Kingly Gold Co (A Firm) v. Chan Sau Shui

HCA003042/1978

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Coram: Mr. Commissioner Bewley.

Date of Judgment: 15 November 1979

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JUDGMENT

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1. The plaintiff is a member of the Chinese Gold and Silver Exchange and trades as a broker on that exchange. The case for the plaintiff is that the defendant, having signed a letter authorizing the plaintiff to trade in gold on margin on his behalf and pursuant to his instructions, has failed to make good subsequent losses amounting to $101,560. The defendant maintains, on the contrary, that his instructions to the plaintiff were limited to the purchase of a quantity of gold bars, that he gave no instructions to buy or sell gold on margin, and that he signed the letter of authorization by mistake, following a false representation by the plaintiff. The defendant counterclaims for $20,000, being the amount of a cheque given to the plaintiff in alleged part payment for the gold bars.

2. The plaintiff's case rests on the evidence of the manager of the firm, Chan Mou-chuen (P.W.1), and a sales representative, Yip Kwok-keung (P.W.2). Both men were very good witnesses and gave the impression that they were telling the truth. There were, however, several discrepancies in their evidence which I shall deal with in due course.

3. The defendant came to the plaintiff's office on 25th August, 1978 and was introduced to Mr. Yip. According to Mr. Yip, the defendant asked him how he could invest in gold. Mr. Yip explained that it was a risky business in which it was possible to lose money. They discussed it and eventually had lunch together, during which Mr. Yip explained in detail the investment procedure. That was the euphemism used by Mr. Yip. In fact the whole business was highly speculative.

4. After lunch they returned to the office and the defendant opened an account by making out a cheque for $20,000, for which he was given a receipt (60 in Agreed Bundle) and signing a letter of authorization. The letter was in both Chinese and English (5 in Agreed Bundle), but it is agreed by counsel that the English version is not an accurate translation and they have put in by consent an alternative version (6A).

5. Mr. Yip says they were sitting side by side on a sofa with the letter on a table in front of them. He read aloud the Chinese version character by character. It is not clear from Mr. Yip's evidence whether the defendant also read the document. He first said: "He read it carefully before he signed." In cross-examination he said: "He did not spend a long time studying it." Then he said : "He did not read it himself." Finally in re-examination he said : "At the same time he was looking at the document, which was placed right in front of us."

6. Mr. Yip did, however, inform the defendant that there would be no trading without his knowledge or authorization. The defendant indicated that he understood the document and signed his name. His address and other particulars at the foot of the letter were filled in by Mr. Yip.

7. The defendant remained in the office until it closed at 4.30 p.m., during which time he placed two orders with Mr. Yip. Mr. Chan suggested that enquiries may have been made at the bank regarding the defendant's cheque and that, the answer being favourable, the defendant was permitted to trade that afternoon. He is not very sure about this, however, and Mr. Yip was not asked about it. According to Mr. Chan the margin insisted upon was $3,000 per 100 taels. But Mr. Yip said that this was the overnight rate when a client maintained an open position: if he settled his account before the market closed, the rate required was only $1,000 per 100 taels. Mr. Chan was not asked about this.

8. At any rate, whether the cheque was cleared or not on 25th, and whatever the rate of margin required, Mr. Yip, on the defendant's instructions, placed an order to buy 500 taels of gold at 2.45 p.m. that afternoon. To do this, Mr. Yip completed and signed a buying order (7 in Agreed Bundle), on which were stated the date, the client's name, the quantity and the limit price. Following standard procedure, this document was then passed to a member of the accounts staff behind the counter, who telephoned another staff member at the Exchange, who in turn placed the order. When the deal was completed, the latter telephoned the accounts office and quoted the price. The employee in the accounts office noted this on the buying order, which he then inserted in a machine, which stamped the date and time on the bottom of the document.

9. At 3.08 p.m. the defendant "cleared" the first order by selling 500 taels. To achieve this, a selling order (9 in Agreed Bundle) was completed and signed by Mr. Yip. The market price had, however, in the meantime, fallen to $1,115.30 per tael and the defendant accordingly made a loss on the transaction of $1,350. Undeterred, the defendant decided to place an order to sell 500 taels. This was timed at 3.15 p.m. and the price was $1,117. Half an hour later the defendant decided to close his position by buying the same quantity. As everyone in the plaintiff's office could hear, by virtue of telephoned reports from the Exchange amplified by loudspeaker, the market price had by now fallen to $1,113.50 and this was the price obtained at 3.52 p.m. The defendant made a profit on this deal of $1,750 and his profit on the day's trading was $400 less commission i.e. $240.

10. Next morning the defendant returned to the plaintiff's office and was given three documents by Mr. Yip relating to the previous day's trading. These were (1) a purchase report (15 in Agreed Bundle) showing his two buying orders, (2) a sales report (17 in Agreed Bundle) showing his two selling orders, and (3) a balance sheet showing the current state of the defendant's account (19 in Agreed Bundle). The purchase and sales reports were in triplicate. The bottom copy is retained in the accounts office as an office copy. The original is kept by the client, while the second copy, provided he agrees that it is accurate, is signed by the client and returned by the sales representative to the accounts office.

11. The plaintiff is unable to produce any signed copies of these reports, either the ones handed to the defendant on 26th August, or that relating to a selling order placed on 26th August and handed to the defendant on 29th August (23 in Agreed Bundle). Mr. Yip's explanation is that, though the defendant had no complaint about any of these documents - he was showing a profit up to and including 29th - the accounts office was very busy and the signed copies must have gone astray. The documents in the Agreed Bundle are photostats of the office copies. The defendant himself has produced the signed originals of the reports he received on 26th, relating to 25th (Exhibit D1 - 2), but he says these documents were blank when he signed them. The signature in the left bottom corner of all the sales and purchase reports is that of Mr. Chan.

12. At 11.54 a.m. on 26th August the defendant placed a selling order for 500 taels (21 in Agreed Bundle). The price obtained was $1,117.30. This was the only order placed that day, a Saturday, when the market closed at midday. He did not liquidate the selling order before the market closed but, as he had $20,240 in his account, this was sufficient to comply with the overnight margin required of $3,000 per 100 taels, i.e. $15,000.

13. On the morning of 29th August the defendant was handed the sales report in respect of 26th (23 in Agreed Bundle), which he signed without complaint. According to Mr. Chan, if the signed copy is not received by the company within three days, it is assumed that the client has no complaint regarding the order. He says this is set out in an introductory pamphlet. Mr. Yip, however, is unaware of any such rule. He delivered the reports personally and the client either signed there and then or made a complaint.

14. On 29th August the defendant's first transaction was to clear his selling order of 26th by buying 500 taels. He gave this order to Mr. Yip, but the latter was busy at the time and the buying order was signed instead by another sales representative, Mr. Kwong (25 in Agreed Bundle). The price was $1,114.10, which meant a net profit for the defendant of $1,625.

15. Unfortunately it seems as if this success went to the defendant's head for, in the course of the day, he placed three selling orders for a total of 2,500 taels. The first was for 1,500 taels at $1,115.30 (27 in Agreed Bundle). After lunch he sold a further 500 taels at $1,116 (29 in Agreed Bundle). This order was timed at 3.27 p.m. Mr. Yip pointed out to the defendant that, if he did not liquidate his position by 4.30 p.m., he would be required to increase his margin deposit. The defendant replied that he would watch the market for a while. Then at 4.00 p.m., the defendant instructed Mr. Yip to sell another 500 taels, but he gave no indication as to whether he was going to liquidate his position wholly or in part before 4.30 p.m. The final selling order is timed at 4.01 p.m. and the price was $1,117.30 (31 in Agreed Bundle). The defendant's margin deposit was now insufficient, even if he intended to liquidate before the close. Mr. Yip told him that he must settle before 4.30 p.m. those orders not covered by his margin deposit, and that, if he wished to hold the orders overnight, he would have to increase his deposit in any event. This was on the express orders of Mr. Chan, who had been alerted by the accounts department, which had suggested an additional deposit of $60,000. Mr. Chan never actually met the defendant, but he observed him in the office on several occasions and was aware that he was giving trading instructions to Mr. Yip.

16. Shortly before the close, the defendant decided to leave his orders overnight and to write a cheque for $60,000 (37 in Agreed Bundle), for which a receipt was given (61 in Agreed Bundle)

17. Unfortunately for the defendant, the price of gold on the New York market, which opened at 10.00 p.m. Hong Kong time, rose approximately US$10 per tael and maintained this level until the close. This was known to Mr. Yip before the Hong Kong market opened on 30th and he telephoned the defendant at home that morning to break the bad news and seek his instructions.

18. The defendant decided to see what happened when the Hong Kong market opened but, predictably, the price was up HK$50 and he was in trouble. Mr. Yip telephoned again and informed him that, as well as the $60,000 represented by his cheque, he had lost $40,000 at the present price, and asked him to come to the office at once.

19. Later that day the cheque for $60,000 was dishonoured by the bank (52 in Agreed Bundle). Mr. Yip spoke to the defendant again; he promised to come to the office, but never did.

20. To protect his company, therefore, Mr. Chan had no alternative but to settle the defendant's position by buying 2,500 taels at the market price, in case the price continued to rise. This was done by buying orders 39, 41 and 43 in the Agreed Bundle, at a cost of $1,165, $1,165.10 and $1,165.20 respectively. These orders were stamped with the company's chop. The defendant was notified by letter (51 in Agreed Bundle) but, though Mr. Yip twice went to his address in Tsuen Wan, no further contact with the defendant was made. For this reason the final purchase report of 30th August (45 in Agreed Bundle) was never signed by the defendant. The balance sheet in respect of the final day's trading (47 in Agreed Bundle) reveals a debit balance of $41,560, to which must be added the dishonoured cheque for $60,000. The plaintiff claims that it is entitled to be indemnified for these losses incurred while trading on the Exchange as a broker on the defendant's behalf. A broker, who has properly carried out his instructions, is entitled to a full indemnity from his client against any loss or liability incurred by him by reason of his having entered into a contract on behalf of his client: Smyth v. Reynolds⁽¹⁾. It is further submitted that, irrespective of the merit of this claim, the plaintiff is entitled to judgment for $60,000 in respect of the cheque, in the absence of proof by the defendant of a total failure of consideration.

21. Turning now to the defendant's case, it is important, in the light of his evidence, to look at the particulars of his defence. Paragraph 6(a) states that the plaintiff told him that it would

"buy gold and silver for him and would in due course sell the silver and gold so purchased when the market value of the same rises."

The defendant does not allege this in his evidence.

22. Paragraph 6(b) commences:

"The Plaintiff also assured the Defendant that he will not make any loss and that the Plaintiff would not buy or sell and/or dispose of any gold and silver so purchased without first informing him and getting his authority to do so."

Neither of these matters is referred to by the defendant in his evidence.

23. Finally paragraph 6(a) states that

"the Plaintiff orally represented to the Defendant that the signature on the said authorisation letter was just to open an account for the purpose of depositing the Defendant's money."

Nor does he allege this : on the contrary he says he was told by Mr. Yip that the letter authorized the plaintiff to buy gold on his behalf.

24. The significance of all this is explained at page 131 of Odgers' Principles of Pleading and Practice 21st Edition. I quote

"How far should the pleader confine himself to merely traversing? Should he not, after denying his opponent's story, go on to add his own version of the matter? This is sometimes a difficult question. It is sometimes most desirable to do so, in order to show clearly what is the real point in dispute ..... If the plaintiff gives his version of the effect of a written document, it will certainly tend to clear the matter up if the defendant, instead of merely denying the plaintiff's version, states also his own construction of the document. And in many cases it may be desirable for a defendant thus to state definitely which his exact contention is. But by so doing he necessarily somewhat limits his case at the trial. He has no longer the same free hand. And there is this further danger that if the defendant, instead of merely denying, sets up an affirmative case as well, both judge and jury will expect him to prove his affirmative case, and are apt to find against him if he does not."

Quite so. Strictly speaking, counsel for the plaintiff might have been entitled to object to the admissibility of that part of the defendant's evidence which contradicted his pleading. He did not do so, but nevertheless the difference between the case pleaded and the one presented in the witness box, not to mention counsel's opening, is a factor I am entitled to bear in mind when assessing the defendant's credibility.

25. In truth, however, the defendant cut a poor figure in the witness box. His story was an unlikely one at best and it was at such variance with the established facts that I have no difficulty in concluding that it is untrue.

26. The defendant is a sewing worker and he lives in Tsuen Wan. In August, 1978, he and his mother-in-law decided to buy a quantity of gold bars, which they intended to store as an investment. He was to put up $30,000 and his mother-in-law $50,000. The latter agreed to transfer her share to the defendant's bank account after he returned home with the gold.

27. On 25th August at 2.30 p.m. the defendant went to the plaintiff company in order to place an order for gold bars. He spoke to Mr. Yip who told him that the current price was $1,100 per tael, but that, if he bought, say 80 taels, the price would be only $1,000 per tael. I must say this was a remarkable coincidence. Mr. Yip apparently suggested a deal involving precisely the amount of money that the defendant had to spend. The defendant was unable to explain how the plaintiff would find it profitable to sell gold at $100 per tael less than the market price. This evidence cannot be true.

28. Mr. Yip denied that the defendant ever mentioned that he wished to buy gold bars. In fact he went further initially, when he said emphatically that the plaintiff company did not do that kind of business, which was the preserve of the goldsmiths' shops. It was only in re-examination that he admitted that a client could take delivery of the actual gold provided he paid certain additional charges to cover delivery and insurance. He would however have to wait until the following day, whereas a gold smith could provide it quicker. Another difference was that the plaintiff dealt in a minimum quantity of 100 taels: if the defendant wanted 80 taels, he would have to buy it at a goldsmith's shop. Mr. Yip also insisted that payment in full was required before delivery of the gold. A post-dated cheque was not acceptable.

29. According to the defendant he and Mr. Yip did not have lunch together. They were sitting opposite each other when Mr. Yip produced the letter of authorization. Mr. Yip did not read it out to him and he himself did not read it, as he does 'not know much about reading'. In this connection he was rather embarrassed in cross-examination when he was asked why he studied the card so carefully as he repeated the affirmation after the court interpreter. All that Mr. Yip told him was that this document - the letter - was to authorize him to buy gold on the defendant's behalf. The defendant assumed this was a reference to the 80 taels and duly signed his name. Mr. Yip assured him that he would have the gold in 3 - 4 days.

30. The defendant then wrote 2 cheques - one for $20,000, which he dated 25th August, and the other for $60,000, which he postdated 29th August. This was to allow time for the transfer of funds to his bank account. The defendant was asked in cross-examination why the numbers of the two cheques were not in sequence. His answer was that he made a mistake in the No. '6' when writing the second cheque and cancelled it. Mr. Yip himself then wrote out the second cheque and the defendant signed it. The defendant did not explain why it was necessary for Mr. Yip to do this; on the face of it this is suspicious.

31. Counsel for the plaintiff then taxed him on the question of the receipt numbers, which are 591 and 601 respectively. The defendant admitted that he had received both receipts at the same time, but explained that Mr. Yip had dated the receipt for $60,000 29th August, in order to avoid giving the impression that the full price had been paid on 25th. He did not, however, give any explanation why Mr. Yip did not use consecutive receipts. In any case, I see no reason why one receipt would not have sufficed.

32. That same afternoon Mr. Yip showed the defendant two blank forms. He told him they were order forms, which the defendant must sign and which he himself would later complete with the details of the quantity and price. The defendant signed both forms (Ex. D1 and D2). If this is correct, the forms must have been signed by Mr. Chan some time later.

33. Next day these two documents were handed to him by Mr. Yip. The defendant admits that he knew D1 was for the purchase of gold and that he saw "the figures - the price". This is not credible evidence, because the prices on the document are $1,118 and 1,113.50. The defendant must have realized that this was not in accordance with their bargain and should have remonstrated with Mr. Yip. He says he did not realize that D2 was a sales report, because it was clipped underneath D1. The defendant said he did not want these two documents, but Mr. Yip said he must accept them and in any event had to 'admit those accounts'. I bear in mind that, at this point, the defendant was showing a profit of $240, according to Mr. Yip. The defendant therefore accepted these two forms, plus one other, which he has since mislaid.

34. The defendant left the plaintiff's office at 3.10 p.m. on 25th August and went home. On arrival his wife asked him where was the gold and said he had been fooled. That evening she rang her mother and also told her that her husband had been fooled. As a result the defendant's mother-in-law changed her mind and failed to transfer $50,000 to the defendant's account. This evidence is very hard to accept. The defendant does not say that he tried to reassure his wife that the gold would be delivered in due course. This would have been his natural reaction, since, at that time, he had no reason to suspect that Mr. Yip was not engaged in buying 80 taels of gold on his behalf. Neither woman was called to corroborate this evidence. It occurs to me also that, if the defendant's mother-in-law was going to put up $50,000, she would have deposited this sum in his account by 25th August.

35. When the defendant returned to the plaintiff's ofice on the morning of 26th August, he told Mr. Yip that he wished to cancel his order of the previous day and asked for the return of his two cheques. Mr. Yip told him that the cheques were with Mr. Chan, who was not in. Mr. Chan had still not arrived at the office by midday and Mr. Yip told him to come back on 29th. He told Mr. Yip that he would cancel the cheque for $60,000, but apparently he did not do so. Later in answer to the Court he says this did not occur to him. This is contradictory and I do not believe it. On 26th he knew that the deal was off and that there were no funds in the bank. The obvious thing to do was to stop the cheque.

36. On the morning of 29th August the defendant once more presented himself at the plaintiff's office. There was still no sign of Mr. Chan and he waited until 4.00 p.m. in vain. Mr. Yip's explanation for his absence was that he was very busy because those days were public holidays. This does not make sense; if they were holidays the office would have been closed. Furthermore, this point was never put to Mr. Chan.

37. Mr. Yip told the defendant to come again on 30th and he left the office. Next morning Mr. Yip telephoned him at home and said that, quite apart from the cheque, he owed him $41,000 odd. He did not apparently explain why. He threatened the defendant and asked him to come to the office straightaway, or some harm would come to him.

38. The defendant arrived at the plaintiff's office at 7.05 p.m. and Mr. Yip asked him to sign some papers, saying that the defendant had authorized him to buy 'future gold'. Incidentally the term 'future' is a misnomer. The transactions were very much in the present, whether or not the gold was to be delivered. There was no trading in a futures market, where the price of the commodity at some future date is the critical factor. He thinks this document was the balance ledger (49 in Agreed Bundle). The defendant refused to sign and returned home. He never saw Mr. Yip again.

39. On this evidence I conclude that Mr. Chan and Mr. Yip are essentially witnesses of truth and that the defendant is lying. I find that, when the defendant signed the letter of authorization, whether he read it himself or not, he well understood the nature and meaning of the document. I also find that he gave Mr. Yip instructions to buy and sell gold as stated. Apart from those given above, there are other reasons for coming to this conclusion. If the defendant's evidence is true, or even partly true, there must have existed a fraudulent scheme, involving Mr. Chan as well as Mr. Yip. To support the fraud, the mass of documents in the Agreed Bundle would have had to be forged.

40. If Mr. Yip was trading without the defendant's knowledge, intending to pin any losses on him, but to deprive him of any profits, there was certainly no downside risk, unless the defendant proved to be a man of straw. But such a fraud must have involved other company employees, since, at the end of the day, when the account was settled, the cheque would otherwise have been made out in favour of the plaintiff and Mr. Yip could not have cashed it without the defendant's knowledge.

41. The alternative fraudulent hypothesis is that no trading ever took place and that a mass of false paper was put together with the sole object of suing the defendant for a selected, but arbitrary sum. This is possible, but so difficult of accomplishment that I reject it. The plaintiff, after all only has to prove the case on a balance of probability.

42. I pay no attention to Mr. Yip's professed ignorance concerning the significance of the client's failing to sign the reports within three days. This is an unimportant matter and something about which it was not necessary for him to know. I consider the explanation given for the disappearance of the second copies of these reports to be reasonable.

43. Mr. Yip's original denial that the plaintiff company ever sold actual gold bars is more serious. But, if his evidence were untrue, I don't think he would have eventually admitted that this was not the case and gone on to describe in detail how delivery of the gold might be obtained. It is more likely that, as so few clients wish to take delivery, Mr. Yip was emphasizing that this was not the kind of business with which the plaintiff was concerned.

44. Mr. Fung, for the defendant, suggested that Mr. Yip's assertion, that there was a day time margin of $1,000 per 100 taels, shows that Mr. Yip was covering up his negligence in allowing the defendant to trade with insufficient margin. But I bear in mind that Mr. Chan was not specifically asked about this and that he was concentrating on the situation at 4.00 p.m., when the defendant had sold 2,000 taels. Having regard to the weight of the remaining evidence in the plaintiff's favour, I do not consider that this discrepancy is sufficient to tip the scales. In any case, it does not necessarily mean that Mr. Yip is lying about the pattern of trading. We are not concerned here with the question of negligence.

45. It was put to Mr. Yip that, if the defendant had really given instructions to buy and sell as he described, the buying and selling order forms would bear the defendant's signature, since, according to Mr. Yip, the defendant was present at all times. Mr. Yip replied that in many cases the client gave his instructions by telephone and that it was, therefore, provided in company regulations that the sales representatives should sign the order. I should have thought, moreover, that, given the importance of these documents, that the accounts office staff, who have to act upon them, should be able to recognize the signature on each order. Responsibility for each order can then be pinned on a particular sales representative. This in itself is a good reason why the client should not sign the order.

46. Mr. Fung submits that, even if the plaintiff's version of the facts is true, the plaintiff has failed to prove any loss or damage. He bases his argument on the absence of evidence as to what happened in the accounts office and on the market floor. He submits that there is no evidence that these sums were ever paid out to the Gold & Silver Exchange and that, therefore, the plaintiff cannot succeed in this action.

47. There is some substance in this argument. Mr. Law, for the plaintiff, sought to counter it with the assertion that the formal record of bargains is kept by the Exchange and that, therefore, he could not call the evidence. I do not think however that this is a matter of which I may take judicial notice. On the question of judicial notice of commercial and other usages, Halsbury's Laws of England, Vol. 12, states at paragraph 479

"As regards the necessity of proof, usages pass through certain stages. There is the primary stage when the particular usage must be proved with certainty and precision; there is the secondary stage when the court has become to some degree familiar with the usage, and when slight evidence only is required to established it; and there is the final stage when the court takes judicial notice of the usage, and evidence is not required."

The authority for this is Moult v. Halliday ⁽²⁾ per Channell J. In my judgment, if this particular usage exists, it has not yet reached the second stage.

48. Mr. Law also asks me to take judicial notice of the trust and confidence which exists among traders on the Exchange. I agree that this is a notorious fact and that it may be judicially noticed, but it does not really advance the plaintiff's case.

49. The only evidence that the plaintiff company has paid out money on the defendant's behalf is the evidence of the plaintiff's witnesses as to what they themselves did. They cannot give direct evidence as to what actually happened after the orders were handed in at the counter. They say that the defendant was trading normally, in accordance with the usual routine, and that the documents show the end result. Mr. Chan says they had to buy the same amount of gold that was sold by the defendant on 29th August and that they bought 2,500 taels on 30th accordingly. Is this enough? If there were the slightest suspicion that everything was not above board in the plaintiff's office, I would be inclined to say that it is not. If the plaintiff did not incur the liability indicated by the balance sheet, there must have been fraud on the part of Mr. Chan, Mr. Yip and the account staff. They must have been parties to the complilation of the false paperwork to cover their fraud. But there is absolutely no evidence of this. A picture has been painted of a reputable member of the Gold & Silver Exchange going about its business as a broker on behalf of a client. If the papers tell a true story, the bargains were struck in the market and liability incurred. In these circumstances there is an evidential burden on the defendant to show that the documents were not compiled in the ordinary course of trading. They have been spoken to by witnesses of truth and I am not prepared to say, in the absence of some evidence to that effect, that they are the fruits of a fraudulent scheme on the part of these and other members of the plaintiff's staff. I find, therefore, that the plaintiff has incurred the liability stated and is entitled to be indemnified by the defendant in terms of the letter of authorization.

50. There will be judgment for the plaintiff for $101,560, with interest at 8% from 8th September, 1978, and costs. The counterclaim is dismissed with costs.

Representation:

Mr. A Law (Chow & Howell ) for plaintiff.

Mr. A. Fung (Johnson, Stokes & Master) for defendant.

(1) [1892] 66 L.T. 808

(2) (1898) 1 Q.B. 125 at 129, 130.