Frank Lee and Another v. The Hongkong and Shanghai Banking Corporation Ltd

HCA 1924/2016

[2022] HKCFI 3680

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1924 OF 2016

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Before: Hon Au-Yeung J in Chambers

Dates of Hearing: 23 May 2022

Date of Decision: 6 December 2022

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D E C I S I O N

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A.     INTRODUCTION

1.This is an appeal against a Master’s refusal to grant leave to amend the Statement of Claim (“SOC”).

2.The Plaintiffs’ claim concerns their discretionary hedge funds investment account with the Defendant (“Bank”) and losses allegedly suffered when the Global Financial Crisis hit in September 2008.

3.The Writ was issued on 15 September 2014 under HCCL 21/2014, at the eve of expiry of the limitation period, and later came under the present action.

4.The SOC was filed only 15 months later, on 21 December 2015.  It sets out various claims against the Bank, including misrepresentation, breach of contract and breach of fiduciary duties.  Pleadings have closed on 25 March 2016.

5.Since then the parties have engaged in extensive discovery.  The Bank says that it has completed discovery by 19 July 2018.

6.The summons for leave to amend was filed on 15 March 2021 (“Amendment Summons”), 5 years after pleadings have closed, and 12-16 years after the relevant events have happened.  The proposed amendments jettison everything in the existing version.  In a related action, the Plaintiffs sue the relevant Bank officers. 

7.On 30 September 2021, Deputy Master Cruden dismissed the Amendment Summons, on the bases that all amendments related to causes of action that were already time-barred.

8.This is the Plaintiffs’ appeal against the Master’s decision.  The Plaintiffs say that the amendments import claims that were current at the date of the writ but had since become time barred.  What divided the parties can be classified into the following issues:

(1)  Whether the DASOC introduces new causes of action or the amendments fall within the “purview” of the Indorsement of Claim (“Indorsement”) (“Within Purview Issue”);

(2)  Whether the claims in the draft amended SOC (“DASOC”) were time-barred at the time of the Writ (“Writ Time-Barred Issue”);

(3)  Whether there was postponement of the limitation period under section 26 of the Limitation Ordinance, Cap 347 (“LO”) (“Postponement under Limitation Ordinance Issue”);

(4)  Whether the claims in the DASOC arose out of the same or substantially the same facts as a cause of action in respect of which relief has already been claimed in the Indorsement when apply the three stage test for amendment (“Three-Stage Test Issue”);

(5)  Whether the amendments ought to be rejected as they are bound to fail (“Amendments Bound to Fail Issue”)

(6)  Whether the amendments ought to be rejected as there is delay causing prejudice to the Bank (“Delay and Prejudice Issue”).

B.     BACKGROUND

9.The Plaintiffs are a married couple.  Mr Lee is a retired businessman while Mrs Lee is a home-maker.  Both of them did not have prior knowledge or experience in the field of hedge funds.

10.The Plaintiffs were invited by the Bank’s employees, Ms Ellysi Fung and Mr Henry Lee (“Fung” and “Lee” respectively) to meetings to discuss the possibility of engaging its investment portfolio management service.  There were 2 Meetings: one on 3 August 2006 and the other on 18 August 2006.

11.During the initial meeting on 3 August 2006, Fung and Lee presented various information to the Plaintiffs, including a Pitch Book.  One of the programmes presented by the Bank was the Alternative Investment Fund Portfolio Management Programme (“AIF Programme”), an “aggressive” portfolio under which the Bank had discretionary power to invest in hedge funds on behalf of the Plaintiffs according to a pre-agreed investment portfolio strategy.

12.In the meetings, the Bank’s employees allegedly guaranteed full value upon redemption and made Four Representations to the Plaintiffs:

(1)  That those employees held particular posts of responsibilities in the Bank and were experienced in the trade (“Title and Expertise Representation”);

(2)  That the Bank would closely monitor through reviewing the funds and would report to the Plaintiffs regularly (“Regular Review Representation”);

(3)  That there would be ongoing risk management of the Plaintiffs’ portfolio, to assess qualitative and quantitative factors of the funds and changes in the funds’ mandates in the portfolio (“Risk Management Representation”); and

(4)  That the Bank would know when to exit from a particular fund and that any redemption would usually take about 3 and 6 months upon decision to exit (“Redemption and Exit Representation”).

13.The Plaintiffs claim that the Bank’s employees did not draw to their attention the investment and liquidity risks attached, and that the employees failed to explain the implications of “side pockets”, “gating” and similar features in hedge funds to Mr and Mrs Lee. 

14.On the above bases, the Plaintiffs agreed to subscribe to the AIF Programme on 18 August 2006.

15.On 23 August 2006, the Plaintiffs signed (i) an Account Opening Booklet to open a joint account and (ii) a Discretionary Investment Application Form (collectively, “Main Agreement”).  These documents incorporated the Bank’s Standard Terms and Conditions (“STC”) and Risk Disclosure Statement (“RDS”).  In the Account Opening Booklet, the Plaintiffs confirmed that they “duly considered the Hong Kong Securities and Futures (Professional Investor) Rules (the Rules) and notice(s) issued by the Bank in relation thereto, and agree to be classified as a ‘professional investor’ under the Rules…”.

16.Two months later, on 24 October 2006, the Plaintiffs invested US$3 million into their account for the AIF Programme.  This was followed by a further US$7 million on 19 November 2007.  Subsequently, the Bank purchased and sold a number of funds, in exercise of its discretion to manage the Plaintiffs’ Portfolio, including the BlueBay Fund; Discus Fund, Drawbridge Fund, Harbinger Fund and GLG Fund (“5 Funds”).

17.On the Plaintiffs’ own case, up to August 2008, their Portfolio was performing well and they were pleased with its performance.

18.On 15 September 2008, Lehman Brothers filed for bankruptcy in the United States, triggering a crash of the global markets.  The next day, Mr Lee instructed the Bank’s employees to liquidate the entire US$10 million worth of funds in the Portfolio (“Redemption Instruction”) but was advised to only redeem US$7 million, which they acceded to and received payment. 

19.In June 2009, the Bank first referred to 3 types of illiquidity risk to which the Funds may be subject: side pocket (a type of account in hedge funds segregating illiquid assets from liquid ones), gating and suspension of redemption.

20.In June 2010, the Plaintiffs gave instructions to redeem the remaining funds and terminate the investments.  Yet, the Bank notified them in October 2010 that full redemption had been effectively postponed through side pockets.  In the same month, the Bank allegedly first officially informed the Plaintiffs that over 20% of their Portfolio was in side pockets.  Part of the side pocket holdings remains unredeemed and the Plaintiffs were only able to recover 95% of the capital invested.

21.Before October 2010, the Plaintiffs were not aware of the severe illiquidity of the Funds in their Portfolio.

22.Around July 2011, the Plaintiffs filed an official complaint against the Bank to the Hong Kong Monetary Authority, which was copied to the Bank.  The allegations, amongst others, were that:

(1)  The Plaintiffs were told by the Bank that the customers of the AIF Programme would be guaranteed full value upon redemption of their investments, but in truth the Plaintiffs were unable to realize the full value of their investment.

(2)  The Bank had not kept the Plaintiffs updated on the investments in the AIF Programme.  The Bank had also withheld from the Plaintiffs pertinent information relating to the Funds and that the severity of the problems (particularly that some funds were subject to side-pockets and were partially illiquid), only became known in October 2010.

(3)  There was overconcentration of hedge funds under the AIF Programme, which made the Plaintiffs’ Portfolio especially risky when the Funds became illiquid; and

(4)  There had been no briefings as promised by the Bank on hedge fund holdings since the inception of the investment portfolio in 2006.

23.By a letter dated 28 October 2011 (“2011 Letter”), the Bank responded to the Plaintiffs’ complaints in the preceding paragraph.

24.The Plaintiffs filed the writ on 15 September 2014, the last day of the 6-year period from the Redemption Instruction.  The SOC was filed on 21 December 2015. It sought damages for (i) breach of contract, (ii) 3 specific misrepresentations made between August and September 2008, and (iii) negligence and/or breach of duty, plus an array of claims.

25.After close of pleadings, the Bank filed 5 lists of documents between 18 October 2016 and 19 July 2018.  On 18 January 2019, the Plaintiff’s application for specific discovery was dismissed and their appeal was not pursued.  Discovery can be said to have completed.

26.Meanwhile, the Plaintiffs issued HCA 896/2017(“Related Action”) against Lee and Fung who allegedly made the Four Representations.  The Plaintiffs have entered default judgment against Fung, but its action against Lee is ongoing.

27.On 15 March 2021, the Plaintiffs took out the Amendment Summons.  In the draft amended SOC (“DASOC”), there are very substantial amendments. Apart from the Four Representations which are new, there are Four Duties (Duty to Classify, Duty to Advise, Duty to Manage and Duty to Inform) which arose from implied terms.  There are also new allegations of breach of collateral warranties and statutory duties. It is also alleged that the limitation period has been postponed under LO s.26 due to the Bank’s deliberate concealment.

28.The Plaintiffs submit that the proposed amendments are within the limitation period and that these newly pleaded causes arose from the same or substantially the same facts as in the SOC.  They claim that non-disclosure of documents from the Bank created difficulty for them to formulate a more detailed SOC.  The process of discovery spanned over 21 months after close of pleadings.  By October 2020, the Plaintiffs already informed the Bank of their intention to amend the SOC. The Amendment Summons was taken out 5 months later.

29.The summary of amendments and the Bank’s grounds in opposition have been succinctly summarized by Mr Westbrook SC, Mr Tang and Mr Kwan (counsel for the Plaintiffs) and Ms Sit SC and Mr Lok (counsel for the Bank), which I tabulate as follows:

Table 1

C.     LEGAL PRINCIPLES ON LIMITATION AND AMENDMENT

C1.    General principles

30.A distinction is to be drawn between (i) a new claim that was already time barred at the date of issue of the writ; and (ii) a new claim that was current at the date of the writ but had become time-barred before an amendment summons was taken out. 

31.In scenario (i), no leave to amend will be granted due to LO s.35(3).   In scenario (ii), LO ss.35(5), 35(6) and Order 20, rule 5(2) permit the Court to grant leave where the application to amend is made after any relevant period of limitation current at the date of the writ has expired, if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the applicant.

32.The principles on amendment of pleadings have recently been considered in Li Ngan Kwan v Gao Li Hui & Ors [2021] HKCFI 2878, §§38-49, Au-Yeung J.  I shall not set them out in detail except to highlight 5 broad principles which Ms Sit and Mr Lok have very ably summarized in their written submission: (i) burden of proof, (ii) purview issue, (iii) three-stage test, (iv) rejecting amendments that are bound to fail and (v) need for proper particulars.

33.Firstly, burden of proof: where the amendments plead an arguablytime-barred claim such that LO s.35 may be engaged, the correct approach is to refuse leave to amend, unless the plaintiff can show that the defendant does not have a reasonably arguable case on limitation or that the new claim arises out of the same or substantially the same facts as a cause of action in respect of which relief has already been claimed in the existing action: Delco Participation B.V. v Chiho Environmental Group Ltd [2020] 5 HKLRD 712, §§28, 35-36 (CA).

34.Secondly, purview issue: where the writ is not specially indorsed, one has to compare the indorsement on the writ to see whether the new claims sought to be introduced come “fairly within the purview” of the indorsement.  If they are, the amendment should be allowed; LO s.35 does not come into play: Moulin Global Eyecare v Olivia Lee (2014) 17 HKCFAR 466, at §§23-28(a), 30.

35.O.6, r.2(1)(a) only requires the indorsement to be “a concise statement of the nature of the claim made or the relief or remedy required in the action”. The Court of Final Appeal has held that “or” should be read as “and”: Moulin, §23. 

36.How much detail is required of the “concise statement” in the indorsement (ie what falls within the purview) may vary from case to case. What is important is that a defendant should know what the claim is against him: Ting Siu Wing v Chan Kwok Bun [2012] 5 HKC 87, §8, approved in Moulin,§32.

37.In determining whether an indorsement on a writ is adequate, it is necessary to bear in mind the 3 functions served by an indorsement as set out in Glendinning v Cuzens [2009] WA SCA 21, §29, CA of Western Australia:

(1)  It informs the defendant of the nature of the claim made and the relief sought so as to enable the defendant to determine whether to enter an appearance and, if so, whether conditional or unconditional appearance;

(2)  It enables the determination, for the purpose of limitation, of whether a cause of action is contained in the writ; a cause of action in this context means a factual situation which will entitle a person to relief; and

(3)  It sets out the metes and bounds within which the statement of claim must be framed.

38.The indorsement is not a pleading.  It suffices if it conveys that information generally and without particularity save where and to the extent to which particularity is indispensable to notify the required elements of the indorsement: Renowden v McMullin, (1970) 123 CL Report 584, at 595, HC of Australia.  But, while the indorsement determines the essential nature of the action, it does not define, nor necessarily form part of the definition of the issues for trial.  It is the statement of claim which does (at p596). 

39.A statement of claim must not contain any allegation or claim in respect of a cause of action unless that cause of action is “mentioned in the writ or arises from facts which are the same as, or include or form part of, facts giving rise to a cause of action so mentioned; but subject to that, a plaintiff may in his statement of claim alter, modify or extend any claim made by him in the endorsement of the writ without amending the endorsement”: Order 18, rule 15 (2), RHC.

40.Thus, generally if a plaintiff seeks to make any claim in contract, it would be necessary for it to be able to identify the particular contract and the alleged breach; in the case of any breach of tortious duty, it would be necessary for the plaintiff to be in a position to identify the essential acts or omissions which constituted the breach of duty, negligence or negligent misstatement. For the purposes of negligent misstatement, the plaintiff would have to be able to identify what advice or information was inaccurate and what was given negligently, at least in essence. If the plaintiff was not in a position to do this, it was not in a position properly to issue a claim, since it could not have proceeded properly to plead particulars of claim without the off-chance occurring that something would turn up: Nomura International plc v Granada Group Ltd [2008] Bus LR 1, §§38-41.

41.These principles were approved by English CA in Libyan Investment Authority v King [2021] 1 WLR 2659, §61, wherein the CA stated that it was not sufficient for the plaintiff to indorse his writ merely with a claim for damages, or damages for breach of contract or negligence, but he had to give some indication of the contract said to be broken, or the duty which the defendants were said to have failed to perform.  A plaintiff does not need to put very much in the way of details in the claim form (although he can add more if he wants to), but there is a certain minimum that he needs to state.  There will therefore always be facts stated in the claim form, even if they are quite exiguous.

42.If at the time of issuing its writ, the plaintiff was not in a position to do the minimum necessary to set out the nature of the claim it was making, it would be seeking an illegitimate benefit, namely the prevention of further time running under the limitation statute for a claim which it could not properly identify or plead, and that would be an abuse of the process of the court: Nomura, §41. 

43.The above principles are not in dispute.  The parties are, however, divided on 3 Propositions put forth by Mr Westbrook:

(1)  That the indorsement does not have to expressly provide for a recognizable cause of action. The ambit of the action commenced by the writ is determined by reference to the matters asserted, and not by reference to any legal labels or categories which may or may not have been used in the indorsement. Thus, if the indorsement sets out the essential features of the claim, it is not necessary to go further to identify the legal basis for the claim by, for example, naming any particular cause of action.  Mr Westbrook cites Graff Brothers Estate v Rimrose Brook Joint Sewerage Board[1953] 2 QB 318, 325.

(2)  In interpreting the indorsement and determining its purview, the court is entitled to take into account, not only the words appearing in the indorsement but also the surrounding factual matrix including what the defendant knew.  If the defendant already has proper notice of the nature of the claim the indorsement should be construed in the light of such: Travis Perkins v Caerphilly [2014] EWHC 1498 (TCC), §22(d), Akenhead J; affirmed by Lord Denning in Sterman v Moore [1970] 1 QB 596; Pontin v Wood [1962] 1 QB 594.

(3)  There is residual discretion of the Court to allow an amendment in accordance with RHC O.20, r.5(1) even if limitation is engaged: Hong Kong Islands Shipping v Castle Insurance (CACV 178/1980, 8 July 1981), p. 13.

44.Proposition (1) arose from a rule that does not apply to Hong Kong.  As shown on page 325 of Graff, the then Order 2, rule 1, RSC, was similar in terms to Order 6, rule 2(1)(a) of the Hong Kong RHC.  However, Order 3, rule 2, RSC provides that “In the indorsement required by Ord. 2, r.1, it shall not be essential to set forth the precise ground of complaint, or the precise remedy or relief to which the plaintiff considers himself entitled.”  This latter rule is not in the current Hong Kong RHC and is inconsistent with Order 18, rule 15, RHC, which prohibits a statement of claim from containing a claim in respect of a cause of action unless that cause of action is “mentioned in the writ” or arises from facts which are the same as, or include or form part of, facts giving rise to a cause of action so mentioned.  Accordingly, Proposition (1) cannot stand.

45.Proposition (2) was based on §22(d) in Travis Perkins:

“In construing or understanding what was intended by the wording used, the Court can and where necessary should have regard to the context or “factual matrix” (as per Arden LJ in Evans) in which the Claim has been prepared.  It is legitimate to have regard to the Particulars of Claim, particularly if served promptly at or about the time of the issue and/or service of the Claim. It is legitimate to have regard to correspondence and applications sent or served at or about the same time as the Claim.  Indeed, it may be legitimate to look further back in time for exchanged communications between the parties, albeit that caution may need to be exercised to limit this exercise only to such communications which clearly demonstrate what was intended to be the subject matter of the proceedings which followed.” (underlines added)

46.However, Proposition (2) has been doubted and is not supported by the authorities that Mr Westbrook relies on:

(1)  The English Court of Appeal expressed “quite serious reservations” for Travis Perkins went further than Evans in suggesting that regard can be had to the particulars of claim not only when served with the claim form, but also “particularly” when served “about” the time of service of the claim.  Nugee LJ expressed some reservations about this as normally a document has a single meaning when first executed, or at least communicated, and cannot change its meaning in the light of later developments: Libyan Investment Authority [2021] 1 WLR 2659, §§67 & 68.   

(2)  In Sterman v Moore, the writ and statement of claim did not state the cause of action (such as negligence or breach of statutory duty) (603D-E). The governing rules were then the equivalent of Order 6, rule 2(1)(a) and Order 18, rule 15(2), RHC.  However, that caseis distinguishable from the present in that the defendants were aware of the nature of the claim and had waived the irregularity by entering an unconditional appearance to the writ.  It was in that context that the CA held that the defendants should not be allowed to bar the plaintiff from amendment on the most technical consideration of failing to mention the cause of action (at p602D, 604D-E).  Sterman v Moore does not support Proposition (2) at all.

(3)  In Pontin v Wood, the writ was filed close to expiry of the 3‑year limitation period. The indorsement merely contained these words (at p595): “The plaintiff’s claim is for damages for personal injuries”.  The court held that failure of the indorsement to set out the cause of action only made the writ defective but not a nullity (at p610).  The defect was subsequently cured by the delivery of a proper statement of claim after expiry of the period of limitation.  There was no reason to set aside service of the writ as the defendant was at all times perfectly aware of the nature of the claim and the cause of action from a contemporary letter issued 9 days after the accident, which made a claim for damages on the ground of the defendant’s negligent driving (p596).  The defective writ has caused the defendant no difficulty (at pp 608 & 612).  However, Pontin v Wood is distinguishable in that it did not have the equivalent of Order 18, rule 15 of RHC.

47.Proposition (3) relies on Hong Kong Island Shipping, pp13-14. Hong Kong Island Shipping was a case on limitation and joinder of another plaintiff.  The Court of Appeal held that the cause of action sought to be set up was not the same as that presently before the Court, but arose out of substantially the same facts and the proposed amendment was within Order 20, rule 5(5).  There was therefore a discretion for the Court to exercise under rule 5(2) to allow the amendment.  If that was wrong and rule 5(2) had no application, the Court of Appeal adopted the view that Order 20, rule 5(1) was not limited by the later provisions of the rule and should be given its full width, relying, amongst others, on the observations of Lord Denning MR to that effect in Sterman v Moore.  The Court of Appeal held that whether the case was within rule 5(5) or not, the judge had a discretion to allow amendment.  However, given the change in rules since Sterman v Moore, Hong Kong Island Shipping is no longer applicable.  Proposition (3) therefore cannot stand.

48.In the light of the more updated authorities cited by Ms Sit and the above analyses, I reject the 3 Propositions of Mr Westbrook.

49.Thirdly, the “three-stage test” applies: Shenzhen Futaihong Precision Industry Co., Ltd & Ors v BYD Co Ltd & Ors (HCA 2114/2007)(18 July 2016), Ng J (“Shenzhen Futaihong (CFI)”), §§16, 30, 32-33, 53-56; upheld by the Court of Appeal in [2019] 2 HKC 175 (“Shenzhen Futaihong (CA)”), §74.

(1)  Stage 1: Is it reasonably arguable that the amendments are outside the applicable limitation period?  The burden is on the applicant to show that it is not.  (This is covered by the first broad principle in paragraph 33 above.)

(2)  Stage 2: If the answer to Stage 1 is yes, do the proposed amendments seek to add or substitute a “new cause of action”? If not, the amendments fall to be considered in accordance with general principles.

(i)  A cause of action in this context is not so much the label attached to the claim (eg “breach of contract”), but the set of facts which entitles the plaintiff to relief.

(ii)  It is the essential factual allegations upon which the original and proposed new claims are reliant which must be compared; the bare minimum of essential facts abstracted from the original pleading is to be compared with the minimum as it would be constituted under the amended pleading. The amendment will introduce a new cause of action if there is a “change in the essential features of the factual basis” relied upon (rather than giving further particulars of existing allegations).

(iii)  Where different facts are alleged to constitute a breach of an already pleaded duty, one must look not only to the duty, but also the nature and extent of the breach relied upon, as well as to the nature and extent of the damage complained of in deciding whether, as a matter of degree, a new cause of action is sought to be relied upon.

(iv)  Further, where the writ is not specially indorsed, the comparison is by reference to the indorsement on the writ and not the current statement of claim.

(3)     Stage 3:- 

(i)  “Same or substantially the same” is not synonymous with “similar”, but this phrase should be given a broad and liberal interpretation to attain the object of the rules.

(ii)  It is necessary to consider the extent to which the defendant would be required to embark upon an investigation of facts which it would not have been concerned to investigate, by considering the range of facts which is likely to be adduced at trial. This is a question of analyses.  See Shenzhen Futaihong (CA), §86.

(iii)  The concept involves something going no further than minor differences likely to be the subject of enquiry, but not involving any major investigation, and/or differences merely collateral to the main substance of the new claim, proof of which would not necessarily be essential to its success.

(iv)  Whilst on a purview issue, one compares the proposed amendments to the indorsement of claim, in Stage 3, one is at liberty to compare the proposed amendments to the existing version of the statement of claim for the purpose of (ii).

50.Fourthly, no leave to amend will be granted if it is shown that the new claim based on the proposed amendment is bound to fail.  The Court will take the applicant’s proposed pleaded case to the highest.  The test to be applied is the same as that for summary judgment under Order 14, RHC. The applicant has to have a case which is better than merely arguable.  But while the court is entitled to have regard to the merits of the case, it should only do so when the merits are readily apparent, and are so apparent as not to require prolonged investigation: Shenzhen Futaihong (CFI), at §15.

51.Fifthly, the need to properly particularize amendments is all the more important where amendments to plead a new case are introduced at a late stage.  The applicant has the obligation to put forward an amended text which itself satisfies to the full the requirements of proper pleading. It should not be acceptable for the applicant to say that deficiencies in the pleading can be made good from the evidence to be adduced in due course, or by way of further information if requested, or as volunteered without any request. The opponent must know from the moment that the amendment is made what the amended case that he has to meet is, and with as much clarity and detail as he is entitled to under the Rules.  See Taching Petroleum Co Ltd v Meyer Aluminium Ltd [2020] HKCT 2, §98, Au-Yeung J; upheld by the Court of Appeal in [2021] HKCA 294, §47.

D.      WITHIN PURVIEW ISSUE

52.Mr Westbrook submits that the proposed amendments fall within the purview of the Indorsement: 

(1)  The factual context of the claim arose out of the banking relationship between the parties from 23 August 2006 to 27 November 2007 during which the Plaintiffs invested US$10 million in various funds chosen by the Bank.  The new causes of action in the DASOC occurred at the same 2 Meetings, related to the same subject matter of the Bank’s mismanagement of the Plaintiffs’ investments and lack of information about the Funds and the Bank’s failure to provide adequate or correct advice to the Plaintiffs.  It is not necessary to state the exact legal terms of a cause of action as the different causes all arose from essentially the same factual scenario.

(2)  The Plaintiffs are entitled to rely on the 2011 Letter, by which the Bank was made aware of the substance of the Plaintiffs’ complaints at the time and thus “gave further context to the nature of those complaints”.

53.I am unable to agree with Mr Westbrook for the following reasons.

54.Firstly, applying the legal principles in paragraphs 34 and 46 above, it is not permissible to look beyond the Indorsement and rely on the 2011 Letter. 

55.Secondly, even if it is permissible to rely on the 2011 Letter, that Letter was sent 3 years before the writ was issued and was not contemporaneous to the writ.  Only 2 out of 5 pages were related to the AIF Programme.  The contents bore no resemblance to the complaints to the misrepresentations or breaches of duties pleaded in the DASOC.

56.Thirdly,

(1)  The newly pleaded misrepresentation in the DASOC abandons the existing ones and introduces 4 new ones. 

(2)  In respect of breach of contract, the DASOC newly relies on implied terms, contractual and/or collateral warranties apart from the Main Agreement, new problems relating to the 5 Funds and new facts (conflict of interest) concerning the Bank’s breach.  The Indorsement does not identify these breaches and gives no hint of the continuing nature of any breach. 

(3)  The Plaintiffs cannot rely on Indorsement §§2-3 to say that the Court should construe §1 by reference to them.  The Plaintiffs have on legal advice specifically set out each of the causes of action and they must be held to them.

(4)  None of the breach of statutory duties or breach of fiduciary duties are mentioned in the Indorsement.

(5)  The Indorsement gives no hint on a cause of action based on fraud or intentional wrong.  There is no sharper diving line that separates cases of fraud and dishonesty from negligence and incompetence: Li Ngan Kwan, §93. 

(6)  The Indorsement gives no hint of reliance on LO s.26.

Applying the principle in Glendinning v Cuzens (paragraph 37 above) the Bank will hardly know from reading the Indorsement whether it is alleged that it had mismanaged a particular Fund or there was a wholesale mismanagement of the whole Portfolio and how.  It will not be able to decide whether to defend or to settle a particular cause.

57.Fourthly, the use of the words “including but not limited to” cannot be used as a catch all phrase to justify introduction in the DASOC new causes of action that bear the same labels of breach of contract, misrepresentation, negligence and/or breach of duty but is in substance not mentioned in the Indorsement. That phrase shows that the Plaintiffs, all along acting with legal representation, were not in a position to do the minimum necessary to set out the nature of the claim.  They were seeking an illegitimate benefit, namely the prevention of further time running under statute for a claim which they could not properly identify or plead; that was an abuse of process: Nomura, §41. 

58.I find that the amendments in the DASOC do not fall within the purview of the Indorsement.

E.      WRIT TIME-BARRED ISSUE

59.Mr Westbrook submits that the proper approach is to deal with a claim that was already time-barred at the date of the writ as if it were a strike-out application and ask: is the defence manifestly and immediately destructive of the plaintiff’s claim: China Medical Technologies v Bank of China (Hong Kong) Ltd [2021] HKCFI 3042, §55, Ng J.  With respect, that is a wrong approach.  The burden is on the Plaintiffs to show that the Bank does not have a reasonably arguable limitation defence: ­Stage 1 of Shenzhen Futaihong (CFI).

E1.     Misrepresentation Claim

60.This is a claim in tort, for which the limitation period is 6 years. The cause of action accrues when the damage is suffered.  The damage that results from the tortious conduct must be real, as distinct from minimal or negligible and is actual, as opposed to purely contingent: Kensland Realty Ltd v Tai, Tang & Chong (2008) 11 HKCFAR 237, §51.   

61.Mr Westbrook cited several cases to illustrate his point that the Plaintiffs’ loss was not necessarily at the time of investment of the US$3 million and US$7 million because of the contingent nature of those investments.  He submits that it was only, at the earliest, in around June to October 2010 when the Plaintiffs gave instructions to terminate the Account but were informed by the Bank that such redemption was not viable due to side pockets.  That was the first period in time when the Plaintiffs became unable to retrieve their investments in the Portfolio by reason of the severe illiquidity of the Funds.

62.However, his submission overlooks DASOC §98(4)(a), which pleads that the Plaintiffs “would not have made their investment under the AIF Programme at all”.  The relevant date of loss would thus have been before 15 September 2008, ie time-barred before writ.

E2.    Breach of Contract and Contractual Warranties Claim

63.The cause of action accrued when the breach occurred. 

64.Mr Westbrook submits that the breaches of the Duty to Advise, Duty to Manage and Duty to Inform were continuing and recurring after 15 September 2008; so were the duties arising out of the contractual warranties.

65.However, that submission ignores DASOC §88-89, which plead specific breaches showing the Bank not to be acting in the best interests of the Plaintiffs and failed to exercise reasonable care and skill in the management of the Portfolio.  All of those alleged breaches were time-barred at the date of the writ:

(1)  Duty to Classify: the Plaintiffs were improperly classified as aggressive or professional investors.  The date of the alleged breach was 23 August 2006 when the classification was made or, October 2006 at the latest, when the Bank created the client profiles for them. 

(2)  Duty to Manage: the Bank should not have purchased for and/or maintained in the Plaintiffs’ portfolio the 5 Funds.  The breach would have occurred at the time of the purchase.

(3)  Duty to Inform: the Bank failed to inform the Plaintiffs “in a timely manner” of the material adverse information and risk in relation to the 5 Funds.  However, problems with all the Funds had arisen well before 15 September 2018.  The DASOC fails to particularize other dates of breach, which is a reason for disallowing the amendment: Taching, §§97-99. 

(4)  Duty to Advise: the Bank failed to ensure that its advice and/or information regarding the Funds and the manner of the Bank’s management was true, accurate, complete and not misleading.  The only pleaded dates when the Bank had meetings with the Plaintiffs and presented advice/information to them were in August 2006.  Any breach of duty would have occurred at about that time.  Again, the DASOC fails to particularize other dates of alleged breach: Taching, §§97-99.

66.For the reasons given, the contractual claims were time-barred at the date of the writ.

E3.    Negligence Claim

67.This claim is premised on facts similar to the breach of contractual duties and contractual warranties, which similarly were continuing in nature and extended beyond 15 September 2008.  The loss only accrued beyond that date.  Alternatively, the Funds became severely illiquid and unredeemable starting from around May/June 2009 or October 2010 and the Plaintiffs continued to suffer loss when their Portfolio maintained such Funds.  The same time-bar arguments are relied on.

68.Such contention, once again, ignores the pleaded loss in DASOC §98(2)-(3) that the Plaintiffs would not have invested in the Portfolio at all, or would only have invested US$3 million. Accordingly, the cause of action in negligence would have been time-barred before issue of the writ.

E4.     Breach of Fiduciary Duty

69.This breach concerns, in particular, the duty of honesty and loyalty, given the problems suffered by the BlueBay Recovery Fund.  The Plaintiffs’ claim is based on a “reasonable inference” that the Bank acted in conflict of interest to the detriment of the Plaintiffs by sourcing the Plaintiffs’ purchases of the Fund internally from within the Bank.  The Plaintiffs thus seek equitable compensation (DASOC §§41, 89(4)).

70.Mr Westbrook submits that a claim for equitable compensation based on a breach of fiduciary duty is a claim for equitable relief: Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, §96.  As such, s.4(7) of LO applies to displace any limitation period, unless it can be said that some limitation period can be applied by analogy.  Likewise, the breach of the no-conflict rule is also within the jurisdiction of equity: Libertarian, §72.

71.However, it is established law that there are 2 categories of constructive trust: (i) against persons who have lawfully assumed fiduciary obligations in relation to trust property but without a formal appointment; and (ii) against persons who have never assumed and never intended to assume the status of a trustee, but have exposed themselves to equitable remedies by virtue of their participation in the fraud or unlawful application of trust assets and hence required by equity to account as if they were trustees: Paragon Finance Plc v DB Thakerar & Co (a firm) [1999] 1 All ER 400, 408b-c, e – 409j; Williams v Central Bank of Nigeria [2014] AC 1189, §§9, 35, 90.  On the Plaintiffs’ case, the Bank could not be regarded as real trustees for which no limitation period applies. The limitation period should be 6 years.

72.For the reasons given in this Section, I rule that the proposed amendments were time barred at the time of the writ.  Even if the principle in China Technology were to apply, this is a case where the proposed amendments can be struck out on the limitation ground alone.

F.     POSTPONEMENT UNDER LIMITATION ORDINANCE ISSUE

73.LO s.26 provides that:

“(1) Subject to subsection (4), where in the case of any action for which a period of limitation is prescribed by this Ordinance, either –

(a) the action is based upon the fraud of the defendant;

(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant;

(c) the action is for relief from the consequences of a mistake,

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.

…

(3)  For the purposes of subsection (1), deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.”

74.The Plaintiffs appear not to rely on LO s.31.

75.The fact that a plaintiff did not know or could not, even with reasonable diligence, have discovered the essential facts for pleading a cause of action is not, on its own, sufficient to postpone the commencement of the limitation period.  To postpone time under LO s.26(1), the additional element of fraud, deliberate concealment or mistake must be shown: Hotung Investment (China) Ltd v Ernst & Young (a firm) [2012] 5 HKLRD 421, §§29-30, Kwan JA (as she then was). 

76.To rely on LO s. 26(1)(b), the Plaintiffs must prove:

(1)  Deliberate concealment of relevant facts and the 6-year limitation period starts to run from the date on which the concealment was discovered.

(2)  The burden rests on a plaintiff to establish that there has been a relevant concealment, and that he could not have discovered the concealed facts without exceptional measures which he could not reasonably have been expected to take.

(3)  A fact relevant to a plaintiff’s cause of action is an act without which the cause of action would be incomplete.  It is not relevant that a defendant may have concealed a fact which, if known, would merely go to strengthen an existing case.

Lee Tsan Sum v Wong Pui Hon David, [2010] 4 HKLRD 219, §39(a)-(c), Fok J (as he then was);  China Citic Bank International Ltd v Li Yan Hung and Ors [2022] HKCFI 354,§52, Wilson Chan J.

77.LO s.26(1) is construed strictly against the plaintiff, who bears the burden of showing that he/she falls strictly and literally within the exception given by statute: Hotung, §35.

78.The Plaintiffs have to show that the Bank took a positive act of concealment or withheld relevant information, with the intention of concealing the fact in question.  The standard of proof is on balance of probabilities.  Inferences can be drawn from suitable primary facts but proof of intention, particularly when an omission rather than a positive act is relied on, is often very difficult.  See Lee Tsan Sum, §71.

79.Mr Westbrook relies on Potter v Canada Square Operations Ltd [2021] 3 WLR 777, §§67, 137-138, wherein the Court took the view that active steps of concealment were not necessary, but realization of the defendant that there was a risk that the defendant had a duty to disclose to the plaintiff but failed to do so was sufficient.  With respect, insofar as Potter is inconsistent with Hotung, the latteris binding on this Court.

80.The Plaintiffs plead in DASOC §§96-97 a case of deliberate concealment.  It is alleged that they did not know and could not have reasonably discovered the Bank’s wrongful conduct.  In particular, they were not informed of the adverse information and risks concerning the Funds in their Portfolio, not told that the Four Representations were false, deceptive or ceased to be true.  The Plaintiffs were not aware of the concept of “side pocket”.  Before June 2009, the bank statements deliberately concealed the illiquid nature of certain investments in the Plaintiffs’ Portfolio.  It was after the Plaintiffs had given instructions to terminate the Account in June 2010 that the Bank informed the Plaintiffs by letter dated 28 October 2010 that full redemptions had been effectively postponed through side pockets.  The Plaintiffs were informed that over 20% of their Portfolio were side pockets.  Even so, the Bank, in response to enquiry by the HKMA, were unable to locate any notice from the underlying fund managers that the illiquid investment would be put into side pocket accounts.

81.As stated above, the Indorsement gives no clue that the Plaintiffs would rely on LO s.26.  Nor does the Indorsement contain any cause of action that involves intentional wrong.

82.Moreover, applying Hotung, it is not sufficient that the Plaintiffs did not know or could not reasonably have discovered the Bank’s wrongful conduct.  The pleaded case of the Plaintiffs is deficient in 4 aspects:

(1)  It has not identified the “active steps” taken by or “deliberate” wrongdoing of the Bank to conceal a fact relevant to the cause of action, or any “conscious decision” or “intention” to conceal on the part of the Bank. 

(2)  Mr Westbrook relies on Potter to submit that “given the inherently highly material nature, it is unthinkable that the Bank did not know that they had to disclose the Relevant Facts to Ps”.  However, not only has this not been pleaded in the DASOC, but this submission is also inconsistent with Hotung.

(3)  The Plaintiffs failed to explain why they could not reasonably have discovered the alleged wrongful conduct of the Bank through due diligence and why they could not have discovered the concealed facts without exceptional measures which they could not reasonably have been expected to take: Lee Tsan Sum, §39(b). 

(4)  The Plaintiffs failed to pinpoint the date when they could, with reasonable diligence, have discovered the concealment for the purpose of LO s.26.  On the Plaintiffs’ pleaded case, in June 2009, the bank statements provided to them marked certain illiquid investments as “side pockets” with the symbol “##” and provided an explanatory note of the meaning of side pockets. There was no explanation as to why the Plaintiffs could not, with reasonable diligence, have discovered the meaning of side pockets at or about that time.

83.For the reasons given in this Section, the Plaintiffs’ reliance on LO s.26 to get round the limitation issue simply does get off the ground.

G.      THREE-STAGE TEST

84.The appeal can be dismissed on the limitation ground alone.  I only deal with the rest of the arguments for the sake of completeness.

G1.    Misrepresentation Claim

85.This is based on the Title and Expertise Representation, and Redemption and Exit Representation (DASOC, §§ 94-95, 98(4)-(5)).

86.The pleaded losses have 4 limbs:-

(i)  making the US$3m Investment, which took place on 24/10/06;

(ii)  making the US$7m Investment, on 20 & 26/11/07;

(iii)  the Redemption Instruction, made on 16/9/08; and

(iv)  the loss of the chance to invest US$10 million or any part thereof in the Plaintiffs’ “Accustomed Investments” which would have made a gain.

87.In respect of the losses in limbs (i) and (ii), the causes of action were time-barred before issue of the writ.  Insofar as the misrepresentation is said to be based on fraud, the new cause must have been time-barred because the Indorsement cannot be read in anyway as including a claim in intentional wrong.  LO s.26 also does not apply for the reasons given in Section F above.

88.In respect of the loss in limb (iii),

(1)  The cause of action was time-barred on the date of the Amendment Summons.  The Bank passes Stage 1.

(2)  The misrepresentation in the Indorsement fell within the same timeframe as those pleaded in the DASOC.  However, §2 of the Indorsement pleads a misrepresentation “as to the liquidity of the Plaintiffs’ investment in the Investment Funds”, which is completely different from the pleaded misrepresentations in the §§94-95 of the DASOC.  The Bank passes Stage 2.

(3)  DASOC §10 focuses wholly on the background and role of Lee with respect to the Portfolio.   DASOC §13(2) is based on the Bank’s own circumstances with the Funds and access to information relating to them that the Bank would know when to exit from a particular Fund.  One can compare these to SOC §7, where Lee and Fung were held out to the Plaintiffs as “experienced and responsible investment advisers and managers”.  None of the matters in DASOC §10 or 13(2) have been raised in existing pleadings and need not be investigated at a trial on the SOC.  The Bank passes Stage 3.

89.In respect of limb (iv), loss of chance is a consequence of the tort giving rise to the damage.  It is still the dates of accrual of action in limbs (i) to (iii) that determine when the cause of action arose.

90.Overall, the misrepresentation claim fails the 3-stage test.

G2.    Breach of contract and collateral warranties

91.To establish a claim for breach of collateral warranties, the Plaintiffs need to show (i) a promise or assertion made by the promisor, (ii) which was intended to have contractual force, (iii) in reliance on and/or in consideration of the promise or assertion, the person to whom the promise was made entered into the main contract, (iv) the warranty was inaccurate, and (v) the person to whom the promise was made suffered loss as a result.  It is not necessary for the collateral warranties to be made fraudulently or negligently: New York Laser Clinic Limited v Naturastudios Limited [2019] EWHC 2892 (QB), §§34-66.

92.The new causes rely on express terms in the Main Agreement, stating that the Bank would be acting as the customer’s agent when carrying out the discretionary investment and portfolio management service. On top of that, there were implied terms to and implied duties under the Main Agreement (DASOC §§25-27).

93.Paragraph 65 above has explained why the contract claim was time-barred when the writ was issued.  The Bank passes Stage 1.

94.To the extent the breaches are of implied terms and implied duties, the material facts pleaded in the DASOC are very different from those is the SOC. 

95.DASOC §§7, 10, 49, 52, 54, 55-56 allege that Lee’s position was exaggerated by the Bank as to give rise to the Title and Expertise Representation when in fact he did not perform the duties of a Portfolio Manager (§§7, 10).  By the time the Bank made the first purchase of the BlueBay Recovery Fund, that Fund was already in the course of being delisted from the Irish Stock Exchange and was officially delisted with effect from 16 August 2006 (§49).  The Model Portfolio regarding the BlueBay Fund was inaccurate and/or materially misleading (§52).  Redemption of the BlueBay Fund was effectively suspended from 30 June 2008 to at least July 2009 and the Plaintiffs were not notified (§54).    The Discus Fund was not listed in the Model Portfolio but was purchased on behalf of the Plaintiffs between 31 October 2006 and 26 May 2010.  Unknown to the Plaintiffs, in August 2007, the SEC in USA complained about an entity acting as cash manager to the Discus Fund and defrauded client funds including the Discus Fund.  But for deliberate concealment from the Plaintiffs of such an industry-wide known event, the Plaintiffs would have inquired into the event, properly assessed the risks involved and would have instructed the Bank to redeem the entire portfolio (which was then of US$3 million) (§§55-56).

96.SOC §§12 and 13 plead contractual terms which were duties to act honestly and fairly, to exercise reasonable skill and care when providing advice, managing the Plaintiffs’ money and keeping them informed of all material information in respect of the Funds, not to invest in the Funds which suffered from problems under SFO, ss. 277 and 108, comply with the Code of Conduct in dealing with the Plaintiffs, providing accurate and up-to-date monthly statements and necessary documents in respect of the Funds on demand.  There are also pleaded in SOC §54 duties of the Bank as trustees. 

97.The Bank passes Stage 2.

98.It follows that what needs to be investigated under the DASOC is different from those in the SOC.  Stage 3 is met.

G4.    Negligence Claim

99.DASOC, §§28, 98(3) and (5) are premised on breach of duty of care.  The loss and damage are identical to that of misrepresentation.  The same analyses in on misrepresentation apply.

G5.    Breach of Statutory Duties

100.SFO s.277 concerns disclosure of false or misleading information inducing transactions. The analyses on misrepresentation and negligence apply. 

101.DASOC alleges that breach of implied terms and breach of duties (paragraphs 64-65 above) amounted to wilful default and/or gross negligence under SFO s. 108, such that the Bank should pay compensation.

102.At the time when the Plaintiffs opened the joint account with the Bank and engaged the discretionary investment portfolio management service of the Bank under the AIF Programme, Lee knew or was reckless as to whether the Redemption and Exit Representation, the Title and Expertise Representation were false, deceptive and/or misleading, or without reasonable care to ensure its truthfulness and accuracy.  The Bank is said to have breached SFO s. 108.

103.LO section 4(1)(d) provides for a 6-year limitation period for actions to recover any sum recoverable by virtue of any Ordinance.  A claim of breach of statutory duty is characterized as a claim in tort: McGee, §4-003, and the limitation period is also 6 years.

104.The pleaded case shows that the cause of action is time-barred at the time of the writ. The Bank passes Stage 1.

105.The amendments require investigation of a deliberate wrong, as opposed to negligence, and are outside the purview of the Indorsement.  The Bank passes Stages 2 and 3.

G6.     Breach of fiduciary duties

106.The limitation period is 6 years.  The Bank passes Stage 1.

107.SOC §14 pleads that unknown to the Plaintiffs at the time, the Bluebay Recovery Fund was in truth and in fact different to the one named in the Fund Proposal, namely, BlueBay High Yield Total Return Fund Ltd. 

108.DASOC §41 pleads that “the Bank made purchases of the BlueBay Recovery Fund on behalf of the Plaintiffs …The Plaintiffs have never been informed of the source(s) of the units purchased on their behalves, but it is to be reasonably inferred that, given the fund’s suspension and/or closure to new investments at the time, the said purchases could only have been sourced internally from within the Bank. In view of the problems suffered by the fund …, it is to be reasonably inferred that the Bank acted in conflict of interest to the detriment of the Plaintiffs by sourcing the Plaintiffs’ purchases internally from within the Bank.”  These allegations involve a wholly new scope of investigation concerning the BlueBay Recovery Fund. The Bank passes Stages 2 and 3.

H.     AMENDMENTS BOUND TO FAIL ISSUE

109.The Bank submits that the proposed new claims have inherent defects and are bound to fail.

110.The Court is entitled to have regard to the merits of the amendments only if the merits are readily apparent without prolonged investigation: Hong Kong Civil Procedure 2022, Volume 1, §20/8/6. 

111.The Court will take the proposed amendments to their highest.  Amendments are to be refused only if they are bound to fail.  See Bank of China v Leigh Hardwick, HCA 1110/2006, 28 August 2013, §2. 

H1.    Misrepresentation

112.DASOC §94, the Title and Expertise Representation, and the Redemption and Exit Representation are said to have been made when Lee knew or was reckless as to whether those Representations were false, deceptive and/or misleading, alternatively made without having taken reasonable care to ensure its truthfulness and accuracy.  This is in substance a late plea of fraud.

113.The Court should disallow a belated introduction of a plea of fraud, particularly in the absence of good reason for delay: Li Ngan Kwan, §64.

114.In the present case, there was no reason provided for the delay save that the plea was made as a result of considering the disclosed materials.  And yet there was a 13-month delay between the statement of claim in the Related Action on a similar set of facts in February 2020 and the Amendment Summons in March 2021.

115.The inference must be that the Plaintiffs’ legal representatives did not consider that there was sufficiently cogent evidence to plead causes involving fraud and dishonesty then: Li Ngan Kwan, §65.  Worse still, no particulars of fraud or intentional wrong have been given in the DASOC.

H2.    Breach of contract and collateral warranties

116.The 4 Duties are premised on implied terms. 

117.Firstly, it is trite law that one cannot imply obligations that are contrary to the express terms of an agreement: Kwok Wai Hing Selina v HSBC Private Bank (Suisse) SA [2012] 4 HKC 260, §105, Reyes J.

118.The alleged Duties were contrary to the express clauses in the STC and RDS which excluded the Bank from various liabilities.  By way of example:

(1)  Contrary to the Duty to Inform: the Bank had “absolute discretion on behalf of the Customer” to buy and sell and “generally to exercise complete control and all powers in relation to the management of the Portfolio”. Other than providing regular bank statements, “the Bank is not required to confirm, whether orally or in writing, any transaction nor the essential features thereof carried out pursuant to the Management Services”. See clauses 2.1 & 11 of Section VI of the STC. 

(2)  Contrary to the Duty to Advise, clause 9.1-9.2 of the RDS states that whilst the Bank may provide information or express opinions from time to time, such information or opinions are not offered as investment advice.  The Customer should place no reliance on the Bank to give advice or make recommendations.  If in doubt about the risks involved in any trading the Customer should seek independent professional advice.  In clause 10(c) of the STC, the Customer represents to the Bank that the Customer has sufficient knowledge and experience as to be able to evaluate the merits and risk of entering into each transaction and has made his own independent decisions to enter into such transaction.  The Customer is not relying upon any communication of the Bank as an investment advice or as a recommendation to enter into any transaction.  In Selina Kwok (§§103-106), the Court refused to imply the duty to advice in the light of similar clauses into the banking contract.

(3)  Contrary to the Duty to Manage, see clause 2.1 of Section VI of the STCquoted in sub-paragraph (1) above.  In Orient Centre Investments v Societe Generale [2007] 3 SLRC(R), 566, the Singapore CA held that “the essence of a discretionary account is that the investment manager may make any investments he thinks fit or suitable for his client without reference to his client. The fact that an investment account is discretionary or advisory cannot determine the duties of the trader or manager to the client or his liability for losses suffered by the client. In the case of the structured products, the contractual terms speak for themselves”: §§56, 58.  Further, as a matter of law, where a discretion conferred on a contracting party is unqualified, the Court’s role is to ensure that that power is not abused by implying a term that the contractual decision-making process is lawful and rational in the public law sense:  Chitty on Contracts (34^th ed.), §16-029, but that implied term is not relied on in the DASOC.

119.Secondly, the mere fact that the parties have had a relationship of customers and banker did not mean that the Bank had a duty to consider the prudence of an investment from the customers’ perspective or to warn him of the risk involved.  The mere act of giving advice did not necessarily mean that a bank had assumed legal responsibility for it. An important aspect to decide if the Bank had assumed the legal responsibility was the terms of the contract between them.  See Shine Grace Investment Ltd v Citibank, N.A.[2018] HKCFI 1737, §§88-94, Ng J.

120.Thirdly, the Duty to Advise and Duty to Classify are doomed to fail due to contractual estoppel:

(1)  Where the parties agree that a certain state of affairs should form the basis for the transaction in a contractual document, neither party can subsequently deny the existence of the facts and matters upon which they have agreed, at least so far as concerns those aspects of their relationship to which the agreement was directed: Peekay Intermark Ltd v ANZ Banking Group Ltd [2006] 1 CLC 582, §56.

(2)  In view of the preceding paragraph, the Plaintiffs are contractually estopped from arguing that the Bank owed any Duty to Advise or Duty to Classify.

(3)  Further, in the Account Opening Booklet, the Plaintiffs confirmed that they “duly considered the Hong Kong Securities and Futures (Professional Investor) Rules (the Rules) and notice(s) issued by the Bank in relation thereto, and agree to be classified as a “professional investor” under the Rules…”[1].  The Plaintiffs are thus contractually estopped from arguing that they have been misclassified as professional investors.

121.Fourthly, the Duty to Classify is bound to fail because, under the Hong Kong Securities and Futures (Professional Investor) Rules (Cap.571D), rr.3(b) & 5, a “professional investor” is defined as including an individual with an investment portfolio of not less than HK$8 million. The Plaintiffs had deposited US$10m with the Bank for the investment and were clearly required by the Rules to be classified as professional investors.

122.Fifthly, the implied fiduciary duties in DASOC §27(3) is bound to fail as being contrary to the express terms:-

(1)  The primary source of duty between a principal and an agent is a matter of contract law.  It is possible for fiduciary duties to be excluded even where there is conflict between a fiduciary’s duty and his interest, provided the principal gives his authorization with informed consent and disclosure of the fiduciary’s interest in the transaction: MA(HK) Ltd v Yeung Yuk Sing, HCA 1641/2010, 31 October 2017, §§56-58. 

(2)  In this case, the pleaded fiduciary duties are excluded by 2 clauses in the STC:

(a)  Clause 10.1 of Section VI which provided that,

“When managing the Portfolio, the Bank may effect transactions on behalf of the Customer when the Bank or a Group Office has an interest, relationship or arrangement that is material or a conflict of interest in relation to the transaction. Such transactions will be carried out on arm’s length terms consistent with best execution standards and at a price and on terms that are no less favourable than could reasonably have been expected had such transaction been effected through or with an independent third party. By way of example of such conflicts of interest, the Bank or a Group Office could be (a) matching the Customer’s transaction with that of another customer of the Bank by acting on behalf of both customers…” (underline added)

(b)  Cl.9.3 of Section I which provided that,

“The Bank shall be entitled at its discretion to deal as principal on its own account or trustee or agent for the Customer without disclosing such capacity to the Customer in relation to any transaction (notwithstanding that it is also under certain circumstances acting as agent of the Customer) and without being liable to account for or disclose to the Customer any profit derived by it in such capacity (whether in the form of commission, rebate or otherwise)” (underline added)

(3)  Such express terms have been upheld by the Court.  In Ko Wang Ming v Hong Kong Forex Investment Ltd, HCA 2320/2008, 27 December 2013, §107, Deputy Judge Sakhrani  held that “by agreeing that the 1^st defendant may act as principal and take an opposite position to the plaintiff the 1^st defendant was permitted to act in its own interest and against the plaintiff's interest”.

123.Sixthly, in respect of the collateral warranties claim arising from the statements in the Pitch Book and the new representations (DASOC §§8, 10, 12, 13(2) and 29):- 

(1)  A collateral agreement must be objectively viewed and the question is whether “on the totality of the evidence, must the parties be taken to have intended that the representation made by one of them should form part of the basis of the legal relationship between them”: Sui Kan (HK) Ltd v Kingspower Bullion Ltd, HCA 937/2010, 2 November 2012, Harris J, §31.

(2)  Any collateral contract could have been excluded by clear wording in the disclaimer on the basis of contractual estoppel: Taberna Europe CDO II plc v Selskabet AF1 [2017] QB 633, §19, CA.

(3)  The Pitch Book contains a clear disclaimer (though in small print):

“This document is not and should not be construed as an offer to sell or solicitation of an offer to purchase or subscribe for any investment… PBRS HNK and the HSBC Group makes no guarantees, representations or warranties and accept no responsibility or liability as to its accuracy or completeness”.

The parties could not have intended the Pitch Book to govern their relationship.

H3.    Breach of Unconscionable Contracts Ordinance (“UCO”), Control of Exemption Clauses Ordinance (“CECO”) and Misrepresentation Ordinance (“MO”)

124.UCO s.5(1) (Cap 458) provides that in a contract for the supply of services in which one of the parties deals as consumer, if the court finds any part of such contract to have been unconscionable in the circumstances relating to the contract at the time it was made, the court may refuse to enforce the contract, or enforce the remainder of the contract without the unconscionable part or limit the application of any unconscionable part so as to avoid any unconscionable result.  In determining whether clauses are unconscionable, the court takes into account all relevant facts, including those in UCO s.6(1).

125.MO s.4 (Cap 284) provides that if a contract contains a term which would exclude or restrict, amongst others, any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made…the terms shall be of no effect except insofar as it satisfies the requirement of reasonableness as stated in CECO s.3(1).

126.CECO s.3(1), Cap 71, provides that reasonableness is satisfied if the court determines that the term was a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably have been, known to or in the contemplation of the parties when the contract was made.

127.In brief, Mr Westbrook submits that the Bank had a relatively stronger bargaining position, having drafted the STC and RDS.  There was no evidence that critical parts of the STC and RDS were drawn to the Plaintiffs’ attention or had been explained to them in a way that they would understand. 

128.Further, he submits that as a result of conduct of the Bank, the Plaintiffs were required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the Bank: UCO, section 6(1)(b).  By way of example,

(1)  ST&Cs Section I §10.1(c) provides, that:

“…The Customer is not relying upon any communication (written or oral) of the bank as an investment advice or as a recommendation to enter into any transaction”.

(2)  RDS §9.1 provides, inter alia, that:  

“…whilst we may provide information or express opinions from time to time, such information or opinions are not offered as investment or tax advice. You should decide upon any dealing only after having made all such enquiries and assessments as you consider appropriate, and you should place no reliance on us to give advice and make recommendations.”.

129.Mr Westbrook submits that it could not be reasonable for the Bank to rely on those clauses when, on the Plaintiffs’ case, the Bank did provide the advice. 

130.Further, Mr Westbrook relies heavily on Chang Pui Yin  where similar clauses (pp465-466) were deployed by the defendant bank to escape or restrict liability.  If the substance of the clauses was to exclude or restrict liability, the validity of the exclusion clauses were subject to a fact sensitive analysis of reasonableness under CECO s.3, which has to be measured against all the circumstances of the case.  There is clearly an arguable case.

131.The reliance on these statutory provisions first appeared in the Reply §§20(3), 22(8), 36(2).  They are then introduced under the proposed amendments in DASOC §25, unparticularized.  The MO is not even mentioned in the DASOC. 

132.Further, Mr Westbrook’s submission relies on general contract principles but ignores the whole host of authorities on UCO/CECO/MO which gave effect to similar express terms now relied on by the Bank, eg Kwok Wai Hing Selina, DBS (Hong Kong) Ltd v San-Hot HK Industrial Co Ltd & Anor [2013] 4 HKC 1,§234, DHCJ Pow SC.

133.Moreover, the circumstances in Chang Pui Yin were distinguishable from the present case.  The customers therewere an elderly couple who led very humble lives until they came into very substantial inheritance at an old age.  They had limited knowledge and rudimentary understanding about the investments they made through the Bank and the risks associated with them. Their investment objective had always been to preserve their capital and achieve a return slightly better than bank deposits, belonging to the category of medium-risk investors. They were manipulated by the bank officer into investing in high-risk products that were demonstrably not suitable.  The bank officer had broken her promise of re-adjusting their portfolio back to medium risk level. The risk profiles maintained by the bank internally were changed, without the couple’s knowledge, to high risk.  Their accounts were held to be discretionary accounts to which the exclusion clauses did not apply. The case did not lay down the principle that just because a customer was elderly, he/she, without more, would be able to invoke UCO/CECO/MO. 

134.Specifically, reliance on CECO is bound to fail because CECO would not apply to a situation where the Bank had not undertaken duties towards the Plaintiffs: Kwok Wai Hing Selina, §157, Reyes J.  Terms that merely define the nature and scope of the parties’ relationship and are not exclusion clauses are not subject to CECO: San-Hot.

H3.    Negligence claim

135.The duties in tort are the same as the contractual terms.  In a banker/customer relationship established through agreements, recourse to the law of tort cannot add significantly to an analysis based on the law of contract: Selina Kwok, §138.

H4.    Breach of SFO and Code of Conduct

136.The analyses concerning misrepresentation or negligence apply to the SFO s.277 claim.

137.As for the Code, it sets out “high level” general principles. Absent express incorporation into the contract, the Code cannot override express contractual terms or impose a contractual duty which a bank has not undertaken: Kwok Wai Hing Selina, §§133-135.

138.The claim of the Plaintiffs under this limb is bound to fail.

I.     DELAY AND PREJUDICE ISSUE

139.The Plaintiffs dispute the claim of prejudice to the Bank.  They say that apart from the 2 Meetings in August 2006, which must have been intensively reviewed by both sides from the outset of this litigation, almost all of the relevant evidence is documentary and does not depend on memories of events long past. 

140.Mr Westbrook points out that the matters complained of had been the subject of intensive internal investigation by the Bank’s Operational Risk and Internal Control Department since the time of the 1^st Plaintiff’s threat of claim.  Investigation reports were sent to the Bank’s Legal Department for legal advice in 2011.  Mr Westbrook submits that none of the matters in the DASOC would require the Bank to investigate facts or obtain matters completely outside the ambit of the facts which the Bank could reasonably have assumed to have investigated for the purpose of defending the unamended claim.  He quotes as an example Chan Ping Che v Gao Gunder [2019] HKCFI 670, §§91 & 92.

141.I am unable to agree with Mr Westbrook.  The subject events took place 14 year ago.  The writ was issued on the eve of expiration of the limitation period.  It took the Plaintiffs another 8 years to come to the Court for amendments because they say that, until discovery, they did not have access to most of the documents disclosed by the Bank. 

142.The Bank’s 3^rd and 4^th lists of documents were filed on 18 July 2017 and 19 July 2018, respectively, ie 4 years and 3 years before the Amendment Summons.  The long delay in issuing the Amendment Summons cannot be explained by the old age of the Plaintiffs and their lack of understanding of finance and hedge funds.  They have been acting with legal representatives all along.  Even taking into account the volume of documents and the need to engage experts, it is hardly acceptable that a party needs 3-4 years to draft up the amendments.

143.It is irrelevant that the Plaintiffs have reserved their right to plead further after discovery (DASOC, §§35, 39, 48).  It is their duty is to proceed expeditiously to put forth the proposed amendments.

144.Further, it is alleged by the Plaintiffs that the Bank should not have purchased or maintained certain funds in the Plaintiffs’ Portfolio as they were not of reasonable quality and the Bank failed to put in place effective due diligence and/or monitoring mechanisms to ensure an ongoing review of the performance, selection and suitability of the funds for the Plaintiffs’ portfolio.

145.To deal with issues in the preceding paragraph, the Bank would not only require Lee and Fung and another employee who took over the Plaintiffs’ Account as witnesses, but also research analysts responsible for due diligence and monitoring the quality of funds.  11 out of 13 research analysts have left the Bank and prospects of obtaining contact with them are doubtful.  The remaining 2 may not have memory of the allegations about the Funds given the long lapse of time.

146.Significant costs and time will have to be incurred in yet another extensive round of discovery eg in relation to the BlueBay Fund and Bluebay Recovery Fund even before January 2004 (ie 18 years ago). It is unlikely for the Bank to be able to locate such documents after the serious lapse of time.

147.I find the delay to be inordinate and that it gives rise to prejudice to the Bank that cannot be compensated for by costs.  The amendments ought to be rejected.

J.     CONCLUSION AND COSTS

148.The Bank’s arguments as set out in Table 1 have been made out.  The amendments are bound to fail.  The inordinate delay in seeking amendment give rise to real prejudice to the Bank which cannot be compensated for by costs.  I therefore dismiss the appeal. 

149.On a nisi basis, I order the Plaintiffs to bear the costs of the Bank, summarily assessed at $450,000.

150.I thank counsel for their assistance.

Mr Simon Westbrook SC, Mr Alexander Tang and Mr Kwan Ping Kan, instructed by Robertsons, for the 1^st and 2^nd Plaintiffs

Ms Eva Sit SC and Mr Michael Lok, instructed by Allen & Overy, for the Defendant