Bank Ordered to Compensate Client for Investment Losses

06 September 2017

Richard Keady, James Wong

DBS Bank lost partly in defending investors' claims relating to breach of trust, in yet another court action arising from the global financial collapse of 2008. This case differs from others in that the claims are based, not on "mis-selling" of investment products, but on dishonest breach of trust by the bank trustee, breach of fiduciary duty and knowing assistance by the bank and its employees.

While dismissing the claims against the bank, its private banking division and its employees, the Court held that two DBS entities were "grossly negligent" in approving investment decisions and hence liable to compensate for the investment losses. (Zhang Hong Li v DBS Bank (Hong Kong) Ltd [2017] HKEC 772)

Background

Zhang is a senior executive vice president of ICBC and former China head of Deutsche Bank AG. His wife, Ji, set up a Jersey trust with DBS in favour of the Zhang family. In July 2008, DBS substantially increased the credit facility for the trust's investment company to fund purchases of Australian dollars, causing substantial losses to the trust.

Zhang, Ji, the trustee and the investment company of the trust brought the action against DBS, its various related companies and its employees.

Breach of trust

The primary claim was against the DBS trustee entity for breach of trust, particularly in approving a substantial increase in the credit facility and approving certain investments.

Bharwaney J stated that the DBS trustee "had to act honestly and in good faith, with due diligence, as would a prudent person, to the best of their ability and skill, only in the interests of the beneficiaries, and in accordance with the terms of the trust, and no in a grossly negligent manner". He found that the DBS trustee breached its "high level supervisory duty" in approving (a) the further purchases of HK$83m worth of Australian dollars; (b) the increase in the credit facility; and (c) the purchase of three foreign currency products called "decumulators", which resulted in substantial losses to the trust.

Another DBS entity, which was a director of the asset holding company of the trust, owed fiduciary duties to the company. The Judge found that it had breached its duties in approving the increased credit facility and the purchase of the three decumulators, as well as the acts and omissions of its agent.

The Judge described the degree of negligence of both entities as "serious and flagrant".

There were exemption clauses in the relevant agreements which exempted the entities from liability for acts except wilful misconduct or gross negligence. As the Judge found that the negligent acts amounted to "gross negligence", the exemption clause could not exempt them from liability. Accordingly, the two DBS entities were held liable to pay equitable compensation, in an amount to be assessed.

Other claims against the bank and its employees

The plaintiffs also claimed against DBS and its private banking division and employees, for breach of fiduciary duty and knowing assistance of the above breach of trust.

The Judge held that DBS, its private banking division and its employees did not owe any statutory or common law duties of care to the plaintiffs. The banking relationship, which was exclusively governed by contract, was not "advisory" but "transaction execution" only. In line with DBS Bank (HK) Ltd. v Chang Tse Wen, the establishment of a fiduciary relationship in the commercial setting of a banker-customer relationship required "exceptional circumstances", which the Judge found not to exist in this case. Similarly, the Judge held that DBS's employees who dealt with the plaintiffs did not assume statutory or common law duties of care. Accordingly, the Court dismissed the claims against them.

The Judge also dismissed other claims including breach of fiduciary duties and knowing assistance in the breach of trust against DBS and its employees. He criticised this type of "carpet bombing" litigation, which involved raising multiple and serious allegations and resulted in complex, costly and prolonged litigation.

Analysis

This case confirms the approach in DBS Bank (HK) Ltd. v San-Hot HK Industrial Co. Ltd. [2013] 4 HKC 1 that the establishment of a fiduciary relationship in a bank-customer relationship requires exceptional circumstances. In normal commercial settings, the Court would not require the bank to subordinate its interests to those of its customers. Their relationship will be governed by express contractual documents.

The Court will give effect to properly drafted exemption clauses in favour of bank trustees and directors, in accordance with the proper law of the contract (in this case, Jersey law and Hong Kong law respectively). This in theory enables banks and its employees to benefit from the exemption, if the exemption clauses satisfy the requirements under the applicable law. However, this was not tested in this case, as the Court found that the entities were liable for "wilful misconduct" or "gross negligence", for which liability was not exempted under the relevant clauses.

Authors

Keady-Richard

Richard Keady

Partner
China and Hong Kong

Call me on: +852 2248 6000
Image of James Wong

James Wong

Associate
China and Hong Kong

Call me on: +852 2248 6000