CHINE KIT LTD v. CHU KONG SHING

Commercial List No. 26 of 1988

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. This is another case arising from the stock and futures market collapse in October 1987.   The plaintiff seeks to recover from the defendant the sum of $1,362,175. The Hong Kong Futures Exchanges Limited was joint as a third party, but on the 9th March 1990, Mayo J. made an order that all third party proceedings would be stayed pending an application to strike out those proceedings and accordingly the third party does not appear at this hearing.

2. The plaintiff was at all material times a member of the Hong Kong Futures Exchange and as such, authorised to deal in futures contracts. It is the evidence of Mr Tang Cheuk-kin, a director of the plaintiff, that on the 17th December 1986 the defendant came to his office on the recommendation of Tang Yim Sze, a friend of the plaintiff, and a dealer in securities.  The defendant wanted to open an account with the plaintiff to trade in Hang Seng Index Futures which Mr Tang agreed to do.  His evidence is that he showed to the defendant the company's usual documentation which consisted of a contract in both Chinese and English, a document in Chinese which set out the company's charges and which included a notice stating that the customer was required in the event of a market fall to deposit sufficient money to maintain the deposit in respect of each contract, which at that time was $10,000. Mr Tang advised the defendant that the risk in dealing in Hang Seng Index Futures in that the market was subject to fluctuation, and he gave him a verbal summary of the most important clauses in the contract. This included advice that the defendant would be called upon to pay further money to keep the deposit intact when the market moved against him; and that if that margin was not paid, the plaintiff had the right to liquidate the account and to look to the defendant for any shortfall. The defendant was given a copy of the contract to read and he then signed on the English version, his signature being witnessed by Mr Tang:

3. In addition, he signed a risk disclosure statement which stated inter alia, that if the market moved against him, he could, at short notice, be called upon to deposit a substantial amount of additional margin funds in order to maintain his position, and that if he did not do so, the company could liquidate at a loss and he would be liable for any resulting deficit.

4. It is Mr Tang's evidence that the defendant was given a copy of the documentation. The defendant then started trading in Hang Seng Index Futures and continued to do so up to October 1987.  The company regularly sent to him confirmation/statement of account forms which showed the contracts bought and sold on his instructions and on his behalf, and the balance held in his account. As at the 12th October 1987, his account was in credit in the sum of $486,939 and he held open 28 contracts.

5. The worldwide stock market collapse then occurred, and from the 19th October 1987 to the 23rd October 1987, the Hong Kong Futures Market was closed. Mr Tang advised the defendant that his position had, as a result of the crash, deteriorated drastically and that the account would have to be liquidated unless further funds were  paid. He says that the defendant asked him not to do so and said he would pledge shares that he held to prevent this event occurring.  Mr Tang directed him to a finance company where the defendant raised $170,000 on the security of his shares and this sum was paid to the plaintiff on the 23rd October 1987. When the market re-opened, it deteriorated further and as the defendant could not put additional funds into his account, the plaintiff liquidated it leaving a balance due of $1,362,175.

6. As a result of the losses incurred in respect of its customers' accounts, including that of the defendant, the plaintiff was required to make good these losses to the Exchange which it did.

7. The defendant pleaded that the plaintiff was in breach of a fiduciary relationship in not explaining to him the nature of futures contracts and in particular the risks involved; that the plaintiff had misrepresented the position to him and had given to him a warranty that he would not suffer losses in excess of his deposits.

8. In his evidence, the defendant stated that prior to mid-1985 he had been employed as an assistant accountant, but from that time until the beginning of 1988, he had been unemployed.  He agreed that during the period up to the market crash his only commercial activity was dealing in stocks and shares and Hang Seng Index Futures. After the crash, he proceeded to deal in foreign currencies up to early 1988 when he obtained work at a company in respect of which he is now the manager. His introduction to the plaintiff was through a share broker with whom he had had dealings.   He claimed to have had no knowledge as to how the margin system worked although he agreed that he knew he was trading on margin with the plaintiff. I reject this claim to lack of such knowledge as untrue.  I am satisfied that he knew full well when he signed the contract what he was committing himself to.

9. In cross-examination he agreed that Mr Tang had in fact explained to him parts of the contract, he agreed he was told that if the market moved against him he would be called upon to make up the margin and that if he did not do so the plaintiff could liquidate his account.  He initially claimed that he had not seen the Chinese version of the contract, but when the contract which he had signed was shown to him in the course of cross-examination, he had to agree that there were two versions, one in English and one in Chinese which formed one document. His explanation for his earlier evidence was that Mr Tang might have folded the document in such a way as to prevent him from seeing the Chinese version.  He did agree that he was given the document to read prior to signature, but said that he just quickly scanned the pages as it was noisy in the room and Mr Tang was busy; and he claimed he was never given a copy of the contract.  He further claimed that Mr Tang had, undertaken to him that he would not lose more than his deposit

10. When his attention was drawn to the confirmation/statement of accounts which clearly show that on occasions he had lost more than $10,000 on individual contracts, he said that he did not usually check the details on such statements.  The defendant, in cross-examination, then went on to say that what Mr Tang had told him was that the plaintiff at most would liquidate his account according to the market's ups and downs which of course was what in due course happened.

11. The defendant's evidence is that when he paid $170,000 to the plaintiff he was told by Mr Tang that when the market re-opened, he would be able to square his account leaving the defendant at most with a very small loss. This allegation was denied by Mr Tang and I do not accept it as the truth. In my view, no dealer in his right mind would have at that point of time given such an undertaking.

12. During the course of the hearing, the defendant who was not represented endeavoured to introduce a defence which had not been pleaded, namely, that on the 13th October 1987, he instructed the plaintiff's floor dealer to square his account and that the dealer had negligently failed to do so.  The defendant had in the preparation of his defence, had the benefit of advice from counsel. I refused to allow the introduction of this further ground of defence.  The defence had not been pleaded, the plaintiff was not at the time in a position to answer it and I did not consider an adjournment should be granted to permit the defendant to add it to his case at such a late stage in the proceedings.

13. I am satisfied that the defendant is not a witness as to the truth on the important issues in this case, that having been a victim of the market crash, he is fabricating evidence in an attempt to avoid his liability.  I am satisfied that Mr Tang has given a true account of what took place between him and the defendant, that the defendant was fully aware of margin dealing and the risks that it involved.  I find that Mr Tang did advise the defendant as to the risks involved in futures dealings; that he did not give any undertaking that any loss the defendant might incur in such dealings would be limited to the amount of his deposit nor did he undertake that when the market re-opened, he would square the defendant's account.

14. Like many other unfortunate investors, the defendant did not envisage that there could be such a disasterous collapse in the market. I find that there was, on the part of the plaintiff, no breach of any fiduciary duty no misrepresentation and no breach of warranty.

15. The defence also pleaded that the futures contracts are illegal being gaming contracts.   With respect I agree with the judgment of Sears J. in Richardson Greenshields of Canada (Pacific) Ltd. v. Keung Chak-kiu [1989] HKLR 477 and accordingly, this ground of the defence fails.  The defence also pleaded frustration as a further ground of defence. There was no unforeseen event which made the performance of the contract between the parties impossible. The market was closed for five days but then re-opened and the plaintiff acting in accordance with the terms of the contract proceeded to liquidate the defendant's account: This ground of appeal also fails.

16. There will be judgment to the plaintiff in the sum of $1,362,175.  The counterclaim is dismissed and there will be costs of the action to the plaintiff to be taxed if not agreed. There will be interest on the judgment sum from the 29th October 1987 calculated at 1% over prime rate to today.