XCHRX CHANG KA PIO v. NICESON INVESTMENT LTD.

1992, No.A6546

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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D E C I S I O N

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1. This is the Plaintiff's application for summary judgment pursuant to O.14. The Plaintiff claims the sum of $26,618,771.81 being the surplus value at the close of business on 17th September 1992 in his account with Defendant through which he transacted buying and selling of foreign exchange. The Plaintiff also seeks a declaration that the Defendant is not entitled to claim under a bank guarantee for $10 million which the Plaintiff procured for the benefit of the Defendant, and an injunction restraining the Defendant from claiming under that guarantee. The Defendant resists the application and, if allowed to defend, will counterclaim for a sum of $39,414,542.04, comprising $20,000,000.00 which had been mistakenly paid out to the Plaintiff, together with the deficit on his account after it had been properly closed and liquidated following the Plaintiff's failure to meet a margin call.

2. The Plaintiff and Defendant entered into a customers' agreement on 30th June 1992 by which the Plaintiff could trade in foreign exchange on margin. The Plaintiff's credit limit was $10,000,000.00 for which the Plaintiff procured a bank guarantee. Initially, his margin was $3,000,000.00 which was subsequently raised to $5,000,000.00. The Plaintiff traded in pounds sterling. Trading proceeded satisfactorily on both sides until the beginning of September. From time to time, margin calls were made and met by the Plaintiff who injected approximately $34,000,000.00 into his account in this period. At the same time, he withdrew sums from his account when it was in surplus as he was entitled to do under the terms of the agreement between the parties. For example, $5,000,000.00 on 23rd July.

3. On 8th September, the price of the pound sterling rose to a very high level. As a result, at the close of business (which is 3:00 a.m. the following morning), the Plaintiff had suffered a loss of just over $6.2 million. That loss being in excess of the Plaintiff's margin, the Defendant's computer automatically generated a margin call. The following day, 9th September, however, the price of sterling fell. The Plaintiff continued trading and by the end of day, his loss had been reduced to approximately $1.1 million.

4. What took place between the parties on 9th September gives rise to two issues of fact which, on the material before me, I am unable to resolve. The first issue is whether or not the Defendant waived the margin call made to the Plaintiff. There was discussion between representatives of both parties by telephone. The Plaintiff asserts that because the price of the pound was falling by the time trading started on 9th September, and because it was probable that he would be able to trade his way out of his loss, the Defendant agreed to waive the margin call. The Defendant asserts that the margin call was not waived but that the Plaintiff was given until the afternoon of 10th September to comply. It is not in dispute, however, that the Plaintiff did not comply.

5. The second dispute is whether or not there is a general practice in the trade by which a trading company, depending upon its assessment of its customer, will extend the time within which any margin call has to be made and allow the customer to continue trading in the meantime. If the margin call is met the customer's account continues without interruption. If the margin call is not met, however, the company closes any open positions and liquidates the customer's account at prices most advantageous to the company and least advantageous to the customer. The Defendant says that it dealt with the Plaintiff in accordance with this custom.

6. The Plaintiff's position is that there is no such practice. Once a margin call has been made, a customer is not allowed to open any new positions until the call has been met and will only be able to lock in or close existing positions. Although theoretically a margin call must be met immediately, sometimes a trading company will allow the call to be met within a reasonable time, say by 3:00 p.m., on the day on which the call is made.

7. There are conflicting affidavits from both the parties and from persons with experience in the trade independent of the parties on this point. It is not a matter which I can resolve on paper. Further, even if there is such a practice, another point to be canvassed would be whether or not the Plaintiff was aware of it. This point is further confused because it now appears that the Plaintiff himself has a foreign exchange dealing room in Macau where he lives and carries on business.

8. Whatever happened, the Plaintiff was allowed to continue trading. On 11th September, the Defendant wrote to the Plaintiff setting out a version of events. Both parties rely on this letter. The Defendant relies upon it as recording the agreement reached on 9th September that the margin call had to be met. The Plaintiff says that on its true interpretation, the letter indicates that the call was waived and only required the Plaintiff to comply in relation to future calls. Suffice it to say, in my view, there is a degree of ambiguity about this letter.

9. On paper at least the Plaintiff's fortunes took a marked turn for the better. By 14th September, he was well in credit to the tune of some $23,000,000.00. He withdrew $10,000,000.00. On the following day, he withdrew a further $10,000,000.00 which left approximately $3.3 million in his account.

10. On 17th September, the Plaintiff's fortunes suffered an abrupt reversal. At the end of the previous day's trading his account showed a profit of something over $14,000,000.00. He applied to withdraw $14,000,000.00 from his account. This application was not complied with. Instead the Plaintiff received by fax a letter from the Defendant's solicitors stating that the Defendant was seeking legal advice, the result of which would be communicated within 7 days. In the meantime, however, any outstanding equity in the Plaintiff's account could not be withdrawn until further notice.

11. It is a matter of dispute as to whether the Plaintiff gave other instructions in relation to his account which were acted upon by the Defendant that day. A recording of telephone conversations between the two offices has recently been produced by the Plaintiff. I have not seen or heard the tape or had the benefit of a transcript. Doubtless, however, it will eventually help to resolve the matter.

12. Based upon the instructions which he asserts were given to the Defendant on 17th September, the Plaintiff reconstructed his account for that day. He calculated that his profit or equity was $26,618,771.81. He wrote a letter, undated, to the Defendant calling attention to this position and requiring a cheque for payment before 1:00 p.m. on 19th September. No cheque was forthcoming. He consulted solicitors who wrote on his behalf to the Defendant's solicitors. On 25th September, the Defendant's solicitors replied as follows:

"At all material times, our client is the agent of P.T. Sahabat Gunungarta of Indonesia ("PTSGA"). All trading contracts of our client's customers, including your client, are actually handled by our client on behalf of PTSGA.

We are instructed that in the early morning of the 9th September 1992, the equity in your client's account was HK$6,290,044.79 in deficit which far exceeded the settlement limit allowed by our client or PTSGA. Accordingly, PTSGA liquidated your client's account. However the advice from PTSGA informing our client of the same have been misplaced by our client's staff and was not discovered by our client until 16th September. In the circumstances, the actual position of your client's account on 9.9.1992 should be a deficit of HK$6,290,044.79 instead of the amount not shown on the statements previously supplied to your client. The amended statements will be supplied to you in due course. According to the amended statements, your client is now indebted to our client in the sum of HK$26,290,044.79 together with interests.

We are instructed to demand from your client which we hereby do that unless your client repays to our client the amount of HK$26,290,044.79 together with interests by noon tomorrow, our clients may take all necessary actions as they may be advised without further notice."

13. The sum there claimed comprises the two payments of $10 million each to the Plaintiff plus the outstanding margin call. It was subsequently increased to include the complete liquidation of the Plaintiff's account.

14. According to the Plaintiff at the time of opening his account he was told that the Defendant belonged to the Tamara Group, an Indonesian group of companies. He knew nothing of the Defendant's alleged principal and was not told that the Defendant was only an agent. There is no contradictory evidence. Therefore, while the Defendant's position as agent is undoubtedly interesting and has led to the present unhappy situation, in my judgement the principles of agency have no relevance in these proceedings.

15. The Defendant's case is that a fax was sent to its principal on 9th September, advising that the margin call had not be met and asking for instructions. Mr. Dave Yip, the Executive Director of the Defendant, says that he tried to contact the person in charge of the principal on 11th September to follow up the fax. Mr. Yip was unsuccessful in making contact. On 16th September, he discovered a fax dated 11th September from the principal which advised that the Plaintiff's 600 lots of sell positions had been liquidated at 2.0050. Mr. Yip is still unable to explain how the principal's fax was misplaced. However, upon finding the fax, he realized that there had been "a mistake" with the Plaintiff's account and that $20 million had already been withdrawn. At this point, there was an urgent meeting of the Defendant's directors, at which it was resolved that the Plaintiff's account should be immediately closed and legal advice sought. The account was closed on 16th September at which time it showed a loss of more than $13,000,000.00.

16. In relation to withdrawals by the Plaintiff, Mr. Yip explained that he and his assistant had omitted to instruct the staff of the computer department to correct the data in the computer to exclude the Plaintiff's transactions until the margin call had been met. Consequently, the computer had not frozen the Plaintiff's position as at 8th September and had continued to generate statements as though the Plaintiff was trading normally. Mr. Yip says that all the statements prepared by the computer after 8th September were incorrect. It is acknowledged, however, that one of the cheques for $10 million was signed by Mr. Yip himself.

17. To complete the evidential picture, it is not in dispute that the Plaintiff was, at the same time, trading in currency with another company called Investment City. It is Mr. Yip's evidence that on 7th September he received advice that the Plaintiff had received a margin call from that other company which the Plaintiff had not met, and that the Plaintiff might be a risky customer. The Plaintiff's position with Investment City is not entirely clear. The Plaintiff's account with that company, however, indicated that he received only one margin call for approximately $6.3 million on 8th September, and deposited almost $300,000.00 on 10th September. He continued to trade until 15th September when his account was closed. Whether the account was closed by the Plaintiff or by Investment City is difficult to tell. The Plaintiff also produced evidence to show that, in at least one bank account, he had sufficient funds at the time to meet the Defendant's margin call had the Defendant insisted upon it.

18. The Defendant's conduct beggars belief. How the Defendant could overlook the problems attaching to the account of a customer thought to be a possible risk and allow that customer to withdraw $20 million is beyond my comprehension. Also bewildering is the fact that, notwithstanding the worries about the Plaintiff's account, when the Defendant wrote to the Plaintiff on 11th September it advised him that his loss limit had been increased to $13,000,000.00. Nonetheless the question remains whether, despite its bungling and its mistakes, the Defendant can arguably recover all or part of its claim from the Plaintiff.

19. For the Plaintiff, Mr. Ching said that he had made out a case for judgment, that it was incumbent on the Defendant to show a defence and that the Defendant had failed to show that there is a fair and reasonable probability of a real or bona fide defence: Banque de Paris v Costa de Noray (1984) 1 Lloyd's L.R. 21.

20. I have already said that I am unable to resolve certain factual issues which might give rise to possible lines of defence for the Defendant. In my judgement, however, these matters are of little consequence. I am satisfied that the undisputed events which occurred after 8th September can resolve the issue at this stage. Mr. Ching argued that there is a clear case of estoppel, in particular estoppel by convention. He relied upon Amalgamated Investment and Property Company Limited v. Texas Commerce International Bank Limited (1982) 1 QB 84. There, the parties had for many years acted on the assumption that the plaintiff was liable to the defendant on a guarantee. Ultimately, the Bank was obliged to sell certain properties from which sale there was a surplus. The Bank purported to apply that surplus in discharge of the plaintiff's liability on the guarantee. The plaintiff sought a declaration that it was under no liability to the Bank under the guarantee. Although it was found that the Bank could not rely directly upon the guarantee, the plaintiffs were estopped from contending that they were not liable. On appeal, Lord Denning M.R. said at p. 121:

"If parties to a contract, by their course of dealing, put a particular interpretation on the terms of it - on the faith of which each of them - to the knowledge of the other - acts and conducts their mutual affairs - they are bound by that interpretation just as much as if they had written it down as being a variation of the contract. There is no need to inquire whether their particular interpretation is correct or not - or whether they were mistaken or not - or whether they had in mind the original terms or not. Suffice it that they have, by the course of dealing, put their own interpretation on their contract, and cannot be allowed to go back on it.

To use the phrase of Latham C.J. and Dixon J. in the Australian High Court in Grundt v. Great Boulder Proprietary Gold Mines Ltd. (1937) 59 C.L.R. 641, 657, 677, the parties by their course of dealing adopted a "conventional basis" for the governance of the relations between them, and are bound by it. I care not whether this is put as an agreed variation of the contract or as a species of estoppel. They are bound by the "conventional basis" on which they conducted their affairs. The reason is because it would be altogether unjust to allow either party to insist on the strict interpretation of the original terms of the contract - when it would be inequitable to do so, having regard to dealings which have taken place between the parties. That is the principle upon which we acted in Crabb v. Arun District Council [1976] Ch. 179, 187. It is particularly appropriate here - where the judges differ as to what is the correct interpretation of the terms of the guarantee. The trial judge interpreted it one way. We interpret it in another way. It is only fair and just that the difference should be solved by the course of dealing - by the interpretation which the parties themselves put upon it - and on which they conducted their affairs for years.

So I come to this conclusion: When the parties to a contract are both under a common mistake as to the meaning or effect of it - and thereafter embark on a course of dealing on the footing of that mistake - thereby replacing the original terms of the contract by a conventional basis on which they both conduct their affairs, then the original contract is replaced by the conventional basis. The parties are bound by the conventional basis. Either party can sue or be sued upon it just as it had been expressly agreed between them.

Conclusion

The doctrine of estoppel is one of the most flexible and useful in the armoury of the law. But it has become overloaded with cases. That is why I have not gone through them all in this judgment. It has evolved during the last 150 years in a sequence of separate developments: proprietary estoppel, estoppel by representation of fact, estoppel by acquiescence, and promissory estoppel. At the same time it has been sought to be limited by a series of maxims: estoppel is only a rule of evidence, estoppel cannot give rise to a cause of action, estoppel cannot do away with the need for consideration, and so forth. All these can now be seen to merge into one general principle shorn of limitations. When the parties to a transaction proceed on the basis of an underlying assumption - either of fact or of law - whether due to misrepresentation or mistake makes no difference - on which they have conducted the dealings between them - neither of them will be allowed to go back on that assumption when it would be unfair or unjust to allow him to do so. If one of them does seek to go back on it, the courts will give the other such remedy as the equity of the case demands."

21. Both Eveleigh and Brandon L.JJ. agreed that the facts gave rise to estoppel by convention.

22. Mr. Ching said that in the instant case both parties acted in the belief that the Plaintiff's account had not been closed. He said they assumed that the account continued to exist and as a consequence the account traded between 8th and 17th September, notwithstanding that both parties knew the margin call had not been met. The Plaintiff gave instructions for the sale and purchase of sterling and applied for withdrawals of profit. The Defendant acted upon those instructions, continued to provide daily statements and paid two sums demanded by the Plaintiff.

23. Even if not estoppel by convention, Mr. Ching said that it is estoppel by representation. He said that the Defendant represented that the account was in existence and in funds and that new orders could be given and executed which indeed was done.

24. For the Defendant, Mr. Rogers complained that the estoppel is being used as a sword rather than as a defence. I think, however, that Brandon L.J. dealt with the point in Texas Bank where he said at p. 131:

"turn to the second argument advanced on behalf of the plaintiffs, that the bank is here seeking to use estoppel as a sword rather than a shield, and that is something which the law of estoppel does not permit. Another way in which the argument is put is that a party cannot found a cause of action on an estoppel.

In my view much of the language used in connection with these concepts is no more than a matter of semantics. Let me consider the present case and suppose that the bank had brought an action against the plaintiffs before they went into liquidation to recover moneys owed by A.N.P.P. to Portsoken. In the statement of claim in such an action the bank would have pleaded the contract of loan incorporating the guarantee, and averred that, on the true construction of the guarantee, the plaintiff's were bound to discharge the debt owed by A.N.P.P. to Portsoken. By their defence the plaintiffs would have pleaded that, on the true construction of the guarantee, the plaintiffs were only bound to discharge debts owed by A.N.P.P. to the bank, and not debts owed by A.N.P.P. to Portsoken. Then in their reply the bank would have pleaded that, by reason of an estoppel arising from the matters discussed above, the plaintiff were precluded from questioning the interpretation of the guarantee which both parties had, for the purpose of the transactions between them, assumed to be true.

In this way the bank, while still in form using the estoppel as a shield, would in substance be founding a cause of action on it. This illustrates what I would regard as the true proposition of law, that, while a party cannot in terms found a cause of action on an estoppel, he may, as a result of being able to rely on an estoppel, succeed on a cause of action on which, without being able to rely on that estoppel, he would necessarily have failed. That, in my view, is, in substance, the situation of the bank in the present case."

25. In my judgement that exactly fits the position of the Plaintiff in the instant case. The Plaintiff plainly has a cause of action. That cause of action may be liable to defeat on one or more grounds advanced by the Defendant. The Defendant, however, is precluded from challenging the validity of the transactions between the parties because both assumed them to be valid. Put another way, the Plaintiff is not employing the estoppel as one of the facts or matters pleaded in support of its cause of action, but rather using it as a shield to defeat the attacks upon the cause of action by the Defendant.

26. Texas Bank was recently canvassed by Bokhary J. in Chan Ho Har Wane, Daisy and another v. the Clear Water Bay Golf and Country Club 1992 No. MP750 (unreported), a decision from which Mr. Ching sought support. It is certainly an example of the application of the principles of Texas Bank. The facts, however, were very different from those of the instant case. I derive no great assistance from the case.

Mr. Rogers also relied upon the final sentence in the passage which I have cited from the judgment of Lord Denning to the effect that the Courts will afford such remedy as the equity of the case demands. He asked whether it would be inequitable to go back to the position as at 8th September because the Defendant had been paid $20 million. He suggested that it would not be inequitable because the real mischief was that the Plaintiff had not paid the margin as required by the Defendant and as to which he had a choice. That, of course, begs the question of whether or not the margin call was waived. Assuming, however, that it was not waived, it seems to me that the equity lies with the Plaintiff in the light of the somewhat casual manner in which the Defendant dealt with the Plaintiff's account. The effect was to allow the Plaintiff to commit himself to greater and greater loss if, after further trading, the Defendant is allowed to liquidate all the Plaintiff's positions as at the date of the margin call or such other date as is most advantageous to the Defendant.

27. Mr. Roger's principal argument, however, was that the case is simply one of mistake of fact which would entitle the Defendant to recover its losses from the Plaintiff if the matter proceeds to trial. He relied upon Anglo-Scottish Beet Sugar Corporation Limited v. Spalding Urban District Council (1937) 2 K.B. 607. There the defendant was under contract to supply the plaintiff with water at ?375 per quarter. Two years later, a new contract was made by which the payment was reduced to ?100. By mistake, the offices of both parties which dealt with the demand and payment were not notified so that, for another nine years, the plaintiff overpaid the defendant. The plaintiff successfully sought to recover the over-payments. At p. 613, Atkinson J. said:

"The case relied upon by the plaintiffs is Kelly v. Solari. There the executrix of a man named Solari had received payment from the Argus Life Assurance Company of money due, or alleged to be due, on three life policies. In fact one of those policies had lapsed before the death of the assured. The actuary of the office, who knew all about it, had informed two directors of the lapsing of the policy, and the policy had been marked "Lapsed." When the claim was made, although these two directors had been given this information, they had forgotten all about it and they passed the claim for payment, and signed the cheque in payment of the amounts due, or apparently due, on the policies. Then the mistake was discovered, the representatives of the assurance company claimed back the money paid on the policy which had lapsed, and they were held entitled to recover. Two passages have been frequently cited; one is a passage from the judgment of Parke B.: "I think that where money is paid to another under the influence of a mistake, that is, upon the supposition that a specific fact is true, which would entitle the other to the money, but which fact is untrue, and the money would not have been paid if it had been known to the payer that the fact was untrue, an action will lie to recover it back, and it is against conscience to retain it; though a demand may be necessary in those cases in which the party receiving may have been ignorant of the mistake. The position that a person so paying is precluded from recovering by laches, in not availing himself of the means of knowledge in his power, seems, from the cases cited, to have been founded on the dictum of Bayley J. in the case of Milnes v. Duncan; and with all respect to that authority, I do not think it can be sustained in point of law. If, indeed, the money is intentionally paid, without reference to the truth or falsehood of the fact, the plaintiff meaning to waive all inquiry into it and that the person receiving shall have the money at all events, whether the fact be true or false, the latter is certainly entitled to retain it; but if it is paid under the impression of the truth of a fact which is untrue, it may, generally speaking, be recovered back, however careless the party paying may have been, in omitting to use due diligence to inquire into the fact." Rolfe B. said: "With respect to the argument, that money cannot be recovered back except where it is unconscientious to retain it, it seems to me, that wherever it is paid under a mistake of fact, and the party would not have paid it if the fact had been known to him, it cannot be otherwise than unconscientious to retain it."

28. At first sight that case appears strongly to favour the Defendant. Closer analysis, however, shows very different factual situations. In Anglo-Scottish itself, both parties simply overlooked the true position although equally aware of it. In Kelly v. Solari referred to by Atkinson J., the error was on one side, that party having no particular reason to be put on enquiry. In the instant case, the Defendant's position is far more vulnerable, the status of the Plaintiff's account being a matter for lively concern.

29. The importance of the Anglo-Scottish decision, in my view, lies in the use of the words "against conscience" and "unconscientious". They signify that it is not a simple matter of the person who made the over-payment showing that it was made by a mistake of fact and, without more, recovering the excess. Rather it is a matter of equity which requires an examination of all the facts and circumstances giving rise to the payments. Such a view, of course, coincides with the conclusion reached by Lord Denning in Texas Bank, that the courts will give such remedy as the equity of the case demands.

30. For the purpose of determining this application, I am prepared to accept that the Defendant did not waive the margin call and that there is a general practice as asserted by the Defendant. It is, of course, also part of the Defendant's case that the Plaintiff was thought to be in some financial difficulty at the material time. In such circumstances, the Defendant was very plainly put on enquiry in relation to any dealings with the Plaintiff's account. Equally plainly, the Defendant eschewed any real enquiry, even when Mr. Yip was called upon the sign a cheque for $10 m in favour of the Plaintiff; permitted the Plaintiff to continue trading; and compounded its mismanagement by making two substantial payments to the Plaintiff, payments which the Defendant clearly intended the Plaintiff should have. The overall effect, as I have said, was to induce the Plaintiff to continue trading to his ultimate detriment. I cannot see how, in all conscience, the Plaintiff can be expected to pay for the Defendant's catastrophic mismanagement. Whether the point is labelled estoppel by convention or by representation, I am persuaded that in principle the Plaintiff is entitled to the relief which he seeks.

31. The precise amount sought by the Plaintiff is based upon his reconstruction of his account for 17th September. There is, however, a dispute as to whether or not any instructions were given and acted upon by the Plaintiff upon that day. Although that dispute may easily be resolved once the tape recording has been transcribed, it is not a dispute which I can resolve at present. I cannot therefore be satisfied as to the precise amount due to the Plaintiff.

32. Accordingly, I give judgment for the Plaintiff for an account to be taken of the sum owing to the Plaintiff at the time of the closure of his account during the trading day of 17th September 1992 and for such sum to be paid by the Defendant to the Plaintiff. I make an order nisi that the account is to be taken by a master.

33. The Plaintiff is to have his costs, which costs by agreement to include a certificate for two counsel.