Banking Law

• Citation: (2020) 21 SAL Ann Rev 135
• Published date: 01 December 2020
• Date: 01 December 2020
• Publication year: 2020

I. Customer claim against bank for investment losses: Misrepresentation

5.1 Sheila Kazzaz v Standard Chartered Bank1 (“Sheila Kazzaz v SCB”) was an appeal to the Court of Appeal against a judgment of the Singapore International Commercial Court.2 The plaintiffs/appellants (Sheila Kazzaz and her son, Ahmed Kazzaz) were UK citizens who lived in Dubai. They had sold one of their family properties in the UK and sought the advice of Standard Chartered Bank (“SCB”) as to how best to invest the proceeds. SCB structured a property financing arrangement (“PFA”) for the plaintiffs that was supposed to generate sufficient income to meet certain interest costs. When the income generated by the PFA was not sufficient, the bank terminated the credit facilities that were part of the arrangements, and the plaintiffs suffered investment losses. The plaintiffs sued the bank and its representatives, claiming, inter alia, that they had been induced to enter into the PFA by misrepresentations made by the bank's representatives.

5.2 A customer who suffers investment losses after a misrepresentation has been made to him by his bank can bring a claim for damages under the tort of negligent misrepresentation, or under s 2(1) of the Misrepresentation Act.3 Regardless of which of these two causes of action is pursued, the requirements for an actionable misrepresentation must first be satisfied: there must be a false representation of fact made to the plaintiff which induced him to enter into the contract, and which has caused him loss. These elements are easy to state, but the assessment of whether there has been an actionable misrepresentation is not always

straightforward and may sometimes involve the court in detailed examination of the facts of the case. For instance, a statement of opinion is not regarded as a statement of fact, except in so far as it amounts to an implicit statement that the opinion was reasonably held.4 As the decisions involving the Kazzaz family in the Singapore International Commercial Court and the Court of Appeal show, it may not be easy to show an operative misrepresentation, nor to persuade an appellate court to overturn the decision of the trial judge on this issue.

5.3 Two allegations of misrepresentation were particularly relevant to the appeal in Sheila Kazzaz v SCB. The first was that SCB and its officers misrepresented to Ahmed that the returns on the investments under the PFA would cover the interest payments for a mortgage and a loan for an insurance premium, both of which were part of the arrangement (referred to by the Court of Appeal as “Alleged Misrepresentation (1)”). The second was that SCB and its officers had misrepresented to Ahmed that the PFA was suitable for the Kazzaz family's needs (referred to by the Court of Appeal as “Alleged Misrepresentation (3)”). The trial judge disagreed with both allegations. The plaintiffs appealed against these findings, and the Court of Appeal dismissed the appeal.

5.4 In relation to Alleged Misrepresentation (1), the Court of Appeal agreed with the trial judge's assessment that the statement that the PFA would generate sufficient returns to cover the interest on the insurance premium and mortgage loans was a statement of opinion and not one of fact. Although the statement amounted to “an implicit representation that the maker knew of facts that might reasonably have led the maker to believe that the proposed financial arrangements could generate sufficient returns to cover the relevant interest payments in the future”,5 this representation was not false, as it was based on a reasonable assumption on the part of the bank officer.6 Further, the representation was not that the PFA would be guaranteed to have that effect, only that it had the potential to do so.7 This assessment also did not take into account the possibility that Ahmed might negatively affect the ability of the portfolio to be self-funding by taking out substantial loans against the value of the portfolio, as he subsequently did.8 The approach taken by the Court of Appeal in dealing with the issue of whether there was an operative misrepresentation is particularly instructive in wealth management disputes, where bank representatives typically make statements about

the future. A bank cannot escape liability simply by claiming that the statement made by its representative was one of opinion and not fact. However, this does not mean that the bank will be easily found to be liable. The court will carefully interpret the implicit statement of fact embodied in the statement of opinion (for example, as referring to potential returns and not guaranteed returns), and find it to be true if the bank representative had reasonable grounds for holding that opinion.

5.5 As regards Alleged Misrepresentation (3) that the arrangement was suitable for the Kazzaz family's needs, the plaintiffs argued that the trial judge's rejection of this allegation was incorrect and against the weight of evidence. The plaintiffs pointed out that the judge did not assess whether the PFA, which was highly leveraged and could result in a 71% potential loss over five years in the worst-case scenario, was suitable for someone of Ahmed's risk profile. They argued that the PFA was “unsuitable” as it was complicated and Ahmed did not have sufficient experience to appreciate its risk and that it was not suitable for a person of Ahmed's net worth, income and access to cash.9 The Court of Appeal did not accept these arguments and was persuaded instead by SCB's submission that the suitability of a financial arrangement was to be assessed by reference to a relevant objective or goal. Judged against the goal of family estate planning (generation of capital growth and ring-fencing the family's assets from forced heirship under French and shari'a law) and not immediate investment risk/return, the bank officer rightly formed the view that the proposed arrangements were suitable.10 SCB also argued that the plaintiffs had misstated the risk of the PFA based on a worst-case scenario of a total potential loss over five years. It asserted that a distinction must be made between the concept of a total potential loss as compared to risk assessed based on a worst-case scenario. This was supported by the trial judge's observation that “it is in the nature of even conservative financial products … that … the entire value of an investment might be lost”.11 This is an illuminating and useful distinction that might not be fully appreciated by many investors seeking to sue their bank when they incur investment losses. Finally, SCB argued that, based on the trial judge's findings that Ahmed had ample actual knowledge of financial concepts, he was capable of understanding the risk and benefits of the PFA.12 This argument also found favour with the Court of Appeal.

5.6 The Court of Appeal's willingness in Sheila Kazzaz v SCB to accept SCB's submissions as discussed above is a reminder that wealth

management is not an exact science. A bank cannot foretell the future, and it is likely to be insulated from a claim in misrepresentation as long as there is a reasonable basis for any statement made by its representatives to its clients, even if actual events subsequently turn out differently. On the other hand, clients who understand the risks of financial arrangements proposed to them by their banks and choose to proceed with the arrangements cannot easily shift responsibility for their own decisions to the banks when they lose money on their investments, by claiming to have limited knowledge or understanding. These issues involve an evaluative judgment of the facts by a trial judge, whose findings will not be overturned by an appellate court unless the trial judge is shown to be wrong.

II. Bank's claims in relation to fraudulently obtained credit facilities

5.7 Where a bank has been induced to grant credit facilities by a fraud that has been perpetrated on it and subsequently fails to get paid, it can bring a number of legal claims to recover its losses. This situation is illustrated by National Bank of Oman SOAG Dubai Branch v Bikash Dhamala,13 which came before the High Court in 2020. The plaintiff, the National Bank of Oman SOAG Dubai Branch (“NBO”), offered an invoice discounting credit facility to Kismat International FZC (“Kismat FZC”), a company incorporated in the United Arab Emirates, which was owned by two individuals, Bikash and Prakash. Pursuant to these credit facilities, NBO disbursed four loans (“the Loans”) to Kismat FZC in respect of, inter alia, invoices issued by Kismat FZC to British Petroleum Co Pte Ltd (“BPCPL”) and Total Singapore Pte Ltd (“TSPL”). In doing so, NBO was deceived into believing that it was dealing with BP Singapore, the real McCoy being a multinational oil trader, and a company legitimately related to another real McCoy, Total SA, a major global petroleum corporation. The truth was that BPCPL and TSPL were incorporated in Singapore by Zu Lwin (who later became a director and shareholder of Kismat Singapore Pte Ltd (“Kismat Singapore”)) on Bikash's instructions in order to impersonate these top petroleum companies. A series of transactions followed, in which the money lent by NBO to Kismat FZC was dissipated. The relevant transactions included the following: (a) Kismat Singapore received moneys from Kismat FZC; (b) Kismat Singapore remitted sums to TSPL as well as Bikash and Prakash; (c) Kismat Singapore bought US$6m worth of gold bars; (d) Kismat Singapore transferred a total of more than US$7m to Joshi Trading Pte Ltd (a Singapore incorporated company owned by Bikash's

and Prakash's nephew); (e) Joshi Trading bought more than US$5m worth of gold bars and remitted a total of US$35,000 to a bank account held by Madhu (Prakash's wife); and (f) Joshi Trading issued an invoice for the sale of 128kg of gold bars to Zu Lwin and Madhu for more than US$7m.

5.8 NBO brought the present action against 15...