The Importance of Inclusion of Terms to Limit Bank’s Duty of Care

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Authored by: Peter So and Mandy Pang

The Court of Appeal’s decision in Shine Grace Investment Ltd v Citibank, N.A. and Anor [2022] HKCA 1341 is welcome news for banks and illustrates the importance of inclusion of terms to limit the bank’s duties in banking agreements.   The Court of Appeal held that the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC Code) is not meant to govern the contractual relationship of licensed or registered persons and their customers, unless parties expressly incorporate the same into a contract.  Further, where parties have agreed on their respective rights and duties by way of contract, this will generally preclude a wider duty of care from being imposed on banks.

Background

Shine Grace Investment Ltd (Shine Grace), a company which was owned, controlled and operated by Mrs Anita Chan Lai Ling (Mrs Chan), brought an action against Citibank, NA (Citibank) and one of Citibank’s relationship managers, Ms Mak.  Shine Grace claimed that Citbank had mis-sold nine equity accumulator contracts to Shine Grace (Disputed Accumulator Contracts) in October 2007 (Main Action).  Shine Grace did not meet Citibank’s margin calls and claimed that the Disputed Accumulator Contracts were invalid and unenforceable.

Meanwhile, Shine Grace’s two guarantors, Shinning International Holdings Limited (SIH) and Bonds & Sons International Limited (BSI), brought two actions to challenge the transfer of funds by Citibank from the accounts of Shinning and BSI to meet the outstanding liability of Shine Grace. These companies claimed that Shine Grace had no liability under the Disputed Accumulator Contracts, on the same grounds put forward by Shine Grace.

The Court of First Instance dismissed all three actions. In the Main Action, the Court of First Instance found that Citibank did not owe to Shine Grace the alleged duty to advise; even if Citibank owed a duty to advise Shine Grace on the risks of its investments, Citibank did not breach the alleged duties; and the alleged breaches did not cause Shine Grace to suffer any loss.

Shine Grace, SIH and BSI subsequently appealed to the Court of Appeal and their appeals were eventually dismissed by the Court of Appeal.

The key points in the Court of Appeal’s decision are set out below.

Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC Code) does not govern the contractual relationship of licensed persons and their customers

As to the issue of whether Citibank owed a duty to advise Shine Grace on the risks of its investments in the Disputed Accumulator Contracts by reason of express incorporation of relevant provisions in the SFC Code, the Court of Appeal confirmed the view of Deputy Judge Pow, SC in DBS Bank (Hong Kong) Ltd v San-Hot HK Industrial Co Ltd that the SFC Code was primarily promulgated for the purpose of determining whether a person is a fit and proper person to be or to remain as a licensed or registered person under the Securities and Futures Ordinance (Cap 571), and not meant to be a code or guideline to govern the contractual relationship of a licensed or registered person and his customers.  

That said, it is possible for a code or guideline promulgated by a regulatory body to be incorporated into a contract. However, there must be explicit language to show that this was the intention of the parties.  This is especially the case where detailed provisions have already been made governing their relationship, rights and obligations. 

The Court of Appeal therefore took the view that Citibank did not owe a duty to advise Shine Grace on the risks of its investments in the Disputed Accumulator Contracts because the relevant provisions in the SFC Code were not incorporated into the contract as terms.

Banks are not normally under a duty to advise customers

Regarding the issue whether Citibank owed a duty of care to Citibank at common law, the Court of Appeal confirmed that the undisputed starting point is that bankers are not normally under a duty to advise customers on the prudence of their investments or warn them of the risks involved. 

Ultimately, the scope of a bank’s duties is fact-sensitive.  The terms of the contract between the parties would be one of the crucial objective evidence which the court would consider.  Where the parties have agreed on their respective rights and duties by way of contract, this will normally preclude any wider duties from arising at common law, and especially so if the relevant duty has been expressly precluded by contract. 

The Court of Appeal upheld the Court of First Instance’s finding that the duties claimed by Shine Grace were inconsistent with the contractual provisions and must have been negatived by the disclaimer of responsibility and that there was no duty for Citibank to advise Shine Grace on the suitability and risks of the accumulator contracts, despite the fact that recommendations or suggestions might have been made to Shine Grace in the course of their relationship.

Banks under no duty to advise

Shine Grace complained that Citibank failed to advise or warn Mrs Chan of the total maximum exposure of the Disputed Accumulator Contracts against the cash resources available to Shine Grace, which rendered the Disputed Accumulator Contracts unsuitable for Shine Grace.

The Court of Appeal found that Mrs Chan knew well her financial commitments and had her own team of staff to monitor her investments and provide daily and regular reports to her.  In the circumstances, Citibank was under no duty to advise her whether Shine Grace had adequate financial resources as she was in a far better position to assess this risk.

Adequate disclosure of risks 

Another  of Shine Grace’s complaints was that Citibank failed to provide a full, fair, reasonable, accurate and honest depiction of the risks involved, including the “black box” nature of “mark to market” calculations, and that Citibank had positively misled Mrs Chan into the Disputed Accumulator Contracts in volunteering information and explanations of the accumulator contracts (including the Disputed Accumulator Contracts).

The Court of Appeal held that the Tailored Investment Proposal (TIP) relating to each accumulator contract, including the Disputed Accumulator Contracts, which were sent to Shine Grace after each accumulator contract trade, stated that changes to any of the listed factors could result in significant adverse impact on the “mark to market” values.  The Court of Appeal took the view that the relevant TIPs were not inadequate, unbalanced or misleading in any way.

Causation

The Court of First Instance concluded on the available evidence (including, numerous audio recordings) that Mrs Chan would have entered into the Disputed Accumulator Contracts regardless.  Shine Grace challenged the findings of fact and the inferences drawn by the Court of First Instance.  The Court of Appeal held that Shine Grace was not able to identify any palpable error of the Court of First Instance that was sufficiently material for the Court of Appeal to intervene and that the trial judge’s findings of primary fact should not be disturbed unless shown that he was plainly wrong.

Commentary

While banks are required to consider a customer’s financial background, investment appetite and investment experience when recommending suitable products to customers pursuant to the SFC Code of Conduct, such regulatory duties were rarely, if at all, incorporated into the banking agreement as terms.

The Court of Appeal has again confirmed that the parties’ relationship was governed by the terms of the contract.  It is therefore important to define the relationship in banking agreements.  In preparing banking agreements, banks should consider whether:

• to expressly exclude the incorporation of the SFC Code
• to include an appropriate disclaimer of responsibilities to limit their duty of care
• the risks of the relevant product have been adequately set out in the banking agreement

Banks should also keep documentation and contemporaneous records of their communications and dealings with customers (such as audio recordings), which would serve as important evidence for the court when considering the scope of duties of banks and whether banks have breached those duties.

Key Contacts

Peter So

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9247