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Victory (Partial) for Claimant against Private Banker for Mis-selling of Financial Products

2008-10-01

In the recent Hong Kong Court of Appeal case of Natamon Protpakorn v. Citibank, N.A. HCA 190 of 2005, the Court removed some big obstacles to the claims against those private bankers accused of mis-selling financial products to their unwary customers.

Background

The plaintiff was a private banking customer of the defendant. For the first one and a half years with the defendant, her money was simply deposited in interest bearing accounts. In late 2001, the Vice President of the defendant, Henny Lai (‘Mr. Lai’), persuaded the plaintiff to take on a risky investment in the nature of ‘margin FX trading’. At the time, Mr. Lai made representations to the plaintiff that the defendant would allow the plaintiff to roll over the contracts as long as she maintained sufficient margin; by keeping open a contract with unrealized loss, she would have the opportunity to recover the loss when the exchange rate moved back in her favour. Therefore her risk in the investment would be small. She relied on the representations and agreed to carry out margin FX trading on those terms (‘2001 Agreement’).

In late April 2004, Mr. Lai left the defendant. His successor Ms Poh revised the terms of the 2001 Agreement so that the plaintiff’s contracts could still be rolled over, but only for six months at prevailing foreign exchange rate, and not at the original rate when the contract was acquired. The plaintiff specifically accepted the revised terms (‘2004 Agreement’) and entered into six new contacts in margin FX trading with the defendant. However, the defendant changed its mind 3 days later and told the plaintiff that the defendant would close her accounts and close out any of her then-open FX contracts within one month. The defendant eventually closed out all the plaintiff’s contracts, thereby crystallizing the loss for which the plaintiff now claimed.

The Standard Term FX Agreement (‘The Standard Agreement’)

The problem the plaintiff faced was that she had signed the Standard Agreement when she opened the account with the defendant.

Clause II. 7.01(g) of the Standard Agreement allowed the defendant to terminate the plaintiff’s trading account at its absolute discretion when it considers advisable or necessary to safeguard its interest. Clause II. 7.02 further precluded any claim by the plaintiff against the defendant for any loss arising out of ‘any liquidation, realization, sale disposal or dealing’ of the account.

Ground 1: Collateral contract/ independent contract

The plaintiff averred that her relationship with the defendant on margin FX trading was based on the terms of the 2001 Agreement, as varied by 2004 Agreement and that the defendant, in breach of the 2001 and 2004 Agreements, wrongly closed her contracts.

The Entire Agreement Clause

The defendant relied on Clause II. 15 of the Standard Agreement (‘the Entire Agreement Clause’) which essentially provides that any amendment or waiver of any provision in the Standard Agreement must be in writing and signed by the defendant. The defendant argued that since the plaintiff was seeking a departure from the terms of the Standard Agreement, any consent by the defendant to this departure must be in writing.

The Court held whether or not the Entire Agreement Clause should apply depends on the construction of its terms. However, even if by its wording it applies to this case, that is still not the end of the matter because such a clause can be waived by a party who might otherwise have relied on it. If the defendant was of the view that the Entire Agreement Clause governed the relationship of the parties, its conduct in allowing the plaintiff to trade on the terms of the 2001 and 2004 Agreements was fundamentally inconsistent with this avowed position.

Ground 2: Misrepresentation

It is well established that in order to constitute an effective common law misrepresentation the representation must be of existing facts and not mere opinion or intention ‘which is not put into effect’.

The Court held in this case that even if the representations made by Mr. Lai were mere representations of intentions, they were nonetheless representations which were put into effect when the defendant actually allowed the plaintiff to roll over the contracts. And if at the time of these representations the defendant was of the view that the Entire Agreement Clause still applies, then arguably the defendant did not have an honest belief when the representation were made.

Another very important point raised by the Court was that for investment agreements, the plaintiff could rely on statutory misrepresentation conferred by the Section 108 of the Securities and Futures Ordinance (Cap. 571). This section defines misrepresentation to cover not only existing facts but also ‘promises’ and ‘forecasts’.

Ground 3: Promissory Estoppel

The plaintiff alleged that the defendant’s purported excuse for terminating her accounts were not genuine or justified, and in any event in the circumstances of this case the defendant was estopped from relying on the purported excuses.

The defendant relied on Clause II. 7.01(g) when it terminated the accounts of the plaintiff, which gives the defendant an absolute discretion to terminate the plaintiff’s account “when it is advisable or necessary to safeguard its interest under these terms and conditions and/or any or all the Contracts.” The factual matters relied upon by the defendant were the integrity of the plaintiff’s agent, whether the plaintiff was exercising independent control of the assets and the legitimate nature of the plaintiff’s money.

However, the Court in view of the constantly changing position of the defendant shortly before it exercised the termination, questioned that the reasons advanced indeed represented the real reasons for the termination. If these reasons were not the genuine reasons for termination, then the defendant might be estopped from relying on the purported excuses.

Court’s criticism on the Defendant’s Strategy to Stifle the Plaintiff’s Claim

The Court heavily criticized the defendant’s strategy to delay and stifle the plaintiff’s claim in this case. 3 years 7 months since the action was commenced, it is still at the interlocutory stage and had attracted the vast volume of interlocutory activity. During the period there have been 4 disputed hearings. The interlocutory argument has been conducted at very considerable expense, and yet, some 43 months after the issue of the writ, resolution of this dispute is no further forward. In his judgment, Honourable Stone J stated that:-

“ Viewed objectively, it is difficult to conclude other than that this case represents a calculated attempt by the defendant bank to flex its financial muscle – hitherto, remarkably successfully, it must be said – in a bid to prevent what appears to be a bona fide commercial dispute from seeing the light of the day.”

Since this case, it could be expected that attempts to dispose of claims by interlocutory applications would be viewed with circumspection by the courts. That means it is much more likely after this case that private bankers alleged to have mis-sold financial products would have to face the claim, make discovery and defend themselves in the open court.


For enquiries, please contact our Litigation & Dispute Resolution Department:

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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.
Published by ONC Lawyers © 2008

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