JIN WEI CHENG v. UBS AG

HCA 632/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 632 OF 2012

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REASONS FOR DECISION

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Introduction

1. On 25 September 2014, I had a summons issued by the defendant (the “Summons”) returned before me.  The Summons sought an order for the plaintiff to withdraw the interrogatories dated 19 February 2014 (the “Application”).

2. The plaintiff was a customer of the defendant bank.  The plaintiff kept a few investment accounts with the defendant in his name or in the name of his companies.  This claim concerned only one of these accounts, namely the account with account number ended with “225” (the “Account”).

3. The plaintiff’s case was that the Account was not a discretionary account, ie all transactions for the Account had to be authorized by the plaintiff.  The plaintiff’s claim is that the defendant’s client adviser for the Account, a Mr Marvin Zhang (“Mr Zhang”), had carried out transactions for the Account not authorized by the plaintiff causing loss to the plaintiff.  The period concerned was from June 2006 to August 2008.  The plaintiff claims more than HK$250 million.

4. The defendant’s case is that all transactions for the Account were authorized by the plaintiff either by specific authorization or pursuant to a general authority to trade the Account given to Mr Zhang orally or implied by conduct.  The defendant also relied on ratification, estoppel and contractual terms to resist the plaintiff’s claim.

5. The plaintiff issued the writ on 19 April 2012 and served his interrogatories on 19 February 2014 to ask 22 questions.  I shall call them Interrogatories 1 to 22 in this Decision.

6. The defendant did not answer the interrogatories after being served with the same but took out the Summons on 5 March 2014.  No supporting affidavit was filed or served when the defendant took out the Summons.  The Summons was first returned on 13 March 2014 when the court gave directions for the parties to file and serve affidavits.

7. The defendant filed the Affirmation of Law Wai Ho on 6 June 2014 (“Law’s Affirmation”) to answer Interrogatories 17 to 22 but continued its application for the plaintiff to withdraw Interrogatories 1 to 16.  The defendant also filed the 2^nd Affidavit of Ann Yuk-Fun Cheng-Echevarria (“Cheng”) on 6 June 2014 in support of the Application (“Cheng’s 2^nd Affidavit”). Cheng is the legal counsel of the defendant.

8. On 29 July 2014, the plaintiff filed the 6^th Affidavit of Tang Chi Keung (“Tang’s Affidavit”) in opposition to the Application.

9. On 2 September 2014, the defendant filed the 3^rd Affidavit of Cheng (“Cheng’s 3^rd Affidavit”) to deal with certain matters raised in Tang’s Affidavit.

10. The plaintiff’s counsel Mr Li confirmed in his skeleton for the hearing of 25 September 2014 that in view of the information provided by the defendant in Cheng’s 2^nd and 3^rd Affidavits, the plaintiff would not pursue further the remaining interrogatories except Interrogatories 4, 14, 15 and 16.

11. At the hearing on 25 September 2014, Mr Li agreed that Interrogatory 14 was in duplicate with Interrogatory 4.  He further agreed that the plaintiff would not pursue Interrogatory 14.  The issue before me at the hearing was whether the plaintiff should be ordered to withdraw Interrogatories 4, 15 and 16.  Of course, costs for the Application were also in issue.

12. The defendant was represented by Mr Yu SC and Mr Stock at the hearing.

13. After hearing the parties’ submissions, I ordered the plaintiff to withdraw Interrogatories 4, 15 and 16.  I also made a costs order nisi (the “Costs Order Nisi”) ordering the defendant to pay the plaintiff’s costs for the Application up to 2 September 2014, ie the date when the defendant served Cheng’s 3^rd Affidavit.  I ordered the plaintiff to pay the defendant’s costs for the Application incurred after 2 September 2014 including the costs for the hearing before me.

14. By a summons dated 6 October 2014 (the “Costs Summons”), the defendant applied to vary the Costs Order Nisi to the effect that the plaintiff should be required to pay the whole of the defendant’s costs for the Application.  The plaintiff did not seek to vary the Costs Order Nisi.

15. In the Costs Summons, the defendant also applied to have the Costs Summons disposed of by way of paper disposal to which the plaintiff confirmed no objection.  The court gave directions for the parties to lodge their respective written submissions and set down the Costs Summons for paper disposal for 10 December 2014.

16. On 10 December 2014, I dismissed the Costs Summons and ordered the defendant to pay the plaintiff’s costs for the Costs Summons.  I now set out reasons for my said decision below.

Application to vary the Costs Order Nisi

17. The defendant lodged Mr Stock’s written submissions dated 10 October 2014 and the plaintiff lodged Mr Li’s written submissions dated 7 November 2014.

18. Mr Stock submitted that it was unfair for the defendant to be ordered to pay all or any of the plaintiff’s costs for the Application.  He submitted that Interrogatories 1 to 16 were doomed to failure from the outset or at the very latest when Cheng’s 2^nd Affidavit was served.

19. He submitted that Interrogatories 1 to 16 were: (i) not relevant; (ii) not necessary; and (iii) would unnecessarily increase costs.  They ought never to have been issued, and/or the plaintiff ought to have withdrawn them as soon as the defendant issued the Summons.

20. Mr Stock further submitted that the defendant did not answer Interrogatories 1 to 3 and 5 to 13 by Cheng’s 3^rd Affidavit and yet the plaintiff dropped these interrogatories at the hearing.  He concluded that Interrogatories 1 to 3 and 5 to 13 fell to be set aside from the outset for the same reasons for which the court disallowed Interrogatories 4, 15 and 16, ie relevance and necessity.  Mr Stock submitted that the defendant ought to have all of its costs of the Application irrespective of the content of Cheng’s 3^rd Affidavit.

21. Mr Li in his written submissions submitted that Cheng’s 3^rd Affidavit answered Interrogatories 1 to 3 and 5 to 11.  The defendant’s answers to Interrogatories 10 and 11 rendered it unnecessary for the plaintiff to pursue Interrogatories 12 and 13.  Mr Li was of the view that the plaintiff succeeded on 18 out of 22 interrogatories and the Costs Order Nisi was justified and correct.

22. Mr Li submitted that the plaintiff’s pleaded case was that Mr Zhang could not have had any discretionary authority to trade the Account because the applicable regulations and the defendant’s internal policies prohibited him from obtaining such authority.  In its defence, the defendant partly denied and partly did not admit the point about the applicable regulations.  It also did not admit that its internal policies prohibited Mr Zhang from having discretionary authority.  Thus one of the central matters in dispute was what restrictions the defendant had imposed on Mr Zhang and other client advisers/relationship managers.  He contended that Interrogatories 1 to 16 were related to this matter.

23. Mr Li submitted that by Cheng’s 3^rd Affidavit, the defendant admitted that Mr Zhang’s obtaining oral discretionary authority to trade the Account would be against the defendant’s own rules and policies.  He further submitted that this directly answered Interrogatories 5 to 9 and in effect also answered Interrogatories 2 and 3.

24. Mr Li said that the defendant also answered Interrogatories 1, 10 and 11 directly.

25. He submitted that the answers that the defendant gave by Cheng’s 3^rd Affidavit finally reduced the number of outstanding interrogatories to four with one being the subset of another leaving only three interrogatories remained.

26. Mr Li contended that the admissions in Cheng’s 3^rd Affidavit were significant and the Costs Order Nisi ordering the defendant to bear the costs up to the time of Cheng’s 3^rd Affidavit was justified and should not be varied.

Discussion

27. Costs of interlocutory proceedings are at the discretion of the court. Order 62, rule 3(2A) of the Rules of the High Court (the “RHC”) provides that:

“(2A) If the Court in the exercise of its discretion sees fit to make any order as to costs of or incidental to any interlocutory proceedings, it may, subject to this Order, order the costs to follow the event or make such other order as it sees fit.”

28. Rule 3(2A) was introduced by the Civil Justice Reform.  Recommendation 122 of the Civil Justice Reform Final Report stated that:

“The principle that the costs should normally “follow the event” should continue to apply to the costs of the action as a whole. However, in relation to interlocutory applications, that principle should be an option (which would often in practice be adopted) but should not be the prescribed “usual order.” Costs orders aimed at deterring unreasonable interlocutory conduct after commencement of the proceedings should be given at least equal prominence in practice, with the court being directed to have regard to the underlying objectives mentioned in relation to Recommendation 2 [The underlying objectives have now been set out in Order1A, rule 1 of the RHC].”

29. Order 1A, rule 1 of the RHC provides that:

“1. The underlying objectives of these rules are –

(a) to increase the cost-effectiveness of any practice and procedure to be followed in relation to proceedings before the Court;

(b) to ensure that a case is dealt with as expeditiously as is reasonably practicable;

(c) to promote a sense of reasonable proportion and procedural economy in the conduct of proceedings;

(d) to ensure fairness between the parties;

(e) to facilitate the settlement of disputes; and

(f)   to ensure that the resources of the Court are distributed fairly.”

30. Order 62, rule 5 of the RHC further provides that:

“ (1) The Court in exercising its discretion as to costs shall, to such extent, if any, as may be appropriate in the circumstances, take into account-

(aa) the underlying objectives set out in Order 1A, rule 1;

(a) …

(e) the conduct of all the parties;

(f) whether a party has succeeded on part of his case, even if he has not been wholly successful;

(g) …..

(2) For the purpose of paragraph (1)(e), the conduct of the parties includes-

(a) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

(b) the manner in which a party has pursued or defended his case or a particular allegation or issue;

(c) whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim; and

(d)  conduct before, as well as during, the proceedings.”

31. The principles upon which interrogatories may be administered or are allowed have been conveniently set out in paras 26/4/5 to 26/4/15 of the Hong Kong Civil Procedure 2014 and in the case of Lee Nui Foon v Ocean Park Corp (No. 2) [1995] 2 HKC 395.  The principles concerning us in this case are relevancy, necessity and oppressiveness.

32. The defendant did not dispute the appropriateness of Interrogatories 17 to 22 and had answered the same by Law’s Affirmation.  I see no reasons why the defendant should not bear the plaintiff’s costs in respect of the defendant’s application requiring the plaintiff to withdraw Interrogatories 17 to 22.

33. Interrogatories 1 to 3 were on “oral” discretionary accounts.  They covered number of such accounts served and number of such clients as well as the identities of the principal and back-up/assistant client advisers involved.

34. In para 6 of Cheng’s 2^nd Affidavit, it was stated that as at 31 December 2008 the defendant had 16,939 Wealth Management accounts booked to its Hong Kong branch and had about 31,393 accounts managed by its client advisers in Hong Kong booked to its Singapore branch.

35. Interrogatories 5 to 9 were on the defendant’s policies on non-discretionary accounts covering the defendant’s rules or policies on whether or how its client advisers might make discretionary investment decisions for non-discretionary clients’ accounts and the defendant’s guidance or reminder to its client advisers.

36. Interrogatories 10 to 13 were on Mr Zhang’s alleged discretionary dealings covering the date and the circumstances when the defendant became aware of Mr Zhang’s operating the plaintiff’s account with discretionary authority and the defendant’s measures to ascertain whether Mr Zhang also operated other non-discretionary clients’ accounts with alleged oral but not written authority.

37. One of the central issue for this case is whether the alleged unauthorized transactions in the plaintiff’s non-discretionary account were in fact authorized by the plaintiff either specifically or by way of a general authority to trade.  The defendant’s practice and system of operating non-discretionary accounts relying on non-written authorization are related to matters in question in this action and are admissible.

38. The plaintiff pleaded in para 25 of the statement of claim that the defendant had internal controls to supervise the operation of a discretionary account as stated in the defendant’s internal policies but the defendant did not apply them to the Account.

39. In paras 5 and 6 of Cheng’s 3^rd Affidavit, it was stated that the answer to whether a client adviser (or a desk head or client adviser assistant) executed a trade on an account pursuant to an oral discretionary authority granted by a client was extremely unlikely to be contained in the defendant’s computer systems because the defendant’s internal policies did not permit client advisers to undertake discretionary management of clients’ account (with the exception of limited intra-day discretions) and the defendant’s internal policies required that discretionary fund management be undertaken by dedicated portfolio managers within separate departments.

40. Para 20 of Cheng’s 3^rd Affidavit stated that for reasons explained in that Affidavit the defendant could not know with certainty whether Mr Zhang might or might not have traded on the basis of an oral discretionary authority for other clients.  In para 27 of the same Affidavit it was stated that the defendant’s investigations into the allegations made by the plaintiff were carried out in contemplation of litigation and were privileged.

41. The plaintiff decided not to pursue Interrogatories 1 to 3 and 5 to 13 after receiving Cheng’s 3^rd Affidavit which contained the aforesaid information.  Cheng’s 2^nd and 3^rd Affidavits either provided answers to the interrogatories not further pursued or confirmed that the defendant did not have the information to answer those interrogatories with explanations.

42. If the defendant served Law’s Affirmation and Cheng’s 2^nd and 3^rd Affidavit when the defendant received the interrogatories in February 2014 before it took out the Summons on 5 March 2014, much time and costs would have been saved by the parties.

43. I am of the view that in exercising its discretion on costs for the Application, the court shall take into account the defendant’s following ways of handling the interrogatories raised:

(1)   Although the defendant did not challenge the appropriateness of Interrogatories 17 to 22 (the “Undisputed Interrogatories”), the defendant did not answer the Undisputed Interrogatories or inform the plaintiff that it would answer the Undisputed Interrogatories when the plaintiff served the same on 19 February 2014. Instead, the defendant took out the Summons on 5 March 2014 requiring the plaintiff to withdraw all interrogatories served, including the Undisputed Interrogatories.  Even when the parties attended the call-over hearing of the Summons on 13 March 2014, the defendant did not inform the court and the plaintiff that six of the interrogatories raised would be answered.

(2)   The defendant did not provide its answers to the Undisputed Interrogatories until 5 June 2014 when the defendant served Law’s Affirmation, ie more than 3 months after service of the interrogatories and more than 2 months after the call-over hearing of the Summons.

(3)   When the defendant issued the Summons, no supporting affidavit was filed or served.  The position remained the same at the call-over hearing of the Summons.  The supporting affidavit was not served until 6 June 2014 when the defendant filed and served Cheng’s 2^nd Affidavit, ie 3 months after the defendant had issued the Summons.

(4)   The bulk of the plaintiff’s interrogatories were on the defendant’s policies and records on its client advisers making discretionary investment decision for non-discretionary clients’ accounts.  The defendant’s stance was that the defendant’s internal policies did not permit client advisers to undertake discretionary management of clients’ accounts and required discretionary fund management to be undertaken by dedicated portfolio managers within separate departments and that if a client adviser had executed a trade pursuant to an oral discretionary authority contrary to the defendant’s internal policies, the client adviser was very unlikely to have recorded that fact at the time he entered the trade into the defendant’s Computerised Order Placing System.  Stating the defendant’s aforesaid stance would have disposed of the bulk of the plaintiff’s remaining interrogatories (other than the Undisputed Interrogatories).  However, the defendant only disclosed a portion of its internal policies through discovery without stating its aforesaid stance as to whether its internal policies had actually been implemented until it filed and served Cheng’s 3^rd Affidavit on 2 September 2014, ie more than 6 months after service of the interrogatories.

44. The aforesaid ways of handling the plaintiff’s interrogatories and the Application can hardly be considered as conduct assisting the court to give effect to the underlying objectives as set out in Order 1A, rule 1 of the RHC especially the objectives to increase the cost-effectiveness of practice and procedure; to ensure a case is dealt with as expeditiously as is reasonably practicable; and to promote a sense of reasonable proportion and procedural economy in the conduct of proceedings.

45. As I had found at the hearing on 25 September 2014 that only four out of 22 interrogatories were inappropriate, I was of the view that in the circumstances as set out above the defendant should bear the plaintiff’s costs for the Application up to the date when the defendant served Cheng’s 3^rd Affidavit.  The plaintiff should not have continued to pursue the remaining interrogatories after the plaintiff had received Cheng’s 3^rd Affidavit for reasons which I had given at the hearing of 25 September 2014.  In such case, the plaintiff should bear the costs incurred after serving of Cheng’s 3^rd Affidavit including the costs for the hearing of 25 September 2014.

46. In the premise, I affirmed the Costs Order Nisi made herein on 25 September 2014 and made it absolute on 10 December 2014.  I dismissed the defendant’s application by the Costs Summons and make another order nisi for the defendant to pay the plaintiff’s costs for the Costs Summons also to be assessed by summary assessment.  Such order nisi should become absolute after 14 days from 10 December 2014 (ie the date when the said order nisi was made and informed to the parties).

47. I had given directions on the aforesaid summary assessment of costs on 10 December 2014 and do not propose to repeat the same here.