In search of a fair bargain – balancing the rights of banks and their customers in Singapore
November 2015 | PROFESSIONAL INSIGHT | BANKING & FINANCE
Financier Worldwide Magazine
Seven years on from the global financial crisis, many claims against banks arising from failed investments are still being heard in the Singapore Courts. One important issue that the Courts repeatedly face in such claims is the effect of standard banking terms, which define the basis of the banker-customer relationship. Banks regularly rely on these ‘basis clauses’ or ‘non-reliance clauses’ in response to claims of breach of duty or misrepresentation. These clauses usually contain express representations from the customer that he does not rely on the bank for investment advice, or that he understands and accepts the risk of his investments. The Singapore Courts have not resolved how to deal with such clauses, and are still searching for the balance between upholding the sanctity of commercial bargains freely entered into and the need to protect vulnerable customers.
Pre-crisis decisions on investor claims against banks
Prior to the global financial crisis in 2008, the Singapore Courts readily enforced the contractual bargains struck between the bank and its customer, reflecting the primacy of freedom of contract in judicial thinking.
As the Court of Appeal, Singapore’s apex court, explained in Pertamina Energy Trading Ltd vs. Credit Suisse, “In the end, the relationship between a bank and its customer is governed by contract; and the parties are at liberty to expressly agree on any peculiar arrangement to define and determine their relationship”.
The high-water mark in respect of this approach in the context of banking claims is the case of Orient Centre Investments Ltd and another vs. Société Générale. In Orient Centre, the Court of Appeal exonerated Société Générale from a claim by one of its corporate customers for, among other things, misrepresentation and breach of duties arising from investments in structured financial products.
The Court of Appeal referred to various non-reliance clauses in Société Générale’s standard terms, which it found was in the nature of representations and warranties made by the customer to the bank. This included, among other things, that the customer was exercising “its own business judgment independently of the Bank”, “it has not relied upon any representations (whether written or oral) of [Société Générale], other than the representations set forth [in the contract documents]”, and it has carried out its own analysis of the transaction.
The Court of Appeal held that such clauses estopped the customer from arguing that it had relied on Société Générale’s representations when it entered into the investment through the bank. It further held that the effect of Société Générale’s standard terms was to provide “an insuperable obstacle to any claim by the appellants against [Société Générale] based on the alleged breach of representations or duties, fiduciary or contractual or on negligence”.
A change in judicial sentiment
In Als Memasa and another vs. UBS AG, the Court of Appeal was faced with an appeal against a decision of the High Court, which had struck out a claim by wealthy Indonesian businessman Tjo Bun Khai and his daughter, who had invested in, among other things, Russian bank bonds on a leveraged basis. The value of these bonds collapsed during the global financial crisis, and the Tjos’ investment accounts with UBS were margin-called. Consequently, UBS liquidated a portion of their investment positions at a loss. The Tjos brought a claim for the losses they suffered alleging, among other things, that their investments made through UBS were unauthorised.
The High Court struck out the Tjos’ claim on the basis that the Tjos had abused the court’s process by advancing a false case which they knew must be untrue for many, if not all, of the transactions executed by UBS, and then tailoring their case to suit the evidence disclosed by UBS in the striking out application.
The Court of Appeal agreed that the Tjos “might have overstated their case initially by asserting factually incorrect and unsupportable claims, and to that extent might have abused the process of the court”. However, it found that there was some evidence that may support the Tjos’ claim at least in respect of the Russian bank bonds, and was prepared to allow the Tjos a final opportunity to amend and limit their claim to the Russian bank bonds, which may then be tested at trial.
The Court of Appeal’s comments made in obiter, which had no bearing on the actual decision in Als Memasa, were significant.
First, the Court of Appeal questioned whether non-reliance clauses in the nature of exclusion clauses are subject to the Unfair Contract Terms Act (Cap. 396) (UCTA). The Court of Appeal noted that the appellants in Orient Centre raised this issue, but it did not find it necessary to comment or decide the point at that time.
Second, the Court of Appeal noted that the established principle was that a party is generally bound by his signature on a contract, even if he is unaware of the existence or effect of some term in that contract. He is not bound only if he can show non est factum, i.e., his mind did not go with his signature because, for example, he was mentally incapacitated or misled into signing it, thinking he was agreeing to something else.
The Court of Appeal then questioned whether the above principle should still apply, saying, “in 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 in 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”.
The Court of Appeal had the opportunity to consider this matter more fully in a later case of Deutsche Bank AG vs. Chang Tse Wen and another appeal. In this case, the customer Dr Chang Tse Wen was a research scientist who was to come into considerable new wealth from the sale of his shares in Tanox Inc, a NASDAQ-traded drug development company he had co-founded.
Dr Chang claimed that Deutsche Bank AG had, among other things, misrepresented the nature of the services they would render him and was negligent in failing to advise him properly on managing his new wealth. Deutsche Bank AG relied on, among other things, its standard terms to raise a defence of evidential or contractual estoppel.
The High Court had found that Deutsche Bank AG was in breach of its duty of care owed to Dr Chang, and dismissed its defence of evidential or contractual estoppel because it failed to show that Dr Chang had intended Deutsche Bank AG to act on his representations in the standard terms. As the High Court observed, “There was no evidence to suggest that the relevant disclaimers [in its standard terms] were even brought to Dr Chang’s attention”.
Significantly, the High Court referred to Als Memasa and cited its observation that it may be desirable to reconsider whether financial institutions should be entitled to invoke its non-reliance clauses against unsophisticated customers. It also distinguished the Court of Appeal’s decision in Orient Centre on the grounds that Deutsche Bank AG knew Dr Chang was “financially inexperienced”, whereas the plaintiffs in Orient Centre were financially sophisticated parties.
The Court of Appeal, however, overturned the High Court’s decision. Unfortunately, the Court of Appeal was reluctant to comment on the High Court’s findings on the law in respect of contractual estoppel arising from non-reliance clauses. It only said, “We doubt the correctness of the [High Court] Judge’s exposition on this area of the law but as the issues raised are important, they are better addressed on a future occasion when it is necessary to do so”.
The Court of Appeal nevertheless did answer one of two questions it posed in Als Memasa, and held that ‘basis clauses’ such as non-reliance or non-representation clauses have the effect of excluding or restricting the imposition of a duty of care in law, and would therefore have to satisfy the reasonableness test under the UCTA. However, it is the unanswered (and harder) question it posed in Als Memasa – whether a non-reliance clause should be enforced against “financially illiterate and unwary customers”, which has created some uncertainty. This uncertainty was reflected in the recent decision of Koh Kim Teck vs. Credit Suisse AG, Singapore Branch, where the High Court questioned whether Credit Suisse’s non-reliance clauses were valid and binding on its customer, and declined to strike out the claim against Credit Suisse for breaches of duty in relation to various investments, without actually deciding the point.
The UCTA as the means of striking a fair balance
The Court of Appeal’s confirmation in Deutsche Bank that non-reliance clauses are subject to the reasonableness test in the UCTA offers a hint on how the Singapore Courts intend to treat non-reliance clauses in the future.
Non-reliance clauses are likely to be enforced unless they offend the reasonableness test in the UCTA. In cases where the banks are dealing with a financially literate or corporate investor, non-reliance clauses will likely be found to be reasonable and enforceable. However, if banks seek to rely on non-reliance clauses to avoid fraud, gross negligence or reckless misconduct by its officers, this would likely render these clauses unreasonable, and consequently unenforceable. The reasonableness test in the UCTA therefore offers the Singapore Courts some flexibility in determining whether to enforce non-reliance clauses in specific cases.
This flexibility may translate into uncertainty, in particular for banks. It remains to be seen whether an appropriate case comes before the Singapore Courts, such that more guidance may be offered in relation to the validity of non-reliance clauses. In the meantime, banks should re-examine the express scope of their non-reliance clauses, and ensure that these terms are brought to the attention of and explained to their customers, in particular those with limited or no investment experience. This would mitigate the risk that their non-reliance clauses are found to be unreasonable and unenforceable under the UCTA.
Benedict Teo is a director at Drew & Napier LLC. He can be contacted on +65 6531 2499 or by email: firstname.lastname@example.org.
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