Refco Inc v. Troika Investment Ltd and Another
Read the full judgment text of CACV 47/1988 on BabelCite. This Court of Appeal judgment.
1. These appeals arise from an application to re-amend pleadings. It was dealt with below as though it had been brought together with a hypothetical application to strikeout the Writ and Points of Claim in so far as they related to the 2nd Defendant. We have taken it in the same vein and proceeded on the basis that the facts alleged in the Points of Claim are indeed the true facts.
|
CACV000047/1988 IN THE COURT OF APPEAL 1988, Nos. 46 & 47 (Civil) BETWEEN
_______________ Coram: Hon Con's, V.-P., Clough, J A & Rhind, J. Dates of hearing: 28th-30th June, 1988. Date of delivery of judgment: 30th June,1988. ______________ J U D G M E N T ______________ Cons, V-P : 1. These appeals arise from an application to re-amend pleadings. It was dealt with below as though it had been brought together with a hypothetical application to strikeout the Writ and Points of Claim in so far as they related to the 2nd Defendant. We have taken it in the same vein and proceeded on the basis that the facts alleged in the Points of Claim are indeed the true facts. 2. The Plaintiff ("Refco Inc.") is a commodity futures and options commission merchant incorporated in Illinois and trading, in particular with relation to present matters, on the Chicago Mercantile Exchange. The 1st Defendant ("Troika Investment Ltd") is a futures broker and licensed dealer in commodities and futures on the Hong Kong Futures Exchange. It was incorporated in Hong Kong. 3. In April 1981 Troika opened a trading account with Refco, although it was not actually used until the 25th February 1983. 4. Unfortunately it was still being used, and extensively so, on Black Monday in October last year. I do not think it is necessary to go into the details. It merely mention that as a result of what happened at that time in the market, and the failure of Troika to keep its promises, Refco suffered a financial loss of a little over US$7 million. 5. On the 21st November Refco commenced proceedings in the court below to recover its loss. The claim was based on moneys due on the trading account, alternatively upon misrepresentation. 6. On the 3rd February this year Refco obtained leave from Sears J to amend the Writ by adding the 2nd Defendant as a party to the proceedings. The 2nd Defendant is Tai Fook Finance Co Ltd incorporated in Hong Kong, its principal business is to deal in securities, gold and futures. Until at least the 16th April 1987 it owned all the issued shares of Troika except one. The Points of Claim alleges that at that date it purported to sell these shares to a third party. The two Companies for sometime at least maintained a certain community of directorship. They still share the same telephone and telex numbers. 7. Sears, J also gave leave to amend the Statement of Claim to allege, as against Tai Fook, breach of an agreement to indemnify Refco against moneys not paid, by Troika, alternatively misrepresentation. However on the 3rd March he acceded to an application by Tai Fook to strike out the Statement of Claim in so far as it related to that Company. 8. Undaunted Refco applied for leave to re-amend both the Writ and the Statement of Claim. The amendment was in fact a completely new points of Claim put forward in substitution for the Statement of Claim that had been struck out. 9. It comprises four causes of action as far as Tai Fook is concerned. The first is based on implied terms in a contract, dubbed the "Clearing Agreement" made no between Refco and Tai Fook in January 1983. The second alleges breach of a collateral warranty, the third misrepresentation and the fourth agency. The suggestion is that Troika was the agent of Tai Fook. 10. The judge allowed re-amendment with regard to the first cause of action, that is the contractually implied terms. He refused leave with regard to the other three. Refco appeals today as against that refusal. 11. Tai Fook, by way of cross-appeal, asks us to strike out the contractual cause of action, in effect to remove Tai Fook completely from the proceedings. 12. Refco also appeals against the first striking, out I do not think that need to detain us as a separate matter. It is brought for technical reasons, in that the judge took the view that the second cause of action, that is the breach of collateral warranty, was nothing more than a rehash of the earlier claim for indemnity. If that indeed is so, then should we shall the second appeal in this respect, we allow have as a matter of course to allow the first appeal. Otherwise there would be an apparent contradiction on the record. But the essential question remains in any event, "does the second cause of action, the breach of collateral warranty, disclose a reasonable cause of action?" 13. The four causes of action to a large extent overlap each other. They are perhaps little more than variations on a single theme. However I attempt to deal with them separately and I find it convenient to start with the cross-appeal. This relates to the claim the judge allowed to stand, the implied terms in the Clearing Agreement. It is set out in paragraphs 12 and 13 -
Particulars
14. Paragraph 13 as it stands at the moment relates only to matters pleaded up to that point in the document. Lord Irvine, who appears for Refco, relies also in this respect on paragraphs 14 and 15. He indicates that he intends, at sometime, to include them in the Statement of Claim and suggests that the judge dealt with the question below on the same footing. I make no further comments as to that, save to say that I too deal with the question as though the Statement of Claim had already been amended.
Particulars 15. The Plaintiff relies on the nature of the First Representation and the circumstances under which the same was made. 16. The starting point of Mr Clarke's attack on the pleading is what he called the "inherent incredibility" of a company such as Refco relying on an unrecorded oral promise of this nature. He suggested, as did Mr Tang below, that it was simply not possible to read into the particulars pleaded a promise unlimited as to amount or time, and one that would even continue after Tai Fook may have disposed of its interest in Troika. 17. With every respect to Mr Clarke the fact that Tai Fook sold its shares in Troika in April 1987, assuming for the moment that it did so, is in my view of lesser Importance than he attaches to it. The essential question is whether, considering the position as at January 1983, the terms suggested are to be implied in the agreement then made between Refco and Tai Fook. The fact that Tai Fook might subsequently sell its interest in Troika is a matter no doubt to be taken into account, but it is one that could easily be balanced by other terms which might also have been implied, although not relevant to these proceedings. 18. The judge acknowledged that there might be weaknesses in Refco's claim, but observed at the same time that it was necessary to examine all the surrounding circumstances. That of course must be so the officious bystander needs to know all the details before his opinion can be requested. I would not commit myself, on the bare outline provided by the pleading, to the conclusion that Refco will necessarily, or even probably, succeed at the trial in this respect. But I am not able to say that they must inevitably fail. I agree with the judge that there is here a question which ought to be tried. For my part I would dismiss the cross-appeal. 19. The claim for breach of warranty is based, as indeed are the claims of misrepresentation and agency, upon the facts alleged in paragraph 14 to which I have already referred. The breach is pleaded in paragraph 31.
20. The crucial question, as Lord Irvine commented at the closing part of his submission dealing with this aspect, is whether the words used are capable of giving rise to a legal obligation. For the moment I will concentrate on the words which suggest that Tai Fook put its assets behind and/or would support Troika. 21. The recent case of Kleinwort Benson Ltd. v Malaysia Mining Corp Bhd.(1) is heavily relied upon. There the words which were found to have contractual status were
22. Mr Clarke has emphasized differences in that case, both, as to the actual words used and the circumstances in which they came to be expressed. Context is naturally of great importance, but nevertheless it seems to me that there is a similarity in principle between the case of Kleinwort Benson(1) and the present. I find myself unable to rule out the possibility that when the context in which the present promises were made, if in fact they were, is investigated, they may be found also to have contractual status. I am unable to agree with the judge below that the suggestion is unsustainable and I would allow the appeal in this respect. 23. The exact nature of the obligations thus created is relevant at this stage merely because as I mentioned earlier, the judge equated them with the indemnity sought in the earlier Statement of Claim. Their nature too, may be influenced by the context. Lord Irvine is reluctant to commit himself until that context has been established by evidence, but he tentatively suggests obligations that are close to, but not identical with, an indemnity. If that is so, no difficulty arises. But to cover the possibility that it is eventually found that the obligation is in fact an indemnity, I would also allow the appeal against the first striking out. 24. The other words relied upon by Refco as amounting to warranty are that Troika was the commodity trading arm of Tai Fook, and from this the pleader asks us to draw the inference that Toika was the agent of Tai Fook. In other words, as I see it, and adopting language more appropriate to a discussion on agency, Tai Fook held out Troika as its agent. If that is so there is a good claim in agency, a matter to which I turn next. But for my part I am unable to see those word are capable of some other legal construction supporting a distinct and separate course of action. I propose therefore to confine them to the claim for agency.
Particulars
and a further claim in paragraph 36-
The second representation is a reference to particular conduct of Troika, on the 19th October, in failing to fulfill the promise of a further margin. I do not think it is necessary to set out the details. 25. To establish the viability of the claim in agency Lord Irvine relies on four matters. The first is a letter of the 31st January 1983 from Refco to Tai Fook, with its emphasis throughout on the words "you" and "your" together with a telex of the 25th February which was possibly, but not necessarily, in answer to the letter, and which directs that the profits of the trading should be paid into an account in the name of Tai Fook, plus the fact that payments were later so made. The second is the Clearing Agreement itself, together with the fact that actual trading only started thereafter. The third is the representation to which I have already referred, that Troika was the commodity trading arm of Tai Fook. And the fourth, is the Standard Consumer Agreement, from which it may be inferred that Tai Fook, Troika and a third unincorporated company of similar name traded together as a single party. 26. Mr Clarke contends that these matters are not sufficient to establish the appointment of Troika as the agent of Tai Fook, and in particular that when the material time had arrived that is the autumn of 1987, the position had radically changed from what it was in 1983, Tai Fook by then having sold its interest in Troika. 27. With respect again I feel that to be of little relevance by itself. If indeed there had been agency before then, it would not necessarily have stopped on the sale of the shares, and further, ostensible authority, once given, will continue until other parties are made aware of any change. 28. Mr Clarke established two propositions of law. Firstly, that the representation of authority must be unequivocal, and he relied there on Woodhouse AC Israel Cocoa Ltd S.A. v. Nigerian Produce Marketing Co Ltd(2) Secondly, that the apparent agent must act as such, and for that he referred us to the cases of Freeman & Lockyer v. Buckhurst park Properties (Mangal) Ltd & Another(3) and Underwood v Bank of Liverpool(4). 29. Lord Irvine does not contest the law as such, but argues that whether a representation is unequivocal and whether an agent is acting as such are matters, like the question of whether actual agency has been created, that can only be established at a trial. With that I would agree, provided that a sufficient basis for the inferences is set out in the pleadings. I have to remind myself, as we were reminded during the course of the submissions, to avoid the temptation of trying to decide the case itself at this stage. I have come to the conclusion that the matters alleged here might, although not necessarily would, justify a finding of agency. I would therefore allow this aspect of the appeal as well. I turn finally to misrepresentation. 30. Lord Irvine acknowledges that the allegations made in the pleadings are allegations of fraud. The fraud suggested is that never, that is right from the very beginning, did Tai Fook have any intention to support Troika should it get into financial trouble, as in fact it did. That is pleaded in as many words in paragraph 28(a) -
Paragraph 27(a) reads -
I have already set out 27(b). 31. To that extent, and strictly speaking, Tai Fook do know "what is charged against them" as that phrase is often used in this context. However although that criterion may be sufficient in a simple case, for example that of a dishonest servant, it is not necessarily sufficient in all cases. The requirements imposed by the courts, to avoid as far as possible the horrendous consequences that many flow from a completely unfounded accusation of fraud, have to be considered with respect to each particular situation. In my view a bare, though precise, allegation is not sufficiently stringent in a case like the present. Refco need to show that there is some foundation for their suspicions. 32. Lord Irvine draws our attention to several matters which he says support the allegation. The first is the initial representation, a representation that, as he observes, is a continuing one, right up until October last year. The reliance upon it by Refco was likewise continuing, each time that it accepted an order in the name of Troika Further representations were made in the form of the financial documents forwarded from time to time until 1985. In April 1987 there was the sale of Tai Fook's interest in Troika without notice to Refco. Finally, although this fact is not yet included in the pleadings, we understand that Tai Fook has the capacity to pay the amount that is claimed, yet chooses not to do so. 33. It is possible to imagine various scenarios in which these factors could play a part, which might be either innocent or evil. It may be necessary in the future to consider those scenarios, but at the moment the only question for consideration in this Court is whether if these factors remained unexplained a court could justifiably find fraud on the part of Tai Fook. It is a question which has caused me considerable anxiety but in ultimate conclusion I have some doubts that a court so could. My Lord Clough, in the comments which he is about to deliver, and which he has been kind enough to read to me already, deals with this question more fully, and I am content in this respect to go along with his conclusion. 34. For these reasons I would allow the appeal, save with regard to the allegations of fraud, and would dismiss the cross-appeal.
Clough, JA : 35. I agree with the judgment given by my Lord the Vice-President and confine myself to the following observations on the issue of fraud. It seems to me that the particulars of the alleged fraud do not sustain the allegation of fraud. At the most reliance is placed on the fact that Tai Fook, which is alleged to be a company with a paid up capital of $10 million, made, representations between 1983 and 1985 which give rise to contractual obligations to meet the liabilities of its subsidiary Troika and which were not honoured in 1988 after Tai Fook had sold its shareholding in Troika in 1987 without notifying Refco. Refco then went on dealing with Troika until the 26th October 1987. 36. The allegation in the pleading is that the representations were made falsely or fraudulently in that they were known or ought to have been known, when made, to be false. Continued reliance on the representations is pleaded, but there is no pleading that if and so far as the representations were not false when made, they were continuing representations which became false when or after Tai Fook sold its share in Troika. 37. This appeal concerns an application to re-amend Refco's Particulars of Claim. It seems to me that we are concerned with the pleading as it stands, but not as it may hereafter be sought to be amended. 38. As it stands, I consider that the judge was right to refuse leave to introduce the allegation of fraud by way of re-amendment. Considering the allegations relied on by way of particulars of the alleged fraud and putting myself in the position of the trial judge in the event of all those allegations being proved without any evidence in rebuttal from Tai Fook, I cannot see how it could fairly be held that the proper and true inference on the balance of probabilities must be that Tai Fook had no intention of honouring the alleged representations when they were made and that Tai Fook knew or ought to have known that they were then false. 39. In my judgment the particulars relied upon are equally consistent with the conclusion that the representations were genuinely made, but the obligations they created were simply not honoured. To draw any other conclusion seems to me to be tantamount to equating breach of contract with fraud. There is no pleading of a fraudulent change of mind. I do not consider that, on appeal, we should treat the proposed re-amended points of claim as if they contained such a Pleading. 40. Accordingly, I too would allow the appeal of Refco on all issues save that of fraud, and I would dismiss Tai Fook's cross-appeal.
Rhind, J :
(1) [1988] 1 All E.R. 714 at 716 (2) [1972] A.C. 741 (3) (1964) 2 Q.B. 480 (4) (1924) 1 K.B. 775 Representation: Lord Irvine, Q.C., Neil Kaplan, Q.C. & Ronny Tong (M/s Denton, Hall, Burgin & Warrens) for pPaintiff/ Appellant Christopher Clarke, Q.C. & Adrian Huggins (M/s Johnson, Stokes & Master) for 2nd Defendant/Respondent |