Supreme Court of Canada
George et al. v. Dominick Corporation of Canada, [1973] S.C.R. 97
Date: 1972-06-29
David George and Louis Miklovic (Plaintiffs) Appellants;
and
Dominick Corporation of Canada (Defendant) Respondent.
1971: December 6, 7; 1972: June 29.
Present: Martland, Judson, Ritchie, Spence and Laskin JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR BRITISH COLUMBIA
Stockbrokers—Short sales—Broker closing out accounts to cover customers’ short position—Circumstances of case justifying broker’s action—Express power in broker-customer agreement to close out accounts.
Short sales by the plaintiffs, G and M, of shares of a particular company were made by the defendant brokerage firm on the American Stock Exchange. Between December 8, 1967, and January 9, 1968, G sold short 400 shares at prices ranging from $83 to $125. From December 13, 1967, to January 19, 1968, M sold short 200 shares at prices ranging from $94.50 to $131.50. On January 18, 1968, the price reached an all-time high of $177. On January 19, the closing price was $176.50. On January 22, the next trading day, the closing price was $166. The accounts were closed on January 23, 1968, when the broker purchased 400 shares at $162.50 to cover G’s short position, and 200 shares at $163 to cover M’s short position. By March 5, 1968, the shares had reached a low of $105.
In clause 7 of the customer’s agreement it was provided that: “You [the broker] may, in your sole discretion, close out any marginal account(s) or reduce or extinguish any indebtedness of the [customer] to you whenever the margin in any account(s) of the [customer] may not meet your requirements, or whenever you deem it necessary for your protection…”
On March 15, 1968, G and M issued a writ claiming (a) rescission of all contracts entered into between them and the broker, and the return of all moneys paid by them to the broker; (b) damages for misrepresentation for breach of the brokerage contracts, and (c) damages for negligence.
At trial they recovered damages because the judge thought that they had not been given a reasonable
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opportunity to transfer their account to another broker and that the action of the broker was unreasonable and precipitous. They failed in their claim for misrepresentation and negligence. On appeal, a unanimous Court of Appeal dismissed their action. The plaintiffs then appealed to this Court.
Held: The appeal should be dismissed.
As to the claim for misrepresentation and negligence, which arose from the margin requirements that were imposed by the brokers at the beginning of the transactions, the Court agreed with both Courts below that the alleged misrepresentation, i.e. that no special requirements had been imposed by the Exchange, on the evidence was not material and did not operate as an inducement to the customers to make their short sales.
As held by the Court of Appeal, in the circumstances of the case the broker had acted reasonably and, quite apart from its rights under clause 7 of the customer’s agreement, was justified in closing out the accounts. The Court also agreed with the Court below that there was express power in clause 7 to close out the accounts.
APPEAL from a judgment of the Court of Appeal for British Columbia, allowing an appeal from a judgment of Verchere J. Appeal dismissed.
W.A. Esson, for the plaintiffs, appellants.
C.C. Locke, Q.C., and G.R.B. Coultas, for the defendant, respondent.
The judgment of the Court was delivered by
JUDSON J.—This litigation arises out of certain short sales made by the appellants, David George and Louis Miklovic, of shares of a company known as Data Processing Financial and General Corporation. These sales were made by Dominick Corporation of Canada on the American Stock Exchange in New York where the shares were listed.
Between December 8, 1967, and January 9, 1968, George sold short 400 shares at prices ranging from $83 to $125. From December 13, 1967, to January 9, 1968, Miklovic sold short 200 shares at prices ranging from $94.50 to $131.50.
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With the exception of two temporary recessions, the price of the shares steadily increased. On January 18, 1968, it reached an all-time high of $177. On January 19, the closing price was $176.50. On January 22, the next trading day, the closing price was $166.
The accounts were closed on January 23, 1968, when the broker purchased 400 shares at $162.50 to cover George’s short position, and 200 shares at $163 to cover Miklovic’s short position. By March 5, 1968, the shares had reached a low of $105.
On March 15, 1968, George and Miklovic issued a writ claiming (a) rescission of all contracts entered into between them and the broker, and the return of all moneys paid by them to the broker; (b) damages for misrepresentation for breach of the brokerage contracts, and (c) damages for negligence.
At trial they recovered damages because the judge thought that they had not been given a reasonable opportunity to transfer their account to another broker and that the action of the broker was unreasonable and precipitous. They failed in their claim for misrepresentation and negligence. On appeal, a unanimous Court of Appeal dismissed their action. I would affirm the judgment of the Court of Appeal.
The claim for misrepresentation and negligence arises from the margin requirements that were imposed by the brokers at the beginning of these transactions. These required the deposit of an initial margin of 70 per cent of the proceeds of the sale. They were also obliged to maintain the value of their equity in margin shares at an amount equal to 35 per cent of the market value, which meant that as the market went up, they would have to pay in additional sums as maintenance of their 35 per cent equity.
The Vancouver office of the broker did not know that on November 29, 1967, the American Stock Exchange had issued a notice stating that effective November 30, 1967, and until further notice, the Exchange’s initial margin requirement would be 100 per cent on new transactions in Data Processing. The Vancouver office did not
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find out about this until January 9, 1968, which was the date of the last short sales in each account. The customers then discussed this matter with the broker. They asserted that if they had known of the Exchange requirement, they would not have gone into these transactions, and that the broker was negligent in not knowing of the requirement. They argued that when they were told by the broker that the normal 70 per cent margin and 35 per cent equity maintenance in accordance with Exchange rules would be applicable, this amounted to a representation that no special requirements had been imposed.
The trial judge, after concluding that the alleged misrepresentation was capable in law of being construed as material, found on the evidence that it was not in fact material and did not operate as an inducement to the customers to make their short sales. In other words, he did not believe their repeated assertions to the contrary. The Court of Appeal affirmed this conclusion and finding of fact.
On the other aspect of the case—the closing out of the account—the learned trial judge took the view that the Customer’s Agreement signed by George and Miklovic did not enable the broker to close the accounts on January 23, 1968. I refer to the following passage:
In my opinion, the broad power taken by the defendant under its contract was intended to be exercised and could only be exercised for its protection against a reasonably anticipated monetary loss and, furthermore, and in any event, if and when it was exercised summarily and without notice, as happened here, the exercise of it should be accompanied by a reasonable regard for the interests of the other party not inconsistent with the protection the defendant required. In other words, I accept the view that action taken by the defendant in its asserted protection must be neither unnecessary or unreasonable in the circumstances, and that because that was not the case here, the action taken by Campbell on January 23rd, when he covered the plaintiff’s short positions completely, amounted to a breach of the defendant’s contracts with them.
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The Court of Appeal did not accept these conclusions of the learned trial judge. First of all, they found that the broker did act reasonably; that both the customers knew that further maintenance payments were needed; that they were taking the position that they had repudiated all the transactions which they said were invalid, and had demanded the immediate return of all margin and maintenance payments previously made. In these circumstances, the broker, quite apart from its rights under clause 7 of the Customer’s Agreement, was justified in closing out the accounts.
The Court of Appeal also found express power in clause 7 of the Customer’s Agreement to close out the accounts. Clause 7 reads in part:
7. You may, in your sole discretion, close out any marginal account(s) or reduce or extinguish any indebtedness of the undersigned to you whenever the margin in any account(s) of the undersigned may not meet your requirements, or whenever you deem it necessary for your protection…
The Court of Appeal’s conclusions on this point are stated as follows:
The circumstances of this case show that the margin requirements of the appellant were not met and that it considered or deemed the covering purchases necessary for its protection. I again point out that, even if no call had been previously made, both respondents were fully aware of (and had previously complied with) the 35% maintenance requirement; knew well that because of the substantial rise in the market price they were undermargined and were obligated to make payments. However, they categorically rejected that obligation by repudiating the transactions and demanding immediate return of all moneys previously paid. A formal call may be the best way to show a “requirement”, but the contract does not so stipulate and, in fact, specifically provides that no notice or demand is required before the power may be exercised. In my opinion, a call was not required in view of the respondents’ knowledge and their actions as above indicated. Again, where customers have definitively and formally, individually and by their solicitor, repudiated their respective short sales when the market was at its height, and said, in effect, “we will have no part of these transactions, they must be treated as your own”, I find it
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difficult to conclude that an immediate termination of the short positions with their almost limitless hazards, was anything but for the protection of the broker.
In my opinion, the appellant acted, under the circumstances, in a manner plainly permitted by its agreements with each of the respondents and there was no breach of contract. In any event, even if necessity and reasonableness were requisites to the deeming that the appellant’s action was necessary for its “protection”, as found by the learned trial Judge, I am unable to agree with him that the appellant’s exercise of its right to purchase the shares was unnecessary and unreasonable.
I agree with the reasons given in the Court of Appeal in their entirety. I would dismiss the appeal with costs.
Appeal dismissed with costs.
Solicitors for the plaintiffs, appellants: Bull, Housser & Tupper, Vancouver.
Solicitors for the defendant, respondent: Drost, Coultas, Stanfield & Whitehall, Vancouver.
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