Banks, in their standard terms and conditions, commonly include non-reliance clauses which expressly negate an advisory relationship to protect themselves from misrepresentation claims by disgruntled clients for losses suffered on their investment portfolios. Such clauses typically contain declarations of the absence of:-

  1. representations;
  2. the authority to make representations; and
  3. any inducement by the bank beyond the terms of the contract.

These clauses are also coupled with a declaration of the absence of reliance on the client’s part in entering into standard investment management contracts.

The effect of non-reliance clauses was first acknowledged in the local case of Orient Centre Investments Ltd and another v Societe Generale [2007] 3 SLR(R) 566 (“Orient Centre Investments”). In that case, the plaintiffs, who were clients of the defendant bank, were precluded from contending that they had relied on certain representations made by the bank’s officer to invest in certain investment products, which resulted in losses. The Singapore Court of Appeal considered the combined effect of the express and specific terms and conditions, under which the plaintiffs as clients to the defendant bank acknowledged that they had not relied upon any representations other than those explicitly set forth in the bank’s documents. The Court held that these terms and conditions provided an “insuperable obstacle” to any claim by the plaintiffs against the bank based on the alleged breach of representations.

Accordingly, it was widely believed that non-reliance clauses can immunise banks and financial institutions from liability for misrepresentations by barring a client from alleging reliance on representations made by a bank, in the absence of exceptional circumstances. The English courts have also taken similar positions in the cases of Titan Steel Wheels Limited v The Royal Bank of Scotland Plc [2010] EWHC 211 and Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] 2 Lloyd’s Rep 511.

While non-reliance clauses may be widely used by banks, the validity and effectiveness of such clauses have been recently questioned and challenged following the Court of Appeal’s judgment in ALS Memasa and another v UBS AG [2012] SGCA 43 (“ALS Memasa”).

In ALS Memasa, two elderly Indonesians appealed against the lower court’s decision to strike out their claim against the bank for damages for misrepresentations (based on the presence of non-reliance clauses). In a surprising turn of events, the Court of Appeal granted their appeal and stated that while non-reliance clauses are intended to immunise the banks and financial institutions from liability for post-contractual representations made by their officers, these clauses cannot immunise the bank from liability for unauthorised transactions. The case appears to turn upon the fact that there was a lack of authority in the bank’s purchase of the investment product and the bank’s officers might have misrepresented to the elderly pair the exact nature of, and the risks inherent to, the investment product in order to induce the elderly pair to affirm the purchase.

In the same case, the Court also raised two other issues that challenged the effect of non-reliance clauses. The first issue is whether non-reliance clauses in the nature of exclusion clauses are subject to the Unfair Contract Terms Act (Chapter 396) (the “UCTA”). The second issue is the relevance of illiteracy. The Court then went on to express the view that:-

“[i]n the light of the many allegations made against many financial institutions for ‘mis-selling’ complex financial products to linguistically and financially illiterate and unwary customers during the financial crisis 2008, it may be desirable for the courts to reconsider whether financial institutions should be accorded full immunity for such ‘misconduct’ by relying on non-reliance clauses which unsophisticated customers might have been induced or persuaded to sign without truly understanding their potential legal effect on any form of misconduct or negligence on the part of the relevant officers in relation to the investment recommended by them”. This approach may signal a shift in judicial attitude adopted by the Singapore Court in that it may be more sympathetic towards unsophisticated clients when the defence of non-reliance clauses are raised by financial institutions against them.

This approach may signal a shift in judicial attitude adopted by the Singapore Court in that it may be more sympathetic towards unsophisticated clients when the defence of non-reliance clauses are raised by financial institutions against them.

Consequently, although Singapore appears to have adopted the principle of English contract law expressed in Orient Centre Investments, namely that a person who signs a document knowing it is intended to have a legal effect is generally bound by its terms, the decision in ALS Memasa now questions the extent in which non-reliance clauses can truly protect banks from misrepresentation claims especially where the transaction is unauthorised. The relevance of the UCTA and illiteracy of clients, as emphasised in ALS Memasa, are now factors that could undermine the effectiveness of non-reliance clauses. Against the backdrop of the financial crisis in 2008, the Singapore Court may view unsophisticated clients as requiring greater protection by the Court from the ‘mis-selling’ by financial institutions. Preceding public policy reasons for the strict application of non-reliance clauses such as the need to preserve commercial certainty and the assumption that the price to be paid in contractual settings reflects the commercial risk which each party is willing to accept appears to have taken a backseat as the judiciary tries to strike a balance between the competing policies.

Comment

With the red flag raised following ALS Memasa and given the sparse local judicial decisions on this area of law, it will be prudent for banks to give greater consideration when relying on the non-reliance clause. In particular, considering that the effectiveness of non-reliance clauses lies on the principle of parties’ consent and intention that the clause is true and it is to be acted upon, it is critical that reasonable steps be taken by the bank to ensure that the client fully knows and understands the legal effect of the non-reliance clause and is indeed not induced by representations which the bank knows or suspects have been made. Beyond that, it will be interesting to see the outcome of ALS Memasa when this matter proceeds to a full trial.