NATAMON PROTPAKORN v. CITIBANK, NA

CACV 78/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 78 OF 2008

(ON APPEAL FROM HCA 190 OF 2005)

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REASONS FOR JUDGMENT

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Hon Cheung JA :

1. The plaintiff was a customer of the defendant bank.  She sued the defendant for damages in the sum of US$38,828,277 arising from the closure by the defendant of her accounts.  On the defendant’s application, her statement of claim was struck out by Deputy High Court Judge Muttrie.  She then sought and obtained leave to amend the statement of claim from Master Hui.  The defendant appealed, Deputy High Court Judge Carlson reversing the decision of the master.  The plaintiff has therefore appealed to this Court.  We allowed the appeal and restored the order of the Master which granted the plaintiff leave to amend the statement of claim.  I will now give my reasons for allowing the appeal.

The pleaded facts

2. The plaintiff came from Thailand and was formerly a customer of another international bank, namely, UBS AG.  In 2000 when her banker in USB AG joined the defendant, she was persuaded by the banker to transfer her account to the defendant.  She agreed and became a private banking customer of the defendant.  For the first one and a half years with the defendant, her money was simply deposited in interest bearing accounts.  This was also the same mode of investment when she was with UBS AG.  In late 2001, her banker left the defendant and her account was handled by Henny Lai (‘Mr. Lai’) who was a Vice President of the defendant.

3. Mr. Lai persuaded the plaintiff to take on a more risky investment in the nature of ‘margin FX trading’.  According to paragraph 22(4) of the proposed amended statement of claim, Mr. Lai made the following representations to the plaintiff :

‘(a)   The Defendant would make available foreign exchange trading lines (“FX Trading Lines”) to such extent as it shall notify the Plaintiff from time to time.

(b)   The initial FX Trading Lines were no less than 7 times the value of the deposits the Plaintiff had placed with the Defendant.

(c)   The Plaintiff could enter into foreign exchange contracts (each an “FX Contract”) with the Defendant up to the amount of her FX Trading Lines.

(d)   The above has the effect that the Plaintiff would be trading on margin.  In other words, the FX Contracts are leveraged.

(e)   As the foreign exchange rates fluctuate, the value of a Contract would constantly move in favour of or against the Plaintiff.

(f)   Any decrease in value (“Unrealized Loss”) would be marked by the Defendant against the value of the deposits the Plaintiff had placed with it.

(g)   If the total Unrealized Losses would cause the value of the Plaintiff’s deposits to shrink such that the ratio of the value of the deposits over the total nominal value of the Plaintiff’s FX Contracts (the “Margin Percentage”) falls below a level (the “Margin Call Level”), the Defendant would require the Plaintiff to deposit additional funds with it so as to restore the ratio to above the Margin Call Level.

(h)  If the Plaintiff is unable to restore the Margin Percentage to above the Margin Call Level, the Defendant would close out the Plaintiff’s FX Contracts.

(i)   As long as the Plaintiff maintains the Margin Percentage above the Margin Call Level, the Defendant would not close out the Plaintiff’s FX Contracts.

(j)    Each FX Contract would carry an initial maturity date.

(k)  On the maturity date of an FX Contract, as long as the Plaintiff has sufficient funds deposited with the Defendant such that the Margin Percentage is above the Margin Call Level, the Plaintiff would be entitled to “roll over” the FX Contract at the original exchange rate.  Upon being rolled over, the FX Contract would have a new maturity date.

(l)   The effect of the Plaintiff’s entitlement as stated in (k) above is that she would have the opportunity to recover any Unrealized Loss in an FX Contract when the foreign exchange rate moves back in her favour, as long as she has sufficient deposits with the Defendant to roll over and keep open the FX Contract.

(m)   Therefore, ultimately, the risk involved in Margin FX trading is small for an investor with sufficient funds.

(n)   The Plaintiff would have to pay the applicable banking charges of the Defendant.  In particular, when the Plaintiff rolls over an FX Contract, she would have to pay the Defendant interest on any amount (in whatever currency) that the plaintiff had sold.’

4. The importance of this arrangement is that Mr. Lai allowed the plaintiff to roll over the contracts in that as long as she maintained sufficient margin and by keeping open a contract with unrealized loss, she would have the opportunity to recover the loss when the exchange rate moved back in her favour and therefore her risk in the investment would be small.

5. The plaintiff relied on the representation by Mr. Lai and agreed to carry out margin FX trading on those terms (‘2001 Agreement’).  She carried out the trading from October 2001 to sometime in 2002 and then from early 2004 to June 2004.  The trading was carried out in the manner as represented by Mr. Lai.

6. Between 2002 and early 2004 when the plaintiff was not engaged in margin FX trading, she was, at the suggestion of Mr. Lai, engaged in trading foreign exchange options.  She suffered loss in such trading and with the help of a friend, Mr. Kawabe (who became her appointed agent with the defendant), she decided to revert back to margin FX trading.  Mr. Lai confirmed that the previous terms that had been agreed between the parties would continue to apply for the resumed margin FX trading.

7. Between February and April 2004, the defendant, in order to encourage the plaintiff to increase her margin FX trading, increased her FX trading line on four occasions.  The line that was available to her came to US$250,000,000.

8. In late April 2004, the plaintiff was informed by the defendant that Mr. Lai had left, and that her account was being looked after by a Ms Poh, who was the Managing Director and the Head of the defendant’s private banking business in Thailand and Vietnam.

9. On 11 May 2004, Ms Poh met the plaintiff and Mr. Kawabe, in Osaka, Japan and confirmed that the plaintiff was entitled to roll over and keep open her FX contracts, and was not required to realize any unrealized loss, as previously had been agreed between the parties.

10. Relying on such confirmation the plaintiff carried out further margin FX trading with the defendant.

11. However, on 30 June 2004, Ms Poh met the plaintiff in Bangkok, Thailand and requested her to close out some of her existing open FX contracts.  The plaintiff refused.  The defendant nonetheless on 30 June 2004 suspended the plaintiff’s FX trading lines and refused to accept her orders for entering into new FX contracts.  The plaintiff was told that the defendant would close out her existing FX contracts in about six months i.e. around the middle of December 2004.

12. The defendant, however, apparently changed its position a few days afterwards when on 2 July 2004, Ms Poh informed the plaintiff about the new terms for her margin FX trading.  Paragraph 50(3) of the proposed amended statement of claim pleads that :

‘(a) The Plaintiff may maintain her existing FX Contracts and enter into new contracts up to the amount of her FX Trading Lines.

(b)    When the Plaintiff enters into any new FX Contract, she would specify a maturity date for the contract, which may not be more than six months from the contract date.

(c)    For any new FX Contract, upon its maturity date, provided that the Plaintiff has sufficient funds deposited with the Defendant to maintain her margin, the Plaintiff has the option to roll over and keep open the contract to a new maturity date, which may not be more than six months from the original contract date.

(d)    For any existing FX Contract, upon its maturity date, provided that the Plaintiff has sufficient funds deposited to maintain her margin, the Plaintiff has the option to roll over and keep open the contract to a new maturity date, which may not be more than six months from the original contract date.

(e)    When an FX Contract, whether new or existing, is rolled over, it will be rolled over at the foreign exchange rate then prevailing in the market (and not, as under the previous Margin FX Terms, at the original rate).

(f)    Any loss at the rollover will be realized and debited against the Plaintiff (and not, as under the previous Margin FX Terms, be an Unrealized Loss).  (The terms pleaded in subparagraphs (c)-(f) will be referred to as the “Revised Roll-over Term”.)’

13. The major difference between the revised and old terms was that the contracts could still be rolled over, but only for six months at prevailing foreign exchange rate, and not at the original rate when the contract was acquired.

14. The plaintiff specifically accepted the revised terms (‘2004 Agreement’) and entered into six new contracts in margin FX trading with the defendant.

15. However, the defendant again changed its mind 3 days later when, on 7 July 2004, Ms Poh informed the plaintiff that the defendant would close her accounts and close out any of her then-open FX contracts within one month.  It would not allow her to enter into any new FX contract in the meantime.  It would not allow her to roll over any of the new contracts on their maturity date and would close out the new contracts on that date.

16. This was followed by a letter dated 8 July 2004 from the defendant informing the plaintiff that her accounts would be terminated in one month’s time.  In the letter the defendant for the first time in the entire relationship with the plaintiff raised concerns about her ‘source of wealth’, the ‘effective control’ of her assets and the ‘good standing’ of Mr. Kawabe who was previously convicted of fraud in Japan.

17. On 13 July 2004 the defendant closed out the plaintiff’s six new contracts, and on 3 August 2004 closed out the plaintiff’s open FX contracts which were entered into prior to 4 July 2004, thereby crystallising the loss for which the plaintiff now claims.

The Standard Term FX Agreement

18. The plaintiff admitted that she had signed a Standard Term FX Agreement (‘the Standard Agreement’) when she became a client of the defendant.  Clause II. 7.01(g) of the Standard Agreement allowed the defendant to terminate the plaintiff’s trading account at its absolute discretion when it considers ‘advisable or necessary to safeguard its interest’.  Clause II. 7.02 further precluded any claim by the plaintiff against the defendant for any loss arising out of ‘any liquidation, realisation, sale disposal or dealing’ of the account. 

Collateral contract/independent contract

19. The plaintiff, however, averred that her relationship with the defendant on margin FX trading was based on terms of the 2001 Agreement, as varied by 2004 Agreement.  She contended that she was entitled to roll over her contracts, and that the defendant, in breach of the 2001 and 2004 Agreements, wrongly had closed out her contracts.  These two agreements were in the nature of collateral contracts or independent freestanding contracts from the Standard Agreement.

Misrepresentation

20. The plaintiff also relied on misrepresentation by the defendant. 

Termination

21. She further alleged that the defendant’s purported excuse for terminating her accounts were not genuine or justified, and in any event that in the circumstances the defendant was estopped from relying on the purported excuses.

Breach of duty

22. Breach of duty by the defendant to the plaintiff as a customer also was relied upon.

Exemption Clauses

23. The plaintiff further pleaded the Control of Exemption Clauses Ordinance (Cap. 71) which precludes the defendant from relying on Clause II. 7.02.

Calculation of damages

24. The damages sought by the plaintiff were calculated by reference to the loss arising from the early closing out of the FX contracts and also by reference to the profits that she otherwise would have made if she had been allowed, pursuant to established practice, to roll over the contracts.

Principles on amendment

25. It is well established that, generally speaking, all such amendments ought to be made ‘for the purpose of determining the real question in controversy between the parties to any proceedings or of correcting any defect or error in any proceedings’ (per Jenkins L.J. in G. L. Baker Ltd v. Medway Building and Supplies Ltd [1958] 1 WLR 1216 at 1231); see also paragraph 20/8/6 of Hong Kong Civil Procedure 2008.  Leave is readily granted to amend before the trial unless it can be demonstrated that the new claim based on the proposed amendment is bound to fail (see Hancock Shipping Co. Ltd v. Kawasaki Heavy Industries Ltd [1992] 1 WLR 1025).  While the Court is entitled to have regard to the merits of the case, it should only do so when the merits are readily apparent, and are so apparent as not to require prolonged investigation (see e.g. Kings Quality Homes Ltd v. A. J. Paints Ltd [1997] 3 All ER 267).

26. It must be borne in mind that to preclude the plaintiff in this case to amend her statement of claim, the initial version of which already had been struck out, is a drastic measure.  The defendant seeks to drive the plaintiff from the judgment seat even before she has the chance to put forward her case at the trial, and clearly this can only be done in plain cases.  Whilst this principle is usually stated in the context of striking out applications, considering the stand taken by the parties in this application, whereby leave to amend is objected to, it is equally appropriate to adopt the same approach in this instance.

Clause II. 15

27. Proceeding on the facts as pleaded, if the plaintiff was indeed allowed by the defendant to roll over her open contracts either until such time as she could make a gain under the 2001 Agreement or for a period of six months under the 2004 Agreement, she has made out a reasonably arguable claim that it was wrong for the defendant to have closed out the contracts in July and August 2004 without observing the terms of these agreements.

28. The response by the defendant is a reliance on Clause II. 15 of the Standard Agreement which provides that,

‘ No amendment or waiver of any provision hereof or of any Contract, nor consent to any departure by the Account Holder therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.’

29. Mr. Shieh S.C., counsel for the defendant (who did not appear below), attractively argued that whether the plaintiff’s case is based on collateral contract or an independent contract, the real effect is that she is seeking a departure from the terms of the Standard Agreement which confers on the defendant an absolute discretion to close out the open contracts.  As such any consent by the defendant to this departure must be in writing in order to be effective under Clause II. 15.  There was no written consent in this case.

30. In Inntrepreneur Pub. Co (GL) v. East Crown Ltd [2000] Vol. 2 Lloyd’s Rep 611, the contract consisted of an ‘entire agreement clause’, namely,

‘ Any variations of this Agreement which are agreed in correspondence shall be incorporated in this Agreement where that correspondence makes express reference to this Clause and the parties acknowledge that this Agreement (with the incorporation of any such variations) constitutes the entire Agreement between the parties.’

31. Lightman J was of the view that

‘ … such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that accordingly any promises or assurances made in the course of the negotiations (which in the absence of such a clause might have effect as a collateral warranty) shall have no contractual force, save insofar as they are reflected and given effect in that document.  The operation of the clause is not to render evidence of the collateral warranty inadmissible in evidence as is suggested in Chitty on Contract, 28^th ed., vol. 1, par. 12─102: it is to denude what would otherwise constitute a collateral warranty of legal effect.’

See also Edward Wong Finance Company Ltd v. Profit Making Investment Limited & Others (CACV 1049/2000) where Inntrepreneur Pub. Co (GL) was applied. 

32. The editors of Chitty on Contracts, Vol. 1, Paragraph 12─104 commenting on Lightman J’s statement, maintained the alternative explanation that the entire contract clause renders inadmissible extrinsic evidence to prove terms other than those in the written contract.  

33. Collateral contract is an exception to the parol evidence rule, which precludes the admission of oral evidence to contradict the terms of a written agreement.  The collateral contract is, however, treated as an independent contract and therefore not subject to the rule.  Clause II. 15 is an attempt to ‘internalize’ or to ‘formalize’ this rule in the relationship between the plaintiff and the defendant.  Although not expressly stated to be the case, this clause may also be in the nature of an ‘entire contract clause’. 

34. I am prepared to accept, for the purpose of this application, that whether or not Clause II. 15 applies depends on the construction of its terms.  However, even if by its wording it applies to this case, that is still not the end of the matter because Chitty, at paragraph 12─104, states that such a clause can be waived by a party who might otherwise have relied on it, citing SAM Business Systems Ltd v. Hedley & Co [2003] 1 All ER (Comm) 465.  That case was not referred to by the parties in this appeal.  But as Sedley LJ recognized in I-Way Limited World v. Online Telecom Limited [2002] EWCA Civ 413, there is still room for debate on this issue because of the absence of decisive authority, and that summary judgment should not be granted on that basis (see also Langston Group Corporation v. Cardiff City Football Club Ltd [2008] EWHC 535 (Ch)).  An example of such a clause being rendered ineffective is the case of Edwin John Phillips v. Sa Sa International Holdings Ltd (HCA No. A5190 of 2001), wherein the parties expressly agreed that certain oral terms should not be revealed to the public.

35. In my view there is clearly room for argument in this case that Clause II. 15 may not be applicable having regard to the sequence of conduct of the defendant as described by the plaintiff.  Both Mr. Lai and Ms Poh belonged to the senior management of the defendant, and they should be taken to know the terms of the Standard Agreement.  If the defendant was of the view that Clause II. 15 governed the relationship of the parties, its conduct in allowing the plaintiff to trade on the terms as agreed by Mr. Lai, its confirmation of the terms when Ms Poh took over from Mr. Lai, taken together with its subsequent conduct in allowing the plaintiff to continue to roll over the contracts although with a limited duration, was fundamentally inconsistent with this avowed position.  The plaintiff stated that by relying on the confirmation she carried out further transactions, and further by relying on the revised terms she had executed six new contracts.  In my view the questions of waiver and estoppel, be it promissory or otherwise, are clearly matters that are available to the plaintiff.  This cannot be resolved in an interlocutory proceeding and should be canvassed at a full hearing at trial.

Misrepresentation

36. It is well established that in order to constitute an effective common law misrepresentation the representation must be of existing facts and not mere opinion or intention ‘which is not put into effect’ : Chitty paragraph 6─005.  In this case arguably even if, for the purpose of argument, the representations by Mr. Lai may be characterized as mere representations of intentions, they were nonetheless representations which were put into effect when the defendant actually allowed the plaintiff to roll over the contracts.  And if at the time of these representations the defendant was of the view that the legal relationship of the parties was still to be governed by Clause II. 15, and not on the terms of the oral representations, then arguably the defendant did not have an honest belief when the representations were made.  This is a reasonably arguable point, and I cannot see why the plaintiff should be precluded from pursuing her claim at this stage of the proceedings.

Termination

37. The defendant further relied on Clause II. 7.01(g) when it terminated the accounts of the plaintiff, namely,

‘ The Bank considers, due to a material adverse change in the financial condition of the Account Holder or otherwise in its absolute discretion, it is advisable or necessary to safeguard its interest under these terms and conditions and/or any or all of the Contracts.’

38. The factual matters relied upon by the defendant were the integrity of the agent, whether the plaintiff was exercising independent control of the assets and the legitimate nature of the plaintiff’s money.  Even assuming that the clause intends to cover such events, an arguable question remains as to whether, in context of the constantly changing position of the defendant shortly before it exercised the termination, the reasons that were advanced indeed represented the real reasons for the termination.  These matters must be exclusively within the knowledge of the defendant, and may indeed be revealed on discovery.  In my view the plaintiff must be allowed to pursue her claim.

Others

39. In this appeal the plaintiff further relied on statutory misrepresentation conferred by the Securities and Futures Ordinance (Cap. 571), which have not yet been pleaded, although I assume that this will now occur.  However, even without formulation of this plea, the existing pleading is sufficiently clear to show that she should be allowed to proceed with her case.

Hon Stone J :

40. I respectfully agree with the Reasons for Judgment of Cheung JA.

41. In the particular circumstances of this case, perhaps I might be permitted some more general observations of my own.

42. Notwithstanding the forensic skill with which Mr Shieh SC invested his legal arguments, it seems to me that a decision not to permit this plaintiff to proceed to trial on the basis of the proposed amended pleading would, quite simply, be unjust when viewed against the backdrop of the history of events, and the dealings between the plaintiff and the defendant bank.

43. I agree with the broad submission made on behalf of the plaintiff that, looked at in the round, this case ‘bristles’ with legal issues which are ‘fact sensitive’, and which require adjudication at trial in light of such evidence as therein will be adduced; in this regard I refer to the careful and cogent judgment of Cheung JA for adumbration of the issues which the court perceives as arising.

44. I remain nonplussed that that which strikes me as a relatively straightforward commercial dispute between bank and dissatisfied customer should have attracted the volume of interlocutory activity which thus far has transpired, and that to-date the defendant bank successfully has managed not only to persuade one judge to strike out the initial Statement of Claim, but thereafter to persuade another judge, on appeal from a Master’s decision granting leave to amend, to refuse such leave in terms of the proposed new pleading.

45. Resistance to the current application to amend – which represents the subject-matter of the present appeal – constitutes, in effect, the mirror image of a strike out, and, with respect, I find it difficult to comprehend how, as a matter of commercial reality, the defendant’s position should have been accorded the significance which thus far it seems to have commanded.

46. The primary facts of this case are not complex, and for the most part are undisputed.

47. Certainly there is no dispute as to broad course of conduct between these parties.  It is clear that, shortly after entering into a further six new FX contracts (on 4 July 2004) with the plaintiff, and in a situation wherein the defendant bank apparently remained sufficiently protected by margin deposits, nevertheless, on 13 July 2004, the bank chose to close out these new positions, and thereafter, on 3 August 2004, also to close out all the plaintiff’s other open positions at a significant loss, absent explanation save for the alleged (and unparticularised) concern as to the tainted ‘source of’ her wealth and the status of her agent – and thereafter placing legal reliance upon the small print of a historical agreement of 17 March 2000, itself arguably superseded by the course of commercial dealing between these parties, including representations made to the plaintiff made in 2001 and 2004.

48. It is established principle that leave to amend is liberally granted in order to enable determination of the real issues in dispute, and against this tangled factual matrix, I venture to suggest that it is difficult to understand why the plaintiff’s revised pleading against the defendant should not be permitted the opportunity of detailed consideration at trial, after completion of due interlocutory process; in the latter context, and in the circumstances as have arisen, discovery seems to me likely to be of particular relevance.

49. Viewed objectively, it is difficult to conclude other than that this case represents a calculated attempt by the defendant bank to flex its financial muscle – hitherto, remarkably successfully, it must be said – in a bid to prevent what appears to be a bona fide commercial dispute from seeing the light of day.

50. At trial the plaintiff may win, the plaintiff may lose – as to which eventuality naturally I express no view whatever at this stage – but manifestly this is not the point currently at issue, which is whether this plaintiff is to have the opportunity to put the case as now pleaded against this defendant before a judge of the High Court for adjudication.

51. The writ in these proceedings was issued on 28 January 2005, that is, some 3 years 7 months ago.

52. During this period there appear to have been 4 disputed hearings : on 23 November 2005, on an application to strike out before Deputy Judge Muttrie; on 14 September 2007 before Master Hui on application to file an Amended Statement of Claim; on 17 December 2007 before Deputy Judge Carlson, on appeal from the Order of Master Hui, who had granted leave to amend in terms; and on 3 September 2008, on appeal to this court from the Order of Deputy Judge Carlson, who had allowed the defendant’s appeal against the Order of Master Hui.

53. This interlocutory argument no doubt has been conducted at very considerable expense, and yet, some 43 months after the issue of the writ, resolution of this dispute is no further forward.

54. Accordingly, it is fair to say that this case does not provide a stellar example of the speedy and efficient disposition of commercial disputes; might I suggest that had a more constructive litigation philosophy been in operation that this case, which commenced in early 2005, by now could have been heard and determined, and hence that this appeal might as easily have been against its substantive result instead of that which is no more than an appellate pronouncement upon an extended bout of preliminary procedural sparring, concomitant with what strikes me as an entirely unjustifiable waste of costs.

55. For my part, I hope that it is not too much to expect that, with the co-operation of the parties, this case now will be pushed to trial as quickly as possible, untrammelled by further interlocutory diversion.   

Hon Hartmann J :

56. I too agree with the lucid and comprehensive Reasons for Judgment of Cheung JA and can add nothing of substance to them.