UOB KAY HIAN FUTURES (HONG KONG) LTD v. LAI, LAWRENCE AND ANOTHER

HCA 1946/2011
[2018] HKCFI 95

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1946 OF 2011

____________

BETWEEN
	UOB KAY HIAN FUTURES (HONG KONG) LIMITED	Plaintiff
	and
	LAI, LAWRENCE	1st Defendant
	HORN, LIND	2nd Defendant

____________

Before: Hon G Lam J in Court

Date of Hearing: 20, 22, 23 and 26 June 2017

Date of Judgment: 25 January 2018

_________________

J U D G M E N T

_________________

Introduction

1.  The plaintiff was a futures brokerage firm, the 1^st defendant (“Mr Lai”) an account executive employed by the plaintiff and the 2^nd defendant (“Mrs Horn”) a client with a futures trading account with the plaintiff.  The ultimate question in this action is who should bear the losses incurred in the trading of Nikkei 225 Index futures on Mrs Horn’s account between 11 and 15 March 2011 in the wake of the earthquake off the coast of Tōhoku, Japan on 11 March 2011.

The facts

2.  In this section I set out the facts most of which are uncontroversial.

3.  The plaintiff was a company licensed under the Securities and Futures Ordinance (Cap 571) to carry on dealing in futures.  Mr Lai joined the plaintiff and its associated company, UOB Kay Hian (Hong Kong) Ltd in December 2002 as an account executive, holding the title “Associate Director”.  Under the terms of a letter of agreement dated 13 November 2002 signed by him (“2002 Agreement”), he was entitled to a basic salary and 40% of the commission generated by him (beyond a certain amount), but he was also liable on a guarantee of the liabilities of his clients.  The validity and effect of this guarantee is a matter in dispute.

4.  Mrs Horn is Mr Lai’s sister.  She lives in South Africa, running a software company and a real estate agency there.  From around 2000, Mrs Horn had started some futures trading of her own using online trading systems for North American indices.  When Mr Lai visited her in South Africa in around May 2010, she agreed at his suggestion to open an account with the plaintiff, where he was working, to profit from trading in Asian index futures, and signed an agreement called “Futures Client Agreement” which incorporated an application form for opening an account and the terms of a document called “Client Agreement — Terms and Conditions”.

5.  On the basis of these documents, an account was opened with the plaintiff in Mrs Horn’s name for dealing in futures and options (“the Account”).  The account executive was Mr Lai.  The initial “trading limit” of HK$100,000 was increased in July 2010 to HK$4m; in September, to HK$6.5m; and in October, to HK$7.5m.  There were several temporary increases (each for a month) of the “trading limit” to various amounts between November 2010 and February 2011.  The last of these ad hoc increases was granted in February 2011 up to HK$17m, ending on 10 March 2011.  This limit referred to the fixed margin requirement for futures contracts.

6.  On 11 October 2010, when the Account was turned into a “house account” within the plaintiff’s system, Mr Lai was required to and did sign a further letter of agreement with the plaintiff relating to his liabilities for the Account (“2010 Agreement”). Again, its validity and effect is in dispute.

7.  From the time the Account was opened, there had been active trading of futures in it, including Nikkei 225 Index futures (traded in JPY at Singapore Exchange Ltd), Hang Seng Index futures (traded in HK$ at the Hong Kong Futures Exchange (“HKFE”)) and Japanese Yen futures (in US$).  The trading of Nikkei 225 Index futures was highly profitable for the Account between June 2010 and January 2011^[1] as a whole.  The realised profits and losses made for each month can be seen from the following table:

Month	Profit/Loss (JPY)	Profit/Loss (HK$)	Profit/Loss (US$)
Jun 2010	11,850,000	247,200	0
Jul 2010	45,602,500	85,600	26,250
Aug 2010	(33,650,000)	0	11,713
Sep 2010	40,425,000	0	(7,275)
Oct 2010	5,862,500	0	0
Nov 2010	10,125,000	(848,750)	0
Dec 2010	146,925,000	(728,550)	(12,250)
Jan 2011	(2,925,000)	5,328,850	0

8.  There was an initial capital deposit of HK$1.2m into the Account for the trading but this was withdrawn on 15 July 2010, there being sufficient profits by then to support further trading.  On 17 January and 1 March 2011 respectively, on the strength of the accumulated profits, Mrs Horn withdrew HK$8m and HK$7m from the Account.  Throughout this period of time Mrs Horn was Mr Lai’s key client.  Indeed, by March 2011, the Account was the only active one handled by Mr Lai.  Mr Lai also had a futures account with the plaintiff in his own name (opened in 2008), although it was inactive with a positive equity balance.

9.  Nikkei futures were traded on the Singapore Exchange. The plaintiff’s clients’ orders for trading in Nikkei futures were placed by telephone with a sister brokerage company in Singapore, called UOB Bullion & Futures Ltd (“UOBBF”).  Mr Lai was one of a select group of experienced account executives in the plaintiff who could place orders for clients with UOBBF, and a maximum daily trading limit of HK$10m applied to him.  At that time, UOBBF’s confirmation of the trade deals would only be received by the plaintiff later on, so that the information the plaintiff received could in the ordinary course lag behind by as much as 2 trading days.

10.  By 7 March 2011, Mr Lai had purchased and rolled over 420 Nikkei futures contracts for the Account.  The movement of the index by each point up or down would bring a gain or loss of 500 yen on each contract.  With 420 contracts for the Account, each point would mean 210,000 yen (equivalent to about HK$21,070).  That remained the Account’s exposure as at 11 March, when the index closed at 10,254. 

11.  All was well until the afternoon of 11 March, Friday, when a severe earthquake hit Japan at 14:46 (Japan time), followed by a tsunami and nuclear leakage.  As a consequence, the Nikkei index remained highly volatile in the following days. 

12.  In the morning of Monday, 14 March, a daily statement for the trading day of 11 March was emailed to the email address stated in the account opening form (“designated email address”), showing a margin call in the amount of JPY 65,311,997.  There were also telephone calls by the plaintiff’s employees to Mr Lai telling him the margin shortfall.  At 12:16pm, an employee in the plaintiff’s credit department, Rex Au, emailed Mr Lai a formal margin call on the Account, with a call amount of approximately HK$4.74m (based on closing prices of 11 March). 

13.  Mr Lai squared some of the Nikkei futures positions. At 1:59pm, he cross‑checked with the Credit Department, confirming that 180 lots of Nikkei futures remained outstanding on the Account.  He asked the Credit Department to work out the margin shortfall.  At 2:20pm he received a reply that the client should pay in roughly HK$2m.

14.  That afternoon, Mr Lai closed out the rest of the pre‑existing Nikkei futures positions in the Account (at points ranging from 9,470 to 9,990) but, perhaps in the hope of recouping the losses, opened 420 new Nikkei futures contracts for the Account.  Mr Lai also transferred HK$1m of his own money into the Account.

15.  Between the late afternoon (after 4:30pm) and evening of 14 March and the morning of 15 March (about 8:20am), Mr Lai bought another 420 new Nikkei futures contracts for the Account (300 on the 14^th and 120 on the 15^th), unknown to the plaintiff’s credit department at that moment in time.  By the morning of 15 March, there were therefore 840 open positions in Nikkei futures.  Unfortunately, the market did not rebound and they were to result in further losses.

16.  I need not find that Mr Lai had deliberately sought to conceal these trades from the plaintiff but I accept the evidence of Ms Tse, head of the plaintiff’s credit department, that she and senior management did not at that time know about the opening of the new positions.  I found her evidence generally credible even though she was at times a little overly defensive.  Mr Lai did not have to go through the plaintiff’s staff in order to trade in Nikkei futures, since he was himself one of the authorised persons to place orders with UOBBF in Singapore.  Taking out such a large number of new open positions at that time was highly risky and would have raised alarm with the plaintiff’s management if they had known about it.  It also seems likely that the risk officers in the credit department did not have knowledge either on 14 March.  The confirmation from UOBBF would only be received after a short delay.  The risk officers would not necessarily have known about the new trades before that unless they called UOBBF to check. Since they were making a margin call on the Account and urging Mr Lai to square the outstanding positions, it is unlikely that they would have stood idly by if they had known Mr Lai proceeded to take out such a large number of new open positions.  Nor did Mr Lai in his pleadings or statements assert that any specific person in the plaintiff knew about those new trades.  In my opinion, the defendants have failed to prove that any specific person in the plaintiff other than Mr Lai himself actually knew about the trades that day.

17.  On 15 March, at 8:28am, Mr Lai sent an email to Rex Au saying that his client would pay in HK$6.8m on 15 March and a further HK$12m on 16 March.  By then the true state of the Account was known to senior management.  At 8:48am, Rex Au told Mr Lai that no new positions could be opened before incoming funds were confirmed.  Eventually, the sum of HK$6.8m was paid in not on 15 March but on 16 March, and the sum of HK$12m was never deposited.

18.  Under pressure from the plaintiff, the Nikkei futures positions in the Account were all closed out by Mr Lai by 1:30pm on 15 March, at very substantial losses, wiping out any previous surplus in the Account which went into a large net deficit.  On 18 March, to cover the losses, the plaintiff caused a sum of HK$2.02m to be transferred into the Account from Mr Lai’s own account.

19.  By 21 March, the net debit balance of the Account was approximately HK$23.6m.  On that day, a solicitor from H L Wong & Co, as solicitors for Mr Lai and Mrs Horn, contacted Mr Mickey Lee, Deputy Managing Director of the plaintiff.  By a following email, Mr Lee asked the solicitors to advise when the debit balance would be paid.  On 22 March, the solicitors replied that their clients were:

“unable to settle the said outstanding balance in full but they are in the course of restructuring their financial positions and are trying to see if there is any possible resolution workable to both parties in resolving the whole matter”.

20.  A formal letter of demand was issued to Mrs Horn on 24 March, which was passed to her and Mr Lai by their solicitors.  Mr Lai began to be absent from work from 1 April 2011.

21.  As at 25 October 2011, the debit balance in the Account stood at HK$24,466,180.31.  The writ of summons was issued by the plaintiff on 14 November 2011 claiming this amount.

Provisions of the Futures Client Agreement

22.  The most significant provisions of the Futures Client Agreement for present purposes are as follows:

“11. Margin

11.1 The Client agrees to maintain such Initial Margin and/or Maintenance Margin in any and all Accounts the Client may at any time carry with the Broker. All Margin Requirements must be settled in cash. All Variation Adjustments and Interest Rate Cash Adjustments must also be paid by the Client in cash.

11.2 The Broker may make margin calls and demands for Variation Adjustments and Interest Rate Cash Adjustments to the Client either orally or in writing and may specify therein the period within which the margin call, or demands for Variation Adjustments and Interest Rate Cash Adjustments must be met. The Client agrees and undertakes to pay any margin calls, Variation Adjustments and Interest Rate Cash Adjustments made orally or in writing, immediately on demand or within the time specified (if any) by the Broker.

11.3 The Client further acknowledges and agrees that:

…

11.3.2 the Broker will not transact any Futures/Options Business for the Client until and unless the Broker has received from that Client sufficient cash to cover that Client’s expected trading liabilities, Initial Margin, Variation Adjustments and/or Interest Rate Cash Adjustments;

…

11.3.5 the Broker is obliged to report to the HKFE and the Commission particulars of all open positions in respect of which two successive margin calls, demands for Variation Adjustments and/or Interest Rate Cash Adjustments are not met within that period specified by the Broker.

…

11.6 In the event of a failure by the Client to meet margin calls and/or demands for Variation Adjustments and/or Interest Rate Cash Adjustments as specified in such calls and/or demands, the Broker shall be entitled to close out open positions including open positions taken out at different times without further demand or consent from the Client with absolute discretion to the Broker to choose which position(s) should be liquidated and in which order provided, however, notwithstanding any demand for margin, the Broker may at any time proceed in accordance with clause 13 of this Agreement. The Client agrees that in closing out the Client’s open position(s) the Broker owes no duty or obligation of whatsoever nature to the Client to minimize or eliminate the Client’s loss.

…

12. Margin Call Policy

12.1 Margin calls will be issued when the net equity in the Client’s account falls below the maintenance level.

Margin Call

12.2 The Broker, through the Account Executives, will notify the Client of the margin call amount and the time period to fulfil the margin requirement.

12.3 No new open position is allowed within the period of margin call.

12.4 The Client is required to meet the margin call within the time period by depositing cash and/or closing out an appropriate number of existing open positions. Otherwise the Broker has the sole discretion to restore the margin ratio by liquidating positions in the Client’s account.

12.5 Notwithstanding anything provided in clauses 11.2, 12.2 and 12.4 of this Agreement, whenever the Broker deems it advisable for its protection, the Broker has the right to shorten the time period to meet margin call and/or force liquidate positions immediately without prior notice to the Client. The Broker reserves the right to liquidate the positions at any time and at any prices. The net proceeds of any such liquidation shall be applied against the Client’s indebtedness to the Broker, and the Client shall remain responsible for any deficiency.

12.6 The Broker’s non‑action does not prejudice its claim on the Client.

……”

The plaintiff’s claims

23.  The plaintiff’s claim against Mrs Horn is simple.  It is based on the Futures Client Agreement, clauses 4.14, 5.4 and 13.5 of which provided that the client shall be liable to the plaintiff for any deficiency in the account.  The plaintiff claims the sum of HK$24,466,180.31 with interest under s 48 of the High Court Ordinance (Cap 4).

24.  The plaintiff’s claim against Mr Lai is for the same amount, based on the guarantee he gave in the letters of agreement but primarily the 2010 Agreement.  The 2002 Agreement provided:

“UOB Kay Hian Group includes all its subsidiaries. In consideration of the UOB Kay Hian Group providing securities and futures trading, margin financing facilities and/or other allowed financing facilities to any non‑institutional clients or institutional clients trading beyond approved limit, (1) you guarantee to discharge on demand by UOB Kay Hian Group from time to time the Clients’ Liabilities in relation to each client you serve; and (2) you agree as an additional and independent obligation that, if any of the Clients’ Liabilities of any client you serve are not recoverable from you under the guarantee above for any reason, you will be liable to UOB Kay Hian Group as a principal debtor by way of indemnity for the same amount as that for which it would have been liable had those Clients’ Liabilities been so recoverable and you will discharge that liabilities on demand by UOB Kay Hian Group from time to time.”

The 2010 Agreement provided:

“This is to confirm that you have agreed to serve Ms Horn and responsible [sic] for the obligations and liabilities to UOB Kay Hian Group of any kind and in any currency, whether present or future, actual or contingent and whether as principal or surety or incurred alone or jointly with another (and includes any purported obligation or liability of such client to UOB Kay Hian Group which if valid would be comprised in such obligations and liabilities) arising from any trades or transactions effected by this client through you.”

25.  According to the plaintiff, this kind of guarantee served as a check and balance on the account executive so that he would have a strong incentive to monitor the status of the client’s account.

The defences raised by Mrs Horn

26.  On behalf of Mrs Horn, it is accepted that Mr Lai was authorised by her to trade on her behalf, but she contends that she is not liable for the debit balance in the Account because the plaintiff had breached its duty to her and thereby caused her loss.  Essentially she complains the plaintiff wrongfully allowed the Account to trade and accepted orders to open new positions when margin calls remained unsatisfied, an applicable position limit was exceeded and the trading activities were manifestly inconsistently with her investment objective.  Specifically, the breaches alleged are that:

(1) In breach of clause 12.2, the plaintiff failed to notify Mrs Horn of the margin call of 14 March 2011.

(2) In breach of clause 12.3, the plaintiff continued to open new positions within the period of margin call.

(3) In breach of clause 11.3.2, the plaintiff continued to transact futures business for the Account without sufficient cash to cover Mrs Horn’s expected trading liabilities.

(4) In breach of clause 11.3.5, the plaintiff failed to report to the HKFE and SFC the open positions in the Account after 2 successive margin calls were not met.

(5) In breach of its duty to observe the regulations of HKFE, and in breach of Rule 617, the plaintiff failed to ensure the minimum margin requirements were satisfied in relation to the Account, and in breach of Rule 619, the plaintiff failed to notify the HKFE of the failed margin calls on the Account.

(6) In breach of an implied term, the plaintiff failed to contact Mrs Horn to confirm with her directly, when the trading in the Account was not consistent with her investment strategy.

(7) The plaintiff breached its duty of care to Mrs Horn (a) to ensure margin calls were delivered to her in a timely manner, (b) to monitor the volatile futures market and pay special attention to the exposure of the Account in extraordinary market fluctuations, (c) to monitor and enforce the position limit (of 400 futures contracts), trading limit and other limits on the Account, (d) to inform her timeously when the Account turned into sudden huge deficit, (e) to liquidate and close the Account when she could not satisfy margin calls, and (f) to abide by the HKFE and SFC regulations which were designed to protect her as an investor.

27.  It is contended that, without these breaches, the Account would not have turned into deficit.  Mrs Horn says that the debit balance was therefore “not valid” or that any liability on her part for the debit balance is extinguished by set‑off against her claim for the loss caused by the plaintiff’s breaches.  (There was a pleaded counterclaim in the same terms but it was provisionally struck out under RHC O 25 r 1C and never revived.)

The defences and counterclaim raised by Mr Lai

28.  Mr Lai contends that despite the 2002 Agreement and 2010 Agreement, he is not liable to the plaintiff because:

(1) The 2002 Agreement was not enforceable for want of certainty, intention or consideration.

(2) The 2010 Agreement was not a guarantee of the liabilities in respect of the Account.  If there was a liability of Mrs Horn outstanding, Mr Lai would be responsible to the extent he would get a poor performance appraisal, but would not be liable to make good any deficiency.

(3) The plaintiff breached:

(a) its duty of care to Mrs Horn (essentially as alleged by Mrs Horn);

(b) HKFE Rules 617 and 619 (essentially as alleged by Mrs Horn);

(c) an implied term of the 2002 Agreement (and of the 2010 Agreement if it constituted a guarantee), in that it failed to advise Mr Lai from time to time of his liabilities as guarantor for his clients.

29.  On a basis similar to that raised by Mrs Horn (see §27 above), Mr Lai says the debit balance was therefore “not valid” or extinguished by set‑off. 

30.  Further, Mr Lai claims that on 17 March 2011, the plaintiff unlawfully coerced or induced him to authorise the transfer of HK$2.02m from his own account with the plaintiff to the Account.  He says he agreed to the transfer based on his understanding that the plaintiff would comply with HKFE regulations, which it did not.  He seeks the return of the sum.

Discussion

Relationship of the defendants

31.  Before dealing with the defences raised by the defendants one by one, it is important to note the special circumstances of this case flowing from the relationship and private arrangement between the defendants, for in my view it is key to the proper analysis of the legal rights and obligations between the parties.

32.  As noted above, the defendants are brother and sister.  They agreed between themselves that all the statements of the Account should first be sent to Mr Lai, and he would verify them before passing them on to her.  Accordingly, in the client information statement for the opening of the Account, Mrs Horn gave as her correspondence address an email address which (unknown to other staff of the plaintiff) was Mr Lai’s private email address.

33.  For trading, Mr Lai would sometimes give her suggestions and recommendations and they would discuss them and later on he would tell her the results.  However, it is clear — as was expressly admitted in their witness statements — that Mr Lai was authorised by Mrs Horn to trade the Account at his sole discretion without obtaining her prior approval on the trades, though this was not known to others in the plaintiff.  It was stated in Mr Lai’s first witness statement, which he adopted as his evidence in chief:

“32. D2 had authorised me to trade on her behalf on my sole discretion for investment return.

33. With D2’s approval, I did not consult with D2 before I traded in the Account.”

Paragraphs 19 and 20 of Mrs Horn’s witness statement, also adopted as her evidence in chief, were mutatis mutandis the same.  Mrs Horn’s oral evidence confirmed that Mr Lai effectively had blanket authority.  In his oral evidence, Mr Lai sought to downplay the scope of his discretion, and explained that, generally, the trading was done after discussion with Mrs Horn in which she gave him “a bit of leeway” to make decisions in the light of market conditions.  I am sceptical about that evidence which seems to have been motivated more by concerns for potential breach of SFC rules for licensed persons.  In any event, irrespective of the extent of actual participation by Mrs Horn in the decision for each trade, there is no dispute raised in the pleadings that they were all her trades and properly attributed to the Account.

34.  Mr Lai did trade the Account using his “leeway” or discretion.  In particular, in March 2011, Mrs Horn was away from home — actually in a meditation sanctuary — between the 9^th and 17^th, with a mobile phone but without any Internet connection.  The trades during this period were done without her prior knowledge, but with her general authority.  She returned home to learn on the 18^th that there had been very substantial losses sustained in the Account.  It was no doubt a shock to her, but as Mr Lai kept telling her he would handle it, she left the matter to him.

35.  Mr Lai said it was an “open secret” within the plaintiff that Mrs Horn — the account holder — was his sister.  Whether that was so or not, there is nothing to suggest that any other person within the plaintiff knew that any of the trades done by Mr Lai for the Account were done at his own discretion without the specific knowledge of Mrs Horn.  Mrs Horn did not inform the plaintiff that Mr Lai was “Authorised Representative” (a specifically defined status in the Futures Client Agreement) even though he in fact operated with her actual authority.  Mr Lai admitted (in his 2^nd statement §29) that the plaintiff did not know about “the discretionary arrangement” between him and Mrs Horn.

36.  Whether or not it was the result of collaboration — and I note that certain passages in their pleadings and witness statements were materially identical — their defence in these proceedings is consistent one with the other.  Mrs Horn’s case is that she authorised Mr Lai to trade the Account on her behalf. Even though they complain that certain trades were done in contravention of specific provisions of the Futures Client Agreement, there is no pleading by either of them that any of the trading was or should be regarded as having been done without her authority or in excess of Mr Lai’s authority.  No trade has been disowned by her.  Nor is there any suggestion that Mr Lai himself breached any duty as private discretionary agent of Mrs Horn or was negligent or reckless in his trading decisions.  For present purposes, therefore, the trades must all be taken to have been desired by her and done with her actual authority — they were as good as if she had directly placed the order with the trader for each trade.

37.  As both defendants must have known, the plaintiff was not a fund manager or investment adviser, but an execution broker for futures trading.  The core service it provided to clients was to execute deals upon their instructions.  By the Futures Client Agreement (clause 4.1), the plaintiff agreed “to purchase, sell (including short sales) or otherwise deal with” futures contracts, on margin or otherwise, “for the Client’s Account in accordance with the oral or written instructions or orders of the Client …”, though clause 4.2 reserved to the plaintiff the right, at its discretion, to accept or reject any instructions or orders for the client’s account and to impose trading limits without assigning any reason therefor.

38.  The scope of the plaintiff’s services did not include giving investment advice or carrying out discretionary trading.  By employing him and by assigning him as the account executive for Mrs Horn, the plaintiff did not confer on Mr Lai any actual or ostensible authority to carry out discretionary trading for Mrs Horn.  In using Mr Lai’s private email address as the designated email address for the Account, and in authorising Mr Lai to trade the Account at his own discretion, Mrs Horn must in my view be taken to have appointed Mr Lai as her own agent for those purposes.  In so acting, Mr Lai was acting in his private capacity, as Mrs Horn’s brother and agent, not for and on behalf of the plaintiff.  When Mr Lai eventually carried out the physical exercise of placing orders with UOBBF, he could be said to be acting in his capacity as the plaintiff’s employee, but he was acting, as it were, on the express instructions of Mrs Horn given through himself as agent for the client.  This kind of double-aspect agency is well known to the law: see eg Cheng Kwok Fai v Mok Yiu Wah Peter [1990] 2 HKLR 440.

Crux of defendants’ complaints

39.  The defendants have raised quite a number of allegations of breach of contract or duty by the plaintiff, but the gist of their complaint is that Mr Lai should not have been permitted to open new positions in the late afternoon and evening of 14 March and in the morning of 15 March, and that the Account should have been liquidated earlier on 14 March instead.  It is unnecessary to examine in detail the spreadsheets put forward by Mr Lai in submissions to work out the various hypothetical consequences. As demonstrated by Mr Lynn, appearing for Mrs Horn, it is clear enough from the account statements that there would probably not have been a debit balance if Mr Lai had not opened any new Nikkei futures positions after 2:30pm on 14 March 2011. 

40.  Essentially, after the Account had suffered some relatively small losses on 11 March, Mr Lai took a bet by opening new positions on 14 and 15 March.  The real question is whether the plaintiff should be held liable for failing to prevent him from taking that gamble on his sister’s account and therefore responsible (to the exclusion of the defendants) for the losses in the Account.

Alleged failure to notify Mrs Horn of margin call

41.  Mrs Horn alleges that in breach of clause 12.2, she did not receive any margin call from the plaintiff directly or through Mr Lai on 14 March 2011.^[2]  I reject this allegation.  The daily statement for 11 March was sent to the designated email address in the morning of 14 March.  It stated a margin call of JPY 65.3m (equivalent to HK$6.15m) for the position in Nikkei futures and an overall margin deficit of HK$5.12m for the Account.  Even though there might in the industry be other ways of making a margin call, there is no reason why this did not amount to a margin call within the meaning of the contract between the parties here.

42.  This was followed by an email at 12:16pm on 14 March from Rex Au to Mr Lai, stating an overall margin call of HK$4.74m. Further, recorded conversations between Mr Lai and other employees of the plaintiff on 14 and 15 March show that Mr Lai, who was Mrs Horn’s fully authorised representative for trading the Account and the one in fact trading it, was fully informed of the margin requirement.

43.  There is also an allegation of breach of duty of care to ensure margin calls were delivered to Mrs Horn in a timely manner, though it was not seriously pursued at trial.  The margin call was made in the statement sent in the morning of the next working day (14 March) following the drop in the market on 11 March.  There is nothing to suggest that this was not a timely margin call.

44.  In any event, it is clear from the evidence including the recorded telephone conversations between Mr Lai and the other staff members of the plaintiff that he knew broadly of the position of the Account, even if not the precise amount of deficit at each moment.  The new Nikkei futures contracts Mr Lai decided to take up for the Account were not taken up in ignorance of the deficit position, but as a bet that the market would move in their favour.

Alleged breach in opening new positions within period of margin call

45.  It was provided in clause 12.3 of the Futures Client Agreement that no new open position was allowed within the period of margin call.  It was also the credit control policy of the plaintiff not to allow new position if there was any unsettled margin call.  Mr Lynn described it as a “cardinal” rule.  Mr Lai admitted he knew of this basic rule and policy.  It is a fact that new positions were opened for the Account between the afternoon of 14 March and the morning of 15 March 2011 when a margin call had not been fully settled. 

46.  Can the defendants complain that the plaintiff acted in breach?  In my judgment they cannot.  The plaintiff’s action in allowing the new open positions in Nikkei futures was done upon the defendants’ instruction.  If there was a breach of clause 12.3, it was as much a breach by the defendants.  More accurately, rather than saying both parties were in breach, the preferable analysis seems to me to be that the parties by mutual assent waived or varied that provision at least in relation to the trades in question.  The plaintiff had a right not to allow the new positions to be opened for the Account, but Mrs Horn, through Mr Lai as her discretionary trader, wanted and decided to buy those new open positions.  When Mr Lai then placed the orders with UOBBF, he, acting as the plaintiff’s employee, permitted that to happen.  Both parties agreed therefore not to abide by clause 12.3 in relation to those trades.  This in my opinion affords the plaintiff a complete defence.

Alleged breach in transacting business without sufficient cash to cover Mrs Horn’s expected trading liabilities

47.  The same analysis as in the preceding paragraph applies to the alleged breach of clause 11.3.2.

Alleged breach of duty of care by failing to liquidate and close the Account

48.  This plea fails both on the law and on the facts.  While the plaintiff had a power to liquidate and close the Account (see clauses 11.6, 12.4, 12.5 & 13.1.5 of the Futures Client Agreement), it was in my opinion a power conferred not for the client’s benefit but for the plaintiff’s purposes.  The plaintiff did not act in a fiduciary or advisory capacity towards Mrs Horn.  Clause 4.13 of the Futures Client Agreement provided:

“Each Contract shall be deemed to have been entered into by the Client in reliance only upon the Client’s own judgment and deliberations. Neither the Broker nor any of its employees or agents holds out itself as advising or having authority to advise the Client on the terms and conditions thereof or on any other matters connected with futures/options transactions. …”

49.  The plaintiff did not have the responsibility of deciding for her how as a prudent investor Mrs Horn should conduct herself.  If the state of the client’s account was such that the power had become available, but it was not exercised, then the plaintiff might find itself exposed to an increased credit risk as regards the client inasmuch as the plaintiff was itself liable as principal to the HKFE on the client’s transactions, but it does not mean the client, who chose to continue trading rather than close out her positions, is not liable for her trades.

50.  On 14 March 2011, while a margin call for HK$4.74m was made by noon, Mr Lai squared part of the open positions and HK$1m was deposited into the Account.  As far as the credit department was concerned (which was not aware of the new contracts purchased), the position of the Account had significantly improved.  The plaintiff was in my view entitled to decide in its discretion not to exercise the right to liquidate the Account.

51.  It is ironic that the defendants complain in this action that the plaintiff failed to force‑close the Nikkei futures positions in the Account.  As Mr Lai said in his evidence, he was complaining in the immediate aftermath about the plaintiff’s action in forcing the closure of the Nikkei futures positions on 15 March.  In fact, he asked the plaintiff to wait; he was “begging for time”; he was hoping the market would come back.  But the plaintiff told him: “If you don’t close it, we will do it for you.”  In his evidence, he said the plaintiff “should never have foreclosed”.

Alleged breach in failure to report to the HKFE and SFC

52.  Clause 11.3 specifies the matters that the client “acknowledges and agrees”.  The obligation referred to in clause 11.3.5 is an obligation of the plaintiff to the HKFE and the Commission to report to them (in the case of the former, under HKFE Rule 619).  It is not, in my view, an obligation owed to the client so as to found a complaint by the client in effect saying: “if you had performed your obligation to the HKFE or the SFC, you would have reported me to them, and they would not have allowed you to carry out any further trades for me, and I would have been prevented from placing those orders which proved disastrous”, which in my view lies ill in the client’s mouth.  The plaintiff as a broker was not under a duty to the client to supervise him so as to protect him from trading losses.  The client cannot rely on the plaintiff’s obligation to the authorities as a check on his own improvidence and to shift all responsibilities for his trades to the plaintiff.

Alleged breach of HKFE Rules 617 and 619

53.  The defendants allege that the plaintiff breached HKFE Rule 617 which provided that no “Exchange Participant” (such as the plaintiff) shall transact futures business for any client until and unless it has received from the client collateral adequate to cover that client’s minimum margin requirement.  The defendants also allege breach of Rule 619 which provided that Exchange Participants should monitor continuously their clients’ ability to meet any margin calls and should notify the HKFE if any Client has failed to meet two or more successive margin calls exceeding HK$150,000.

54.  However, the trades were not done on HKFE but on the Singapore exchange.  Clause 3.2 of the Futures Client Agreement provided:

“3.2 If the Client wishes to have Futures/Options, Business executed in markets other than those operated by the HKFE, in respect of transactions related to such Futures/Options Business, such transactions will be subject to the rules and regulations of those markets and not those of the HKFE, with the result that the Client may have a markedly different level and type of protection in relation to those transactions as compared to the level and type of protection afforded by the Rules, the Regulations and the Procedures.”

55.  Accordingly, irrespective of whether as between the HKFE and the plaintiff those rules actually applied in relation to the trades in question, they were as between the plaintiff and Mrs Horn not incorporated as part of their contract.  Indeed, their contract expressly stipulated that those rules were not to apply.  It follows that this complaint fails.

Alleged breach of implied term in failing to contact Mrs Horn directly when trading was not consistent with her investment strategy

56.  In the client information statement, under the heading of investment objective and strategy, Mrs Horn ticked the box “Investment” as opposed to “Hedging”, “Speculation” and “Others”.  It is alleged that it was an implied term of the Futures Client Agreement that the plaintiff would confirm with her directly, rather than rely on the account executive, when the trading activities in the Account were not consistent with an “investment” strategy, and that the opening of new positions on 14 and 15 March 2011 were manifestly inconsistent with the stated objective.^[3]

57.  This plea fails because, first, I am not satisfied that there was the alleged implied term in the contract.  The principles on the implication of terms are well established; see eg Tadjudin Sunny v Bank of America, National Association (unrep, CACV 12/2015, 20 May 2016) at §§37‑43.  The UK Supreme Court re‑visited the area in Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC 742, where Lord Neuberger, with whom Lord Sumption and Lord Hodge agreed, re‑affirmed the traditional approach (while offering 6 comments on the 5 conditions enunciated in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 283), and stated (at §31) that Lord Hoffmann’s observations in §§17‑27 of Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988

“should henceforth be treated as a characteristically inspired discussion rather than authoritative guidance on the law of implied terms”.

58.  More recently, in Ali v Petroleum Co of Trinidad and Tobago [2017] ICR 531, Lord Hughes, with whom the majority of the Privy Council agreed, said that the law has authoritatively been restated by the Supreme Court in Marks & Spencer plc and that:

“A term is to be implied only if it is necessary to make the contract work, and this it may be if (i) it is so obvious that it goes without saying (and the parties, although they did not, ex hypothesi, apply their minds to the point, would have rounded on the notional officious bystander to say, and with one voice, “Oh, of course”) and/or (ii) it is necessary to give the contract business efficacy. Usually the outcome of either approach will be the same.  The concept of necessity must not be watered down.  Necessity is not established by showing that the contract would be improved by the addition.  The fairness or equity of a suggested implied term is an essential but not a sufficient pre‑condition for inclusion.  And if there is an express term in the contract which is inconsistent with the proposed implied term, the latter cannot, by definition, meet these tests, since the parties have demonstrated that it is not their agreement.”

59.  I do not think the implied term contended for was necessary to make the contract work.  To the contrary, it is difficult to see how the contract could properly work if every time the account executive sought to place an order for the client, someone either in the trading department or otherwise would have to check the client’s investment strategy and objective, then form a value judgment as to whether the order was consistent with such strategy and objective, and, if not, bypass the account executive and try to contact the client directly.

60.  Secondly, Mrs Horn has in my view failed to establish that the new “buy” orders for Nikkei futures placed by Mr Lai on 14 and 15 March 2011 were manifestly inconsistent with her objective. “Investment” was a vague concept as a strategy and objective; it does not necessarily indicate a low risk approach.  Index futures itself is a high risk investment.  The risk disclosure statement that formed part of the agreement stated that one could easily lose a lot of money, beyond the margin one had to put up.

61.  Thirdly, it is not clear what, Mrs Horn alleges, would have happened if the plaintiff did seek to talk to her directly.  It could not have been for the purpose of ascertaining if the order was authorised, for there is no suggestion that it was not. 

Alleged breach of duty of care by failing to monitor market and pay attention to the exposure of the Account

62.  I do not think this allegation is made out.  I do not accept that in the absence of any special circumstance or arrangement, the plaintiff, as an execution broker, had a duty to monitor the market for the client.  It was ordinarily the client’s own responsibility to keep watch over his investments.  The broker might have an interest in monitoring the market and the Account to enforce its own rights as regards margin requirements and in order to comply with the requirements of the HKFE and other regulatory authorities, but not for the purpose of advising the client. 

63.  In any event, there was no lack of knowledge here.  Mr Lai was handling no other account at the time.  Throughout 11, 14 and 15 March 2011, Mr Lai — when making decisions as agent for Mrs Horn — only knew too well what was happening in the market and the effect it had on the Account.  He knew how many open positions there were, and kept a record of what deals he put through for the Account.  The losses were suffered because of the gamble he took, not because of lack of information.

Alleged breach of duty of care by failing to monitor and enforce the position limit (of 400 futures contracts) and trading and other limits on the Account

64.  The pleaded allegation is that there was a position limit of 400 futures contracts, and that the plaintiff wrongfully allowed that limit to be exceeded.^[4] This allegation fails because the defendants have in my view failed to establish that there was such a position limit in fact.

65.  There was a memorandum from the plaintiff to its Singapore sister company UOBBF in July 2010 stating that Mr Lai was authorised to place orders, but it only specified a “maximum daily trading limit” of HK$10m, not a position limit of any number of futures contracts. There was no “trade lot limit” applicable after 12 July 2010.  Nor is there any other evidence of such position limit apart from Mr Lai’s assertion, which is contradicted by the evidence of Ms Tse, which I prefer in this regard.  As a matter of fact, prior to March 2011 the position in the Account had from time to time exceeded 400 futures contracts.

66.  As admitted by Ms Tse, however, the trading did exceed the trading limit (applicable to the fixed margin requirement), even assuming the limit was HK$17m rather than HK$7.5m.  For the same reasons as stated in §46 above, I do not think that this resulted in liability on the part of the plaintiff to Mrs Horn.  The decision of Mr Lai to trade was attributable to her.  It was she therefore who wanted to trade beyond the applicable limit.

Alleged breach of duty of care by failing to inform her timeously when the Account turned into sudden huge deficit

67.  This plea in my view fails on the facts because, as stated above, Mr Lai, as the plaintiff’s agent, was well aware of the margin position.  When the market turned drastically down on 15 March 2011, Mr Lai was well aware of the consequences and the resultant deficit.  That was why he pleaded with the plaintiff not to close out all the positions but to wait.

68.  Insofar as it is contended that there was a duty to inform Mrs Horn personally, I reject it as being without legal basis.  In any event, when the “sudden huge deficit” appeared on 15 March 2011, it is not clear what it is said Mrs Horn could have done which would have averted the loss.

Enforceability of the 2002 and 2010 Agreements

69.  There was clearly consideration moving from the plaintiff.  But for the guarantee and indemnity in these agreements, the plaintiff would not have provided trading services and margin financing facilities to the clients served by Mr Lai.

70.  There was some suggestion in the evidence that an account executive would not without more be liable for any debit balance in a “house account” and that the Account was turned into a house account in October 2010. However, the 1^st defendant was specifically asked to sign the 2010 Agreement at the same time so that notwithstanding the Account became a house account, he would still be responsible.

71.  In my view the 2010 Agreement was clear and no issue of lack of certainty or intention could arise.  There is no reason why the agreement should not take effect in accordance with its terms.

Alleged breach of implied term of the 2002 Agreement and 2010 Agreement by failing to advise Mr Lai from time to time of his liabilities as guarantor

72.  Based on the principles applicable to the implication of terms in a contract as discussed in §§57‑58 above, I am unable to accept there was the implied term contended for.  Mr Lai as the account executive should have a fairly good idea of the state of the Account.  Anyhow there is nothing to suggest that he would have any difficulty in obtaining information about the Account if he wished to do so.  There is nothing unworkable without the alleged implied term which in any event was too imprecise.

73.  Further, Mr Lai was provided each day with a Client Margin Status Detail Report and an Online Client Margin Status Detail Report so that he was informed at least on a daily basis of the positions and liabilities of each of the clients he served, including Mrs Horn.

Mr Lai’s counterclaim

74.  In my judgment, Mr Lai has failed to make out his allegation that the plaintiff “unlawfully coerced or induced” him to transfer HK$2.02m to the Account on 18 March 2011.  There is no evidence of anything wrongful or unlawful done by the plaintiff to procure that payment.  In any event, given his liability to the plaintiff on the guarantee, it would be circuitous to set aside the credit of HK$2.02m only for the Account’s debit balance to be increased by the same amount.

Conclusion

75.  For the above reasons, the defences raised all fail.  The plaintiff is entitled to judgment.  Judgment will be entered for the plaintiff against both defendants jointly and severally in the sum of HK$24,466,180.31 together with interest from the date of the Writ of Summons to the date of this judgment at the usual rate of prime rate plus 1% per annum.  Thereafter interest accrues on the entire judgment sum at judgment rate.  Mr Lai’s counterclaim is dismissed.

76.  There will be an order nisi that the plaintiff is to have the costs of the action (including the counterclaims), to be taxed if not agreed.

	(Godfrey Lam)
	Judge of the Court of First Instance High Court

Mr Paul H M Leung, instructed by Edmund Cheung & Co, for the Plaintiff

The 1^st Defendant acted in person and present

Mr Andrew Lynn, instructed by C Y Lam & Co, for the 2^nd Defendant

HCA 1946/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1946 OF 2011

____________

BETWEEN
	UOB KAY HIAN FUTURES (HONG KONG) LIMITED	Plaintiff
	and
	LAI, LAWRENCE	1st Defendant
	HORN, LIND	2nd Defendant

____________

Before: Deputy High Court Judge Marlene Ng in Chambers

Date of Hearing: 18 May 2015

Date of Handing Down Decision: 4 June 2015

________________

DECISION
________________

 

I. INTRODUCTION

1.  The plaintiff (“P”) was/is a participant of the Hong Kong Future Exchange Limited (“HKFE”) and a licensed corporation to conduct Type 2 (dealing in futures) regulated activities[1] registered with the Securities and Futures Commission (“SFC”).  The 1^st defendant (“D1”) was its account executive.

2.  P claimed that:

(a) P together with other companies were/are members/ subsidiaries of the UOB Kay Hian Group (“Group”).

(b) On/about 13 November 2002, D1 made an agreement with members of the Group (“2002 Agreement”) to (i) guarantee the liabilities of his clients and (ii) indemnify the Group for non-recoverable liabilities of his clients. 

(c) P introduced the 2^nd defendant (“D2”) as client to P.  On/about 31 May 2010, D2 entered into a futures client agreement with P and opened/maintained an account with P for trading in futures/options contracts (“D2 Account”).  At all material times, D2 was served by D1.

(d) On/about 11 October 2010, D1 entered into a further agreement with P (“2010 Agreement”) to confirm he agreed to serve D2 and be responsible to the Group for obligations and liabilities arising from trades/transactions effected by D2 through D1.

(e) On/about 14 March 2011, P notified D1 of a margin call of JP¥53,524,997 for the D2 Account.  As at 25 October 2011, there was a debit balance of HK$24,466,180.31 under the D2 Account incurred by D2’s trades/transactions effected through D1. 

On 28 November 2011, P commenced the present action against D1 and D2 to claim for the sum of HK$24,466,180.31 with interest and costs.

3.  D1 denied liability.  He did not admit the 2002 Agreement, which (even if it existed) (a) was not enforceable for want of certainty, intention and/or consideration, and (b) had implied terms to the effect that P as creditor shall from time to time advise him of his liabilities as guarantor and that the liabilities of D1’s clients must be bona fide and incurred lawfully.

4.  D1 claimed that by the 2010 Agreement he agreed to be responsible for D2’s obligations/liabilities (if validly made) in his capacity as account executive and not as guarantor.  He averred that P as D2’s broker/agent in futures trading activities owed her a duty of care to protect her interest, so even if the 2010 Agreement were a guarantee agreement (which D1 denied), it would have the same implied terms as for the 2002 Agreement.

5.  D2 contended P “has imposed a position limit for [the D2 Account] of about 400 futures contracts.  By such position limit, D1 legitimately believed that D2, at all material times, cannot have entered into an open position of significantly more than 400 contracts”.[2] The earthquake/tsunami disaster in Japan on 11 March 2011 caused messy trading/clearing environment outside anyone’s reasonable contemplation, but P had not cautioned D1 (a) about his alleged potential liability as guarantor for D2 and/or (b) that D2 had unrealistically breached her position and other limits by her new trading activities on 14‑15 March 2011, and P was therefore in breach of its duty of care to D2 and of the implied terms in the 2002 and/or 2010 Agreements.

6.  D1 further claimed there were breaches of the rules of the HKFE (“HKFE Rules”), the “Code and Conduct for Persons Licensed by or Registered with SFC” (“SFC Code”), and the implied terms of the 2002 and 2010 Agreements.  D1 also had a counterclaim against P which did not concern the present application.

7.  P’s Reply disputed D1’s Defence, and denied his Counterclaim.  P averred that D2’s trading in inter alia Nikkei 225 Index Futures (“N225 Futures”) was conducted on/through the Singapore Exchange Limited (“SGX”) and not through HKFE, so the HKFE Rules and SFC Code were not applicable.  P further averred inter alia that (a) D1 was at all material times aware of the approved trading limit of each client he served (including that of D2), (b) D1’s applications on 5 July, 14 September and 11 October 2010 to P to increase D2’s trading limit from HK$100,000 to HK$4,000,000, HK$6,500,000 and HK$7,500,000 respectively were approved, (c) P’s Settlement Department would inform D1 the position/liabilities of each client he served by way of daily report, and (d) the trading activities under the D2 Account (including those on 11, 14 and 15 March 2011) were executed through D1 so he was fully aware of them.

II.  SUMMONS AND APPEAL

8.  On 8 November 2013, D1 applied by summons (“Summons”) for specific discovery of inter alia “Document detailing “position limits” for all [his] clients, trading N225 futures and HSI futures [ie Hang Seng Index Futures (“HSI Futures”)] contracts, orders executed through “UOB Bullion Singapore” [ie UOB Bullion and Futures Limited (“UOBB”)], under the Sub “Account G” (Please see attached email)” (“Requested Document”). The attached email dated 6 November 2011 from D2 to P’s solicitors referred to the Requested Document as follows:

“There are documents related to the “position size limits of both [N225 Futures] contracts and [HSI Futures] contracts, at the executing broker [UOBB] Singapore” for [D1’s] clients (under the UOB kayHian HK Ltd, sub account G). [D1] signed the document and Rex Au was witness to this.”

9.  D1 filed 3 affirmations on 8 and 13 November and 13 December 2013 respectively in support of the Summons (“D1’s 1^st, 2^nd and 3^rd Affs”). P filed the 3^rd affirmation of its head of credit department Tse Helen Kwokmun (“Tse”) on 8 January 2014 (“Tse Aff”) in opposition.

10.  The substantive hearing of the Summons with 2 hours reserved came before Master Chow on 7 July 2014.  It was adjourned part-heard to 25 September 2014 with another 2 hours reserved.  On 21 November 2014, Master Chow handed down a 40-page written decision (“Decision”), and dismissed the Summons with costs (including all costs reserved) to P to be summarily assessed (“Order”).  On 27 December 2014, such costs were summarily assessed at HK$74,000 (“Assessment Order”).

11.  On 15 December 2014, D1 filed Notice of Appeal to set aside and to stay execution of the Order (“Appeal”).  Since the Appeal was out of time for about 10 days, he also applied for extension of time to appeal (“Leave Application”) and filed a further affirmation in support of the Leave Application (“D1’s 4^th Aff”). 

12.  The Appeal and Leave Application came before me for hearing on 4 March 2015 (“1^st Hearing”).  D1 (who was self-represented all along) was absent, but he did inform P shortly before the 1^st Hearing he could not attend as he was feeling unwell.  On the morning of the 1^st Hearing, he sent through to P’s solicitors a medical certificate confirming he had sought medical treatment on that day and was granted sick leave for 4-5 March 2015 (inclusive).  So I adjourned the Leave Application and Appeal, and the adjourned hearing came before me again on 18 May 2015 (“2^nd Hearing”). 

III.  LEAVE APPLICATION

13.  Order 58 rule 1 (3) of the Rules of the High Court (“RHC”) provides inter alia that unless the court otherwise orders, the notice of appeal against a master’s decision or order must be issued within 14 days after the decision or order appealed against was given or made.  Under the proviso “unless the court otherwise orders” in Order 58 rule 1 (3) of the RHC and pursuant to Order 3 rule 5 of the RHC, the court has a discretion to grant enlargement of time to appeal.

14.  In PostwellLtd v ChengKap Sang,[3] DHCJ Wong Yan Lung SC stated that:

“…… Although I agree …… that the absence of an acceptable explanation for the delay does not preclude the court’s discretion to extend time, I am of the view that in applications for extension of time to appeal an adverse order or adjudication, as opposed to extension of time to remedy other procedural default, the court should be slow to accede to the application in the absence of an acceptable reason for the delay.”

15.  In considering whether to extend time to appeal, the court has to consider all relevant factors, particularly (a) the length of the delay, (b) the reasons for the delay, (c) the merits of the proposed appeal, and (d) the degree of prejudice to the other party.[4] DHCJ Peter Ng SC (as he then was) in Hady v Bazar[5] reminded that in the post-Civil Justice Reform (“CJR”) era, it is incumbent on the court to give effect to the underlying objectives of the RHC when exercising any of its powers,[6] but the court must 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.[7]

16.  In D1’s 4^th Aff, D1 claimed he received the Decision on 26 November 2014 via the post.  He went to the High Court on 12 December 2014 to ask for assistance on the procedure for appeal against the Decision, and was informed he had 14 calendar days in which to lodge the Appeal.  He apologised for the delay and urged this court to hear the Appeal.

17.  Whilst recognising D1 was self-represented, there was no explanation why he did not make enquiries to ascertain the procedure for appeal from 26 November to 12 December 2014.  Mr Leung, counsel for P, accepted not many litigants acting in person would be aware of the time limit for appeal, but suggested that upon receipt of an adverse decision or order which any such litigant did not accept it would be incumbent on him to make enquiries as to how and when to challenge such decision or order. 

18.  However, I bear in mind the Decision comprised 40 pages, and D1 as litigant in person would reasonably require time to read/understand the same in order to decide whether to appeal and if so to frame the grounds of appeal.  Here, D1’s grounds of appeal were set out in 7 pages of D1’s 4^th Aff, and the delay was only 10 days.  Despite complaint by Mr Leung, I do not think the delay caused any significant prejudice to P in the particular circumstances herein given the history of the Summons which took more than a year for adjudication below.

19.  In any event, the lack of any satisfactory reason for the delay is only one factor to be taken into account in the exercise of my discretion.  The primary consideration in the exercise of my discretion is to secure just resolution of the dispute between the parties.  For the reasons set out below, although I am prepared to uphold Master Chow’s decision in declining specific discovery of the Requested Document, I rest my conclusion on reasons different from those given in the Decision, which necessarily has impact on the costs order made in the Decision/Order.  In the particular circumstances of this case, I find there is justification to grant the Leave Application.

IV.  D1’s 1^ST, 2^ND AND 3^RD AFFS

20.  D1 claimed he was employed by P as a broker.  He placed his client’s orders for N225 Futures contracts through P’s sub-account G with UOBB.  D1’s clients had trading limits approved by P and UOBB, who would monitor the “up to the minute” positions.  The Requested Document, a document signed by D1 and P’s director, was described as follows:

“Document relates to:

: [D1] executed/placed “Nikkei futures” orders, for the client ([D2]) account, via telephone, “directly” to [UOBB], Singapore.

: client ([D2’s]) “Nikkei futures positions” were conducted through the UOB Kay Hian Futures Account sub-account G, held under [UOBB], in Singapore.

: “sub account G” in Singapore, was solely for the use of [D1’s] clients, not for [P’s] other brokers.

: This ‘sub-account G” had “position limits” set and monitored by [P and UOBB].

Please note, that [the Requested Document was] witnessed by [P’s] employee, Rex Au.”

“1. [D1 was] employed by [P], as an account executive (Broker), in the Hong Kong office.

[D1] placed [his] orders “verbally” to the appropriate [UOBB] dealer.

[D1] “did not” execute/place the “client orders” through [his] computer terminal/login account.

2. [D1] executed/placed “HSI futures” orders, for clients, though [P’s] trading desk, in Hong Kong.

[D1] executed/placed “Nikkei futures” orders, for clients, through [P’s] affiliated company in Singapore, called [UOBB].

On various occasions, [D1] executed “HSI futures” through [UOBB].

[P] had other hong kong brokers/dealers, who also placed “Nikkei futures” orders at [UOBB], for UOB Kay Hian HK clients.

To avoid confusion, all [D1’s] client orders were placed/executed at [UOBB], in the name of “UOB Kay Hian HK Ltd-sub account G”.

3. [D1] signed the document, which was titled similarly to “Trading Limits of Dealers of [UOBB]”.

[D1] cannot recall the actual signing of this document, but it should be before 9^th July 2010.

Rex Au, employed of [P], was witness to this document.

4. This document was very specific in its description, in regards to [D1’s] “total overall clients” position limits, executed/placed at [UOBB].

Although each client had their own individual “margin/equity limits’ at UOB Kay Hian HK Ltd, [D1’s] “total position limits for all my clients” executed/placed at [UOBB], were detailed in this document.

- the position limits, for “Nikkei futures” was in the region of 400 contracts.

- the position limits, for “HIS futures” was in the region of 120 contracts.

-- executed at [UOBB] under the account “UOB Kay Hian HK Ltd-sub account G”.

V.  TSE’s AFF

21.  Tse explained that having considered D1’s portfolio of existing clients at the time, P’s management approved his application to increase his then position limit of 100 lots of N225 Futures so that he was authorised to place orders for 180 lots of N225 Futures for all his clients with UOBB (P’s global futures broker) with effect from 10 February 2009 pursuant to a document known as “Application of Trading Limit for Futures & Option Dealing” (“2009 Document”).  On/about 9 February 2010, D1’s position limit of 180 lots of N225 Futures was changed to a monetary limit of HK$6,000,000, and by a document known as “Application for Trading Limit of Dealers – UOBB” dated 9 July 2010 it was increased to HK$10,000,000 with nothing written in the “Remarks” section (“2010 Document”).  Tse noted there were 8 documents of various dates known as “Application of Ad Hoc Trading Limit for Futures Dealing (Futures Account)” for D2 (“Horn Applications”).

22.  Tse stated she had caused a diligent search of all P’s records and was only able to identify the 2009/2010 Documents that might possibly meet D1’s description of the Requested Document.  D1 indicated the 2010 Document was not the one, and the 2009 Document was not known as “Trading Limits of Dealers at UOB Bullion Singapore” and not witnessed by Rex Au. 

23.  Tse said in any event the 2009 Document was not relevant because D2 was not yet P’s client when it was signed,[8] and less than 2 months after D2 became P’s client D1 by the 2010 Document applied to increase the limit on his authority to place orders with UOBB from HK$6,000,000 to HK$10,000,000.  So when D2 breached her client futures agreement in March 2011, D1’s authority to place orders with UOBB was governed by the 2010 Document with a monetary limit of HK$10,000,000 that superseded D1’s authority to place orders with UOBB for all his clients up to 180 lots of N225 Futures under the 2009 Document.

24.  Tse claimed that if the 2009 document was not the Requested Document, the Summons ought to be dismissed because P was not in possession of any other document that might meet D1’s description of the Requested Document, but if the 2009 Document was the Requested Document, the Summons ought to be dismissed because P had failed to show how it was relevant to the present action.

VI.  APPEAL – LEGAL PRINCIPLES

25.  It is trite that an appeal from the master to judge in chambers is dealt with by an actual rehearing of the application which led to the order under appeal, and the judge treats the matter as though it came before him for the first time.  The judge will give the weight it deserves to the previous decision of the master; but he is in no way bound by it.[9]

26.  In pages 2-8 of D1’s 4^th Aff, D1 disputed the reasoning in various paragraphs of the Decision, and they were in effect his grounds of appeal for the purpose of the Appeal.

27.  After the CJR, Order 58 rule 1(5) of the RHC provides that “[no] further evidence (other than evidence as to matters which have occurred after the date on which the judgment, order or decision was given or made) may be received on the hearing of an appeal under this rule except on special grounds”.  The phrase “special grounds” is the same expression as in Order 59 rule 10(2) of the RHC and requires the conditions laid down in Ladd v Marshall[10] to be satisfied.[11]  The Ladd v Marshall conditions are: (a) the evidence could not have been obtained with reasonable due diligence for use at the hearing below, (b) the evidence must be such that, if given, it would probably have an important influence on the result of the case, though it need not be decisive, and (c) the evidence must be such as is presumably to be believed.  DHCJ Au‑Yeung (as she then was) in Bank of China (Hong Kong) Limited v Certain Aim Limited[12] said as follows:[13]

“… Order 58, rule 1(5) was introduced to curb the undesirable practice before the [CJR] when parties sought to adduce a further round(s) of evidence on appeal after an unfavourable decision from a Master. Rule 1(5) aims at effecting a change of culture so that parties should prepare their application properly at the earliest possible opportunity and lay all cards on the table prior to the hearing before a Master. The spirit of this rule will be defeated if a party is allowed to revert to the pre-CJR practice. …”

28.  Mr Leung objected to pages 2-8 of D1’s 4^th Aff on the basis that the Ladd v Marshall considerations had not been satisfied.  At the 2^nd Hearing, I received such affirmation evidence on de bene esse basis.   Having carefully considered pages 2-8 of D1’s 4^th Aff, I have no doubt that with reasonable diligence those matters could have been raised before Master Chow and they would not have satisfied the Ladd v Marshall requirements.  But this is subject to my decision below to receive materials by way of evidence in (a) the July and September Submissions[14] and (b) D1’s oral submissions made to Master Chow on the July and September submissions that travelled beyond D1’s 1^st, 2^nd and 3^rd Affs (collectively, “New Materials”) for the purpose of the Appeal,[15] which meant that any part of the New Materials reiterated in pages 2-8 of D1’s 4^th Aff would not be excluded.

VII.  JULY AND SEPTEMBER SUBMISSIONS

29.  D1 prepared written submissions for the hearings on 7 July and 25 September 2014 described as the July and September Submissions in paragraph 30 of the Decision.  There were 5 attachments to the July Submissions described as Sets A(a)-(b), B, C, D and E.  Except for the 2009/2010 Documents, Horn Applications and extracts from D1’s Defence and Counterclaim, the July/September Submissions contained some evidence/explanation that travelled beyond D1’s 1^st, 2^nd and 3^rd Affs.

30.  Despite objection by P’s solicitor against D1’s failure to file affirmation evidence to substantiate the July/September Submissions,[16] Master Chow heard oral submissions by D1 on 2 days based on the July/September Submissions.[17] But it was unclear from the Decision whether the learned master formally received the New Materials and then heard D1 on them as part of D1’s case for the Summons or whether they were merely received de bene esse.  But when Master Chow handed down the Decision 2 months later, she criticised D1 for not setting out in his affirmations the requisite supporting evidence and only giving oral explanations at the hearings,[18] and she concluded that “the submissions of [D1] should be disregarded”[19] because it would have been an affront to the underlying objectives under Order 1A rule 1 of the RHC to deny P “a chance to make a considered reply”.[20]

31.  Master Chow also criticised D1 for failing to comply with case management directions to file/serve affirmation in reply to the Tse Aff, and she disbelieved D1’s explanation that he (a) misunderstood the master who gave such directions and (b) thought he could present his arguments in reply at the hearing.[21] The learned master castigated D1 for his inertia “to find out for himself what the legal requirements are and …… albeit without justification, [to harbour] an expectation that guidance in the navigation of the legal minefield and coaching as to the steps he should take would be provided by the court”.[22]

32.  Master Chow reproved D1 for taking up 2 hours of the hearing on 7 July 2014 on oral submissions that should have been made on affirmation such that by the time the hearing resumed on 25 September 2014 the application had dragged on for over 10 months.  The learned master found “such waste of court time could and should have been avoided”,[23] and concluded as follows:

“76. Noting the many chances afford to [D1] to ensure that he would not go off course, permitting [D1] to have another chance to rectify the deficiency in the evidence adduced by him will not be conducive to achieving the objective of ensuring that a case is dealt with as expeditiously as is reasonable practicable. The case is almost ready to be set down for trial. This summons for discovery is the only outstanding interlocutory application. To turn the clock back now after so many months have passed since the time for [D1] to file his affirmation in reply and for the progress of the application to be drawn to the attention of the court by way of the joint report will be highly unjust to [P].

77. In light of the above findings, [D1’s] application for discovery should be dismissed.  I should add that even if I were to disregard the procedural irregularities outlined above, I do not think [D1] has made out a case for the exercise of the court’s power to order specific discovery.”

33.  I do not agree.  If formally receiving D1’s new materials beyond D1’s 1^st, 2^nd and 3^rd Affs by way of evidence would have caused irreparable prejudice by depriving P of a fair opportunity to respond, the learned master could have made a preliminary ruling on admissibility of the July Submissions upon objection made by P’s solicitor at the hearing on 7 July 2014.  Had the learned master decided against D1 by disallowing any new material by way of evidence in the July Submissions, D1 would not have been able to rely on the September Submissions and/or oral submissions premised on such new materials in which case there would not have been any delay at all.  Alternatively, had the learned master thought it would not have been appropriate to make any immediate ruling, procedural fairness (which is as equally important as substantive justice) would have required it to be made known to D1 (especially when he was self-represented) that the New Materials were only received de bene esse, so both D1 and P would have understood the question of admissibility of such materials/evidence was at large pending subsequent decision.  If such course had been adopted, the question of delay would not have arisen since it would be necessary to hear addresses on the New Materials in order to decide on their admissibility.

34.  Since the Appeal is by way of re-hearing, this court is not bound by Master Chow’s decision on admissibility of the New Materials.  So at the 2^nd Hearing, I informed D1 and Mr Leung that I would receive the New Materials and D1’s oral submissions thereon on de bene esse basis. 

35.  Mr Leung maintained P’s stance that D1 was not entitled to rely on the New Materials for the purpose of the Appeal since they were not evidence properly placed before the court.  D1 contended otherwise.  In my view, given the procedural history as explained above (including the fact that the New Materials were received and D1 was heard on them for 2 hearing days before Master Chow) and further given that even up to the 2^nd Hearing P had not outlined how it would need to answer the New Materials (bearing in mind it was P’s case that it did not have the Requested Document in its possession, custody or power), I am persuaded that in the particular circumstances of this case, I should exercise my discretion to allow the New Materials for the purpose of the Appeal.

VIII.  SPECIFIC DISCOVERY – LEGAL PRINCIPLES

36.  Under Order 24 rule 7 of the RHC, a party may apply for an order requiring any other party to make an affidavit stating whether any document or class of document specified or described in the application is or has at any time been in his possession, custody or power, when he parted with it and what has become of it.  But if the court is satisfied that discovery is not necessary, or not necessary at that stage of the cause or matter, it may dismiss or adjourn the application, and shall in any case refuse to make such an order if and so far as it is of opinion that discovery is not necessary either for disposing fairly of the cause or matter or for saving costs.[24]

37.  Court’s approachHong KongCivil Procedure2015 states inter alia as follows:[25]

“…… But this is not sufficient unless a prima facie case is made out of (a) possession, custody, or power, and (b) relevance of the specified documents …… This prima facie case may be based merely on the probability arising from the surrounding circumstances or in part on specific facts deposed to. …… See too BerkeleyAdministration v. McClelland [1990] F.S.R. 381 where at 382 the court restated the principles as follows: (1) There is no jurisdiction to make an order under RSC, O.24 r.7, for the production of documents unless (a) there is sufficient evidence that documents exist which the other party has not disclosed; (b) the document or documents relate to matters in issue in the action; (c) there is sufficient evidence that the document is in the possession, custody or power of the other party. (2) When it is established that those three prerequisites for jurisdiction do exist, the court has a discretion whether or not to order disclosure. (3) The order must identify with precision the document or documents or categories of document which are required to be disclosed, for otherwise the person making the list may find himself in serious trouble for swearing to a false affidavit, even though doing his best to give an honest disclosure ……”[26]

38.  Existence of the documents  In Ngan In Lengv Chu Yuet Wah (No 1), DHCJ Queeny Au-Yeung (as she then was) said as follows:[27]

“42. A prima facie case on existence may be established on merely showing the probability arising from the surrounding circumstances or on specific facts deposed to: Hong KongCivil Procedure 2012, Vol 1, p.553 para.24/7/1. For example, a prima facie case on existence may be established simply by assessing whether it is business practice for a certain type of document to exist: Union Bank of India v General Nice Resources (Hong Kong) Ltd (unrep., HCA 299/2007, [2010] HKEC 704), 10 May 2010, Bharwaney J, [10].”

39.  Relevance  It is for the party seeking specific discovery to demonstrate a prima facie case for inter alia the relevance of the documents sought to the “matters in question”.  The well-known test for determining “relevance” is set out in The Compagnie Financiere et Commerciale du Pacifique v The Peruvian Guano Company as follows:[28]

“…… It seems to me that every document relates to the matters in question in the action, which not only would be evidence on any issue, but also which, it is reasonable to suppose, contains information which may – not which must – either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary. I have put in the words ‘either directly or indirectly’ because, as it seems to me, a document can properly be said to contain information which may enable a party requiring the affidavit either to advance his own case or to damage the case of his adversary, if it is a document which may fairly lead him to a train of enquiry, which may have either of these two consequences: the question upon a summons for a further affidavit is whether the party issuing it can shew, ……, that the party swearing the first affidavit has not set out all the documents falling within the definition which I have mentioned and being in his possession or control ……”[29]

40.  On the Peruvian Guano test of “relevance”, the real question is whether the documents sought to be discovered are relevant to the issues between the parties to the litigation or, putting it in another way, to the “questions in the action”.[30] There has been suggestion that the issues or questions must be those identified in the pleadings, but it was held in Thorpe v Chief Constable of Greater Manchester Police[31] that matters can be “in question” or be the subject of controversy between the parties even though not expressly raised on the pleadings.  But even if an issue is raised in the pleadings, it is not necessarily determinative as to whether it relates to a “matter in question”.[32]  

41.  Necessity According to Hong Kong Civil Procedure 2015,[33] if the party seeking discovery establishes a primafacie case, it is for the party objecting to the order for discovery to satisfy the court that the discovery is not necessary either for disposing fairly of the cause or matter or for saving costs under Order 24 rule 8 of the RHC.[34] Such provision brings in the question of evidential materiality of the discovery sought to a particular issue.  DHCJ Horace Wong SC in Chan Hungv Yung Kwong Chung said as follows:[35]

“32. In any given case, there is likely to be a spectrum of evidential materiality within which documents may fall. There may be documents which are central to the pleaded issues; but there may also be documents which fall at the other end of the spectrum in that though they may ‘fall within the letter of Lord Justice Brett’s formulation of relevance for discovery purposes’, they are documents which are unlikely to contain or yield information of such evidential materiality to the pleaded case (in the broad sense mentioned above) of the parties as to make their disclosure necessary for the fair disposal of the proceedings or to save costs. The Court is entitled to take the view that although relevance in the Peruvian Guano sense has been established, it is not necessary for them to be disclosed. The power to refuse unnecessary discovery of documents is expressly conferred by the rules of court.

33. Indeed in the O Company v M Company case mentioned above, after dealing with the question of relevance, Colman J further held at p.352:

‘… I would only add that if I had held that the applicable analysis of relevance derived from Compagnie Financiere du Pacifique v Peruvian Guano Co., sup., was wide enough to include as relevant those documents in respect of which I have refused to make an order for discovery, I should in each case have held that discovery was not necessary either for disposing fairly of the matters in issue or for saving costs under O.24. r.8. Documents of which discovery is necessary for the fair disposal of a matter in issue must at least have a demonstrable evidential materiality. For the reasons which I have given in relation to relevance I am not satisfied that all those documents covered by items 9, 10 and 20 do so.’

Hence Colman J would have arrived at the same conclusion by applying O.24 r.8 if he had simply followed the ‘letter’ of Brett L.J.’s formulation in the Peruvian Guano case on the question of relevance.”

42.  This is echoed in Hong Kong Civil Procedure 2015 which states that “[an] application for discovery of a specific class of documents was refused in Kahn (David) Inc v Conway Stewart & Co Ltd [1972] F S R 69 upon the grounds that the probative value of the documents, if they existed, would be so slight as not to justify the inconvenience of giving discovery; and upon grounds that such discovery was not in the circumstances necessary for determining the issue to which it was said to relate ……”[36]

43.  Discovery affidavits are conclusive  The making of an order for specific discovery does not preclude the other party from deposing in the affidavit that he in fact does not have the documents in his possession, custody or power.  Generally speaking, the affidavit in answer is invariably taken at face value, and subject to limited exceptions, it is conclusive as to relevance and existence or otherwise of documents at the interlocutory stage so that the applying party cannot seek to contravene the statements or assertions in the affidavit either by way of a further contentious affidavit or by applying to cross-examine the deponent.[37]

44.  In Edmiston v British Transport Commission, there was already on the file an affidavit sworn by the defendant’s staff setting out certain documents and deposing to the fact that there were no other relevant documents before the application for further discovery was made.  Singleton LJ found there was nothing in the supporting affidavit for the application which enabled the court to go behind the conclusiveness of the discovery affidavit, and discovery was refused.[38]

45.  But if the affidavit is shown to be insufficient by its content or by admissions made in the proceedings, in such a case a further affidavit may be ordered.[39] “[The discovery] affidavit is not regarded as conclusive only where it can be shown that there has been insufficiency of discovery.  The insufficiency can be demonstrated by (a) the pleadings, the list and affidavit of documents themselves, or documents referred to therein; (b) any other source that constitutes an admission of the existence of a discoverable document not so far discovered; (c) an apparent exclusion of documents from discovery by a party under a misconception of the case: Matthews & Malek, §6.43”.[40]

IX.  APPEAL - DISCUSSION

46.  D1 confirmed the 2009/2010 Documents were not the Requested Document, which document was in relation to his “total overall client” position limits, executed/placed at [UOBB] Singapore” and witnessed by Rex Au.  D1 clarified what he meant was Rex Au saw him sign the Requested Document in Hong Kong, but his orders for N225 Futures contracts were executed/placed at UOBB.

47.  Master Chow opined “this piece of information is of no help in establishing that the documents sought exist, that they are relevant to the issue in dispute, or that they are in the possession, custody or control of the [P]”.  She said “[there] is thus no need to address the point”[41] because (a) it was not P’s case that Rex Au signed the Requested Document and/or his name appeared on it, and (b) there was no affidavit from Rex Au that he witnessed D1’s signing of the Requested Document.

48.  I disagree.  Surely D1’s contention that P’s employee actually saw him sign the Requested Document must be pertinent to the questions of whether (a) such document actually exists and (b) it is in P’s possession, custody or control.  Before one criticises D1 for failing to produce any affidavit by Rex Au, one must not forget that (i) Rex Au was/is P’s employee and (ii) D1 is only required to establish a prima facie case rather than to provide absolute proof on existence of the Requested Document. In my view, absence of corroboration on oath by Rex Au does not call for throwing out D1’s assertion about the Requested Document that Rex Au witnessed his signing it.

49.  As explained in paragraph 38 above, a prima facie case on existence (and thus P’s possession, custody or control) of the Requested Document could arise from the surrounding circumstances or even business practice.  D1 reminded that P was/is a financial institution.  According to him, paper trail/record was the mainstay of financial institutions, and essential source for explaining, justifying and validating (and in due course understanding) management decisions.  Any apparent deviation from or omission in compliance with standard procedure/record would raise “red flag” as to whether there was in fact other undisclosed documentation of relevant management decisions that would fill the lacuna.  On such basis, D1 urged this court to accept that financial institutions would not have approved any increase in his trading limits without his signed application and/or documented management explanation/approval, and that against such contextual background his discovery request made commercial sense.

50.  I do not propose to repeat Master Chow’s summary of D1’s submissions in paragraphs 44-62 of the Decision, and will only deal with matters relevant for the purpose of my decision on the Appeal.

51.  I start with D1’s explanation of the function of trading limits imposed on him as account executive.  He placed orders for N225 Futures for his clients under sub-account G of P’s account with UOBB in Singapore.  UOBB would not know and was not concerned with the equity and cash position of D1’s clients.  Rather, UOBB acted on D1’s trading limits imposed on him as part of P’s risk control measures.  This meant (a) the aggregate trades for all clients of D1 as account executive could not exceed his own trading limits in terms of monetary value and/or number of contracts, and (b) if they did D1 would have to apply for increase of his own trading limits.

52.  According to D1, P concurrently imposed 2 types of limits, ie total position limit and total monetary limit, on him.  The former restricted the total number of contracts and the latter restricted the total dollar value of the trades he could effect for all his clients.  So even if a client had extra equity, D1 could not buy N225 Futures contracts for such client that would exceed D1’s total position and/or total monetary limits unless there was variation of such limits by application, justification and approval.  D1 said such risk control mechanism afforded protection to both P’s and D1’s clients. 

53.  D1 submitted that the Requested Document set out his total position limit of about 400 N225 Futures contracts for sub-account G at UOBB, which also served a risk control function during margin fluctuation.  In times of market turbulence, the margin threshold could go up by 30%, which meant D1’s total position limit would prevent him from buying more than 280 N225 Futures contracts in the aggregate for all his clients. But in a quiet market, the margin threshold could go down by 30% so his clients in the aggregate could notionally buy up to 550 N225 Futures contracts, his total position limit would prevent him from buying more than about 400 contracts for all his clients.

54.  I now turn to D1’s explanation of the existence of the Requested Document in the above context.  There was no dispute that (a) by the 2009 Document D1 applied to increase of his total position limit from 100 lots to 180 lots of N225 Futures and such application was approved by P, and (b) by the 2010 Document D1 made a signed application for increase of his total monetary limit from HK$6,000,000 to HK$10,000,000 that was eventually approved but no explanation, justification or remark was given on the relevant form. 

55.  D1 submitted it would have been impossible for P to approve such substantial increase in his total monetary limit without any explanatory remark,[42] and the only plausible reason would have been his signed and approved application for increase of his total position limit from 180 lots to about 400 N225 Futures contracts made between the 2009 and 2010 Documents.  D1 said this was echoed in paragraph 9(a) of D1’s Defence and Counterclaim.[43] He also gave an illustration by relying on two emails from Choong and Cai of SGX in June 2014 (“Emails”) which I will turn to below.[44]

56.  In contrast, P by the Tse Aff claimed that the 2009 Document increased D1’s total position limit from 100 to 180 lots of N225 Futures, but on/about 9 February 2010 D1’s total position limit was changed to a total monetary limit of HK$6,000,000, and later it was increased to HK$10,000,000 by the 2010 Document.  However, the Tse Aff did not state or exhibit relevant documentation for change of D1’s total position limit to total monetary limit on/about 9 February 2010.

57.  In the circumstances, the crucial difference between P’s and D1’s respective case turned D1’s trading limit(s) between the 2009 and 2010 Documents in respect of N225 Futures contracts placed by D1 with UOBB for all his clients, ie P claimed there was just D1’s total monetary limit, but D1 claimed his total position limit was still applicable and his total position and total monetary limits worked in tandem to limit the trades he could place in respect of N225 Futures with UOBB for all his clients.  In my view, such difference went to the question of whether, how and to what extent D1’s trades for D2 in respect of N225 Futures placed with sub-account G at UOBB exceeded the trading limits, which in turn went to the question of whether P owed/breached any duty of care to D1 and/or breached any implied terms under the 2002 and/or 2010 Agreements.  These questions are obviously matters of controversy between the parties in this action.

58.  By the Decision, Master Chow rejected D1’s submissions on both existence and relevance of the Requested Document.  Before I turn to D1’s submissions before me which focused on his disagreements with Master Chow’s views, I need to reiterate two matters which form a running theme in the analysis below.  First, D1 was only required to establish a prima facie case and not an absolute case on existence and relevance of the Requested Document.  After all, at this interlocutory stage, the court would not be in a position to make any “findings” in favour of either P’s or D1’s case or come to any definitive decision on the Requested Document merely on affirmation evidence and/or the New Materials.  Secondly, the Peruvian Guano test of relevance required the court to consider whether it was reasonable to suppose the Requested Document would contain information that may (not must) either directly or indirectly enable D1 to advance his own case or to damage P’s case, which test plainly recognised that sometimes adversaries in litigation might raise different contentions.  But unless it was clear that the requested document(s) were irrelevant, it would not be appropriate to conflate the parties’ different contentions to downplay relevance.

59.  I bear in mind the Appeal is by way of rehearing. Having considered the matter afresh, I am satisfied on D1’s explanations as to P’s business practice and the nature of his case (in contra-distinction to that of P) that there was a prima facie case on existence and relevance of the Requested Document.  Master Chow decided otherwise.  Since P relied on her reasons for decision for the purpose of the Appeal in answer to the New Materials whilst D1 disputed them, which contentions are also pertinent to the issue of costs below, it is necessary to turn to those matters.

60.  First, Master Chow found D1’s contention that the Requested Document was his applicable total position limit to be a shift in goalposts from D1’s pleaded case in paragraph 9(a) of the Defence and Counterclaim, ie the position limit was imposed on D2 in respect of the D2 Account, and she came to the view that “[the] variation in the description can only mean that [D1] is talking about different documents, and the document he is now seeking does not match the description in the pleadings”.[45]

61.  As a starting point and as explained in paragraph 40 above, it was incumbent on D1 to establish a prima facie case on existence and relevance to “questions in the action” irrespective whether they were pleaded.  D1 submitted that if he was subject to a total position limit of about 400 N225 Futures contracts, then any/all of his clients would be subject to the same cap so that any client with extra equity could buy other instruments through the Hong Kong trading desk but not any more N225 Futures contracts through UOBB without application by D1 to P for ad hoc increases of his own position limit (but this never happened for D1 in respect of the D2 Account). 

62.  It was evident from the level of trading activities in the D2 Account as recorded in the Horn Applications that D2 was probably a major client of D1 for N225 Futures contracts.[46] Plainly, if D1 was subject to a total position limit, that total position limit would also apply to the D2 Account such that D2 who would not be able to purchase N225 Futures contracts in excess of 400 contracts.  I am unable to discern from D1’s pleadings that the position limit applicable to the D2 Account as pleaded was definitely not D1’s total position limit and had to be a position limit applicable only to D2 and not to D1 and/or his other clients.  As seen in paragraph 20 above, it is telling that D1’s 3^rd Aff drew a distinction between “each client [having] their own individual “margin/equity limits’ at UOB Kay Hian HK Ltd” (which sits well with the Horn Applications that spoke of monetary limits for D2) and his own total position limit.  This arguably suggested that the position limit as referred to in D1’s pleadings was D1’s total position limit, and I am unconvinced at this interlocutory stage there was clear contradiction between D1’s pleadings and his present contention.

63.  Secondly, D1 tried to illustrate his point with the Emails[47] that concerned margin requirements for N225 Futures contracts.  Using the initial revised margin as at 2 June and 14 July 2010, D1 worked out that 420 N225 Futures contracts would be about HK$9,800,000 which he said would explain why there was no explanatory remark in the 2010 Document that increased his total monetary limit to HK$10,000,000 (ie he must have already applied to increase his total position limit and P had approved such increase limit to 400-420 N225 Futures contracts some time between the dates of the 2009 and 2010 Documents).

64.  Master Chow made a number of criticisms of such illustration put forward by D1.  She queried:

(a) why the margin values for June/July 2010 and not those for other months were chosen, and suggested that if the latter differed greatly from the former, then the value of 420 N225 Futures contracts might not be about HK$10,000,000;[48]

(b) why D1’s reference to 420 (as opposed to 400) N225 Futures contracts only surfaced after D1 received the Emails, and she cast doubt on D1’s late recollection of the 5% increase in the limit from 400 to 420 N225 Futures contracts;

(c) whether the manuscript annotations on the Emails came from SGX or whether they were D1’s calculations, how they were arrived at, and/or why they should be adopted;

(d) why D1 adopted the value of the initial revised margin as at 2 June and 14 July 2010 but not as at other dates, and she cast doubt on the correlation between two dates/values in the Emails;[49]

(e) the absence of documentary evidence of the HK$/JP¥ exchange rate “despite the relative ease for producing such proof”.

Master Chow concluded that “[in] the absence of such explanations, and in light of the timing of the change in the number of futures contracts that the document sought is supposed to relate to, the revised figure of 420 contracts could have been arrived at by working backwards from the date available to come up with a figure that is closest to the HK$10 million limit approved under the 2010 Document”.[50]

65.  In my view, the learned master erred in adopting the aforesaid approach to the Emails.  At this interlocutory stage, D1 was not obliged to establish his full/complete case by disproving other possibilities that might lead to a different interpretation of the Emails.  That would be a matter for assessment of factual evidence and legal arguments at trial.  In the meantime, one must not forget that D1’s submissions on the Emails were intended to be illustrative only, and in my view they would not detract from D1’s primary submissions set out in paragraphs 54-55 above.  At this interlocutory stage, it is also inappropriate to draw a definitive conclusion from D1’s affirmation evidence and the New Materials (without testing such evidence/materials at trial) that D1 must have used the margin values in the Emails to work backwards towards a figure close of HK$10,000,000 to make up or bolster his case.  I also note that D1 in his pleadings referred to “a position limit of about 400 futures contracts” and in D1’s 3^rd Aff referred to “the position limits, for “Nikkei futures” was in the region of 400 contracts” (my emphasis).  I am unconvinced there was any belated shift on D1’s part from 400 to 420 N225 Futures contracts for the Requested Document. 

66.  Thirdly, Master Chow found the description for the Requested Document in D1’s 3^rd Aff also touched on trading limits for HSI Futures, but pointed out D1 failed to clarify whether approval for increase in trading limits for HSI Futures were carried out separately from N225 Futures.  The learned master said that if D1’s total monetary limit applied to both types of futures contracts, the total position limit of 400‑420 N225 Futures contracts would have been incorrect unless D1’s position limit for trading in HSI Futures was reduced from 120 contracts to zero.[51]

67.  But even taking the matter to its highest as set out in the above paragraph, it at best showed that D1’s case on correlation between his total position and total monetary limits called for some clarification, but at this interlocutory stage before final determination on the merits I am not persuaded it went so far as to demonstrate non-existence or irrelevance of the Requested Document.  More importantly, despite dispute between the parties on whether or not there was breach of D1’s and/or D2’s trading limits that led to breach of duty of care or breach of implied terms on P’s part, to date P had not disclosed/discovered under Order 24 of RHC any documentation that evidenced the alleged change of D1’s total position limit into a total monetary limit on/about 9 February 2010.  P’s solicitor informed Master Chow that such change was effected by way of an internal email,[52] but P resisted disclosure on the basis it was not the Requested Document.[53] But in the absence of such documentation, I cannot conclude/infer at this interlocutory stage that there was necessarily anything untoward in relation to the total position limits for N225/HSI Futures contracts vis-à-vis the total monetary limit.

68.  Fourthly, Master Chow noted 7 out of 8 Horn Applications contained explanations for increase of D2’s monetary limit, but in the Horn Application dated 29 November 2010 the increase in monetary limit from HK$7,500,000 to HK$18,000,000 (which increase was even greater than the increase recorded in the 2010 Document) was approved without explanation.  The learned master regarded this as an example of P’s approval for increase of trading limit without explanation or justification that went against D1’s submissions.[54]

69.  However, as D1 explained, prior to the Horn Application dated 17 November 2010 there was already an approved ad hoc increase from HK$7,500,000 to HK$16,600,000 (with explanation given) that was valid until 17 December 2010, so the Horn Application dated 29 November 2010 only sought an effective increase of 9% from HK$16,500,000 to HK$18,000,000, which increase was sufficiently covered by D1’s equity of HK$21,000,000 as recorded in the Horn Application dated 17 November 2010. Given such objective information, I am unconvinced the matters raised by the learned master detracted from the prima facie case on existence and relevance of the Requested Document.

70.  Fifthly, Master Chow noted the 8 Horn Applications documented a number of ad hoc increases of D2’s monetary limit from HK$4,700,000 to HK$17,000,000 which exceeded D1’s total monetary limit of HK$10,000,000.  The learned master concluded that “[by D1’s] account given at the hearing, when the limits of the clients exceed his personal limits, he would have to seek approval for increase.  The risk management system that he so emphatically insists as having been put in place cannot work if such a breach is not taken care of”.[55]

71.  In my view, the learned master might have misunderstood D1’s case on the position limit.  D1 contended that any client of his with extra equity could purchase other instruments that might be subject to corresponding trading limits for such other instruments (eg total position limit of 120 contracts for HSI Futures), but not N225 Futures in excess of D1’s position limit of about 400 contracts unless there was ad hoc approval to increase D1’s total position limit (which never happened).  Thus, the risk control mechanism imposed by D1’s total position limit would not prevent his clients from purchasing other instruments with their extra equity, but the total monetary limit would kick in to cap the number of contracts D1 could buy for his clients upon margin fluctuation.  It is at the heart of D1’s case that despite such risk control mechanism P by allowing purchases that exceeded D1’s/D2’s trading limits was in breach of the duty of care owed to D1 and of the implied terms of the 2002 and/or 2010 Agreements.  I am not persuaded D2’s monetary limit was necessarily inconsistent with D1’s pleaded case, which must be a matter for trial.

72.  Sixthly, Master Chow found the Horn Applications that imposed D2’s trading limits in monetary terms tallied with D1’s total monetary limit in the 2010 Document, and in the absence of evidential support for D1’s allegation that “the monetary limit could not have superseded the position limit because the two work together” and given “the lack of any explanation as to why the client-specific limits were only in terms of dollar amount, I am not persuaded that the two limits invariably work concurrently”.[56]

73.  I note that in approving increases for D2’s monetary limits in the Horn Applications, D2’s margin requirement, cash balance and equity were specifically noted.  As explained by D1, D2 as client should have equity before he bought/sold instruments, but D1 as accountant executive did not have to show client’s equity or cash balance before placing orders for N225 Futures at UOBB.  On such basis, the risks posed by D1 and D2 were different.  But more importantly, the learned master erred in conflating P’s and D1’s case, which were quite different, and in making inappropriate findings at this interlocutory stage.  Whether the total position and monetary limits invariably worked together would be a matter for trial.

74.  Seventhly, Master Chow held that the Requested Document was irrelevant because (a) the Tse Aff deposed to a change from a total position limit to a total monetary limit for D1 on/about 9 February 2010, and (b) on 9 July 2010 such total monetary limit of HK$6,000,000 was increased to HK$10,000,000 by the 2010 Document that remained applicable for the D2 Account during the volatile market situation in March 2011.  The learned master opined that since D1 argued D2 had entered into an open position of significantly more than 400 N225 Futures contracts but he worked out 420 such contracts would be about HK$10,000,000 (which meant breach of D1’s total position and total monetary limits), D1 could “simply draw support from the 2010 Document and the document sought is not relevant”.[57]

75.  In short, the learned master held that despite D1’s case that there was breach of his total position limit as well as his total monetary limit which D1 said amounted to P’s breach of the duty of care and breach of implied terms of the 2002 and/or 2010 Agreements, D1 should merely rely on documentation that would demonstrate breach of his total monetary limit and not documentation that would arguably demonstrate breach of his total position limit.  I cannot understand why D1 should have one arm tied behind his back, and this is certainly no basis for saying the Requested Document was irrelevant or unnecessary.

76.  Eighthly, Master Chow believed it was possible D1’s total monetary limit of HK$10,000,000 was “not equivalent to the 420 contracts position limit” “because of the turbulent market conditions in March 2011 …… In that case, there could be breach of the limit set in terms of lot number but not a breach of the limit in monetary terms.  There is no evidence, or submissions for that matter, before me to show that the position [D1] seeks to rely.  Without the necessary information to fill in the gap in the case of [D1], the only conclusion that can be reached is that he has failed to satisfy the court that an order should be made under Order 24 rule 7”.[58]

77.  It is not for the court hearing an interlocutory application for specific discovery to require proof or to make findings on the ultimate issues at trial. Quite simply, the trading limits of D1 and D2 were very much at the heart of the issues in controversy between the parties.  It is D1’s case that there was breach of the trading limits and hence P was in breach of obligations owed to D1/D2, but P contended that trades for D2 were within the approved limits.  As a corollary to this contested issue, there was further dispute over whether D1’s operative trading limit(s) were his total position and total monetary limits or just his total monetary limit.  These disputes alone would have been sufficient to require Peruvian Guano discovery of all documents pertaining to D1’s trading limits and/or changes to his trading limits during the relevant period.  Ultimately, what exactly were D1’s applicable trading limit(s) and whether there had been breach thereof would be a matter for trial.

78.  In light of all of the above matters, I am convinced D1 had established a prima facie case on existence and relevance of the Requested Document.  But that is not the end of the matter because Tse deposed she had caused a diligent search of P’s records to be made and was unable to find any document that came within the description for the Requested Document other than the 2009/2010 Documents which D1 said were not the Requested Document. 

79.  As explained in paragraphs 43-45 above, unless it could be shown that the Tse Aff was insufficient by the pleadings, lists of documents and the Tse Aff itself and/or by admissions made by D1, it would be taken as conclusive at this interlocutory stage so that D1 could not seek to contravene the same or apply to cross-examine Tse.  Here, there was no admission by P in its pleadings or elsewhere of the existence of the Requested Document.  Rather, P’s allegation that it did not have the Requested Document in its possession, custody or power stemmed from difference/contest between the parties’ respective case, ie P claimed D1’s total position limit had been superseded on/about 9 February 2010, but D1 claimed his total position limit was still effective.  Such difference cannot be resolved on affidavit/submissions at this interlocutory stage.  Rather, it is a matter for resolution at trial.  Should D1 be able to convince the trial judge of the persuasiveness of his case and/or to trump P’s contentions at trial, he may urge the trial judge (if he can) to draw adverse inferences against P for failing to disclose/discover the Requested Document.  But there is no basis for me to go behind the conclusiveness of the Tse Aff at this stage, and hence D1’s application for specific discovery of the Requested Document is refused.

80.  Neither Mr Leung nor D1 addressed me on the costs order made by Master Chow in the Decision/Order.  Although the learned master reserved her decision to be handed down by way of the Decision, she heard addresses on costs by P’s solicitor.  D1, who obviously did not know the outcome of his application for the Requested Document, understandably had no submissions to make on costs at the 2^nd Hearing.  But in the Decision the learned master granted an absolute and not nisi order that D1 shall pay P’s costs for the discovery application (including all costs reserved) to be summarily assessed. 

81.  In my view, procedural fairness would have required D1 to be given an opportunity to address on the issue of costs after knowing the outcome of and reasons for the court’s decision on the Summons, and hence the costs order below should have been made on a nisi basis.  Given my conclusion on the substantive application under the Summons, I agree that P was entitled to costs of the Summons after 9 January 2014 when the Tse Aff was filed.  I have found that D1 had shown a prima facie case on existence and relevance, but his pursuit of the Requested Document became unjustified when the Tse Aff verified that such document was not in P’s possession, custody or control.  Since the propriety of P’s request would turn on the ultimate findings at trial, the appropriate costs order below should be (a) costs of the Summons up to and including 9 January 2014 (including all costs reserved if any) be costs in the cause and (b) D1 shall pay P costs of the Summons after 9 January 2014 (including all costs reserved if any) to be taxed if not agreed. 

X.  CONCLUSION

82.  In the circumstances, I grant the following orders:

(a) leave be granted for D1 to appeal against the Decision/Order out of time;

(b) costs of the Summons up to and including 9 January 2014 (including all costs reserved if any) be costs in the cause;

(c) D1 shall pay P costs of the Summons after 9 January 2014 (including all costs reserved if any) to be taxed if not agreed;

(d) save and except for (b)-(c) above, the Appeal be dismissed.

83.  Further to the order made in (b)-(c) above, it follows that the Assessment Order that summarily assessed costs payable by D1 to P at HK$74,000 has to be set aside.  I therefore order that the Assessment Order be set aside.

84.  In respect of the costs for the 1^st Hearing, both D1 and P were innocent parties.  Although D1 was ill and could not attend the 1^st Hearing, P could not be faulted for having incurred costs to engage legal representatives to appear at such hearing.  In the circumstances, a fair order would be P’s costs in the cause, which meant P would only recover costs if it succeeded at trial.

85.  I grant a costs order nisi that (a) costs of the 1^st Hearing be P’s costs in the cause, and (b) save and except for (a) above, D1 do pay P costs of the Leave Application and 80% of the costs of the Appeal (including all costs reserved if any) to be taxed if not agreed.  Although I have allowed the Leave Application, it was D1 who sought indulgence from the court and he should bear costs of such application. Save for the minor question of part of the costs below, D1 failed in the Appeal and costs should follow event.

	(Marlene Ng)
	Deputy High Court Judge

Mr Paul Leung, instructed by Edmund Cheung & Co, for the plaintiff

The 1^st defendant acting in person and present

HCA 1946/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1946 OF 2011

_________________________

BETWEEN

	UOB KAY HIAN FUTURES (HONG KONG) LIMITED	Plaintiff
	and
	LAI, LAWRENCE	1st Defendant
	HORN, LIND	2nd Defendant
	_________________________

Before : Master Chow in Chambers

Date of Hearing : 7 July and 25 September 2014

Date of Judgment : 21 November 2014

__________________________

ASSESSMENT OF DAMAGES

__________________________

BACKGROUND

1.  On 8 November 2013, the 1^st defendant (“Mr Lai”) took out a summons seeking discovery of two categories of documents from the plaintiff. Subsequent to the filing of the summons, the 2^nd Supplemental List of Documents of the plaintiff was filed and Mr Lai confirmed that there has been satisfactory discovery of the first group of documents.  The hearing was only concerned with discovery of the second group of documents.

2.  The description of this second group of documents as set out in the summons is –

“Document detailing “position limits” for all my clients, trading N225 futures and HSI futures contracts, orders executed through “UOB Bullion Singapore”, under the Sub “Account G” (Please see attached email)”

3.  The email attached was dated 6 November 2013 and sent by Mr Lai to Messrs Edmund Cheung & Co (“EC”), solicitors representing the plaintiff. The description of the documents in it reads as follows –

“There are documents related to the “position size limits of both Nikkei 225 futures contracts and Hang Seng futures contracts, at the executing broker UOB Bullion Singapore” for my clients (under the UOB Kay Hian HK Ltd, sub Account G).  I signed the document and Rex Au was witness to this.”

4.  The call over hearing took place before Master Hui on 21 November 2013. By then, Mr Lai had already filed two affirmations in support of his application.  Upon hearing Mr Lai and the legal representative of the plaintiff, Master Hui gave an order (“Master Hui Order”) granting leave to Mr Lai to file and serve a further affirmation in support of his application, leave to the plaintiff to file and serve affirmation in opposition and leave to Mr Lai to file and serve affirmation in reply.  Master Hui also ordered the parties to jointly report to the court in writing the progress of the discovery application by 30 January 2014.  Paragraph 9 of Master Hui Order stipulates that the court will give further directions on paper.

5.  After Mr Lai had filed a further affirmation in support of his application, an affirmation was filed by the plaintiff in opposition to the application for discovery, but no affirmation in reply was filed by Mr Lai. There was also no report of the progress of the discovery application by 30 January 2014 as ordered by Master Hui.

6.  There are a number of factual issues in dispute between the parties. Since not all of them have a bearing on the present discovery application, their full particulars will not be set out here.  What follows is only a brief account of the relevant averments in the pleadings which show the case of the plaintiff and that of Mr Lai in relation to the position limits for the trading of futures contracts carried out by Mr Lai on behalf of Ms Horn.

Statement of Claim

7.  The plaintiff was and is a participant of the Hong Kong Future Exchange Limited (“HKFE”) and a licensed corporation under the Securities and Futures Ordinance licensed to conduct Type 2 (dealing in futures) of the regulated activities and registered as such with the Securities and Futures Commission (“SFC”).  The plaintiff, together with UOB Kay Hian (Hong Kong) Limited, UOB Kay Hian Asia Limited, UOB Kay Hian Finance Limited and UOB Kay Hian Private Limited, is and was at all material times a member and/or subsidiary of UOB Kay Hian Group.

8.  Mr Lai was an account executive of the plaintiff who, on 13 November 2002, entered into an agreement entitled “Commission Sharing and Clients’ Liabilities” with members of the plaintiff’s group (“2002 Agreement”) by which Mr Lai agreed to guarantee and indemnify the plaintiff’s group for the liabilities of all his clients. 

9.  The 2^nd defendant (“Ms Horn”) was a client introduced by Mr Lai to the plaintiff and the plaintiff entered into an agreement with Ms Horn on or about 31 May 2010 (“Futures Client Agreement”).  An account was opened and maintained in the name of Ms Horn with the plaintiff for the purchase, sale or other dealing in or with futures and/or options (“Futures Account”).  Ms Horn was served by Mr Lai at all material times.

10.  Mr Lai entered into another agreement with the plaintiff on or about 11 October 2010 (“2010 Agreement”), which confirms the agreement of Mr Lai to serve Ms Horn and his responsibility for the obligations and liabilities to the plaintiff’s group of companies arising from any trades or transactions effected by Ms Horn through Mr Lai.

11.  On or about 14 March 2011, the plaintiff notified Mr Lai by email that the Futures Account had a margin call of JPY53,524,997.00, based on the closing price on Friday, 11 March 2011.  The Futures Account ended up with a debit balance and the plaintiff now claims against Ms Horn for the outstanding amount of the debit balance.  The claim of the plaintiff against Mr Lai is based on the guarantee and indemnity under the 2002 Agreement and/or the 2010 Agreement.

Defence of Mr Lai

12.  Mr Lai does not admit to what has been pleaded by the plaintiff in relation to the 2002 Agreement.  Mr Lai alleges that he was never given a copy of the 2002 Agreement.  Even if the 2002 Agreement exists, it is not enforceable for a number of reasons and it should include the implied terms that the plaintiff shall advise Mr Lai of the liabilities of his clients from time to time and that the liabilities to be guaranteed by Mr Lai must be bona fide and incurred lawfully.

13.  In respect of the 2010 Agreement, Mr Lai avers that it should also include the same implied terms of the 2002 Agreement. Mr. Lai also avers that the plaintiff, as broker and agent of Ms Horn in future trading activities, owed Ms Horn a duty of care to protect her interest

(a) To monitor volatile futures market and to pay special attention to the exposure of the Futures Account in unprecedented market fluctuations;

(b) To closely monitor and control the position limit and other limits already imposed on the Futures Account so that its exposure would be contained within such limits;

(c) To timeously inform Ms Horn when the Futures Account turned into deficit;

(d) To liquidate and close the Futures Account when Ms Horn could not satisfy margin calls;

(e) To abide by the rules, regulations, procedures, codes, reminders and/or guidelines of the HKFE and the SFC which were designed to protect Ms Horn as an investor.

14.  Mr Lai alleges that the period within which margin calls and demands for variation adjustments must be met has not been specified in the Futures Client Agreement. Mr Lai also denies the averments of the plaintiff in respect of the debit balance in the Futures Account.  He claims that the debit balances of the Futures Account were not valid because :

(i) Mr Lai’s legitimate belief that the position limit of about 400 futures contract that was applicable to the Futures Account  would mean that Ms Horn could not have entered into an open position of significantly more than 400 contracts;

(ii) The turbulence in the Japan futures market in the trading days following the occurrence of the unprecedented earthquake and tsunami that happened in Japan on Friday, 11 March 2011 and the subsequent nuclear leakage in Fukushima put the plaintiff, Mr Lai and Ms Horn in a messy trading and clearing environment beyond anyone’s reasonable contemplation;

(iii) The plaintiff had not cautioned Mr Lai about his alleged potential liability as guarantor for Ms Horn;

(iv) The plaintiff had not cautioned Mr Lai that Ms Horn had unrealistically breached her position limit and any other limits, by her new trading activities on 14 and 15 March 2011;

(v) The plaintiff has breached its duty of care towards Ms Horn as mentioned; and

(vi) There had been the breach of the Rules of the HKFE, the “Code and Conduct for Persons Licensed by or Registered with SFC” and the implied terms of the 2002 Agreement and of the 2010 Agreement.

Reply to Defence of Mr Lai

15.  The plaintiff takes issue with Mr Lai on what was pleaded about the signing of the 2002 Agreement or the effect of this agreement and the 2010 Agreement.  It is stated in the Reply that the 2002 Agreement was signed in duplicate and a signed copy was given to Mr Lai forthwith upon signature.

16.  In respect of the earthquake and tsunami that happened in Japan on 11 March 2011 and the nuclear leakage that occurred subsequently in Fukushima, the plaintiff admits that the Japan futures market became volatile on the trading days that followed.

17.  On the issue of trading limit, according to the plaintiff, an approved trading limit was imposed by the plaintiff on the Futures Account, which limit could be increased from time to time on application by Ms Horn through Mr Lai, and such applications had been made by Mr Lai on behalf of Ms Horn from time to time.  It is also averred that Mr Lai was at all material times aware of the approved trading limit of each of the clients he served, including that of Ms Horn.  Three particular instances of increase of trading limits made by Mr Lai for Ms Horn to increase the trading limit of Ms Horn under the Futures Account are pleaded, all three of which had been approved by the plaintiff.  The three instances are:

(a) Application made on or about 5 July 2010 to increase the limit from HK$100,000 to HK$4 million;

(b) Application made on or about 14 September 2010 to increase the limit from HK$4 million to HK$6.5 million; and

(c) Application made on or about 11 October 2010 to increase the limit from HK$6.5 million to HK$7.5 million.

18.  The plaintiff also claims that Mr Lai was informed by the Settlement Department of the plaintiff on a daily basis of the positions and liabilities of each of the clients served by Mr Lai by way of daily reports.  In respect of all the trading activities under the Futures Account in particular, including those carried out on 14 and 15 March 2011, the plaintiff avers that they were executed through Mr Lai and so he was fully aware of them.

19.  The plaintiff points out that the trading of Ms Horn in Japanese Yen Futures and Nikkei 225 Index Futures was conducted on or through the facilities in the Chicago Mercantile Exchange in Chicago and the Singapore Exchange in Singapore respectively.  It is averred that the Rules of HKFE and the Code of Conduct of SFC referred to in the Defence of Mr Lai were not applicable since the commodity, futures or option contracts were not traded through the facilities of HKFE.

20.  Some of the provisions in the Futures Client Agreement on the making of margin calls are quoted in the Reply.  These are:

“ 11.2 The Broker may make margin calls and demands for Variation Adjustments and Interest Rate Cash Adjustments to the Client either orally or in writing and may specify therein the period within which the margin call, or demands for Variation Adjustment and Interest Rate Cash Adjustments must be met. The Client agrees and undertakes to pay any margin calls, Variation Adjustments and Interest Rate Cash Adjustments made orally or in writing, immediately on demand or within the time specified (if any) by the Broker.

12.1 Margin calls will be issued when the net equity in the Client’s account falls below the maintenance level.

12.2 The Broker, through the Account Executives, will notify the Client of the margin call amount and the time period to fulfill the margin requirement.

12.4 The Client is required to meet the margin call within the time period by depositing cash and/or closing out an appropriate number of existing open positions. Otherwise the Broker has the sole discretion to restore the margin ratio by liquidating positions in the Client’s account.

12.5     Notwithstanding anything provided in clause 11.2, 12.2 and 12.4 of this Agreement, whenever the Broker deems it advisable for its protection, the Broker has the right to shorten the time period to meet margin call and/or force liquidate positions immediately without prior notice to the Client.  The Broker reserves the right to liquidate the positions at any time and at any prices.  The net proceeds of any such liquidation shall be applied against the Client’s indebtedness to the Broker, and the Client shall remain responsible for any deficiency.”

Affirmations of Mr Lai

21.  In support of the present application, three affirmations have been filed by Mr Lai, on 8 November 2013, 13 November 2013 and 13 December 2013 (respectively “1^st Lai Affirmation”, “2^nd Lai Affirmation” and “3^rd Lai Affirmation”).

22.  In the 1^st Lai Affirmation, Mr Lai deposed to four matters:

(a) Mr Lai was employed by the plaintiff as a broker;

(b) the placing of the orders of Mr Lai’s clients for N225 (Nikkei 225) futures contracts through UOB Bullion in Singapore (“UOBB”);

(c) each client had trading limits and position limits which were approved by the plaintiff and UOBB and these were monitored up to the minute;

(d) Mr Lai operated his clients’ orders through a “sub account G” of the plaintiff held at UOBB.

23.  In the 2^nd Lai Affirmation, Mr Lai exhibited a letter sent to him by EC asking for more details of the documents he requested and the letter Mr Lai sent in reply.  In respect of the documents in question, the following details are set out in Mr Lai’s response:

(a) The document is an application for “Nikkei futures and HSI (Hang Seng Index) futures” trading limits that relate to the orders that [Mr Lai] was allowed to execute or place at UOBB for the “UOB Kay Hian Hong Kong Futures Ltd – sub account G”;

(b) Date of document is unclear but only one document was signed for this particular matter;

(c) Parties to the document are Mr Lai and director of plaintiff, with Rex Au, an employee of the plaintiff, as witness;

(d) Mr Lai executed or placed Nikkei futures orders for the account of Ms Horn via telephone directly with UOBB and the Nikkei futures positions of Ms Horn were conducted through this sub account G;

(e) sub account G in Singapore was solely for the use of Mr Lai’s clients and not for other brokers of the plaintiff;

(f) this sub account G had position limits set and monitored by the plaintiff and UOBB.

24.  In the 3^rd Lai Affirmation, Mr Lai stated that he was employed by the plaintiff as an account executive or broker in the Hong Kong office.  He pointed out that orders were placed by him verbally to the appropriate UOB dealer, not through a computer terminal or login account.  With HSI futures, Mr Lai averred to the order being placed for clients through the trading desk of the plaintiff in Hong Kong but on various occasions through UOBB, the affiliated company of the plaintiff in Singapore.  With Nikkei futures, orders for clients were placed through UOBB.  “UOB Kay Hian HK Ltd – sub account G” was the sub account through which the orders of all clients of Mr Lai were placed with UOBB and other brokers of the plaintiff had their own sub accounts.

25.  According to the 3^rd Lai Affirmation, the document sought to be discovered bears a title similar to “Trading Limits of Dealers at UOB Bullion Singapore” and although Mr Lai cannot recall the actual date of the document, it should be signed before 9 July 2010.  Mr Lai reiterated that Rex Au was witness to the signing of the document.  There is a statement that the document has very specific description of the total overall clients’ position limits for orders placed by Mr Lai at UOBB and that the document was executed or placed at UOBB.  The position limits for Nikkei futures were, Mr Lai affirmed, in the region of 400 contracts while those for HSI futures were in the region of 120 contracts.  Mr Lai stressed that this total position limits represent the limits for all orders of his clients and were different from the individual margin or equity limits applicable to each client.

Affirmation of the plaintiff

26.  A 3^rd Affirmation of Tse Helen Kwokmun (“Tse Affirmation”) has been filed in opposition by the plaintiff.  Ms Tse explained in the Tse Affirmation that Mr Lai was directed by Master Hui at the hearing on 21 November 2013 to file a further affirmation setting out the details of the document that he would like to seek discovery so that the plaintiff could know what or which document it was.  The 3^rd Lai Affirmation came into being because of such order of Master Hui. 

27.  The plaintiff caused a diligent search of its records and was able to identify two documents which may possibly meet the descriptions in the 3^rd Lai Affirmation, one “Application for Trading Limit of Dealers – UOBB” dated 9 July 2010 and one “Application of Trading Limit for Futures & Option Dealing” dated 10 February 2009, copies of which are exhibited as “THK-16” and “THK-17” respectively.  The “Application for Trading Limit of Dealers – UOBB” in THK-16 (“2010 Document”) records an increase of trading limits from HK$6 million to HK$10 million on a printed form, and nothing had been written down in the “Remarks” section.  The “Application of Trading Limit for Futures & Option Dealing” in THK-17 (“2009 Document”) is a different printed form and it records an increase of 100 lots of Nikkei Futures to 180 lots.  There are some handwritten notes in the “Remarks” section of this form in THK-17.

28.  In respect of the limits on the placing of orders, Ms Tse deposed to the setting of such limits by way of approval by the management of the plaintiff upon applications made by Mr Lai, after consideration of the portfolio of Mr Lai’s existing clients.  According to the Tse Affirmation, with effect from 10 February 2009, Mr Lai was authorized to place orders with UOBB for all his clients up to the maximum of 180 lots of Nikkei Futures.  This was changed on or about 9 February 2010 from a limit in terms of lot number to a limit in monetary terms and the limit was HK$6 million.  This HK$6 million limit was then increased on 9 July 2010 to HK$10 million by the 2010 Document.

29.  There is also an account in the Tse Affirmation as to why the 2009 Document is not relevant to the present action.  The document is dated 10 February 2009 and at that time, Ms Horn was not yet a client of the plaintiff. Ms Horn entered into the Futures Client Agreement with the plaintiff on 31 May 2010 and on 9 July 2010, in less than 2 months’ time, the application of Mr Lai to increase the limit of his authority to place orders with UOBB from HK$6 million to HK$10 million, as recorded in the 2010 Document, was approved.  The limit that governed Mr Lai’s authority in March 2011, the time when the alleged breach of the Futures Client Agreement by Ms Horn occurred, is that approved under the 2010 Document, namely HK$10 million.

Additional information from Mr Lai

30.  Mr Lai had actually prepared a set of “brief description argument” for the hearing on 7 July 2014 (“July Submissions”) and another set for the hearing on 25 September 2014 (“September Submissions”).  They contain more detailed explanations of his case.  The July Submissions have 5 sets of attachments, Sets A, B, C, D and E, and some brief descriptions as to what these documents are meant to demonstrate.  The documents attached as Sets A, B, C, D and E are listed out in the table below.

Set A(a)	2009 Document
Set A(b)	2010 Document
Set B	8 sheets of Application for Ad Hoc Trading Limit relating to the Futures Account (“Horn Applications”)
Set C	Pages 6-7 of the Defence of Mr Lai
Set D	Brief description of group history of United Overseas Bank Limited
Set E	Emails from Lynette Choong (“Choong”) and Serene Cai (“Cai”), both of Singapore Exchange Limited (“SGX”)

Legal Principles

31.  Rules 7 and 8 of Order 24 of the Rules of High Court govern discovery of particular documents and are thus applicable to the present application of Mr Lai.  I set out below the provisions of these rules –

“ 7 (1) Subject to rule 8, the court may at any time, on the application of any party to a cause or matter, make an order requiring any other party to make an affidavit stating whether any document specified or described in the application or any class of document so specified or described is, or have at any time been, in his possession, custody or power, and if not then in his possession, custody or power when he parted with it and what has become of it.

(2) An order may be made against a party under this rule notwithstanding that he may already have made or been required to make a list of documents or affidavit under rule 2 or rule 3.

(3) An application for an order under this rule must be supported by an affidavit stating the belief of the deponent that the party from whom discovery is sought under this rule has, or at any time had, in his possession, custody or power the document, or class of document, specified or described in the application and that it relates to one or more of the matters in question in the cause or matter.

8 (1) On the hearing of an application for an order under rule 3 or 7 the Court, if satisfied that discovery is not necessary, or not necessary at that stage of the cause or matter, may dismiss or, as the case may be, adjourn the application and shall in any case refuse to make such an order if and so far as it is of opinion that discovery is not necessary either for disposing fairly of the cause or matter or for saving costs.

(2) No order for the disclosure of documents shall be made under section 41 or section 42 of the [High Court] Ordinance, unless the Court is of opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.”

32.  Mr Lai did not address me on the legal principles applicable, nor did he comment on those relied on by Mr Iu, as set out in the skeleton submissions of the plaintiff.  The principles quoted by Mr Iu, having been enunciated in a number of cases, do represent the approach of the court in considering an application for discovery of documents and I do not see any reason to depart from them.  The following is what Mr Registrar Lung said in the case of The Incorporated Owners of Kodak House II and No. 321 Java Road v Kai Shing Management Services Limited HCA 711/2011 9 October 2012, as set out in the skeleton submissions of the plaintiff –

“The legal principles are trite. In a recent decision by Deputy Judge Sakhrani said in Joyce T. Ongsip trading as L.T. Enterprise Co. v Primatronic Limited HCA 611/2010 delivered on 20 September 2012, the learned Deputy Judge has set out the relevant principles, which are apt for the present discussion:

“ 14. A party seeking an order for discovery must make out a prima facie case that:

(1) the specified document or class of documents exist;

(2) the party against whom discovery is sought has or had the documents in his possession, custody or power;

(3) the document relate to a matter in question in the action; and

(4) discovery is necessary either for disposing fairly of the cause or matter or for saving costs.

(as per To J at paragraph 11 of his judgment in Tullet Prebon (Hong Kong) Ltd v Chan Yeung Fong Nick HCA 2197/2009, 9 June 2011)

15. As was held in Deak & Co (Far East) Ltd v NM Rothschild & Sons Ltd [1981] HKC 78, even if existence, possession etc. and relevancy were established, discovery would only still be granted if it was necessary for fairly disposing of the cause or matter.

16. It is also useful to bear in mind what Burrel J said in his decision dated 18 January 2002 in Mariner International Hotels Ltd v Atlas Ltd & another (HCA 10714, 10753 and 10821 of 1998). At paragraph 11, Burrel J said:

“The task of the court will often be to determine when “doing justice to the claim” stops and “fishing” or, to use another analogy “the scatter gun approach” starts. At that point the onerous nature of the discovery exercise passes from the necessary and permissible to the unnecessary and impermissible”

17. The pleadings in an action define the issues to be tried.

18. I would also refer to what Cheung JA said in Paul’s Model Art GmbH & Co KG v U.T. Limited CACV 139 of 2005 14 December 2005 at paragraph 25 of his judgment:

“25.  The real issue that has been focused at this hearing is whether the documents sought to be disclosed are relevant to the issues in this case between the plaintiff and the 4^th defendant.  In this context the issue must be one identified in the pleadings.  Sun Yuet Tai Ltd v British American Tobacco Co (HK) Ltd (CACV No 95 of 1999).  On the other hand the fact that an issue is raised in the pleadings is not determinative as to whether it relates to a matter.  Discovery is not required of documents which relate to irrelevant allegations in pleadings which even if substantiated could not affect the result of the action: Allington Investments Corp & Others v First Pacific Bancshares Holdings Ltd & Another [1995] 2 HKC 139”

19. I would also agree with the observations of Deputy Judge Mimmie Chan (as she then was) in Sunny Tadjudin v Bank of America, National Association (HCA 322 of 2008, 22 December 2011) when she said at paragraph 7 of her judgment:

“7. It is also clear that post [Civil Justice Reform], the Court should give effect to the underlying objectives of the rules and procedures when it exercises its powers under Order 24 and when it interprets the provisions of Order 24. In deciding whether any document relates to a matter in question in the action, whether any document is or has been in the possession, custody or power of a party, and whether discovery of a document sought is necessary either for disposing fairly of the cause or matter or for saving costs, the Court should always bear in mind the objectives of cost effectiveness, expeditious disposal of cases, proportionality, procedural economy and ensurance of fairness between the parties.””

Documents already discovered

33.  I have mentioned in paragraph 1 above that the summons of Mr Lai actually seek discovery of two categories of documents from the plaintiff and that there has been satisfactory discovery of the first group of documents upon the filing of the 2^nd Supplemental List of Documents of the plaintiff.  The first category of documents also relate to trading limits and they are the 2010 Document and eight documents all bearing the title “Application of Ad Hoc Trading Limit for Futures Dealing (Futures Account)” of dates between 3 Aug 2010 to 10 Feb 2011, that is, the Horn Applications in Set B of the July Submissions.

34.  The 2010 Document is not client specific and it records the approval of an increase of trading limit for Mr Lai from HK$6 million to HK$10 million.  As regards the eight Horn Applications, they are specific to Ms Horn and in each of them, the existing limit, the proposed ad hoc limit and the date up to which the ad hoc limit is to be applicable are set out.  For the first two of such documents (both bearing dates in Aug 2010), the existing limit recorded is HK$4 million and the ad hoc limit was increased to HK$4.7 million in one case and HK$4.4 million in another.  As for the remaining six (bearing dates from Nov 2010 to Feb 2011), the existing limit shown on them is noted as HK$7.5 million while the ad hoc limits range from HK$11 million to HK$20 million, more than double of the existing limit in some cases.

35.  In the last of the Horn Applications, the one dated 10 Feb 2011, the handwritten notes under the section entitled “Reasons” read: “Lawrence wants to propose ad hoc only.  Last ad hoc to $16m expired 19/2/2011.  But traded to $17m on 10/2 (Lawrence not in office to sign form).”  This document tends to show that despite having imposed such trading limits, instances of these limits being exceeded had occurred before.

36.  The 8 Horn Applications form the documents described as Set B in the July Submissions.  The notes in the July Submissions indicate that the increased limits represent the total position of Nikkei Futures of +420 contracts executed through UOBB in Singapore, Hong Kong HSI Futures executed in Hong Kong and Globex CME Currency Futures under the client account of Ms Horn with the plaintiff.  Although Mr Lai expressly pointed out that the Horn Applications have explanation for allowing increase, this is true only in respect of seven of the 8 Horn Applications.  In the one dated 29 November 2010, the part where descriptions are found in the other seven applications has been left blank.

Change of limit on 9 February 2010

37.  As pointed out in paragraph 28 above, it is averred in the Tse Affirmation that on or about 9 February 2010, the limit imposed on Mr Lai was changed from a limit in terms of lot number to a limit in monetary terms of HK$6 million.  Mr Lai asked for the production of the document recording this change at the hearing although he had not raised any request in his affirmations.  Mr Iu indicated that the change was effected by way of an internal email and so it is not a document signed by Mr Lai and as such, the document does not come within the description of the document sought for in the summons taken out by Mr Lai for the present discovery application. 

38.  Mr Lai expressed his doubt on what Mr Iu said.  According to Mr Lai, the change could not have been effected by the internal arrangement suggested by Mr Iu because everything had to be initiated by a proposal signed by him.  He basically asked me not to believe Mr Iu on this.

39.  Whether or not Mr Iu knew the correct position or not, he could not give evidence at the hearing and I will not take into account his version of how the change took effect on or around 9 February 2010.  However, the Tse Affirmation is unequivocal about there being only 2 documents meeting the description in the summons and there has been no challenge by Mr Lai in an affirmation in reply.  I see no justification to question what has been deposed to by Ms Tse. There is thus no basis to include this additional document in the consideration of this discovery application. 

40.  Since the reason why Mr Iu said the document does not come within the term of the summons is because it was not signed by Mr Lai, Mr Lai then attempted to modify his request by suggesting that this other document should also be discovered because, except for it not being signed by him, it meets all the descriptions in his summons.  However, Mr Lai cannot have the best of both worlds when the Tse Affirmation has already been deposed to in response to the descriptions he gave. 

41.  What is more objectionable is the reason why Mr Lai wants to seek discovery of this document.  That the monetary limit was changed to HK$6 million is not actually challenged by Mr Lai.  He is not denying that HK$6 million was the applicable monetary limit on or around 9 February 2010, nor is he suggesting that the HK$6 million was the limit applicable at the time of the turbulent trading in March 2011.  Instead of alleging that the document exists, it is Mr Lai’s case that the document does not exist because all such documents would have been initiated and signed by him.  It is therefore clear that this document is neither relevant, nor does it come within the terms of this discovery application.

Preliminary matters

42.  Before turning to the explanation provided by Mr Lai at the hearing as to why he claims the document he seeks to discover exists, I shall first deal with a few other matters first.  One such matter is the reference to a Mr Rex Au who Mr Lai said was witness to Mr Lai’s signing of the documents for which specific discovery is sought.  However, as explained by Mr Lai at the hearing, by witnessing, it does not mean that Mr Au signed on the documents, nor does it mean that the name of Mr Au or the fact that the signing was so witnessed by Mr Au would be apparent from the documents.  There is no affirmation from this Mr Au about his witnessing of the signing of the documents.  As such, this piece of information is of no help in establishing that the documents sought exist, that they are relevant to the issue in dispute, or that they are in the possession, custody or control of the plaintiff.  There is thus no need to address this point.

43.  Another matter is the number of documents that Mr Lai seeks.  The terms of the summons and the email attached to it suggest that there are more than one such document.  The position has however been clarified by the subsequent refinement of the request in the affirmations of Mr Lai.  What is sought to be discovered is only one document, an application for the increase of the position limits in respect of the trading of Nikkei futures contracts by Mr Lai for all his clients.  

Submissions of Mr Lai

44.  At the hearing, Mr Lai gave a very detailed account of the risk control procedures implemented by banking institutions like the plaintiff in relation to trading in futures contracts by its clients.  According to Mr Lai, limits are set by the plaintiff in respect of the amount of futures contracts that each particular client can purchase and also the amount of futures contracts that each account executive can purchase on behalf of all his clients.  These limits are set upon approval of applications made to the plaintiff by the account executive who serves the client. 

45.  Mr Lai used a specific example to illustrate the interface between the limits specific to the account executive and that of the client.  When a client opens a futures trading account with the bank, a trading limit will be applied for by the account executive serving the client, which limit will be set with reference to the money deposited with the bank.  Where this limit does not exceed the limit applicable to the account executive, no increase of the limit of the account executive has to be sought. 

46.  Similarly, even when the client deposits further money into the bank and each time the account executive applies for further increase of the trading limit of the client, the limit of the account executive does not have to be increased if the number of lots that can be purchased by the client does not exceed that of the account executive.  In the example given by Mr Lai, only the case of one client is considered.  Nonetheless, unless the account executive in question serves only one client or the account executive has only one client that trades in the specific types of futures contracts in question, the logical deduction is that the limit specific to the account executive will have to be increased if it is exceeded by the aggregate of the limits of all his clients.

47.  There are two types of limits – position limits and monetary limits. The position limits are the limits in terms of the number of futures contracts, Nikkei 225 futures being the type of futures contracts in question in the present application, while the monetary limits are limits in terms of dollar amount.  The two limits work hand in hand because when there is fluctuation in the market, a client cannot purchase more futures contracts simply because the monetary limits have not been exceeded if the position limits have been reached.  He or she has to have the position limits increased before purchase of more futures contracts can be effected.  Risk control can be achieved because every time an application for variation of a limit is made, the banking institution asks for verification or substantiation.  If the limits are enforced, loss owing to insufficient equity in the client’s account can be avoided and the client is also protected against loss in excess of the limits.

48.  Where an incident occurs that results in a significant drop of the market value of the stock in question, the bank has the right to close up the whole position and this is what the plaintiff has done with the Futures Account after the turmoil in the Japanese yen market in 2011.  It was then discovered that there was negative equity in the Futures Account and not only that, the actual purchase amount had exceeded the trading limits.

49.  Mr Lai then proceeded to explain how the margin system works in the trading of futures.  By virtue of the margin system, a client can buy stock that is worth much more than the money he has, and in the case of Nikkei 225, with $10 million one can buy stock in region of HK160 million -HK180 million, depending on how the index fluctuates.  This means that, in the case of the limits approved under the 2010 Document, the account executive can buy about HK160 million-HK180 million worth of Nikkei 225 futures contracts.  There is no explanation from Mr Lai as to how the leverage is set and whether the same margin of HK160 million-HK180 million worth of stock that can be purchased at the limit of HK$10 million applies throughout the period when the Futures Account was maintained with the plaintiff.

50.  There is, Mr Lai explained, still another margining system in place which works as a risk control mechanism.  Under such a system, the margin changes and it can fluctuate about 30 percent either way, which means that the range of fluctuation is 60 percent.  When the market goes quiet, the plaintiff will bring down the margin and when the market is in turmoil, the margin will be raised.  So for example if the plaintiff raises the margin to 30 percent, then the maximum number of contracts that can be bought will become 280 although the approved position limits applicable at the time is 400 contracts. This margining system works differently when the margin is brought down in a quiet market.  Where the margin is brought down by 30 percent, the actual number of contracts that can be bought will theoretically become 520 contracts.  However, if more contracts are actually purchased but the amount of money in the accounts remains the same, the risk of loss if the market falls will not be covered.  Hence, to protect the client and the bank, the approved limit of 400 contracts kicks in and purchase over the 400 contracts limit will not be allowed.

51.  When the above risk control system is taken into account in the context of the present application, the case of Mr Lai is that the document he now seeks records the limits in terms of lot numbers that were imposed by the plaintiff on the amount of Nikkei 225futures contracts that Mr Lai, as account executive, could purchase at UOBB, the Singapore branch of the plaintiff’s group, for all his clients.  In the July Submissions, Mr Lai referred to what was pleaded in paragraph 9(a) of his Defence and Counterclaim, which states –

“(a) The Plaintiff has imposed a position limit for the Futures Account of about 400 future contracts. By such position limit, D1 legitimately believed that D2, at all material times, cannot have entered into an open position of significantly more than 400 contracts”

52.  For the trading of Nikkei 225 futures by his clients at UOBB, Mr Lai had to apply for a limit within which he could purchase the futures and upon approval by the plaintiff, UOBB will be informed of the approved limits.  Such limits serve to prevent Mr Lai from purchasing futures without authorizationand to protect the clients served by Mr Lai, who will not be exposed to risk occasioned by purchases over the approved limits.  Mr Lai stressed that UOBB does not know the cash positions of the clients and it relies solely on the limits approved by the plaintiff for each respective account executive.  The about 400 contracts position limit at UOBB is, as Mr Lai put it, the sum of all the Nikkei positions of Mr Lai’s clients held at UOBB.

53.  Mr Lai then pointed to the 2009 Document which has explanatory notes, as mentioned in paragraph 27 above, and then the absence of any notes in the 2010 Document in the corresponding section when the trading limits were increased on 9 July 2010.  Mr Lai said the increase recorded in the 2010 Document means an increase of the worth of the stock that can be bought from $80 million to $160 million and it is impossible for such a position to be approved without any explanatory remarks, which Mr Lai categorized as a big irregularity in a bank. The only reason for this to have happened is, according to Mr Lai, because he had in between the dates of the 2009 Document and the 2010 Document proposed an increase of limits to about 400 future contracts.

54.  Mr Lai took me to the emails attached to the July Submissions as Set E. One email is from Choong and the other from Cai, both of Singapore Exchange Limited and both in reply to enquiry made by Mr Lai via email on 18 June 2014 for margin requirements for N225 futures contracts for the nearest trading months during June and July 2010.  Among the information sent by Choong to Mr Lai, there is an item about the outright margin changes for four commodities, one of which is Yen Nikkei-225 Index, and the values of such Yen Nikkei-225 Index on 2 June 2010 and 14 July 2010 can be found.  There are four sets of values, presented in the form of a table.  This is extracted and reproduced below –

2 June 2010

Outright Margin Changes	Revised Margins		Current Margins
Commodity	Initial	Maint.	Initial	Maint.
Yen Nikkei-225 Index (NK)		¥220,000	¥250,000	¥200,000

14 July 2010

Outright Margin Changes	Revised Margins		Current Margins
Commodity	Initial	Maint.	Initial	Maint.
Yen Nikkei-225 Index (NK)		¥190,000	¥275,000	¥220,000

55.  Mr Lai has circled the value of the Initial Revised Margins on the information sheet for both dates.  As for the email from Cai, the maintenance margin requirements for SGX Yen Nikkei on five dates in 2010 were set out. Handwritten against four of such values is another set of values with the title “Initial Margin” and these values are marked against the values in the email of Cai in the manner shown below –

			(Handwritten part) INITIAL MARGIN
07/05/2010	¥180,000		->¥225,000
21/05/2010	¥200,000		->¥250,000
04/06/2010	¥220,000		->¥275,000
02/07/2010	¥190,000		->¥237,500
13/08/2010	¥180,000

56.  Mr Lai then explained why the position limit shown on the document sought is about 400 contracts.  He assumed the initial margin for each Nikkei 225 contract to be the average of ¥275,000 and ¥250,000, ie ¥262,500.  Explaining then that since the margin was 262,500 yen per contract for Nikkei-225 Index and the Hong Kong dollar rate was then about 0.088703 which is equivalent to HK$23,285 per Nikkei contract, 420 contracts of such value work out to be HK$9.8 million. 

57.  According to Mr Lai, the approval of the increase of the limits to HK$10 million under the 2010 Document was tied to the increase of the position limits to 400 or 420 contracts that had already been applied for by Lai and approved by the plaintiff.  That is why, Mr Lai went on to explain, the plaintiff did not require any explanation when they increased the limits under the 2010 Document, despite the very significant increase in the amount of stock that can be purchased (from around HK$60 million–HK$80 million worth of stock to HK$160 million–HK$180 million worth of stock).

58.  So what Mr Lai is saying is the only reason that can explain the absence of any descriptions of the basis for permitting the increase on 9 July 2010 as recorded in the 2010 Document is because there had been an earlier approved increase of the position limits of the number of Nikkei 225 futures contracts that Mr Lai was permitted to purchase to about 400 contracts.  Mr Lai has no recollection of the date of such document but it is his case that the application was signed by him and that it was approved by the plaintiff. 

Submissions of the plaintiff

59.  Naturally Mr Iu objected to the failure of Mr Lai to file evidence to substantiate his claim about the existence of the document to be discovered and its relevance to the dispute between the parties.  He pointed straight to the requirement under Order 24 rule 7(3) of affidavit evidence in support of an application for an order under rule 7, the provisions of which have already been reproduced in paragraph 31 above.  Mr Iu went on to refer to the case authority and legal principles above referred to.

60.  Mr Iu then addressed me on the affirmations filed by Mr Lai.  Suggested succinctly by Mr Iu, all that was said by Mr Lai in the affirmations is that there is a document and Mr Lai needs it, and so Mr Lai had not established to the court the existence of this document.  Given that Mr Lai had deposed to the existence of only one such document that relates to the trading limits for Nikkei 225 futures contracts and that the 2010 Document fits the description, it is Mr Iu’s submission that there cannot possibly be another document that was signed by Mr Lai before 9 July 2010.

61.  On relevance, Mr Iu pointed out that even if Mr Lai had signed another document prior to 9 July 2010 as alleged, the limits approved under such document would have been superseded by the 2010 Document.  Since the incident that led to this action took place on or around 11 March 2011, well after 9 July 2010, Mr Iu questioned the relevance of a document that only shows what the previous superseded limits were.  Mr Iu also drew my attention to the fact that Mr Lai has not stated in any of his three affirmations as to how the document sought by him relates to any of the matters in question in the cause of the present action. 

62.  On the point about the document sought being in the possession, custody or power of the plaintiff, Mr Iu questioned how the document could wind up being in the possession, custody or power of the plaintiff when Mr Lai affirmed to it being executed at UOBB, a separate entity in Singapore.  That the affirmations of Mr Lai has not addressed why the document is in the possession, custody or power of the plaintiff, or how it is necessary for the fair disposal of the cause or matter or for saving costs, is also pointed out by Mr Iu.

Discussions

63.  The manner in which the present application was prosecuted by Mr Lai is indeed a grave cause for concern.  The criticism of Mr Iu that Mr Lai has not set out in his affirmations the requisite evidence to support a case of specific discovery is a fair one.  Mr Lai was given the chance to respond to the Tse Affirmation and instead of filing an affirmation in reply to rebut those matters in the Tse Affirmation that relate to the existence of the document he seeks to discover, the relevance of the document to his case and the plaintiff’s possession of the document, Mr Lai only gave full explanation when he came before me.  It is clear that the requirements of Order 24 rule 7 of the Rules of High Court have not been met.

64.  The procedural requirements are designed to ensure fairness between the parties.  In not setting out his full case in the evidence, the plaintiff will be denied the chance to respond by evidence, should it think that to be appropriate.  I agree with Mr Iu that the submissions of Mr Lai should be disregarded.

65.  Mr Lai has a reason to give for his so doing.  He said he was told by Master Hui to come to the hearing to present his case and he was not asked to respond to the affirmations of the plaintiff.  So, Mr Lai said, he was not aware of the importance of giving details of his case in the affirmations.  Had Mr Lai been genuinely misguided about the procedures for going about the matter, there might have been justification for allowing him a second chance and to have him rectify the matter by putting much of what he said in his submissions in a properly filed affirmation.  I am however not persuaded that what Mr Lai had done was due to such mistake.

66.  In the first place, what Mr Lai said he was told by Master Hui is clearly contradictory to the terms of the Master Hui Order.  It should be borne in mind that Mr Lai had already filed two affirmations before he appeared before Master Hui.  If Mr Lai were to have the option of presenting his case at the substantive hearing of the summons without the need to put forward the evidence he would rely on beforehand, Master Hui would not have ordered him to file another affirmation to support his case.  That would not be necessary. 

67.  After Mr Lai had filed the 3^rd Lai Affirmation, the plaintiff adduced evidence in opposition to this application for specific discovery in the form of the Tse Affirmation.  What the Tse Affirmation set out to achieve could not have been clearer.  The plaintiff has clearly stated the attempts it made in trying to locate the document that Mr Lai said should be in existence and the outcome of such attempts.  There is also an account as to why even if there was such a document it would not, in the view of the plaintiff, be relevant to the action between the parties.  Even if Mr Lai had not known what should be addressed in the affirmations filed or to be filed by him prior to the filing of the Tse Affirmation by the plaintiff, he would have had an inkling of the purposes that they were meant to serve by the time he had a chance to read the Tse Affirmation. 

68.  Given that Mr Lai takes issue with the plaintiff on the various matters set forth in the Tse Affirmation, the natural and logical step for a party in the position of Mr Lai to take would be to set out his side of the story in the affirmation which he was directed to file under the terms of the Master Hui Order.  The suggestion that an affirmation was not filed in reply despite his disagreement to what was deposed to in the Tse Affirmation was because he thought he could simply do that at the hearing does not have any ground to stand on. 

69.  Mr Lai has not only disregarded this part of the Master Hui Order.  The parties were further ordered to jointly report to the court in writing the progress of the discovery application by 30 January 2014.  Records of the court file show that EC wrote to Mr Lai on 27 January 2014, asking Mr Lai for comments on a draft joint letter which they had prepared for reporting the matter to the court.  The draft joint letter states clearly that it is to be submitted pursuant to the requirement of the Master Hui Order. Instead of responding to this, Mr Lai filed with court on 27 January 2014 his earlier email response to EC, also dated 27 January 2014, which confirmed that the 2010 Document and the 2009 Document“does not fit the description of the document in discovery”.

70.  There had been no reply by Mr Lai to the letter of EC dated 27 January 2014.  When this state of affairs was reported to Master Hui, he ordered the fixing of the hearing date of this application.  The report was meant to be made to the court after both sides had filed all their affirmations in accordance with the earlier parts of the Master Hui Order.  Mr Lai’s disagreement to the matters stated in the Tse Affirmation, the inadequacy of the evidence presented by him, or his perception, albeit incorrect, of the applicable procedures for his further conduct of the discovery application could, if Mr Lai had so required, well have been drawn to the attention of the court in such report then.  If the court had had this opportunity to take stock of the situation before the application was set down for hearing, it would have been in a position to set things back on their right course and to give all necessary further directions for the purpose, if considered appropriate.  This opportunity for the court to put the matter back on its right course was also missed because of the conduct of Mr Lai.

71.  Mr Lai has his own understanding of what Master Hui asked him to do on this.  He did admit that the learned Master asked both parties to revert to him if both sides agreed that the document produced by the plaintiff is not the document sought.  Mr Lai is of the view that in writing to the Master himself, he has done exactly what the Master asked him to do.  I do not see how this misunderstanding could have arisen.  Mr Lai was present at the call over hearing before Master Hui when the order that a report be made jointly was made.  Furthermore, the draft letter prepared by EC clearly stipulated that it was to be submitted pursuant to the order of Master Hui. 

72.  One hour was reserved for the hearing on 7 July 2014 but it lasted for over 2 hours.  All the time at that hearing was used by Mr Lai to present his case, most of which should have been submitted as evidence in the form of an affidavit, and he spent a lot of time repeating his submissions.  Some of the points were also repeated at the hearing on 25 September 2014.  Such waste of court time could and should have been avoided.  By the time the hearing resumed on 25 September 2014, the application has already been dragged on for over ten months. 

73.  One other thing worth mentioning is that at the beginning of the hearing, Mr Lai even suggested a question and answer approach so that he could put questions to Mr Iu back and forth, presumably so that his prosecution of the discovery application could proceed on the basis of the responses to the questions he put.  This shows his total disregard of the fact that the burden to show that the grounds for specific discovery subsist rests on him.  In any event, Mr Iu is only the legal representative of the plaintiff.  He would not be in a position to give evidence on behalf of the plaintiff in relation to the matters pertaining to the setting or monitoring of trading limits by the plaintiff.

74.  Instead of a genuine misunderstanding of the procedural requirements or the directions given by Master Hui, the aforesaid behaviour of Mr Lai demonstrates a deliberate tendency on his part to do things his own way and to interpret rules and directions in such ways that suit his own purpose.   Furthermore, judging from the account of Mr Lai as to the course ran by him in the prosecution of this application, Mr Lai has demonstrated an inertia to find out for himself what the legal requirements are and has, albeit without any justification, harboured an expectation that guidance in the navigation of the legal minefield and coaching as to the steps he should take would be provided by the court.

75.  The underlying objectives of the Rules of the High Court can be found in Order 1A rule 1.[1] As stipulated in Order 1A rule 2, the court shall seek to give effect to these underlying objectives in the exercise of its powers or in its interpretation of any of the rules or a practice direction.  One of the objectives of the procedural rules is to ensure fairness between the parties.  If Mr Lai is allowed to rely on the submissions he made at the hearing as evidence, the plaintiff will be denied a chance to make a considered reply, when at the hearing only the legal representatives need to attend. 

76.  Noting the many chances afforded to Mr Lai to ensure that he would not go off course, permitting Mr Lai to have another chance to rectify the deficiency in the evidence adduced by him will not be conducive to achieving the objective of ensuring that a case is dealt with as expeditiously as is reasonably practicable.  The case is almost ready to be set down for trial.  This summons for discovery is the only outstanding interlocutory application.  To turn the clock back now after so many months have passed since the time for Mr Lai to file his affirmation in reply and for the progress of the application to be drawn to the attention of the court by way of the joint report will be highly unjust to the plaintiff. 

77.  In light of the above findings, Mr Lai’s application for discovery should be dismissed.  I should add that even if I were to disregard the procedural irregularities outlined above, I do not think Mr Lai has made out a case for the exercise of the court’s power to order specific discovery. 

78.  This document that was so important in the eyes of Mr Lai relates to the number of futures contracts that he was authorized to purchase on behalf of all his clients.  When the matter was pleaded in paragraph 9(a) of the Defence and Counterclaim of Mr Lai, he referred to the position limit imposed by the plaintiff for the Futures Account of about 400 futures contracts.  The Futures Account is the account held by Ms Horn and so the averment in paragraph 9(a) of the Defence and Counterclaim is directed at the limit imposed on the trading of Ms Horn, as opposed to the limit of the trading of all clients of Mr Lai. 

79.  In the 3^rd Lai Affirmation, the description about this position limit for Nikkei 225 futures in the region of 400 contracts shifts. It was stated there that the documents relates to the total position limits for all the clients of Mr Lai executed or placed at UOBB.  When making his submissions at the hearing, Mr Lai himself said that separate limits apply to individual clients and to the account executives.  The variation in the description can only mean that he is talking about different documents, and the document he is now seeking does not match the description in paragraph 9(a) of his Defence and Counterclaim. 

80.  The shifting of the goalposts does not end there.  In the July Submissions, the 8 Horn Applications attached as Set B documents were described as showing increase in limits for Ms Horn which represents the total position of +420 contracts of Nikkei futures.  This number of 420 contracts also featured in the description in Set E of the July Submissions when Mr Lai dealt with the position limit that was applicable to him, as opposed to the limits for individual clients.  There is an explanation set out against the documents in Set E on how the worth of 420 contracts of Nikkei 225 futures can be translated into about HK$10 million.  This means that, in the same document of the July Submissions, Mr Lai talked about the 420 contracts as being the limit for Ms Horn as well as the limit for himself.

81.  As pointed out earlier, Mr Lai has taken the average of two values of the “initial margin” for Nikkei 225 futures from June-July 2010 that are shown on the emails of Choong and Cai (¥275,000 and ¥250,000) and then adopting what he said was the exchange rate between yen and Hong Kong dollars to arrive at the worth of one Nikkei 225 futures contract in Hong Kong dollars, ie HK$23,285.  420 contracts of such Nikkei 225 futures would amount to HK$9,779,506, if this formula of calculation is applied. 

82.  There is however no explanation from Mr Lai as to why he asked Cai and Choong for the margins for June and July 2010 only.  It is Mr Lai’s own case that he does not remember the exact date of the document that he is seeking and that it can be signed any time between 10 February 2009 and 9 July 2010.  If the margin requirements for the other months within this period differ greatly from those in June and July 2010, then the position limits for 420 contracts of Nikkei 225 futures may not be more or less the same as HK$10 million. 

83.  The increase from 400 to 420 contracts is a 5% change in volume. Despite his repeated emphasis on the importance of such approval documents to those involved in the futures trading market, Mr Lai was only able to remember with greater accuracy as to the increase in the number of futures contracts that the document was for after he was provided with the initial margin requirements by personnel of the Singapore Exchange.  This number of 420, as opposed to 400, only began to surface after Lai had received the replies from Cai and Choong in July 2014.

84.  Those are not the only concerns I have.  The initial margins for the dates set out in the email from Cai were handwritten on the email.  There is no explanation from Mr Lai whether those figures came from SGX as well or were his own calculations and if it is the latter case, how they were arrived at and why they are to be adopted in place of the requirements that should have been set by SGX.  In addition, no reason has been given as to why the two figures of ¥275,000 and ¥250,000 were taken to work out an average and not the other values of initial margins appearing on the two emails.  ¥275,000 is the initial “revised” margin requirement as at 2 June 2010, but it is not clear whether the figure of ¥250,000 was adopted because it is the initial “current” margin requirement as at 2 June 2010 (as shown in Choong’s email), the initial margin as at 21 May 2010  (as shown handwritten on Cai’s email), or otherwise. 

85.  In addition, there is no documentary evidence showing that the exchange rate between yen and Hong Kong dollars at the material time was indeed what Mr Lai said was the case, despite the relative ease for producing such proof.  In the absence of such explanations, and in light of the timing of the change in the number of futures contracts that the document sought is supposed to relate to, the revised figure of 420 contracts could have been arrived at by working backwards from the data available to come up with a figure that is closest to the HK$10 million limit approved under the 2010 Document.

86.  As pointed out in paragraph 25 above, the descriptions in the 3^rd Lai Affirmation of the document sought to be discovered indicate that it relates to the limits of trading in HSI futures as well.  There is no clarification from Mr Lai as to whether approval for increase in trading limits for HSI futures is carried out separately from that in relation to Nikkei 225 futures and more importantly, whether the monetary limits imposed have taken into account the position limits imposed on trading in the two types of futures together.  If it is indeed the case that one single monetary limit covers the position limits for both types of futures contracts, then the 420 lots figure would not be correct unless the position limit imposed on Mr Lai in respect of the trading in HSI futures is almost zero, and not the 120 HSI contracts averred to.

87.  Another inconsistency in the case presented by Mr Lai is his claim, in the description of the documents in Set B of the July Submissions, that those documents have explanation for allowing increase.  That is the case with seven out of the eight sheets of Horn Applications.  In the Horn Application dated 29 November 2010, there is no description in the document and the increase of limit was, on the face of it, approved without any questions or challenge. 

88.  Although Mr Lai is adamant that the plaintiff could not have approved the increase applied for under the 2010 Document without any explanatory notes, the fact that this had happened at least in the case of one of the Horn Applications suggests that there can be exceptions.  Under the Horn Application dated 29 November 2010, which has no notes written on it at all, the limit was increased from HK$7.5 million to HK$18 million.  That is a substantial increase in terms of the value of the futures contracts that Ms Horn would be allowed to purchase and at least on the face of it, more substantial than the increase of the limit under the 2010 Document.

89.  A yet another matter which needs explanation from Mr Lai is the trading limits that were effective at the time the turmoil in the Japanese yen market occurred in 2011.  The 8 Horn Applications documented the change of the trading limits of Ms Horn, albeit on an ad hoc basis, from HK$4.7 million to eventually HK$17 million.  This well exceeds the HK$10 million imposed on Mr Lai under the 2010 Document for trading by all his clients.  By Mr Lai’s account given at the hearing, when the limits of the clients exceed his personal limits, he would have to seek an approval for increase.  The risk management system that he so emphatically insists as having been put in place cannot work if such a breach is not taken care of. 

90.  One other thing that can be gleaned from the Horn Applications is that limits can indeed be set in monetary terms only.  All the Horn Applications relate to the trading limits of Ms Horn in monetary terms only.  This tallies with the version put forward in the Tse Affirmation that the limit imposed on Mr Lai had become one based on monetary terms only before the 2010 Document was signed.  Mr Lai tried to convince me that the monetary limit could not have superseded the position limit because the two work together.  However, in the absence of evidence in support of such allegation and the lack of any explanation as to why the client-specific limits were only in terms of dollar amount, I am not persuaded that the two limits invariably work concurrently.

91.  Even if I were to find that Mr Lai succeeded in establishing that the document he seeks exists, I would agree with Mr Iu that Mr Lai has failed to demonstrate the relevance of the document now sought to a matter in question in the action.  According to the Tse Affirmation, the limit imposed on trading by Mr Lai was changed on or about 9 February 2010 from one in terms of lot number to a limit in monetary terms of HK$6 million, and this limit of HK$6 million was increased to HK$10 million on 9 July 2010, as evidenced by the 2010 Document.  This limit of HK$10 million is, according to the plaintiff, the limit that began to apply two months after Ms Horn became a client of the plaintiff and was the limit applicable to the trading of Ms Horn during the period of the tumultuous market in March 2011.

92.  It is Mr Lai’s own case that the debit balance in the Futures Account arose from trading by Ms Horn around the time when the earthquake and tsunami occurred in Japan in March 2011.  It is also his own case that the 420 position limits work out to around HK$10 million.  What has been pleaded in his Defence and Counterclaim is that Ms Horn had entered into an open position of significantly more than 400 contracts, resulting in the debit balance in the Futures Account that the plaintiff is now suing the defendants for.  On the basis of his own case, if the eventual open position of the Futures Account had breached the 400 contracts limit, it would also have breached the HK$10 million limit.  That being the case, Mr Lai can simply draw support from the 2010 Document and the document sought is not relevant.

93.  It is possible that the HK$10 million limit was, because of the turbulent market conditions in March 2011, not roughly equivalent to the 420 contracts position limit.  In that case, there could be a breach of the limit set in terms of lot number but not a breach of the limit in monetary terms.  There is however no evidence, or submissions for that matters, before me to show that that is the position Mr Lai seeks to rely.  Without the necessary information to fill in the gap in the case of Mr Lai, the only conclusion that can be reached is that he has failed to satisfy the court that an order should be made under Order 24 rule 7.

94.  For the reasons stated above, I dismiss the application of Mr. Lai in his summons dated 8 November 2013.

Costs

95.  Mr Iu submitted that costs should follow the event.  Mr Lai had no submissions to make on costs.  I see no reason for departing from the usual practice of the winning party getting the costs.  I therefore order Mr Lai to pay the costs of the plaintiff for the application for discovery, including all costs reserved.  The plaintiff shall submit skeleton bill of costs for summary assessment within 14 days and Mr Lai shall have 14 days thereafter to make submissions on paper. 

	(Chow)
	Master of the High Court

Mr Wallace Iu, of Edmund Cheung & Co, for the plaintiff

The 1^st defendant appeared in person

The 2^nd defendant was not represented and did not appear