SHINE GRACE INVESTMENT LTD v. CITIBANK, N.A. AND ANOTHER

HCCL 28/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 28 OF 2008

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J U D G M E N T

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Introduction

1.  At the PTR held on 11 October 2017, three actions were before the Court viz HCCL 28/2008, HCCL 28/2013 and HCCL 29/2013.  The three actions had been ordered to be tried at the same time.  The trial will commence on 13 November 2017, with 5 weeks reserved.

2.  By summons dated 20 September 2017 issued in HCCL 28/2008, the Plaintiff (“Shine Grace”) applies for leave to inter alia amend the Re‑Amended Reply filed herein on 27 June 2013.  The application is opposed by the Defendants.

Material Background

3.  All three actions arose out of the alleged mis‑selling of 9 equity accumulator contracts (“Disputed Contracts”) on 15 and 16 October 2007 by the 1^st Defendant (“Citibank”) to Shine Grace.  These were set out in Schedule 1 to the Amended Statement of Claim filed on 16 April 2013.  The same were listed as the 274^th to 282^nd equity accumulator contracts between Shine Grace and Citibank in Schedule 3 to the Re‑Amended Defence filed on 28 May 2013.  These 282 accumulator contracts covered a period of almost 4 years — from 2 January 2004 to 16 October 2007.

4.  Shine Grace was wholly‑owned, controlled and operated by the late Mrs Anita Chan Lai Ling (“Mrs Chan”), a wealthy businesswoman and philanthropist.  In March 2003, Shine Grace opened an account with Citi Private Bank (“Account”).  The 2^nd Defendant (“Hailey Mak”) was the relationship manager of Mrs Chan and Shine Grace.

5.  The Plaintiffs in HCCL 28/2013 and HCCL 29/2013 (“Shinning” and “BSI” respectively), which are connected with Mrs Chan, entered into several guarantees (“Shinning Guarantees” and “BSIGuarantees”) with Citibank in 2004 and 2006 to support Shine Grace’s trading activities.

6.  Mrs Chan died on 17 October 2007 due to an overdose of fentanyl patches.  According to the medical experts, the critical overdosing with fentanyl very likely ensued in the afternoon or evening of the day before ie 16 October 2007.  After Mrs Chan’s death, her children were appointed directors of Shine Grace.  Shine Grace ceased trading on the Account and disclaimed the Disputed Contracts.  Citibank’s margin calls were not met.  Eventually, in January 2008, Citibank decided to close out and unwind all of Shine Grace's actual open accumulator contracts as well as the Disputed Contracts and recoup the costs (“Unwinding Costs”) from Shine Grace.  When Shine Grace’s assets with Citibank were insufficient to cover the Unwinding Costs, Citibank turned to Shine Grace’s guarantors and transferred funds from Shinning's and BSI’s accounts with it to satisfy the outstanding Unwinding Costs.

7.  In HCCL 28/2008, Shine Grace seeks a declaration that it has not contracted with Citibank in respect of the 9 Disputed Contracts, alternatively, a declaration that the 9 Disputed Contracts are unenforceable; a declaration that all purported margin call notices were invalid and of no legal effect.  Shine Grace also seeks an Order that Citibank account for and return all securities and/or monies held on trust for Shine Grace or due to Shine Grace as well as damages or restitutionary relief against both Defendants.

8.  In HCCL 28/2013 and HCCL 29/2013, Shinning and BSI seek repayment from Citibank of sums transferred out of their bank accounts to pay for the Unwinding Costs on the ground that, since the Disputed Contracts were either void or rescinded, Citibank had no right to call on the Guarantees.  BSI also claims the BSI Guarantees had been terminated by written notice in July 2007 and Citibank was not entitled to call on the BSI Guarantees.

The proposed amendments

9.  Shine Grace’s proposed amendments to the Re‑Amended Reply are concerned with two main aspects: (1) Shine Grace’s reliance on the Unconscionable Contracts Ordinance (“UCO”), Cap 458 and the Control of Exemption Clauses Ordinance (“CECO”), Cap 71 and (2) mitigation of loss.

UCO and CECO

10.  At paragraph 21BA, Shine Grace seeks relief under s 5 of UCO in relation to the contractual provisions pleaded at paragraphs 12 and 29 of the Re‑Amended Defence in order to preclude Citibank and Hailey Mak from relying on those provisions to avoid liability.  After this court’s clarification with Mr Pao at the hearing, it now seems that Shine Grace is not seeking relief in relation to the Suitability Confirmation Letters pleaded at paragraph 12(b) of the Re‑Amended Defence[1]. Shine Grace avers that “such contractual provisions were unconscionable in the circumstances relating to the contract at the time it was made, having regard to all the relevant facts and matters at the material time”.  Shine Grace then goes on to particularize such “facts and matters” in 11 sub‑paragraphs.

11.  At paragraph 21BB, Shine Grace relies on the CECO and contends that the same contractual provisions pleaded at paragraphs 12 and 29 of the Re‑Amended Defence were “not fair or reasonable in all the circumstances” to the extent that they served to exclude or restrict liability on the part of Citibank and/or Hailey Mak.  The same particulars pleaded in paragraph 21BA are referred to.

12.  Both paragraphs 21BA and 21BB are directed at the Defendants’ argument of contractual estoppel pleaded at paragraph 64B of the Re‑Amended Defence[2] which is in these terms:

“...by reason of the provisions in the agreements between the 1^st Defendant and SGIL as pleaded in paragraphs 12 and 29 above, SGIL is contractually precluded and estopped from: (i) alleging that the Defendants are in breach of the duties alleged; and (ii) asserting that it entered into the transactions in question relying on the alleged misrepresentation.”

13.  Mr Dawes SC, for the Defendants, opposes the amendments at paragraphs 21BA and 21BB on the ground that they are new pleas which will open up vast new areas of evidential inquiry at an extremely late stage — the trial is only a month away, Shine Grace’s opening submissions are due in two weeks’ time and the Defendants’ are due one week thereafter.  Even if Shine Grace chooses not to do so, the proposed amendments will necessitate the obtaining and filing of extensive evidence by the Defendants.  Implicit in the opposition is that it is highly likely the trial date will be jeopardized if the amendments are allowed.

14.  In order to appreciate how extensive the Defendants’ evidential inquiry is likely to be in order to deal with paragraphs 21BA and 21BB, it is imperative to consider:

(1)   what contractual provisions are being challenged as falling foul of the UCO and CECO,

(2)   the relevant provisions of the UCO and CECO, 

(3)   what are the “relevant facts and matters” that Shine Grace relies upon in support of the challenge, and

(4)   what additional “facts and matters” the Defendants may wish to raise for the court's consideration in response.

15.  In relation to 14(1), as can be seen from paragraph 12 of the Re‑Amended Defence, the contractual documents which contain provisions under “challenge” are these:

(1)   The Terms and Conditions for Derivative Transactions signed by Mrs Chan on 12 March 2003.

(2)   The Terms and Conditions for Credit Services signed by Mrs Chan on 31 March 2003.

(3)   The Master Derivative Agreement signed on 12 March 2003.

(4)   The TIP[3] sheets sent to Shine Grace in respect of each accumulator contract entered into by Shine Grace[4].  Presumably, Shine Grace is only challenging the TIP sheets in respect of the 9 Disputed Contracts entered into on 15 and 16 October 2007 (rather than the 282 accumulator contracts) although the proposed amendments are not entirely clear on this.

(5)   The Risk Disclosure Statement and Terms and Conditions for Derivative Transaction of Citibank provided to Shine Grace on 12 March 2003.

16.  In relation to 14(2), s 5(1) of the UCO provides that if, with respect to a contract for the sale of goods or supply of services in which one of the parties deals as consumer, the court finds the contract or any part of the contract to have been unconscionable in the circumstances relating to the contract at the time it was made, the court may (a) refuse to enforce the contract; (b) enforce the remainder of the contract without the unconscionable part; (c) limit the application of, or revise or alter, any unconscionable part so as to avoid any unconscionable result.

17.  S 6(1) of the UCO gives a non‑exhaustive list of the factors to be considered by the court as follows:

“(1) In determining whether a contract or part of a contract was unconscionable in the circumstances relating to the contract at the time it was made, the court may have regard to (among other things) -

(a) the relative strengths of the bargaining positions of the consumer and the other party;

(b) whether, as a result of conduct engaged in by the other party, the consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the other party;

(c) whether the consumer was able to understand any documents relating to the supply or possible supply of the goods or services;

(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the consumer or a person acting on behalf of the consumer by the other party or a person acting on behalf of the other party in relation to the supply or possible supply of the goods or services; and

(e) the amount for which, and the circumstances under which, the consumer could have acquired identical or equivalent goods or services from a person other than the other party.”

18.  The expression “among other things” makes it clear that the list is non‑exhaustive.  Indeed, the Court of Appeal recently held that “Whilst the court must have regard to the non‑exhaustive list of factors in the statute, it should also consider all other relevant matters and circumstances reasonably foreseeable at the time of making the contract in determining if there is any unconscionability in the terms of the contract”: Chang Pui Yin v Bank of Singapore, unrep, CACV 194/2016, 20 July 2017 at [66].  Further, the expression “unconscionable in the circumstances relating to the contract at the time it was made” requires the court to look into the relevant circumstances in relation to each contract under challenge at the time it was made.  Hence, if the matters in dispute between the parties involve more than one contract, as in the present case, the court must consider the relevant circumstances at the time when each such contract was made.

19.  As for CECO, the test of reasonableness is also fairly wide.  S 3(1) provides:

“(1) In relation to a contract term, the requirement of reasonableness for the purposes of this Ordinance and section 4 of the Misrepresentation Ordinance (Cap. 284) is satisfied only if the court or arbitrator determines that the term was a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.”

20.  In relation to 14(3), as stated above, Shine Grace has pleaded 11 sub‑paragraphs as particulars of such “facts and matters at the material time” as rendering the contractual provisions unconscionable.  Mr Dawes SC’s point is that the factual matters particularized under paragraph 21BA are far from undisputed and hence the need on the part of the Defendants to file evidence in response.  A number of examples were given in his written submissions.  For illustration purposes, suffice it for this court to refer to the following two.

21.  First, the averment in paragraph 21BA(1) that “The relevant terms were part of Citibank’s standard terms and conditions and there was no scope for negotiation on the part of [Shine Grace]”.

22.  With regard to this averment, Mr Dawes SC points out that at the time of opening the Account in 2003, Mrs Chan and her group of companies had already been “mega wealth” clients of Citibank for over 19 years.  Given Mrs Chan’s longstanding relationship with Citibank, her status as a mega wealth client, the amount of business she brought to Citibank and the fact that other banks in Hong Kong were also actively vying for her business, the assertion that there was no scope for negotiation between Shine Grace and Citibank must be open to question.  Fairness dictates that Citibank should be given the opportunity to make inquiries of all its previous negotiations with Mrs Chan / Shine Grace and to lead evidence on the same if so advised.

23.  This court would add that the “material time” for the present purpose is not just when Shine Grace opened the Account in March 2003.  The contractual documents under challenge include the TIP sheets.  Even if Shine Grace is confining itself to the 9 Disputed Contracts, the circumstances prevailing in 2007 must also be looked into.  By the end of 2006, Shine Grace had entered into over 160 accumulator contracts with Citibank.  In 2007, Shine Grace was trading even more actively.  In this regard, Mr Dawes SC refers in his written submissions to an incident in which Mrs Chan successfully negotiated reductions of Citibank’s normal requirements for initial margin requirements and the amount of “loanable value” to be deposited with it and an internal email dated 26 March 2007 which recorded the reason for approving the reductions.

24.  Second, the averment pleaded in 21BA(3)that “The Defendants had no legitimate interest to protect in avoiding liabilities by relying on the terms they pleaded on the facts pleaded in this case”.

25.  Mr Dawes SC submits that this plea also opens up an extremely broad field of inquiry.  This is because in determining whether it is reasonable or legitimate for a defendant to limit the scope of its liability, the court will look into all the circumstances including the nature of the business, the difficulty of the task, the amount of money at stake, the availability of alternative means of protection eg by insurance and whether others in the market are offering similar terms.  These are all matters in relation to which the Defendants may wish to adduce detailed evidence in response to the averment.  For example, the Defendants may adduce evidence on the likely additional financial burden which would be borne by Citibank if its contractual provisions were struck down as unreasonable or unconscionable, on the availability or otherwise of insurance coverage, on how prevalent the contractual provisions in question were in the market and the rationale behind it.

26.  In relation to 14(4), given that court must have regard to the non‑exhaustive list of factors in s 6 of the UCO as well as all other matters and circumstances reasonably foreseeable at the time of making the contract, it is open to the Defendants to raise a host of factors for the court’s consideration, even though Shine Grace only relies on a few.  One prominent example given in Mr Dawes SC’s written submissions is the fact that Mrs Chan had previously engaged the services of other banks in Hong Kong and executed a fair number (50) of accumulator contracts with the Bank of East Asia.  The fact that Shine Grace had entered into accumulator contracts with the Bank of East Asia is a potentially relevant factor under s 6(1)(e) of the UCO, depending on whether the terms of those contracts were sufficiently “identical or equivalent” with those offered by Citibank.  Mr Dawes SC also suggests that Citibank would wish to explore and rely upon Bank of East Asia’s role in the management of Mrs Chan’s finances and the advice which was provided to her.

27.  In light of the above analysis, this court is in no doubt that the proposed amendments will necessitate a wide range of evidential inquiry on the part of the Defendants and raise the distinct prospect of their having to file extensive evidence to deal with the new pleas.  Given the imminence of the trial, this court is also in no doubt that it is wholly unfair to the Defendants to have to carry out this exercise at this late stage, almost 10 years after the commencement of proceedings and less than a month before the trial.  If the amendments are allowed, it is more than likely that the trial date will be derailed.

28.  RHC O 20 r 5(1) provides that the Court may at any stage of the proceedings allow any party to amend his pleadings on such terms as to costs or otherwise as may be just and in such manner as it may direct.

29.  In urging this court to allow the proposed amendments, Mr Pao refers to the oft‑cited passage in the speech of Lord Brandon in Ketteman v Hansel Properties Ltd [1987] AC 189 at 212F–H:

“With regard to the principles on which his discretion to allow or refuse the applications to amend should be exercised, the judge referred to the notes to R.S.C., Ord. 20, r. 5, in The Supreme Court Practice 1982 and to the authorities there cited. The effect of these authorities can, I think, be summarised in the following four propositions. First, all such amendments should be made as are necessary to enable the real questions in controversy between the parties to be decided. Secondly, amendments should not be refused solely because they have been made necessary by the honest fault or mistake of the party applying for leave to make them: it is not the function of the court to punish parties for mistakes which they have made in the conduct of their cases by deciding otherwise than in accordance with their rights. Thirdly, however blameworthy (short of bad faith) may have been a party’s failure to plead the subject matter of a proposed amendment earlier, and however late the application for leave to make such amendment may have been, the application should, in general, be allowed, provided that allowing it will not prejudice the other party. Fourthly, there is no injustice to the other party if he can be compensated by appropriate orders as to costs.”

30.  For completeness, this court should mention another passage of Lord Griffiths’ speech at 220D–G which set out a number of factors which have become highly pertinent after the Civil Justice Reform:

“Whether an amendment should be granted is a matter for the discretion of the trial judge and he should be guided in the exercise of the discretion by his assessment of where justice lies. Many and diverse factors will bear upon the exercise of this discretion. I do not think it possible to enumerate them all or wise to attempt to do so. But justice cannot always be measured in terms of money and in my view a judge is entitled to weigh in the balance the strain the litigation imposes on litigants, particularly if they are personal litigants rather than business corporations, the anxieties occasioned by facing new issues, the raising of false hopes, and the legitimate expectation that the trial will determine the issues one way or the other. …

Another factor that a judge must weigh in the balance is the pressure on the courts caused by the great increase in litigation and the consequent necessity that, in the interests of the whole community, legal business should be conducted efficiently.  We can no longer afford to show the same indulgence towards the negligent conduct of litigation as was perhaps possible in a more leisured age…”

31.  The statement of principles summarised by Lord Brandon continues to be applied by the Courts in Hong Kong after the CJR but that is subject to the underlying objectives set out in RHC O 1A and the importance of not disturbing a milestone date.

32.  In Li Shiu To v Li Shiu Tsang, unrep, HCA 416/2003, 14 August 2012, Deputy Judge Lok (as he then was) observed at [16]–[17] that:

“16. …First, the new O 1A of the RHC makes it clear that the court shall give effect to the underlying objectives when it exercises its power or interprets the RHC, including increasing cost‑effectiveness of litigation, ensuring that a case is dealt with as expeditiously as is reasonably practicable, promoting a sense of reasonable proportion and procedural economy in the conduct of proceedings, facilitating the settlement of disputes and ensuring that the resources of the court are distributed fairly. If the amendment application is made in circumstances offending these underlying objectives, the court may have to balance all the factors in the case in determining whether to grant the application.

17. Second, there is a heightened concern to guard against late applications after the implementation of the CJR.  For case management purposes, there are now certain milestone dates in the course of litigation, and one of which would be the trial date.  If a party makes a late application to amend the pleading with the effect that the trial date may have to be adjourned, the court would be very reluctant in allowing the application unless there are exceptional circumstances. Indeed, adjournment of the trial is now considered as a serious prejudice to the parties involved in litigations.  Hence, one should not assume that, once the Ketteman principles are satisfied, the court would automatically grant an application for amendment of pleading in particular at a very late stage of the proceedings.”

33.  Similarly, in Topwell Corporation Ltd v Kwan Kam Kee [2014] 5 HKLRD 1 at [39], Kwan JA said:

“…in the exercise of discretion, the court must of course have regard to the underlying objectives in Order 1A of the RHC or of the RDC, so it cannot be assumed that once the principles in Ketteman are satisfied, the amendment would be allowed. The court would need to balance all relevant factors to decide how its discretion should be exercised, if the application is made in circumstances offending one or more of the underlying objectives.”

34.  In this particular case, it seems to this court that allowing the amendments would offend almost all the underlying objectives set out in RHC O 1A.  Importantly, allowing the amendments at this late stage would likely derail the trial date and for that very reason would cause serious prejudice to the Defendants, especially the personal Defendant Hailey Mak.  This piece of litigation has been hanging over her head for almost 10 years and she has, to quote from Lord Griffiths, a “legitimate expectation” that the trial scheduled to commence very shortly will determine the presently pleaded issues one way or the other.  As for Citibank, this court cannot assume that, just because it is a big financial corporation with enormous resources, the evidential inquiry suggested by Mr Dawes SC would necessarily bear fruit.  After all, the inquiry is into events dating back to 2003 — the possibility of the bank not being able to locate relevant documents or witnesses can hardly be dismissed as fanciful.

35.  Furthermore, there is no explanation as to why leave to amend was not applied for much earlier — bearing in mind that the case was set down for trial in August 2015 — and certainly no exceptional circumstances have been shown to exist which might possibly justify the grant of leave at this late stage.  The suggestion that the proposed amendments were prompted by the recent decision of Chang Pui Yin v Bank of Singapore is in this court’s view a flimsy excuse.  Reliance on UCO in disputes involving accumulator contracts is nothing new: see eg DBS Bank v Sit Pan Jit, unrep, HCA 382/2009, 6 February 2014.  In fact, Shine Grace has pleaded ss 5 and 6 UCO at paragraph 10(3) of the Reply by way of (red) amendment in May 2010.

36.  This court has borne in mind that it “shall always recognise that the primary aim in exercising the powers of the Court is to secure the just resolution of disputes in accordance with the substantive rights of the parties”. In the circumstances of this case, it is unjust and unfair to the Defendants for this court to allow the proposed amendments.

Mitigation of loss

37.  At paragraph 22(1) of the Re‑Amended Reply, Shine Grace has pleaded a denial that it was under a duty to mitigate its loss. By the proposed amendment at paragraph 22(3), Shine Grace now wishes to rely on an incident which took place on or about 28 November 2007.  The proposed amendment reads:

“…on or about 28 November 2007, SGIL requested that Citibank assist SGIL to obtain stock loans in the shares underlying the disputed ACs to enable SGIL to short sell the shares and thus most effectively hedge against the open AC positions.  This option was referred to as “borrow stock & sell short at or near current spot” in a detailed written note provided by SGIL to Citibank at a meeting on 28 November 2007.  However, Citibank unreasonably failed and/or refused to allow SGIL to perform such hedging in such a manner which would have been most effective in limiting financial exposure on the open AC positions.”

38.  The incident was referred to in Mr Anson Chan’s Witness Statement dated 2 October 2015 at paragraph 57 in which he said:

“…I also suggested that Citibank (through its affiliate Salomon Smith Barney) help us obtain stock loans in the shares underlying the disputed ACs; this would enable us to short sell the underlying shares which would have been an effective hedge against the open AC positions. Citibank refused to allow Shine Grace to do this hedging”.

39.  According to Mr Pao, the purpose of this amendment is simply to ensure that the pleadings on mitigation of loss tallies with the witness’ evidence and hence there should be no valid objection from the Defendants.

40.  On the face of it, the proposed amendment is short and simple.  So is the explanation of its purpose.  It also appears easy enough for the Defendants to admit or deny the incident as such.

41.  However, in order to understand the relevance of the incident to Shine Grace’s financial loss, one needs to know inter alia (1) the commercial mechanism of borrowing stock and selling short, (2) the stock market condition at or around 28 November 2007 including, in particular, the movements of the price of the stocks underlying the 9 Disputed Contracts viz Petrochina, Sinopec, China Shenhua Energy, and China Life Insurance, (3) the terms of the proposal put forward by Shine Grace to Citibank[5], (4) in what way(s) and to what extent Shine Grace’s proposal would have been effective in limiting its financial exposure on its open accumulator contract positions, (5) Citibank’s reason(s) for refusing Shine Grace’s proposal, (6) the basis for the averment that such refusal was unreasonable, and, last but not least, (7) the calculation of the amount of Shine Grace’s financial loss which could have been reduced if Citibank had accepted the proposal.

42.  Seeing it in that light, the proposed amendment is deceptively simple but in fact seriously complicated and would require factual and expert evidence from Shine Grace to explain the plea that “Citibank unreasonably failed and/or refused to allow SGIL to perform such hedging”.  Without such explanation from Shine Grace, the plea is just a bare assertion[6] and in that sense a futile one.  If so, leave to amend should not be granted.  Furthermore, if this court were to give leave to amend, Citibank would naturally and quite reasonably wish to put in evidence to rebut the plea.  Mr Dawes SC has already indicated in his submissions that his client intends to do so.  In fairness to Citibank, this court will be compelled to grant permission to it to file additional evidence.  If so, the trial date would again be in serious jeopardy.  In that scenario, the reasons given in paragraphs 34 to 36 above in refusing leave to amend paragraphs 21BA and 21BB would apply mutatis mutandis here.  

43.  On any view of the matter, leave to amend paragraph 22(3) should be refused.

Disposition and costs order nisi

44.  Shine Grace’s application to amend paragraphs 21BA, 21BB and 22(3) of the Re‑Amended Reply is hereby dismissed.

45.  There be an order nisi that costs of and occasioned by the application to amend be to the Defendants in any event, save that costs of the PTR hearing on 11 October 2017 be in the cause.

HCCL 28/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 28 OF 2008

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D E C I S I O N

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1. I am not satisfied that defendants have established there are reasonable prospects of success in their intended appeal against my exercise of discretion and case management powers in ordering the defendants’ discovery of documents which I considered to be relevant. Relevance is still determined by the wide Peruvian Guano test. In my view the documents sought to be disclosed are relevant to the issues of whether the plaintiff understood the relevant risks and was able to make an informed decision about the subject contracts, which is the defence asserted. The order flow documents are also relevant in that they may, to say the least, lead to a train of inquiry as to whether there was collection of orders and aggressive marketing of the relevant contracts to the plaintiff (which is denied by defendants), and whether the defendants had induced the plaintiff to enter into the contracts.

2. The application for leave to appeal is accordingly dismissed, with costs.

3. There is no justification or grounds to order any stay of execution.

HCCL 28/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERICAL ACTION NO. 28 OF 2008

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DECISION

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1. This is an application by the plaintiff, by summons dated 15 October 2012, to amend the Statement of Claim in the terms of the draft Amended Statement of Claim annexed to the summons.  Mr Jin Pao, who appeared for the plaintiff, has, very helpfully, attached the draft Amended Statement of Claim as an annex to his skeleton submissions.

This shows the proposed amendments underlined in red, with certain passages highlighted in yellow to identify the specific paragraphs which have been objected to by the defendants.  I make an order in terms of the summons in respect of the proposed amendments which are not objected to, and I make an order in terms of §§2 - 6 of the plaintiff’s summons dated 15 October 2012 in respect of these amendments.

2. The proposed amendments that are in issue can be divided into two categories, the first category of amendments introduce a number of technical concepts associated with the risk of the investment product in question, and the second category of amendments concern the medical condition of Mrs Anita Chan, after her discharge from hospital in October 2007, and contain allegations that the defendants were aware of her condition.  Mr Victor Dawes, who appeared for the defendants, readily conceded that amendments to pleadings ought to be allowed “for the purpose of determining the real question in controversy between the parties to the proceedings or correcting any defect or error in any proceedings”, and that leave was readily given, in cases where the amendments were sought before trial, unless it could be demonstrated that the new claim based on the proposed amendments was bound to fail.  However, he opposed the application on the basis that the proposed amendments, highlighted in yellow, were not for the purpose of determining the real question in controversy between the parties and that, in any event, they were bound to fail. 

Background

3. This matter went before the Court of Appeal recently on an interlocutory appeal against the refusal of Reyes J to make certain orders for specific discovery.  I sat with Lunn JA on that appeal and agreed with his judgment, given on 17 August 2012, in which he set out the background to the case.  I replicate that background in this decision but I also include some additions of my own.

4. The plaintiff company was a private investment BVI company beneficially owned by Mrs Anita Chan until her death on 17 October 2007.  There is no dispute that she controlled the plaintiff, at least until the period when it is said that she became incapacitated through illness, about 10 days before her death.  She was one of the two directors of the plaintiff.  The action brought by the plaintiff is in respect of 9 accumulator contracts of Chinese companies listed on the Hong Kong Stock Exchange.  These accumulator contracts were entered into with Citibank NA, the 1^st defendant, and were made on 15 and 16 October 2007 between Ms Hailey Mak, the 2^nd defendant, acting on behalf of her employer, the 1^st defendant, and Mrs Anita Chan, acting on behalf of the plaintiff.  The plaintiff had been a customer of the 1^st defendant since 2003 and, since that date, the 2^nd defendant had acted as her employer’s relationship manager with the plaintiff.  Mrs Anita Chan had been a customer of the 1^st defendant since 1999, and had dealt with the 2^nd defendant, as her relationship manager, throughout that period. 

5. Very substantial losses were occasioned by these transactions.  Margin call notices were issued by the 1^st defendant on various dates in November and December 2007, and also in January 2008. Absent the injection of further funds pursuant to these margin calls, all open positions in the 9 accumulator contracts were closed by the 1^st defendant on or about 23 January 2008, thereby crystallizing the losses. 

6. The nub of the plaintiff’s case is that, knowing her to be incapacitated and not competent to make decisions in the best interests of the plaintiff, the 2^nd defendant had inveigled Mrs Anita Chan to enter into the 9 accumulator contracts on behalf of the plaintiff, which were “massively imprudent and contrary to the best interests” of the plaintiff, in breach of various duties owed to the plaintiff by both the 1^st and 2^nd defendants.  The amount of initial margin security required by the plaintiff was in excess of its net asset value and its liability on the contracts, many times greater than that value.  Conversely, it was contended that those contracts were “massively advantageous” to the 1^st defendant. 

7.  The relevant allegations made by the plaintiff are:

(1)  The 9 accumulator contracts were not authorised by the plaintiff, alternatively, Mrs Anita Chan was not competent to authorise the accumulator contracts.  Further, the accumulator contracts were incomplete and/or void for uncertainty.

(2)  The plaintiff was entitled to rescind and void the accumulator contracts for breach of duties, contractual, fiduciary and/or at common law, failing to provide reasonable, fair, accurate and honest advice composed with reasonable diligence and care.

(3)  Given the condition of the market on 15 and 16 October 2007, the defendants misrepresented the risks of entering into the accumulator contracts and the plaintiff was entitled to rescind and/or avoid the accumulator contracts for fraudulent, reckless and/or negligent misrepresentation and/or is entitled to damages for the same.  Further or alternatively, the defendants are also liable for the tort of deceit and/or negligence.

(4)  By reason of Mrs Anita Chan’s illness, medication, and lack of rest on 15 and 16 October 2007, she was incapable of making decisions in the best interests of the plaintiff.  The accumulator contracts were entered into by reason of the undue influence of the defendants over her.

(5)  The defendants were also in breach of various statutory duties under the code of conduct issued by the Securities and Futures Commission (“SFC”) and the Securities and Futures Ordinance, Cap 571. 

8. In respect of the plaintiff’s case that was based on the medical condition of Mrs Anita Chan, it appears to be common ground that Mrs Chan was hospitalized from 6 October to 10 October 2007 and that, between 11 and 17 October 2007, when she passed away, no accumulator contracts were entered into on 11 October 2007, which was a Friday, and that she gave instructions on Monday 15 October 2007 and Tuesday 16 October 2007 to enter into the 9 accumulator contracts.  The defendants’ case is that Ms Hailey Mak did not see Mrs Anita Chan in person since July or August 2007, and that all their communications were via the telephone and, in particular:

(i)  Mrs Anita Chan initiated contact with Ms Hailey Mak on 15 October 2007 at 9:36 am.  The conversation between them indicated that Mrs Anita Chan’s memory and cognitive abilities appeared to be the same as before. 

(ii)  The conversations that Ms Hailey Mak had with Dr Yau, a friend of Mrs Anita Chan, and with Mr Anson Chan (Mrs Anita Chan’s son) on 18 October 2007, indicated that everyone was shocked and surprised about Mrs Anita Chan’s demise.  In particular, Mr Anson Chan had said that his mother was very healthy on 16 October 2007.

9. In short, the plaintiff asserted that the 9 accumulator contracts were not authorised, alternatively that the plaintiff was able to rescind them by reason of undue influence and/or unpleasant conduct exercised over Mrs Anita Chan at the time when she was seriously ill and close to her untimely death.  She was not competent and/or not able to exercise either an independent or an informed judgment.  The plaintiff also contended that the defendants were in breach of statutory and contractual duties owed to the plaintiff and sought various reliefs, including a declaration that the 9 accumulator contracts were invalid and/or unenforceable, and claiming, alternatively, damages, or restitutionary relief, arising from the closing of the open positions and associated trading.

10. At issue between the parties is Mrs Anita Chan’s experience in investing in structured financial products, in particular, highly leveraged structured derivative products, of which accumulator contracts are but one example.  It is the defendants’ case that Mrs Anita Chan had experience in investing in various options and derivative products and was aware of the level of risk associated with accumulator contracts and that, in trading in the latter, she was highly successful.  Further, that she relied on her own investment strategy and experience.  It is the plaintiff’s case that, although Mrs Anita Chan had investment experience, in the period 2003 until her death in October 2007, including investments in Equity-Linked Notes, Exchange-traded options and warrants, she had “less experience in investing in structured financial products and, in particular, in highly leveraged structured derivative products such as accumulator contracts”.  There is no dispute that in the period 2004 to 2007, Mrs Anita Chan caused the plaintiff to enter into 271 accumulator contracts with the 1^st defendant and 50 accumulator contracts with the Bank of East Asia.

What is an Accumulator Contract?

11. I find helpful the explanation given by Deputy High Court Judge Pow SC in his recent judgment in DBS Bank (Hong Kong) Ltd v San-Hot HK Industrial Co Ltd and Anor (HCA 2279/2008, 13 March 2013) that :

“5. … An accumulator contract has the following main features:

(1) a customer who enters into such a contract has the right and obligation to purchase a set volume of listed shares (or foreign currencies) at a price (the “Strike Price” [also known as Accumulator Forward Price (‘AFP”)]) lower than the prevailing market price at the time when the contract was entered into (the “Initial Price”);

(2) the difference between the Strike Price and the Initial Price, when expressed in terms of a percentage of the Initial Price, is normally described as the “Discount”;

(3) if the price of the underlying listed shares (or foreign currencies) has arisen to or above a certain pre-agreed price (the “Knock-out Price”) at the close of a trading day, then the contract will automatically be determined, i.e. “knocked-out”. In that case, the customer will get a guaranteed amount of the shares purchased at the Strike Price;

(4) unless the contract is knocked-out, i.e. the price of shares (or foreign currencies) fluctuates below the Knock-out Price, the customer’s right and obligation to purchase the fixed volume of listed shares (or foreign currencies) per trading day will continue until the expiry of the entire term of the contract (1 year in the case before Deputy High Court Judge Pow SC). In other words, the customer will be accumulating the said listed shares (or foreign currencies). This is however a slight misnomer because the customer can always choose to sell the listed shares (or foreign currencies) back into the market at any time he sees fit. He may do so when there is a profit arising or he may do so to limit loss and to keep his cash-flow healthy;

(5) a contract may simply require a customer to purchase a fixed volume of listed shares (or foreign currencies) when the closing price for any trading day falls below the Strike Price. In that case, the contract is described as a “1X contract”. A contract will be described as a “2X contract” if it requires a customer to purchase twice the fixed volume of listed shares (or foreign currencies) under the same circumstances. For the same listed share (or foreign currency), a “2X contract” will customarily offer a higher Discount as compared to a “1X contract”);

(6)  an accumulator contract may be a product structured and devised by a bank and offered to its own customers.  It may also be a product structured and devised by a third party issuer and marketed by a bank to its customers.”

12. In the present case, each accumulator contract was accompanied by an 8-page “Tailored Investment Proposal” (“TIP”) setting out the risk and reward profile of the accumulator contract in question. 

The proposed amendments

13. Before dealing with the proposed amendments, I should state, at the outset, that whilst the underlying objectives set out in Order 1A of the Rules of the High Court (“RHC”) must be taken into account in exercising my discretion whether or not to grant the leave that has been sought to make these amendments, the current application is not one which is made at a late stage of the proceedings, nor does it jeopardise a milestone date.  The amendments relate to the risk factors arising from accumulator contracts and the medical condition of Mrs Anita Chan.

Risk factors

14. The disputed proposed amendments appear in §§21A-C, 22A-C, 22E and 24A-C.  These proposed amendments introduce a number of new risk factors such as “Hold to maturity risk” (“HTM Risk”) and “Mark-to-Market risk” (“MTM Risk”).  These risks are introduced in §§21A-C.  §22A introduces the concept of “implied volatility” as a key risk factor.  §22D, which is a proposed amendment that is not disputed, pleads the effect of margin calls and consequent increased exposure to various risks.  It is pleaded, in §22E, that the defendants ought to have explained and disclosed these risk factors to the plaintiff and, in §24A, that disclosure contained in the TIP was inadequate and/or incomplete, and did not identify these newly pleaded risks. 

15. The amendments are objected to on the ground that they are being introduced solely for the purpose of complicating relevant issues, and to pave the way for an application to introduce expert evidence.  The latter point is not something that affects the exercise on my discretion on these applications.  If, and when, an application for expert evidence is made, that application will be dealt with on its merits.  So far as HTM Risks and MTM Risks are concerned, it is submitted these are risks associated with the credit risk arising from the use of margins and, as explained by the defendants, the risks are not specific to accumulator contracts but apply to all investment undertakings.  It is submitted that these risks are irrelevant in the context of accumulator contracts.  Further, it is submitted that the concept of implied volatility is theoretical, and that it is neither practical nor realistic in the assessment of risks arising from accumulator contracts. 

16. I am not persuaded, on these submissions, that the purpose of the proposed amendments, introducing these new risk concepts, is not to enable the real question in controversy to be determined but to muddy the waters, so to speak; and that they are bound to fail.  I find substance in the submissions of the plaintiff that whether it was, in fact, necessary, meaningful or possible to disclose the risks identified in the proposed amendments, is clearly a matter for trial.  The plaintiff’s case is that there was an over-emphasis on HTM Risk, with the corresponding emphasis on absolute price movements, and that MTM Risk was not dealt with, either sufficiently or at all.  I am not prepared, on the submissions I received from the defendants, to shut the plaintiff out from raising these allegations at trial.  Whether or not the TIP sheets supplied to the plaintiff in respect of the 9 accumulator contracts were adequate is clearly a matter for trial.  Much will depend on evidence of the prevailing practice of banks and financial institutions dealing with these products.  I, therefore, grant leave to the plaintiff to amend the Statement of Claim to include the disputed amendments relating to the alleged risks arising from accumulator contracts. 

The Medical Condition of Mrs Anita Chan

17. The defendants assert that Ms Hailey Mak and Mrs Anita Chan did not meet each other between July to August 2007 and 17 October 2007.  They also assert that the communications between Mrs Anita Chan and Ms Hailey Mak, after Mrs Anita Chan was discharged from hospital, which were all recorded and have been transcribed, showed that Mrs Anita Chan was intelligent, coherent, articulate, logical, and gave very clear instructions and that, contrary to the plaintiff’s suggestions, an objective bystander listening into those conversations would not detect anything wrong with Mrs Anita Chan.  They also rely on the reactions of Dr Yau and of her son, Mr Anson Chan, which clearly showed that they were shocked by her sudden death.  Accordingly, the defendants submitted that the averment in §30, that Mrs Anita Chan’s illness and impairment in memory and cognitive abilities on 15 and 16 October 2007 were known and/or should have been known to the defendants, did not have any evidence to support it.  This would have been a strong submission to advance to oppose the proposed amendments on the ground that they were bound to fail.  However, the proposed amendments to §30 are no more than a paraphrase of the original pleading in the same paragraph that “Citibank’s Hailey Mak knew that Mrs Chan was grievously ill, and that her memory and cognitive abilities were significantly impaired to the degree that she was not competent to make decisions in the best interests of SGIL”.  The proposed change to §30 is no more than cosmetic, and I allow the proposed amendments.  I also allow the proposed amendments to §30(6) because they plead the following material facts:

(1)  that Ms Hailey Mak spoke with Dr Yau on or around 10 October 2007 and on 15 October 2007;

(2)  that Dr Yau treated Mrs Anita Chan from 6 October to 10 October 2007;

(3)  that Dr Yau knew the state of Mrs Anita Chan’s health and the effects of the drugs that had been prescribed to her;

(4)  that Dr Yau was a client of Citibank and dealt with Ms Hailey Mak, and that Mrs Anita Chan had placed investments with Citibank, through Ms Hailey Mak, on behalf of Dr Yau and that she did so on 16 October 2007 (this latter averment suggests to me that Dr Yau was of the view that Mrs Anita Chan was mentally fit to place an investment on his behalf on 16 October 2007);

(5)  that Dr Yau was very close to Mrs Anita Chan; and

(6)  that Dr Yau was the first person who informed Ms Hailey Mak of Mrs Anita Chan’s death when they spoke on 18 October 2007.

However, I do not allow the proposed amendment to the final paragraph of §30(6) which pleaded:

“In the above circumstances, it is to be inferred that Hailey Mak and Dr Yau discussed Mrs Chan’s state of health during their conversations on or around 10 October 2007 and 15 October 2007 (and/or any such further conversations that took place between 6 October 2007 and 17 October 2007 inclusive).”

The preceding facts, which I have permitted to be pleaded, do not support such an inference, particularly in the absence of any further specific averment(s) to support a plea that Dr Yau breached doctor-patient confidentiality by discussing Mrs Anita Chan’s illness with Ms Hailey Mak.

18. §30A introduces the allegation that, given her illness and medical condition, Ms Hailey Mak ought to have taken particular care to ensure that Mrs Anita Chan fully understood the risk of any transactions marketed and/or sold; and §31 contains the allegation of the failure to take reasonable care in the marketing and/or sale of these products and/or in the provision of advice on these products.  These amendments were introduced to replace the original plea, contained in §31, that:

“On 15 and 16 October 2007, Citibank and Hailey Mak knowingly breached their duties to SGIL by exploiting the grievous illness, need for rest and significantly impaired memory and cognitive functions of SGIL’s Mrs Chan, through their use of unethical high pressure sales and solicitation techniques, and including the provision of investment advice which was known to be inaccurate, misleading, unfair and contrary to the best interests of SGIL in order to attempt to induce SGIL, through Mrs Chan, to enter into 9 purported “Accumulator Contracts” (namely those pleaded in paragraph 33 below).”

19. I accept the submission of the plaintiff that this was a refinement of the existing pleading.  I, therefore, allow the proposed amendments contained in §§30A and 31.

Consequential orders and Costs

20. I also make an order in terms of §§2 - 6 of the plaintiff’s summons dated 15 October 2012 in respect of the proposed amendments which I have allowed.

21. Whilst the costs of and occasioned by the amendments are awarded to the defendants, in any event, I award the costs of the hearing to the plaintiff, in any event, for the reason that the plaintiff was substantially successful in its application for leave to amend the Statement of Claim.  Although I had sought, and have obtained, statements of costs from both parties, given the very substantial amount of costs being claimed, I decline to make a summary assessment of these costs and would leave them in the good hands of the taxing master who will deal with them in due course. 

HCCL 28/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 28 OF 2008

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