as a ‘swap’.  This might eventuate where the customer on or prior to the maturity date asks for and is given an extension and the transaction is rolled over to a new date at a revised rate.  In these circumstances, the plaintiff may be obliged to buy from the market the currency that the customer was but for the rollover committed to pay on the due date.  This is known as a swap.  It is a transaction between dealers.  There will be a net cost of that transaction which is charged to the customer factored into the revised rate.  A swap thus is not a service or product that is available to a customer.

23.  Mr Leung said that the telephone conversation he had with Miss Ho, during the course of which according to the statement of defence the misrepresentation was allegedly made, one day before the Agreement was entered into, centred on the product that the plaintiff could offer; namely, a forward contract or an open forward contract.  Miss Ho indicated that the defendant was proposing to sell its euro receipts for US dollars.  He gave her the going rate of exchange on various dates forward.

24.  Mr Leung went on to say — and to stress —  that there was no mention by either he or Miss Ho about options or swaps, or any transaction which would give the customer the right but not the obligation to settle on the maturity date, nor of any product of that nature.

25.  As I have stated, the telephone conversation, conducted in Cantonese, was recorded.  That recording was transcribed; that and a certified translation has been produced in evidence.  Were there to have been reference therein to swaps, options or the like, it would be there to be read.  But there is no word of that.

26.  The Agreement was in the plaintiff’s standard form.  It incorporates detailed terms and conditions only a few of which I need to repeat.  Those parts that are pertinent are as follows :

“1.  Services

The scope and terms of Services available to customers (each a “Customer”) or any particular Customer may be varied by us from time to time as we think fit.  These may include, without limitation, remittance services, foreign exchange services, forward hedging, options, telegraphic transfers, issuance of drafts, collection/negotiation/purchasing of bills, drafts, cheques currency documents, other instruments (“instruments”) and bank notes, and receipt of funds, whether by way of telegraphic transfer or otherwise.

…

5.  Fees and indemnity

We shall be entitled to charge our currently prevailing fees for any of the Services provided by us to the Customer.

The Customer shall further indemnify and hold us harmless from and against any and all loss, damage, costs, charges and/or expenses of whatsoever nature and however arising (including legal fees on a full indemnity basis) as a result of (i) any matter arising under these terms, (ii) our relying and/or acting on any Instructions in any manner permitted herein or otherwise in accordance with these terms; (iii) any breach by the Customer of any of these terms; or (iv) any Netting Event (as defined in section 6 below).  [This should be section 7]

…

7.  Currency services

On receiving Instructions or for the purposes of providing other Services, we shall be entitled to enter into a foreign exchange contract with the Customer on such terms and at such rates as we deem fit.  Each such foreign exchange contract shall be deemed part of a single agreement between us and the Customer (save that any foreign exchange contract that is settled or liquidated by an offsetting contract shall be deemed severed from this single agreement).

We shall not be obliged to settle any foreign exchange contract if there is a prevailing Netting Event (as defined below) except in accordance with the procedures set out below.

Any of the following shall deem to be a “Netting event” : … (iv) the Customer is in breach of these terms; or (v) the Customer fails to pay to us any sum as and when such sum falls due to be paid (whether pursuant to a delivery under a forward exchange contract or otherwise).

On the occurrence of a Netting Event, all foreign exchange contracts shall be deemed immediately liquidated by offsetting foreign exchange contracts at our prevailing rates and the amounts resulting shall be converted into Hong Kong Dollars or US Dollars (as we may determine) at our prevailing rates and set off with each other resulting in a single net sum payable either from us to the Customer or vice versa.  Our sole obligation remaining in respect of all such foreign exchange contracts after the Netting Event shall therefore be to settle this net sum (if any).

8.  Forward Exchange Contracts

For forward exchange buying and selling contracts, we will buy from and sell to the Customer overseas currency against Hong Kong Dollars (or another overseas currency where so specified by the Customer in any instruction) at the contract rate on the contract agreed date.

The Customer understands that for fixed term contracts forward exchange contracts deliveries will only be made on the maturity date(s) specified in the contract, unless we agree to vary the date of delivery, whereupon we may apply any rate of exchange we deem appropriate.

In the event of the Customer’s failure to pay when any amount due to us or failure to complete any forward exchange contract on the contract agreed date, the Customer agrees that in addition to our other rights and remedies (including the declaration of a Netting event) :

a) we may, at our discretion, buy/sell the necessary covering currency to terminate the forward exchange contract, and/or

b) the Customer must indemnify us for all costs (on a full indemnity basis), taxes, expenses and losses arising from such failure; and/or

c) we may, at our discretion, decline to effect payment to the Customer’s beneficiary.

9.  Collateral Deposit for Forward Exchange Contracts

The Customer should place a collateral deposit of a % (such percentage shall be varied and determined by [the plaintiff] from time to time) on the forward exchange contracted with [the plaintiff] on the bank working day following confirmation of the forward exchange contract.  [The plaintiff] reserve the right to exercise immediate actions as mentioned in Clause 8 a), b) & c) under the following events :

I. Customer fails to place the collateral deposit on time,

II. the current FX market rate moves adversely against the forward exchange contract rate by a % more than the collateral deposit %, and, the customer fail to place addition collateral deposit equal to the difference of the two.

Without limiting the foregoing, [the plaintiff] have the right to call up additional collateral deposit any time without prior notice.

10.  Late Payment Interest Charges

If any amount payable by the Customer is not received by us as and when such payment falls due, in addition to other rights and remedies available to us, we reserve the right to impose a late payment interest charge of 2% over Prime rate of our major banker, calculated on a day to day basis.

…

18.  Governing law and jurisdiction

These terms shall be governed by and construed in accordance with HKSAR law.  The parties hereby irrevocably submit to the non-exclusive jurisdiction of the courts of HKSAR.”

27.  The defendant began trading almost immediately.  The deposit required was negotiated at 3% of the amounts bought and sold.

28.  At the foot of the notice of each transaction that followed was recorded the following :

“Important Note :

As a company policy, Travelex Hong Kong Ltd will not accept any transaction in respect of margin trading or speculative in nature.”

29.  In some instances the market had moved between the transaction date and the maturity date resulting in what Mr Leung had referred to as a lost opportunity; yet the defendant settled these and all other transactions without demur.

30.  The two transactions ultimately not settled and which gave rise to this action comprised the sale by the defendant of E500,000 and E1,000,000.  The maturity dates originally fixed were extended on several occasions by agreement, using the rollover procedure.  By revision maturity of both transactions came to be set for 19 January 2004.  But the defendant did not pay then or thereafter.  After notice was given by the plaintiff’s solicitors, the plaintiff exercised its right to buy in the market a total of E1,500,000 and thereby terminated the two contracts.

31.  Outstanding but not yet due was a third transaction being the sale of E3,000,000, whose date of maturity was 4 June 2004.  Declaring the defendant’s default to be a “netting event” under clause 7 of the Agreement’s Terms and Conditions, the plaintiff closed that contract down as well.

32.  Mr Leung said that these steps were preceded by conversations he had with Miss Ho, before and after 19 January.  The euro was at the time rising in value, and he pressed her to complete or increase the deposit, for it had fallen below the required 3%.  She responded that her boss (Mr Nassetti) was not happy with the turn of events.  She asked for more time.  That was agreed, but upon enhancement of the deposit by the sum of US$200,000, or its equivalent in euros.  But having agreed, through Miss Ho, to pay this amount, the defendant then declined to do so.

33.  The plaintiff’s Head of Foreign Exchange, called Ernest Ching, was engaged to assist in recovering the overdue contract price, and he gave evidence of his involvement.

34.  He spoke to Miss Ho following 19 January.  I repeat verbatim his account of events :

“9. At 19:07 of 20 January 2004, Cathy called my mobile and told me that she had difficulty executing the overdue EURO/USD forward contracts because her boss Mr Nassetti questioned about the usage of forward contracts.  She mentioned that she knew what forward contract was and that using it to hedge the defendant’s Euro exposure was what the defendant wanted.  Her problem was Mr Nassetti had mixed up forward contract with swap and option.  She also mentioned that Mr Nassetti was the gambling type of person and was unhappy that he had lost from the forward contracts placed with us.

10. I repeated to Cathy that the EURO/USD forward contract was to protect their Euro receivables at the time it was incurred so that any subsequent movement in EURO/USD exchange rate will not affect their financial position.  Therefore, any subsequent change in EURO/USD exchange rate should not be viewed as gain or loss.  Cathy re-affirmed that she knew and agreed, but she was unable to convince her boss.  I agreed to send a fax ASAP to her to explain the difference between option and forward contract so that she could show it to her boss.  Cathy agreed to settle the overdue EURO/USD forward contract ASAP.

11. As agreed, I sent a fax on 21 January 2004 to Cathy to explain the difference between option and forward contract.  In the fax, I clearly mentioned that the option quotation was from DZ Bank AG (Germany).  In addition, I repeated again the EURO/USD forward contracts overdue had to be settled.

…

14. A few days before 13 February 2004, Cathy called us that she was unable to change the mind of her boss (Mr Nassetti) and asked whether we could come and see her boss.  A meeting on 13 February was then fixed.

15. On 13 February 2004, Dennis and myself met Cathy and Ettore Massimiliano Nassetti (“E Nassetti”) at the defendant’s office.  During the meeting, Dennis explained briefly the difference of various FX hedging products to E Nassetti.  We emphasized again that the overdue EURO/USD forward contracts had to be settled.  E Nassetti requested a solution for him to win back the loss incurred.  I repeated that the EURO/USD forward contract was to protect their Euro receivables at the time it was incurred so that any subsequent movement in EURO/USD exchange rate will not affect their financial position.  Therefore, any subsequent change in EURO/USD exchange rate should not be viewed as gain or loss.

16. At the meeting on 13 February 2004, I also mentioned that the EURO/USD forward contract agreed between us was simply forward FX contract, it was not swap or option.  E Nassetti replied that he knew it was forward contract and he also knew that Travelex had the right to force the defendant to execute the contract.  However, he would only settle the contract if Tavelex could help him to win back the loss.  He also requested a proposal to show him how we could do that.  I repeated again the overdue EURO/USD forward contracts had to be settled.  In addition, Travelex could help customer to hedge FX exposure but we were in no position to advise on investment or to guarantee a gain.  At the end of the meeting, no agreement or compromise could be made.”

Findings of Fact

35.  The defendant having played no part in the trial, I did not have the benefit of evidence from it, anticipated to have been forthcoming from Miss Ho and Mr Nassetti.  That said, I am quite satisfied that there was no representation given by Mr Leung or anyone else at the plaintiff that the transactions entered into by the defendant were in the nature of a swap or an option or otherwise which gave it the right not to complete on the date of maturity.  There are numerous indicators that this was not and could not have been so.  Amongst these are the following :

(a) the plaintiff did not then and does not now deal in options.  Options are speculative, and the plaintiff does not enter into speculative transactions.  And this is stated unequivocally on the face of the notification of each transaction;

(b) Miss Ho did not raise the possibility of dealing in swaps or options or suchlike.  Mr Leung has sworn to this; furthermore, the translation of the transcript of the telephone conversation contains no such topic;

(c) during the course of the parties’ relationship the defendant settled the forward contracts in the conventional way, without challenge, even though on occasions it would have profited by going into the market and forfeiting the deposit, if it had, or assumed it had, the right to do so;

(d) throughout the period surrounding the date of default there was no indication by correspondence or otherwise that the defendant was complaining of being duped;

(e) there being nothing to suggest otherwise Miss Ho at any event accepted liability but could not, on her account, persuade Mr Nassetti to do so.

The Result

36.  There is no question but that the parties contracted as described by Mr Leung and as is evident from the Agreement and the notifications of transactions thereafter entered into.

37.  The defendant defaulted.  Given the opportunity to make amends and then notice of the consequences of not doing so it did not. 

38.  The plaintiff was exercising its rights under the Agreement when it terminated the three transactions and then covered its position by going into the market. 

39.  The consequential cost of that less the deposit held is recoverable in liquidated damages, see Terms and Conditions, clause 8(c), together with interest at 2% over prime of its major bank; see clause 10.  I am told that the major bank is HSBC.  The interest is to be calculated on a daily basis at simple interest from 20 February 2004 until this date; thereafter at judgment rate.

40.  There will be judgment to the plaintiff on these terms.  The counterclaim is dismissed.

41.  Costs shall follow the event and be to the plaintiff.  The defendant committed under the Agreement to pay full indemnity costs; see clause 5.  It is trite law that such a provision may not fetter the court’s discretion on costs.  However I see no reason why the defendant should not be held to what it contracted for.  Thus I order that costs shall if not agreed be taxed on an indemnity basis.