Ipsofactoj.com: International Cases [2002] Part 8 Case 3 [CFA]



Ka Wah Bank Ltd

- vs -







8 MARCH 2002


Lord Hoffmann NPJ

  1. In July 1998 Mr. Moorjani decided to speculate on the foreign exchange market. He opened an account for that purpose with the Ka Wah Bank Ltd ("the bank") and entered into a number of currency purchases. The three with which this appeal is concerned were to buy Japanese Yen for a total of US$1.1 million at the rate of exchange prevailing at the time of the contracts.

  2. Mr. Moorjani of course hoped that by the time he had to complete the contracts, the Yen would have risen in value against the dollar. In that case, his Yen would have been worth more than the US$1.1 million he owed. He did not particularly want to pay dollars or take Yen. What was no doubt contemplated was that the bank would net off the cross-debts and pay Mr. Moorjani the profit, if any, or debit him with the loss. As a matter of contract, however, the transaction was a sale of Yen by the bank in exchange for a payment in dollars.

  3. In order to provide against the possibility that the Yen might go down as well as up, the bank required security in the form of a cash margin. In fact the bank was obliged by the regulatory system under which it operates (Leveraged Foreign Exchange Trading Ordinance, Cap. 451 and Leveraged Foreign Exchange Trading (Books, Contract Notes and Conduct of Business) Rules, Cap. 451 sub. leg. D) to require certain minimum cash margins to be deposited.

  4. The bank's terms as to margins were contained in clause 3 of the Master Agreement which governed Mr. Moorjani's trading:


    Immediately upon the Customer entering into a Contract, the Customer shall, unless the Bank otherwise agrees, pay to the Bank an Initial Cash Margin in an amount equivalent to five per cent. (5%) ... of the face value of the Contract ...


    The Bank may at any time and from time to time...request the Customer to pay Additional Cash Margin or Margins for any outstanding Contract ... in such amounts so that the percentage that the relevant Margin bears to the then current value of the relevant Contract is not less than the percentage applicable under Clause 3.1 and the Customer shall pay all such Additional Cash Margin in accordance with the demand.


    The Bank shall be entitled to apply Cash Margin in discharge of the Customer's liabilities to the Bank.

  5. On 18 July 1998 Mr. Moorjani went to India. At that time he had US$70,631.15 and about HK$68,000 in his savings account. On 30 July 1998 the bank contacted him on his mobile phone in India and it was agreed that US$70,000 of the money in his savings account could be treated as a cash margin in respect of his open foreign exchange contracts. These were the three dollar-Yen contracts with which we are concerned and two smaller contracts for Deutschmarks and New Zealand dollars respectively. They do not affect the position one way or the other.

  6. In the few days after the conversation on 30 July, the Yen dropped sharply against the dollar. Mr. Moorjani was showing a floating loss of about US$50,000 on the three contracts. The bank decided to ask under clause 3.2 for more margin. It tried to reach Mr. Moorjani on his mobile phone and the telephone of a friend in Hong Kong which he had notified to the bank. But no contact was made until more than a week later.

  7. Clause 11.2 of the Master Agreement provides:

    If the Bank requests or attempts to contact the Customer by telephone to provide Additional Cash Margin, such a demand shall be deemed to have been made and effective as at the time of the telephone call notwithstanding that the Customer could not then be personally contacted provided that the Bank has left a message for the Customer at any of the telephone numbers of the Customer recorded in the Bank's records.

  8. The bank left a message with Mr. Moorjani's friend. But no instructions or additional cash margin were provided. So the bank treated his failure to pay as a termination event under clause 8.1(c), which gives it a right of termination if "the Customer fails to pay any .... Additional Cash Margin." It closed out the three contracts and debited Mr. Moorjani with the losses.

  9. On 25 September 1998 Mr. Moorjani sued the bank for damages for breach of contract. He said that the bank had not been entitled to terminate the three contracts because it had not been entitled to demand additional cash margin. He said that upon the true construction of clause 3, the US$70,000 held by the bank exceeded its entitlement. Yam J rejected this argument and dismissed Mr. Moorjani's claim. But the Court of Appeal accepted it. Against that decision the bank appeals.

  10. A bank which enters into a leveraged foreign exchange transaction has two forms of security for performance of the customer's obligation to pay for the currency he has bought. The first is the right of set-off conferred by clause 13 of the Master Agreement, which enables the bank on the settlement date to convert the currency which it owes the customer into the currency which it is owed and set off the one against the other. If the value of the currency bought by the customer increases, the set off will discharge his liability to the bank in full and leave him a profit. The bank will not need to resort to any of the deposited cash margin.

  11. On the other hand, the cash margin is the bank's second line of security in case the value of the currency bought by the customer falls and is insufficient to discharge his debt to the bank. And the more that value declines, the more margin the bank will need to secure it against the existing floating loss and any future loss.

  12. Against this background, the formula in clause 3.2 for determining what cash margin the bank is "at any time and from time to time" entitled to require must be interpreted. It consists of a multiplier, 5%, and a multiplicand, the "current value" of the relevant contract. As the Court of Appeal correctly observed, the multiplier is fixed at 5%. It is the multiplicand which is contemplated as varying.

  13. What then is meant by the "current value" of the contract? The first question is: in which currency must the "current value" be calculated? On this point there is general agreement. It means US dollars. The bank is owed US dollars, so it must calculate the amount of the necessary margin in US dollars.

  14. The value of the contract must mean the value of the rights under the contract. But, as the currencies fluctuate, the value of the rights of the party who is to receive the one currency will change reciprocally with the value of the rights of the other party. So the next question is: value of the contract to whom? For the purposes of the formula, this must mean the value of the contract to Mr. Moorjani. If the calculation is made in US dollars, the value of the contract to the bank is always the same. It is entitled to US$1.1 million, no more and no less. But the formula contemplates that the value of the contract is something which will vary. So it must mean its value to Mr. Moorjani, because he is entitled to Yen, and the US dollar value of his Yen will fluctuate.

  15. This accords with the purpose of the margin, which is to provide security for the bank. The bank's primary security, as I have said, is the US dollar value of Mr. Moorjani's rights under the contract, which can be set off against his indebtedness to the bank. As this value declines, the bank requires more margin.

  16. So far, so good. But then we come to the point at which, as it seems to me, the case went wrong. Mr. Moorjani, who appeared in person before the Court of Appeal and in this Court, somehow persuaded the Court of Appeal that when the value of the Yen declined, the "value of the contract" in dollars went up. Keith JA said that when Mr. Moorjani was showing floating losses of US$50,000 on his three contracts, their "current value" had risen from US$1.1 million to US$1.15 million.

  17. He did not explain the method of calculation by which he reached this result. In my opinion, the simple answer is that if the value of the Yen goes down, the value of Mr. Moorjani's rights under the contract goes down and the bank correspondingly requires more margin to maintain its security. How is the amount to be calculated? The Court of Appeal, proceeding on the theory that more margin was needed when the value of the contract went up, said that the bank was entitled to 5% of the increase. But once it is appreciated that one needs more margin if, and only if, the value of the contract goes down, a different approach is obviously necessary.

  18. The language of the formula makes it clear that the bank is entitled to a margin of 5% of the current value. If, therefore, the value of Mr. Moorjani's Yen has fallen, in dollar terms, to US$1 million, the bank is entitled to a margin of $50,000. If it has fallen to US$900,000, the bank is entitled to a margin of US$45,000, and so on.

  19. It is not compatible with such a calculation that the Mr. Moorjani should be credited with the whole of his original cash margin, as if it had remained intact. On that basis, the bank would never be entitled to additional margin. 5% of the original value will always be more than 5% of any lower value. Plainly, therefore, what the formula contemplates is, so to speak, a new beginning, in which the bank will be covered for the current (or "floating") loss and provided with the same relative cash margin as it had at the beginning, to cover it against any future decline in the purchased currency.

  20. It follows that in my opinion, the bank was entitled to deduct the US$50,000 floating loss from the cash margin it held and to require that the remaining sum be made up to 5% of the dollar value of Mr. Moorjani's Yen entitlement on the day of the demand. As Yam J held, the money which the bank held as cash margin was insufficient for this purpose and it was therefore entitled, in default of payment, to close out the contracts.

  21. As will already be apparent, Mr. Moorjani is a capable and courteous advocate and he took a number of other points in his written and oral submissions. He said, by reference to the terms of the contract and the regulatory scheme which I have mentioned, that the bank was entitled to close out the contracts only if the value of the contract had fallen by more than 5%. This had not happened.

  22. It is true that one of the terminating events in the contract (clause 8.1(i)) is a fall of the rate of exchange by more than 5%. But this is not the event upon which the bank relies. It closed the contract because of a failure to provide additional cash margin, which is a terminating event under clause 8.1(c). And the bank's right to require additional cash margin is not limited to a situation in which the currency has fallen by more than 5%. If the currency falls at all, clause 3.2 entitles such a demand to be made at any time.

  23. As for the regulatory scheme, I do not see how it assists. It prescribes minimum cash margins which the bank is obliged to take. But that does not prevent the bank from giving itself additional protection by contract.

  24. Finally, Mr. Moorjani argued that the bank had access to other accounts which could have been used as cash margin and that its calculations were wrong. But these questions of fact were decided against him by the judge (who did not form a good opinion of his credibility as a witness) and were not re-examined by the Court of Appeal. It is not possible to re-open them now.

  25. I would therefore allow the appeal and restore the judgment of Yam J.

  26. I would make an order nisi awarding costs here and below in favour of the bank against Mr. Moorjani, such order to become absolute 21 days from today unless a written application is received by the Court before then. I would direct that if such an application is received, costs be dealt with on written submissions which should be filed by the party making the application at the time of the written application; the other party to file written submissions within 14 days thereafter; and written submissions in reply within 7 days thereafter. The Registrar will give such further directions as may be necessary.

    Mr. Justice Bokhary PJ

  27. I agree with the judgment of Lord Hoffmann NPJ.

    Mr. Justice Chan PJ

  28. I agree with the judgment of Lord Hoffmann NPJ.

    Mr. Justice Ribeiro PJ

  29. I agree with the judgment of Lord Hoffmann NPJ.

    Chief Justice Li

  30. I agree with the judgment of Lord Hoffmann NPJ.

  31. The Court unanimously allows the appeal and restores the judgment of Yam J. The Court also makes the order nisi as to costs and the directions set out in the concluding paragraph of the judgment of Lord Hoffmann NPJ.


Leveraged Foreign Exchange Trading Ordinance, Cap. 451

Leveraged Foreign Exchange Trading (Books, Contract Notes and Conduct of Business) Rules


Mr. Robert Tang, SC and Mr. Alfred Liang for the appellant (instructed by Messrs Wilkinson & Grist).

Respondent in person.

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