Jurisdiction - Hong Kong
Hong Kong – Court Dismisses Investor’s Counterclaim Against Bank For Mis-Selling Of Financial Products.

1 June, 2015


Legal News & Analysis – Asia Pacific – Hong Kong – Banking & Finance


The Hong Kong Court of First Instance handed down its judgment in DBS Bank (Hong Kong) Limited v Sit Pan Jit(HCA 382/2009) on 2 April 2015. It is the most recent decision in a string of cases that have dealt with alleged mis-selling of financial products by banks and which have to date all been in favour of the banks.


In addition to defending the claim, Sit Pan Jit (Sit) made a counterclaim to an action by DBS Bank (Hong Kong) Limited (DBS) to recover monies owing by him. The court’s decision to wholly reject Sit’s defences and counterclaim and find in favour of DBS follows the recent trend of banks successfully defending claims for mis-selling and misrepresentation by their customers. The recent claims have all benefitted from the court’s clear willingness to uphold the principles of contractual estoppel and enforcing the terms of the written contract between the parties.


Whilst banks may take some comfort from this trend, they should be cautious and recognize that decisions like these are significantly reliant on the particular facts of the case. This article provides a more substantial overview of the background facts of the case, the key arguments presented by each side, a summary of the court’s deliberations and ultimate decision, and some key take away points for defendant banks.




Sit opened a private banking account with DBS in 2004. Their contractual relationship was governed by an Account Opening Form, which expressly incorporated all the terms of a Master Agreement, and a number of other documents (including facilities letters) signed by Sit (the Contract). Under this arrangement, DBS extended credit facilities to Sit which he used to purchase investment products including some equity-linked notes (ELNs). The ELNs were essentially structured investment products tied to certain equities and the final payout was based on the return of those underlying equities. 


As a result of adverse market conditions, there was a significant drop in the value of Sit’s investments, resulting in material depreciation of the securities held by DBS. Accordingly, DBS sought additional security from Sit to cover the margin shortfall or, alternatively, payment to reduce his indebtedness under the outstanding credit facilities. Sit failed to provide either and so DBS commenced proceedings to recover the outstanding amount. 


Sit defended DBS’ claim and counterclaimed for various declarations and damages largely on the basis that DBS had mis-sold the ELNs to him and, in doing so, had made misrepresentations and breached duties owed in tort and contract and its fiduciary duties. In summary, Sit’s principal arguments included that: 


  1. There was an oral contract between him and DBS for the provision of the investment services by DBS to him. In particular, there was an implied representation by DBS that it would comply with the Securities and Futures Ordinance (SFO), subsidiary legislation and all relevant codes and guidelines issued by the Securities and Futures Commission (SFC). 
  2. The oral contract was invalid and void for uncertainty and/or was unenforceable due to illegality as a result of breaches by DBS of the SFO and various SFC code provisions. 
  3. The terms of the banking documents relied on by DBS were not binding on him because they had not been incorporated into any contract between him and DBS or drawn to his attention. 
  4. DBS’ relationship manager, Kong Tak-lap Dicky (Kong) made reckless or negligent misrepresentations to induce Sit to sign the banking documents and to make investment decisions which turned out to be inappropriate and loss-making. 
  5. DBS, as salesperson and investment advisor, owed Sit various duties in contract and/or tort (both at common law and statutory), as well as fiduciary duties, and such duties were breached. 
  6. If the contractual relationship between DBS and Sit was governed by the terms and provisions of the banking documents and by the disclaimers in the trade confirmations for the ELNs that purported to exclude or restrict DBS’ liability to Sit, such terms or disclaimers were subject to the Control of Exemption Clauses Ordinance (Cap. 71) (CECO) and the Misrepresentation Ordinance (Cap. 284) (MO), and DBS could therefore not exclude liability for breach of obligations arising in contract, in tort or under statute since those terms did not satisfy the requirement of reasonableness. 


In response, DBS argued, amongst other things, that Sit had actually been regularly involved in equity and bond trading which involved a risk of losing principal; DBS was not Sit’s investment advisor as the agreement between them made clear that they were offering an “execution only” service and so no reliance could be placed on any investment information that was provided; and, in relation to Sit’s investments in the ELNs, the features of these products had been explained to him by Kong and it was for Sit to exercise his independent judgment in deciding whether to purchase a particular investment. 


The Court’s Findings 


The court found in favour of DBS, rejecting all the defences and dismissing the counterclaim brought by Sit. Judgment was granted in the sum of approximately USD 3.43m. 


The Key Issues 

The court focused on three broad issues after having decided that the agreement constituting the Contract between DBS and Sit was contained in, and governed entirely by, the banking documents which were signed by both parties and which included the usual “entire agreement” clause. The three broad issues were as follows: 


  1. Whether there was any misrepresentation by DBS, and if so, what was the effect? 
  2. Whether DBS owed Sit duties in tort and contract or fiduciary duties and, if so, were there any breaches of these duties? 
  3. Whether the terms or disclaimers in the banking documents, which formed the Contract, were subject to the Control of Exemption Clauses Ordinance (CECO) and the Misrepresentation Ordinance (MO), and DBS could therefore not exclude liability for breach of obligations arising in contract, tort or under statute? 


Alleged Misrepresentations And Estoppel 


The factual evidence of Sit’s extensive and successful commercial background, his pattern of taking and understanding the implications of high-risk investments (particularly ELNs which he had invested in before) and his lack of credibility and reliability as a witness were key to the court’s finding that no misrepresentations were made by Kong to induce Sit to purchase the ELNs. 


Even if Kong had made the aforementioned representations, the court held that Sit was contractually estopped from claiming that he was so induced because the express terms of the Contract confirmed that DBS had agreed to provide an “execution only” service to Sit. Accordingly, Sit should have made his own investment considerations rather than relying on any representations made by Kong. The court considered that section 108 of the SFO, which imposes civil liability for fraudulent misrepresentations that induce a person to invest in certain products, does not preclude the operation of contractual estoppel. 


In its findings, the court also reaffirmed that “the ultimate rationale for contractual estoppel is freedom of contract” and therefore where a particular state of affairs has been agreed between parties, they will be estopped from denying that state of affairs. In dealing with Sit’s assertion that his relative unequal bargaining position against DBS meant that DBS could not rely on estoppel to protect the terms of the Contract, the court concluded that the application of contractual estoppel will not be determined by consideration of the equal or unequal bargaining power of the parties but rather what those parties were aware of and what they contractually agreed. 


Alleged Breach Of Duties By DBS 


Sit argued that DBS was also in breach of various tortious, contractual, fiduciary and professional duties owed to him on the basis that, as his investment advisor, DBS had failed to provide adequate and responsible advice by recommending he invest in the ELNs. The court held that the Contract provided that DBS did not act as Sit’s advisor and that Sit had practical and contractual control and knowledge over his investments. Therefore DBS did not assume responsibility for the duties alleged (including any fiduciary duties). Similarly, the court was unwilling to imply any terms imposing duties on DBS that would be contrary to the Contract’s express “execution only” and “no recourse” terms. 


Sit argued that, by not drawing his attention to certain contractual clauses, such as the provision that DBS agreed to provide an “execution only” service, DBS had breached the well-known legal principle that onerous or unusual conditions that the counterparty is seeking to incorporate into a contract must fairly and reasonably be brought to the attention of the other party (the Interfoto principle). The court confirmed the findings of the Court of First Instance in the 2013 decision in DBS Bank (Hong Kong) Limited v San-Hot HK Industrial Company Limited and Hao Ting [2013] HKEC 352, and held that the Interfoto principle does not apply to signed contracts so Sit’s argument could not succeed. 


Exemption Of Liability Clauses 


Sit argued that the “no execution” and “recourse only” terms of the Contract amounted to exemption of liability clauses caught by sections 7 and 8 of CECO and section 4 of MO, which prevented DBS from relying on them, to the extent they were unreasonable, to avoid liability. 


On this point, the court considered that these clauses unambiguously operated only to define the scope of services to be provided by DBS which was accepted by Sit upon his execution of the Contract. A clause can only be categorised as an exemption or exclusion clause if it has the effect of limiting liability for obligations that have been expressly promised or offered. The contrary was the case here. Under the Contract, DBS expressly undertook to provide “execution only” services to Sit such that DBS would not provide investment advice and would need to exercise his own independent judgment and assessment of risk and so DBS could not be held liable for reliance on any information it provided. These terms were considered not to be true “exemption of liability” clauses even though they adopted language such as “DBS assumes no responsibility” or “DBS shall have no liability”. 


The court went further to conclude that, even if it was incorrect in its characterisation of the terms in question, these terms nonetheless passed the statutory test for reasonableness in section 3 of CECO on the basis that DBS and Mr Sit were not of unequal bargaining power and the terms were commonly used in the trade. 




The outcome of this case will be welcome news to private banks, as it continues the recent trend of banks successfully defending claims for mis-selling and misrepresentation by their customers. The series of these recent claims have all benefitted from the court’s willingness to uphold the principles of contractual estoppel and enforcing the terms of the written contract between the parties. However, the degree of comfort that banks can take from this decision may be limited given that the case turned upon its specific facts. 


With this in mind, there are prudent steps that can be taken to help banks protect themselves from customer claims in circumstances where investments go wrong: 


  • Banks should ensure that all the terms of their arrangements with clients are captured clearly within written documents countersigned by the customer. These documents should also include an “entire agreement” clause which unambiguously provides that the full contractual terms of the arrangement are contained in those documents, so as to prevent pre-contractual representations or discussions from forming part of the arrangement. 
  • Terms included in contracts which relate to the “execution only” and “no recourse” nature of the service to be provided by the bank should not seek to limit the liability of the bank for obligations expressly promised. Even if “no liability” language is used in these clauses, they will not be considered to be true exemption clauses for the purposes of CECO and MO if they merely define the scope of the bank’s services. 
  • Where contractual terms relating to the banks “execution only” service deviate from what may be considered market standard, they should be brought to customers’ attention as otherwise the bank may not be able to rely on them to deny liability for the provision of advice. 


Banks should also be aware of the SFC’s proposed amendments to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission relating to client agreement requirements. As part of this suite of amendments, the SFC has proposed including a requirement for banks to insert a clause in all client agreements which would compel them to consider the “suitability” of any investments recommended to clients in light of their financial situation, investment experience and investment objectives. This clause, and its effect in factual circumstances such as those in this case, could drastically reduce the scope of protection afforded to banks by “execution only” clauses where investment advice or recommendations are actually given. Whilst still at the consultation stage, banks should nonetheless consider the impact of this requirement on their internal policies, documentation and practices, particularly in the course of providing “execution only” services.


herbert smith Freehills


For further information, please contact:


Gareth Thomas, Partner, Herbert Smith Freehills

[email protected]


Dominic Geiser, Partner, Herbert Smith Freehills

[email protected]


Richard Norridge, Partner, Herbert Smith Freehills

[email protected]


William Hallat, Herbert Smith Freehills

[email protected]


Herbert Smith Freehills Banking & Finance Practice Profile in Hong Kong


Homegrown Banking & Finance Law Firms in Hong Kong 

Comments are closed.