PT ASURANSI TUGU PRATAMA INDONESIA TBK (formerly known as PT PRATAMA INDONESIA) v. CITIBANK N.A.

CACV 548 /2018

[2022] HKCA 510

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 548 OF 2018

(ON APPEAL FROM HCCL NO 1 OF 2007)

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J U D G M E N T

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Hon Kwan VP:

1.  This is the plaintiff’s appeal against the judgment of Anthony Chan J on 12 October 2018 (“the Judgment”)^[1], by which he dismissed the plaintiff’s claim against the defendant bank in respect of 26 payments totalling about US$51.64 million out of the plaintiff’s account held with the defendant on the ground that it is time-barred. It is the plaintiff’s case that the account was opened and operated by its rogue directors and the defendant had failed to exercise the duty of care owed by a bank to its customer.

2.  We owe an unreserved apology to the parties for our delay in the handing down of this judgment.

Background

3.  The relevant background matters are taken from the Judgment and may be stated as follows.

4.  The plaintiff was the largest insurer in Indonesia in the 1990s. It was founded in 1981 by P N Pertamina, the Indonesian state-owned oil and gas company, to act as its captive insurer.  The plaintiff had two subsidiaries to act as its agent in the London insurance market: TRB & Co Ltd (renamed YHT & Co Ltd; “YHT”) and TRB (London) Ltd (“TRB London”).  The plaintiff also had a subsidiary in Hong Kong called Tugu Insurance Co Ltd (“TIC”).

5.  Of the directors of the plaintiff from 1986 to 2005, there were four alleged rogue directors: Mohamad Hasan (“Hasan”; a shareholder and Commissioner of the plaintiff), Sonni Dwi Harsono (“Harsono”), Rizaludin Sunjaya (“Sunjaya”) and Anton S A Ponto (“Ponto”).  Hasan was an associate of President Suharto and served briefly as the Minister of Trade and Industry in 1998 just before President Suharto stepped down. The rogue directors did not at any material time constitute more than half of the plaintiff’s board of directors.

6.  TRB London was an indirect wholly owned subsidiary of the plaintiff.  Its directors included Harsono, Sunjaya and Faisal Abdaoe (“Abdaoe”).  YHT was wholly owned by the plaintiff and its directors at the material times were Hasan, Harsono, Sunjaya and Abdaoe.  In respect of TIC, its shareholders from 1994 to 1998 were Pertamina, Hasan and the plaintiff.  Its directors from 1999 to 2001 included Hasan, Harsono and Abdaoe.

7.  According to the Articles of Association of the plaintiff, it should be managed by a board of directors under the supervision of a board of commissioners.  The power of the board of commissioners included inspection of the books of the plaintiff and it was entitled to request information from the board of directors and the assistance of experts to conduct investigations.  Abdaoe became the President Commissioner of the plaintiff in August 1988.

8.  The plaintiff opened a bank account with the defendant’s Jakarta branch in 1981 and opened another account with the same branch in June 1989.

9.  In December 1990, Hasan, Harsono and Sunjaya opened a bank account in the name of the plaintiff with Citicorp Investment Services Ltd (“CISL”) in Hong Kong.  CISL was at the time a subsidiary of the defendant.  The account application form was accompanied by a Mandate for Account of a Limited Company (“Mandate”) with the board resolution of the plaintiff on 13 December 1990, passing these resolutions:

(a)     A Citifunds Account be opened with CISL in the name of the plaintiff and CISL was authorised to treat and consider as valid instructions given in relation to the withdrawal of funds from and deposit of funds into and the general operation and opening of the account in the following manner.

(b)     Written instructions of the plaintiff might be given and signed by any two of the persons as set forth in Schedule 1.

(c)     The plaintiff certified that Schedule 1 was a true and correct list of specimen signatures of the persons who were authorised to sign on the Account.

10.  Schedule 1 of the Mandate contained the names of Hasan, Harsono and Sunjaya with their official titles (Commissioner, President Director and Finance Director respectively) and their specimen signatures.

11.  For the “Mailing Address” on the application form, it was stated: “C/O Citibank N A Jakarta P O Box 2463 JKT HAM Custodian”. HAM signified the “Hold-All-Mail” service offered by the defendant to its customers as required by some customers for security reasons.

12.  In April 1994, as a result of corporate reorganisation, the plaintiff’s account with CISL was transferred to the defendant’s Hong Kong branch (“the Account”).  This was described by the defendant as a “migration” of the plaintiff’s CISL account.  A letter dated 25 April 1994 was sent by CISL to its customers notifying them of the transfer of accounts to the defendant.

13.  There was a set of opening documents with terms and conditions for the Account dated 6 July 1995.  Among them was a fresh Mandate with the plaintiff’s supporting board resolution.  Paragraph 3 of the Mandate stated: “That you be instructed to honour all checks, bills accepted, promissory notes or other orders which may be drawn or made … which may be signed on our behalf … and honour all our written instructions as described below, provided such checks, bills, notes, orders or receipts or instructions are signed … by such number of signatories as from time to time authorized pursuant to this mandate …”.

14.  Schedule 1 of the fresh Mandate had the same effect as the previous one, namely, the authorised signatories were Hasan, Harsono and Sunjaya, and any two of them might give any instructions in relation to the Account.

15.  The Account was a private banking account and had a designated Relationship Manager (“RM”), who was the primary point of contact with the customer.  The RM at the relevant period was Ms Indah Hadimulya (“Hadimulya”).  A number of the Payment Instructions (“PI”) were sent to the defendant for her attention.  The name of another staff, who might be her assistant, appeared on some of the PI. The defendant, in particular Hadimulya, was aware that the plaintiff was in the insurance business.

16.  Between 23 June 1994 and 14 July 1998, there were payments in and out of the Account, of which 26 payments out were disputed (“Disputed Payments”) and formed the subject matter of the plaintiff’s claim.  There was no other material activity in the Account during the relevant period apart from the payments into the Account from YHT, TRB London and TIC (most of which exceeded US$1 million) and the subsequent transfer out via the Disputed Payments with the accrued interest (mostly within two weeks of payment).

17.  Although the PI for five of the Disputed Payments are no longer available, the judge inferred that all such payments were preceded by a PI.  Each of the available PI contained the signatures required pursuant to the Mandate, namely, those of Sunjaya and Harsono.  The judge also inferred that for the five missing PI, payments were made in accordance with the authorised signatures in the Mandate.

18.  Of the Disputed Payments, about US$11.7 million went to Sunjaya, US$1.1 million to Harsono, US$33.1 million went to an account in the joint names of Sunjaya and Harsono, US$4.1 million to Hasan, US$100,035 to Ponto and US$1.4 million to a Citibank account in Jakarta marked “as per your instructions” on the PI.  Hence, save for the last mentioned unidentified account and the payment to Ponto (there is no clear evidence whether the defendant knew Ponto was a director), all the Disputed Payments were made to the known officers of the plaintiff, with no apparent connection with the business of the plaintiff.

19.  The Account was closed on 30 July 1998, upon the instructions of a letter dated 16 July 1998 signed by Harsono and Sunjaya. That letter also instructed the defendant to pay the balance in the Account to a Citibank account in Jakarta with the beneficiary being “Sonny D Harsono/R Sunjaya”.  The balance, being a sum of US$250,328.07, is the last of the Disputed Payments.

20.  There were well publicised investigations over the financial affairs of the plaintiff and those of Hasan after President Suharto stepped down in May 1998.  Hasan, Harsono and Abdaoe were removed as directors and/or officers of the plaintiff in February 1999.  Hasan was arrested in early 2000 on fraud and corruption charges.  Sunjaya and Ponto were removed as directors and/or officers of the plaintiff in April 2000.

21.  According to the plaintiff, it became aware of the Account and the Disputed Payments in mid-February 2001, when it conducted a review of the affairs of TRB London.  It discovered that the plaintiff’s premiums paid to TRB London appeared to be missing or diverted and only a portion of the significant amount of premium paid by the plaintiff to TRB London was actually paid to underwriters.

22.  Correspondence between the parties concerning the Account began on 3 April 2001, through which the plaintiff inquired with the defendant about the status of the Account and the transactions that the Account was involved in.  Shortly thereafter, the defendant provided the plaintiff with documents relating to the Account, including the account opening documents, the bank statements, the PI and the termination letter.

23.  On 18 May 2001, the defendant made a report to the Joint Financial Intelligent Unit (“JFIU”) of the Hong Kong Police about the activities in the Account.  On 17 September 2001, JFIU wrote to the defendant stating that investigation had been conducted but no criminal activities had been detected.

24.  The defendant did not hear from the plaintiff again until 6 October 2006, when the plaintiff’s solicitors wrote to it alleging that it had wrongly debited the Account in accordance with the purported instructions which were given without the plaintiff’s authority.  A demand was made for repayment of US$51,638,964.73 plus interest, being amounts which the plaintiff claimed were fraudulently diverted from the Account by the rogue directors.

25.  The plaintiff had not sued any of the rogue directors to recover its very substantial loss, nor did it make any report to the police about the fraud.

26.  The plaintiff issued the writ in this action against the defendant on 2 February 2007.  By then, the defendant no longer retained a full set of documents and records relating to the Account during the relevant period of 1994 to 1998.  The plaintiff’s two witnesses had no personal knowledge of the events in question.  The defendant did not call the RM, Hadimulya, who had long since left the employment of its Jakarta branch.  One of its witnesses, Sharon Chan (“Chan”), had some dealings with the Account as the Operations Manager of the Hong Kong branch. Other than that, the defendant’s witnesses had no personal knowledge of the events.

27.  The plaintiff’s case, which was accepted by the judge, is that none of the PI and Disputed Payments were authorised or ratified by the plaintiff and none of the Disputed Payments was used for investment services associated with the Account or was in any way relevant to the purpose and objective of the plaintiff.  Instead, they were remitted into the rogue directors’ pockets for their own benefits.

The Judgment

28.  The judge found that despite the compliance with the Mandate in making the Disputed Payments, the defendant was in breach of its duty of care to the plaintiff in that the defendant was put on inquiry, by the time of the 3^rd Disputed Payment at the end of November 1994 when a pattern would have emerged, that it should have reasonable grounds for believing that the PI was an attempt to misappropriate the funds of the plaintiff but had taken no action to make inquiry about the propriety of the PI (Barclays Bank plc v Quincecare Ltd [1992] 4 All E R 363 at 376e to h)^[2].

29.  However, the judge dismissed the plaintiff’s claim as he held that the defendant has an unassailable defence on limitation of action.  He held that time ran from the closure of the Account in July 1998 when the relationship of banker and customer was terminated and the money thereupon became payable.  He rejected the plaintiff’s contention that as the unauthorised Disputed Payments and the unauthorised closure of the Account were of no effect, the plaintiff was entitled to demand reconstitution of the Account without the wrongful debits on 6 October 2006 and any limitation period would only run from the day of the demand^[3].  He also rejected the plaintiff’s contention of relying on section 26(3) of the Limitation Ordinance, Cap 347 (deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time) to delay the accrual of limitation period^[4].

30.  Given his holding that the plaintiff’s claims are time-barred, it was unnecessary for the judge to deal with the remaining issues. Nevertheless, he set out his decisions on those issues as they were fully argued.

31.  The judge rejected the plaintiff’s allegation that the defendant was “reckless” and “turned a blind eye” to the rogue directors’ diversion of funds for their personal benefit and “recklessly assisted” the rogue directors in breach of their fiduciary duties^[5].

32.  As for contributory negligence of the plaintiff, he followed the English and the current Australian approach where contributory negligence is available when the contractual duty of care co-exists with one owed in tort.  He would have apportioned blame equally on the plaintiff and the defendant^[6].

33.  In respect of the defendant’s reliance on clause I(P) of its Terms and Conditions for Bank, Fiduciary, Investment and Managed Investment Services (“General Terms”) (which were part of the contractual documents which came into existence on 6 July 1995), the judge held that the defendant cannot rely on this as exemption of liability due to its “wilful default”^[7].

The issues in this appeal

34.  The broad issues in this appeal raised in the notice of appeal and the respondent’s notice may be stated as follows:

(1) whether the defendant was in breach of the Quincecare duty: (a) whether the defendant was put on inquiry about the propriety of the PI; (b) whether it was proved that the defendant did not make any inquiries^[8];

(2) whether the judge should have held that the defendant was liable for all the Disputed Payments including the first two Disputed Payments prior to the end of November 1994^[9];

(3) whether the plaintiff is entitled to ratify any of the rogue directors’ acts regarding the Account so as to found an action thereon, alternatively estopped by conduct from claiming against the defendant^[10];

(4) whether the judge erred in holding that time began to run for the plaintiff’s claim from the date of the closing of the Account in July 1998^[11];

(5) whether the defendant is exempted from liability arising out of the Disputed Payments by virtue of Clause I(P) of the General Terms, Clause 3 of the Mandate, and Clauses I(E) and I(J) of the General Terms^[12];

(6) whether the defence of contributory negligence is available to the defendant and if so how should the apportionment be made^[13]; and

(7) whether any interest found due to the plaintiff should run only from the date of service of the writ^[14].

35.  The issues will be considered in the order set out above.

Issue 1(a): Whether the defendant was put on inquiry about the propriety of the PI

36.  There is no dispute about the law as to what the Quincecare duty of care requires.  What the defendant sought to challenge in the respondent’s notice is the judge’s application of the law to the findings of primary fact and the inferences to be drawn from the findings of primary fact.

37.  A concise explanation of the Quincecare duty of care may be taken from the judgment of Baroness Hale of Richmond PSC in Singularis Holdings Ltd (in liquidation) v Daiwa Capital Markets Ltd [2020] AC 1189 at §1:

“In Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363, Steyn J held that it was an implied term of the contract between a bank and its customer that the bank would use reasonable skill and care in and about executing the customer’s orders; this was subject to the conflicting duty to execute those orders promptly so as to avoid causing financial loss to the customer; but there would be liability if the bank executed the order knowing it to be dishonestly given, or shut its eyes to the obvious fact of the dishonesty, or acted recklessly in failing to make such inquiries as an honest and reasonable man would make; and the bank should refrain from executing an order if and for so long as it was put on inquiry by having reasonable grounds for believing that the order was an attempt to misappropriate funds. …”

38.  The authorities emphasised that statements in cases on relevant factors in assessing whether a bank is put on inquiry are not principles of law, as such cases are no more than decisions of fact and observations found in them are no more than comments on particular facts or situations^[15]. Likewise, what a bank should do when it was put on inquiry will vary according to the particular facts of the case^[16].

39.  The judge rightly reminded himself that the threshold which triggers the banker’s duty to make inquiry is high^[17], as “credit, not distrust, is the basis of commercial dealings”^[18] and, “in the absence of telling indications to the contrary, a banker will usually approach a suggestion that a director of a corporate customer is trying to defraud the company with an initial reaction of instinctive disbelief”^[19].  He also remarked that much of the challenges in the cross-examination of the defendant’s witnesses (Chan and Manoj Gopalakrishnan (“Gopalakrishnan”)) were based on hindsight with a mind to look for suspicious circumstances and that is not the applicable test^[20].

40.  The judge went through the “red-flags” pleaded by the plaintiff^[21] and found on the evidence that the duty of inquiry was triggered in this instance.  His relevant findings may be stated as follows:

(1) Lack of apparent business connection between the Disputed Payments and the plaintiff’s insurance business

41.  There is no dispute that the defendant, in particular Hadimulya, was aware that the plaintiff was in the insurance business.  Save for one payment which went to an unidentified account held with the defendant’s Jakarta branch and another payment to Ponto (there is no clear evidence whether the defendant knew about Ponto’s position in the plaintiff), all the Disputed Payments were made to the known officers of the plaintiff – Sunjaya, Harsono, Hasan.

42.  The judge noted there is evidence of payments of legitimate remuneration to these officers, and, in the case of Hasan, dividends (Hasan was a 35% shareholder of the plaintiff prior to 2000).  However, these payments, although of significant amount, were made once a year, and were dwarfed when compared with the Disputed Payments.

43.  The judge found that from June 1994 to July 1998, there were 25 (or 26) payments from the Account and most of them went to the rogue directors personally and there was no apparent connection between them and the plaintiff’s business.  Further, there was no other material activity in the Account during the period of time apart from the payments into the Account from YHT, TRB London and TIC and the subsequent transfer out via the Disputed Payments.  The judge took the view that even though this feature alone would not trigger a duty of inquiry, it ought to be taken into account with other factors in assessing whether the defendant was put on inquiry.

(2) The PI were signed by those who would benefit from them

44.  All the available PI were signed by Harsono and Sunjaya.  The judge bore in mind Gopalakrishnan’s evidence that the defendant was entitled to take comfort in the fact that according to the Mandate, any two out of the three authorised signatories (who were in the top echelon of the plaintiff) must sign to give valid instructions and that the defendant would not normally expect two such persons to collude and commit fraud against their own company.

45.  The judge noted this point cannot be made as regards the payments to Hasan and Ponto.  Giving due weight to Gopalakrishnan’s evidence, he would not regard this indicium as sufficient in itself to call for an inquiry by the defendant.  That said, he did not think this indicium should be ignored in considering the evidence if the defendant had reasonable grounds for believing that the PI was an attempt to misappropriate the funds of the plaintiff.

(3) The pattern of payment

46.  The payments from YHT, TRB London and TIC into the Account – most of which exceeded US$1 million – all went out of the Account together with the accrued interest.  All the PI came within a short period of time, mostly within two weeks of payment.  The judge found that the Account was used as a “temporary repository of funds”.  He treated Gopalakrishnan’s evidence on this (that the transaction pattern was not unusual for an operational account of a private company, and there was nothing which “jumps out” from the pattern) with caution, as it appeared to him that the witness was “over-protective” of the defendant.

47.  He commended the fairness of Chan who accepted in cross-examination that: “(i) that the RM should have considered the common features of the PI and the pattern of the Disputed Payments; (ii) had the RM looked at the previous transactions on 23 November 1995 or on each PI thereafter, she would have seen that the Account was being used as a temporary repository for funds; and (iii) that the Disputed Payments themselves were unusual.”

48.  The judge agreed with the suggestion made in cross-examination by the plaintiff’s counsel, Mr Nigel Kat, SC,^[22] that by the third of the Disputed Payments, a pattern would have emerged.  He found the pattern of payment “a powerful indicium that there was something wrong with the PI” and when this feature was considered in conjunction with the previous two, they presented a picture which should have alarmed a reasonable and prudent banker that there was a serious or real possibility that the plaintiff was defrauded by its directors.  He concluded that he was “in no real doubt” that the defendant was indeed put on inquiry.

(4) The HAM arrangement

49.  Although the judge did not think there was anything untoward with the HAM service, he noted there was a risk with such arrangement that the plaintiff might not have seen the bank documents of the Account.  This feature fortified his view that the defendant was put on inquiry by the time it received the PI for the 3^rd Disputed Payment (which is missing) sometime at the end of November 1994.

50.  On behalf of the defendant, Mr John Scott, SC^[23] sought to challenge each of the judge’s findings regarding the “red-flags” set out above.  It seems to me he was merely repeating the matters he had urged upon the judge and which the judge had considered and given such weight to as appropriate.  I am not persuaded there is any legitimate ground for the appeal court to disturb the judge’s inferences and findings arrived at on his evaluation of the evidence.  It cannot be shown that he was plainly wrong.  As apparent from the summary given above of the judge’s reasoning and findings, what the judge did was to mention the matters that he would consider, balance those matters (as they do not point in the same direction) and give such weight to them as he thought fit in all the circumstances.  On a proper reading of the Judgment, there is no inconsistency in his reasoning as alleged in the respondent’s notice.

51.  Nor is there any basis to challenge his inference and finding that a clear pattern of payment would have emerged with the 3^rd Disputed Payment and that the Account was used as a temporary repository for funds. The judge had reminded himself not to approach this with hindsight or with a mind to look for suspicious circumstances.  He was clearly entitled to prefer and accept the oral testimony of Chan under cross-examination to the evidence of Gopalakrishnan or Chan’s witness statement^[24] on the monitoring process of transaction instructions by the Operations team (as distinguished from any monitoring by the RM).  The defendant adduced no evidence to establish any involvement of the RM in the payments into the Account or that she was given reasonable explanations regarding the PI.  It gave no explanation why Hadimulya was not called to testify save that she had long since left its employment and that there is no property in a witness.  I do not think any speculative inference sought to be drawn from the lack of evidence from Hadimulya could assist the defendant.

52.  Mr Scott criticised the judge’s observation there was no other “material activity” in the Account during the relevant period apart from the payments in by YHT, TRB London and TIC and payments out via the Disputed Payments.  He made the point it is not clear there were no other payments in and out of the Account during the relevant period, due to the unavailability of the bank statements covering the period.  There is nothing in this criticism.  In making the remarks, the judge was clearly aware of this as he had expressly referred to this when he noted the confirmation of the plaintiff’s witness there is no dispute of the payments in and out of the Account apart from the Disputed Payments notwithstanding there is no clear evidence on such payments due to the unavailability of bank statements^[25].

53.  For all the above reasons, it has not been shown that the judge has fallen into any palpable error which could give rise to grounds for intervention by the appeal court.  I would uphold the judge’s finding that the Quincecare duty of inquiry was triggered in this instance.

Issue 1(b): Whether it was proved that the defendant did not make inquiries about the propriety of the PI

54.  Having found that an honest and reasonable banker in the defendant’s position would be put on inquiry, and noting that “it is not in dispute that the Defendant had taken no action to inquiry [sic] about the proprietary [sic] of the PI”, the judge held that negligence is established and the defendant was in breach of its duty of care to the plaintiff^[26].

55.  The judge was in error in stating that it is not in dispute that the defendant did not make any inquiries.  We were referred by Mr Scott to his closing submissions before the judge in which he submitted that the plaintiff has not satisfied the burden of proof that there was “no inquiry made about the business purpose of [the PI], the authority of the person to issue the instruction, and all the things that have been raised as breaches of the Quincecare duty”^[27]. Mr Scott refuted the inferences sought to be drawn by Mr Kat from the PI and the defendant’s internal documentation that there was no “voice logging” and no “validity check”^[28].

56.  As the Judgment does not contain any analysis of the available evidence due to the judge’s erroneous assumption, it falls on this court to analyse the relevant evidence in order to determine if the plaintiff has established that the defendant made no inquiries about the business purpose of the Disputed Payments.  Before doing so, I will just deal with a short pleading point raised by the defendant.

57.  Mr Scott submitted the plaintiff did not even plead that the defendant had failed to make necessary inquiries and no particulars were given of how the defendant had failed in its duties.  I do not think this is correct, on a fair and proper reading of the points of claim.  In §24A(b), it was pleaded that the defendant “[made] the Disputed Payments without making any inquiries and/or informing [the plaintiff’s] board of directors, or at least one or more of [the plaintiff’s] independent directors.” In §§27(i) and (ii) (albeit in the context of refuting the limitation defence that may be raised), it was pleaded that the defendant was “under a duty to make inquiries and/or to inform [the plaintiff’s] board of directors, or at least one or more of [the plaintiff’s] independent directors, of the Disputed Instructions”, and that “[the plaintiff’s] failure to do so in the circumstances amounted to a serious breach of duty …”.  There is sufficient pleading of the failure to make proper inquiries.

58.  I turn to the substantive points made by the defendant on this issue.  It is contended that not only had the plaintiff failed to establish that the defendant made no inquiries, to the contrary, it is established on the documentary evidence that the RM did make telephone inquiries with Harsono and Sunjaya in respect of a number of the PI.  In particular, the judge failed to take into consideration it was recorded on the PI that the plaintiff’s instructions were subject to “voice logging”.  Further, a number of the PI were affixed with the defendant’s MIFT^[29] chop, indicating that the RM had “spoken to client” about the payment instructions.

59.  According to the revised guideline of the defendant for the Private Banking Group on the policy and standards for MIFT dated January 1997, the 1997 MIFT policy was introduced in which a maximum limit of US$200,000 was set for telephone or facsimile instructions and US$500,000 for written instructions.  For transfer instructions that exceeded the limit, bank staff handling fund transfers would be required to comply with additional procedures^[30]. Where “validity check” was performed under the policy, a staff would check if the transaction was “consistent with previous and/or anticipated activity”^[31]. Before “validity check” was formally included in the 1997 MIFT policy, what was required in the earlier years was “voice logging” or a record of the transaction being pre-advised^[32].

60.  The PI received after January 1997 bore the defendant’s MIFT chop, showing that the policy was implemented.  Chan gave evidence that the MIFT policy has been a very important process which the Operations team “always observes” and she did not have “any doubt” that the procedure was complied with^[33]. Gopalakrishnan gave evidence that although the defendant “may not have crossed all the t’s and dot all the i’s, … there were no systemic issues that [he] could think that would have been there in the bank that would not have been picked up by the control functions who reviewed these transactions from time to time”^[34].

61.  We were referred by both parties to a bundle of the PI with signatures, handwritten annotations and internal chops and given an explanation of what they meant insofar as they could be deciphered.  Mr Scott drew our attention to the chops and initials of the defendant’s staff, evidencing that the RM had “spoken to client” as named (Sunjaya, and in some instances both Harsono and Sunjaya) in respect of a number of the PI, as shown by the MIFT chops.  As mentioned, Hadimulya was not called as a witness, so there is no evidence of what was discussed in her conversations with Harsono and Sunjaya.  Mr Scott submitted there is a real likelihood that Hadimulya had discussed with Harsono and Sunjaya the purpose of the Disputed Payments, as it is difficult to imagine that this topic would be overlooked in the defendant’s rigorous checking exercises.  In any event, as the burden of proof is on the plaintiff, due to the lack of evidence from Hadimulya, the judge should not have found that the defendant had failed to make any inquiry.

62.  Even if it was probable that Hadimulya had discussed with Harsono and Sunjaya the purpose of the Disputed Payments, I am inclined to agree with Mr Kat that the defendant had not discharged its duty to make inquiry as to the propriety of the instructions.  That duty is not discharged by making inquiry with the authorised signatories who gave the instructions and who would benefit from the instructions as the recipients of funds.  As alleged in the points of claim, the defendant had failed to make inquiry with the independent directors.  The MIFT policy, as recognised by Chan, was “intended to prevent third party fraud on accounts and would not, nor was it designed to, detect or prevent the payments out of the Plaintiffs Account by its authorised signatories.”^[35]

63.  Gopalakrishnan maintained in cross-examination it is his view and belief that the defendant would deal with the people who are authorised to operate the Account and not go to talk to somebody else not associated with the Account or not authorised to operate the Account. When it was put to him that a prudent or reasonable banker in this situation would have checked the PI with the plaintiff’s head office in Indonesia, he replied that he did not think it possible, because the plaintiff has authorised three individuals to operate the account and the defendant has got “no other leads to go and talk to anybody else”.  He also said it was not permissible to deal with anyone other than the three authorised signatories due to “privacy issues and secrecy issues”.  He reiterated that as the plaintiff has authorised the individuals who will be giving instructions, and they are the ones who will operate the Account, the Mandate does not say that the defendant “can reach out to [the plaintiff’s] account department – or it doesn’t even give [the defendant] that leeway, to reach out to somebody else in the company to understand it in a better way.”^[36]

64.  This is tacit acceptance that the defendant did not make inquiries with the independent directors or the independent commissioners of the plaintiff of the purpose of the transactions.  It is incorrect that the defendant had no information about the identities of the independent directors or the independent commissioners, as there is information on this provided to the defendant^[37]. It has not been suggested by Mr Scott that the defendant was unable to make proper inquiries with appropriate officers of the plaintiff as a matter of fact or law.

65.  As for Mr Scott’s complaint that the plaintiff did not put to the defendant’s witnesses during cross-examination that Hadimulya had failed to make proper inquiries, this is not a matter of consequence.  It is pointless for this to be put to Chan or Gopalakrishnan as nothing was known about the contents of Hadimulya’s discussions with Harsono and Sunjaya.

66.  On the available evidence, I am inclined to think there is sufficient evidence to find that the defendant had failed to take action to inquire about the propriety of the PI and was in breach of its duty of care to the plaintiff.  I would therefore uphold the judge’s finding on this for different reasons.

Issue 2: Whether the judge should have held the defendant liable for all the Disputed Payments including the first two Disputed Payments prior to the end of November 1994

67.  In his cross-examination of Gopalakrishnan, Mr Kat put to the witness that the pattern of using the Account as a temporary repository of funds was established by the time the 3^rd Disputed Payment of US$6 million odd was paid out on 1 December 1994, when the money came in six days before and was paid out four working days later, and thereafter, with each similar instruction, the pattern became more clearly visible to the defendant’s staff^[38]. The judge agreed with this suggestion notwithstanding the witness’s denial, and held that the defendant was put on inquiry by the time it received the PI for the 3^rd Disputed Payment^[39].

68.  The plaintiff contended on appeal that as the judge had found “at least 3 ‘red flags’ in existenceprior to the end of November 1994 which should have put the Defendant on inquiry”, the judge should have held that the defendant was liable for all of the debits and payments made on the PI given by the rogue directors.  It was further contended that the judge erred in holding that irregularities with the Account opening documentation is not made out on the evidence and that there is nothing in this alleged “red-flag”^[40]. It was submitted that had the judge taken into account these other breaches in 1993 and 1994 by the defendant’s own policies or guidelines of the standards of a reasonable and prudent banker, the judge would have held the defendant liable for all the Disputed Payments, given the said “red-flags”, breaches and failings.

69.  As for the alleged breaches in 1993 and 1994, they were said to have occurred when the plaintiff’s account with CISL was “migrated” and the Account was opened in the defendant’s Hong Kong branch.  It was alleged that as Schedule 2 of the Mandate (“List of officers and directors other than those mentioned in Schedule 1”) was not completed as part of the Account opening procedure, this failure had “disabled [the defendant] from meaningful monitoring or detecting the Account.”^[41] There was also delay in preparing the fresh opening documents after the migration of the Account in that the opening documents for the Account were only submitted in July 1995, 15 months after the Account had been opened and active^[42].

70.  I am unable to see how it could be said that the judge should have held the defendant liable for all the Disputed Payments, including the first two Disputed Payments, merely because the judge had found at least three “red-flags” in existence prior to the end of November 1994.  The judge held it was only when the pattern of payment was considered with the other two “red-flags” that a reasonable and prudent banker should have been alarmed about a serious possibility of fraud, and that the pattern of payment would not have emerged from the beginning but only by the time of the 3^rd Disputed Payment^[43].

71.  The judge had considered the alleged irregularities with the Account opening documents and the delay in preparing the fresh opening documents after the migration of the Account.  He saw nothing of substance in the plaintiff’s contentions.  The plaintiff merely repeated the contentions made before the judge without showing in what respect he was in error in his reasoning in §§66 and 86 of the Judgment for rejecting the contentions.  There is no valid basis to interfere with the holdings that these allegations are not made out on the evidence.

Issue 3: Whether the plaintiff is entitled to ratify any of the rogue directors’ acts regarding the Account so as to found an action thereon, alternatively estopped by conduct from claiming against the defendant

(1) The contentions raised on appeal

72.  The defendant contended in the respondent’s notice that the plaintiff is not entitled to ratify any of the rogue directors’ acts regarding the Account (including the opening of the Account, the payments into and out of the Account, and the closing of the Account) so as to found an action thereon.  It was only by a letter of the plaintiff’s solicitors dated 6 October 2006 that the plaintiff sought to ratify the opening of the Account and the payments into it but disclaim the payments out of the Account and demanded a reconstitution of the Account with a balance disregarding the debit transactions.

73.  The defendant contended that the purported ratification is not effective because it was not made within a reasonable time after the acts sought to be ratified were done, and/or after the plaintiff had knowledge of the acts sought to be ratified (by 1995 or at the latest in 2001), and the delay in ratification had caused prejudice to the defendant rendering ratification inequitable, citing Smith v Henniker-Major & Co (a firm) [2003] Ch 182 at §§73, 82 and Bowstead & Reynolds on Agency (22^nd ed) at §2.89. Alternatively, a party wishing to ratify a transaction must adopt it in its entirety and not merely pick out the parts to its advantage, citing Smith v Henniker-Major & Co at §56 and Bowstead & Reynolds on Agency at §2.81. Hence, the plaintiff is not entitled to ratify only the opening of the Account and the payments into it without also ratifying the payments out and/or the closing of the Account.

74.  Further or alternatively, the defendant contended that the plaintiff is estopped by conduct from claiming against the defendant where the plaintiff failed to inform the defendant of the unauthorised payments as soon as the plaintiff became aware of them in 2001, citing Greenwood v Martins Bank [1933] AC 51 at 58 to 59.

(2) The plaintiff’s arguments

75.  Mr Kat submitted that it is not permissible for these contentions to be entertained on appeal.  He relied on the principles in Flywin Co Ltd v Strong & Associates Ltd (2002) 5 HKCFAR 356 at §38 where a party has omitted to take a point at the trial and seeks to raise it on appeal: “He will be barred from doing so unless there is no reasonable possibility that the state of the evidence relevant to the point would have been materially more favourable to the other side if the point had been taken at the trial.”

76.  He argued that in light of how the defendant’s case was pleaded and conducted at the trial, it is now too late for the defendant to run a case based on the above contentions which are unpleaded.  He quoted from Wing Hang Bank Ltd v Crystal Jet International Ltd & Ors [2005] 2 HKLRD 795 at §6(3): “On appeal, it will be extremely rare for the Court of Appeal to allow unpleaded issues of fact to be run for the first time.  Save in exceptional circumstances (such as where documents can safely be assumed to speak for themselves), the Court will often not be in a position to take the view confidently that the other side has not been prejudiced.”  “The Court must have regard to the impact of the new point on the conduct of the case by the opposite side.” (Osman Mohammed Arab & Wong Kwok Keung v Ng Shui Ching Irene & Anr [2020] HKCA 818 at §45; see also Lehmanbrown Ltd v Union Trade Holdings Inc & Ors, HCMP 977/2015, 17 June 2015 at §10)

77.  It was pointed out that the issues of estoppel and ratification are matters of mixed law and fact.  A new ground of mixed law and fact should not be entertained on appeal (Li Xiaoming v Diligent Myria Ltd [2020] HKCA 465 at §21).  If the defendant is permitted to raise the estoppel point, and as detrimental reliance is an essential element of the estoppel (Greenwood v Martins Bank at 57 to 58; Chitty on Contracts, vol II (34^th ed) at §36-051), factual evidence would have to be adduced on whether there was any reliance by the defendant, whether and when the defendant suffered any detriment as a result.  No evidence of detrimental reliance was called.  The forensic shape of the plaintiff’s response would require to be recast.  Further, an important facet of the court’s discretion whether to entertain such new points on appeal is that the Court of Appeal will almost invariably expect an explanation to be given why such new points, whether of fact or law, were not raised below (Cathay Pacific Airways Flight Attendants Union v Director-General of Civil Aviation [2007] 2 HKLRD 668 at §45(5)).  No explanation has been given why these the issues of ratification and estoppel were not pleaded or run below.

78.  As for the defendant’s contentions on ratification, he submitted that in any event these contentions (that the plaintiff is not entitled to ratify the opening of the Account or the payments into the Account, or that it is not entitled to do so without ratifying the Disputed Payments and the closing of the Account) are not open to the defendant on its pleadings as the defendant has admitted in §26 of the defence that “the Account was a company account which was opened and maintained by the Defendant’s private banking group”.  Further, there was no need in law for the plaintiff to ratify the opening of the Account or the payments into the Account, as the opening of the Account was not in itself against the plaintiff’s interest and the payments into the Account benefited the plaintiff.  It was therefore not irrational for the plaintiff to rely on the apparent authority of the rogue directors.  In contrast, the Disputed Payments and the closing of the Account were against the plaintiff’s interest and hence it was irrational for the plaintiff to rely on any apparent authority.

79.  In any event, he submitted that the opening of the Account and the payments into the Account are distinct from the later closing payment out.  As a matter of law, the plaintiff can ratify the former and disavow the latter, citing Bowstead & Reynolds on Agency at §2.81 for the proposition that “where an agent has effected several separate transactions, the principal may ratify certain transactions individually and refuse to ratify others” and furthermore it is possible to “ratify a transaction for one purpose while rejecting it for another”.

(3) The defendant’s arguments

80.  Mr Scott submitted that the defendant is entitled to run the arguments on ratification on appeal, in particular the objection to “selective ratification” raised by the defendant in response to the plaintiff’s reliance on National Bank of Commerce v National Westminster Bank [1990] 2 Lloyd’s Rep 514 to circumvent the limitation period.  To establish breach of the Quincecare duty, the plaintiff must uphold the banking relationship with the defendant at the time of the Disputed Payments.  What is being ratified here is the authority of the rogue directors in creating the banker-customer relationship between the defendant and the plaintiff; it is artificial to break down this relationship into individual credits and debits, such that there was a relationship on the days when money was paid into the Account but no relationship on the days the Disputed Payments were made.  Hence, the plaintiff is only entitled to either ratify all activities in the Account (including the opening and closure) or denounce all such activities.

81.  It is incorrect for the plaintiff to argue that there was no need in law for the plaintiff to ratify the opening of the Account or the payments into the Account, as everything about the Account was carried out without the plaintiff’s actual authority and ratification is a precondition for the principal to sue on the contract made without antecedent authority.  Nor can the plaintiff rely on apparent authority instead of ratification as contended by Mr Kat, as apparent authority is a species of reliance-based estoppel which operates against the representor (ie the plaintiff) but not the defendant in this instance (Thanakharn Kasikorn Thai Chamkat v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479 at §52; Spencer Bower: Reliance-Based Estoppel (5^th ed) at §§9.3 and 9.31).  As for §26 of the defence, the plaintiff is not entitled to rely on this to bar the defendant from running the argument as the defendant has never accepted that the rogue directors only had apparent authority to open the Account but not to close it.

82.  Thus, it is the plaintiff who needs to rely on ratification to make good its claim.  The defendant does not need ratification as part of its defence.  As the plaintiff has not pleaded any element of ratification in the points of claim, it cannot complain about the defendant’s pleadings. Further, no new evidence, such as evidence on detriment, is required for this point to be run.  In any event, the judge has dealt with the point on selective ratification when it was held that the Account was closed in accordance with the Mandate, stating that “if the opening of the Account was authorised, I fail to see why the Defendant was not entitled to act on the Mandate to close it.”^[44]

83.  Furthermore, the plaintiff is not entitled to make a selective ratification by its letter dated 6 October 2006 because of its unreasonable delay, which has caused unfair prejudice to the defendant.  The delay of more than five years after April 2001 was unfairly prejudicial to the defendant in locating documentary evidence and witnesses.  The judge has rejected the plaintiff’s argument based on section 26 of the Limitation Ordinance that he would not have accepted the plaintiff had discharged the burden of proving that it could not with reasonable diligence have discovered the concealment of fraud until mid-February 2001^[45]. For the same reasons, and based on Greenwood v Martins Bank at 58 to 59, the plaintiff should also be estopped from seeking a reinstatement of the Account and its balance.

84.  As to objections based on the Flywin principle due to the lack of pleadings, Mr Scott pointed out it was pleaded in the defence that “the Plaintiff is in any event estopped from denying that Mr Harsono and Mr Sunjaya had authority to give the Disputed Instructions to the Defendant on behalf of the Plaintiff” (at §19) and “If it is intended to allege that the Plaintiff’s said letter dated 6 October 2006 was sufficient in law to re-activate the account closed on the Plaintiff’s instruction on the 30^th July 1998, the same is denied” (at §30).

85.  Mr Scott further submitted that the state of the evidence would not have been materially more favourable to the plaintiff had the new arguments been made at trial.  Parameswara gave a detailed account in his witness statement of the plaintiff’s investigations from 1999 to 2007 and was cross-examined on the plaintiff’s lack of concern about the rogue directors’ misappropriation^[46]. He confirmed that the plaintiff had already made discovery of all documents relating to the steps taken to investigate the Account after the Account was discovered in 2001^[47].

86.  The judge has mentioned the absence of some of the relevant documents of the Account due to the document retention policy of the defendant for seven years^[48] and there is evidence from Gopalakrishnan that as a result of the passage of time and the delay by the plaintiff in bringing this action, the staff who managed and handled the Account have all left the defendant’s employment and there is limited information and/or records relating to the operation of the Account^[49].

(4) Discussion

87.  I will deal with the issue of estoppel first^[50]. The estoppel sought to be raised on appeal is that the plaintiff is estopped by conduct from claiming against the defendant where the plaintiff failed to inform the defendant of the unauthorised payments as soon as the plaintiff became aware of them in 2001^[51]. This is different from the estoppel pleaded in §19 of the defence.  It is an unpleaded issue of fact and law, and not raised before the judge.

88.  Applying the principles in the cases cited by Mr Kat, it could not be said with confidence that the plaintiff would not be prejudiced if the defendant were permitted to run this new estoppel point on appeal.  The matters canvassed in evidence regarding reasonable diligence that should have been exercised in the discovery of concealed fraud (in the context of section 26 of the Limitation Ordinance) do not relate to the plaintiff’s conduct after its actual discovery of the fraud in 2001.  The prejudice that may be suffered by the plaintiff is not confined to further evidence that might have been adduced to meet the new point.  As stated in Lehmanbrown Ltd v Union Trade Holdings Inc & Ors at §10, the raising of new point may lead to the other party raising counter arguments and the consideration of which may involve factual assessment in a different light from that undertaken by the court below, alternatively the other party may embark on a different course of forensic conduct if the new point were taken earlier.

89.  To avoid unfairness to the plaintiff, the defendant should not be permitted to run the proposed arguments on estoppel on appeal.

90.  Turning to the contention that the plaintiff is not entitled to ratify any of the rogue directors’ acts regarding the Account because this was not done within a reasonable time after the plaintiff had acquired knowledge and the delay had caused prejudice to the defendant, I am also inclined to think that the defendant should not be allowed to run this unpleaded issue of fact and law on appeal.  This is akin to the situation of the new point on estoppel sought to be raised.

91.  I take a different view for the issue of selective ratification. This is a point of law.  It is not required to be pleaded.  Also, the judge would appear to have considered it in §99 of the Judgment, even though the parties might not have addressed him in such detail as they have done on appeal.  Mr Kat has sought to answer this on appeal with submissions on points of law.  In the circumstances, there is no good reason why the defendant should not be allowed to run arguments on selective ratification on appeal.

92.  I agree with Mr Scott the admission in §26 of the defence (that the Account was a company account opened and maintained by the defendant’s private banking group) does not preclude the defendant from advancing the argument on selective ratification.  The defendant’s position is that the rogue directors had apparent authority to bind the plaintiff as regards all conduct and transactions of the Account from its opening to the closing of it, and the defendant has never accepted that the rogue directors only had apparent authority to open the Account but not to close it.

93.  In the end, I do not think selective ratification would assist the defendant.  It does not follow from the mere fact that the banker-customer relationship is ratified or upheld that all the transactions conducted under that relationship must be ratified and considered valid.  It was owing to the existence of a banker-customer relationship that the Quincecare duty was said to arise in the present situation.  The dispute before the judge was whether the defendant had breached the Quincecare duty in making the Disputed Payments, not whether this duty did or did not arise.  The present situation is distinguishable from Smith v Henniker-Major & Co (by which the subsequent deed sought to ratify a transaction by furnishing a new consideration for the transaction effected by an earlier assignment instead of adopting the transaction in its entirety, including the consideration found in the earlier assignment, see §§57 and 59); this is not adopting the favourable parts of a transaction and disaffirming the rest, or to approbate and reprobate.  Rather,several separate transactions were carried out by the agents with respect to the Account, it is therefore permissible for the plaintiff to ratify only some of the transactions individually and refuse to ratify others (Bowstead & Reynolds on Agency at §2.81, citing Fitzmaurice v Bayley (1860) 9 HL Cas 78 at 112 in support). As stated in Fitzmaurice v Bayley at 112, “ratification may take place in two ways, either by a specific ratification of the particular act, or by a general ratification of everything which has been done by the agent on behalf of his principal.” The present situation may be regarded as falling within the former.

Issue 4: Whether the judge erred in holding that time began to run for the plaintiff’s claim from the closing of the Account in July 1998

(1) The contentions raised on appeal

94.  The plaintiff contended that the judge erred in holding that time began to run for the plaintiff’s claim from the closing of the Account in July 1998, as the closing of the Account on the instructions of Harsono and Sunjaya in the letter dated 16 July 1998 was unauthorised in fact and in law for want of actual or apparent authority.  The letter was part of the fraud and as such unauthorised and ineffective in law, so the defendant still owed a debt in the amount of the sums wrongly debited to the plaintiff, as to which time only began to run upon the demand for payment on 6 October 2006, citing Joachimson v Swiss Bank Corporation [1921] 3 KB 110 at 131 and Paget’s Law of Banking (15^th ed) at §4.43^[52].  Time only begins to run on a bank account debt when demand is made, notwithstanding an earlier purported closing of the account, citing National Bank of Commerce v National Westminster Bank plc.  Further, the judge was wrong to hold that the “general rules of attribution”^[53], namely, the ordinary rules of agency and vicarious liability, applied to the closure of the Account.  Where the law imposes on a banker the Quincecare duty to guard against the facilitation of fraud to protect the customer, the general rules of attribution should not apply so that the knowledge of the rogue directors is not to be attributed to the plaintiff.

95.  The defendant contended that the plaintiff’s cause of action accrued once the Account was closed in July 1998.  In addition to the judge’s holding that the defendant was entitled to act on the Mandate or rely on the apparent authority of Harsono and Sunjaya to close the Account, the defendant was contractually entitled to close the Account unilaterally in July 1998, after which the limitation period started to accrue.  And even if the defendant had wrongfully closed the Account, such a conclusion does not prevent the application of the principle in Russian Commercial and Industrial Bank [1955] Ch 148 at 156 to 157^[54] (for a customer’s demand for payment of the balance in the account to be effective so as to give rise to a cause of action, the banking relationship must be subsisting at the time of the demand) from applying in the present case.  As to the attribution of knowledge, the Quincecare duty is a duty of care pertaining to making inquiries and bankers are not contractually obliged to detect the fraud of its customers.  The judge was correct in holding that the general rules of attribution should not be displaced in relation to the closure of the Account.

(2) The plaintiff’s arguments

96.  At the forefront of Mr Kat’s arguments is that the defendant is not entitled to rely on the rogue directors’ apparent authority to “drain and close” the Account as being in accordance with the Mandate, and hence the banking relationship was not terminated when demand for payment was made in 2006.  Much of his submissions was devoted to the contention that the closing of the Account was unauthorised.

97.  He referred this court to the evidence surrounding the closing of the Account.  The closing was not an administrative act but involved the transfer of the entire balance in the Account of US$250,328.07 to a Citibank account in Jakarta with the beneficiary being “Sonny D Harsono/R Sunjaya”.  He pointed to the letter of instructions dated 16 July 1998, which was marked received on 9 July 1998.  It was dealt with by the Operations team on 14 July 1998 when the payment of all the funds in the Account was effected.  Chan accepted in cross-examination that these post-dated instructions were not usual instructions they would see day to day^[55]. By itself, the “drain and close” instructions letter would call for inquiry as to its propriety.  Somewhat inconsistently, the reason recorded by the defendant on 24 July 1998 for having closed the Account was that the plaintiff was “not a Target Customer”, when the Account had been closed on the instructions of the rogue directors.

98.  The question is whether it was rational for the defendant to rely on the apparent authority of the rogue directors’ letter of instructions to drain and close the Account, applying the law in Thanakharn Kasikorn Thai Chamkat v Akai Holdings Ltd (No 2) at §§49 to 62, in which the Court of Final Appeal held that the ability to rely on apparent authority will be lost if the third party’s belief in the agent’s apparent authority was “dishonest or irrational (which includes turning a blind eye and being reckless)”.  Mr Kat reserved his right to argue elsewhere that the lower threshold test held by the Privy Council in East Asia Co Ltd v P T Satria Tirtatama Energindo [2019] UKPC 30 at §§83 to 93 should be followed instead, namely, that a third party may not rely on apparent authority “if it failed to make the inquiries that a reasonable person would have made in all the circumstances in order to verify that he had that authority”. 

99.  Mr Kat submitted that on the facts as found by the judge, it was “irrational” for the defendant to rely on the apparent authority of the rogue directors’ letter of instructions to drain and close the Account.  The defendant is not entitled to treat the Mandate at face value and simply rely on the apparent authority of the signatories in the Mandate.  This is because the defendant had been put on inquiry by the time it received the PI for the 3^rd Disputed Payment some time at the end of November 1994^[56], in circumstances “which should have alarmed a reasonable and prudent banker, i.e. there was a serious or real possibility that the Plaintiff was defrauded by its directors”^[57], as the Account “appeared to have been used as a temporary repository of funds”^[58].

100.  According to the internal policies of the defendant on the need to be aware of money laundering activities by a customer^[59], its staff was required to be alert where the account “shows little or no business-related banking activity and appears to use the account as a temporary repository for funds that ultimately will be transferred to foreign-based accounts”. Money laundering laws in the United States required financial institutions to establish a transaction monitoring process and the defendant’s employees who participated in monitoring transactions were reminded that “knowledge” included the concepts of “wilful blindness” and “conscious avoidance of knowledge” and employees whose suspicions were aroused but deliberately failed to make further inquiries might be considered under the law to have the requisite knowledge^[60].

101.  In another internal bulletin on business risk management and control^[61], it was stated that “In all cases, a Relationship Manager accepting telephone instructions must … be satisfied with the identity and authority of the customer to give the instructions”.

102.  As the defendant was put on inquiry as to a real and serious possibility of fraud by the rogue directors from at least November 1994, it was irrational for the defendant to rely on any apparent authority of the rogue directors to drain and close the Account.  Alternatively, the defendant’s breach of duty in closing the Account despite being put on inquiry in November 1994 and not having inquired thereafter amounted to “conscious ignorance” or “wilful blindness”.

103.  In holding that the Account was closed in accordance with the Mandate, the judge had reasoned that if the opening of the Account was authorised, he failed to see why the defendant was not entitled to act on the Mandate to close it^[62]. Mr Kat criticised this reasoning.  The opening of the Account was not in itself against the plaintiff’s interests and it was therefore not irrational for the defendant to rely on the apparent authority of the rogue directors.  By contrast, the closing of the Account, which involved the transfer of all the remaining monies to the account of Harsono and Sunjaya, was against the plaintiff’s interests, it was not rational for the defendant to rely on any apparent authority.

104.  The judge had also held, if necessary, he would have held that the general rules of attribution applied to the closure of the Account^[63]. Mr Kat submitted that the judge was wrong.  He argued that the judge had misdirected himself in law in purportedly applying the approach of the Court of Final Appeal in Moulin Global Eyecare Trading Ltd v Commissioner of Inland Revenue (2014) 17 HKCFAR 218 at §§131 to 135^[64]. Whilst bankers are not insurers or auditors and do not have detective duties, once a banker is presented with a serious and real possibility of fraud by the officers of its corporate customer, the law imposes on the banker the Quincecare duty to guard against the facilitation of fraud to protect its customer.  The judge should have followed the approach in Singularis Holdings Ltd (in liquidation) v Daiwa Capital Markets Ltd, where there was breach of the Quincecare duty and the fraudulent knowledge and conduct of the company’s chairman and sole shareholder was not attributed to the company to bar its Quincecare claim. As stated by Baroness Hale at §35:

“The context of this case is the breach by the company’s investment bank and broker of its Quincecare duty of care towards the company. The purpose of that duty is to protect the company against just the sort of misappropriation of its funds as took place here. By definition, this is done by a trusted agent of the company who is authorised to withdraw its money from the account. To attribute the fraud of that person to the company would be, as the judge put it, to ‘denude the duty of any value in cases where it is most needed’: para 184. If the appellant’s argument were to be accepted in a case such as this, there would in reality be no Quincecare duty of care or its breach would cease to have consequences. This would be a retrograde step.”

105.  In any event, whether or not the defendant can rely on the purported closing of the Account has nothing to do with the attribution of the rogue directors’ knowledge to the plaintiff, as the closure of the Account was still unauthorised even if knowledge could be attributed to the plaintiff.

106.  Mr Kat submitted that the judge was wrong to distinguish National Bank of Commerce v National Westminster Bank plc on its facts^[65]. He drew attention to the fact that in that case, the customer’s mail transfer orders purportedly signed by authorised officers occurred seven years before the customer’s solicitors wrote to the defendant bank demanding reimbursement of the unauthorised debits in the customer’s account.  It was held on a preliminary issue that the claim was not time-barred in that the cause of action arose when the bank refused to repay the customer on demand, as the unauthorised debits were ineffective to alter the true state of account between the customer and the bank as creditor and debtor.  Mr Kat submitted that this case established the proposition that time only begins to run on a bank account debt when demand is made, notwithstanding an earlier purported closing of the account.

107.  The judge was also wrong to brush aside Limpgrange Ltd v Bank of Credit and Commerce International SA [1986] FLR 36^[66]. In that case, the bank closed the customer’s account before the action was brought against it for repayment of unauthorised debits.  It was held that the customer was entitled to repayment without the wrongful debits which were made without authority and should be disregarded (at p 47, lines 37 to 40).  Further, there was no implied term that the customer had abandoned any right to claim that sums had been wrongly debited to the account when an agreement was made with the bank to close the account, as it was not a case of the term being so obvious or necessary to give business efficacy to the bargain (at p 55 lines 21 to 45). 

108.  As for Russian Commercial and Industrial Bank, Mr Kat submitted this should be distinguished on the facts.  There, the termination of the relationship of banker and customer was brought about by the dissolution of the bank in Russia and without the consent of the customer.  The English branch continued for a time to carry on banking business and a petition for compulsory winding up of the bank was later presented in England.  A customer with a credit balance at the English branch sought to prove in the winding up. The court held that for the purpose of the distribution of assets among the creditors in a winding up in England, the previous dissolution of the bank in Russia was to be ignored and the relationship of banker and customer was deemed to continue until the commencement of the winding up in England.  There may be ways in which an account may unilaterally be closed and a banking relationship terminated so as to make time run for limitation, but an unauthorised closing is not one of them.

109.  In summary, the instruction to drain and close the Account was devoid of authority.  The judge was wrong to hold “the incontrovertible fact is that that Account was closed in accordance with the Mandate”^[67]. The purported closure had no legal effect and did not validly close the Account. Hence, the defendant remained the plaintiff’s debtor and banker, and the purported closure could not start time running. Limitation does not run on dormant accounts, citing Paget at §22.79^[68].

(3) The defendant’s arguments

110.  Mr Scott submitted that the judge was right in holding that the claim is time-barred, whether the claim is presented as a reconstitution of the credit balance in the Account and a demand for that credit balance, or otherwise^[69]. It was held in Russian Commercial and Industrial Bank that on the termination of a banker and customer relationship, any balance belonging to the customer becomes payable to the customer.  Hence, the limitation period started to run from the closure of the Account in July 1998 and the plaintiff’s claim was time-barred by July 2004.

111.  He submitted that the defendant was entitled to close the Account by relying on the apparent authority of the instructions letter dated 16 July 1998.  The instruction to close the Account was given in accordance with the Mandate^[70]. Mr Kat has relied on breach of the Quincecare duty to argue that the defendant was not entitled to rely on apparent authority.  But this is to elide the concept that a bank may be put on inquiry (upon which it has a duty not to pay without inquiry under the Quincecare duty) with being put on notice of the fraud.  A breach of the Quincecare duty does not nullify or invalidate the payment.  Further, the nature of instructions to pay out money is materially different from an instruction to close the Account.  Closing an account is an administrative act and on its face is not against the customer’s interest.  Even if the rogue directors lacked apparent authority to give the PI, it does not follow that they lacked apparent or even actual authority in relation to the operation of the Account for all other purposes, citing First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] BCLC 1409 at 1422c to d.

112.  It was held by the Court of Final Appeal in Thanakharn Kasikorn Thai Chamkat v Akai Holdings Ltd (No 2) that a third party could rely on apparent authority unless its belief in that connection was dishonest or irrational.  The threshold requirement is high.  The defendant cannot be said to have been put on inquiry because of mere unreasonableness in failing to see through the rogue directors’ deceit if the instruction is within the class of acts that the rogue directors are usually authorised to do, citing Paul Quinn v CC Automotive Group Ltd t/a Carcraft [2010] EWCA Civ 1412 at §23.  Further, the judge has rejected the plaintiff’s claim in “reckless assistance”^[71]. This precludes the plaintiff from making any allegation of “conscious ignorance” or “wilful blindness” on appeal.

113.  There was nothing inherently suspicious about the closure of the Account.  The instruction letter dated 16 July 1998 was passed by the RM to the fund transfer unit and the latter had to make sure all the requirements under the MIFT policy were in place before they processed the fund transfer.  After that, the RM passed on the instruction letter to the account closure team and a review was conducted for approval to be given to proceed with account closure^[72].

114.  As the Account was validly closed, the claim for any balance in the Account was time-barred by July 2004.  But even if the Account was not validly closed, this does not prevent the application of the principle in Russian Commercial and Industrial Bank.  The plaintiff’s argument that a consensual or legally valid termination of the banking relationship is required is a misreading of Russian Commercial and Industrial Bank.  The termination of the banking relationship in that case was not consensual. The bank having gone into dissolution in Russia and liquidation in England, its persona juridica ceased to exist and the relationship of banker and customer could not continue (at 157).  Where the incidents of banker-customer relationship no longer existed, the balance in the account became due at that point.

115.  The judge was correct to hold “the incontrovertible fact is that the Account was closed in accordance with the Mandate”.  It was expressly provided in paragraph 4 of the Mandate dated 6 July 1995 that the instructions in paragraph 3 (to honour all cheques and written instructions as described provided that they were signed by such number of signatories authorised pursuant to the mandate) “cover or include … the operation and closing of any Account and any changes in operation”. 

116.  It is a fact that after July 1998, there were no features of an extant banking relationship between the plaintiff and the defendant in respect of the Account.  An Account Closure Review was made by the defendant on 24 July 1998 with the recommendation that the Account should be closed as the Account was not within the Private Banking Group’s target market. The closure of the Account was processed on 24 July 1998.  The defendant provided the bank statements for the Account for the period between 28 February 1998 and 30 July 1998 to the plaintiff and Sunjaya acknowledged receipt of the bank statements on 21 July 1999. By a letter dated 22 July 1999, Sunjaya instructed the defendant to cancel the HAM service in Singapore with immediate effect^[73].

117.  The plaintiff’s reliance on National Bank of Commerce v National Westminster Bank plc and Limpgrange Ltd v Bank of Credit and Commerce International SA is misplaced.  The payment instructions in those cases were a nullity as they were not authorised by the required signatory.  In the present case, there were genuine signatures by the required signatories in the Mandate.

118.  As for Joachimson v Swiss Bank Corporation, this was a case where a partnership account had a pre-existing credit balance which did not depend on a prior claim against the bank as the basis for the credit balance.

119.  The above cases established the proposition that if there is a credit balance in the bank account, the customer’s cause of action accrues only after a demand of that balance is made.  This renders those cases distinguishable from the present situation.  To rely on those cases, the plaintiff has to demonstrate a credit balance in its favour.  To do so, it needs first to succeed in establishing a breach of the Quincecare duty, which is subject to the normal period of limitation.  The cause of action for breach of the Quincecare duty accrues at the time of the failure of the banker.  If the claim for breach of the Quincecare duty is time-barred, there is no credit balance to claim.

120.  Put in another way, to establish the “true” balance of the Account, the plaintiff must rely on the defendant’s breach of the Quincecare duty as the legal basis for reversing the debits.  The payment instructions were not in themselves a nullity and can only be set aside as the result of an action based on breach of the Quincecare duty.  For the purpose of limitation period applicable to this reconstitution claim, the plaintiff needs to circumvent the six-year period for such a breach.

121.  The substance of the plaintiff’s claim is undeniably in negligence.  By dressing up the claim as one of a demand for the balance in the Account, the plaintiff seeks to circumvent the limitation period of six years; the effect of section 26 (postponement of limitation period in case of fraud, concealment or mistake)^[74], section 31 (special time limit for negligence actions where facts relevant to cause of action are not known at date of accrual), and even the overriding time limit for negligence actions of 15 years under section 32 of the Limitation Ordinance.

122.  The judge is correct to observe that it is a “stark” case^[75] for a customer to reopen an account and reverse withdrawals made by delinquent directors without any time constraint.

(4) Discussion

123.  There is no dispute that limitation period does not run on dormant accounts.  Nor is there any dispute of the principle in Russian Commercial and Industrial Bank that on the termination of a banker and customer relationship, any balance belonging to the customer becomes payable to the customer and the customer’s cause of action then accrues.  The crucial question is whether a valid termination of the banker-customer relationship is required for the limitation period to run.

124.  I would endeavour to approach this from first principles.

125.  The relationship of banker to customer is one of contract, the classic description of which is as stated by Atkin LJ in Joachimson v Swiss Bank Corporation at 127:

“The bank undertakes to receive money and to collect bills for its customer’s account. The proceeds so received are not to be held in trust for the customer, but the bank borrows the proceeds and undertakes to repay them. The promise to repay is to repay at the branch of the bank where the account is kept, and during banking hours. It includes a promise to repay any part of the amount due against the written order of the customer addressed to the bank at the branch, and as such written orders may be outstanding in the ordinary course of business for two or three days, it is a term of the contract that the bank will not cease to do business with the customer except upon reasonable notice. The customer on his part undertakes to exercise reasonable care in executing his written orders so as not to mislead the bank or to facilitate forgery. I think it is necessarily a term of such contract that the bank is not liable to pay the customer the full amount of his balance until he demands payment from the bank at the branch at which the current account is kept.”

126.  An implied term of the debtor-creditor relationship under a current account is the need for a demand by the customer before the bank is obliged to repay the debt.  It follows that in the case of a credit balance on current account, time does not run until the customer makes a demand for payment.  So banks may have to face claims for balances on accounts that have remained dormant for more than six years.  Customers may also challenge an unauthorised debit by the bank more than six years after the debit, as an unauthorised debit is a nullity and of no effect on the balance owing by the bank to the customer, and the customer is entitled to demand repayment of the true balance owing in the account (Paget at §4.43, citing National Bank of Commerce v National Westminster Bank plc).  I do not agree with Mr Kat that the case cited established the proposition that time only begins to run on a bank account debt when demand is made, “notwithstanding an earlier purported closing of the account”.  As stated in 517 col 2 of that case, “the parties were in the relationship of banker to customer, when the demand was made” seven years after the last unauthorised debit, and it does not appear from the law report there was any purported closing of the account.  There was closure of the account in Limpgrange Ltd v Bank of Credit and Commerce International SA, but no point of limitation arose as the account was closed by agreement a few months before the demand was made and the action was brought within time.

127.  National Bank of Commerce v National Westminster Bank plc is authority for the proposition that where the customer wishes to challenge an unauthorised debit to his account, limitation begins to run when the demand is made by the customer, and not on the date of the unauthorised debit (Paget at §22.79, citing this case in support at footnote 5).  Webster J rejected the defendant’s submission that the cause of action accrued on the various dates when the purported debits were made and without the precondition of demand for payment (at 516 col 2 to 517 col 1).  As explained in Paget, the claim is in reality for repayment of a debt said to be owed in full (i.e. the amount standing to the customer’s credit, without deduction of the disputed debit), as opposed to a right to damages.  Webster J agreed with these statements of Staughton J in Limpgrange Ltd v Bank of Credit and Commerce International SA at p 47 lines 33 to 43:

“It was pleaded in the points of claim that, in breach of contract and of their duty of care, BCCI had wrongly debited the company’s account with the amounts of the disputed transfers, and that the company had thereby suffered loss and damage. Strictly speaking it seems to me that those are unnecessary averments. If debits were made without authority they should be disregarded, and the company can claim as money owed to it by BCCI the credit balance remaining when those debits are left out of account. Or, if there would still be an overdraft, the company would be liable to BCCI only for such amount as the account was overdrawn after deletion of the disputed debits.”

128.  As long as the customer’s claim is properly made for a debt, the rule in Joachimson v Swiss Bank Corporation applies and the cause of action accrues when demand for payment was made.

129.  In light of the above authorities, I do not agree with Mr Scott where it is necessary to establish breach of the Quincecare duty, the cause of action should accrue at the time of the failure of the banker or when the unauthorised debits were made.

130.  To recap, where there is in existence the relationship of banker and customer, it is an incident of that relationship that a demand by the customer is a precondition to the liability of the banker to repay a credit balance in a current account.  This precondition does not apply where that relationship has been terminated.  In Russian Commercial and Industrial Bank at 156,Wynn-Parry J referred to the last paragraph in the judgment of Atkin LJ in Joachimson v Swiss Bank Corporation:

“Finally it is perhaps unnecessary to say that the necessity for a demand may be got rid of by special contract or by waiver. A repudiation by a bank of the customer’s right to be paid any particular sum would no doubt be a waiver of any demand in respect of such sum.”

Wynn-Parry J then continued at 156 to 157:

“Now as I read that paragraph, Atkin LJ was not designing to make an exhaustive statement as to the circumstances in which a demand by the customer would be unnecessary. He gave waiver by the banker as an example and he gave repudiation as a possible example of waiver. …

The last paragraph in the judgment of Atkin LJ in Joachimson v Swiss Bank Corporation proceeds, as I read it, on the assumption of the continued existence of the relationship of banker and customer; it is an incident of that relationship so long but only so long as it lasts; just as the banker has the corresponding obligation not to stop acting as the customer’s banker without reasonable notice.  But if the relationship of banker and customer is terminated, there can be no need for either of those incidents of that relationship to continue, and indeed they must cease with the termination of the relationship.  Thereafter, it appears to me that on such termination any balance belonging to the customer in the hands of the banker becomes payable to the customer.”

131.  It does not appear from the various works in this field the parties have referred us to that the termination of the banker/customer relationship must be valid for the credit balance in the account to become payable.  To quote a few:

“If the banker/customer relationship is terminated before a demand is made, the moneys become repayable upon such termination.” (Paget at §22.79)

“In principle, the debt due from paying bank to the drawer on a current account is repayable only on demand, and time does not begin to run against the drawer for limitation purposes until he has made a demand on the paying bank for payment, and the drawer will not be time barred until six years after demand. Accordingly, the paying bank must make payment even if more than six years has elapsed since moneys were credited to (or paid from) the drawer’s account. If the drawer terminates the mandate to the paying bank he thereby makes due the sums to his credit on the account.” (Law of Bank Payments (5^th ed) by Brindle and Cox at §6-248)

“Where sums are wrongly debited to the customer’s account, time runs from the date on which the customer demands repayment of the credit balance remaining when those sums are left out of account. If the relationship of banker and customer is terminated before a demand is made, e.g. by dissolution of the bank, the money thereupon becomes repayable.” (Chitty on Contracts, vol 1 at §31-039)

132.  Assuming that the defendant is not entitled to rely on the Mandate and the apparent authority of the rogue directors in giving instructions to close the Account, and that the defendant had acted wrongfully in closing the Account on 24 July 1998 without giving notice to the plaintiff, it remains a fact that as from the latter part of July 1998, there were no features of an extant banking relationship between the plaintiff and the defendant in respect of the Account.  The relationship between a banker and customer involves mutual duties and obligations of a personal nature and confidential character.  Where one party wrongfully purported to terminate that relationship, it would be contrary to principle for the law to treat the relationship as continuing in existence.  Thus, in Prosperity Ltd v Lloyds Bank Ltd (1923) 39 TLR 372, the court refused the customer’s application for an injunction restraining closure of an account pending reasonable notice by the banker where the banker closed the account without reasonable notice, on the ground, inter alia, that such an order would have amounted to specific performance of a contract to provide personal services of a most confidential character, and would have been a direction to the bank to constitute itself a borrower of the customer’s money as and when paid in.

133.  The relationship of banker and customer can be terminated by unilateral act.  It may be by notice given by the customer or the banker (Paget at §4.42), or without reasonable or any notice.  Where it is the latter, this is in breach of contract (Joachimson v Swiss Bank Corporation at 125 per Warrington LJ and 127 per Atkin LJ).  On first principles, the innocent party is entitled to treat himself as discharged from his liability further to perform his own unperformed obligations under the contract and from his obligation to accept performance by the wrongful party if tendered. Hence, where the banker purported to terminate the relationship in breach of contract, one of the consequences is that the customer is relieved from the implied term of making a demand for payment to give rise to the banker’s liability to repay the debt.

134.  In the last paragraph in Joachimson v Swiss Bank Corporation quoted above, Atkin LJ gave as example circumstances in which the precondition of a demand by the customer is unnecessary.  He mentioned waiver of the demand by the customer as an example and gave repudiation by the banker of the customer’s right to be paid any particular sum as a possible example of waiver.  As stated by Wynn-Parry J in Russian Commercial and Industrial Bank at 156, this is on the assumption of the continued existence of the relationship of banker and customer.  Where the banker purported to close an account without notice or reasonable notice, his repudiatory breach may similarly be regarded as amounting to waiver of the customer’s demand.  Or as Wynn-Parry J put it at 157, the requirement of a prior demand is an incident of the relationship of banker and customer only so long as it lasts, there can be no need for this incident when that relationship has ceased to exist.

135.  For the above reasons, I reject Mr Kat’s submission there must be a valid termination of the banker-customer relationship (in the sense that the termination is not in breach of contract) for the limitation period to run as from the date of termination.  I would uphold the judge’s ruling by different reasoning that the plaintiff’s cause of action accrued with the termination of the relationship of the parties when the Account was closed in July 1998 and the plaintiff’s claim is therefore time-barred.

136.  That being my conclusion, it is not strictly necessary to consider Mr Kat’s submission that the defendant is not entitled to rely on the apparent authority of the rogue directors Mandate to close the Account in accordance with the Mandate.  I will deal with this succinctly in view of the substantial submissions from both sides.

137.  I am inclined to agree with Mr Kat that it would not be right to look at the closure of the Account separately from the payment of the entire balance to the private account of the rogue directors, as, after all, the instructions in the letter dated 16 July 1998 were to “transfer all funds in the account” and “close the account after the balance is nil”.  He is correct to characterise the instructions as to “drain and close” the Account. I do not agree with the judge that if the opening of the Account was authorised, there is no reason why the defendant was not entitled to act on the Mandate to close it.  At the time of the opening of the Account, the defendant was entitled to rely on the apparent authority of the rogue directors.  The situation had changed by the time of the instructions to close the Account several years later, as there were then circumstances which should have put a reasonable and prudent banker on inquiry of a serious possibility that the plaintiff was defrauded by its directors, as the judge had found. 

138.  Applying the law in Thanakharn Kasikorn Thai Chamkat v Akai Holdings Ltd (No 2), it would be “irrational” for the defendant to rely on the apparent authority of the rogue directors’ instructions by letter to drain and close the account.  Just as the defendant is not entitled to treat the Mandate at face value and rely on the apparent authority of the signatories for the PI of the Disputed Payments, the defendant is likewise not entitled to rely on the Mandate and apparent authority of the signatories for the instructions letter dated 16 July 1998.

139.  It is unnecessary to discuss the lower threshold test of the Privy Council in East Asia Co Ltd v P T Satria Tirtatama Energindo or the attribution of the knowledge of the rogue directors to the plaintiff, and I do not propose to do so.

140.  In view of my conclusion that the plaintiff’s claim must fail because it is time-barred, the three remaining issues in this appeal do not arise.  The remaining issues were not the focus in this appeal and were lightly argued by the parties.  I will deal with them as briefly as I can on an obiter basis. 

Issue 5: Whether the defendant is exempted from liability arising out of the Disputed Payments by virtue of Clause I(P) of the General Terms, Clause 3 of the Mandate, and Clauses I(E) and I(J) of the General Terms

141.  Of the above mentioned provisions relied on by the defendant to exclude liability, only Clause I(P) of the General Terms was dealt with in the Judgment^[76]. The judge held that the General Terms were part of the contractual documents which only came into existence on 6 July 1995 and hence could not apply to the three Disputed Payments made prior to that date.  Further, the defendant cannot rely on Clause I(P) due to its “wilful default”, as, on the evidence, the defendant’s staff, in particular the RM, was aware of what they were doing, applying what Bowen LJ said about the meaning of this expression in Re Young and Harston’s Contract (1885) 31 Ch D 168 at 174 to 175 (“it generally … implies nothing blameable, but merely that the person of whose action or default the expression is used, is a free agent, and that what has been done arises from the spontaneous action of his will. … that he knows what he is doing, and intends to do what he is doing …”).

142.  I reject Mr Scott’s contention the judge was wrong to hold that the General Terms could not apply to the Disputed Payments made prior to 6 July 1995, when the plaintiff completed the account opening application form in accordance with the General Terms and the Mandate. I do not think it relevant there was a migration of account in April 1994. The fact remains that the contractual documents for the Account only came into existence on 6 July 1995.

143.  It is not necessary to consider Clause I(J) of the General Terms as this was not pleaded in the defence^[77].

144.  I turn to Clause 3 of the Mandate and Clause I(E) of the General Terms.

145.  By Clause 3 of the Mandate, the defendant was instructed to honour all cheques or other orders which may be drawn or made for moneys owing by the defendant to the plaintiff which may be signed on the plaintiff’s behalf and to debit the same to any Account, provided that such cheques, orders or instructions were signed by such number of signatories authorised pursuant to the Mandate and the defendant “[is] entitled to honour and treat as valid the instructions given by [the plaintiff] pursuant to this mandate and the General Terms and shall not be responsible for any loss arising out of their execution.”

146.  By Clause I(E) of the General Terms, the defendant was “authorised (but are not obliged) to treat and consider as valid and binding on [the plaintiff] … any … written instruction purportedly given by [the plaintiff] or [the plaintiff’s] authorised signatory without any inquiry by [the defendant] as to the authority or identity of the person purporting to give such instruction or its authenticity, regardless of the prevailing circumstances or the nature of the transaction and notwithstanding any error, misunderstanding, fraud, forgery or lack of clarity in the terms of such instruction.”

147.  Mr Scott submitted these are “basis clauses” and not exemption clauses, as they do not “[attempt] to rewrite history or [part] company with reality”, but rather “to regulate … future relationship by prescribing the basis on which [the parties] will be dealing with each other” and hence do not fall within the Control of Exemption Clauses Ordinance, Cap 71 (“CECO”) and do not have to satisfy the test of reasonableness thereunder (Raiffeisen Zentralbank v Royal Bank of Scotland Plc [2011] 1 Lloyd’s Rep 123 at §314).

148.  I am inclined to agree with Mr Kat that the correct analysis should be made by reference to substance rather than form and that labelling these provisions as “basis clauses” should not be determinative as to their true effect, following the approach in Chang Pui Yin v Bank of Singapore Ltd [2017] 4 HKLRD 458 at §§101 to 110.  The basic obligations of the banker to honour the instructions of the customer given in accordance with the mandate require no further regulation.  It seems to me that the last part of Clause 3 of the Mandate and Clause I(E) of the General Terms are in substance provisions which seek to exclude the relevant obligation of the banker in law and to avoid what would be a clear liability in negligence.  They come within the latter part of section 5(1) of CECO^[78]and would not be effective unless they satisfy the reasonableness test in section 3 of CECO^[79].

149.  As for Clause I(P) of the General Terms, this provision reads as follows:

“[The Plaintiff] hereby agrees to release [the Defendant and its] nominee and agent and to indemnify and hold [them] harmless from and pay for any and all acts, omissions, negligence, claims, proceedings, demands, costs and expenses (including, without limitation, tax or other levy, interest or service charges and attorney’s fees and expenses) in connection with all or any of the matters or investments in respect of this Agreement other than those done or incurred in bad faith on [the Defendant’s] part or as the direct result of [its] wilful default.”

150.  I think Mr Scott is right in contending that the “wilful default” exception does not apply in this instance and that the judge erred in adopting what Bowen LJ said about this expression in Re Young and Harston’s Contract.  In the present context, the correct approach is to have regard to the meaning given to this expression by Romer Jin In re City Equitable Fire Insurance Co Ltd [1925] 1 Ch 407 at 434:

“… the difficulty is not so much in ascertaining the meaning of the adjective “wilful”, as in ascertaining precisely what is the noun to which the adjective is to be applied.  An act, or an omission to do an act, is wilful where the person of whom we are speaking knows what he is doing and intends to do what he is doing.  But if that act or omission amounts to a breach of his duty, and therefore to negligence, is the person guilty of wilful negligence?  In my opinion that question must be answered in the negative unless he knows that he is committing, and intends to commit, a breach of his duty, or is recklessly careless in the sense of not caring whether his act or omission is or is not a breach of duty.”

151.  See also the judgment of Sir John Chadwick in the Court of Appeal of the Cayman Islands in Weavering Macro Fixed Income Fund Ltd v Peterson & Anr, CICA 10/2011, 12 February 2015, at §§94 to 95. Under the first limb of that test – a knowing breach of duty – it is necessary to prove that the person concerned “made a deliberate and conscious decision to act or to fail to act in knowing breach of his duty: negligence, however gross, is not enough”.  On the facts as found by the judge, neither the first nor the second limb (that he is recklessly careless in the sense of not caring whether his act or omission is or is not a breach of duty) is established.  The defendant was found to be negligent in failing to make inquiries as required under the Quincecare duty.  It was not in “wilful default” properly understood.

152.  For the defendant to rely on Clause 3 of the Mandate, Clause I(E) or Clause I(P) of the General Terms, the defendant would need to satisfy the test of reasonableness in CECO.

153.  These provisions seek to provide a comprehensive protection from liability of the defendant in failing to discharge its duty to the customer in a wide range of circumstances – “regardless of the prevailing circumstances or the nature of the transaction and notwithstanding any error, misunderstanding, fraud, forgery or lack of clarity in the terms of such instruction”, in respect of “all acts, omissions, negligence, claims, proceedings, demands, costs and expenses (including, without limitation, tax or other levy, interest or service charges and attorney’s fees and expenses) in connection with all or any of the matters or investments in respect of this Agreement”, save for “bad faith” or “wilful default”.

154.  There is no evidence that the width of these exemption clauses was drawn to the attention of the plaintiff at the time the contract was made, or that the plaintiff ought reasonably to have known of the width of these provisions.  Nor is there evidence of any scope for the plaintiff to negotiate different terms.  That the plaintiff is a very substantial entity and would have the means to look after its own interests does not mean that the defendant would not have to treat its customer with a minimum standard of fairness in seeking to include provisions of such width to exclude its liability for all its acts and omissions save for bad faith and wilful default.

155.  I am of the view that in light of the above circumstances, it would not be fair and reasonable for these provisions to be included in the contract.  As they do not satisfy the test of reasonableness in section 3(1) of CECO, the defendant is not entitled to rely on any of them to exclude its liability for breach of the Quincecare duty.

Issue 6: Whether the defence of contributory negligence is available to the defendant and if so how should the apportionment be made

156.  The judge followed the English authorities (Forsikringsaktieselskapet Vesta v Butcher [1986] 2 All ER 488 at 508^[80]; Singularis Holdings Ltd (in liquidation) v Daiwa Capital Markets Europe Ltd [2017] Bus LR 1386) and the current Australian statutory position in holding that the defence of contributory negligence is available when the contractual duty of care co-exists with one owed in tort, despite the decision of Tang J (as he then was) in International Trading Co Ltd v Lai Kam Man [2004] 2 HKLRD 937 at §78 which followed themajority decision of the High Court of Australiain Astley v Austrust Ltd [1999] Lloyd’s Rep 758^[81].  Legislative changes in Australia have since brought the law in line with the English position^[82].

157.  The judge found on the evidence that the plaintiff could have prevented the wrongdoings had it put in place proper governance concerning its management and the management of its subsidiaries as well as its accounting.  He held that it would be just to apportion 50% of the liability to the plaintiff^[83].

158.  Mr Kat argued on appeal that contributory negligence is not available as this is a claim in debt and the rules on damages on the apportionment of liability in section 21 of the Law Amendment and Reform (Consolidation) Ordinance, Cap 23 (“LARCO”)^[84] do not apply. Further or alternatively, the judge should have followed Lai Kam Man.

159.  In this situation, the defendant’s breach of contract occurred through its negligence.  In other words, the same act constituted both a tort and a breach of contract.  As a matter of policy, where the tort aspect is subject to section 21 of LARCO, the case should be subject to the statutory provision in its contract aspect, whether the action is framed in contract or in tort.  There is no reason to give a restrictive interpretation to “fault” in section 21(1) as defined in section 21(10)^[85]. As stated by Professor Glanville Williams in Joint Torts and Contributory Negligence (1951 ed) at §80: “To rule otherwise would be to invite technical arguments that should have no place in a rule depending upon broad considerations of justice and equity.”  I am inclined to agree with the judge that section 21 of LARCO applies and the English authorities should be followed.

160.  Mr Scott repeated his contention before the judge that 80% of the liability should be apportioned to the plaintiff.  Mr Kat contended in his oral submissions that liability apportioned to the plaintiff should not have been more than 20%, but this was not raised in his grounds of appeal.

161.  I do not consider it helpful to have regard to the different factual situation in Barings Plc (in liquidation) v Coopers & Lybrand (No 7) [2003] PNLR 34 and how liability was apportioned in that case which was one of auditors’ negligence.  I see no sufficient reason to interfere with the judge’s equal apportionment of liability.

Issue 7: Whether any interest found due to the plaintiff should run only from the date of service of the writ

162.  The defendant contended that in the event it is found liable to the plaintiff, the court should reduce the award of pre-judgment interest so that interest found due should run only from the date of service of the writ, on the ground that the plaintiff has been guilty of unreasonable delay in prosecuting its claim, thereby keeping it out of the sum awarded by its own fault, citing Remedy Asia Ltd v Patrick Tong Hing Chi [2020] HKCFI 2792 at §§12(8) to (11).

163.  In the course of oral submissions, it was clarified that the plaintiff would only seek pre-judgment interest as from the date of demand on 6 October 2006 at the ordinary rates.  Mr Scott made no submission if there should be any reduction on interest between the date of demand and the date of the judgment below on 12 October 2018.  If it were necessary to award pre-judgment interest, I would have ordered interest to run from the date of the demand and not the date of the service of the writ in 2007.

Conclusion and costs

164.  For the above reasons, I would dismiss the plaintiff’s appeal.

165.  I would make this order nisi on costs. Although the defendant is the successful party, I think it would be appropriate to deprive the defendant of part of its costs as it has failed on a number of issues in this appeal.  I would award 60% of the costs of this appeal to the defendant, with a certificate for two counsel.  The order nisi would be made absolute if there is no application for variation within 14 days of the handing down of this judgment.

Hon Barma JA:

166.  I agree.

Hon Au JA:

167.  I agree.