In the latest alleged mis-selling case in Hong Kong, the Court of First Instance maintained a consistent approach with other recent cases, rejecting an investor's claim based on misrepresentation and suggesting that the principle of contractual estoppel is alive and well.(1)
Mr Sit was a private client of DBS. The terms of their relationship were recorded in a series of agreements, account opening forms and other banking documents, which were signed by the parties between June 2004 and March 2008. Sit utilised credit facilities provided by DBS to invest in investment products – including, between February 2007 and February 2008, a series of equity-linked notes. These were structured products whose performance was linked to the value of certain underlying equities. Sit pledged the equity-linked notes to DBS as security for the continued provision of credit facilities.
The banking documents stated that DBS provided an "execution only service" to Sit. They contained the usual terms on which a bank agrees to provide such a service – namely, that Sit declared that:
- he had not relied on any representations that the bank had made regarding the suitability of investments;
- he had exercised his own independent judgement before deciding to enter into the investment transactions;
- he was aware that he was investing on a margin basis, the terms of which he understood; and
- he understood the nature, features and risks involved in investing in equity-linked notes and other investment products.
With the onset of the financial crisis in 2008, the value of the equity-linked notes declined significantly, which in turn impaired the value of the security held by DBS. DBS duly made a margin call on Sit of HK$56,995,851, requiring him either to furnish additional security in this amount or to pay this sum to reduce his indebtedness. When he failed to do so, DBS exercised its right to sell a number of investments held in his account and to apply the proceeds to reduce his indebtedness. DBS then demanded that Sit settle a further sum of HK$3,426,724 and sued him for payment of this amount.
Investor's defence and counterclaim
The case was really about Sit's counterclaim. Sit counterclaimed that the equity-linked notes had been mis-sold to him. He alleged the existence of an oral contract with DBS, pursuant to which it had agreed to make available to him credit facilities for investment purposes. This allegedly contained terms that DBS's relationship manager, Mr Kong, would be personally responsible for looking after Sit's investments and that Kong would not make risky investments on his behalf, as they were to be mortgaged to DBS as security for the credit facilities.
Sit claimed that the terms of the banking documents were not binding on the basis that they were not incorporated into any enforceable contract between Sit and DBS. He also went as far as to claim that the oral contract itself was invalid and void for uncertainty and/or unenforceable due to illegality.
Sit also alleged that a series of misrepresentations had been made to him by Kong, which had induced him to sign the banking documents and had further induced him to invest in high-risk products, including the equity-linked notes, in circumstances where he had made clear that he wished to pursue low-risk, conservative investments.
For the sake of completeness, Sit further alleged breach of implied duties of care in contract and tort, together with a parallel fiduciary duty which DBS owed him, by recommending investment products which were not suitable and failing to explain the nature, mechanism and risk involved in investing in those products.
In a lengthy judgment, the court rejected Sit's defence and counterclaim in its entirety. It found the existence of the alleged oral contract not to be believable and held that the terms which governed the relationship between Sit and DBS were set out in the banking documents. DBS had therefore contracted with Sit to provide an execution-only service.
Having made these findings of fact, it was unnecessary for DBS to rely on contractual estoppel – namely, provisions in the banking documents confirming that the bank was not providing advice and that the customer could not rely on any representations made. Consistent with its approach in DBS v San-Hot,(2) the court approved of contractual estoppel applying to the contractual relationship between DBS and Sit. Sit had signed the banking documents in the knowledge that they set out the terms of the relationship between him and DBS. Having done so, he was estopped from bringing any claim based on Kong's alleged misrepresentations or from asserting that he had not understood the basis on which the credit facilities were provided to him or that he was trading on margin. He was also estopped from arguing that he had not made his own independent investment decisions in relation to the equity-linked notes or that he had not understood the risk involved in investing in these products.
Interestingly, the court considered that, while the doctrine of contractual estoppel may be more easily and powerfully applied to sophisticated parties or those with equal bargaining power, there is no juridical basis on which to qualify the application of the doctrine based on an investigation into the parties' respective bargaining power. To do so would (in the court's opinion) introduce unacceptable uncertainty to the terms of a contract. Neither could Sit argue, having signed each of the banking documents, that their terms could not be enforced by DBS because they had not specifically been brought to his attention.
The court also rejected Sit's argument that the relevant terms of the banking documents were subject to the Control of Exemption Clauses Ordinance and Misrepresentation Ordinance and should be struck out as unreasonable.(3) The clauses which established that DBS was providing services on an execution-only basis and that it would not assume liability when bank staff provided information and materials to Sit were terms which defined the limited scope of the services that DBS had contracted to provide (in contrast to exclusion clauses).
Having determined that Sit had contracted with DBS on an execution-only basis under the express terms of the banking contracts, there was no scope for the court to imply any terms which imposed an advisory duty or to find that there had been any voluntary assumption of responsibility. The claims in contract, tort and for breach of fiduciary duty inevitably failed.
The prevailing approach remains that the Hong Kong courts will be slow to interfere with the principle that written commercial contracts, the terms of which are clear and which have been signed by the parties, are intended to mean what they say.
This is particularly so where the claimant who alleges mis-selling is a relatively sophisticated investor with access to whatever independent advice that he or she may require before entering into an agreement with a bank to provide credit or investment facilities or before entering into any specific investment decision.(4)
The corollary of the courts' unwillingness to interfere with the primacy of contractual arrangements agreed between parties can be seen in the Securities and Futures Commission's proposed amendments to its Code of Conduct in Hong Kong – in particular, the proposed requirement that all client agreements include a term to the effect that if an intermediary recommends any financial product, it must be reasonably suitable for the client, having regard to the client's financial situation, investment experience and investment objectives, and that there may be no derogation from this term. This is an attempt to protect investors from the use by intermediaries of non-reliance clauses and the like.(5)