Osk Asia Futures Ltd. v. Lam Chi Bin Stanley and Another

HCA010335A/2000

HCA10335/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.10335 OF 2000

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Coram: Hon Waung J in Chambers

Date of Hearing: 16 July 2001

Date of Judgment: 16 July 2001

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J U D G M E N T

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1.This is an appeal by the 1st defendant from the order of the Master, whereby the Master granted to the 1st defendant conditional leave to defend by requiring the 1st defendant to pay into court $2.5 million in order to defend the claim brought by the plaintiff against the 1st defendant for a loss suffered by the plaintiff in the amount of something over $9 million in relation to the Futures Exchange Contract entered by the plaintiff on the instructions of the 1st defendant, pursuant to a written agreement entered into between the plaintiff and the 1st defendant.

2.What happened is this : the 1st defendant is a highly experienced professional trader, as he claimed that he was a big player in a big way with a long experience of trading.

3.The transaction in question between the plaintiff and the 1st defendant was the first in their relationship. As the 1st defendant previously had not done any business with the plaintiff, an account was required to be opened in order to transact any business. The 1st defendant was supposed to pay to the plaintiff and into the plaintiff's bank account a sum of $2.5 million as margin deposit. This was purportedly done by way of a cheque and the cheque was given by the 1st defendant not to the plaintiff, but was deposited by the 1st defendant into the plaintiff's bank account and it will seen subsequently that the 1st defendant countermanded that cheque.

4.On the representation of the 1st defendant that the money had been paid by the 1st defendant to the plaintiff's bank account, the plaintiff executed 250 Hang Seng Index Futures October contracts. The market moved that day quite quickly against the 1st defendant, so as to require the 1st defendant to top up the $2.5 million margin deposit that was supposed to have been already paid, by an additional $2.5 million referred to in the affidavit.

5.Instead of paying additional deposit or squaring the contracts, the 1st defendant wished to transfer the contracts to another broker, ASG Futures Limited ("ASG"), i.e. the 2nd defendant. Apparently, the 1st defendant had been a substantial customer of ASG. By a telephone conversation later that afternoon, it appeared that ASG had agreed to take up these contracts and agreed to a transfer. ASG apparently signed the appropriate forms by signature which, however, turned out to be not authorized signature in the eyes of the Hong Kong Futures Exchange Clearing Corporation Ltd ("HK Clearing House"). The HK Clearing House is the mechanism created under the ordinance whereby in relation to Exchange Contracts, the HK Clearing House, as the central exchange, would approve all purported transfers from one broker to another broker of outstanding contracts. The role of this central exchange is to ensure that at the end of every trading day, each broker has sufficient or adequate cover vis-à-vis the central exchange of its outstanding position and that is why it is crucial in relation to contracts that are outstanding at the end of a trading day that either a definite cover must be made to the central exchange or there had been an effective transfer from one broker to another broker in which case the transferee broker would have to ensure adequate cover with the central exchange.

6.At the end of the trading day on Friday, 13 October 2000, because there had not been any effective transfer of the outstanding contracts, something like $20 million additional cover by the plaintiff to the central exchange was required as stated in the documentation, the Daily Settlement Summary between the HK Clearing House and the plaintiff. This can be seen at page 139. That is to say, in the eyes of the central exchange, these contracts were still with the plaintiff and the plaintiff therefore had a liability to pay to the central exchange the sum of some $20 million because the market had been moved adversely in relation to the 1st defendant's contracts and the plaintiff, therefore, incurred such a liability to the central exchange. It also follows that so far as the HK Clearing House/the central exchange, was concerned, the 2nd defendant, ASG, did not have these contracts and did not, therefore, have the liability vis-à-vis adequate coverage with the HK Clearing House. There had been exchanges over the weekend amongst the parties as to these outstanding contracts and eventually on Monday morning, there was the flurry of activities resulting in by 9:45 a.m. when the market opened again, the contracts still being held, in the eyes of the central exchange, by the plaintiff. No effective transfer had been executed by the 2nd defendant to transfer these contracts from the plaintiff to the 2nd defendant. No effective approval of transfer of these contracts was made by the HK Clearing House/the central exchange. The 1st defendant did not put any money into the bank account of the plaintiff but in fact had countermanded the original $2.5 million cheque. The plaintiff had openly indicated to everyone, i.e. the 1st and 2nd defendants, that it was going to liquidate the position in order to protect itself. Throughout the rest of that day, the plaintiff liquidated the outstanding contracts with a result that a loss of something like $9 million odd was suffered.

7.The case of the plaintiff, therefore, against the 1st defendant is that pursuant to the terms of the Written Client Agreement dated 10 October 2000 as between the plaintiff and the 1st defendant as these outstanding contracts resulted in a loss of $9 million the 1st defendant should be responsible for such loss. The plaintiff's position is that the Master was wrong in granting conditional leave to defend. The plaintiff asked for summary judgment. The plaintiff also has claimed in the Statement of Claim the additional remedy against the 2nd defendant for breach of contract, in that the 2nd defendant had agreed to take up the outstanding contracts but then failed to do so effectively by signing the necessary documents.

8.The argument by Mr Stanley Lam, the 1st defendant who appeared in person today before me, really centres on one point and that is the 1st defendant is released from his liabilities to the plaintiff as soon as the second broker, i.e. ASG, has agreed with the first broker, i.e. the plaintiff, to a transfer. From that time onwards, the plaintiff no longer can look to the 1st defendant. I disagree. If you look at the overall mechanism of the way these futures contracts work, then it seems to me that unless and until there has been an effective transfer approved by the central exchange, the central exchange regards the contracts as those undertaken by the plaintiff broker and the plaintiff broker can therefore effectively look to its customer, i.e. the 1st defendant. The fact that there might had been an agreement, whether oral or written, between the two brokers gives only the additional right to the plaintiff broker to look to the second broker for its "additional remedies" not "alternative remedies". So, the primary case that had been argued before me by Mr Lam seems to be a wrong submission. What is suggested by Mr Lam will bring havoc to the whole exchange mechanism and the whole statutory scheme and there is therefore in my view no substance in the defence. It seems to me that Mr Lam has skillfully tried to exploit the existence of a second claim, i.e. the additional claim by the plaintiff against the 2nd defendant and tried to delay the evil day. There is, in my view, no reasons for the court to order conditional leave to defend. This is for me, simply, a case of no defence and so, in my judgment, the proper order under the summary judgment application should be judgment to the plaintiff in the amount as claimed by the plaintiff together with costs of the action, costs of the appeal and the cost of the summary judgment application before the Master.

Representation:

Mr Jat Sew Tong, instructed by Messrs Baker & Mckenzie, for the Plaintiff/Respondent

Mr Lam Chi Bin Stanley, 1st Defendant/Appellant appearing in person

Remarks:
Appeal by the 1st Defendant to the Court of Appeal. Appeal dismissed. Please refer to the Appeal Judgment CACV002690/2001.