Pa Sam Nang and Others v. The Hongkong and Shanghai Banking Corporation Ltd

HCA 1020/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1020 of 2015

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D E C I S I O N

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A. Introduction

1.The plaintiffs commenced this action on 8 May 2015.  They held accounts either individually or jointly with the defendant, the Hong Kong and Shanghai Banking Corporation Ltd (“HSBC”).  They claim that HSBC has since on or about 27 March 2015 wrongfully frozen the accounts specified in the schedule to the amended indorsement of claim (“the Accounts”), and thereby wrongfully prevented them from accessing and operating the Accounts and withdrawing or otherwise dealing with the balance therein.

2.On 12 and 22 May 2015, the 3^rd plaintiff, Mr Fung Ka Chun Ronald (“R Fung”) and the 4^th plaintiff, Ms Lee Yerk Fun (“Lee”) closed their accounts with HSBC; and HSBC repaid the monies deposited in their accounts to them. However, the accounts of the 1^st plaintiff, Mr Pa Sam Nang (“Pa”), and those of the 2^nd plaintiff, Ms Fung Yuen Kwan Veronica (“V Fung”) remain frozen by HSBC up to date.

3.This is the plaintiffs’ application for summary judgment.

B. HSBC’s application to adduce new evidence

4.By an order dated 19 June 2015, Master J Wong ordered, inter alia, that no further evidence be filed without leave of the court save that the plaintiffs were given leave to file affirmations within 28 days of the order.  By a summons dated 4 February 2016, HSBC applied to adduce the affirmation of Mr Wu Wing Chuen (“Wu”), the Head of Financial Crime Compliance, Hong Kong of HSBC, sworn on 4 February 2016.

5.At the hearing, after hearing Mr Man for the plaintiffs and Ms Ismail for HSBC, I allowed HSBC’s application.  These are my brief reasons.  Both parties had referred me to the relevant legal principles.  I had borne those principles in mind, which I need not repeat here.  In short, pursuant to Order 32, rule 11A(4) of the Rules of the High Court (“the RHC”), HSBC must show that there are exceptional circumstances making it desirable that further evidence should be adduced.  I had decided to exercise my discretion in favour of HSBC on the following grounds:

(a) The main purpose of Wu’s affirmation is to provide the court with updated information concerning the investigations conducted by HSBC in respect of the accounts of Pa and V Fung, including the fact that such investigations are still ongoing.  As I shall explain below, the new evidence is relevant to the Order 14 application. Bearing in mind the nature and purpose of such evidence, it is understandable, and indeed desirable, that it should be adduced at a time reasonably close to the hearing.

(b) The plaintiffs must, of course, be given a reasonable chance to consider whether, and if so how, to respond to such new evidence.  In this case, the summons to adduce new evidence was taken out on 4 February 2016, which was three weeks before this hearing.  In a letter dated 5 February 2016, HSBC indicated that it would not oppose the plaintiffs’ filing further evidence in reply should they be minded to do so.  There was no reply to this letter.  Mr Man confirmed that the plaintiffs did not need to file any evidence in reply, and would not seek an adjournment.  The only prejudice that he complained of was that HSBC’s application had disrupted the plaintiffs’ preparation for this hearing.  Such disruption has not, apparently, resulted in any material adverse impact on the plaintiffs’ presentation of submissions at this hearing.

6.As to costs, I shall order that the costs of HSBC’s application be in the cause of the Order 14 application.  I shall now turn to the Order 14 application.

C.  The plaintiffs’ claim and Order 14 application

7.The following facts as pleaded in the statement of claim and supported by contemporaneous documents are not in dispute:

(a) The plaintiffs were customers of HSBC, and held the Accounts with HSBC.

(b) By a letter dated 27 March 2015, Pa, through his former solicitors, demanded HSBC to release the monies in the accounts under his name which had been unilaterally frozen.  In that letter, the solicitors requested HSBC to release all frozen accounts belonging to different persons, including Pa, under an injunction order which had been discharged.

(c) By a letter dated 2 May 2015, Pa’s former solicitors stated that some of the accounts held in the name of Pa and his family members had remained frozen.  They raised strong objections and demanded HSBC to disclose the basis for freezing those accounts.

(d) On or about 4 May 2015, V Fung was unable to access or make withdrawals in respect of some of the accounts held in her name.  On the same day, Pa’s former solicitors stated that they had not received any reply to their previous letters, and that some of the accounts held by Pa and his family members had remained frozen.  They claimed that, if their clients were still unable to operate those accounts after 6 May 2015, they would take appropriate actions.

(e) By a letter dated 6 May 2015, the plaintiffs, through their present solicitors, demanded HSBC to explain why their accounts had been frozen.  They stated that if they did not receive any valid reason or the account holders were still unable to operate those accounts on or before 1 pm on 7 May 2015, they had instructions to commence legal proceedings.

(f) By a letter dated 7 May 2015, the plaintiffs, through their present solicitors, identified more accounts which had been frozen.  They stated their belief that the freezing of the accounts was without basis and HSBC had infringed the rights of the plaintiffs.  They stated that if they did not receive any valid reason or the account holders were still unable to operate those accounts on or before 1 pm on 8 May 2015, they had instructions to commence legal proceedings.  A draft writ of summons was attached to this letter.

(g) By a letter dated 7 May 2015, in reply to the plaintiffs’ solicitors’ letter dated 6 May 2015, HSBC stated that the matter was under investigation, and that it would reply by 13 May 2015 (though occasionally investigations would take longer).

(h) On 8 May 2015, the plaintiffs issued and served the writ of summons herein.

(i) By a letter dated 11 May 2015, in reply to Pa’s former solicitors’ letter dated 4 May 2015, HSBC stated that it was unable to act on the instruction because the account number and authorization of Pa were not enclosed.

(j) By a letter dated 14 May 2015, referring to the two letters issued by HSBC mentioned above, the plaintiffs’ present solicitors put on record that they had not received any response despite HSBC’s indication that a reply would be provided by 13 May 2015.  They repeated that the demand of the plaintiffs was that the relevant accounts be released to the account holders so that they may have access to and operate those accounts.  They stated that they were deeply unsatisfied by HSBC (being the largest bank in Hong Kong)’s inexcusable acts for freezing the accounts without reason or justification.  They stated further that, if they did not receive any valid reason or the account holders were still unable to operate those accounts on or before noon on 16 May 2015, they had instructions to commence legal proceedings.

(k) As mentioned, on 12 and 22 May 2015, R Fung and Lee closed their accounts with HSBC, and HSBC repaid the monies deposited in their accounts to them.

(l) On 21 May 2015, HSBC, through their solicitors, acknowledged service of the writ herein.

(m) On 4 June 2015, the plaintiffs amended the general indorsement of claim (in respect of the particulars of the Accounts), and filed their statement of claim.  On the same day, they took out an Order 14 summons.

8.Hence, the plaintiffs’ claim is simple and straightforward: HSBC has wrongfully frozen the Accounts without providing any reason.

9.Mr Fong Ho Man Raymond (“Fong”), a Senior Sanctions Manager at HSBC, made an affirmation on 17 June 2015 to oppose the Order 14 application.  HSBC’s defence is summarised in §13 of Fong’s affirmation as follows:

“In blocking the Plaintiffs’ accounts, the Defendant has exercised its contractual right to carry out Financial Crime Risk Management Activity, a right which exists in order to enable the Defendant to comply with its legal and regulatory obligations to combat financial crime. Furthermore, both the General Terms and the Integrated Account Terms make clear that, to the extent permitted by law, the exercise of such right by the Defendant shall not give rise to any liability to the Plaintiffs.”

10.What I need to consider is whether HSBC has a “real or bona fide defence”, or that there are triable issues in the light of the said defence raised by HSBC.  The general principles on Order 14 applications are well established, and need not be repeated here.

D.  The contract

11.The relationship between the plaintiffs and HSBC is one of creditors and debtor arising out of a contract.  It is essential to identify, construe and apply the relevant terms in the contract.

12.HSBC relies on the current versions of its General Terms and Conditions (For Personal Sole Account, Joint Account and Business Account Holders) (“the General Terms”) and Integrated Account Terms and Conditions (“the Integrated Account Terms”).  It is not in dispute that they have been governing the relationship between HSBC and the plaintiffs since 15 October 2014.  For the present purpose, the relevant terms in both sets of document are virtually identical.  Hence, suffice for me to refer to the General Terms.  I shall focus on the terms which are related to HSBC’s power to freeze a customer’s account.

13.To begin with, clause 1.1 provides that:

“The relationship between the Bank and the account holder is basically that of debtor and creditor. …”

14.Clause 1.30b(vii) provides that:

“Where

…

· the Bank has, or a member of the HSBC Group has, suspicions regarding Financial Crime or an associated risk,

the Bank may:

(1) be unable to provide new, or continue to provide all or part of the Services to the account holder and reserve the right to terminate its relationship with the account holder;

(2) take actions necessary for the Bank or a member of the HSBC Group to meet the Compliance Obligations; and

(3) block, transfer or close the account holder’s account(s) where permitted under local Laws.”

15.Clause 1.30c(ii) provides that:

“The Bank and HSBC Group’s Financial Crime Risk Management Activity may lead to the delay, blocking or refusing the making or clearing of any payment, the processing of the account holder’s instructionsor application for Services or the provision of all or part of the Services. To the extent permissible by law, neither the Bank or any member of the HSBC Group shall be liable to the account holder or any third party in respect of any loss (howsoever it arose) that was suffered or incurred by the account holder or a third party, caused in whole or in part in connection with the undertaking of Financial Crime Risk Management Activity.”

16.Mr Chan for the plaintiffs submitted that there is a distinction between blocking an account under clause 1.30b(vii) and blocking a payment under clause 1.30c(ii), in particular, the former can be done only “where permitted under local Laws”.  At the hearing, there was a debate on the meaning of the phrase “under local Laws”.  Ms Ismail for HSBC submitted that this would include the contract law of Hong Kong.  Mr Chan submitted that such construction would render this phrase otiose.  It is, however, unnecessary for me to resolve this issue for this reason.  Clause 1.30c(ii) gives HSBC the power to delay or refuse the processing of an account holder’s instructions.  Mr Chan accepted that it is wide enough to cover the power not to process an account holder’s instruction to release the funds in his or her account in the meantime.  What is really in issue is whether HSBC could and can exercise such contractual power in this particular case.

17.It is necessary to consider how various key terms and phrases used in clause 1.30c(ii) are defined in the General Terms.  The most important phrase must be “Financial Crime Risk Management Activity” (“FCRMA”).

18.FCRMA is defined in clause 1.30a to mean:

“… any action to meet Compliance Obligations relating to or in connection with the detection, investigation and prevention of Financial Crime that the Bank or members of the HSBC Group may take.”

19.It should be noted that FCRMA is not confined to any action that HSBC may take; it also covers any action that members of the HSBC Group may take.  “HSBC Group” (or “member of the HSBC Group”) is defined in clause 1.30a to mean:

“… HSBC Holdings plc, its affiliates, subsidiaries, associated entities and any of their branches and offices (together or individually) …”

20.The scope of FCRMA is further defined in clause 1.30c(i) as follows:

“Financial Crime Risk Management Activity may include: (1) screening, intercepting and investigating any instruction, communication, drawdown request, application for Services, or any payment sent to or by the account holder, or on the account holder’s behalf; (2) investigating the source of or intended recipient of funds; (3) combining Account Holder Information with other related information in the possession of the HSBC Group; and (4) making further enquiries as to the status of a person or entity, whether they are subject to a sanctions regime, or confirming the identity and status of the account holder or a Connected Person.”

The word “include” indicates that this clause is not intended to be an exhaustive definition of the scope of FCRMA.

21.Returning to the meaning of FCRMA, it refers to “Compliance Obligations” and “Financial Crime”.  What do they mean?

22.The term “Compliance Obligations” is defined under clause 1.30a to mean:

“… obligations of the HSBC Group to comply with (i) any Laws or international guidance and internal policies or procedures, (ii) any demand from Authorities or reporting, disclosure or other obligations under Laws, and (iii) Laws requiring the HSBC Group to verify the identity of its customers.”

23.Pausing here, the scope of the “Compliance Obligations” is couched in very wide terms:

(a) It covers the obligations of not only HSBC, but also those of the HSBC Group.

(b) It covers not only Laws, but also “international guidance and internal policies and procedures”.  “Laws” is in turn defined to include:

“… any local or foreign law, regulation, judgment or court order, voluntary code, sanctions regime, agreement between any member of the HSBC Group and an Authority, or agreement or treaty between Authorities and applicable to the Bank or a member of the HSBC Group.”

(c) It also extends to “demand from Authorities”.  “Authorities” is defined to include:

“… any local or foreign judicial, administrative, public or regulatory body, any government, any Tax Authority, securities or futures exchange, court, central bank or law enforcement body, self‑regulatory or industry bodies or associations of financial service providers or any of their agents with jurisdiction over any part of the HSBC Group.”

24.On the other hand, the term “Financial Crime” is defined under clause 1.30a to mean:

“… money laundering, terrorist financing, bribery, corruption, tax evasion, fraud, evasion of economic or trade sanctions, or any acts or attempts to circumvent or violate any Laws relating to these matters.”

25.It is noteworthy that clause 1.30e(i) provides that:

“In the event of any conflict or inconsistency between any of the provisions of this Clause 1.30 and those in or governing any other service, product, business relationship, account or agreement between the account holder and the Bank, this Clause 1.30 shall prevail.”

E. Whether the plaintiffs have an arguable cause of action

26.Ms Ismail submitted that the plaintiffs do not even have an arguable cause of action because, as at the date of the writ, HSBC had lawfully exercised its contractual right to freeze their accounts pursuant to the said contractual provisions.

27.Mr Chan reminded me of what the words “cause of action” mean; they “comprise every fact (though not every piece of evidence) which it would be necessary for the plaintiff to prove, if traversed, to support his right to the judgment of the court” (Hong Kong Civil Procedure 2016, vol 1, §15/1/2 at p 301).  He accepted that the plaintiffs must plead a cause of action that existed as at the date of the writ, ie 8 May 2015 (see Wong Siu Co Ltd v Goldquest International Ltd [2003] 2 HKC 64 at 70H–71D, §§17–19).

28.I do not agree with Ms Ismail’s submissions on this point:

(a) The relationship between the plaintiffs and HSBC is that of creditors and debtor.  Their instructions given to HSBC to release the funds in the Accounts as pleaded in the statement of claim are, in effect, demands made by creditors against the debtor for repayment of the debts.  Prima facie, HSBC has a contractual duty to follow the instructions of the plaintiffs, and to repay the debts owed to them. When HSBC refused to follow such instructions, and at the same time, failed to provide any explanation or justification for its refusal (as pleaded in §8 of the statement of claim), the plaintiffs were entitled to make a claim against HSBC.  Ms Ismail has not gone as far as suggesting that the statement of claim does not disclose a reasonable cause of action.

(b) Of course, it does not follow that the plaintiffs’ claim will necessarily succeed.  It is for HSBC to put up a defence to explain and justify why it was entitled not to follow the plaintiffs’ instructions.  Whether the plaintiffs’ claim will succeed must depend on whether the defence raised by HSBC can be established.  I take the view that the burden is on HSBC to explain and justify why it had the contractual power to freeze the Accounts.  When Ms Ismail submitted that the plaintiffs did not even have an arguable cause of action, I believe she was trying to impress upon me that it is clear that HSBC had the contractual power to freeze the Accounts as at 8 May 2015.

29.While I can understand why Ms Ismail ran such argument from a forensic point of view, I am afraid that she had put HSBC’s case too high.  In any event, for the present purpose, HSBC only needs to show an arguable defence, or a triable issue.

F. Relevance of events after 8 May 2015

30.In making the above‑mentioned submissions, Ms Ismail submitted that I should focus on the state of affairs as at 8 May 2015.  As stated above, it is not in dispute that the plaintiffs must plead a cause of action which existed as at 8 May 2015.  However, it does not follow that, in considering whether HSBC has shown any arguable defence, the court should ignore what happened after 8 May 2015.

31.Depending on the nature of the defence in a particular case, a defence which is valid as at the date of the writ may cease to be so subsequently. For example, in this case, assuming that HSBC had the right to freeze the plaintiffs’ accounts on 8 May 2015, but if subsequently it ceased all FCRMA but still refused to release the funds in issue without any valid reason, I will be very surprised if the court should nevertheless dismiss the plaintiffs’ claim on the ground that HSBC had a valid defence on the date of the writ, and require the plaintiffs to start another legal action to demand for release of the funds in the Accounts.  This will not make sense.

32.Indeed, one of the main purposes of Wu’s affirmation is to inform the court that the investigations are still ongoing; and hence, HSBC still has the contractual power to freeze the Accounts up to date.  I take the view that in considering whether I should give summary judgment, I am entitled to, and should, take into account the development up to date.

G.  The real questions

33.As I indicated at the hearing, in my view, in considering whether HSBC had and has the right to freeze the Accounts, it is necessary to consider the matter in two stages:

(a) First, one must consider whether, in the first place, there was sufficient basis for HSBC to invoke the contractual power to carry out FCRMA in respect of the plaintiffs’ account, and, hence, to freeze the Accounts in the meantime?

(b) Second, if so, for how long HSBC was and is entitled to freeze the Accounts on such ground?

34.I shall consider these two questions one by one.

H.  Sufficient basis for HSBC to invoke the contractual power in the first place

35.HSBC’s case (as supported by the evidence of Fong and Wu) is that:

(a) Its FCRMA as defined in the General Terms and the Integrated Account Terms is carried out with reference, inter alia, to the list of Specially Designated Nationals (“the SDN List”) promulgated by the US Department of Treasury’s Office of Foreign Assets Control (“OFAC”).

(b) On 17 April 2014, Pa was designated by the OFAC and added to the SDN List for “undermining democratic processes and institutions in Zimbabwe, facilitating public corruption by Zimbabwean senior officials through illicit diamond deals, and providing financial and logistical support to the Government of Zimbabwe and SDNs”.

(c) In March 2015, HSBC began to carry out FCRMA after it became aware that Pa had been added to the SDN List by OFAC.  As a result, between 28 April and 4 June 2015, HSBC blocked the plaintiffs’ accounts.  V Fung is believed to be Pa’s wife whereas R Fung and Lee are the parents of V Fung.

36.Pa denied in his affirmation filed on 6 August 2015 the allegations made against him, and claimed that he had never taken part in any of the conduct alleged by the US Department of Treasury.  He stated that he has no knowledge of the SDN List and does not know why he has been designated by the OFAC and added to the SDN List.  It is for not the Hong Kong court, let alone by me summarily, to determine whether it is right or wrong for the US authority to designate him as such and add him to the SDN List under the US law.

37.The simple and undeniable fact is that Pa has been so designed, and added to the SDN List.  At the hearing, Mr Chan accepted that such fact provided a sufficient basis to empower HSBC to invoke the contractual power to carry out FCRMA in respect of the plaintiffs’ accounts.  In other words, the plaintiffs accept that the pre‑condition for invoking HSBC’s power to freeze the Accounts under the two‑stage approach I mentioned above has been satisfied.

I. Investigations done by HSBC so far

38.Fong stated in his affirmation made on 17 June 2015 that:

(a) The FCRMA conducted by HSBC in this case is “to conduct a comprehensive review of its relationship and dealings with [Pa] and his Connected Persons, which would in turn permit it to assess its legal and regulatory obligations (whether under Hong Kong law or otherwise) arising from [Pa]’s designation by OFAC”.  (§12)

(b) HSBC possesses a reasonable belief that Pa’s property may be contained (or have been contained) in the accounts of the other plaintiffs, and its review has therefore been extended to include such accounts.

(c) While HSBC had already unblocked the accounts of R Fung and Lee, and their accounts had been closed and the balances had been repaid to them, HSBC’s FCRMA in respect of the accounts of Pa and V Fung remained ongoing as at 17 June 2015.

39.Wu stated in his affirmation made on 4 February 2016 that:

(a) In the course of its investigations, HSBC has discovered that the network of companies with which Pa and V Fung are associated is a highly complex one: over 30 separate entities have been identified in the so‑called Queensway Group, in various jurisdictions across Africa, Latin America, Southeast Asia and the United States.  While there is information suggesting that Pa is the boss of the Queensway Group, neither his name nor any of his known alias appears on any corporate filings for the entities within the Queensway Group.

(b) Among these companies, the most prominent example is a company called China Sonangol International Holding Ltd (“CSIHL”). CSIHL is partially owned by Angola’s state‑owned energy firm, Sonangol.  It is understood to be a key pillar of Angola’s government, which is a key African oil supplier to the PRC.  Both CSIHL and Pa have recently been implicated in a corruption investigation being carried out by the PRC authorities.  It has been reported that CSIHL was previously 70% beneficially owned indirectly by close associates of Pa, who in 2012 transferred their interests to a BVI company called Magic Wonder Holding Ltd, the beneficial ownership thereof is opaque.  On the other hand, V Fung is known to be a director of CSIHL and an active partner in its business.  HSBC continues to investigate the beneficial ownership of CSIHL to determine the nature and extent of Pa and V Fung’s association with and interest in CSIHL.

(c) The complexity of Pa’s network and his apparent efforts to conceal his involvement by not listing his name on any public filings (resulting in a lack of transparency) mean that the examination of the accounts held by HSBC and its related entities globally which Pa may control is a substantial and extensive process.  The opacity of such corporate structures alone would warrant further investigation by HSBC in light of its attendant risk of Financial Crime.

(d) When one considers the apparently questionable nature of some of the transactions in which CSIHL and the Queensway Group are involved, the fact that Pa had been included in the SDN List by OFAC and that Pa is apparently the subject of a corruption investigation carried out by the PRC authorities, such a combination of factors must give rise to significant concerns on the part of HSBC which warrant thorough and detailed investigation.

(e) The progress of the FCRMA has also been affected by media reports of Pa’s alleged involvement in public corruption in various countries which emerged since the commencement of this action.  These countries include Zimbabwe, North Korea and PRC.  Most importantly, on 8 October 2015, Pa was arrested in Beijing and reportedly detained by the PRC authorities in connection with an ongoing corruption investigation into the former chairman of Sinopec and Sinopec’s ties with CSIHL.  Such information served only to increase HSBC’s concerns in respect of its legal and regulatory obligations to combat financial crime.

(f) It is therefore HSBC’s case that:

“… its [FCRMA] must continue until HSBC is able to make an informed determination of its own position and that of the HSBC Group more generally.” (§17)

“It is clear … that, given the nature of the 1^st and 2^nd Plaintiffs’ business and global footprint of the HSBC Group, HSBC will need to investigate not only its own position as a matter of Hong Kong law but also the obligations of its affiliated entities under — as a minimum — the laws of the United States. I am advised that individuals on the SDN List are subject to asset freezes and that US persons (both natural and legal) are generally prohibited from transacting with such individuals, meaning that any such person within the HSBC Group face potential criminal liability if they transact with the 1^st Plaintiff (or any entity owned or controlled by him) or facilitate such transactions.” (§20)

(g) In conclusion:

“… HSBC’s [FCRMA] is still ongoing. In accordance with the General Terms and the Integrated Account Terms, such activity will continue until HSBC has completed an examination of all the bank accounts connected to the 1^st Plaintiff and can be confident that its relationship with the 1^st and 2^nd Plaintiffs do not conflict with any of its legal and regulatory obligations. In the meantime, instructions of the 1^st and 2^nd Plaintiffs cannot be processed until the investigation is completed.” (§21)

J.   Legal limits on HSBC’s contractual power to freeze the accounts

40.It is clear that HSBC will continue to freeze the accounts of Pa and V Fung, and will not entertain their instructions to release the funds in those accounts in the meantime.  As Wu stated in §9 of his affirmation, the Accounts are frozen “pending completion of the [FCRMA]”.  According to the evidence of HSBC, the FCRMA in respect of the accounts of Pa and V Fung is still ongoing.  There is no indication as to when it will be completed.  The crucial and natural question must be for how long may such FCRMA continue as a matter of law?

41.Mr Chan submitted that HSBC has no right to freeze the Accounts “for an indefinite period to enable it to consider what its legal or regulatory obligations are” (plaintiffs’ skeleton submissions, §24).  He said that it would be startling if a bank were entitled to freeze its customer’s accounts indefinitely just to enable it to decide what to do; such an unbridled right for HSBC to take its time would run coach and horses through the debtor‑creditor relationship between bank and customer; it would wreak intolerable havoc to the financial system in Hong Kong; HSBC is, after all, a bank not a law enforcement agency, it cannot have untrammeled power to refuse to pay an undisputed debt indefinitely on the basis that it is considering its options (plaintiffs’ skeleton submissions, §25).

42.Ms Ismail submitted that HSBC had not suggested that “it can take as long as it likes to carry on an investigation while freezing the Accounts but the Accounts might potentially be frozen for an indefinite period if it is established that the funds are indeed illicit or proceeds of crime” (defendant’s skeleton submissions, §18).

43.The question is, in the absence of any express term in the contract between the plaintiffs and HSBC setting a time limit within which HSBC must complete its FCRMA, does it mean that, in law, HSBC can take as long as it wishes?  If not, how and by what criteria can and should the court judge whether HSBC has taken “too long” so that it can no longer justify freezing the accounts of Pa and V Fung on the ground of carrying out FCRMA?

44.Ms Ismail accepted that HSBC’s exercise of contractual discretionary power must not be unreasonable, in a sense analogous to Wednesbury unreasonableness, citing in support the English House of Lords’ judgment in Braganza v BP Shipping Ltd [2015] 1 WLR 1661 at §§17–30 (defendant’s skeleton submissions, §18).  Mr Chan did not dispute with the principles but submitted that they are irrelevant because that authority was concerned with the proper approach of a contractual fact‑finder who was considering whether a person may have committed suicide.  He submitted that HSBC was and is not engaged in any fact‑finding exercise.

45.Mr Chan might have construed that judgment too narrowly.  In my view, the judgment stands for and reaffirms the following principles concerning the exercise of contractual discretion:

(a) Contractual terms in which one party to the contract is given the power to exercise a discretion, or to form an opinion as to relevant facts, are extremely common.  It is not for the courts to rewrite the parties’ bargain for them, still less to substitute themselves for the contractually agreed decision‑maker.

(b) However, the courts have sought to ensure that such contractual powers are not abused.  They have done so by implying a term as to the manner in which such powers may be exercised, a term which may vary according to the terms of the contract and the context in which the decision-making power is given.

(c) Generally speaking, a contractual decision‑maker’s discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality.

(d) It is vital to note the difference between “irrationality” or “Wednesbury unreasonableness” (a well‑established concept used in administrative law) on the one hand, and “unreasonableness” in the ordinary sense on the other hand.  “Reasonableness” (or “unreasonableness”) in the ordinary sense are concepts often used in private law: for instance, in some situations, the court may imply a term requiring a contractual obligation to be discharged within a reasonable time.  In this sense, the concept of “reasonableness” is entirely mutual and guided by objective criteria.

(e) Pursuant to the “irrationality” test, the decision remains that of the decision‑maker, but pursuant to the ordinary “reasonableness” test, the decision‑maker becomes the court itself.

(f)  The “irrationality” test under the public law requires the court to consider both the decision‑making process and the outcome. However, one must note that concentrating on the outcome runs the risk that the court will substitute its own decision for that of the primary decision‑maker.

(g) Nevertheless, whatever term may be implied will depend on the terms and the context of the particular contract involved.  The precise extent to which an implied contractual term may differ from the principles applicable to judicial review of administrative action may not be capable of a precise answer given that the question may arise in so many different contractual contexts.

46.Bearing in mind that this is an Order 14 application, it is unnecessary and inappropriate for me to define precisely the implied contractual term which restricts HSBC’s exercise of contractual power in the present context.  Having said that, applying the above general principles, I am inclined to the view that HSBC must not exercise its contractual power to carry out FCRMA and to freeze the Accounts pending the completion of such FCRMA “irrationally” as correctly conceded by Ms Ismail.

K.  Whether arguable that HSBC is entitled to freeze the accounts up to date

47.The burden is on HSBC to put forward a “real or bona fide” defence.  Having regard to my view on the legal restrictions on HSBC’s contractual power in the present context, HSBC needs to show that it is arguable that HSBC’s decision to exercise its contractual power to carry out FCRMA and to freeze the accounts of Pa and V Fung up to date pending the completion of such FRRMA is a rational one.  Put it another way, I will give summary judgment if I come to the conclusion that this is a clear case that HSBC’s said decision is irrational so that no triable issue in this respect arises, and any suggestion otherwise is not even arguable.

48.Here comes Mr Chan’s main point: he submitted that HSBC has failed to condescend upon particulars in explaining what Compliance Obligations it must potentially meet which justifies the indefinite freezing of the Accounts.  He submitted that there is no clear indication as to what specific laws (Hong Kong or otherwise) and legal provisions HSBC must have to comply with, which arise from Pa’s designation on the SDN List and which require the freezing of the Accounts; and that the ambiguous reference to the Anti‑Money Laundering and Counter‑Terrorist Financing (Financial Institutions) Ordinance and the Organized and Serious Crimes Ordinance in §9 of Fong’s affirmation clearly does not meet the required threshold of condescending to particulars, as it does not identify why the freezing of the Accounts is necessary to meet the obligation “to carry out effective monitoring of [HSBC’s] customers”. He stressed that the burden is on HSBC to properly identify the relevant statutory provision(s) which it says it is presently assessing, which HSBC has hopelessly failed.  In his oral submissions, Mr Chan stressed that, in the absence of such particulars which go to the question of “to do what”, one cannot begin to consider “for how long” the Accounts may be lawfully frozen by HSBC.

49.In response, Ms Ismail submitted that:

(a) HSBC is not in a position to disclose the details of the investigations because it is subject to various confidentiality requirements imposed by the laws, regulations or practices of different countries or the international community.

(b) Under the contract between the plaintiffs and HSBC, the plaintiffs do not have any right to demand HSBC to explain why it has decided to freeze the Accounts.

(c) It will be sufficient for HSBC to plead in the defence that it has frozen the Accounts pursuant to its contractual power.  And if the plaintiffs take the view that HSBC did not and does not have the contractual power to do so, or has abused such power, on whatever grounds, it will be for the plaintiffs to plead such allegation in their reply.  And if and only if the plaintiffs raise such allegation, and depending on the nature of the allegation, will HSBC be obliged to provide the relevant particulars concerning the Compliance Obligations.

50.Ms Ismail’s said submissions do not appear to provide adequate answers to Mr Chan’s submissions:

(a) As to the first point made by Ms Ismail, Mr Chan replied that the plaintiffs are not seeking the details of the investigations at all; they are merely asking for particulars of the Compliance Obligations which are engaged in this case.  Further, Ms Ismail accepted that there is no evidence that, in this case, HSBC is forbidden by any confidentially requirement imposed any laws, regulations or practices to provide such particulars.

(b) As to the second point made by Ms Ismail, it is correct that the contract between the parties does not impose any express obligation on HSBC to explain to the plaintiffs why the Accounts have been frozen.  However, Mr Chan’s submissions are concerned with a defendant’s duty to condescend upon particular in an Order 14 application.

(c) As to the third point made by Ms Ismail, Mr Chan submitted that the particulars of Compliance Obligations engaged in this case are material facts that HSBC must plead in its defence if it intends to justify its freezing of the Accounts pursuant to its contractual power.  It is not for me to determine the requirements on pleadings in this respect.  As I just said, what I need to consider is whether HSBC has met the requirement that a defendant shall condescend upon particulars in an Order 14 application.

51.However, this is not the end of the matter.  While it is trite that a defendant in summary judgment proceedings is obliged to condescend upon particulars (see Hong Kong Civil Procedure 2016, vol 1, §14/4/4 at p 268), it is necessary to bear in mind the purpose of such requirement.  As Ma CJHC (as he then was) held in Toy Major Trading Co Ltd v Hang Shun Plastic Toys Ltd [2007] 3 HKLRD 345 at 349F–G, §12:

“... In my view, the Defendant’s evidence goes nowhere near the obligation on a defendant in summary judgment proceedings to condescend to particulars. This obligation is to ensure that where a plaintiff raises a plausible and prima facie sustainable case, a defendant can convince the court there exists a triable issue so that leave to defend is given or the application for summary judgment is dismissed. In other words, that the Defendant is expected to show a fair probability or reasonable grounds that a bona fide defence exists.”

In other words, to consider whether and to what extent a defendant has been able to condescend upon particulars will assist the court in answering the ultimate question, ie whether the defendant has shown an arguable defence, or raised a triable issue.

52.Returning to this case, to begin with, as I indicated at the hearing, it appears to me that HSBC may face difficulties in pinpointing precisely what Compliance Obligations are engaged.  The whole purpose of carrying out FCRMA is to ascertain what risks arising out of Compliance Obligations HSBC (and the members of the HSBC Group) may be exposed to in handling the Accounts; what HSBC (and the members of the HSBC Group) should do in order to comply with the Compliance Obligations (if any), and to minimize the risks of beaching any of them.  Unless and until the investigations are completed, it may be difficult for HSBC to identify precisely and accurately the Compliance Obligations actually engaged (if any).  I suppose, at best, what HSBC may be able to disclose is what Compliance Obligations it is worried about for the time being, and why it is worried.  However, in order to explain why HSBC is worried, it might be necessary for HSBC to disclose the results of the investigations conducted so far.  But it may well be inappropriate and undesirable to do so.  Wu stated in his affirmation that:

“At this stage, given that the Financial Crime Risk Management Activity is still ongoing, HSBC neither wishes to nor considers it appropriate to disclose full details of its investigation.” (§8)

I am not suggesting that HSBC should be excused from the obligation to condescend upon particulars.  What I wish to say is that, in considering whether HSBC has sufficiently discharged its obligation to condescend upon particulars in the present context, it is pertinent to bear in mind these practical considerations.

53.Nevertheless, secondly, I shall consider whether, and if so to what extent, HSBC has failed to condescend upon particulars.  I agree with Mr Chan that HSBC has not identified or pinpointed the Compliance Obligations which are allegedly engaged in this case.  I also agree that when Fong referred to the Anti‑Money Laundering and Counter‑Terrorist Financing (Financial Institutions) Ordinance and the Organized and Serious Crimes Ordinance in his affirmation, he was not saying that any of these Hong Kong statutes is actually engaged in this case.  However, it does not seem to be entirely accurate to say that HSBC’s explanation is wholly lacking in particulars.  Wu stated in §20 of his affirmation that individuals on the SDN Lists are subject to asset freezes and that US persons (both natural and legal) are generally prohibited from transacting with such individuals, meaning any persons within the HSBC Group will face potential criminal liability if they transact with Pa (or an entity owned or controlled by him) or facilitate such transactions.

54.I am aware that Wu has not referred to any specific US law or regulation.  However, what he said is supported by the press release of the US Department of the Treasury, which expressly states that:

“As a result of the Treasury’s actions, any assets of the individuals or entity designated today that are within US jurisdiction must be frozen. Additionally, transactions by US persons or with the United States involving these individuals and entities are generally prohibited.”

There is no suggestion, let alone evidence, that the above statement is not a correct description of the legal effect under US law of designating Pa on the SDN List pursuant to Executive Order 13469 (as stated in the said press release).  I am satisfied that HSBC has provided some particulars supported by credible evidence that one of the Compliance Obligations that HSBC is concerned about is that a member of the HSBC Group may commit criminal offence under the US law if it transacts with Pa (or an entity owned or controlled by him) or facilitate such transactions.  It must be borne in mind that under the contract between the plaintiffs and HSBC, Compliance Obligations include not merely HSBC’s obligations under Hong Kong law but also those of any member of the HSBC Group under any foreign law, which must include US law.  In the circumstances, I am not convinced that HSBC has completely failed in its obligation to condescend upon particulars.

55.Thirdly, it appears to me that, in effect, Mr Chan was relying on the “failure to condescend upon particulars” point to invite me to conclude that the Accounts had been frozen for an unreasonably long period of time.  In the plaintiffs’ skeleton submissions, after referring to Fong’s evidence, they submitted that:

“16. What D pointedly does not say is that it is freezing the Accounts pursuant to any particular Hong Kong or international law. D is only saying that Ps’ accounts are frozen to enable D to assess its own obligations.

17. This is remarkable, given that the first demand to unfreeze the Accounts was made in as early as 27 March 2015 … i.e. nearly 1 year ago.

18. On any view, this is an unacceptably long time for a bank to freeze its customer’s money just to determine what its obligations (whether under Hong Kong law or otherwise) are.”

56.I take the view that it is inappropriate for me to determine summarily whether HSBC has abused its contractual power, and has frozen the Accounts for a period longer than what the contract permits.  In particular, I am not satisfied that HSBC’s alleged failure to condescend upon particulars supports or leads to the conclusion that HSBC does not even have an arguable case that it has been exercising its contractual power lawfully up to date.  I shall explain why.

57.As I said earlier, it is arguable that HSBC’s contractual power to freeze the Accounts must not be exercised irrationally.  In considering whether HSBC has acted irrationally, it is necessary to consider both the decision‑making process and the outcome.

58.I shall consider the decision-making process first.  The main concern is whether the decision‑maker is acting in bad faith (or capriciously), or for an improper purpose; or has taken into account irrelevant considerations or ignored relevant considerations.  Considering the decision‑making process, on the evidence before me, I am satisfied that it is arguable that HSBC’s decision is rational, and it has not abused its power:

(a) There is no suggestion that Fong or Wu are dishonest, and that their evidence is incredible or unbelievable.  There is no evidential basis to support any suggestion that HSBC was acting in bad faith or dishonestly.  Had there been such suggestion, I would have no hesitation to reject it.

(b) Both Fong and Wu have confirmed in their affirmations that the purpose of freezing the Accounts was to carry out FCRMA. This is a legitimate purpose under the contract between the plaintiffs and HSBC. As just mentioned, the evidence of Wu and Fong is credible and believable.  And as Wu explained in his affirmation, FRCMA:

“… are necessary in order to assess and mitigate its risk in respect of the Financial Crime: HSBC needs to conduct due diligence as necessary and proportionate to the scale of the possible breach of its Compliance Obligations (as defined in the General Terms and Integrated Account Terms) and the potential impact of such breach upon HSBC’s business.” (§6)

(c) There is no suggestion, let alone evidence, that HSBC decided to freeze the Accounts for any improper purpose, or ulterior motive.  Fong and Wu have not said that HSBC froze the Accounts because HSBC is investigating whether Pa (or V Fung) has committed any criminal acts as if it were a law enforcement agency.

(d) I am unaware of any suggestion that, so far, in deciding to freeze the Accounts, HSBC has taken into account any irrelevant considerations or ignored any relevant considerations.

59.I turn to the outcome.  The outcome of HSBC’s decision to exercise its contractual power is that the Accounts have been frozen, and remain frozen, for almost one year.  Considering the outcome, on the evidence before me, I am satisfied that it is arguable that HSBC’s decision is rational, and it has not abused its power:

(a) To begin with, it is essential to bear in mind that the court is not the decision‑maker; it would intervene if and only if the outcome is so unreasonable that no reasonable bank in the circumstances would have frozen the Accounts in such manner.  There is no evidence supporting such a conclusion.

(b) One cannot consider the length of the time for which the Accounts have been frozen in isolation.  It must depend on the facts on each case.  As Wu pointed out in his affirmation:

“The time required to complete an investigation depends on various factors including the complexity of the case, the number of entities, jurisdictions and types of assets involved and the workload and resources of the relevant compliance departments responsible for the investigation. Invariably, some cases (such as the current case) will take longer to resolve than others.” (§7)

There is no suggestion or evidence that what Wu said is untrue or incorrect.

(c) In this case, it is necessary to bear in mind the following factors:

(i) The amounts in the Accounts are extremely substantial.  Suffice for me to give one example: among other things, Pa and V Fung claim for the return of the sum of US$86,770,677.36 in Account No 627830607888.

(ii) There is an apparent lack of transparency in relation to the ownership of entities which appear to be linked to Pa and V Fung as explained by Wu.

(iii) In the course of the investigations, HSBC discovered more and more information about alleged wrongdoings and criminal acts committed by Pa.  The last piece of information disclosed by Wu in his affirmation is a news article dated 27 December 2015, ie about two months ago.

(iv) The alleged wrongdoings and criminal acts committed by Pa involve serious financial crimes including corruption involving foreign governments.

(v) The alleged wrongdoings and criminal acts committed by Pa took place in many different jurisdictions.

(vi) HSBC is not merely concerned with its obligations under Hong Kong law.  It is also concerned with the obligations of all members of the HSBC Group under the law as well as practice in Hong Kong, foreign jurisdictions or internationally.

60.Lastly, I take the view that I am entitled to take into account the fact that HSBC released the monies in the accounts of the 3^rd and 4^th plaintiffs upon completion of the FCRMA in relation to their accounts shortly after the commencement of these proceedings.  This fact gives me an impression that HSBC does not appear to be a bank which would abuse its contractual power and freeze its customer’s account for any period of time irrationally.

61.I need to stress that I have no intention of expressing any view (provisional or otherwise) on whether HSBC has abused its contractual power in fact.  This is not the function of the court in an Order 14 application.  I have decided to explain in detail why I disagree with Mr Chan in order to do justice to his forceful and persuasive submissions.

62.In what Mr Chan himself described as an “emotional” speech, he said forcefully that it is utmost unreasonable and unacceptable for HSBC to freeze the Accounts, in particular, for so long.  He said that, in essence, HSBC is saying to his clients “Trust me”, and that such attitude as the “Big Brother” has no place in Hong Kong; and he found it unbelievable that the largest bank in Hong Kong would behave in such high‑handed manner.  I am afraid that there are the following flaws in his remarks:

(a) Accepting that what has happened must appear to be unreasonable, unsatisfactory and even unacceptable to any customer of the bank in the position of Mr Chan’s clients, this is beside the point.  The question is not whether HSBC’s acts are unreasonable or unacceptable from the perspective of the plaintiffs.  The question is whether HSBC’s acts are permissible under the contract between it and the plaintiffs.  It is trite that even though the application of a contractual provision may turn out to be harsh and unreasonable to one of the parties, the court cannot rewrite the contractual bargain for the parties.  Here, the relevant contract has conferred a wide discretionary power on HSBC to carry out FCRMA and to freeze the Accounts in the meantime for such purpose.

(b) Having said that, in law, HSBC is not entitled to do whatever it likes, or to freeze the Accounts for as long as it wishes, in these circumstances.  As I explained above, the court will ensure that HSBC would not abuse its contractual power, or exercise its contractual power irrationally.

63.For the above reasons, I am satisfied that HSBC has shown a real and bona fide defence.  Whether HSBC has abused its contractual power in these circumstances is a matter that requires investigations and ought to be resolved at a trial.  I should add that the precise scope of the term that ought to be implied in order to ensure that HSBC would not abuse its contractual power in the present context is also a matter that should be determined definitively at the trial.

64.Although it will take some time for the case to go to trial, I am sure HSBC will understand that, on its own case, it is under a continuous legal obligation to ensure that it would not exercise its contractual power irrationally.  Naturally, the longer the Accounts are frozen, the heavier the burden will be on HSBC to justify its decision at the trial.

L. R Fung and Lee’s application for costs

65.R Fung and Lee ask for costs on the ground that they have been wholly successful in their claims because HSBC released the funds in their accounts shortly after the issuance of the writ herein.

66.As a matter of procedural law, and bearing in mind that this is an Order 14 application, I have reservations whether I can and should entertain their application for costs when they need not apply and have not applied for any summary judgment.

67.Nevertheless, in any event, I am not prepared to accede to their application for the following reasons.  As I said at the hearing, the mere fact that HSBC released the funds back to them shortly after the commencement of these proceedings does not necessarily mean that HSBC did not have the power to freeze their accounts in the first place.  In fact, their accounts had only been frozen for a relatively short period of time.  Whether HSBC had lawfully frozen their accounts up to the time the funds were released is a matter that cannot be resolved summarily for reasons similar to those I set out above in relation to the claims made by Pa and V Fung.

68.Hence, I take the view that the issue of costs relating to the claims of R Fung and Lee against HSBC should be resolved at one go in the trial.

M. Conclusion

69.For the above reasons, I refuse to grant summary judgment to Pa and V Fung. However, I will not dismiss the Order 14 summons as suggested by Ms Ismail. Before commencing these proceedings, HSBC has not even told the plaintiffs that their accounts had been frozen because it was engaged in FCRMA in relation to those accounts.  I take the view that the appropriate order that I shall make is to give unconditional leave to defend to HSBC.

70.Under Order 14, rule 6(1)(a) of the RHC, I shall give directions as to the further conduct of the action.  Having considered Order 18, rule 2(1), Order 18, rule 3(4) and Practice Form No 56, the directions that I give are as follows:

(a) the defendant do file and serve a defence and counterclaim (if any) within 28 days hereof;

(b) the plaintiffs do file and serve a reply and defence to counterclaim (if any) within 28 days thereafter;

(c) each party do mutually exchange and file in court their respective List of Documents within 21 days thereafter;

(d) there be inspection of documents within 14 days of the service of the lists;

(e) each party do mutually exchange and file in court signed statements of its witnesses as to facts within 28 days after the expiry of the time for the inspection of documents set out in paragraph (d) above, such statements do stand as evidence‑in‑chief unless the trial judge otherwise directs;

(f) the plaintiffs do take out a summons to apply to set the case down for trial upon the completion of the procedural steps in accordance with the timetable set out above (or such time as the court may extend).

71.As to costs, I shall make a costs order nisi that the costs of the Order 14 summons be in the cause with a certificate for two counsel for this hearing, to be taxed if not agreed.  I note that the plaintiffs were represented by three counsel.  I am grateful to the able assistance of all counsel appearing before me but I am not convinced that I should give a certificate for three counsel in this case.  The costs order nisi shall become absolute unless, within 14 days hereof, any party makes written submissions on costs (in such event, I shall dispose of the issue on costs on paper).

Mr Warren Chan SC and Mr Bernard Man SC, leading Mr Justin Ho, instructed by Anthony Siu & Co, for the plaintiffs

Ms Roxanne Ismail SC, leading Mr Val Chow, instructed by Freshfields Bruckhaus Deringer, for the defendant