WARDLEY-THOMSON LTD. v. TAI CHUN YUNG EDWIN AND ANOTHER

1988, No. CL 102

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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J U D G M E N T

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1. This is another case of trading or speculating, call it what one will, on the Futures Exchange precipitated by the stock market crash on 19th October 1987, the infamous Black Monday. The plaintiff company is, inter alia, a broker in the trading of Hang Seng Index futures contracts, and the defendant was one of its customers. The plaintiff claims $201,825,73 not, it is particularly important to note, upon a general account as is more usual I think in this sort of case, but in respect of essentially one single transaction.

2. The plaintiff alleges that on 19th October 1987 on the defendant's instructions it bought 5 lots of October 1987 futures contracts at 3767, and that later that same day the defendant instructed that the 5 lots be sold. Unfortunately by then the crash had begun and it was not possible to find a purchaser. The exchange was then suspended and did not reopen until the 26th October. Meanwhile the prices on the London market indicated that the defendant's margin would have to be increased. He was asked to do so but failed and the position was closed on the 26th October by the sale of 5 lots of October futures at 2100. This, the plaintiff says, resulted in a loss of sortie $416,000. After addition of commission, exchange fees and interest and after deducting the defendant's credit balance and a transfer of $27,000 from the defendant's bullion account, the balance claimed is $201,825.73.

3. By the defence put in by his solicitors on 10th December 1987, the defendant pleads several defences. Paragraph 1 of the defence alleges that the contract, i.e. the Consumers. Agreement between the plaintiff and the defendant was illegal because the plaintiff was not a member of the Hong Kong Futures Exchange. The point was not pressed as it quickly became clear that the plaintiff acted through a subsidiary, that is Wardley Thompson Futures Hong Kong Ltd. Which is a member of the Futures Exchange. In my judgment there is no merit in this particular defence and it clearly fails.

4. I proceed to paragraph 2 of the defence which alleges that because the plaintiff represented to the defendant that the plaintiff was a member of the Futures Exchange any agreement with the defendant is void for fraudulent misrepresentation. In his further and better particulars of that averment the defendant stated that the misrepresentation was made by Mr. Kenny Ho. But he failed to put that to Mr. Ho or even question him about it when Mr. Ho gave evidence. Nor in his oven evidence did the defendant make any such allegation. When I expressely reminded him of the necessity for some evidence on the point, he made it plain that attached little importance to it, saying that the main thing he wanted to mention was the trading on he 19th October, to which matter shall return later. There is accordingly no evidence of the misrepresentation alleged, nor any that it was relied upon. Paragraph 2 of the defence also fails.

5. Turning to paragraph 3, this alleges that the plaintiff in breach of its fiduciary duty failed to supply a copy of the agreement to the defendant, did not give the defendant an opportunity to read the terms and failed to explain the risks involved in future's trading, as required by the Rules of the Futures Exchange. To begin with I am not persuaded that failure to comply with the Rules of the Futures Exchange would vitiate the Consumers Agreement between the plaintiff and the defendant (whatever the sanction the Futures Exchange might have been able to impose upon its member). Nor am I persuaded that there were any fiduciary duties upon the plaintiff of the nature implied.

6. Furthermore, I accept Mr. Ho's evidence the sometime before the signing of the Consumers Agreement the defendant called in and took away forms for opening an account including blank forms of the Consumers Agreement and a risk disclosure statement. The defendant denied that he called in, but did not explain how he attended for the purpose of opening the account with a Banker's cheque already made out for $100,000, the exact amount of the deposit required. I do not believe the defendant's denial. Moreover, in my finding he had ample opportunity to read the proforma Consumers Agreement, and also the risk disclosure statement and application form which explained the risks involved.

7. I should add that although the defendant's knowledge of English grammar is less than perfect and he chose to give evidence in Cantonese, he demonstrated an entirely adequate ability to read, speak and understand English. He is an articulate and intelligent person, and formerly described himself as a creative director, now freelancing as a publications designer. Clearly there is no merit in paragraph 3 of the defence and I reject it.

8. Paragraph 4 of the defence pleaded that the Consumer's Agreement was frustrated by the illegal closure of the exchange. Prior to the hearing of this action, Mr. Justice Sears in another case held that the closure of the exchange was irrelevant to claims of the present sort.  In the light of that the defendant did not proceed with paragraph 4.

9. Paragraph 5 of the defence averred that the plaintiff did not sign the Consumers Agreement and that therefore the defendant was not bound by its terms. It is clear from the form and contents of the Consumers Agreement and related documentation that the former is embodied in an application form and becomes binding upon acceptance by the plaintiff and maintenance by the plaintiff of one or more accounts of he applicant. There is no merit whatsoever in this ground also.

10. Paragraph 8 complains that the plaintiff was not entitled to transfer the credit in the defendant's bullion account towards reduction of the debit in his futures accounts. It is upon that same basis than the defendant counterclaims the $27,000 odd transferred out of his bullion account. In my judgment the plaintiff was entitled to make the transfer under the express language of paragraph 2 of the Consumers Agreement.

11. Lastly, by the remaining provisions of the defence, the statement of claim was denied and the plaintiff was put to strict proof.

12. I turn then to proof of the plaintiff's claim. The defendant accepted that he had signed the Consumers Agreement and related documentation in several places, although incredibly he denied that he ever read it up to the day before yesterday. I do not believe him. In my judgment he encored into the Consumers Agreement, signed it and is bound by it

13. At this point, I should mention that on the 8th May, some weeks ago, when he appeared before Mr. Justice Sears, he indicated that he wished to make some amendments to his defence. He was warned to do so in good time. But it was not until the eve of this hearing that he served upon the plaintiff's solicitors a document purporting to be an amended defence. It is a home grown product apparently produced by the defendant himself, his solicitors having come off the record some months ago. Sadly it is in large measure a rambling, imprecise and incomprehensible document. Moreover, the defendant did not present any prospect of having those matters rectified nor did he satisfactorily explain his delay. In the circumstances leave to amend was refused. That did not prevent the defendant in the end giving evidence of the additional grounds which he may have wishes to rely upon and partly upon those that he did wish do rely upon. In the circumstances of the case with he defendant defending himself and apparently other members of a "Futures Exchange Victims Association" attending and sometimes taking an audible inheres in the proceedings, it seems to me desirable, not least in fairness to the plaintiff, that those allegations should be addressed, notwithstanding that they were not formally pleaded.

14. Reverting to the facts by October 1987, the defendant had been trading in bulliun for more than a year and actively in Hang Seng Index futures contracts for about a year. It is common ground that the plaintiff's accounts executive team assigned to him and through whom he dealt with were Mr. Ho, to whom I referred, and a Mr. Sonny Wong, and that they were possibly assisted by a trainee accounts executive called Paul C.L. Kwok. It is also common ground chat on the morning of the 19th October 1987 the defendant gave the team instructions to buy 5 lots of October contracts. It is disputed whether the order was at market rate and executes at 3767 as testified to by the plaintiff's witnesses supported by documents or, whether the buy order was first at the limit of 3733, then at market rate and executed as to 4 contracts at 3771 and one contract at 3769 as testified by the defendant.

15. It is also common ground that later the same day the defendant gave instructions to sell the 5 contracts. But Mr. Ho testified that the order was at limit, which the defendant reduced but nonetheless the order could not be executed because the crash had commenced and the market was falling too fast and that when trading was suspended the defendant was left holding the 5 contracts. During the period the exchange was closed, Mr. Ho says he told the defendant his margin would have to be topped up given the further decline on the London market, but the defendant failed to do so. On 26th October when the exchange was reopened in pursuance of enabling provision in the Consumers Agreement the plaintiff liquidated the position on the 5 contracts by purchasing 5 contracts at 2100.

16. The defendant's version was not so easy to gather. His proposed amendments for which leave was refused and his explanation of them suggested that he was concerned not so much to dispute his indebtedness on the two 5 lot contracts on the 19th and 26th October, as to establish a set-off by reason of other transactions. He attempted to pursue that line even after leave to amend his defence was refused, and he did so well into the trial.

17. As the trial progressed it seemed that his progressively developing contention was that in addition to or alternatively, I am still not sure which, the sale of his 5 lots should have been effected on the afternoon of 19th October. He testified that he saw the price rise to 2786 and then asked Mr. Ho sell, presumably at that price, but almost immediately placing another order to sell at 3765 or better. The price stayed in that range for some time he says and then gradually fell. There were 10 points between 3775 and 3765, and ample opportunity to sell. He went home very happy because he had disposed of the 5 lots and with the other transactions he had made on the same day he had on his reckoning made a profit of some $30,000. He says he told other persons about it and a friend was full of admiration for him that he was able to sell so many Hang Seng futures contracts.

18. On the 22nd October he went back to the plaintiff's office and traded in futures on another market, the Hong Kong Futures Exchange being closed. He says he was not asked to provide any additional margin. But on 26th October, very early in the morning, Mr. Ho tolephoned him and he went to see Mr. Ho at the plaintiff's office. He told Mr. Ho to check the matter very carefully and did not give any sale or purchase order that day. On the 29th October he had a discussion with senior officers of the plaintiff, at which he took the view, he says, that on 19th October all his accounts were clesed. On the 11th November the plaintiff took out its writ. Later a group of "victims of the Futures Exchange" formed an association of about 300 to 500 persons. He participated in a general defence fund and gave instructions on a form to the solicitor retained.

19. So by the end of his evidence and specifically in response to my questions seeking clarification, it became clear that what was the defendant's main contention was that the 5 contracts were actually sold on the 19th of October, although the defendant did not in so many words claim that any particular officer or member of the staff of the plaintiff had told him so.

20. The general procedure adopted by the plaintiff, its customers and its dealer i.e. (Wardley Trading Futures) on the Exchange Floor was not seriously disputed by the defendant, and in any case was clearly established by the oral and documentary evidence adduced by the plaintiff. Customers gave their orders to their accounts executives team in a large dealing room, where there were other teams and customers present. The team relayed the order to the order desk at the other end of the dealing room, in the process making out and partly filling out order forms. The "order taker" the order desk accepted the orders on a first-come-first-served basis, recorded them individually or bulked with other orders for the same sort of contract on a daily list called the order sheet, and promptly phoned them through to the Exchange floor. Transactions completed on the floor were recorded an individual prenumbered Futures Exchange Company slips.  Later that same day a printed "commodity statement" would be sent by the Exchange to each member. And when this was received by the plaintiff, the Senior Vice President, Operations, prepare a reconciliation of the orders in conjunction with the order sheet.

21. The defendant's order to buy 5 October futures contracts on the morning of the 19th October is recorded on a plaintiff's order form and the execution of that order is recorded on a buyer's copy of a Futures Exchange transaction slip, both of which were produced and exhibited by the plaintiff. Likewise in relation to the sale of the 5 contracts on the 26th October, a similar order form and slip have been produced and exhibited. In addition both transactions are reflected in the respective days' commodity statements. The order form of the 19th October was erroneously stamped as the 19th September and not 19th October. However, from all the evidence I am satisfied that it was made out on the 19th October. Despite all the suspicions of the defendant, it is difficult to see what purpose there could be in deliberately putting on the wrong month. The 19th September was incidentally a Saturday on which day the Exchange was, as usual, closed. Even the defendant appeared to accept that after it became clear that he could not turn the error to his advantage in any way imaginable. Likewise the floor transaction slip of the 26th October was not time stamped, but again I am satisfied that it was made out on the 26th.

22. There was one further aspect of the documentary evidence in which it was not as fully buttressed as it might have been. The order shoot of the 19th October had in accordance with the usual practice of the plaintiff been shredded 2 months later. I am however satisfied that that was a result of a lack of foresight rather than anything sinister, though it must be said that it is a rather surprising lack of foresight. The effect of these documents nonetheless remains everwhelming and has not been controverted. I reject the defendan's suggestion that he may have been alloted an unfavourable price. I am satisfied on the evidence that the orders were dealt with on a first-come-first-served basis, with market rate orders given priority over limit orders for obvious and good reason.

23. As to the evidence of the plaintiff's witnesses, its Senior Vice President, Senior Vice President, Operatiens, and 2 Accounts Executives, I bear in mind that they clearly had an interest in the result of the action, particularly the two Accounts Executives, Mr. Ho and Mr. Wong. The latter were remunerated by commission and subject to penalties when their customers were in default. And it is possible that Mr. Wong and Mr. Ho might have embellished their evidence in some minor detail. But I have no hesitation in accepting the thrust of all the plaintiff's witnesses' evidence, which, in the context of the crucial matters disputed by the defendant, is fully supported by the documentary evidence I have mentioned.

24. Needless to say, I do not attach any significance to the error in the reference to the month of September nor to the omission of the time stamp on one transaction slip. The latter in any event is not surprising in the hectic trading conditions of the re-opening of the Exchange on the 26th October.

25. The defendant is understandably upset that the consequences of the 19th October crash have fallen upon him so heavily. That is no reason why the costs or consequences should be passed on to the plaintiff, which has had to pay the Exchange Company to close the position left open by the defendant. I have no hesitation in rejecting the defendant's version of the matter, or versions I should say, for, from the outset he has sought to improvise. His counterclaim is only for the $27,000 odd transferred from his bullion account. He says, nonetheless, that he included in his Victims of the Futures Exchange Defence Fund solicitor's form, his claim for the $30,000 profit he had made and with characteristic readiness he blames his solicitor for its omission. And he does that despite having sworn and verified by affidavit his defence in the O.14 proceedings in December 1987. He also maintains his claim that he never saw the defence until relatively recently.

26. As to the order form of the 19th October, wrongly stamped as 19th September, he claimed that it had been made out after the issue of the writ in November. When it was pointed out to him what that would mean he promptly withdrew the suggestion. I do not propose to detail all the straws at which he attempted to clutch. No reliance at all can be placed upon his evidence. His ready propensity to state whatever he considers might assist him in resisting the plaintiff's claim, demonstrated its untrustworthiness, as did his demeanour. In my finding the defendant did order the plaintiff to purchase the 5 lots of October futures contracts at market rate on the 19th October, the order was executed at 3767, his limit order for sale later that date could not be executed in the chaotic conditions of the latter part of 19th October 1987, the plaintiff was entitled under the defendant's Consumer's Agreement to close off the defendant's position on 26th October, it did so at 2100, and the loss incurred by the defendant was some $416,000. Adding that to the commision and exchange fee of $805, and deducting the defendant's credit balance of $180,000 odd and the bullion transfer of $27,000 odd produces a total of $201,452.99. Having found that the plaintiff was entitled to transfer and appropriate the $27,000 odd, it follows that the defendant's counterclaim must fail and it is dismissed.

27. There will accordingly be judgment for the plaintiff in the sum of $201,452.99 together with interest at the commercial rate (which is less than the prime plus 2% non-commercial rate) of prime plus 1% from the 26th October 1987, when the amount should have been paid, until today and hereafter at judgment rate until paid.

28. Before I leave this matter I must record my disquiet at certain aspects of futures trading, to use what in the context of cases like the present is simply a euphemism for dangerous speculation. The aspects I have in mind are first, the relative ease with which persons of modest means can resort to it. Second the leveraged scope for loss. Third the potential effect upon young accounts executives, in a position not dissimilar to salesmen, of remuneration by commission and of financial penalties imposed upon them when their customers default on their accounts. And lastly, the apparent ease with which the safeguards provided in the Futures Exchange Rules for customers can apparently be by-passed by brokers becoming the customer of members and thereby displacing the real customers as the persons protected by those safeguards. I am aware from other cases that some matters are being attended to, that certain changes are being made and that the aspects I have referred to may no longer obtain.

28. I will now hear the defendant on costs.