SUN HUNG KAI INVESTMENT SERVICES LTD. AND ANOTHER v. FUNG TAK SING

[When a bank is instructed by its customer to place an order with a broker for the purchase of shares on the customer's behalf, the relationship of principal and agent arises as between the customer and the broker when the broker accepts the order; no such relationship arises between the customer and the bank]

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ACTION NO.A1554 OF 1989

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BETWEEN

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JUDGMENT

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1. In this action there are two plaintiffs. The lst plaintiff is Sun Hung Kai Investment Services Limited, to which I shall refer as "the broker". The 2nd plaintiff is International Bank of Asia Limited, to which I shall refer as "the bank". The broker is, but the bank is not, a registered dealer in securities. The defendant, a painter and decorator, is a former customer of the bank; I shall refer to him as "the customer".

2. If, in 1987, a customer of the bank wanted to buy securities, the bank, under arrangements it had made with the broker, could do this by placing an order for the shares, on behalf of the customer, through the broker. (The bank itself, not being a registered dealer, could not act as the customer's agent in the purchase.)

3. Under the terms of his own arrangement with the bank, the customer could instruct the bank that he wanted to buy securities; and the bank would pass on his instructions to the broker (with whom it shared the commission). The broker was expressly authorised by the customer to draw on the customer's account for payment for securities bought by the broker on behalf of the customer; but, if a transaction went through in the ordinary way, the bank would debit the customer with the cost and credit the broker with what was due to it.

4. On the morning of 15th October 1987, the customer instructed the bank to purchase on his behalf at the best market price 200,000 shares in Keng Fang Sun Kee Construction and Investment Company Limited ("the shares"). The customer's, instructions were given to the bank, as usual, on the bank's stock purchase order form, the customer copy of which made it clear that the order would be executed on the customer's behalf through the broker. The bank passed on the customer's instructions to the broker. At about 10.17 a.m. the broker bought the shares, at 1.23¢ a share, the best market price. It reported to the bank, mistakenly, that it had done so at 1.25¢ a share (it cannot explain how this mistake came to be made). The bank reported the transaction to the customer, making the same mistake. The customer, while at the premises of the bank, discovered that in fact no such deal had been done at that price. He was right and he was angry; and he appears to have concluded that his deal had never been done at all and that he was being cheated. He wanted to have nothing more to do with the transaction, or the supposed transaction, at any price and did not consider himself bound by what the broker and the bank had done or purported to do on his behalf. He was told later that the deal had in fact been done at 1.23¢ a share; but he refused to acknowledge this. He told me that he did not know until months later that the broker and the bank were saying that the deal had been done at 1.23¢ a share, but I prefer on this point the evidence of the witnesses called for the bank to the effect that he was told this in the early afternoon of 15th October 1987.

5. After an inconclusive discussion with an officer of the bank about cancelling the transaction, he went off and withdrew from his account with the bank a sum of HK$254,160, which represented all but a few cents of what then stood to the credit of the account (he finally closed the account on 12th March 1988). By withdrawing the $254,160 he put it out of the power of the broker and the bank to raid his account for the price of the shares (which, including brokerage, stamp duty and transaction levy, amounted to $247,414.50).

6. The broker and the bank were flummoxed. What were they to do? No doubt, they could have agreed that the broker, or the broker and the bank between them, would bear the consequences of the mistake, carrying the loss to an error account such as stockbrokers and banks maintain for just such a purpose. That would have been a sensible course. But it was not followed. The broker seems to have thought it was entitled to be reimbursed and indemnified by the bank, on whose instructions, and on behalf of whose customer, it had bought the shares. The bank seems to have thought that, as it had acted only as a middleman, it was the customer, not itself, who was liable to reimburse and indemnify the broker. I did not have the benefit of any evidence as to exactly what were the arrangements between the broker and the bank under which the business was transacted. I do know that, initially, neither the broker nor the bank made any attempt to get the customer to pay for the shares. But, a year or so later, they did resolve their differences with each other. Very late in the day, in fact, in the course of the trial, and not without some pressure from the Bench, it was revealed that the broker and the bank had done a deal. They had agreed as between themselves that the bank would pay the broker half the sum due from the customer, i. e. $123,707.25; which, on 27th September 1988, it did. The details of this settlement were recorded in a letter dated 7th October 1988 from the broker to the bank. It read as follows :-

7. On 26th January 1989, Woo, Kwan, Lee & Lo wrote to the customer in the following terms:-

Particulars

Date 15/10/87

Share Keng Fong

No. 200,000

Price per share HK$1.23

Amount HK$247,414.50

8. At the end of January 1989, the broker sold the shares, in two lots. It sold the first lot, 52,000 shares, on 30th January 1949, realising (net) HK$18,605.90. It sold the second lot, 148,000 shares, on 31st January 1989, realising (net) HK$51,486.01. The total realised was thus HK$70,091.91. It night have sold the shares on 16th October 1987 more advantageously, but I am not prepared to hold that it acted unreasonably in not doing so.

9. On 22nd February 1989, Woo, Kwan, Lee & Lo advised the customer's then solicitors of the sale of the shares and demanded payment of the net balance of $177,323.59 and interest. The customer did not make any such payment; and on 22nd March 1989 the broker and the bank instituted these proceedings against him, jointly claiming the $177,322.59 with interest, further and other relief and costs.

10. Those are the material facts, as I find them. To what results do they lead? The field is refreshingly free from any relevant authority; some was cited, but none of it has helped me in resolving the matter.

11. My conclusions are as follows :-

12. I am accordingly prepared to grant the plaintiffs appropriate declaratory or other relief and I shall direct counsel for the plaintiffs to sign a minute or draft of the order to which, on the basis of this judgment, he considers his clients are entitled and to submit it to counsel for the defendant for approval. If any difficulty arises in the drawing of the order, the action may be restored to the list, to be mentioned to me for the purpose of resolving the difficulty. The order will have to make provision for the costs of the action, as to which I will hear counsel either now, or at some other convenient date and time to be fixed through the usual channels. It might be of help in this connection if I point out that while, of course, the general rule is that costs follow the event, I do have a discretion to depart from that general rule if I think it appropriate to do so; and that I have not forgotten (1) that neither the broker nor the bank ever issued any form of contract note or confirmation to the customer about this transaction; (2) that it took them over 15 months to make any sort of claim against the customer in relation to it; and (3) that only in the course of the trial were the September/October 1988 arrangements between the broker and the bank revealed for the first time to the customer and to the court.