Banking Law

• Date: 01 December 2018
• Author: Dora NEO MA (Oxford), LLM (Harvard); Barrister (Gray's Inn); Advocate and Solicitor (Singapore); Associate Professor and Director, Centre for Banking & Finance Law, Faculty of Law, National University of Singapore.
• Publication year: 2018
• Published date: 01 December 2018
• Citation: (2018) 19 SAL Ann Rev 68

Banker and customer

Bank's liability for unauthorised transactions

5.1 There were not many banking cases decided in 2018, and of these, Major Shipping & Trading Inc v Standard Chartered Bank (Singapore) Ltd1 (“Major Shipping”) arguably concerns the most significant banking law issues to have arisen in the course of the year. The decision itself, however, has not garnered much attention: the High Court decision in January 2018 has not been reported, and the plaintiff's appeal to the Court of Appeal was dismissed in September 2018 with no written grounds of decision rendered.

5.2 In Major Shipping, the plaintiff was a company incorporated in the British Virgin Islands and was in the business of trading and shipping cement clinker. The beneficial owners of the company were Majnu and Alam. The plaintiff sued the bank for making four unauthorised transfers totalling more than $1.8m to third parties from the plaintiff's bank account (“the Four Instructions”). The transfer instructions were given in the form of remittance application forms that bore signatures consistent with the specimen signature in the bank's records for Majnu. These forms were attached to e-mails sent to the bank from Majnu's Yahoo e-mail account and were also faxed to the bank. The plaintiff denied that the transfer instructions were given by Majnu. It argued that the bank was not authorised to act on the four instructions, that the bank had breached its duty to use reasonable care and skill and that the bank breached its duties to have the necessary facilities in place to prevent unauthorised transfers. The learned judge identified three main issues that had to be decided:

(a) Did the bank breach its duties to the plaintiff?

(b) Did the exclusion clause in the bank's standard terms (“the Standard Terms”) and the letter of indemnity (“LOI”) exclude the bank's liability for the plaintiff's loss?

(c) Was there contributory negligence on the plaintiff's part?

The first and second issues will be explored below.

Good faith

5.3 One question that was relevant to the first and second issues was the meaning of the term “good faith”. Under the Standard Terms, the bank was authorised to act on the customer's payment instructions,2 which meant instructions in relation to any account, transaction or service which the bank “believe[s] in good faith has been given by an Authorised Person”.3 Further, under the LOI, the customer acknowledged the risks involved in sending instructions via electronic communication and agreed to bear all risks, and the bank would not be liable for any losses or damages arising provided it had “acted in good faith”.4 The plaintiff argued that the meaning of “good faith” had to be understood in its context and this included (a) the other provisions of the account opening documents, particularly the term that required the bank to act with reasonable care and skill; (b) the bank's internal procedures; and (c) relevant banking practices in Singapore.5 The plaintiff's position was that the bank had to act in accordance with these standards before it could be said to have acted in good faith, and contended that it had not. The judge applied the decision in HSBC Institutional Trust Services (Singapore) Ltd v Toshin Development Singapore Pte Ltd6 (“HSBC Trust v Toshin”), where the Court of Appeal stated:7

… At its core, the concept of good faith encompasses the threshold subjective requirement of acting honestly, as well as the objective requirement of observing accepted commercial standards of fair dealing in the performance of the identified obligations. … [emphasis added by the High Court in Major Shipping]

The Court of Appeal in HSBC Trust v Toshin explained that what these accepted commercial standards of fair dealing require “will depend heavily on the commercial nature and purpose of the contract in question”.8 The plaintiff in Major Shipping argued that the bank would not have acted in good faith if it had acted without reasonable care. The judge was of the view that the concept of good faith “incorporated the subjective element of acting honestly, and the objective element of a lack of gross negligence or recklessness”.9 He rejected the argument that the objective aspect of good faith required the bank to act with reasonable care. He was of the view that the objective component of good faith required only that the bank acted without gross negligence or recklessness.10 This interpretation was consistent with the exclusion clause in the LOI, which excluded the bank's liability for all loss except to the extent that such loss was caused by “fraud, gross negligence or wilful misconduct” on the bank's part.11 The judge also rejected the plaintiff's argument that the bank had to obtain call-back confirmation of the plaintiff's instructions before executing them, so as to be considered as acting in accordance with “the spirit of its own internal policies and procedures” and relevant banking practices in Singapore, and therefore to be said to have acted in good faith.12 The gist of this argument was that the bank would only have acted in good faith if it had obtained call-back confirmation of the plaintiff's payment instructions before acting on them.13 The judge found that such a requirement would be inconsistent with the clauses in the Standard Terms and the LOI, which envisaged that the bank was not required to obtain further confirmation with the plaintiff before acting, and would not be a legitimate interpretation of the term “good faith”.14

Authorisation

5.4 The plaintiff argued that Majnu did not issue the Four Instructions, and that the plaintiff had been a victim of an unknown

fraudster who had issued the Four Instructions to the bank. The bank's case was that the plaintiff had to adduce clear evidence of the fraud that it alleged, and it had failed to meet this evidentiary burden. After a detailed examination of the facts, the judge found on the balance of probabilities that Majnu did not issue the Four Instructions to the bank.15 The relevant question then became whether the bank had nevertheless believed in good faith that Majnu had issued the Four Instructions, and was therefore authorised to execute them under the Standard Terms,16 as explained above. In view of the judge's interpretation of “good faith”, he considered that the bank would have believed in good faith that Majnu issued the instructions if it held this belief honestly, and without recklessness or gross negligence on its part. The judge went through the evidence in detail in his consideration of whether the bank was negligent or grossly negligent in believing that Majnu had issued the instructions, and concluded that it not been negligent, let alone grossly negligent, in so believing. He therefore concluded that the bank was acting within its authority under the Standard Terms in executing the Four Instructions.

Implied terms

5.5 One of the plaintiff's arguments in Major Shipping was that the bank had breached implied terms to (a) act in accordance with its internal risk management procedures; (b) take steps and/or have the necessary facilities to prevent unauthorised fund transfers; and/or (c) comply with the relevant Monetary Authority of Singapore regulations and guidelines.17 The judge referred to the three-stage test in Sembcorp Marine Ltd v PPL Holdings Pte Ltd18 for the implication of terms:19

(a) The first step is to ascertain how the gap in the contract arises. Implication will be considered only if the court discerns that the gap arose because the parties did not contemplate the gap.

(b) At the second step, the court considers whether it is necessary in the business or commercial sense to imply a term in order to give the contract efficacy.

(c) Finally, the court considers the specific term to be implied. This must be one which the parties, having regard to the need for business efficacy, would have responded ‘Oh, of course!' had the proposed term been put to them at time of the contract. If it is not possible to find such a clear response, then, the gap persists and the consequences of that gap ensue.

[emphasis added by the High Court in Major Shipping]

Applying this test, the judge did not accept that there were implied terms as asserted by the plaintiff. He stated:20

First, the plaintiff argued that there was a gap in the contracts because they did not make any provision regarding the duties that the plaintiff contended for. In my view, the Account Opening Documents extensively set out the duties owed by the Bank to the plaintiff. There was no gap to be filled by an implied term. Secondly, I found that it was not necessary in the business or commercial sense to imply the duties that the plaintiff contended for. Finally, I found that none of the implied duties that the plaintiff contended for satisfied the officious bystander test.

As the Major Shipping decision shows, the requirement in Singapore law that a precondition for a term to be implied is that there must be a gap in the contract which has arisen because the parties did not contemplate the gap could be hard to satisfy in banking contracts which have set out the parties' duties in detail.

Exclusion of liability

5.6 Given the judge's conclusion that the bank was acting within its authority under the Standard Terms in executing the Four Instructions, there was no need for him to consider the plaintiff's arguments that the bank could not rely on the exclusion clauses in the Standard Terms and the LOI to exclude its liability to the plaintiff. However, he proceeded to do so, for the sake of completeness. Of greatest general interest in this part of the judgment is the discussion of whether cl 10.1(a) of the Standard Terms contravened ss 2(2) and 3(2) of the Unfair Contract Terms Act21 (“UCTA”) on the basis that it unreasonably restricted the bank's liability for negligent conduct. Section 10.1(a) of the Standard Terms provided:22

We are...