Ubs Securities Asia Ltd v. Multec International Holdings Ltd
Read the full judgment text of CACV 269/2007 on BabelCite. This Court of Appeal judgment was delivered on 17 October 2007.
1. The plaintiff obtained summary judgment from Deputy High Court Judge Muttrie against the defendant in the sum of HK$14,138,754.75 together with interest and costs. The defendant now appeals against the judgment.
Cites 1 case
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CACV 269/2007 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 269 OF 2007 (ON APPEAL FROM HCA 672 OF 2007) ______________________ BETWEEN
______________________ Before : Hon Cheung JA, Stone and Suffiad JJ in Court Date of Hearing : 3 October 2007 Date of Judgment : 17 October 2007 ______________________ J U D G M E N T ______________________ Hon Cheung JA : The appeal 1.The plaintiff obtained summary judgment from Deputy High Court Judge Muttrie against the defendant in the sum of HK$14,138,754.75 together with interest and costs. The defendant now appeals against the judgment. Facts 2.The plaintiff is a well-known financial institute engaged in the business of dealing with securities and future contracts and advising on securities. The defendant was a client of the plaintiff. The defendant opened the account with the plaintiff on 13 December 2006. Among the documents signed by the defendant when it opened the account was a Client Agreement For Investment Business (Non-Discretionary) (‘the Agreement’). The Terms and Conditions For Investment Business (Non-Discretionary) (‘the Terms and Conditions’) formed a part of the Agreement. 3.On 14 December 2006 the plaintiff allotted 6,765,000 shares (‘the shares’) in China Communication Construction Limited (‘CCCL’) to the defendant. The shares were held by HSBC as the defendant’s custodian. 4.On 18 December 2006 the defendant instructed the plaintiff to sell the shares at market price. The plaintiff duly executed the sale in the Hong Kong Stock Exchange (‘HKSE’) at the market price of HK$6.2483. The total price was HK$42,118,000.85. On the same day the plaintiff notified the defendant of the sale and the defendant confirmed acknowledgement of the sale by an e-mail. 5.Under clause 3.2 of the Terms and Conditions, all transactions carried out pursuant to the Agreement were subject to, among other things, rules, regulations, customs and practices of the Securities and Futures Commission and the exchange through which the transaction was executed. 6.Under the requirement of HKSE, unless otherwise specifically agreed, settlement of transactions occurs two business days after the date of entry into a commitment to buy and sell listed securities. This is commonly known as the T+2 requirement. 7.Pursuant to this requirement the defendant was required to deliver the shares to the plaintiff by 20 December 2006 in order to settle the sale. The defendant failed to deliver the shares on that date as required. 8.In order to settle the transaction the plaintiff borrowed the required number of shares from its own source. At that time the plaintiff held shares in CCCL on behalf of a number of clients who were allotted CCCL shares. 9.On 20and 21 December 2006 the plaintiff contacted HSBC and was told that the defendant had not given instruction to HSBC to settle the transaction. 10.On 22 December 2006, the plaintiff further informed the defendant that the shares had been sold on 18 December 2006. Despite being so told the defendant on the same day instructed HSBC to sell the shares. It then informed the plaintiff that the shares had been sold through HSBC. The plaintiff requested the defendant to ‘immediately buy in the shares for settlement’. 11.On 3 January 2007 the plaintiff requested the defendant to deliver the shares for settlement no later than 3:45 p.m. on 5 January 2007. The defendant did not comply with this request. The plaintiff on 8 January 2007 which was the next trading day after 5 January 2007, purchased the shares at the market price of HK$8.0368 with a total price of HK$56,195,502.00. 12.The plaintiff sought to recover from the defendant the difference of this sum and the sale consideration of HK$42,118,000.85 together with the fees, expenses and disbursements incurred by the plaintiff as a result of these two transactions. The two issues 13.There are two issues in this appeal. First, whether the defendant was in breach of contract by failing to provide the plaintiff with the shares for the settlement of the transaction? Second, what damages did the plaintiff suffer as a result of this breach? Liability 14.The plaintiff’s case on liability is simple, namely, it had carried out a sale order on the defendant’s instruction and properly advised it about the settlement procedure but the defendant failed to honour the settlement. 15.In an Order 14 application it was for the defendant to condescend to give particulars of its defence. It is not clear what defence was relied upon by the defendant. The defendant said that, first, it was not properly advised of the settlement procedure and second, by relying on some sales confirmations generated by the plaintiff in late December 2006 and early January 2007 it was questionable whether the plaintiff had actually carried out its instruction to sell the shares. No credible defence 16.I do not find that the defendant has provided any credible defence to the plaintiff’s claim for breach of contract. If a customer instructed a dealer to sell shares on its behalf then surely it must provide the dealer with the shares in order to complete the transaction. This point is so fundamental and simple that it does not require elaboration. 17.Starting from this premise I just do not see the relevance of the defendant’s claim that it had not been properly advised on the settlement procedure. The defendant did not say that it was not aware that it had to transfer the shares to the plaintiff for settlement. It, however, said that it assumed the plaintiff would make the necessary arrangements with HSBC to complete the transaction. This is totally incredible. How would HSBC be able to release the shares to the plaintiff without the defendant’s instructions? 18.What was more incredible was that on 22 December 2006, after admitting that the plaintiff had informed it earlier that the shares had been sold, the defendant then further instructed HSBC to sell the shares. The evidence showed that the price of the shares fell from a high of around HK$7.8 on 15 December 2006 to a low of between HK$6.41 and HK$6.06 on 18 December 2006 and then gradually picked up again in the next few days. By 22 December 2006 the price was higher than the price as of 18 December 2006. This suggested that the defendant took a deliberate risk of selling the shares again at a higher price than the one obtained by the plaintiff earlier. 19.As to the question whether the plaintiff had actually sold the shares on behalf of the defendant, my view is that the defendant has not shown by any credible evidence that the instruction was not carried out by the plaintiff on 18 December 2006. 20.Buying and selling of shares are now centrally conducted in the HKSE. If there was indeed no genuine sale by the plaintiff, I would be extremely surprised that the defendant, who is represented by a well-known firm of solicitors, would not be able to obtain evidence to challenge the plaintiff’s claim. 21.In my view the judge was correct to find liability against the defendant. The relevant date for the assessment of damages 22.The real dispute in this case is the quantification of damages that the plaintiff is entitled to recover from the defendant. The general rule is that damages for breach of contract should be assessed as at the date when the cause of action arose, i.e. the date of the breach. This rule usually applies where substitute performance is readily available in the market but as pointed out by Lord Wilberforce in Johnson v. Agnew [1980] AC 367 at 399H─401C this is not an absolute rule: if to follow it would give rise to injustice the court has power to fix such other date as may be appropriate in the circumstances. Thus, if, after a breach, the innocent party reasonably continues to treat the contract as in force, damages may be assessed as at the later date when (otherwise than by his default) the contract is lost, i.e. when performance becomes impossible, or when the innocent party terminates the contract, see Chitty On Contracts 29th Edition, Vol. I, para. 26─057. The parties’ position 23.The plaintiff submitted that the assessment should be based on 8 January 2007 when it acquired the replacement shares in the market. The defendant, on the other hand, submitted that, first, the breach occurred on 20 December 2006 and the assessment should be based on that date. Alternatively the plaintiff should go into the market to acquire the shares at any time after 20 December 2006 and certainly should not wait until 8 January 2007 to acquire the shares. Expert evidence 24.The defendant relied on the evidence of a financial expert, Mr Witts who stated that the HKSE and Central Clearing and Settlement System (‘CCASS’) are very quick to act on any default or tardiness in delivery of scrip or payment of cash for share transactions and the situation is vigorously monitored on a daily basis. He further stated that settlement should take place two days after the transaction. If HKSE and CCASS became aware of a settlement default HKSE will order a dealer to buy in on a T+3 basis i.e. transaction plus three days. My view 25.In my view this is not strictly a T+2 or T+3 situation because the plaintiff had settled the transaction by delivering the shares to the purchasing party within time. The real issue in this case is when should it acquire the shares in the market after the initial borrowing for the purpose of assessing damages. Damages as of 20 December 2006 26.The starting point in this inquiry is that on any basis the defendant must be liable for damages that the plaintiff sustained as of 20 December 2006 when the plaintiff was required to complete the transaction. Because of the upward price trend of the shares if the plaintiff was to acquire the shares in the market that day it would suffer a loss. According to Ms Cheng, counsel for the plaintiff, the loss is the sum of HK$1,225,191.79 calculated as follows :
27.In my view the plaintiff must be entitled to HK$1,225,191.79 in any event. Power to borrow shares 28.For the purpose of an Order 14 application, my view is that the plaintiff has advanced a very strong case that damages should not be confined to the loss as of 20 December 2006. 29.Clause 6.2 of the Terms and Conditions provides that :
30.In my view the plaintiff has a strong case that since it was authorised by the Terms and Conditions to borrow instead of purchasing the shares to settle the transaction and also bearing in mind that it had a pool of shares in its hand to complete the transaction, it was acting reasonably in not immediately acquiring the shares in the market on 20 December 2006. Response to breach 31.I further find Ms Cheng’s argument that the law should not discourage an innocent party from attempting to pursue performance from the contract broker to be persuasive. In Yukong Line Ltd of Korea v. Rendsburg Investments Corporation of Liberia [1996] 2 L1 Rep 604 at 608 per Moore-Bick J held that :
32.In my view the plaintiff has also shown a strong case that it was acting reasonably in not acquiring the shares in the market on 21 December 2006 which was one day after the breach by the defendant. After all the plaintiff knew that the shares were kept by HSBC. 33.However, in my view the events on the next day i.e. 22 December 2006 assumed a significant role. On that day the plaintiff was told by the defendant that it had chosen to sell the shares despite its earlier instruction to the plaintiff to sell them. This suggested that the plaintiff was dealing with an unreasonable customer and I find that there is a strong argument that the plaintiff should immediately have taken steps to mitigate its loss there and then. Whether the plaintiff had acted reasonably thereafter clearly is a matter to be tried. 34.Although Ms Cheng argued that there is nothing more which requires to be considered, in my view the defendant must be given an opportunity to cross-examine the plaintiff on the reasons why it only chose to go into the market on 8 January 2007. Damages as of 22 December 2006 35.If the plaintiff was to acquire the shares from the market on 22 December 2006 its loss would be HK$5,356,339.84 calculated as follows :
36.The difference between the sum of HK$5,356,339.84 and HK$1,225,191.79 (if assessment was to be based on 20 December 2006) is HK$4,131,148.05. 37.Although this is a case where otherwise I would be prepared to give judgment to the plaintiff on the basis that damages is to be assessed as of 22 December 2006, upon reflection, and as the issue involves the question of reasonableness, I would give the defendant a chance to defend this sum i.e. HK$4,131,148.05, conditional upon such sum being paid into Court within 28 days. Damages after 22 December 2006 38.As I have said earlier any damages that the defendant might suffer after 22 December 2006 must be an issue to be tried. In view of the long lapse of time between the clear indication of the attitude of the defendant and the eventual action taken by the plaintiff this particular aspect of the case cannot be resolved by way of affidavit evidence. Conclusions 39.Accordingly the Order below is set aside and the defendant’s appeal is allowed to the extent as follows :
Costs 40.I would invite the parties to submit an agreed costs order within 14 days. If agreement is not reached the parties are required to lodge written submissions on costs. The plaintiff is required to lodge the submission within 14 days of the judgment to be followed by the defendant within seven days thereafter. The plaintiff is to hand the right to reply within seven days of the defendant’s submission. Hon. Stone J : 41.I respectfully agree with the judgment of Cheung JA, and with the Order proposed. 42.In my view the learned Deputy Judge below was entirely correct in his robust assessment of the merits of the defendant’s case in terms of liability, although in the context of quantum, and in particular the relevant date for assessment of damage, I consider that he erred in accepting at face value the manner in which the plaintiff put its case at the summary judgment application, which attracted an award below in the significant sum of HK$14,138,754.75. 43.Although he pursued the appeal in terms of liability, in my judgment Mr Coleman SC was forensically astute in making quantum the primary thrust of his submission, and it is this element of the case which has persuaded this court to take the view that the plaintiff should not necessarily obtain damages to be assessed as at 8 January 2007, which, as Cheung JA has indicated, was the date upon which the replacement shares were acquired in the market, the price of which representing the starting point in the plaintiff’s damages claim as currently framed. 44.The reasonableness of such acquisition on that date in my view is not a matter which can be decided on the basis of affidavit evidence alone, and deserves to be tested after discovery, the opportunity for cross examination, and, if thought necessary, further marshalling of expert evidence. 45.Accordingly, a trial will be required solely upon the issue of quantum, subject to Orders (1) and (2) as set out at paragraph 39 in the judgment of Cheung JA. Hon Suffiad J : 41.I agree with the judgment given by Cheung JA and have nothing to add.
Ms. Yvonne Cheng, instructed by Messrs Herbert Smith, for the Plaintiff Mr. Russell Coleman, SC and Mr. Jonathan Wong, instructed by Messrs Richards Butler, for the Defendant |
Cases cited in this judgment
Further hearings and rulings under CACV 269/2007