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12 July 2016
Since the financial crisis in 2008, only a handful of so-called 'mis-selling' claims by investors against banks have gone to trial in Hong Kong and resulted in reported judgments. In none of these cases has the investor succeeded. Of these cases, to date only DBS Bank (Hong Kong) Ltd v Sit Pan Jit has gone to the Court of Appeal and resulted in an appeal judgment. That judgment was handed down recently. The investor lost on all material points. The outcome in the appeal is further confirmation of some of the challenges involved with bringing mis-selling claims against banks and financial intermediaries.
In DBS Bank (Hong Kong) Ltd v Sit Pan Jit(1) the bank claimed against the investor for significant losses arising out of his trades in certain equity-linked notes in the run-up to the financial crisis. In his defence and counterclaim, the investor made allegations of misrepresentation against the bank, together with claims for breach of contract and breach of a duty of care. Therefore, the case was primarily about the investor's counterclaim and his allegations of mis-selling.(2)
The investor lost on all material points at trial. The trial judge found that the bank did not misrepresent the nature of the equity-linked note investments entered into by the investor with certain third-party issuers. His claims in contract and tort also failed.
For good measure, the judge considered that the bank's terms and conditions established a contractual estoppel, so as to defeat the investor's counterclaim. In effect, the bank was acting on an 'execution-only' basis because this is what was stated in the banking documents governing the relationship between the bank and the investor.
What makes Sit Pan Jit more noteworthy is that it went to appeal. As noted, thus far this is unusual for these types of case in Hong Kong. The investor is apparently a wealthy man and an experienced investor – the fact of the appeal suggests that he is also very determined.
The Court of Appeal's judgment dismissed all the various grounds of the investor's appeal.(3) Essentially, the Court of Appeal was unwilling to interfere with the lower court's findings of primary fact regarding the absence of a misrepresentation and the absence of any breach of contract or negligence on the part of the bank. In short, the trial judge's findings were not "plainly wrong".(4) Perhaps anticipating this, the investor's legal representatives tried to argue in the alternative that the trial judge had made an error of law in handling the evidence. Unsurprisingly, that argument received short shrift from the Court of Appeal, which noted that the judge's judgment ran to some 284 pages and that her approach to the evidence had been "impeccable".(5)
As for the principle of contractual estoppel, the Court of Appeal noted that the trial judge had approved of it. However, the Court of Appeal declined to make any ruling on this issue, although it did acknowledge that the juridical basis for contractual estoppel might be open for argument and appeared to raise "interesting legal issues".(6)
The handful of mis-selling cases that have gone to trial in Hong Kong since 2008 confirm that there has been no 'tsunami' of litigation as some banks had feared or, perhaps, some lawyers had hoped. There have been other mis-selling claims, but many have settled. On the part of investors, such settlements reflect in large measure one or more of the following:
On the part of the banks, it is probably fair to surmise that there have been a number of confidential settlements in cases where they were advised there was a significant risk of liability based on the evidence or the contractual documents, or both. The banks, like other businesses, pursue or defend to trial those cases which they think they can win.(8)
The dearth of appeal cases arising out of investor claims also reflects the above points and the additional requirement that an appellant usually provide security for the respondent's legal costs on appeal.(9) Sit Pan Jit also demonstrates that overturning a trial judge's findings of primary fact on an appeal is by no means an easy task.
Sit Pan Jit is unlikely to go any further. It is difficult to see how the investor's legal representatives could prepare grounds that justified permission to appeal to the Court of Final Appeal. The issue of contractual estoppel may be interesting, but it does not feature in the Court of Appeal's judgment, other than in passing, and the other issues raised in the case (eg, misrepresentation) are based on findings of fact – as opposed to raising questions of great general or public importance such as to justify permission to appeal to Hong Kong's highest court.(10)
On a more optimistic note for claimant investors, the pretence whereby some banks give advice to clients about investments but seek to rely on their acting on an execution-only basis should become less of an issue in Hong Kong. As previously noted, the Securities and Futures Commission has mandated that by June 9 2017, all financial intermediaries governed by its Code of Conduct exclude from their client agreements any provision which (among other things) is inconsistent with their obligations under the code or misdescribes the actual services to be provided to a client.(11)
For further information on this topic please contact Jonathan Cary or Warren Ganesh at Smyth & Co in association with RPC by telephone (+852 2216 7000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(1) For further details please see "Still no joy for investors' mis-selling claims" (May 12 2015).
Essentially, the investor was alleging that the bank's representative ("relationship manager") at the time represented that the equity linked notes were "safe", less risky than investing in mutual funds and "tailor-made" for the investor.
(7) Li Kwok Heem v Standard Chartered International (USA) Ltd is a rare case in Hong Kong of an investor establishing an advisory duty against a bank and defeating its reliance on contractual estoppel, albeit the investor's claim failed on the facts. For further details please see "Investors claims sets up advisory duty" (April 26 2016).
(8) Some banks exposed to significant reputational risk (and regulatory pressure) in Hong Kong have paid compensation to certain investors. For example, following the so-called 'Minibonds' saga in Hong Kong, there were large-scale settlements a few years ago between some banks and certain groups of (primarily) retail investors.
(11) For further details please see "Investors claims sets up advisory duty" (April 26 2016).
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