CHINE KIT LTD v. MA HING FUNG

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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DECISION

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1. The plaintiff was, at the material time, the broker for the defendant trading in the Hong Kong Hang Seng Index Futures Contracts under the provisions of the Commodities Trading Ordinance, Cap. 250. Suffice it for me to say, without making specific reference to the clauses in the General Agreement For Customer Accounts signed by the defendant, the defendant agreed to engage the plaintiff as broker on the basis of agent and principal on an express indemnity clause.

2. The dispute between the plaintiff and the defendant involves some 28 Hong Kong Heng Seng Index Futures Contracts. According to the plaintiff, 32 contracts were bought between the 28th September 1987 to the 15th October 1987, four of which were disposed of prior to the 25th October and as at the 25th October, 28 were left outstanding. They remained, so to speak, open. These 28 contracts were liquidated as from the 26th October down to the 2nd November 1987 and the plaintiff's claim against the defendant is for the debit balance after the loss in the liquidation of these 28 contracts.

3. Raised before me are not less than 5 main factual disputes. Counsel for both the plaintiff and the defendant have very kindly enumerated these various factual disputes for my benefit, and they virtually coincide with the order in which their respective submissions were made.

4. First, it is a question of whether one Mr Loo was duly authorized by the defendant to place order on his behalf. A certain Trading Authorization was signed by the defendant, the defendant's signature on which is not challenged. The defendant has placed on record that he was not very certain what particular document he had signed. The defendant's version is that Mr Loo was introduced to him; and in his own words, Mr Loo told him "that lie could buy and sell Hang Seng Index Futures Contracts for (the defendant) if (he) would open a trading account with (Mr Loo)". Thereafter, he was asked by the introducer, one Mr Chan, to sign a certain document. Mr Chan, according to the defendant explained to him no part of its contents. The defendant maintains that he has no recollection as to what he signed, and he definitely disclaims knowledge of the contents.

5. As I have said, the signing by the defendant of this particular document is not in dispute, and thereafter, as Counsel for the plaintiff pointed out, various Confirmations/Statements of Accounts were from time to time despatched by the plaintiff to the defendant. Although certain allegations have been made as to the effect and date of receipt of these documents, the very receipt of them is itself evidence enough for establishing that the buying and selling on behalf of the defendant by Mr Loo was no longer a live issue after the signing of the Trading Authorization.

6. On the same document, the defendant raises a second factual/legal issue, i.e. whether the defendant can succeed on a plea of non est factum. It is settle law that clear and positive evidence will have to be adduced. if any authority need be cited, I will refer to Gallic v. Lee ⁽¹⁾ for reference. Miss Yuen, Counsel for the plaintiff, displayed the actual copy of the Trading Authorization, on the back of which is printed a Chinese version. It is equally trite law that the signatory would hardly have any complaint to make if he had been careless himself, not exercising reasonable caution in the signing of the document in question. It has not been suggested by the defendant that he does not read or understand Chinese, and from the allegations contained in his affirmations, it is a case of blind reliance on certain vague assertions allegedly made by Mr Chan. Obviously the plea of non est factum would have little prospect of success. Again Miss Yuen is kind enough to refer me, in additon to Gallie v. Lee, The Union Bank of Hong Kong Limited v. Ng Yiu Hing ⁽²⁾ in which reference was made to the principle of non est factum in Gallie v. Lee.

7. Thirdly, it is complained on behalf of the defendnat that by virtue of the regulations of the Hong Kong Futures Exchange Limited, the plaintiff, at least by the 9th October, when margin of the defendant fell below the tolerable limit, should have demanded from defendant additional margin or further deposit. It was submitted on behalf of the defendant that Regulation 441 virtually precluded the plaintiff from serving the defendant when marginal deposit fell below the set ceiling. I have been referred to, by Counsel for the plaintiff, Regulations 440 and 441, and I need only say that the combined effect of both must be the plaintiff was not to trade on behalf of the defendant as its agent/broker without sufficient margin after a reasonable time in the prevailing circumstances had been afforded to the defendant to put in additional margin or further deposit. A fair reading of both regulations could admit of no interpretation sought to be advanced on behalf of the defendant.

8. It was argued on behalf of the defendant that as margin had fallen below the limit, it would have been unlikely that the purchases of these 28 Hang Seng Index Futures Contracts were executed on proper instructions. The defendant denies Mr Loo's authority or having so instructed him.

9. As far as the plaintiff is concerned, margin truly started to fall below the limit commencing from the 9th October. Although from the 9th October to 15th October, margin continued to fall, there was even a floating profit of some $9,700 on the 12th October, and the plaintiff's patience was apparently rewarded by 2 cheques of $100,000 each given by the defendant to the plaintiff for boosting or topping up the margin. The defendant has given, however, a different version for the giving of the two cheques.

10. The plaintiff further explained that the situation before the 9th October was covered by what has been known as the Maintenance Level of 70% of the set limit.

11. The defendant was phoned up by the plaintiff, on and off, from the 9th October to the 15th October. The situation was not regarded by the plaintiff as being really serious in view of the defendant's sound financial background as understood by the plaintiff. The defendant was known to be a man of means, as indeed, the defendant himself confirms in paragraph 7 of his affirmation of the 29th December 1987 that he had a few million dollars in shares.

12. By the 16th October, the margin became appreciable, and it was on that day that the defendant was attempted to be contacted in person by the plaintiff but without success. The 17th and the 18th October 1987 were not trading days. The plaintiff explained, through the affirmations of his staff and Mr Loo, that prior to the 16th October some hope was also held by the plaintiff for the rising market trend to resume.

13. In view of the plaintiff's explanations, the given information for the Maintenance Level and the situation on various dates from the 9th to 15th October culminating in the demand for payment from the defendant personally, though unsuccessful, on the 16th October, what transpired cannot, in my view, be taken as any real corroboration of the defendant's allegations.

14. Regulation 434 of the Hong Kong Futures Exchange Limited was once heavily relied upon, but reliance on that particular regulation has since been abandoned.

15. Fourthly, the relationship between Mr Loo and the plaintiff was a further matter of challenge. Mr Tang, on behalf of the plaintiff, disclosed that Mr Loo was never a broker or agent in the employ of the plaintiff and he qualified it subsequently to the effect that Mr Loo was a part time finance analyst. I derive little assistance from these two assertions. Not much capital can realistically be made from the precise relationship of Mr Loo with the plaintiff.

16. Lastly, written Confirmations/Statements of Accounts had from time to time been sent to the defendant. It is plaintiff's case that under Clause 11 of the agreement signed by the defendant with the plaintiff, such Confirmations despatched by the plaintiff to the defendant would have to be objected to "within 3 business days after transmission thereof by mail". Counsel for the plaintiff further contended that upon the expiration of the stipulated period, the Confirmations would become conclusive evidence against the defendant. Mr Wong, on behalf of the defendant, referred the court to the rider printed on the form of these Confirmations which reads:-

"Please notify us within 48 hours if this confirmation/ statement of accounts is incorrect. Otherwise this confirmation/statement of accounts will be deemed correct and accepted by you."

17. The defendant complained that such Confirmations often came to him days late and for the 28 contracts in question, they came to him even one or two weeks late.

18. Counsel for the defendant further suggested that the force of Clause 11 must have been diminished by the rider, in the sense that the Confirmation can no longer be taken as conclusive evidence against the defendant. Whether or not these Confirmations can be taken as such is not crucial. Moreover, the reference to 48 hours in the rider is open to argument as to whether it was to be 48 hours after receipt or 48 hours from the day of the transaction. There is no evidence in the affirmations that the defendant ever sought clarification from the plaintiff. Leaving aside the power to challenge or object under Clause 11, silence after their receipt tells against the defendant, whether or not these Confirmations are conclusive and binding.

19. That concludes all the five main factual disputes on which I have come down favourably for the plaintiff.

20. The last contention between the parties to these proceedings is one of law. That concerns section 1 of the Gaming Act 1710 as amended up to the 5th April 1843. Counsel for the defendant confines himself exclusively to this section. Counsel has specifically refrained from taking any point on illegality at Common Law or prohibition against wagering contracts and their attendant legislation.

21. Section l of the Gaming Act 1710 "provided that all securities giving wholly or in part for any money or valuable thing won by gambling or by playing at any game or by betting on any game, or for repaying any money lent for such gaming or betting or lent at the time and place of play to any person so gaming or betting, should be utterly 'void, flustrated and of none effect'."   See paragraph 3627 at p. 797 of Volumn 2, Chitty on Contracts, 25th Edn.

22. Evidently, it deals with "securities". The section has been amended by section 1 of the Gaming Act 1835, which softened the impact of section 1 of the Gaming Act 1710 to the extent that any infringing security would no longer be regarded as utterly void but merely an illegal consideration so as to give protection to a bona fide holder for value. Subsequent amendments to section 1 of the Gaming Act 1710, I am told, are not applicable to Hong Kong e.g. the Gaming Act 1845, section 18 which provided that "all contracts of gaming and wagering should be void". See the footnote Halsbury's Statutes, Volumn 5, 4th Edn. p. 7. That seems to be the clear short answer to Counsel's submissions. "Security", in the sense as it is generally understood, was absent in the contract between the plaintiff and the defendant. It does not seem to have been suggested that under the agreement for services rendered as broker, any securities were at any time involved, vis-a-vis the plaintiff and the defendant. Submission of Counsel on section 1 cannot succeed.

23. Some play was made as to the position between the plaintiff and the defendant in the procedural steps that had to be followed within the Hong Kong Futures Exchange. But as the submitted position is not borne out by the affirmations before the court, contention on that basis is no longer persued.

24. Counsel for the plaintiff further submitted that there was in fact no game in the relationship between the plaintiff and the defendant as governed by the agreement and whatever pretence of a defence to the plaintiff's claim on this submission must also fail.

25. Finally, that section 1 could apply to the relationship of agent and principal does not really seem to be sustainable. Counsel cited in support Forget v. Ostigny ⁽³⁾ and Read v. Anderson ⁽⁴⁾. I have also been referred to a very interesting article by Mr Carolan published in the last issue of the Law Society Gazette for April 1988 at page 18.  Mr Carolan advanced the contention that delivery or receipt of a commodity bought was the underlying reason for the English decisions.

26. In Forget v. Ostigny ⁽³⁾ the defendant never asked for nor received delivery of the shares bought. It was a shere speculation, although delivery to the agent was regarded as delivery to the principal. In Thacker v. Hardy, ⁽⁵⁾ delivery of the stocks bought to the principal by the broker/agent was never intended and it was so arranged that the principal was expected only to pay for the price difference. However, there was actual delivery to the broker as agent. In Read v. Anderson ⁽⁴⁾, the question was indemnity against bets lost by a turf commission agent who would not himself have been subject to any claim enforceable in law. There was no question of passing or delivery of any entitlement or merchandise. Actual or presumed delivery is evidently not the test in all these cases, there were real dealings transacted by the broker/agent on behalf of the principal. In none of these cases was there merely a gambling in differences or chances. The emphasis is on genuine transactions, unlike the special arrangements made in Universal Stock Exchange v. Strachan ⁽⁶⁾ and S.E. Mizrahie v. Stanton Nelson ⁽⁷⁾ where the parties gambled on the shere differences in the price of stocks or commodity without the backing of any real purchases. Under the Commodity Trading Ordinance, Cap. 250, in the definition of "commodity" given by section 2, which has recently been amended in Part I of the First Schedule, no distinction is sought to be drawn between tangible commodities and the newly added commodity which is not tangible, i.e. the Hang Seng Index Futures Contracts. The list of commodities in Part I of the First Schedule to that Ordinance formerly contained cotton, sugar, soyabeans, gold, and it has since been extended to include the Hang Song Index Futures Contracts. Delivery, actual or presumed, is not envisaged and has not been made an essential ingredient in the trading of Index Futures Contracts. It would appear highly unlikely that the relationship between the plaintiff and the defendant under the agreement in question would be caught by section 1 of the Gaming Act 1710.

27. The court made enquiry from both Counsel as to why the percentage of 75% was resorted to by the Master in the Conditional Leave granted to the defendant. There seems to be some disagreement between Counsel as to what precisely transpired and the basis on which the Master selected this percentage. I am certainly not prepared to speculate on the real ground on which such 75% was founded. For all the reasons I have given, I am almost prepared to grant judgment agaisnt the defendant in favour of the plaintiff, and it is quite unnecessary for me to try to rationalize the indulgence so granted by the Master to the extent of 25%, the basis of which does not seem to have been satisfactorily explained, and on the basis of which I have not been consistently assisted by Counsel.

28. This is an appeal by the defendant against the decision of the Master. I would not be prepared to deprive the defendant of the indulgence so generously extended to him by the Master. For all the reasons I have given, the appeal do stand dismissed with the order made by the learned Master to stand and I award costs of the appeal against the defendant in favour of the plaintiff.

(1)    [1971] A.C. 1004

(2)    [1974] HKLR 76

(3)    [1895] Appeal cases 318 at p.326

(4)    [1884] 8 Q.B.D. 779 at p.783

(5)    [1878] 4 Q.B.D. 685

(6)    [1896] A.C. 166

(7)    (1958) 24 M.L.J. 97