DBS BANK (HONG KONG) LTD v. SAN HOT HK INDUSTRIAL CO LTD AND ANOTHER

HCA2279/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2279 OF 2008

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BETWEEN

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JUDGMENT

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Introduction

1.  This is the defendants’ appeal from a decision of Master Hui that certain interrogatories served by them on the plaintiff be withdrawn.

2.  The background to the action can be stated quite briefly.

3.  The plaintiff bank is suing the defendants to recover sums due on investment accounts held by the defendants and guaranteed by the 2^nd defendant.  The amount of the claim is substantial, being approximately HK$92 million and JPY 23.5 million plus interest. 

4.  For their part, the defendants say that certain leveraged accumulator transactions in respect of equities and foreign exchange, called “Equity Knock Out Discount Accumulators” (also known as Equity KODAs) and “Accumulating Par Forward Contracts”, were too risky for them.  They claim that the plaintiff owed them certain fiduciary duties and duties of care, which they breached.

5.  One of the allegations of breach is that the plaintiff failed to ensure that the Accumulators were suitable for the 1^st defendant and that they were too risky for it.  It is also pleaded that the plaintiff wrongly categorised the Equity KODAs as class 3 (medium risk) products under its internal guidelines.

The interrogatories and the order that they be withdrawn

6.  The interrogatories relate to paragraph 15 of the witness statement of one of the plaintiff’s witnesses, Mr Cheung Wang Ho Rocky (“Mr Cheung”).  In that paragraph he says :

“KODAs were made available to DBS PB clients in or about September 2006. They were rated the same risk rating as their respective underlying stocks. KODAs on all Hong Kong listed stock had a risk rating of 3, except KODAs on HSBC Holdings (00005.HK) which had a risk rating of 2. A risk rating of 2 or 3 means that KODAs were made available to PB customers who were classified as having a moderate risk appetite, i.e. customers who were willing to achieve capital growth and take a risk that [the] value of their investment may decline from time to time.”

7.  By reference to relevant paragraphs in the pleadings and an exchange of correspondence between the parties’ respective solicitors in September 2010, the interrogatories raise questions as to whether the plaintiff has adjusted its risk rating for the Accumulators “at any time subsequent to September 2006”.  If so, the interrogatories seek answers to when and why the adjustment was made and what the risk rating was adjusted to.  Also, the defendants ask whether based on the adjusted risk ratings the Accumulators would have been considered by the plaintiff to be suitable for its private bank customers who were classified as having a moderate risk appetite.

8.  By summons dated 28 September 2010 the plaintiff applied for an order that the interrogatories be withdrawn.  On 15 November 2010, Master Hui acceded to the application and granted an order to that effect.

9.  By this appeal, the defendants seek the setting aside of the Master’s order and thereby the reinstatement of the interrogatories.

The relevant principles

10.  There was no dispute between the parties as to the relevant principles.  Under RHC O.26 r.1(1), interrogatories will only be allowed if they are relevant to any matter in question between the applicant and the other party.  In addition, it must be shown that the interrogatories are necessary either for disposing fairly of the cause or matter or for saving costs. The burden is on the applying party to show that the interrogatories are necessary for either of these purposes.

Discussion

11.  The plaintiff takes two main points in resisting the reinstatement of the interrogatories.

12.  First, it is submitted that the interrogatories are irrelevant and unnecessary because the question of how the Accumulators were classified under the plaintiff’s internal guidelines is wholly irrelevant, since the only relevant question is whether the standard imposed by the law has been breached.

13.  In this regard, the plaintiff points out that the question of the relevance of the plaintiff’s internal guidelines was considered when the defendants made an application to the Master for leave to adduce expert evidence on the issue of whether the plaintiff had correctly assessed the risk levels of the Accumulators.

14.  That application was dismissed by Master Lo in May 2010 on the basis that the questions which were sought to be addressed by the expert evidence are irrelevant.  It would appear from the skeleton argument for the plaintiff (and this was not disputed by the defendants) that the Master pointed out that the correctness of the categorisation under the plaintiff’s internal guidelines is not relevant.  What is relevant is whether the plaintiff had done things correctly as a matter of law, not as a matter of the internal guidelines.  Whether the plaintiff had committed a breach of the internal guidelines or not would not inform the court on the question of whether a breach of the law had been committed.

15.  If the interrogatories were addressed to the issue of whether the plaintiff’s internal guidelines had been breached, I would have no hesitation in concluding that they were irrelevant and unnecessary.  However, I agree with the submissions made on behalf of the defendants that whether the plaintiff had correctly estimated the risk level of the Accumulators and made proper attempts to ensure that the Accumulators were suitable for the defendants is one of the central issues in this action.

16.  Subject to the plaintiffs’ second main point to which I shall return, I accept that interrogatories (i), (ii), (iv) and (v) do not seek information as to whether the guidelines were breached.  Instead, those interrogatories seek information on how the plaintiff assessed the risks attaching to its products.  I also accept that those interrogatories go to the issue of whether the risk attaching to the Accumulators was properly assessed by the plaintiff, albeit that is an issue which will be determined against the standard imposed by the law rather than against any departure from the guidelines.  These interrogatories are therefore relevant.

17.  On the other hand, I consider that interrogatories (iii) and (vi) seek information which goes to the question of whether the internal guidelines have been breached.  Whether, in the light of an adjustment to their risk rating, the Accumulators were considered by the plaintiff to be suitable for its private bank customers who were classified as having a moderate risk appetite is not a matter that goes to the issue of whether, in terms of the general law, the risk of the Accumulators themselves was misunderstood by the plaintiff.  The assessment by the plaintiff of the suitability of a particular product for its private bank customers generally would be dependent on an application of the guidelines, which is not a relevant issue in this action.

18.  The second main point taken by the plaintiff is that the defendants are seeking information as to whether there was a change of risk rating after the material events, namely after all the relevant transactions were entered into.  This follows because the plaintiff’s solicitors have confirmed in correspondence that the risk ratings remained the same throughout the material period.

19.  In my opinion, this objection is validly taken. Interrogatories (i) and (iv) ask whether the plaintiff has adjusted its risk rating for the Accumulators “at any time subsequent to September 2006”.  On its face, the time period covered by the interrogatories goes beyond the time when the relevant transactions were entered into.  Since it is not relevant to consider whether the plaintiff breached its own internal guidelines, it is not relevant to consider any change in the risk rating for the Accumulators beyond the date of the relevant transactions.

20.  On the other hand, as I have already stated, I consider that it is relevant to know how the plaintiff rated the Accumulators in question but only as to the period until the relevant transactions were entered into.  After that time any change in the risk rating by the plaintiff is, in my opinion, not relevant to any issue in the action.

21.  The relevant period to which interrogatories (i) and (iv) should be restricted is to 7 November 2007, the date of the last of the defendants’ investments in any of the Accumulators.  The starting date of September 2006 is appropriate, since that is the date on which Mr Cheung states that the KODAs were made available to the plaintiff’s private bank clients.

22.  For the sake of completeness, I would add that the parties referred to authorities in the law of negligence dealing with the question of whether experience subsequent to the alleged negligence proves that some additional precaution was necessary.  I did not find these authorities to be of assistance in resolving the appeal before me.  In particular, I do not think the proposition on which the defendants sought to rely relating to the admissibility of evidence of subsequent precautions (based on a statement in the judgment of Peter Cheung J (as he then was) in Wong Wai Ming v Hospital Authority [2000]3 HKLRD 612 at p.619H) assists the defendants in this case since there is no issue of practicability of implementing the subsequent precautions at the time of the alleged negligence.

23.  However, for the reasons and to the extent set out above, I consider that the interrogatories should be reinstated.

Disposition and costs

24.  I therefore allow the defendants’ appeal to the extent of reinstating interrogatories (i), (ii), (iv) and (v), save that the words “at any time subsequent to September 2006” in interrogatories (i) and (iv) should be replaced by “at any time between September 2006 and 7 November 2007”.

25.  I shall hear the parties on costs.