SHINE GRACE INVESTMENT LTD v. CITIBANK, N.A. AND ANOTHER

HCCL 28/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 28 OF 2008

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BETWEEN

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J U D G M E N T

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The application

1.  This is an application by the plaintiff company, taken out by summons dated 21 October 2009 pursuant to Order 18, rule 19 and/or inherent jurisdiction, to strike out parts of the defendants’ Defence, together with an application for further and better particulars of a specific averment within that Defence.

2.  In the event, there was no necessity to proceed with the latter aspect, given that Mr Martin Rogers, who appeared for the defendants on this application, formally withdrew the sentence [at paragraph 30(g) of the Defence: “Instead, CPB receives a fee for each trade”] which had precipitated this particulars’ request.

3.  Hence, this judgment is concerned solely with the strike out application.

The overall shape of the plaintiff’s claim

4.  By this action the plaintiff, Shine Grace Investments Ltd. (‘Shine Grace’), sues Citibank and one of its employees, Ms Hailey Mak, for declaratory relief, together with a claim for damages or equitable restitution.

5.  Although this case has engendered (and doubtless will continue to stimulate) a considerable amount of detail, in outline it is not unduly complex, albeit the subject-matter of the type of investment instruments with which this case is concerned certainly is not straightforward.

6.  Shine Grace was, and remains, a BVI investment company; it is registered under Part XI of the Companies Ordinance.

7.  At the material time it was run primarily, if not exclusively, by an experienced businesswoman/investor called Mrs Anita Chan Lai Ling; there was of course a Board of Directors in place, but it does not appear seriously to be disputed – and for present purposes I shall proceed on this basis – that Mrs Chan was the principal decision-maker and provider of instructions and the driving force in investment matters generally: certainly on the information currently available she appears to have been outstandingly successful in wheeling and dealing on the financial markets.

8.  Be that as it may. One of the principal financial institutions with which Shine Grace dealt was Citibank, an international bank requiring no introduction, and which in Hong Kong provides, inter alia, extensive banking and investment advisory services.

9.  Ms Hailey Mak, the 2^nd defendant, was a Vice President of Citibank’s Private Banking Department, and from about 1999 to mid‑October 2007 was the ‘relationship manager’ assigned to deal with the Shine Grace account and Mrs Anita Chan.

10.  I apprehend that a good deal of the evidence in this case will concentrate upon the professional interaction between these two ladies.

11.  The problem which now has arisen, and the specific subject‑matter of this litigation, focuses upon complex derivative transactions termed ‘Accumulator Contracts’, leveraged structured financial products which were the subject of dealings between Ms Mak and Shine Grace, at all times represented by Mrs Anita Chan until her regrettable death in Adventist Hospital on 17 October 2007.

12.  The 9 contracts in question, which had as their substantive underpinning the purchase of shares in Chinese listed companies on the Hong Kong Main Board, took place during mid-October 2007, and in particular on 15 and 16 October, that is, in the two days immediately prior to Mrs Chan’s death.

13.  Particulars of these 9 contracts are listed in paragraph 1 of the Endorsement of Claim in the Writ issued by Shine Grace on 21 January 2008, and in the various Schedules appended to the Statement of Claim dated 4 June 2008.

14.  What has happened to occasion this litigation is that Citibank, acting as agent for the plaintiff, entered into the 9 ‘Accumulator Contracts’ – in each instance, it is said, with Citibank being the direct contractual counterparty.

15.  In the event, very substantial losses were occasioned upon these transactions; absent provision of margin requirements pursuant to margin call notices issued by the bank at various dates in November/December 2007 and January 2008, all open positions in the 9 contracts were closed out by Citibank on or about 23 January 2008, thereby ‘crystallizing’ these losses.

16.  Demands on the consequent shortfall on the Shine Grace investment account have been made of two third party guarantors (which I take to be associated companies) of this account, namely one Shinning International Holdings Ltd and one Bonds & Sons International Ltd.

17.  These respective demands were not insubstantial, in the range of US$3.2 – 5 million, and on 25 January 2008 the sums in question were appropriated by Citibank from the guarantors’ accounts in order to settle the shortfall thereby crystallized within the investment account of Shine Grace.

18.  By its claim the plaintiff seeks declaratory relief, inter alia, that the 9 contracts are invalid and/or unenforceable, alternatively damages or restitutionary relief arising from the closing of the open positions and associated trading.

19.  The plaintiff alleges that the 9 contracts were not authorized, alternatively that the plaintiff is able to rescind these contracts by reason of undue influence and/or oppressive conduct exercised over Mrs Anita Chan at a time when she was seriously ill and close to her untimely death; it is alleged that at this time she was being ‘badgered’ by the 2^nd defendant with a large number of telephone calls from Ms Mak, so that in giving the instructions she purportedly gave she was not competent and/or that she was able to exercise neither independent nor informed judgment.

20.  The plaintiff says that the defendants were in breach of their statutory duties – these contracts being of a type governed by Hong Kong’s statutory regulatory regime – in that these transactions were of a type wholly unsuitable and “massively imprudent” to which no reasonable investor in the position of Shine Grace would commit, alternatively that Citibank is liable in damages/restitution for breach of contract and/or breach of fiduciary duty and/or conversion.

21.  The foregoing summary is no more than a ‘thumb nail’ outline of the dispute with which this court eventually will have to wrestle, but for interlocutory descriptive purposes I hope that it will suffice.

The defendants’ pleaded response: the argument

22.  It is the nature – or, perhaps more accurately in this instance, the particular style – of this defence response which has stimulated the present strike out application, it being said by Mr Barlow SC, appearing for the plaintiff, that this document is embarrassing and/or an abuse of process.

23.  Let me say at the outset that this is a somewhat unusual case.

24.  Often in a strike out application, there is obvious and real ambiguity as to what the defence case is, and what it is not – accordingly, if not corrected, there is a danger of relevant issues becoming obscured, in turn rendering discovery and subsequent trial correspondingly and unnecessarily difficult; hence the necessity for clarification at an early stage.

25.  Frequently, also, the problem with a pleading the subject of an application of this nature is that too little primary data is vouchsafed, so that absent basic building blocks the pleading neither is linear nor readily comprehensible.

26.  Emphatically this is not the situation here.

27.  To the contrary. Mr Barlow’s position is that far too much data has been vouchsafed in the Defence, together with the unnecessary pleading of tranches of evidence, with the result that, if not inconsistencies within the case as put forward, there was, in counsel’s characterization, at the least “residual uncertainty as to the nature of the case we have to meet”.

28.  Although Mr Barlow had a number of criticisms, his main target was the overall approach adopted by the pleader of the Defence.

29.  His complaint essentially was two-fold.

30.  The first and most obvious difficulty, he said – and absent this aspect Mr Barlow fairly conceded that this application probably would not have seen the light of day – was the bifurcated and unhelpful approach of the pleader in responding to the Statement of Claim; in addition to addressing the specific allegations made in the Statement of Claim, the body of the substantive pleading had been prefaced by an extensive paragraph 2, entitled ‘Background to SGIL and Mrs Chan’s investment experience’.

31.  This paragraph, Mr Barlow complained, extended over fully 10 pages and contained numerous sub-clauses (a-o), and within those sub‑clauses additional sub-sub-clauses containing detailed particulars.

32.  This plea within paragraph 2 of what amounted to a prefatory positive case – as to the presence of which counsel pronounced himself “deeply uncomfortable” – had the effect, Mr Barlow submitted, of causing difficulty in relating back the subsequent (and directly responsive) parts of the pleading, which properly commenced at paragraph 3, and which expressly was entitled ‘Response to Statement of Claim’.

33.  Second, this “unorthodox and undisciplined” style of the pleading notwithstanding, Mr Barlow further observed that throughout there had been an extensive and wholly unnecessary pleading of evidence, in particular verbatim transcripts of telephone conversations between Mrs Chan and Ms Hailey Mak of the defendant bank appearing both within the body of the pleading, as well as within Schedules 3 and 4 which were attached to the Defence; accordingly, said Mr Barlow, if and in so far as paragraph 2 was to be excised from the pleading, these Schedules would have to go as well.

34.  In support of his argument counsel cited the well-known principles relating to the basic requirements of a pleading, noting that every litigant is entitled ex debito justitiae to be served with a pleading which complies with the requirement of Order 18, rule 7, namely that every pleading must contain, and contain only, a statement in summary form of the material facts on which the party pleading relies for his claim or defence, as the case may be, but not the evidence by which those facts are to be proved, and that the statement must be as brief as the nature of the case admits.

35.  Additionally, Mr Barlow reminded the court of the well‑known observations of the Court of Final Appeal as to pleading requirements, as contained in dicta in ADS v Wheelock Marden [1994] 2 HKC 264, at 269E-270A, and further argued that a pleading which is ambiguous, or pleads evidence or prolix irrelevant material may properly be characterized as ‘embarrassing’, and thus was susceptible to correction by an application such as the present.

36.  In reply, Mr Martin Rogers, solicitor for the defendants, in a pithy and attractive address, was wholly disinclined to accept the criticism now heaped upon the Defence, which in the circumstances of this case he suggested both was unfair and unfounded.

37.  Mr Rogers submitted that the real aim in this application, which in reality was “the wrong application”, was to cut down the scope of the Defence as it now stood, the better to minimize the specific discovery arguments which inevitably were going to feature in this case after conclusion of the pleadings stage.

38.  Given the manner in which the plaintiff’s claim had been framed, Mr Rogers argued, he foresaw that there was going to be a dispute between these parties regarding, for example, the myriad variety of other derivative transactions with other financial institutions which Mrs Chan of Shine Grace had been in the habit of conducting, evidence which would give the lie to the plaintiff’s present allegation that the structured derivative investment products the focus of this case reasonably could be regarded either as “oppressive” or “wildly imprudent” such that no sensible advising bank could or should recommend for the type of investment portfolio maintained by the plaintiff, and further would serve to emphasise the very real investment expertise and knowledge possessed by the late Mrs Chan.

39.  Accordingly, Mr Rogers said, there was no real problem with paragraph 2 of the Defence, which in no sense provided inconsistency and/or unintelligibility within the defence case, but, to the contrary, this part of the pleading attempted – usefully and appropriately in the circumstances – to place into proper context the existing relationship between Mrs Chan and Citibank/Ms Mak, and also the degree of investment sophistication and knowledge which Mrs Chan, a highly experienced investor and successful businesswoman, undoubtedly brought to bear in the investment interaction and dealings she had maintained on behalf of the plaintiff with Citibank/Miss Mak.

40.  This at any rate was the broad thrust of Mr Rogers’ submission; thepleading approach as had been adopted was the more regrettably apt, Mr Rogers added, given that Mrs Chan now sadly was deceased, and thus was not able to speak for herself and Shine Grace at trial.

41.  The foregoing observations notwithstanding, it was accepted on his side of the fence, Mr Rogers said, that his clients had, to use his term, “overpleaded” in certain areas, not least in terms of the reproduction of the Chan/Mak telephone transcripts, and perhaps also in terms of general approach, but that this had intentionally been done on the instructions of his corporate client the better to provide, in the circumstances as now prevailed, that which amounted to a fuller exposition of the defence case; to quote from the helpful skeleton argument of the defendants: “to the extent that the defendants may have pleaded more than the facts they were required to do under the RHC, this was done fully to assist at an early stage in knowing the defendants’ case in respect of the matters pleaded by the plaintiff and to enable proceedings to proceed expediently.”

42.  Mr Rogers argued that in approaching the Defence in this way, the defendants effectively had given a form of ‘advance discovery’ to the plaintiff; in this regard he referred to the plaintiff’s requests for specific discovery dated 22 October 2008 and 24 November 2008 to which the defendants had responded by disclosing the required documents, and that in so requesting this specific discovery, the plaintiff had in fact used the paragraphs which it now was seeking to strike out.

43.  Accordingly, when looked at in the round, he said, this application represented no more than an attempt by the plaintiff to engage in unproductive satellite litigation, which at bottom amounted to a waste of time and costs.

Decision

44.  I have been in two minds about this application, which I do not regard as clear-cut. However, a decision must be made, and made quickly, since clearly it is in the interests of both parties that this case, which involves serious allegations and a great deal of money, be taken to trial, and fairly resolved, as soon as possible.

45.  On the one hand there can be no gainsaying the established principles as to pleading, principles laid down by Hong Kong’s highest court, such as were prayed in aid by Mr Barlow on behalf of the plaintiff.

46.  Equally it is generally known that this Commercial Court ‑ before which I anticipate that this case will be tried – instinctively adopts a robust attitude to pleadings, and that as long as the issues are clear at the time of trial this Court does not become unduly exercised over pleading niceties; in his address Mr Rogers relied upon the court’s comment at the outset of this application that if otherwise everything had been in place this case could be tried tomorrow, the plaintiff’s complaints about the pleading defects within the current Defence notwithstanding.

47.  The Court also is entitled to wonder whether in this instance the plaintiff has been too readily inclined to be “embarrassed” by what is admittedly a somewhat unorthodox pleading approach, albeit an approach that I have no difficulty in accepting was adopted not to obfuscate nor delay but, to the contrary, in an effort to assist in circumstances in which the officers currently in charge of the plaintiff necessarily will be in the dark about a good deal of what had transpired between Mrs Chan and Hailey Mak, when, and why.

48.  At the end of the day, however, after putting all the arguments into the ‘mix’ and after some degree of reflection, I have concluded that the appropriate course is to accede, in part at least, to the plaintiff’s request for amendment of the Defence in the form as it currently stands.

49.  I have so decided not because I think that any difficulties as currently envisaged forensically are insurmountable – in my view they are not – but because it may transpire that a more linear approach will facilitate rulings within, inter alia, the inevitable forthcoming discovery debate – wherein, as Mr Rogers has forecast, there is likely to be a stern difference of opinion on either side of the fence as to the ambit of such discovery as relates to Mrs Chan’s investment activities generally; possibly, also, amendment may ease the approach to other interlocutory arguments as may arise, and also because, dependent upon time constraints and the progress of this litigation, there remains a possibility (I hope remote) that this court ultimately will be unable to try what will be an absorbing and interesting case, and that it may be that another tribunal would be assisted by rationalisation of that which is already on paper.

50.  Accordingly, the limited relief which I propose to give on this application focuses upon the removal of the present ‘introductory’ paragraph 2 of the Defence, and the repleading of the content thereof co‑terminus with the paragraphs which are specifically responsive to the plaintiff’s pleaded allegations – thereby removing that which Mr Barlow has seen fit to castigate as a “parallel pleading” and the consequent possibility of any ‘disconnect’, express or by necessary implication, between the content of the defendants’ introductory ‘positive case’ and the existing and directly responsive defence to the plaintiff’s claim.

51.  Save as ordered below, however, I would not anticipate having to referee another pleadings’ dispute in this case, and suggest as firmly as I may that the parties co-operate in getting this matter to trial as expeditiously as possible.

Order

52.  Consequent on the foregoing, therefore, the Order on this application is in the terms following:

(i)  Paragraph 2 of the Defence be deleted in its present form;

(ii)  Leave be given to the defendants to amend its Defence within 21 days of the date hereof so as to plead so much of the substance within the now-deleted paragraph 2 as may be advised within and/or ancillary to the existing paragraphs of the Defence (presently commencing with paragraph 3) as remain directly responsive to the plaintiff’s pleaded claim;

(iii)  The divers pleaded extracts from the transcription of the telephone conversations between Mrs Anita Chan of the plaintiff and Ms Hailey Mak of the 1^st defendant be deleted, and replaced, if so advised, with a pleaded summary of the time and alleged effect and/or consequence of such conversations;

(iv)  The existing Schedules 3, 4 and 6 (which contain extensive portions of such conversation transcripts) be deleted;

(v)  Leave be given to the plaintiff, within 14 days of service of the Amended Defence, consequentially to amend its Reply thereto;

(vi)  The costs of such consequential amendment be borne by the defendants in any event, such costs to be taxed if not agreed;

(vii)  Save as aforesaid, the costs of and occasioned by this application be reserved for argument, and that, absent agreement thereon, any such argument do take place at the next interlocutory application to be fixed for hearing before this Court in this case.

(viii)  There be liberty to apply.