Filter
Back

Be Aware of the Small Prints: The Sanctity of the written terms in your banking service agreement

2013-03-01

In a recent case, DBS Bank (Hong Kong) Ltd v San-Hot HK Industrial Co Ltd HCA 2279/2008 (unreported), the Court of First Instance upheld the validity of the written terms of a banking service agreement despite finding that the customer had not read the documents and that the terms might not have been fully explained to the customer before signing.

Background

The 2nd Defendant, Madam Hao, is an established businessperson whose wealth was acquired from the trading of petroleum and petrochemical products and equipment in China and internationally. The 1st Defendant, San-Hot BVI, is the corporate vehicle of Madam Hao set up for investment purposes at the suggestion of DBS for tax benefits.

San-Hot BVI and Madam Hao are both private banking clients of DBS since August 2007. In the latter part of the same year, Madam Hao has, thorough San-Hot BVI, entered into a total of 21 accumulator contracts with DBS for an array of shares and foreign currencies. Under the terms of these accumulator contracts, San-Hot BVI was obliged to purchase a certain amount of listed securities and foreign currencies every day at a predetermined price (fixed at a discount to the initial market price) for one year unless the spot price of the shares or foreign currencies rises to a certain threshold (“the knock out price”) where the contract will be “knocked-out” and terminated. As the market was on a rising trend, some of the contracts were quickly knocked out yielding a substantial profit. However, as market condition deteriorates, the spot price of the shares and foreign currencies dipped below the predetermined price, causing significant mark-to-market loss to and imposed significant cashflow strains on San-Hot BVI. Eventually, San-Hot BVI was unable to meet its contractual obligations to purchase the shares and foreign currencies under the contracts from DBS, thus DBS unwound the contracts and initiated the debt recovery claim against San-Hot BVI and Madam Hao as guarantor in relation to more than HK$ 92.6 million and JPY 23.5 million outstanding under the contracts.

The Defence and Counterclaim

In resisting the claim, Madam Hao and San-Hot BVI (collectively “the Customers”) alleged that DBS has made certain representations which were relied on by San-Hot BVI in entering into the equity accumulator contracts:

1.that the equity accumulators enabled DBS’s clients to acquire shares at a discount to the market price which was not available to anyone else in the market;

2.that Madam Hao would not have to commit any capital to such transactions as they would come to end very quickly; and

3.that Madam Hao was assuming little or no risk as the shares could be disposed of immediately in the market.

Further, the Customers also relied on section 108 of the Securities and Futures Ordinance (“the SFO”), which impose civil liabilities for inducing others to invest money by misrepresentation. The Customers also pleaded that DBS breached certain professional duties arising out of the banker/customer relationship and also by the express terms of the banking agreement. We will address these issues in this newsletter.

The Outcome

The court has held that there was no misrepresentation as alleged by the Customers. As Madam Hao was an experienced and sophisticated investor, she knew and understood the essential features of the accumulator contracts and exercised personal judgment and made independent decisions. She was also aware of the financial exposure involved and adequate explanation has been given by DBS. Thus the court find that the Customers did not rely on the representations allegedly made by DBS and found that DBS is entitled to the full amount it claimed with interest.

The Court also found that a claim under section 108 of the SFO only differed from a claim for representation under common law or the Misrepresentation Ordinance in two aspects. Firstly, the definition of “representation” under the SFO includes “forecasts” while traditional misrepresentation claims only cover representations of fact. Secondly, a claim under section 108 of the SFO is confined to compensatory damages and other reliefs like rescission, damages in lieu of rescission or restitution are unavailable.

Contractual Estoppel

However, more interesting is the Court has found that the principle of Contractual Estoppel settled by the English Court of Appeal Decision in JP Morgan Chase Bank v SpringwellNavigation Corp [2010] 2 CLC 705 also applies in Hong Kong. The Court has found that parties to an agreement may agree that a certain state of affairs should form the basis of a transaction, regardless of whether the state of affairs actually exists.A properly drafted clause making that intention clear shall stand unless it contradicts some other specific or more general rule of public policy.

This has significant implications on the drafting of banking agreements. Banks can make provisions in the banking agreement specifying that parties to the agreement may give up rights to assert that they were induced to enter into it by misrepresentation so long as the intention is clear. This would essentially extinguish claims of misrepresentation in such cases.

Conclusive evidence clause

The Court also considered the legal effect of a “Conclusive Evidence Clause” in the banking agreement, which provides that the monthly statements shall be “conclusive and binding upon the customer” unless the customer notify the bank within 90 days of any error or discrepancy within 90 days.

The Court find that such clauses could have the desired effect if the term “brings home to the customer the intended importance of inspection of the statement”; “expressly or impliedly invites the customer to make such inspection of the statement” and “is intended to have conclusive effect if no query is raised at all or within certain time limit”. Thus banks may protect themselves by inserting such clauses into the banking agreements, and preclude disputes in transactions by adducing monthly statements, which shall serve as conclusive evidence binding on the customer.

The Incorporation of the SFC Code of Conduct

The Customers also argued that the Code of Conduct ("the Code") for Persons Licensed by or Registered with the Securities and Futures Commission (“the SFC”) has been incorporated into the banking agreement by reference and any breach of the Code is a breach of the professional duties owed to the Customers. The banking agreement provides that ”[e]ach transaction shall be subject to the constitution, rules, regulations, customs, usage, rulings and interpretations in force of the Exchange, the relevant clearing house through which the transaction is conducted and any other authority having jurisdiction and to the applicable laws and regulations in Hong Kong or any other jurisdiction”. The court has held that since the SFC does not have any judicial function, it is not an “authority with jurisdiction” nor was the Code “constitution, rules, regulations, customs, usage, rulings and interpretations”, the Code has not been incorporated into the banking agreement and thus does not form part of the professional duties owed by DBS to the Customers.

However, if one consider the phrase “the Exchange, the relevant clearing house through which the transaction is conducted and any other authority having jurisdiction” carefully, it seems that “any other authority having jurisdiction” shall have a wider meaning than authorities exercising judicial function as it is preceded by the reference to “the Exchange” and “relevant clearing house” which clearly does not exercise any judicial function. Further, the SFC has been tasked with wide regulatory and supervisory powers under the Securities and Futures Ordinance and it seems puzzling to suggest that it is not an “authority having jurisdiction”. To avoid this possible doubt in interpretation, it is advisable that the drafting of similar clauses shall clearly stipulate the relevant authorities and documents that are referred to clarify the matter.

Notice of Incorporation of Contractual Terms

The Court held that regarding standard form documents, it is not necessary for the contractual terms to be read by the person receiving the document to have read itor been made subjectively aware of their import or effect if he knew that the writing or printing contained or referred to conditions before he is bound by the terms. They are bound by the terms of the document they have signed unless they can show their apparent consent is vitiated or obtained by some other form of unconscionable conduct which justifies relief in equity. Thus it seems that banks may now put terms it desired into the standard form banking agreement without the need to draw it to the attention to the customers unless the term can be set aside by misrepresentation or some other vitiating factors.

Conclusion

The Court has taken an approach which shall find delight with bankers as it clearly demonstrates that a carefully drafted banking agreement shall govern the rights and obligations between a banker and client even the client is not aware of its contents. Thus banks shall place extra caution in the drafting of banking agreements as these may be determinative of the rights between itself and its customers when disputes arises. Bank Customers are well advised to read and understand the terms before they sign any banking agreements.


For enquiries, please feel free to contact us at:

E: ldr@onc.hk                                                                      T: (852) 2810 1212
W: www.onc.hk                                                                    F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Our People

Ludwig Ng
Ludwig Ng
Senior Partner
Sherman Yan
Sherman Yan
Managing Partner
Olivia Kung
Olivia Kung
Partner
Ludwig Ng
Ludwig Ng
Senior Partner
Sherman Yan
Sherman Yan
Managing Partner
Olivia Kung
Olivia Kung
Partner
Back to top