Chan King Har v. Mansion House Securities Limited and Another

HCA008142/1984

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HEADNOTE

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Agent and Principal - Transaction by broker on behalf of undisclosed principal with another dealer - constructive trust - Upon actual notice of fiduciary trust dealer not entitled to sell property of beneficial owner - Application of equitable right of tracing - Judgment in foreign currency -

Employer and Employee - Doctrine of holding out - Vicarious liability of employer for loss caused to innocent party from employee's act in the lawful course of employer's business

1984 No. 8142

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: Deputy High Court Judge Henry Wong

Dates of Hearing: 9/5/86, 12-14/5/86, 7-11/7/86, 14-18/7/86 & 24-25/7/86

Date of Judgment: 11th August 1986

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J U D G M E N T

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1. Defendant was at all material times a member of the Gold and Silver Exchange and Kam Ngan Stock Exchange and as such traded for itself or acted as broker in local gold bullions and stocks and shares. In addition it carried on the business of dealer in securities, commodities, foreign currencies and bonds.

2. These facts are not in dispute. On 31st October 1983, Kam Shing Co. (Kam Skiing), also a member of the aforesaid exchanges, and Defendant entered into a "Dealing Agreement" on Spot Gold Trading and that was signed by John S. O. Ng (John Ng), General Manager, Commodities and Bullion - Institutions for Defendant and Chan Wan-Tai (CWT), Kam Shing's manager and another person, on behalf of Kam Shing. At the same time and shortly thereafter Kam Shing opened various accounts for different goods with Defendant and Kam Shing's dealings were recorded in Defendant's books as follows:

a) Purchases or sales in London spot gold, expressed in US dollars, were debited or credited as the case may be to Kam Shing's Loco London Gold account No. 10434-25-03 and, once each transaction was close, the resulting profit or loss would be transferred to Kam Shing's US dollar account No. 10434-23-03. Trading in this commodity, beginning on 6th December 1983, was governed by the terms of the aforesaid Dealing Agreement of 31st October 1983.

b) Purchases and sales in what is termed commodities or forward contracts covered foreign currencies (Japanese yens, German marks and Swiss francs), metals (gold and silver) and even hogs, which were made through New York and Chicago exchanges, had their accounting pattern followed that of spot gold, that is to say, those transactions were first entered in the relevant account No. 10434-24-003 and the outcome of each transaction, be it a gain or loss would be transferred to the said US dollar account No. 10434-03. The only difference between dealings in London spot gold and U.S. commodities was that in the former it was not necessary for Kam Shing to put up margin on each transaction of less than 2,000 ounces of gold, whereas in the latter margin was required by the American exchanges irrespective of the amount involved. The first transaction in commodities took place on 27th December 1983.

c) On 31st December 1983, a Hong Kong Stock account No. 10434-01-003 was opened and its funds in Hong Kong dollars were used (d) to offset any debit balance of the said US dollars account No. 10434-23-03 (b) to transfer money to other accounts and (c) to discharge Defendant's brokerage fees on Kam Shing's transactions in commodities or foreign currencies (account No. 10434-24-03).

3. In the later part of April 1984, Plaintiff, also known as Mrs. Ma Koon-sit, showed to CWT, an acquaintance of hers, a photo-copy of European Economic Community (EEC) bonds and expressed her wish to buy $300,000 worth of them. She was told that those bonds could be obtained by Defendant and that she would be informed of the steps to be taken for that purpose. On this aspect John Ng, stated that CWT, whom he had known since 1977, told him on the telephone on a day between 24th and 26th April 1984 that he wanted to buy some English bonds. John Ng replied with words to the effect that the full purchase money should be paid into Defendant's Sterling account in the first place. He subsequently gave particulars of that account to CWT who passed them on to Plaintiff. Armed with that information, Plaintiff caused her banker, Wing Lung Bank on 27th April 1984 to remit £306,726.21 to the Hong Kong and Shanghai Banking Corporation (Hong Kong Bank), London with instructions to credit that sum to the account of Defendant but in favour of Kam Shing. Notice of that remittance was conveyed by Hong Kong Bank, London to Defendant on 28th April 1984.

4. A couple of weeks later, on 10th May 1984, Plaintiff was informed by CWT that her said remittance was insufficient for the acquisition of £300,000 worth of bonds. She was asked to provide additional funds to CWT himself and, without being told the amount involved, immediately obtained a bank order of £68,000 in his name and gave it to him. CWT used this bank order to open his personal Sterling account No. 10327-003 with Defendant, then on 5th June 1984 withdrew a sum of £54,850 therefrom and on 28th June 1984 transferred the balance, together with interest, of £13,255.76 to Kam Shing's Sterling account.

5. Meanwhile, from that remittance of £306,726.21, Defendant made 3 purchases of EEC bonds as follows: (1) £100,300.87 on 24th May 1984, (2) £104,152.78 on 30th May 1984 and (3) £104,864.58 on 14th June 1984, in the respective face values of £95,000, £100,000 and £100,000. It should be noted that the difference between those purchase prices and the corresponding face values of bonds resulted from the fluctuations of the prevailing market interest and the interest stated on the bonds. This means that if the market interest was low the price of bonds would rise and vice versa. In the words of John Ng, the only benefit to Defendant on transactions in bonds was to make a "spread" or profit between buying cost from the dealer in London and selling price to a local customer.

6. Deliveries of the first two lots of bonds in certificates of 100 bonds each of £100,000 (100 Certificates Nos. 8882-8981) and £95,000 (95 Certificates Nos. 8787-8981) together with the accompanying interest coupons, were made on 28th June 1984 and 10th July 1984 at Kam Shing's request to Defendant and Plaintiff. admitted to have received them from CWT.

7. On 28th August 1984 Kam Shing was informed in writing that their account with Defendant was under margin, meaning in debit, of $822,071.00 and that they ought to make good the deficiency before the end of the same month. That demand gave rise to a deposit by Kam Shing to Defendant of: (a) cash of $50,000 on 7th September 1984 and (b) Far East Savings Zero Coupons of face value of US$200,000 but, as explained by John Ng, were worth US$50,000 because they yielded no interest and would not mature until 1995.

8. In all Plaintiff had paid out a total sum of £374,726.21 (remittance of £306,726.21 to Defendant's London account in favour of Kam Shing and cheque of £68,000 payable to CWT) and considered it to be adequate to cover the purchase of £350,000 EEC bonds. By mid-July 1984 she had in all received £195,000 worth of such bonds and chased after CWT for the balance of £155,000 of those bonds. On 24th September 1984 she was handed interest coupons on the third lot of £100,000 (100 Certificates Nos. 8982-9081) by CWT and then made a trip to China.

9. On 10th October 1984 To Tai-shing, Kam Shing's proprietor wrote to Defendant to ask that trading in Kam Shingle account No. 10434-03 with Defendant be stopped until further notice. This notification gave rise to Defendant's reply of 12th October 1984 together with statements of account between them as at that date as follows:

10. Defendant also requested Kam Shing to settle the deficit resulting from the difference in those accounts.

11. Plaintiff returned from the mainland on 12th October 1984 and telephoned her busband's office from the airport when she was informed that CWT had disappeared. She immediately proceeded to the office of Kam Shing to look for Mr. Edmund Cheng, Kam Shing's staff member and the two of them went to see Philip Poon Tai-yip (Philip Poon), a co-manager of John Ng of Defendant's Gold Bullion and Commodities Department. Plaintiff heard Philip Poon's confirmation of CWT's abscondment and discussed with him her claim of beneficial ownership of the remaining £100,000 EEC bonds. A further meeting between these two persons took place on 20th October 1984 when Plaintiff showed Philip Poon a letter dated 2nd October 1984 and addressed to her by the Citibank to the effect that a deduction of 30% U. K. tax might be made on interest in respect of EEC bonds. Philip Poon then helped her to draft a reply thereto saying that she was not a U.K. resident and should not be subject to withholding tax.

12. On 31st October 1984 Defendant gave an ultimatum to Kam Shing to settle all outstanding debts due to it before 5.00 p.m. of that day. Kam Shing failed to do so and on 7th November 1984. Defendant sold the £100,000 EEC bonds in question and other securities of Kam Shing then held by it. The proceeds of that sale reduced Kam Shing's indebtedness to Defendant to $223,484.64.

13. Plaintiff claims against Defendant damages for conversion of the third lot of £100,000 bonds (the bonds) and an account of the balance of her payment in sterling to CWT of some £13,000.

14. The defence mainly is that, as Plaintiff had held out Kam Shing as her agent, she is estopped from denying that the said remittance was not made for and on behalf of Kam Shing. Defendant further averred that from the custom of trade and/or an implied term of the Dealing Agreement on Spot Gold Trading or of the course of dealing between the parties, Defendant could retain the bonds, bullions and shares of Kam Shing for Kam Shing's margin transactions with Defendant and dispose of them against Kam Shing's general indebtedness to Defendant. It is also Defendant's contention that even if Plaintiff was an undisclosed principal of Kam Shing on the purchase of bonds, money represented by the remittance of £306,726.21 had become mixed with Defendant's funds and was no longer identifiable and that in consequence thereof the equitable right of Plaintiff to trace such money had been lost.

15. It is common ground that Plaintiff had not opened an account with Defendant and that her instructions on the purchase EEC bonds were made to CWT and no one else. In this connection John Ng and Philip Poon stated that Kam Shing was one of Defendant's fifty account holders who had direct telephone lines connected to their dealers' rooms. Although the two of them jointly managed Defendant's Gold Bullion and Commodities Department, John Ng generally handled institutional clients while Philip Poon principally looked after individual or personal accounts. John Ng explained that Defendant and Kam Shing signed the Dealing Agreement to trade in London Spot Gold because that line of business involved a number of conditions concerning margin etc. but that Kam Shing, unlike a holder of a personal account with Defendant, was not required to sign any agreement for transactions in shares and commodities on the ground that the two parties could trade on "dealer to dealer" basis or were "co-traders" of the same two exchanges.

16. According to John Ng, CWT used to ring him daily for information on movements of commodities markets and for transactions thereon. In the latter event, once CWT's order to buy or sell, either to John Ng himself or any dealer, was carried out, the relevant details would be conveyed by the person accepting the order to Defendant's Accounts Department for processing and later to Defendant's Computer Department for registration by the machine. At the end of each month statements of Kam Shing's accounts were printed out by the computer and sent to them.

17. From agreed facts relating to the remittance of £306,726.21 and the purchase of three lots of bonds therefrom, the statements of Kam Shing's accounts with Defendant showed the following positions at four important dates:

1.  27/4/84

2.  24/5/84

3.  30/5/84

4.  14/6/85

18. It is John Ng's evidence that to effect transfers of funds within Kam Shing's accounts or to another account, Defendant's authorization form should be completed and signed, while applications to withdraw money should be in writing and subject to funds being available from the relevant account. It will be noted, from a scrutiny of Kam Shing's accounts and a look at the above table that (a) the Loco London gold account and the Commodities account show the results of normal trading, (b) the debit balance of the US dollar account was saddled with 3 payments:

(i) US$5,000.00 to Cheung Ho on 30th April 1984, (ii) US$150,000.00 to Mrs. Lai-yuk Cheung To on 7th may 1984 and (iii) US$30,000.00 to Shum Sze Chor on 22nd May 1984, and (c) the debit balance of the HK dollar account was weighed doom by a payment of $700,000 to Kam Shing on 5th May 1984.

19. It is also obvious that payments in (b) and (c) above in May 1984 were made when the relevant accounts had inadequate funds to cover them. In this respect John Ng explained that money was lent to Kam Shing on the security of the three lots of bonds in Defendant's custody, whereupon a point was cursorily raised by Mr. Litton, for Plaintiff as to whether or not Defendant was a licensed money-lender to be able to provide those loans. John Ng's reply was that an inquiry made by Defendant some years ago revealed that there was no need for such a licence because Defendant was owned as to 50% by Hongkong Bank and 20% by Hang Seng Bank. As this matter was not strenuously argued upon by counsel, I propose to briefly deal with it by referring to "Harvester Stock Investment Co. v. Kwon Siu May", H. C. Action No. 11515 of 1953. In that case Jackson-Lipkin, J. said at p.10 of his judgment:

"'A money-lender" means every person whose business (whether or not he carries on any other business) is that of making loans ......., but does not include the persons specified in Part 1 of the First Schedule;'. (Money-Lenders' Ordinance)

Part 1 of the First Schedule is a list of "Exempted Persons", but stock-brokers are not included therein. Quite clearly the definition would cover a stock-broker who carried on the business of stock-broking and the business of making loans.

Loan is not defined in the Ordinance, but in the definition section it is said:-

'to include advance, discount, money paid for or on account of or on behalf of or at the request of any person or the forbearance to require payment of money owing or any account whatsoever, and every agreement (whatever its terms of form may be) which is in substance or effect a loan of money, and also an agreement to secure the repayment of any such loan,'.

That is not exhaustive, and, quite clearly, the Ordinance was intended also to cover an "ordinary" loan in the accepted sense of a word. However, even if I come to the conclusion that the Plaintiff's business was both that of stock-broker and of moneylender and that what I have described above comes within the definition section as a "loan", I would then have to consider whether that was an "Exempted loan" as listed in paragraph 5 of Part 2 of the First Schedule.

.......

The Plaintiff (broker) has satisfied me, and, as a matter of Law also, I hold, that it does not have a business of making loans. The "system" which I have described, and which is not in dispute, is part and parcel of, and not a separate business from, its business of stock-broker. . . . . . . . the agreements were to enable the Defendant to purchase shares through the Plaintiff qua stockbroker, but on credit. The credit was arranged in the manner described in the world of stock-broking as "margin trading". If I ask myself "what was the object of the whole exercise?" between these parties, the answer must clearly be that it was stock-broking with credit extended to the client. It would stretch,imagination to breaking point to say that it was moneylending in the guise of stock-broking. '

20. In the present case Mr. Litton remarked that the aforesaid three payments appeared to be overdrafts which were out of character with Defendant's business, whereas Mr. Fung, defence counsel maintained that they were margin money for the purpose of allowing Yam Shing to purchase securities. In the absence of pleading on the legality of the loan and without any suggestion on illicit money-lending business being involved, I do not intend to make a finding on that topic and simply leave the payments in question as they were made out to be, viz., marginal facilities.

21. Reverting to the evidence John Ng stated that after he had been told by CWT that the purchase of bonds would proceed as comtemplated, he alerted Defendant's Accounts Department about a remittance to be made to Defendant's Sterling account in London. Although both he and Philip Poon were then co-managers of the Gold Bullion and Commodities Department of Defendant and the persons directly responsible for Kam Shing's dealings with Defendant, yet the remittance of £306,726.21 came to their knowledge in a casual manner and a few days after it had been known to Defendant's Accounts Department. In my view these two witnesses were untruthful when John Ng stated that he had never seen the credit advice dated 27th April 1984 and the telex of 28th April 1984 from Hong Kong Bank to Defendant about that remittance, and Philip Poon said that he did not see them until November 1984. Those two messages read:

Credit Advice

The Secretary, Mansion House, Securities Ltd., 8th floor, China Building, 29 Queen's Road Central, Amount £306,726.21, A/C No. 595-711-01. We have credited your account with the item detailed below:

"Per bankers payment from MHTC. Dated 27th April 1984 By order of Mm. Chan King Har. "

Telex

To Mansion House Securities Ltd Hong Kong 28 April 1984 "We have today received and credited your A/C 595-711-01 with GBP 306,726.21 by order of Mm. Chan King Har. We have also debited your A/C with GBP 10.00 being the cost of this telex"

22. It is well established that since Defendant is a corporation, correspondence addressed to its secretary or itself, regardless of the person whose hands it has come into, is sufficient notice to it of the contents of the documents involved, i.e., that the remittance of £306,726.21 was made to Defendant by order of Mm. Chan King Har, Plaintiff. In this regard it is John Ng's admission that that remittance was made for the sole purpose of purchasing EEC bonds. He also agreed to Mr. Litton's suggestion that there was a possibility that that money was held by Kam Shing in trust for their client, which means that if such a trust existed Kam Shing would become agent of an undisclosed principal. In this connection I adopt the view that the application of the undisclosed principal doctrine can be found in situations where the third party is actually aware that the agent sometimes deals for himself and sometimes on behalf of others but does not know which is true on this occasion and in situations where the third party is aware of the existence, even the name and involvement of the principal but is not clear as to his exact relationship with the agent.  Furthermore, John Ng had no quarrel with the suggested view that on the face of it the purchase of bonds was an investor's dealing rather than a broker's speculation and, although he was not informed the true identity of the person effecting that remittance, he made no attempt to investigate it. He attributed that attitude to the thought that if Kam Shing acted as agent in respect of that remittance, they would have opened an account with Defendant in their name with the qualifying expression "for and on behalf of XYZ" or words to that effect.

23. There is no challenge that the said sum of £306,726.21 was remitted by Plaintiff. From the evidence I reject Defendant's claim that she had held out Kam Shing or CWT to be her agent in representing to Defendant that that fund was remitted for and on behalf of Kam Shing. I thus believe that the remittance came from her money and was put up for her purchase of EEC bonds. I feel inclined to say that the credit advice of 27th April 1984 and telex of 28th April 1984 of the Hong Kong Bank to Defendant or Defendant's secretary containing words that the remittance was made by Plaintiff's order ought to put Defendant on notice that further investigation on the identity of the owner of the fund was required. That identity visa an easy matter for Defendant to find out but was ignored by Defendant's staff. In my view Defendant knew or ought to have known the fiduciary relationship between Kam Shing and Plaintiff as agent and undisclosed principal of the fund concerned. In other words a chain of trust on that remittance from Plaintiff to Kam Shing and from Kam Shing to Defendant was established. In my conclusion, Defendant's plea of estoppel must fail.

24. Under cross-examination John Ng admitted that the sole purpose of the remittance of £306,726.21 was for the purchase of EEC bonds, but that he held on to that fund and later bonds bought from it as security for Kam Shing's upsurge in speculations. Admit it he must, for Kam Shing's accounts showed enormous increase in dealings, e.g. in Loco London Gold account, from 15 transactions in April 1934 to 70 in May and 39 in June 1934. This situation is understandable because John Ng confessed that he stood to earn more commission from more transactions. On this aspect he explained that from his belief that the remittance was Kam Shingle property, he allowed Kam Shing's spree of transactions and withdrawals of money to mount but within the limit of that remittance or bonds representing it. His stance was echoed by Philip Poon and both shared the same conviction on a broker's right to liquidate a client's account by the disposal of that client's securities to wipe off his outstanding debt. On this assertion an issue was raised as to whether these two managers were expert or ordinary witnesses on trade custom or usuage of share and commodities brokers.

25. John Ng has been engaged in the field of business in stocks and shares, foreign exchange and commodities since 1977, first as a trainee with Sun Hung Kai Securities for a year, then with Richardson & Greenfield Securities for five years to 1982 and with Defendant from 1982 to 1985, whereas Philip Poon worked for Richardson & Greenfield Securities from 1971 to 1983 and with Defendant since 1983. They maintained a consensus of opinion that when a broker extended margin facilities to a customer, the broker might run the risk of that customer being unable to complete the deal. And if it turned out that the customer failed to honour a transaction or pay up his indebtedness after due notice, then the broker would be entitled to sell whatever security he held that belonged to or in the customer's name to make up the deficiency in the customer's account or to clear up the debit of that account.

26. It is not disputed that Defendant had not made any pre-trial application under Order 38/38 for calling expert witnesses on trade custom and usage and that the restrictions of Order 38/36 therefore applied. However, Defendant relied on the alternative method of adducing evidence relating thereto from direct proof of actual instances within the personal knowledge of ordinary witnesses, viz., John Ng and Philip Poon. It can be said that where the alternative procedure is followed, the weight to be given to the witnesses' evidence may be affected by their occupation and experience. Naturally, ordinary witnesses should refrain from expressing an opinion, which is only open to an expert witness, and confine their evidence to transactions within their actual knowledge. Phipson on Evidence (13th edition) para. 9-30, says:

"A business usage, as distinguished from a common law custom, need not be long established, or strictly uniform; it is sufficient if it be reasonably certain, and so notorious and generally acquiesced in that it may be presumed to have formed an ingredient of the contract. . . . . . . . Such usages may be proved either (1) by the direct evidence of. witnesses which must be positive and not amount to more opinion, in which case particular instances of its occurrence or non-occurrence will be admissible in corroboration or rebuttal;"

and para. 9-29 reads:

"the modern rule is more elastic, and under it a party who deals either personally or by agent, in a particular market is held bound by its reasonable usages even though he was ignorant of them. "

27. In the present case I accept the usage as described by Messrs. John Ng and Philip Poon concerning the right of a broker, as a last resort, to liquidate his client's debit account by disposing of that client's negotiable instruments or property held as security. However, I say that that right is only applicable to securities belonging to Kam Shing,and cannot be extended to those of Kam Shing's client, viz., Plaintiff.

28. Mr. Fung, for Defendant, referred to "Aschkenasy v. Midland Bank Ltd." (1934) C.A., The Times Law Reports Vol.lip.34 which says:.

"        In June, 1918, the plaintiff, who was then a banker in Odessa, had a large credit with a Swiss bank at Basle, and he instructed that bank to transfer to the defendants, who were an English bank, £18,044, to be held by the defendants to the credit of a bank in Petrograd. On hearing from the. Basle bank the defendants credited the money to the Petrograd bank in their books on account of the plaintiff, and they notified the Petrograd bank, but their communication was returned and there was no evidence that it was ever received by the Petrograd bank. About 1930 the plaintiff became aware that the money was still with the defendants, and he claimed a declaration that they held it as trustees for him.

Held, that the only party who were the defendants' customers were the Swiss bank, and as there was no contract between the plaintiff and the defendants the action failed. "

29. I agree with Mr. Litton that there is a world of difference between a bank and a broker, in that when a person deposits money into the bank, the bank can treat it as its own money and is a debtor, but not trustee, of the depositor, whereas if that man gives money to his broker for a purchase of shares, the broker is his agent and stands in a fiduciary position to him, a principal, for the purpose in view. Aschkenasy's case is therefore distinguishable from the present case.

30. Mr. Fung also cited "Kabler v. Midland Dank Ltd." (1949) AC 24 in an appeal that involves questions of difficulty affecting the owner's rights to delivery of securities, deposited in a London bank by a bank in a foreign country, the law of which under certain conditions restricts the disposal or transfer of possession of the securities. It was held that there was no contractual nexus between the appellant and the respondent bank. In my view the principle of the decision of Kabler's case cannot apply to the present case because of the widely difference in basic facts between the two cases.   In particular the appellant was bound by his ratification of his agent's act, whereas Plaintiff has not ratified Kam Shing's utlisation of the bonds belonging to her as pledge or security for their speculations.

31. Mr. Fung advanced the argument that the purchase on 16th June 1984 of the third lot of £100,000 came from Defendant's money. The relevant account showed a credit balance of £104,403.81 when this lot was acquired at £104,864.58. There was thus a deficit of £460.77, which was on 28th June 1984 more than covered by the transfer of £13,255.76 from CWT's account (from Plaintiff's cheque of £68,000 to CWT). In the event, that account was back in credit in the sum of £12,794.99. Defendant thus had advanced £460.77 for that purchase, and could at most enjoy a temporary lien on the bonds involved from 14th to 28th June 1984.

32. As far as the first meeting; between Plaintiff and Defendant's representative, Philip Poon is concerned, I accept, after having seen and heard them testify, the story of Plaintiff in preference to that of Philip Poon. I believe'that Philip Poon then looked through Kam Shing's file' and confirmed to Plaintiff various matters, viz., the remittance of £306,726.21, the purchase of three lots of bonds therefrom, etc. In reply to Plaintiff's question Philip Peon said that Plaintiff still had some £13,000 with Defendant and that the third lot of £100,000 EEC bonds would, after some arrangement, be delivered to Kam Shing. In the circumstances I hold that actual notice of Plaintiff's claim as beneficial owner of the third lot of bonds and the balance of some £13,000 from her cheque of £68,000 to CWT was conveyed by Plaintiff to Defendant on 12th October 1985. This notice was further reinforced by admission of what transpired at a meeting between Plaintiff. and Philip Poon on 20th October 1984. Agreed evidence of that meeting, is that when Philip Poon was shown Citibank's letter to Plaintiff on 30% UK interest tax relating to £295,000 bonds, he assisted her in drafting a claim to be dispensed with that tax liability. Defendant was thus put on further notice to inquire into the matter but somehow did not do it and instead proceeded to sell the third lot of £100,000 EEC bonds on 7th November 1984.

33. I hold that this sale amounts to a conversion and find support from "Baring v. Corrie" (1818) 2 B. & Ald. 137 p.317, in which it was held that where a broker sold goods without disclosing the name of his principal and acted beyond the scope of his authority, the buyer could not set off a debt due from the broker to him against the demand for the goods made by the principal. In his judgment Abbot, C.J. said at p.320

"Defendants knew that Coles & Co. acted both as brokers and merchants, and if they meant to deal with them as merchants, and to derive a benefit from so dealing with them, they ought to have inquired whether in this transaction they acted as brokers or not; but they make no enquiry. . . . Now without entering into the question whether or not, under such circumstances, the bargain could be enforced, it is quite sufficient to say, that the defendants negligently abstained from making those enquiries which they ought to have made. I think, therefore, that they ought not be allowed the set-off which is claimed ...... "

and at p.319

"If the defendants were to succeed in this case the effect would be that the goods of one man would be applied in discharge of the debt of another"

34. The principle enunciated in Baring's case was followed in "Isaac Cooke & Sons v. Henry Douglas Eshelby" (1887) H. L. Vol. XII p.271, the headnotes of which read:

"         Where an agent sells in his own name for an undisclosed principal, and the principal sues the buyer for the price, the buyer cannot set off a debt due from the agent unless in making the contract he was induced by the conduct of the principal to believe, and did in fact believe, that the agent was selling on his own account.

L. & Co. sold cotton to C. in their own names, but really on behalf of an undisclosed principal. C. knew that L. & Co. were in the habit of dealing both for principals and on their own account, and had no belief on the subject whether they made this contract on their own account or for a principal :-

Held, affirming the decision of the Court of Appeal, that C. could not in an action brought by the principal for the' price of the cotton set off a debt due from L. & Co."

In his judgment at p.277 Lord Watson said:

"A sale by a broker in his own name to persons having that knowledge, does not convey to them an assurance that he is selling on his own account; on the contrary it is equivalent to an express intimation that the cotton is either his own property or the property of a principal who has employed him as an agent to sell. A purchaser who is content to buy on these terms cannot, when the real principal comes forward, allege that the broker sold the cotton as his own. If the intending purchaser desires to deal with the broker as a principal and not as an agent in order to secure a right to set-off, he is put upon his inquiry. Should the broker refuse to state whether he is acting for himself or for a principal, the buyer may decline to enter into the transaction. If he chooses to purchase without inquiry, or notwithstanding the broker's refusal to give information, he does so with notice that there may be a principal for whom the broker is acting as agent; and should that ultimately prove to be the fact, he has, in my opinion, no right to set off his indebtedness to the principal against debts owing to him by the agent. "

35. In the light of the foregoing, I come to the conclusion that Defendant had wrongly converted Plaintiff's property when it sold the £100,000 bonds to extinguish Kam Shing's indebtedness to it. There will therefore be judgment to Plaintiff against Defendant for damages on conversion. In this regard Macgregor on Damages, 14th edition, para. 499 says that the decision of "Miliangos v. George Frank" (1976) AC 443 was incomplete accord with the principle that damages should be calculated in contract at the date of breach and in tort at the date of determination of the loss even if the loss, contractualor tortious, is a loss incurred in foreign currency.

36. In the present case, I award damages on conversion to Plaintiff against Defendant in the sum of £102,600.69, being the proceeds of sale of the £100,000 EEC bonds, together with interest stated on those bonds at 11.875%, p.a., which is what Plaintiff would have earned had those bonds remained with her, from the date of sale of 7th November 1984 to date of judgment.

37. As regards plaintiff's claim to trace money of the cheque of £68,000 that she made out in CWT's name to supplement the cost of purchase of bonds, Mr. Litton conceded at the outset that since that was a personal payment to CWT he would confine the claim to what could be traced from the account involved. As stated in the summary of agreed facts, CWT opened his personal account with that cheque and withdrew money therefrom to himself, so that on 28th June 1984 there was a credit balance of £13,255.76 that he transferred to Kam Shing's Sterling account. As I have found, there is admission, from Philip Poon to Plaintiff of the existence of that money when he met her on 12th October 1984.

38. It is not disputed that as the common law did not recognise equitable rights, a beneficiary under a trust could not at law follow his property into the hands of the trustee. Snell's Principle of Equity , 28th edition says at p.297 that "for property to be traced in equity, there are three conditions, namely -

(i)    the property must be traceable,

(ii)    there must be an equity to trace, and

(iii)    tracing must not produce an inequitable result. "

39. It further says at p.300 that "even if property is traceable, there is no equitable right to trace and claim it unless some initial fiduciary relationship exists. The right to trace is founded upon the existence of a beneficial owner with an equitable proprietary interest in the property in the hands of a trustee or other fiduciary agent. This initial fiduciary relationship is essential. "

40. Mr. Fung referred to "Diplock v. Wintle" (1948) 1 ch 465 concerning a claim by an unpaid beneficiary under a will to invoke the equitable doctrine of tracing. I find that Diplock's case stands on different footing to the present case and therefore is not applicable.

41. From the evidence, I am satisfied that all the conditions mentioned in Snell's on tracing in equity are obtainable in the present case and consequently give judgment to Plaintiff against Defendant. Since the accumulated amount including interest, stood at £13,629.13 and that amount in sterling was sold at the rate of HK$9.70 per £, judgment will be in the converted sum in Hong Kong dollars of HK$132,202.56. The principle on the rate of interest to be awarded on a judgment debt can be found in "Tate & Lyle Food and Distribution Ltd. and another v. Greater London Council and another" 1 W.L.R.149. It was held at para. (2)

"That interest was paid on damages to compensate a plaintiff for being deprived of money which he should have had; that, in cases affecting commerce, the proper rate of interest was that which reflected the rate of interest which a plaintiff with the general attributes of the actual plaintiff (although not one in any special position) would usually expect to be charged on borrowed money; and that, since large and prestigious companies like the plaintiffs would expect to pay 1 per cent above minimum lending rate, that was the rate of interest that should be used in calculating interest in the present case. "

42. Plaintiff is not a company, so that she would, in my view, be expected to pay a little more than 1 per cent above minimum lending rate which is applicable to corporate borrowing. I would thus put Plaintiff's case to 2 per cent more than the prime rate and award this rate to the judgment debt of HK$132,202.56.

Third Party Proceedings

43. Defendant claims against the Third Party (Kam Shing) indemnity as to all liabilities to which it may be held liable to Plaintiff and an outstanding book debt.

44. Facts, as found in the judgment on the main issue and so far as they concern these Third Party proceedings, are applicable.

45. Defendant produced a number of witnesses to testify on the various steps that it took in its commercial relationship with clients. First, Philip Poon, manager of the Gold Bullion and Commodities Department stated that when an order came from Kam Shing to a dealer or him, e.g., for a purchase of a commodity, a dealing ticket would be made out and passed on to the Accounts Department for verification. Sandy Leung, manager of the Accounting and Settlement Department said that his section would check particulars of the dealing ticket and, if they found it to be correct, forward it to the Computer Department for processing. Miss Pauline Wong, supervisor of the last mentioned unit joined into say that the dealing ticket received from the Accounts Department would be fed into the computer for registration. The same steps would be adopted, for example, on the sale of the commodity that Kam Shing had purchased. Eventually, once a transaction was close, a purchase and sale print-out would be made by the Computer Department and conveyed to the Accounts Department for checking and despatching to the client. At the end of every month the Computer Department would issue a statement of each account for transmission to the client concerned through the interested departments and would also micro-film a copy of that document for record purposes.

46. I have no doubt whatsoever that the testimony of Defendant's witnesses depicts a true picture of the chain of working process within Defendant's organisation in relation to transactions with clients, including Kam Shing and hold that the monthly statements of account produced reflect the exact position of Kam Shingle accounts with Defendant.

47. Mr. Chain, for Kam Shing, advanced the argument that since Kam Shing officially signed the Dealing Agreement with Defendant on London Spot Gold, they should only be bound by CWT's transactions in that commodity. As regards Kam Shing's other dealings, Mr. Chain contended that they were simply "frolics" of CWT, because although CWT was placed in the position of Kam Shing's manager, he had no implied authority to bind Kam Shing, his employer on those activities in general and on transfers of funds in particular.

48. Mr. Chain referred to "Hawtayne v. Bourne" 7 M & W 595, Each of Pleas, a case dated back to 13th February 1841, of which the headnotes read:

"The resident agent, appointed by the directors of a mining company to manage the mine, has not an implied authority from the shareholders of the company to borrow money upon their credit, in order to pay the arrears of wages due to the labourers in the mine, who have obtained warrants of distress upon the materials belonging to the mine, for the satisfaction of such arrears: - nor in any other case of necessity, however pressing. "

49. Mr. Fung, for Defendant, replied with quotations from:

(a)    Halsbury's Laws of England, 4th edition, Vol. I, para 817 that:

"As a general rule, a principal is responsible for all acts of his agent within the authority of the agent, whether the responsibility is contractual or tortibus. Similarly the principal will be bound by many dispositions of property made by the agent. "

Para. 818 says:

"A principal is not exempt, where he would otherwise be liable in respect of an act done or bound by a contract made by his agent, by reason of the fact that the agent in doing it was acting in fraud of the principal, or otherwise to his detriment. A Third party dealing in good faith with an agent, who acts within the apparent scope of his authority, and purports to act as agent, is not prejudiced by the fact that the agent is using his authority for his own benefit and not that of his principal. "

(b)    Bowstead on Agency, 15th Edition, p.108

"Every agent who is authorised to conduct a particular trade or business or generally to act for his principal in matters of a particular nature, or to do a particular class of acts, has implied authority to do whatever is incidental to the ordinary conduct of such trade or business, or of matters of that nature, or is within the scope of that class of acts, and whatever is necessary for the proper and effective performance of his duties: but not to do anything that is outside the ordinary scope of his employment and duties. "

50. I find the Hawtayne's case is different in nature to the present case and should not be followed, whereas the extracts from Halsbury's and Bowstead's are of general and current application. As far as evidence goes, it can be safely assumed that all copies of purchase and sale print-out and monthly statements of Kam Shing's accounts had duly reached Kam Shing and, without proof of complaint from them, are deemed to be accurate.

51. It is common ground that the bone of contention between Defendant and Kam Shing is on CWT's authority to bind Kam Shing. On this question my conclusion is that, between 31st October 1983 and until his authority was revoked on 15th October 1984 CWT had, if not to the world at large, at least to Defendant, an ostensible authority to represent Kam Shing vis-a-vis Defendant. It can be said that ostensible authority comes about where the principal, by words or conduct, has represented that the agent has the requisite actual authority, and the party dealing with the agent has entered into a contract with him in reliance on that representation. The principal in these circumstances is estopped from denying that actual authority existed. In the commonly encountered case, the ostensible authority is general in character, arising when the principal has placed the agent in a position which in the outside world is generally regarded as carrying authority to enter into transactions of the kind in question. Ostensible general authority may also arise where the agent has had a course of dealing with a particular contractor and the principal has acquiesced in this course of dealing and honoured transactions arising out of it.

52. The leading case in this field is "Ldoyd v. Grace Smith & Co." (1912) AC 716. The proposition established by that case is epitomised in the speech of Earl Loreburn ([1912] AC 716 at 725, [1911-13] All ER Rep 51 at 54):

"If the agent commits the fraud purporting to actin the course of business such as he was authorized, or held out as authorized, to transact on account of his principal, then the latter may be held liable for it. "

Lord Shaw said ([1912] AC 716 at 739-740, [1911-13] All ER Rep 51 at 61):

"The case is in one respect the not infrequent one of a situation in which each of two parties has been betrayed or injured by the fraudulent conduct of a third. I look upon it as a familiar doctrine as well as a safe general rule, and one making for security instead of uncertainty and insecurity in mercantile dealings, that the loss occasioned by the fault of a third person in such circumstances ought to fall upon the one of the two parties who clothed that third person as agent with the authority by which he was enabled to commit the fraud. "

53. Lloyd's case was followed by "Meyer & Co Ltd. v. The Sze Hai Tung Banking & Insurance Co Ltd." (1913) AC 847. Headnotes read:

"The appellants' cashier presented at the respondents' bank cheques drawn on the respondents in favour of the appellants and crossed generally; in exchange he was handed cheques for the same amounts drawn by the respondents upon other banks and crossed generally. The appellants had by their conduct held out their cashier as having authority to deal with the cheques in this way. The cashier fraudulently paid the cheques handed him by the respondents to his own banking account and misappropriated the proceeds:-

Held, that the cheques drawn on the respondents were paid by the cheques given in exchange within the meaning of the Bills of Exchange Act, 1882, s. 79, sub-s. 2, but that the appellants were estopped from denying the authority of their cashier to receive payment in that manner and were not entitled to recover damages. "

54. A more recent case is "Armagas Ltd v. Mundogas SA (The Ocean Frost)" (1986) HL 385 in which it was held, inter alia that:

55. In the upshot I hold that CWT was Kam Shing's agent at all material times and that the business dealings and transactions that CWT carried out with Defendant were all done on behalf of Kam Shing, his principal and therefore binding on Kam Shing. In the event I decide in Defendant's favour on its claim for (a) indemnity against Kam Shing in relation to all monies that I hold Defendant liable to Plaintiff and (b) the book debt in the sum of $223,484.64.

Representation:

Messrs. H. Litton Q.C. & W. Wong, instructed by Philip K. H. Wong & Co., for Plaintiff

Mr. D. Fung, instructed by D.W. Ding & Co., for Defendant

Mr. B. Chain, instructed by Michael Cheuk & Co., for Third Party