OSK ASIA FUTURES LTD. v. LAM CHI BIN STANLEY AND ANOTHER

CACV 2690/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 2690 OF 2001

(ON APPEAL FROM HCA NO. 10335 OF 2000)

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal from a decision and judgment of Waung J given on 16 July 2001. The judge allowed the plaintiff's appeal and gave judgment for the plaintiff against the 1st defendant in the sum of HK$9,147,400 together with interest. At the conclusion of this appeal this court said that it would give its decision in writing which we now do.

Background

2. This action concerns a claim by the plaintiff against the 1st and 2nd defendants arising out of the sale of 250 Hang Seng Index Futures October contracts (the "index contracts") on 13 October 2000.

3. The 1st defendant, who, apparently, was experienced in relation to futures contracts made arrangements with the plaintiff to be able to trade futures contracts through them. The client agreement, which the 1st defendant was required to enter, provided that the 1st defendant should be liable for all losses, debts and deficiencies arising on the liquidation of the client's account. The 1st defendant was required to provide margin for any futures trades which might be carried out. The agreement further provided that should margin not be maintained, whether calls were made or not, the plaintiff was entitled under the contract to close all open positions.

4. On the morning of 13 October 2000, the 1st defendant arranged with the plaintiff to sell the index contracts. As part of the arrangement the 1st defendant indicated to the plaintiff that he was depositing into the plaintiff's bank account the sum of HK$2,500,000 as margin. This was a minimal amount to cover a day trade but would have been wholly inadequate to cover the full margin deposit necessary to hold an overnight position according to the revised schedule of margins issued by Hong Kong Futures Exchange effective as of 28 September 2000.

5. At the close of the morning session, the market had moved against the 1st defendant's position and his account showed an unrealised loss of more than HK$2,500,000. He was thus requested to place a further margin deposit of HK$2,500,000 in addition to the amount already placed.

6. Instead of depositing any further amount as margin, the 1st defendant advised Mr Lobo Lee, the managing director of the plaintiff, that the index contracts would be transferred to one of two other brokers and eventually the 2nd defendant was identified as the broker to whom the index contracts would be transferred. Initially, Mr Joe Mak, the dealing director of the 2nd defendant, told Mr Lobo Lee, the managing director of the plaintiff, that the 2nd defendant would take up the index contracts subject to receiving instructions from the 1st defendant. After some delay, transfer forms which had been faxed to the 2nd defendant were returned by fax to the plaintiff and then sent on to the HKFE Clearing Corporation Limited ("HKCC"). On the strength of that arrangement the 1st defendant countermanded payment of the cheque in respect of the initial margin, with the approval, tacit if not explicit, of the plaintiff.

7. However, the HKCC refused to process the transfer of the index contracts because the signature on the transfer forms did not correspond to the specimen signature of the 2nd defendant recognised by the HKCC. Later, it transpired that, in any event, the 2nd defendant refused to take up the contracts; at least it would not do so until some unspecified matters had been clarified which would not happen until Thursday, 19 October.

8. There was a flurry of activity over the weekend, including letters written by the plaintiff to the defendants on Sunday, 15 October. Those letters made it clear that the plaintiff was looking to both defendants as being responsible for any losses under the index contracts. Although there was a tri-party telephone conversation on the morning of Monday, 16 October 2000, the next trading day, no satisfactory arrangements were made between the parties and the plaintiff then proceeded to close the open contracts. There was a loss resulting from the closing of the contracts in the sum of HK$9,147,400.

9. The plaintiff applied for summary judgment against the 1st defendant before the Master and the 1st defendant was given leave to defend conditional upon payment into court of HK$2,500,000. On appeal to the judge, the judge gave final judgment in the sum claimed.

10. On this appeal, Mr Scott, SC, on behalf of the 1st defendant, puts the 1st defendant's case on a number of grounds. In the first place, it is argued that the plaintiff had on 13 October 2000 accepted that the index contracts had been transferred by novation to the 2nd defendant. On that basis it is said that the plaintiff's remedies lay against the 2nd defendant and not against the 1st defendant.

11. In my view, the judge below was correct when he said that unless and until there had been an effective transfer which was approved by the exchange, the exchange regarded the contracts as those undertaken by the plaintiff as the broker of the customer, namely, the 1st defendant. Hence the 1st defendant was liable to the plaintiff as his broker. The change that would happen if the arrangement had taken effect was that the 2nd defendant would have stepped into the plaintiff's shoes; but that never happened. The plaintiff still remained the relevant broker and, importantly, the broker for the 1st defendant. Quite clearly the plaintiff would only relinquish its rights against the 1st defendant once the liabilities for the contract had been taken over by the 2nd defendant. As indicated, that did not happen.

12. The second major point taken by Mr Scott was that even on the morning of Monday, 16 October 2000, the plaintiff was still adhering to the position that it regarded its contractual relationship as being with the 2nd defendant and not only did not give the 1st defendant an opportunity of covering the position itself but did not inform the 1st defendant as to the amount of margin that was required. In support of this, Mr Scott sought to rely upon the transcript of a tape recording of the conversation which took place between Mr Lobo Lee, the 1st defendant and Mr Joe Mak of the 2nd defendant.

13. Two things appear quite clear on reading the transcript. In the first place, the 2nd defendant was not prepared to commit itself to taking up the index contracts, at least not until after some matter, and it is not clear what, had been decided at a "meeting". In any event, it seems that the earliest that the 2nd defendant might have been prepared to commit itself was on Thursday, 19 October. It is also clear from the conversation that the 1st defendant was asking the plaintiff for time, namely, until Thursday, 19 October, and was requesting the plaintiff to trust the 1st defendant as a man of substance to protect the plaintiff against any losses arising on the index contracts. The conversation was clearly predicated upon the basis that either the 2nd defendant would take over the index contracts from the plaintiff by 9.45 a.m. or else the position would have to be closed.

14. Quite clearly the plaintiff was not under any obligation or duty to defer the matter and was acting properly to insist that the situation be rectified by the opening of business on the morning of 16 October 2000. Indeed, had it not been for the possibility that the 2nd defendant would take over the index contracts, the plaintiff would no doubt have closed out the contracts or have demanded the full margin of $62,000 plus the loss per contract as of the afternoon of 13 October. In my view, rather than assisting the 1st defendant's case, the transcript of the telephone conversation confirms the 2nd defendant's unwillingness to take over the index contracts and the 1st defendant's inability to meet the then current liabilities in respect of the index contracts. Moreover, clause 12.1 of the Client Agreement makes clear that if the client does not provide the appropriate margin, whether a call is made or not, the plaintiff was at liberty to close the position.

15. At the court's enquiry, Mr Scott also briefly touched on the point that judgment should not have been entered against the 1st defendant for the amount of the cheque namely $2,500,000. But as Mr Scott indicated, the point is, in the circumstances, academic because the amount of the cheque would not be additional to the plaintiff's claim for the loss on the sale of the index contracts. The basis of the argument is that the plaintiff agreed to the 1st defendant countermanding payment on the cheque on the afternoon of the 13 October. Quite clearly any agreement to allow the 1st defendant to countermand payment of the cheque was conditional upon the 2nd defendant taking over the index contracts. The history shows that the 2nd defendant never did finally agree to take over those contracts. There was a period when it looked as though it would take them over, then an ineffective signature was placed on the document and thereafter it was clear that the 2nd defendant was not prepared to commit itself. In those circumstances, any agreement by the plaintiff to allow the cheque not to be honoured was vitiated by the lack of fulfilment of the arrangement under which it was made.

16. Mr Scott also took the point that the judge entered judgement for the plaintiff for the sum claimed, HK$9,147,400 together with interest at 2% above prime. This point was not covered in the notice of appeal nor in the skeleton arguments and therefore argument had not been prepared in respect of it.

17. It is noted that the judge below gave judgment at the hearing. Apparently an order was submitted by the plaintiff's solicitors and was returned with corrections. Neither the originals nor copies of these documents have been retained on the court file. This court has been shown a letter of 13 August 2001 from the plaintiff's solicitors to the clerk to the judge below in which issue is taken as to the period from which interest should run. Nothing further turns on this. It would seem that there had been no difficulty with regard to the rate of interest. Under the client agreement the plaintiff was entitled to charge interest at such rate as it should establish from time to time. Whilst the rate of 2% above prime may not be the usual rate, which according to the notes in the White Book would be 1% above base rate, I do not consider that the rate is so wholly exceptional that it was wrong in principle. In view of the fact that the matter was only raised at the hearing and not in the notice of appeal I would not be prepared to vary the judge's order in this respect.

18. I would, however, note two matters. In the first place, it is highly desirable that the party with the carriage of the order should show a draft of the proposed order to the opposing party. This should not cause delay. If the draft order is drawn up in a timely manner, a request for a response within a short time, for example, two days, might be appropriate and in default the draft order can then be submitted to the court. Such a procedure could avoid disputes which sometimes arise upon the wording of an order. In the second place, it is highly undesirable that any communication with the court should be made by any party without the same being copied to all other concerned parties.

19. In my view, this appeal falls to be dismissed and there should be an order nisi of costs in favour of the plaintiff.

Hon Le Pichon JA:

20. I agree.

Hon Rogers VP:

21. The appeal is therefore dismissed and there will be an order nisi of costs in favour of the plaintiff.