SAN FU & CO. (a firm) v. SO SUR-YUEN

1985 No. A6021

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. The defendant, Mr. SO Sun-yuen (So), is a Hong Kong businessman who speculated in gold on margin through the plaintiff firm of gold dealers. The dispute and the virtually sole issue in this action is whether the defendant orally instructed the plaintiff to liquidate his position and close his account on 3rd September 1982. If he had done so, he would be entitled to a credit of about $56,000 that then subsisted; if not, he would be indebted to the plaintiff in the sum of some $214,000 following the subsequent rapid increase in the price of gold, the defendant having sold short.

2. The plaintiff firm consists of 2 partners, being one CHAN Chieh-chung, alias CHAN Chung-sing (Chan) and his wife. Chan and So were schoolmates in mainland China before coming to Hong Kong many years ago. So claims that when he wished to speculate in property some years ago, Chan introduced him to trading in gold margins. The trading or speculation was effected through the plaintiff company under an oral agreement supplemented by the terms and conditions printed on the bought and sold notes used. As an old friend, So was permitted to buy and sell on the concessionary margin of $10,000 per hundred taels of gold. Although Chan was in effect the owner of the plaintiff firm, the business of trading in gold was managed by his younger brother, CHEN Chung-mau (Mau).

3. Chan told Mau in So's presence to personally attend to So's transactions and that as an old friend, Mau would not need to collect the full margin from So. Mau gave So his telephone number and it was arranged that So would telephone his buying and selling orders to Mau who would execute them, preparing the buying or selling notes and causing these and statements of accounts to be sent to So. The statements were in fact prepared by the accounts section of the plaintiff. In the way the arrangement was implemented, So remained on the phone after putting through an order while Mau effected the sale or purchase through the plaintiff's hotline to the Gold and Silver Exchange. Mau then confirmed the transaction giving Mr. So the price before his telephone call was terminated. A mass of bought and sold notes and statements were produced by consent and with the evidence of Mau and So clearly established the series of transaction carried out.

4. Three series of transactions were carried out by So through the plaintiff. The first series commenced on 10th November 1981 and ended on 24th March 1982. The second series commenced on 20th August 1982 and ended on 24th August 1982. And the third series commenced a couple of days later on the 26th of August and ended with the dispute that is the subject matter of this action. In the course of this final series, on 2nd September So finished 400 taels short. On 3rd September, he sold 1000 taels and then bought 600 taels which left him short of 800 taels. The price rose steeply and resulted in a substantial loss of some $132,000, the highest single loss he sustained on any day. It is not disputed that he paid in two cheques that day, one of $50,000 and the other of $40,000 which together with the previous day's credit of $98,832.16 made a total of $188,822.60. The loss of $132,620 reduced that to $56,212.60.

5. There is a conflict of evidence on the events of the 3rd September and thereafter. Mau testified that when the price rose, he asked So to increase the margin by an amount of $50,000.00, and that he obtained a cheque for that amount about noon. That afternoon, the price continued to rise and he asked So to buy back 1000 taels, but So refused to do so and bought only 600 taels in the afternoon. So Mau asked for a further $40,000.00 to replenish the margin and obtained a cheque between 4:30 and 5 p.m. which he deposited that same evening. On the following day, Saturday 4th September, Mau telephoned So and asked him to buy back. So refused saying he would like to observe the situation for a couple of days. On the morning of Monday the 6th, So telephoned Mau who again asked him to buy back. There were several telephone conversations during the day but So did not buy back; he said he preferred to observe the situation overnight despite Mau's advice to buy back as the Middle East situation was tense, Israel having invaded Lebanon. Nevertheless, Mau allowed So to retain his position overnight telling him he would require a further $50,000 to make up the margin deposit, and expressing the hope that the price would drop. He went home and some time after 6 p.m. received a telephone call from So who told him the gold price had gone up by US$9 and asked him to come and meet him at a cafe. Mau went immediately and told So that on the latest quotation he would have to pay in a cheque of $100,000 the following day to meet the margin. They discussed the market, Mau saying it might go up because of the confused situation and So opining that having risen by nearly $700 in ten days, the price should drop. But he asked if he could buy back Hong Kong gold that night and was told it was not possible as the Exchange was closed, but that London gold could be purchased in ounces. So said he would let Mau know if he wanted to do that and Mau left the cafe about 7 p.m..

6. Next morning, he found that the price had gone up and telephoned So's office but could not locate him. He tried again several times during the day to locate him even leaving messages without success. About 4 p.m., the price rose steeply. Chan then told Mau that if he failed to locate So the account had to be liquidated. Mau telephoned So's office again and explained the position to a woman who answered the phone, saying that he would have to liquidate the account if no payment was made. At almost 4:30, he liquidated the account by purchasing 800 taels of gold at the price of $3552 which in the event proved to be the highest closing price for the month of September. A statement was prepared and it disclosed a net loss of $214,705.80.

7. Mau tried to get in touch with So that night and again on the 7th and 8th without success. Meanwhile, notes and statements were dispatched but no payment was received. On the afternoon of the 9th September, one Mr. Choi, a friend of Mau's, who also had dealings with So, telephoned him and asked him to come to Maxim's cafe in International Building as So was there. Mau immediately made copies of the bought and sold notes for the period 26th August to 7th September and went to the cafe. So, Choi and others were there. So said he had already received the company's bill and notes and refused the copies. He complained that he had not authorised the liquidation of his account. Mau explained why it had proved necessary to close the account. So took the view that his account should not have been liquidated. He did not pay the $214,000. Despite many subsequent phone calls, Mau was not able to get So to pay up.

8. So's sworn version was very different. He agreed he was 600 taels in credit on 1st September and that he sold 1000 taels on the 2nd. But he says that on the 3rd September at about 11 o'clock in the morning, Mau told him the market was down and suggested he should sell. Accordingly, he sold about an hour before the close of the market at 4:30. He confirmed, however, that he had paid in a total of $90,000 that day by means of a cheque of $50,000 and another of $40,000. He maintained he sent in the cheques at the same time that morning.

9. I digress at this point to say I do not believe so, it simply does not make sense in all the circumstances why two cheques should have been sent at the same time nor is there any explanation why they should have been paid in at different times. I prefer Mau's evidence on the point.

10. Reverting to So's evidence, he said that at 6 p.m. on the 3rd September he received a statement from the plaintiff showing that his credit was only $56,212.60. After checking it, he concluded that it was $10,000 short. He phoned Mau who refused to concede the error. So was very angry. He says he had wanted to hold gold earlier and it was Mau who wanted to sell; if he had not listen to Mau, he would have made a profit of some $200,000 instead of a loss. So when he quarrelled about the $10,000, he told Mau to close his account, he would have no more gold dealings with the company. Apart from those matters, he also felt that $132,000 was a considerable loss, the largest single amount he had lost in a single day. Mau said alright, but as the Hong Kong Gold Market had closed he would not be able to close the account.

11. Between 8 and 9 p.m. that night, So telephoned Mau at his home expressing concern about further losses. Mau told him to buy London gold so he purchased 900 ounces on the night of the 3rd September. Later that same night, he thought that as he would not be dealing with gold, having made a firm decision to close his account with the plaintiff, he would also close that account and so he told Mau to sell the 900 ounces and closed that account too. The London gold was purchased through Manishing and associated company of the plaintiff also owned by Chan. On that day, he had been told that his account with the plaintiff was in credit to the extent of about $56,000 and he owed Manishing about $51,000 for the London gold, so he told Mau to offset the two. Mau told him that was not possible.

12. On the 4th September, a girl from the plaintiff firm telephoned him in the morning and told him of the position of his account. As a result, he rang Mau and told him to work out his account and return any balance due and to close the account. That evening, he received his statement at about 6 p.m. The following day, Sunday, at about 7 in the evening, he telephoned Mau and invited him to tea to discuss the closing of his account, Mau not having closed it. He told Mau he really did not want to carry on, he had made up his mind and he asked Mau not to drag on the matter. Mau said alright, and that he had conveyed So's instructions to the company and he told So not to worry. With that, Mau left.

13. On the 6th after 6 p.m., he received another statement from the plaintiff which showed a debit balance of 800 taels of gold. He felt the plaintiff was dragging on the matter to make him carry on. He could not remember what he did but he did not pay any further amounts because he had closed his account.

14. He said that he had a second evening meeting with Mau on either the 11th or 12th of September about 5 or 6 p.m. A lot of people were present including Choi and Mau who came later. He did not explain how the meeting came about but said that Mau threatened him that if he pursued Choi for some money Choi owed him, he, Mau, would pursue So for some $210,000 odd due to the plaintiff and that it would preferable if both of them dropped those matters.

15. The plaintiff's statement of the 7th which recorded So's indebtedness in the sum of $214,705. 80, So says he received only on the 17th. He did not check it but simply put it into one of his company envelopes and locked it in a drawer of his desk. This evidence of where the statement was placed was no doubt intended to explain the confirmation the defendant's auditors sought to obtain on 22nd November 1983 from the plaintiff that the defendant owed to the plaintiff the sum of $214,705.80. The plaintiff sought to rely upon the confirmation as proof that the debt had been admitted. I am satisfied that the confirmation was sought as a result of the statement and that it does not in fact establish any admission of liability on the part of the defendant.

16. Finally, Mrs. So gave evidence. She impressed me as a dutiful wife who faithfully gave evidence in support of her husband but who knew very little and did not remember much about the matter and upon whose evidence no reliance can be placed.

17. I revert then to the conflict between the versions of the two sides. So could not give any possible motive or any other reason why Mau or the plaintiff would wish to prevent him closing his account or indeed deny that he gave such instructions. Nor did any explanation emerge from the evidence. The plaintiff did not benefit in any material way; on the contrary, the trust and reputation that are said to be essential in the business would obviously be undermined.

18. On So's version, he was due some $56,000 when he closed his account. His explanation that he did not seek to recover it because he wished to preserve his old friendship with Chan, I find quite incredible. On the other hand, there was also delay on the part of the plaintiff in enforcing its claim. However, I accept that this is explained by So's absence for some time in the Philippines and also by the plaintiff's belief that So could not afford to pay the amount outstanding, until their recent discovery that he had applied for membership of the Gold and Silver Exchange.

19. I do not believe So's evidence that in the course of his telephone conversation about 6 p.m. on the 3rd September he asked Mau to close his account. He must have known or would have certainly been told that that was not possible while the Hong Kong gold market was closed. And as to his counsel's submission that it would have been an open order to close his account, that would be contrary to the usual procedure in which sales were always against prices ascertained and confirmed.

20. I also do not believe So's claim that he did not check the plaintiff's statement of the 7th September recording his indebtedness of $214,705.80, which he said he received on the 17th September. In any case upon his own version of the meeting he says he had with Mau on the 11th or 12th September, he would have learned of the sum of $210,000 odd" which he said Mau implied the plaintiff could demand. As to that, he says he asked why he should owe so much and that Mau replied he did not know, it was the business of the company. Again, I find that incredible.

21. So had lost money on both the 1st and 2nd series of transactions, and says he felt that Mau and the plaintiff company were insincere, dishonest and that they wanted to cheat him. Yet he went back to them and continued trading. His explanation (better the devil you know) I find ridiculous in the circumstances. In the context of those two series of transactions, it was submitted on behalf of So that notwithstanding the losses he had made, he made margin deposits shortly before ending each series by closing his account, and that the deposit of $90,000 and loss on 3rd September was consistent with the closing of his account on that day. I do not accept that such consistency, if it can be said to be that, would rebut the other compelling evidence that he did not give instructions for his account to be closed.

22. His transactions towards the end of the 3rd series in my view clearly disclose a belief that the market would fall, a belief quite inconsistent with his version of the events and of the sequence of the sale and purchase of London gold on the night of the 3rd September.

23. Chan's evidence does not bear directly upon the essential matters disputed. As regards Mau and So, despite a degree of brashness and claims to remember details of the market many years back (claims that were not fully tested), I much prefer Mau's evidence to that of So as to content as I have indicated, and also as to demeanour. I do not believe So's evidence and have no hesitation in rejecting his version of the disputed matters. I find that he did not give instructions to have his position liquidated and his account closed on the 3rd September 1982. It was not disputed and in my judgment the plaintiff was entitled to liquidate the account when the margin dropped below $10,000 per hundred taels, and to be paid any resulting loss. In my finding, the defendant's margin deposit was totally depleted on 7th September; the plaintiff made strenuous and all due efforts to locate the defendant and secure instructions from him (far beyond any legal obligation); the plaintiff liquidated the defendant's account on 7th September 1982, and the loss on the account including charges properly made was $214,705.80.

24. I also find that while the defendant was in credit on 3rd September in the sum of $56,212.60, he retained his position of 800 taels short which resulted in that credit being wiped out and a loss of $214,705.80 being incurred. The plaintiff's claim for $214,705.80 accordingly succeeds and the defendant's counterclaim for $56,212.60 fails.

25. Unless counsel wish to be heard, I propose to award costs to the plaintiff together with interest as claimed at 8% from the date of the writ (1st October 1985) until judgment.