WU SHENG LONG v. C-CORP PRECIOUS METALS LTD

HCA 1912/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1912 OF 2008

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BETWEEN

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J U D G M E N T

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Background

1.  The Defendant carries on business in Hong Kong, inter alia, as a trader in precious metals, including Loco-London gold (“London gold”) and Loco-London silver (“London silver”).

2.  The Plaintiff became a client of the Defendant in September 2006 through the introduction of one Miss Fanny Chow.  An account no.109 was opened for the purpose of enabling the Plaintiff to carry on what is known as margin trading in London gold and London silver.  Margin trading is a kind of leveraged trading.  Upon opening the account the Plaintiff was granted facilities which enabled him to trade on the security of a deposit and on condition of maintaining a prescribed level of margin.  Provided the margin requirements were met, the Plaintiff would be allowed to open and maintain short-selling positions of particular commodities.  For margin trading, transactions are conducted in “lots” and do not involve physical delivery of the commodities concerned.

3.  When the account was set up on 13 September 2006, an initial margin of HK$300,000 was deposited into the account. Thereafter, a running balance was kept with reference to the transactions conducted through the account.  Daily Statements were generated and sent to the Plaintiff for record.  After a period of active trading in London gold and London silver, the account became dormant after 5 December 2006.  As of that date, the credit balance in the account stood at US$1,287.81. 

4.  The Plaintiff himself had business in Shenzhen dealing in various nonferrous metals, including silver.

5.  In early September 2008, the Plaintiff contacted Miss Chow and indicated that he wanted to resume trading with the Defendant. He made a deposit of US$150,000 into his account on 5 September 2008.  In addition, the Plaintiff wanted to purchase a quantity of physical silver. Unlike trading on margin, the purchase of physical silver would involve the Plaintiff taking delivery of the silver bullion, and bearing the costs of transportation and warehouse charges.  In addition to the price quoted for the silver, the Defendant would also add “a handling charge” (水價)[1].

6.  On 8 September 2008, several purchase orders for physical silver were placed.  One of the orders involved 32,402.858 oz which was duly paid for.  The second order involved 32,231.398 oz (or 1,002.51 kg) and the third involved two batches respectively of 24,189.576 oz (or 752.381 kg) and 6,454.478 oz (or 200.757 kg)[2], aggregating 62,857.45 oz (or 1,955.647 kg) in total.  As will be apparent later, this 1,955.647 kg of silver has become the subject matter of the Plaintiff’s claim in this Action.

7.  For accounting purposes the transactions in physical silver were recorded and dealt with through account no.109.  There is no dispute that payment for the 1,955.647 kg (or 62,857.45 oz) of silver was settled on 16 September 2008.  Until then, the 62,857.45 oz was treated as an “open position” in the Daily Statements.  On 16 September, Miss Chow informed the Plaintiff by fax that ownership of the silver had passed to the latter and the silver was being stored at the warehouse pending delivery.

8.  On the other hand, soon after reactivation of his account, the Plaintiff also intended to resume margin trading in London gold.  The Plaintiff discussed the margin requirement with Miss Chow.  I wish to note at this point that although questions were directed at the trial as to what exactly was agreed as to the required deposits, it is in fact common ground that the margin requirement was agreed at HK$15,000 per lot for the first 30 lots, and thereafter at 5% of the value of the remaining lots[3]. 

9.  On 9 September 2008, an additional account no.451 was opened.  According to the Defendant, the additional account was opened to facilitate identification and better management of the Plaintiff’s margin trading. 

10.  Since 10 September the Plaintiff had carried out a number of transactions in London gold through account no.451.  With his consent, on 16 September a sum of US$403,748.70 was transferred from account no.109 to account no.451 as deposit.  The transfer of funds enabled the Plaintiff to open new positions to short-sell London gold, which he did on the following day.

11.  On 17 September at about 4 to 5 pm, the Plaintiff placed 2 short-sell orders for London gold, each for 10,000 oz (100 lots) at the respective price of US$780.70/oz and US$782.70/oz.  The Defendant soon discovered that due to the size of the two orders, the funds in the Plaintiff’s account (US$400,000 odd) were insufficient to enable those orders to be maintained as “open positions”.  Miss Chow called the Plaintiff by phone at about 5 pm to inform him that the funds in his account had fallen short of the margin requirement and he would need to close his open positions.  During the conversation, the Plaintiff indicated that he would make up the shortfall the next day whereupon Miss Chow advised him that until then he would be allowed only to close his positions but not to initiate new transactions to enlarge the open positions further. 

12.  At about 10 pm that evening the price of gold fluctuated substantially.  At about 10.30 pm the price already reached about US$800/oz and when trading closed at 1:30 am (Hong Kong time) the price further surged to US$868.40.  However, apart from the conversation mentioned in the last paragraph there was no further communication between the Plaintiff and the Defendant during that eventful evening.  It is the Plaintiff’s evidence that in the course of that evening he had paid attention to the movement of the market and was aware that he would have lost all his deposits, but he trusted that the Defendant would notify him in time or would take steps to close out his positions when the deposits became exhausted. 

13.  In the event, the two orders remained “open” when the Defendant closed for business in the early hours of 18 September. Consequently, not only was the Plaintiff’s deposits insufficient to cover the loss, a net deficit in the sum of US$1,292,383.52 resulted in the Plaintiff’s account no.451. 

14.  Shortly after 8 am on 18 September, Miss Chow called the Plaintiff, informed him of the loss and asked him to make up the deficit in his account.  During the conversation there was some argument whether the Defendant ought to have taken steps to close out the open positions the previous evening.  About half an hour later Miss Chow called the Plaintiff again and informed him that the Defendant would have to close out his open positions, which the Defendant did at the price of US$884.50/oz.  A deficit of US$1,614,383.52 crystallised in the Plaintiff’s account.  The Defendant later demanded the Plaintiff to make up the deficit.

15.  The Plaintiff disputed liability, maintaining that the Defendant had a duty to close out his open positions when his deposits became exhausted when the market turned against him.  The dispute prompted the Plaintiff to demand delivery of the silver bullion held under the Defendant’s custody.  Perhaps not surprisingly, the Defendant refused to deliver up the silver in view of the substantial deficit in the Plaintiff’s account.

16.  Seeing no realistic prospect of resolving the dispute, on 16 October 2008 the Defendant sold the 1,955.647 kg of silver for US$646,359.65.  The proceeds together with interest were applied to offset partially the deficit in the Plaintiff’s account. 

17.  The Plaintiff claimed in this Action that the sale of the silver without his consent constituted wrongful conversion or a breach of contract by the Defendant.  The Defendant sought to justify the sale, first, by relying on an agreement allegedly made between the parties on 12 September 2008 to the effect that the quantity of silver could be used as a pledge or security against the Plaintiff’s margin trading.  Secondly, the Defendant contended that it was entitled to a lien over the silver as a result of the Plaintiff’s failure to make up the substantial deficit in his account. 

18.  The Defendant further counterclaimed a sum of US$967,071.09, being the balance of the deficit after giving credit to the sale proceeds of the silver bullion in question.  The Defendant claimed also to be entitled to set off the sale proceeds plus its counterclaim against any sum it might be found liable on the Plaintiff’s claim.

Alleged Duties

19.  The liquidation of the Plaintiff’s account no.451 resulted in the Plaintiff being indebted to the Defendant for a substantial sum.

20.  The Plaintiff did not specifically challenge the Defendant’s right to liquidate his account but contended instead that the Defendant had breached the duties owed to him contractually as well as under the common law (“the Alleged Duties”) to protect his interest in the following respects:

“(a) to monitor the volatile commodities market and to pay special attention to the market fluctuations ..... ;

(b) to timeously inform the Plaintiff when the margin maintained in the account would been (sic) exhausted due to market fluctuations;

(c) to take reasonable steps to cut loss including but not limited to:-

i. the Defendant should be aware of the market fluctuations;

ii. the Defendant should timeously inform the Plaintiff that the margin maintained in the account no.451 would be and/or had been wholly exhausted;

iii. the Defendant should close the account no.451 when the entire margin deposit would be and/or had been wiped out.”[4]

21.  The Plaintiff’s case is that the Alleged Duties were terms implied in the contract between the parties, or alternatively, were imposed upon the Defendant by reason of its relationship with the Plaintiff as his broker. 

Contract between the Parties

22.  When account no.109 was opened in September 2006, it is not disputed that the Plaintiff had signed some account-opening documents.  However, only 3 pages of such documents (2 of which bore the Plaintiff’s signature) were adduced in evidence.  They are by no means the complete set of account-opening documents.

23.  It appears that the documents bearing the Plaintiff’s signatures were part of a set of documents called the “Precious Metals Trading Services Application Form” (“Application Form”).  Among the set of documents was a “Master Agreement” which set out the terms of the operation of the account (“the Master Agreement”). 

24.  Although there is no evidence that when the Plaintiff opened the account the full set of Application Form was placed before him, it is clear that the terms of the Master Agreement must be regarded as having been incorporated into the contract by reference, for it was expressly provided in the Specimen Form (which the Plaintiff did sign) that:

“I/We further agree that I/We will observe and be willing to be bound by your Master Agreement ....”

25.  Indeed, Mr. Kenneth Chan (counsel for the Plaintiff) confirmed that he was content to treat the terms in the Master Agreement as applicable to the contract between the parties.  Also both counsel had made references to the terms of the Master Agreement in the course of their submissions.  I will therefore proceed on the basis that such terms were applicable to the contract governing the relationship between the parties.

26.  The Master Agreement contains the following material terms:

“The Agreement sets out the terms and conditions to which the Client is subject upon the Client opening an account or accounts with C-Corp for trading of Gold, Silver, Platinum and Palladium.

Contract Details / Margin Requirements

Products	Lot Size	Initial Margin	Maintenance Margin	Commission
...
Loco London Gold	100 Ounce	HKD 10,000	HKD 5,000	HKD 240
Loco London Silver	2,500 Ounce	HKD 7,500	HKD 3,750	HKD 120
...
...

(a) Margin requirements may be changed at the sole discretion of C-Corp accounting to the prevailing market conditions.

(b) The Client is required to deposit sufficient margin with C-Corp before entering into a position.”

The Master Agreement further provided that the Defendant was entitled to, without the Plaintiff’s consent, close out the Plaintiff’s open position:

“(a) At any time, the account available balance falls below the Maintenance Margin level but [the Defendant] has not received [the Plaintiff’s] deposit of Margin Call;

(b) …..

(c) In any case, [the Defendant] will close out [the Plaintiff’s] open position(s) at prevailing market price. [The Plaintiff] shall be liable for any deficiency remaining in his account resulting from such close outs.”

27.  It is the Plaintiff’s case that by entering into the Master Agreement, the Defendant became his broker in respect of his dealings in precious metals.  It is, however, important to look beyond the description as broker/client in order to ascertain the true capacity of the Defendant in its various dealings with the Plaintiff and the duties with which such relationship carries.

Implied Terms

28.  The principles relating to implied terms are not in dispute.  The Plaintiff put his case on the basis that the Alleged Duties should be implied on a proper construction of the Master Agreement, or to give business efficacy to the contract, or alternatively to give effect to unexpressed intention of the parties.

29.  I accept that the surrounding circumstances in which the parties entered into the contract are relevant considerations.  Mr. Chan contended that there were special features in the present case which would warrant such implied terms.  Such features included the fact that the Plaintiff was a major client of the Defendant and was ordinarily resident outside Hong Kong; the Defendant had full discretion from time to time to review the margin requirements and the requirements set out in the Master Agreement were not strictly followed; the Daily Statements did not accurately reflect the true position; due to market fluctuation the Plaintiff would not know the margin required to maintain his account unless the Defendant called him for additional margin, and the Plaintiff would have to rely on the Defendant to inform him when additional margin would be required.  It was further contended that the requirement as to maintenance of a minimum margin level was designed to protect both the broker (the Defendant) and the client (the Plaintiff), and without implying the Alleged Duties, even the Defendant itself would be exposed to unlimited risk. 

30.  I will first consider the Master Agreement.  It is clear that the purpose of prescribing various margin requirements was to protect the Defendant against the financial risk as a result of its allowing the Plaintiff to carry on leveraged trading.  The provisions entitling the Defendant to close out client’s positions also served a similar purpose to minimise the Defendant’s exposure to financial risk.  Sub-paragraphs (a) to (c) under the heading “Closing out of Client’s Open Position by C-Corp” should be construed accordingly.  Hence, despite the words “will close out the Client’s open position(s) ....” in sub-paragraph (c), I do not consider that the provision should be interpreted as imposing a duty or an obligation on the Defendant to close out the Plaintiff’s open positions.  In so concluding, I have taken into account the “special features” mentioned by Mr. Chan but I do not think they compel a different conclusion.

31.  Are the Alleged Duties necessary to give the contract business efficacy?  The question should be considered by first examining the parties’ relationship in respect of margin trading in London gold.  It may be noted that, in this context, I am not concerned with the parties’ position relating to the sale and purchase of physical silver: see the possibility of different capacities noted in Staughton J’s judgment in Drexel Burnham Lambert International NV v. El Nasr [1986] 1 Lloyd’s LR 356 at 359. 

32.  For dealings in London gold, according to Mr. Samuel Poon (the managing director of the Defendant, whose evidence I accept) when the Plaintiff approached the Defendant for a quote of the price, the Defendant would quote to him a bid and an offer price.  The prices would be quoted with reference to those trading at COMEX (the Commodity Exchange Inc. in New York) or shown in Reuters, and the Defendant may make adjustments by adding a premium or giving a discount.  London gold is not traded through a central exchange in Hong Kong and different dealers may quote different prices.  The Plaintiff could then decide whether to place an order to buy or sell at the Defendant’s quoted price.  In the event that an order was accepted from the Plaintiff, depending on the market condition, the Defendant might decide to place a similar order with other dealer(s) in the market to hedge against the risk of the transaction. 

33.  As I see it, such transactions were essentially the result of direct negotiations between the parties as dealer and investor. The dealer (the Defendant in the present case) was free to quote the price as he saw fit albeit with reference to COMEX or Reuters.  When a particular order was accepted, the parties contracted with each other on a principal-to-principal basis.  The mode of transactions described by Mr Samuel Poon is consistent with what is known generally as trading “over-the-counter”. The Defendant was not placing an order on behalf of the Plaintiff or as his agent in the market.

34.  Mr. Chan referred to a credit note dated 16 September 2008 describing certain sums as “commission” to support the argument of agency.  The credit note, as is now clear from the evidence, relates to sums repayable to the Plaintiff as rebates.  These sums relate to transactions involving the purchase of physical silver and not the Plaintiff’s dealings in London gold.  Because of the possibility of different capacities, it is of little assistance to the Plaintiff’s argument. 

35.  In relation to margin trading in London gold, I accept Mr. Samuel Poon’s evidence that the Defendant had in fact not charged any commission[5]. While it is relevant to take note that the Master Agreement provided for commissions, it is by no means decisive.  I think it is more important to ascertain the relationship from the manner in which the transactions were actually conducted between the parties.  As already discussed, my view is that the Defendant acted as principal in dealing with the Plaintiff in relation to London gold.  The Defendant acted consistently with such capacity by not charging the Plaintiff commission.

36.  In this connection, I would add that the fact that the transactions were leveraged trading involving margin facilities should not in any way alter the position that the parties had dealt with each other as principals. 

37.  As principals trading with each other, it is difficult to see why it would be necessary to imply the Alleged Duties to the contract between them.  The contract would be just as effective without such terms.  The investor himself has the duty to safeguard his interest in deciding when his open positions should be closed (subject to the Defendant’s power to close out).  It is he who has the responsibility to make that decision.  By leaving positions open, he bears the concomitant risk of financial loss.  This must be so whether or not he was able to ascertain the level of margins required to maintain his account.  The position is not any different even when the margins in his account had fallen below the prescribed levels, or even exhausted. 

38.  While it may be in the Defendant’s interest to closely monitor a fluctuating market, to make a call for margin when the deposits dropped below the prescribed level or became insufficient, or even to exercise its power to liquidate an account, it does not follow that it was necessary for the Defendant to assume a duty to notify the Plaintiff of insufficiency of margins in his account or take steps to close out the Plaintiff’s positions when the margins became exhausted or nearly so.  I reject the argument that the Alleged Duties were necessary to give efficacy to the contract.

39.  As to the argument of unexpressed intention of the parties, I do not believe that the Defendant would accept such terms as alleged.  It would have put an onerous duty on the Defendant and there is nothing in the evidence to suggest that the Defendant was prepared to accept such obligations vis-a-vis the Plaintiff. 

40.  Even if (contrary to my view) the Defendant was acting as agent for the Plaintiff, the observations in paragraphs 37 to 39 above would equally apply.  I am still not convinced that the Alleged Duties are proper terms to be implied into the contract. 

Common Law Duties

41.  I do not think the reference to duties under common law adds anything to the Plaintiff’s case.  In light of my analysis above I hold the view that as investor, it is the Plaintiff’s own responsibility to safeguard his interest and decide when his open positions should be closed (subject to the Defendant’s power to close out). 

42.  Mr. Chan referred me to Morten v. Hilton [1937] 2 KB 176.  In that case the brokers closed part of the client’s account by selling some shares in it after the latter refused to give security for his speculative trading in the account.  Mr. Chan referred in particular to the following statement of Lord Loreburn L.C. at p.178 that

“... brokers so situated were not only entitled, but bound to carry through the transaction in the reasonable way they honestly thought most to the advantage of their principal and themselves ....”

That statement was made in response to a challenge that the brokers were bound to wait another day before they sold the shares, whether or not the decision to sell on the previous day was reasonable. The context of that statement was obviously very different from the question I am dealing with. In any event, the essence of that statement was to emphasise that so long as the brokers honestly thought the timing of the sale to be advantageous to the parties, the transaction could not be impugned. I do not think it assists the Plaintiff’s contention for the Alleged Duties here.

43.  Mr. Chan next referred to Samson v. Frazier [1937] 2 KB 170.  It is unnecessary to quote any specific part of Hilbery J’s judgment but it is obvious that the decision only emphasised the entitlement of the brokers to close the client’s account.  It gives no support to the Plaintiff’s contention that they are a duty to do so.

44.  I would reject the Plaintiff’s case that the Defendant owed him the Alleged Duties at common law.

Proof of Defendant’s Loss

45.  The Defendant’s case is that upon closing the Plaintiff’s positions in account no.451, a deficit of US$1,614,383.52 resulted.  The Plaintiff challenged the assertion on the basis of lack of documentary evidence to substantiate the transactions.   

46.  However, I take note of Mr. Samuel Poon’s evidence that on 18 September 2008, he took the decision to liquidate the Plaintiff’s open positions at the prevailing market price at US$884.50/oz. This was confirmed in the fax to the Plaintiff of the same day, and was reflected in the Daily Statement of 18 September.  The transcript of a telephone conversation between Miss Chow and the Plaintiff at about 8.30 am on 18 September was also consistent with that.

47.  Indeed, as pointed out by Mr. Sham (counsel for the Defendant) it is the Plaintiff’s pleaded case that he had suffered loss in the sum of US$1,614,383.52[6]. I do not think that the Plaintiff’s challenge has any merits.

48.  Next, the Plaintiff pointed to the evidence of Mr. Poon that the Defendant had placed similar orders with the Emperor Group as a hedging transaction and that would need to be taken into account.  However, even though commercially the hedging transaction may have been prompted by the Plaintiff’s orders, it was itself a separate and independent transaction by the Defendant to guard against its own commercial risk.  Whether the Defendant was actually successful in hedging against the risk is not, in my view, a relevant consideration in relation to its loss arising from the liquidation of the Plaintiff’s account.

Agreement of Pledge or Security?

49.  I turn now to the Plaintiff’s claim in respect of the failure to deliver the 1,955.647 kg of silver.  It is common ground that the silver had been sold on 16 October 2008[7]. There is no question of the Defendant being able to restore the silver to the Plaintiff in specie.  The remedy, if any, lies in damages. 

50.  In defence, the Defendant alleged that there was an oral agreement between the parties on 12 September 2008 that the silver bullion could be used as a pledge or security for the Plaintiff’s margin trading.  Mr. Sham submitted that a pledge in these circumstances gave rise to an inherent right to sell the silver when the Plaintiff defaulted in payment for the loss incurred in the account, citing Halsbury’s Laws of Hong Kong, vol.19(2), p.17.

51.  The only evidence of the alleged agreement is the transcript of a telephone conversation between Miss Chow and the Plaintiff on 12 September.  Miss Chow, however, did not testify at the trial.  The essence of the conversation was that the Plaintiff was trying to persuade Miss Chow that it would be unnecessary for the Defendant to request further deposits since a quantity of silver was held in the Defendant’s custody.  The Plaintiff did not indicate that he was prepared for the silver to be used as a pledge or security for margin trading.  Nor was the conversation sufficient to infer an acknowledgment by the Plaintiff to that effect. 

52.  I do not think the conversation constituted the agreement as alleged by the Defendant. 

53.  Mr. Sham furthter alluded to the fax from Miss Chow on 16 September as evidence of the pledge.  I fail to see that the fax is of any assistance to the Defendant on this question. 

Lien

54.  Mr. Sham accepted at the outset that a lien would not have entitled the Defendant to sell the silver.  There is therefore no question but that the sale of the silver was wrongful and the Defendant was guilty of conversion.  However, he argued that the lien is relevant to the question of the date for the purpose of assessing damages.  In the absence of a lien, the cause of action in conversion accrued when the Plaintiff demanded and the Defendant refused to deliver the silver, that is, 20 September 2008, whereas if the lien is upheld the Defendant would be entitled to retain possession of the silver until it was sold on 16 October 2008. 

55.  First, I do not believe there should be a distinction as to the time for accrual of the cause of action on the facts of the case.  A wrongful sale would no doubt amount to conversion, but a wrongful detention without assertion of title to the goods would only give rise to an action in detinue: see Crossley Vaines’ Personal Property, 5^th ed., p.20.  In the present case, as is evident from the letter of 23 September 2008 from the Defendant, the Defendant regarded the silver as being held as security.  There was no denial of the Plaintiff’s title at that stage.  In the circumstances, conversion was committed only upon the sale of the silver on 16 October but not before. 

56.  In light of the above finding, though strictly unnecessary to do so, I propose to deal with the question of the lien briefly in deference to counsel’s submissions.

57.  In contending for a general lien, Mr. Sham argued that on receiving payment for the silver on 16 September 2008, the Defendant became a bailee at will.  As such, the Defendant was an agent for the Plaintiff and would be entitled to a general possessory lien on the silver bullion.  The following passage of Bowstead and Reynolds on Agency, 18^th ed., para.7-073 was relied upon:

“An agent has a general or particular possessory lien on the goods and chattels of his principal in respect of all lawful claims he may have as such agent against the principal, for ..... losses or liabilities incurred, in the course of the agency, or otherwise arising in the course of the agency, provided –

(a) that the possession of the goods or chattels was lawfully obtained by him in the course of the agency, and in the same capacity as that in which he claims the lien; .....” etc. (emphasis added)

58.  With respect, I disagree with Mr. Sham’s argument.  First, while a bailee may be regarded as an agent of the bailor for certain purpose when dealing with third parties, for instance, with respect to the bailee’s right to take action against a stranger for conversion of the goods under bailment (see Clerk & Lindsell on Torts, 19^th ed., para.17.61), that is not to say that a relationship of agency arises between the bailee and the bailor generally.

59.  Secondly, it is clear from the passage extracted from Bowstead & Reynolds that as a prerequisite for a valid lien to arise over the principal’s goods, a nexus must be established between the losses or liabilities incurred by the agent and the course of dealings in respect of which the relationship of principal/agent arises.  In other words, the relevant losses or liabilities must have been incurred by the agent qua agent.  In the present context, as the relevant losses and liabilities of the Defendant did not arise in its capacity as bailee of the silver bullion but rather as a result of the Plaintiff’s default in making good the trading losses from his dealings in London gold, the necessary connection has not been established.  In any event, as I have already found that the parties’ dealings in London gold were conducted on a principal-to-principal basis, there is no question of the loss or liability having arisen in the Defendant’s capacity as agent.   

60.  As an alternative, Mr. Sham further contended that the Defendant would be entitled to a general lien by virtue of the broken/client relationship between the parties (if the court so found).  In support of the argument, Mr. Sham referred me to the decisions in John Hope & Co. v. Glendinning [1911] AC 419 and Re London and Globe Finance Corp. [1902] 2 Ch 416.

61.  It would appear that this argument is but an application of the principle summarised in the passage quoted from Bowstead & Reynolds above.  In John Hope & Co. v. Glendinning, the relevant principle is stated in the speech of Lord Kinnear as follows, at p.431:

“The principle which I take to be very well settled in the law of Scotland is that every agent who is required to undertake liabilities or make payments for his principal, and who in the course of his employment comes into possession of property belonging to his principal over which he has power of control and disposal, is entitled in the first place to be indemnified for the moneys he has expended or the loss he has incurred, and in the second place to retain such properties as come into his hands in his character of agent until his claim for indemnity has been satisfied.”

62.  Re London and Globe Finance Corp. was an application of the above principle.

63.  But as I have found that the parties’ relationship was not one of principal/agent in their dealings in London gold, the loss or liability was not suffered by the Defendant as agent.  This argument of Mr. Sham must fail accordingly.

64.  Before I turn to the measure of damages for conversion, I wish to note at this point that in relation to his claim for wrongful sale of the silver, the Plaintiff had put his case also on the basis that the silver bullion was held by the Defendant pursuant to an agreement. The relevance of the agreement, apparently, relates to the measure of damages.

65.  It is the Plaintiff’s pleaded case that the agreement was reached on or about 16 September 2008 whereby the Defendant would hold the silver bullion as the Plaintiff’s trustee and would redeliver the same upon request.  The fax from Miss Chow of 16 September was relied upon as evidencing the agreement[8]. In my view, while the said fax was properly regarded as an acknowledgment by the Defendant of the Plaintiff’s title to the silver, it was not in the nature of an agreement (express or implied) with mutual exchange of promises.  The agreement, if any, would probably have been made when the orders were placed for the purchases, but it is unnecessary to express any views on what that agreement might have been.  It suffices to say that the Plaintiff has failed to establish its claim based on the contract as pleaded.

Damages for Conversion

66.  At common law, the measure of damages for conversion is normally the market value of the goods which is prima facie assessed as of the time of the conversion.  If the market value of the goods had since appreciated, the court has a discretion to take into account the subsequent rise in value as consequential damages.  Each case will depend on its facts: see Clerk & Lindsell on Torts, paras. 17-89 to 17-91; McGregor on Damages, 18^th ed., paras. 33-011 to 33-013.

67.  In the present case, it is the Plaintiff’s evidence that the quantity of silver was purchased to fulfil orders from his own clients in Shenzhen.  Specifically, the Plaintiff stated that the whole quantity of 1,955.647 kg had been sold for a sum of US$880,256.  This is therefore not a case of the goods being purchased to be kept or enjoyed.  Any consequential loss would lie not so much in being deprived of the opportunity to capture the rise in value of the silver, but rather in the inability to satisfy the sub-sale contracts of the clients. 

68.  In this regard, I am prepared to accept on the evidence that before the date of the conversion, the Plaintiff had informed the Defendant that he had sub-sold the quantity of silver, and therefore the Defendant ought to have known that the disposal of the silver would expose the Plaintiff to claims from his clients.  Yet, the Plaintiff’s pleaded case gives hardly any detail as to what exactly was the loss suffered by the Plaintiff and how such loss was occasioned.  As pointed out by Mr. Sham, although it was asserted by the Plaintiff that he had sub-sold the silver for US$880,256, there was no documentary evidence to substantiate the details of the sub-sale.  There had also been inconsistent evidence from the Plaintiff as to the price at which the silver had been sold and what exactly the position with regard to the sub-sale contract was.  In short, I am not satisfied that the Plaintiff has established a sufficient case that he was entitled to consequential loss arising from the sub-sale of the silver bullion.  

69.  Accordingly, I would hold that the damages to which the Plaintiff is entitled is the market value of the silver as of 16 October 2008.  Although according to the Defendant, the silver was sold for a sum of US$646,359.65, I think the Plaintiff is entitled to have an assessment of the market price which may yield a figure different from that at which the silver was sold.    

Set-off

70.  As Mr. Sham observed, since the Court is not dealing with a summary judgment application, there is perhaps little practical significance whether separate judgments are entered for the claim and counterclaim, or whether there is to be a single judgment for the balance after a set-off.  The issue may, however, be relevant to the question of costs.

71.  In this case, the Defendant sought to set off the sale proceeds[9] of the silver bullion plus the sum counterclaimed.  In other words, the sum sought to be set off was the amount of the deficit (that is, US$1,614,383.52) upon liquidation of the Plaintiff’s account.  

72.  It is unnecessary to repeat the three categories of set-offs summarized in the judgment of the Court of Appeal in Karpex (HK) Ltd. v. Yasmine Printing (China) Ltd. [2008] 1 HKLRD 200 at 202-203.  We are here concerned with an equitable set-off. 

73.  The jurisprudence on formulation of the test for equitable set-off has been examined by the English Court of Appeal in Geldof Metaalconstructie NV v. Simon Carves Ltd. [2010] EWCA Civ 667.  Paragraph 43 of the judgment of Rix L.J. set out the conclusions of the court which included the following:

“(ii) There is clearly a formal requirement of close connection. ……. The requirement is put in various ways in various cases. …..

(v) Although the test for equitable set-off plainly therefore involves considerations of both the closeness of the connection between claim and cross-claim, and of the justice of the case, I do not think that one should speak in terms of a two-stage test. I would prefer to say that there is both a formal element in the test and a functional element. The importance of the formal element is to ensure that the doctrine of equitable set-off is based on principle and not discretion. The importance of the functional element is to remind litigants and courts that the ultimate rationality of the regime is equity. The two elements cannot ultimately be divorced from each other. …….

(vi) For all these reasons, I would underline Lord Denning’s test, … as the best restatement of the test, and the one most frequently referred to and applied, namely: ‘cross-claims ….. so closely connected with [the plaintiff’s] demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim’. That emphasizes the importance of the two elements identified in Hanak v. Green; it defines the necessity of a close connection by reference to the rationality of justice and the avoidance of injustice; and its general formulation, ‘without taking into account’, avoids any traps of quasi-statutory language which otherwise might seem to require that the cross-claim must arise out of the same dealings as the claim, as distinct from vice versa …..”

74.  Whilst bearing in mind the importance of considering both the formal and the functional element as discussed in the judgment of Rix L.J., the interplay between these elements must depend on facts of the particular case. 

75.  In the present case, Mr. Chan argued that it would be wrong to allow the Defendant to rely on its counterclaim as a set-off when it had failed to establish a lien or other security over the silver.  He referred to the case of Smith v. Bridgend County BC [2002] 1 AC 336.  In that case, an argument was advanced by counsel that even if a claimant was entitled to damages for conversion, such a claim would be met by a set-off in equity arising from the defendant’s monetary cross-claim.  In rejecting the argument, Lord Hoffmann said (at para. 36):

“Similarly, equitable set-off depends upon showing some equitable reason for protection against the plaintiff’s demand: see Hanak v Green [1958] 2 QB 9. In my opinion a defendant could not, in the absence of a lien or other security, claim to retain an asset belonging to a plaintiff by way of set-off against a monetary cross-claim. If this were not the case, every one would in effect have a lien over any property of his debtor which happened to be in his possession. It follows, in my opinion, that he cannot improve his security in equity by wrongfully converting the debtor’s property. ....” (emphasis added)

76.  I think Mr. Chan is plainly correct.  For the reasons given by Lord Hoffmann (which I respectfully adopt), I would hold that the defence of equitable set-off was not available to the Defendant in the circumstances of the present case.

Miscellaneous

77.  Before I summarise my conclusions, I wish to mention a point of disagreement referred to in the parties’ pleadings, that is, whether the Defendant was entitled to make transfers between the Plaintiff’s accounts without his consent.  As already noted, it is common ground that the Plaintiff had consented to a transfer of US$403,748.70 from account no.109 to account no.451.  It does not appear to me, however, that any other transfers are relevant to the issues in this case and I therefore do not propose to deal with the point.

Summary of Findings and Reliefs

78.  The Plaintiff is entitled to damages for conversion, to be assessed on the basis of the value of the silver as of 16 October 2008.  Judgment will be entered for the sum assessed with interest at the rate of 1% above HIBOR from 16 October 2008 until completion of the assessment and thereafter at judgment rate.

79.  The Defendant has established liability for the sum of US$1,614,383.52, but has only claimed for US$967,071.09 after giving credit for the sale proceeds.  This has given rise to some complications.  As I have given judgment for the Plaintiff on the assessed amount, I think it will be unfair to allow the Defendant to enter judgment only for US$967,071.09. Therefore, notwithstanding the amount stated in the Counterclaim, I will give judgment to the Defendant for the sum of US$1,614,383.52, with interest at the same rate above-mentioned from 18 September 2008 until this judgment, and thereafter at judgment rate.   

80.  I think it will be just to stay execution on the respective judgment sums until completion of the assessment of the Plaintiff’s claim, to the intent that there should be a mutual set-off of the respective sums and that execution should only be levied by the party who is in credit after the set-off.  However, because of the way the Counterclaim has been framed, in the event of there being an amount found due in favour of the Defendant after set-off, then execution ought properly to be limited to a sum not exceeding the amount pleaded in the Counterclaim, that is, US$967,071.09.

81.  As both parties have succeeded in their respective claims, I would make an order nisi that the Plaintiff and the Defendant will bear their own costs incurred up to the time of this judgment.