Sun Hung Kai Investment Services Ltd. and Another v. Fung Tak Sing

Case No.

Court

Date24 Oct 1991

Judge—

Case Document

100%Judiciary

HCA001554A/1989

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

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ACTION NO.A1554 OF 1989

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BETWEEN

	SUN HUNG KAI INVESTMENT SERVICES LIMITED	1st Plaintiff
	INTERNATIONAL BANK OF ASIA LIMITED	2nd Plaintiff
	AND
	FUNG TAK SING	Defendant

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Coram: Godfrey, J.

Dates of hearing: 11, 14, 15 October 1991

Date of judgment: 24 October 1991

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JUDGMENT

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

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

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

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

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

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

	" Thank you for your letter of 27th September 1988 enclosing your cheque for the sum of HK$123,707.25 in full and final settlement of all our claim that we may have against you in respect of the account of Mr Fung Tak Sing for the purchase of 200,000 shares of Keng Fong on 15th October 1987.
	The settlement is made on the basis of the following understanding and arrangement:-
	1.	We have no further claim against you of whatever nature in respect of that account.
	2.	We are now holding the said 200,000 shares and shall effect sale thereof after the appropriate notice being given to Fung Tak Sing. The proceeds of sale shall first be applied for payment to us of your half share of interest cost on the said sum of $247,414.50 from 15th October 1987 to today's date and the balance thereof shall be divided and distributed to both parties in equal shares.
	3.	Both your goodself and our company shall instruct Messrs. Woo, Kwan, Lee & Lo to take whatever action as the solicitors shall think appropriate against Mr Fung Tak Sing for recovery of the loss suffered by both parties.
	4.	Any amount recovered from the said Mr Fung Tak Sing shall be divided and distributed between both parties in equal shares.
	5.	The legal expenses to be incurred in respect of this action shall be shared and borne by both parties in equal share.
	6.	You agree to join in with us as plaintiffs in any action to be taken against Fung Tak Sing but you have the right to refuse as the sole plaintiff in any action or proceedings.
	If we do not hear from you within the next seven days we shall instruct Messrs. Woo, Kwan, Lee & Lo to take the necessary action."

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

	" We act for Sun Hung Kai Investment Services Limited ('SHK') and International Bank of Asia Limited ('IBA').
	On the date particularized herein you have, through IBA as your agent, instructed SHK to purchase the shares in the Stock Market which particulars are as set out hereinbelow. After execution of your said order, you have failed to pay our clients the purchase price for the said shares, the brokerage fee, stamp duty and transaction levy amounting to HK$247,414.50.

Particulars

Date
15/10/87
Share
Keng Fong
No.
200,000

Price
per share

HK$1.23

Amount
HK$247,414.50

As the said sum of HK$247,414.50 has been due but still remains unpaid for 15 months, you are also liable to pay to our clients the interest accrued on the said sum of HK$247,414.50 at the rate of prime + 5% per annum calculated from 16th October 1987 up to the date of your payment thereof.

We are therefore instructed to give you notice, which we hereby do, that unless you pay the said sum of HK$247,414.50 plus the aforementioned interest thereon to us or to any of our clients within the next 3 days SHK shall have no other alternative but to sell the said shares which it is still holding for you and then legal proceedings will definitely be instituted by our clients against you for the then outstanding balance without further notice. Such proceedings, of course, will include a claim for further interest and legal costs substantially increasing the final amount payable by you."

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

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

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

11. My conclusions are as follows :-

	1.	The bank did not act as "agent" for the customer in the purchase of the shares, any more than it acted as "agent" for the broker. It simply received the customer's instructions and passed them on to the broker. At all times the only legal relationship between the bank and the customer was that of banker and customer.
	2	The broker did act as agent for the customer, the customer having asked the bank to instruct it so to do. The bank not having become the customer's "agent" no question arises of the broker becoming a "sub-agent".
	3.	In these circumstances, there was created privity of contract between the broker (the agent) and the customer (the principal), the broker acting on behalf of the customer in the purchase of the shares : compare De Bussche v. Alt (1878) 8 Ch.D.286.
	4.	The broker executed the customer's order and the customer is therefore, on the face of it, liable to reimburse and indemnify the broker over the transaction.
	5.	The mistakes made by the broker (and repeated by the bank) in telling the customer that the broker had purchased the shares at 1.25¢ a share when in fact it had purchased them at 1.23¢ a share, and then not correcting that mistake for some hours, although serious, were not of so serious a nature, or of so fundamental a character, as to deprive the broker of its rights to reimbursement and indemnity from the customer.
	6.	The September/October 1988 arrangements between the broker and the bank constituted the bank equitable assignee, to the extent of one half, of the broker's claim against the customer, so that the proceedings brought by the broker and the bank against the customer are correctly constituted, all the parties legally and beneficially interested in this chose in action being before the court.

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

(G.M. Godfrey)
Judge of the High Court

Representation:

Mr Andrew K.N. Cheung, inst. by M/s Woo Kwan Lee & Lo for 1st and 2nd Plaintiffs

Ms Cissy Lam, inst. by M/s Fred Kan & Co. for Defendant