Lam Chi Kin David v Deutsche Bank AG

• Judge: Chan Sek Keong CJ
• Judgment Date: 01 December 2010
• Neutral Citation: [2010] SGCA 42
• Citation: [2010] SGCA 42
• Docket Number: Civil Appeal No 41 of 2010
• Published date: 05 January 2011
• Hearing Date: 16 August 2010
• Plaintiff Counsel: Christopher Chong, Kelvin Teo and Jasmine Kok (MPillay)
• Date: 01 December 2010
• Defendant Counsel: Ang Cheng Hock SC, Paul Ong, Goh Zhuo Neng and Nakul Dewan (Allen & Gledhill LLP)
• Court: Court of Appeal (Singapore)
• Subject Matter: Contract

Chan Sek Keong CJ (delivering the judgment of the court): Introduction

This is an appeal by Lam Chi Kin David (“the appellant”) against the decision of the Judicial Commissioner (“the JC”) in Suit No 834 of 2008 in dismissing his claim against Deutsche Bank AG, Singapore branch (“the respondent”) for damages for breach of contract, and in giving judgment for the respondent for the sum of US$1,135,239.43 for its counterclaim against the appellant for payment of his outstanding liabilities with interest and costs (see Lam Chi Kin David v Deutsche Bank AG [2010] 2 SLR 896 (“the GD”)).

The material facts are as follows. In November 2007, the appellant became a private banking client of the respondent. He signed the following agreements with the respondent: an agreement called “Deutsche Bank Master Agreement for Foreign Exchange Transactions and Derivatives Transactions” dated 28 November 2007 (“the Master Agreement”); an undated document called “Service Agreement” (“the Service Agreement”); a Risk Disclosure Statement dated 28 November 2007, for all types of accounts; and a Security Agreement dated 28 November 2007 (“the Security Agreement”). Subsequently the appellant signed two other documents, viz: a Short Term Facilities/Foreign Exchange Facility dated 21 July 2008 (“the Short Term/Foreign Exchange Facility”); and a Declaration of Pledge (First Party) dated 28 August 2008.

The Master Agreement is intended to apply to all transactions between the respondent (referred to therein as “the Bank”) and the appellant (referred to therein as the “Counterparty”) as the recital states that the respondent and the appellant “have entered and/or anticipate entering into one or more transactions (each a “Transaction”) that are or will be governed by this Master Agreement”. Clause 9 of the Master Agreement provides that the respondent and the appellant may “enter into such Transactions under this Agreement as they may from time to time determine” and that such Transactions include, without limitation, the following: (a) FX Transactions and Currency Option Transactions; (b) Equity Option and Equity Swap Transactions; (c) Swap Transactions; and (d) Other Transactions.

Clause 2.5 of the Master Agreement provides that each Transaction shall not become effective until the Counterparty has signed the respondent’s Service Agreement and other documents requested by the respondent from time to time (see [23] below for the text of cl 2.5). The Service Agreement provides, inter alia, for the granting of credit facilities to the customer. Pursuant to this provision, the respondent granted to the appellant a credit line of United States Dollar (“USD”) 200,000,000 on the terms of the Short Term/Foreign Exchange Facility (see [2(e)] above). The credit facilities granted to the appellant under the Short Term/Foreign Exchange Facility were secured (or collateralised) by the appellant’s currency deposits held by the respondent under the Security Agreement.

In connection with or pursuant to these two agreements, the appellant opened two accounts with the respondent: (a) a Private Wealth Management Account (Account No 6017180) (“the Advisory Account”); and (b) a Foreign Exchange Gem Account (Account No 2658540). In this appeal, only the Master Agreement and the Service Agreement are material to the issues raised by the parties. As will be seen, the legal relationship between the Master Agreement and the Service Agreement is crucial to the determination of the issues arising in this appeal.

The appellant’s Transactions with the respondent

The Transactions that the appellant entered into with the respondent that are relevant to this appeal were foreign exchange (“FX”) contracts made under a “Carry Trade Investment Strategy”. This strategy involved the appellant in arbitraging on the interest rate differentials between different currencies. The appellant would buy currencies carrying low interest rates and convert them into other currencies carrying higher deposit interest rates, and thereby lock in a guaranteed gain from these differences in interest rates. However, as is common knowledge, this kind of carry trade also carries with it the risks associated with fluctuations in the exchange rates of the currencies involved.

The appellant is a knowledgeable and sophisticated currency arbitrageur. As will be seen, he appeared to have a better understanding of how foreign exchange market worked than the respondent’s officers who were servicing his trading account (ie, the Advisory Account). The currencies which the appellant was allowed to trade in under the Short Term/Foreign Exchange Facility covered 23 currencies. However, in this appeal, the relevant currencies are Australian dollars (“AUD”), Swiss Francs (“CHF”), Japanese Yen (“JPY”) and New Zealand dollars (“NZD”).

The material events

In early October 2008, the foreign exchange market became very volatile and the relevant exchange rates of the currencies of the appellant’s Transactions started to move against him. On 7 October 2008, the respondent faxed to the appellant a letter (“the 7 October 2008 letter”) informing him that his “collateral availability” in relation to his currency deposits in AUD and NZD were “Negative USD610,000”. This collateral shortfall increased the next day. On 8 October 2008, the respondent faxed another letter (“the 8 October 2008 letter”) to the appellant informing him that based on that morning’s rates of AUD 0.7084, NZD 0.6248, JPY 101.30 and CHF 1.1416, there was “a shortfall in [the appellant’s] account approximating USD2.3mil”. Both letters contained the following note:

This is not an official bank’s statement or advice and is not a substitute for our official statements or advices. This summary is prepared for you as a service to provide account information and is intended for discussion purposes only. ...

The meaning of the note is clear beyond any doubt. Thus, the two letters were not demands for additional collateral or for any action to be taken by the appellant vis-à-vis his financial position with the respondent. They were intended for information and discussion purposes only.

It is not disputed that while there was a collateral shortfall in the appellant’s account on 7 and 8 October 2008, his account remained in “positive equity” (ie, the mark-to-market value of his liabilities to the respondent was less than the market value of his collateralised assets). However, on 10 October 2008, the shortfall increased further to around USD 5,460,370.02, resulting in the appellant’s account having “negative equity” of USD 1,054,612.74 as well (ie, the mark-to-market value of his liabilities exceeded the market value of his collateralised assets). In other words, if the appellant’s assets were liquidated on 10 October 2008, the proceeds from the liquidation would not have been sufficient to cover his liabilities to the respondent. This was not the case between 7 and 9 October 2008 when the appellant’s account remained in positive equity.

This led to the respondent faxing another letter to the appellant dated 10 October 2008 (“the 10 October 2008 letter”) which stated, inter alia, as follows:

We refer to the ... Master Agreement ... and the ... Service Agreement ... (together, “the Agreement”) ...

Under the terms of the Agreement, you have agreed to maintain the value of the Collateral pledged to us at not less than 100% of your Total Exposure to us. We wish to advise you that there is a current shortfall of USD5,460,370.02 between the Collateral Value and your Total Exposure.

Accordingly, we request that you take immediate steps to restore the shortfall in the Collateral Value by 5pm Singapore time today. You may either provide additional security to us or reduce your Total Exposure. Notwithstanding the foregoing, we would also like to bring to your attention that during this interim period when the shortfall is outstanding, we reserve all our rights under the Agreement, which include without limitation the right without prior notice to terminate early and close out your outstanding contracts and sell any or all of your property or collateral and apply the sale proceeds (after deduction of costs) to discharge your liabilities.

[emphasis in bold in original]

The said letter was faxed to the appellant at about 11.15am (reflecting the appellant’s collateral position with the respondent at around that time). At 4.32pm, the respondent’s relationship manager, Ms Cynthia Chin Mei Lin (“Ms Chin”) telephoned the appellant. During this conversation, Ms Chin told the appellant that the respondent would not close out his account immediately, but only that he should give a commitment to remit additional funds (to his account) to cover the negative equity by 13 October 2008. Ms Chin also estimated that the loss which the respondent would suffer if all of his FX contracts were closed out on that day would be about USD 1 million.

At 5.06pm, Ms Chin telephoned the appellant and told him that she had no authority to “sit on this one million” negative equity position overnight, unless the appellant made a commitment to remit additional funds to his account by 13 October 2008. During this conversation, the appellant protested that the respondent had no right to ask for such a commitment as he had been promised a 48-hour grace period (“the Grace Period”) for any margin call by the respondent. Ms Chin acknowledged that such a promise had been made, but replied that the respondent could close his account immediately if it did not want to do business with him. The appellant refused to give the commitment Ms Chin wanted because (as he later candidly admitted in his evidence) he knew that he would not be able to honour the commitment by 13 October 2008 (because even if he had funds in other banks, he would not be able to remit the funds as it needed two business days to do so: see [42] below). At 7.19pm, the...