The courts in Hong Kong have generally been consistent in rejecting investors' mis-selling claims and in upholding the banks' reliance on the principle of contractual estoppel.(1) This is why the judgment of the High Court in Li Kwok Heem v Standard Chartered International (USA) Ltd, earlier this year, is of particular interest.(2) While the plaintiff investor's claim was (on the facts) unsuccessful, he was able to make significant inroads into the usual defence that the bank was acting on an execution-only basis (not advising) or that its standard terms of business prevented the plaintiff from arguing otherwise (a contractual estoppel).

Recent case

In Li Kwok Heem the plaintiff lost all of his sizeable investment in a hedge fund in 2008. The hedge fund turned out to be part of the Madoff Ponzi scheme. The investment was made on the recommendation of the bank's investment team.

The plaintiff was not a high-risk investor and, although a professional man of business, he was not experienced in hedge fund products. The bank appreciated that the plaintiff was a balanced investor who was not looking for high risk or high yield. The hedge fund in question had a modest risk rating.

The plaintiff's alternative claims were rooted in allegations of misrepresentation, negligence (breach of a duty of care) and breach of an implied term requiring the bank to act with reasonable care and skill.

In its defence, the bank relied on (among other things) its standard terms to the effect that it was not advising the plaintiff and that those terms prevented the plaintiff from claiming otherwise.

Main issue

The main issue in dispute was whether, relying on its standard terms, the bank could defeat the plaintiff's claim – in particular, that it did not accept any duty to advise on the suitability of the hedge fund and that it had not breached any duty of care (implied in contract or assumed in tort) to the plaintiff regarding the investment.


The court held that the bank's representatives had made representations to the plaintiff regarding the suitability of the hedge fund and, relying on those representations, he had invested. In short, based on the evidence at trial, the bank's representatives had advised the plaintiff.

The court also held that the bank could not rely on its standard terms, to the effect that it was not advising and the plaintiff was not relying on any information provided by the bank's representatives, because (on the facts) those terms applied to higher-risk investments (eg, margin trading, leveraged trades and forex transactions), but not to the plaintiff's investment in question.

The court also held that the bank could not rely on the exemption clauses in its risk disclosure statement, because they failed to satisfy a test of reasonableness.(3)

Where the bank succeeded was that the court held that it had not been negligent. The representations made by its representatives had not been negligent and neither had the bank been negligent in advising the plaintiff. In short, the court held that, in the absence of something awry, the bank was entitled to rely on (among other things) the audited financial statements prepared by the auditors of the hedge fund and the fund manager. The following passage from the judgment will help to assuage some financial advisers' concerns:

"I have held above that if the auditors and custodian are supposed to work according to professionally acknowledged standards, code of conduct or declared principles which are acceptable, then unless there are concerns about their reports or the underlying information, the financial adviser can safely rely on the reports without making any further enquiry on the auditors or custodian or to replicate their work."(4)

Therefore, despite the significant inroads that the plaintiff made into the bank's defence, ultimately his claim failed and was dismissed.


The court's finding that the bank's representatives had advised the plaintiff and that, based on the wording of the disclaimer, the bank could not establish a contractual estoppel reflects the actual position. Banks' representatives often advise their customers as to the suitability of investments with third parties. To this extent, the judgment will be welcomed by investors and contrasts with other cases where banks appear to have offered advice, but have been able to rely on their standard terms to avoid liability.(5)

One may also, perhaps, detect a marked difference in how the courts in Hong Kong approach claims by different types of investor. For example, an investor who trades his or her investments in high-risk products is very different from an inexperienced retail investor or a cautious investor who is looking to invest while also preserving capital.(6) In Li Kwok Heem the plaintiff may have been educated and wealthy, but he was not experienced in the type of investment in question. His evidence during a 10-day trial appears to have attracted some sympathy from the court.

Ultimately, the outcome in the case is no great surprise. On the facts, the bank was entitled to rely on the due diligence of the fund's professionals and there was apparently nothing that should have put it on notice that something was untoward. The case is another illustration of a bank's various 'layered' and alternative defences in these types of dispute, and of the various hurdles that a plaintiff investor must overcome. The case also illustrates the importance of expert evidence, particularly as to industry standards.

Interestingly, although the plaintiff was ordered to pay the bank's costs, it appears that he will have to pay only half of those costs, because the court considered that the costs liability should acknowledge that the plaintiff had succeeded on the representation issue (even if he failed in establishing that the bank had been negligent). That is a significant costs discount and one assumes that the parties are now trying to agree the exact amount of the costs liability.

There is no appeal in Li Kwok Heem. A 10-day trial can be a bruising affair and on an appeal the plaintiff would face significant challenges in overturning the trial judge's primary findings of fact. He would also likely have to put up security for some of the bank's costs on an appeal. For its part, the bank is probably content to walk away – somewhat shaken, but ultimately successful.

Going forward, the fiction whereby some banks make recommendations as to clients' investments, but seek to rely on their acting on an execution-only basis, will shortly come to an end in Hong Kong. The Securities and Futures Commission has mandated that by June 9 2017, all financial intermediaries governed by its Code of Conduct must include a new 'suitability' clause in all client agreements.(7) The expectation is that financial intermediaries will do this well before that date. The new clause includes a 'non-derogation' provision.(8) This will be complemented by a new provision in the Code of Conduct that a financial intermediary may not include in a client agreement any provision which is inconsistent with its obligations under the Code of Conduct or which misdescribes the actual services to be provided to a client.(9)

For further information on this topic please contact Warren Ganesh or Jonathan Cary at Smyth & Co in association with RPC by telephone (+852 2216 7000) or email ( The RPC website can be accessed at


(1) For further details please see "Still no joy for investors' mis-selling claims".

(2) [2016] HKEC 7, HCA 498/2010.

(3) Sections 7 and 8 of the Control of Exemption Clauses Ordinance (Cap 71) and Section 4 of the Misrepresentation Ordinance (Cap 284) and taking into account (among other things) the plaintiff's experience with investments in hedge funds and the bank's representatives' own purported expertise.

(4) Supra note 2, at paragraph 370. Also see paragraph 334 of the judgment.

(5) For example, see Kwok Wai Hing v HSBC Private Bank (Suisse) SA [2012] HKEC 903, HCCL 7/2010.

(6) For example, see Field v Barber Asia Ltd [2004] 3 HKLRD 871.

(7) "If we [the intermediary] solicit the sale of or recommend any financial product to you [the client], the financial product must be reasonably suitable for you having regard to your financial situation, investment experience and investment objectives. No other provision of this agreement or any other document we may ask you to sign and no statement we may ask you to make derogates from this clause." (new paragraph 6.2 of the Code of Conduct). See Securities and Futures Commission circular dated March 21 2016 (regarding "New Professional Investor Regime" and "New Client Agreement Requirements").

(8) Supra note 7, last sentence.

(9) New paragraph 6.5 of the Code of Conduct.

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