A Hong Kong judge has ruled that banks can tell HNW customers that off-the-shelf products are 'tailor-made' for them and not be held liable for misrepresentation. This is the latest in a long line of 'pro-bank' mis-selling decisions.

The Hong Kong Court of Appeal has dismissed an appeal in DBS Bank (Hong Kong Limited) v Sit Pan Jit (CACV 91/2015), a recent case dealing with the mis-selling of financial products by a bank.

The Court of Appeal upheld the first-instance decision, where DBS Bank (Hong Kong) Ltd succeeded in its monetary claim against Sit Pan Jit; and Sit's counter-claim on the basis of purported mis-selling and misrepresentation was dismissed. This is consistent with the other recent mis-selling cases which have all been in favour of the banks.

The appeal largely focused on the findings of fact made by the first-instance judge, and to what standard the Court of Appeal had to be satisfied in order to disturb those findings. The Court of Appeal emphatically affirmed the well-settled principle that, subject to one small exception, findings of fact could only be disturbed if they were shown to be plainly wrong. Accordingly, in the absence of any demonstration of palpable error by the trial judge, the appeal was dismissed.

Given the factual nature of the appeal, banks should be cautious about relying on this decision as a confirmation of the trend in favour of the banks in mis-selling cases. In fact, the Court of Appeal, while not making any findings on this issue, found some force in the appellant's submissions challenging the contractual estoppel defence relied upon by DBS. In addition, recent regulatory changes implemented by the Securities and Futures Commission (SFC) to protect investors from sharp practice are set to change the dynamics between investors and banks significantly.

At first instance

The 'first instance' facts and decision are as follows

• Sit opened a private banking account with DBS in 2004 and their relationship was governed by a series of contractual documents.
• DBS extended credit facilities to Sit to purchase certain investment products (equity-linked notes (ELNs)) which, following adverse market conditions, dropped significantly in value.
• DBS sought additional security or payment to reduce Sit's indebtedness.
• When he failed to pay, DBS went to court to recover the outstanding amount.
• Sit defended DBS' claim and counterclaimed for damages on the basis that DBS had mis-sold investment products, made misrepresentations and otherwise breached the duties owed to Sit as a client.
• The court dismissed Sit's counterclaims and granted judgment in favour of DBS of approximately $3.43 million.
• As part of its decision, the court found that none but one of the representations alleged by Sit had been made. In relation to the sole representation which Sit established (the sixth), which the court found had only been made in part, it was decided as matter of fact that Sit had not been induced to act on that representation, and therefore it was unnecessary to determine whether the sixth representation was misleading or deceptive.

Sit raised 20 grounds of appeal but most of these were preconditioned on a finding that misrepresentation had been made. Accordingly, the grounds of appeal that challenged the findings of fact as to the sixth representation – that only part of it had actually been made, and that in any event it had not been relied upon by Sit, were wholly determinative of the appeal.

A poor witness

Sit's case at the first instance, regarding the sixth representation, was dismissed on the specific facts of the case, and largely because of Sit's poor credibility as a witness.

The sixth representation said that it was "safe, conservative and traditional" to invest in ELNs, that they were "less risky than mutual funds" and that the ELNs had been "tailor-made" for Sit. The first-instance judge found that the statement that the ELNs had been "tailor-made" for Sit had been made (but that the other parts of the sixth representation had not been made). However, he found that no reasonable customer in Sit's position would have thought that the ELNs were truly tailor-made. Rather, the reasonable interpretation of "tailor-made" was that the ELNs had been hand-picked by DBS' relationship manager for Sit. The words were not held to be misleading or deceptive and the misrepresentation case in relation to the sixth representation was dismissed.

As the Court of Appeal observed, the general principle is that an appellate court will disturb a finding of fact made by a trial judge only if the appellant can demonstrate that it is plainly wrong.

However, Sit argued that in this instance that the plainly wrong test did not apply, on two grounds:

• the first-instance judge had misdirected herself in law regarding the correct approach as to the evidence, with regards to Sit's credibility as a witness, and that error of law should allow the Court of Appeal to reconsider the underlying findings of fact; and
• the “plainly wrong” test does not apply to challenges against inferences drawn from primary facts.

Sit's credibility

As to the first argument, while it was accepted that the judge, after making adverse findings in relation to Sit's credibility, could approach his evidence with caution, Sit asserted that his evidence should have still been considered in the light of contemporaneous documents which supported that evidence. In particular, Sit relied on the fact that DBS presented no evidence, and did not call the alleged individual representor (or cross-examine Sit) in relation to the sixth representation.

In respect of this argument, the Court of Appeal rejected the idea that any error of law had occurred and accepted the findings of the trial judge on credibility. The Court of Appeal found that in fact the judge had considered all the facts and contemporaneous documents, contrary to what had been asserted. It also accepted that DBS had legitimate reasons not to call the representor or cross-examine Sit (as the findings on inducement were based on an objective appraisal of the words used, not on Sit's understanding of them).

The 'plainly wrong' test

As to the second argument, Sit argued that the 'plainly wrong' test did not apply to inferences drawn from findings of fact. The challenged inference was the inference drawn by the first-instance judge that Sit could not have interpreted the representation that the ELNs were "tailor-made" literally and therefore that he could not have been induced into the transaction on this basis.

The Court of Appeal rejected this argument and said that the only instance in which the 'plainly wrong' test did not apply was when a finding of fact was based purely on inference, without reference to any established factual evidence.

That was not the case in this instance, as the inference had been drawn from the facts. Applying the 'plainly wrong' test to the challenged findings of fact, the court rejected Sit's appeal on the factual findings he was making about the sixth representation.

Other grounds

As a result of the finding that the sixth representation was not made in full as alleged, and that the relevant part that had been made was not misleading or deceptive, the rest of the appeal fell away. However, out of deference to the submissions of the appellant on the other grounds, the court did briefly mention the submissions made in relation to contractual estoppel.

At first instance, the Court held that contractual estoppel is part of the laws of Hong Kong and it was available to DBS as a defence to a claim brought under s108 Securities and Futures Ordinance on misrepresentation (which Sit argued had been breached by the alleged misrepresentations).

The appellant challenged this on a number of grounds, asserting that the contractual estoppel being asserted was not good law and that, in any event, on a proper construction of s108, such a section could not be excluded by contract.

The Court of Appeal observed that there was some force in these submissions. However, as it did not overturn the first-instance finding on the sixth representation, it refrained from expressing a view on the issue.

Welcome news for private banks

As with the first-instance case, the outcome of this appeal will be welcome news for private banks as it continues the recent trend of banks successfully defending claims for mis-selling and misrepresentation by their customers. However, they must be cautious in their optimism in this case; the outcome of the appeal depended largely on the unique facts of the case.

In addition, the Court of Appeal's observations in relation to the defence of contractual estoppel in relation to s108 SFO will probably prompt other parties to challenge that defence as it relates to mis-selling or misrepresentation cases in the future.

Furthermore, this decision comes at a time in which the relationship between banks and investors is about to shift significantly (to the benefit of investors) due to the Securities and Futures Commission's new professional investor regime (which came into effect on 25 March 2016) and new client agreement requirements (which come into effect on 9 June 2017).

In particular, the new client agreement will protect  investors more copiously, with a mandatory new clause to be inserted into all client agreements which will compel banks to consider the "suitability" of any investments recommended to clients in the light of their financial circumstances, investment experience and investment objectives. On top of this, the new clause contains a non-derogation component which means that any contractual exclusions on which private banks might rely (this case included) to frustrate the new clause will have no effect. The SFC has stated that this part of the new clause is of paramount importance and is aimed at ensuring a fair and equitable balance in the relationship between intermediaries and their clients.

Accordingly, going forward banks should be cautious in relying on contractual carve-outs to protect against investor claims for mis-selling. In cases where the mandatory client agreement clause applies, banks will not be able to rely on contractual carve-outs. Rather, banks should focus on ensuring compliance with the new and existing regulations through training and effective management.

* Richard Norridge is Herbert Smith Freehills' head of private wealth for Asia (+852 2101 4107) who is based in Hong Kong. William Hallatt is the financial services regulatory partner in Hong Kong (+852 2101 4036). The other authors, also partners, are Gareth Thomas (+852 2101 4025) and Dominic Geiser (+852 2101 4629).