Unauthorised Transactions Not Saved by Conclusive Evidence Clause

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1 Unauthorised Transactions Not Saved by Conclusive Evidence Clause The Singapore High Court recently held, in Jiang Ou v EFG Bank AG [2011] SGHC 149, that a bank was liable for losses suffered by its customer when its relationship officer acted without the customer s authorisation to enter into transactions on her account. The bank sought to rely on the conclusive evidence clause and the presumption of delivery of transaction documents in its standard account opening documentation to argue that the customer was bound by the transactions as she had failed to notify the bank of them. The Court held that reliance on such clauses was untenable in the circumstances. This Update takes a look at this case. Facts Plaintiff opened nondiscretionary account The plaintiff had opened a non-discretionary account with the defendant-bank. Accordingly, the defendant-bank and its representatives could only act on her specific instructions. The plaintiff s client relationship officer purported to enter into some 160 high-volume and/or high risk leveraged foreign exchange and securities transactions on the plaintiff s behalf but without the plaintiff s authority. As a result, the plaintiff s account reflected a loss of some US$2.3 million which she sought to recover from the defendant-bank. Plaintiff did not authorise transactions At the trial, the defendant-bank argued that it was not liable for the unauthorised transactions as the plaintiff had not, as required by the terms of her account opening terms & conditions ( Terms ), notified the bank that she had not authorised these transactions after receiving confirmation notices of the transactions. Accordingly, pursuant to the Terms, she was no longer entitled to seek to challenge the transactions. Defence of deemed receipt and conclusive evidence The defendant-bank s defence was based on two clauses in the Terms: the deemed receipt clause and the conclusive evidence clause: The deemed receipt clause essentially stated that the defendant was deemed to have been validly given any notifications sent to (UEN: T08LL0003B) is a limited liability law partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

2 her if they had been sent to the mailing address she had provided to the bank. The conclusive evidence clause essentially provided that the plaintiff was obliged to notify the bank if there were any discrepancies between the contents of any transaction confirmation sent to her, and her instructions to the bank. If she failed to do so within the time limit specified (i.e., 14 days), the details contained in the transaction confirmation would be evidence of the particulars of the transaction and would be binding and conclusive on her. For her part, the plaintiff stated that she had not been informed of these transactions. She had at best only received a handful of transactions confirmations which, being in English, she could not understand. Decision Court found for plaintiff on all counts The Court found in favour of the plaintiff on the following bases: The defendant-bank bore the burden of proving that it had sent the plaintiff the transaction confirmations, and that it had failed to do so. Even if it could show that the transaction confirmations had been sent, the wording of the conclusive evidence clause was not sufficiently wide or specific to cover the present situation. Finally, even if the clause had been sufficiently widely drafted, such a clause would not be upheld by the Court as being in breach of the Unfair Contracts Terms Act. Bank Fails to Establish Deemed Receipt Bank had to prove notes were sent As noted above, as a first step in its case, the defendant-bank sought to rely on the deemed receipt clause to establish that the plaintiff had received the transaction confirmations. The Court held that, nevertheless, the defendant-bank had to establish that it had indeed sent the transaction confirmations before it could rely on the deemed receipt clause. On the facts, however, the Court found that the defendant-bank had not proven that the transaction confirmations had been sent. The - 2 -

3 No records of sending of mails were available Head of Operations testified as to the general manner in which such confirmations are sent out. In addition, computer generated checklists in relation to the documents that were sent out were produced. While the Head of Operations stated that the mail room operators would mark by a cross or a tick respectively when they completed their duties and when they sent out the documents, the checklists produced were incompletely marked and undated. No further evidence such as a dispatch list was provided. On this basis, therefore, the defendant-bank had not met the burden of proof to establish that it had indeed sent the transaction confirmations to the plaintiff. Wording of the Conclusive Evidence Clause Conclusive evidence clause in the Terms The Court, nevertheless, went on to consider the issue as to the legal position if the confirmation notices had indeed been sent. Under these circumstances, the question was whether the conclusive evidence clause in the Terms was worded sufficiently broadly to catch such unauthorised transactions. The relevant parts of the clause were as follows: The Client further undertakes to inform the Bank promptly in writing... of any discrepancies, omissions, incorrect or inaccurate entries in the Account or the contents of any confirmation, advice or statement of account or the execution or non-execution of any order, failing which the Bank may deem the Client to have approved the original confirmations, advices or statements of account as sent by the Bank to the Client, in which case they shall be conclusive and binding upon the Client without any further proof that the Account is and all entries therein and the execution of all Transactions are correct, and the Client shall be deemed to have waived all Claims against the Bank in respect of the Account and all such Transactions, even if the Bank had not exercised the usual diligence in relation thereto

4 The details contained in the Transaction Confirmation shall be evidence of the particulars of the Transaction concluded between the Bank and the Client and shall be binding and conclusive on the Client. The Client must notify the Bank in writing...of any claimed discrepancy between the Instructions and the Transaction Confirmation...if no such notification is received by the Bank in writing within the time stipulated, the Client will be deemed to have waived all further rights to raise any objection or query thereto, and to have waived all Claims against the Bank in respect of the relevant Transaction, even if the Bank had not exercised the usual diligence in relation thereto. Such clauses shift risk to customer The Court held that it should construe the clause within the context of the creation and development of conclusive evidence clauses. In this regard, it noted that such clauses were developed to contractually shift the risk and corresponding liability arising from erroneous transactions to the customer. The Court then drew a distinction between erroneous transactions (i.e., transactions that were executed pursuant to the customer s instructions but were incorrectly executed, such as an order to sell at a price $1.50 only being executed at a price of $1.30) and transactions made without authority which was the case here. Discrepancies or omissions not wide enough to apply It therefore held that a bank that seeks to contractually allocate the burden and responsibility of the duty to inform of any forgery or unauthorised drawing or instruction on the customer would need to use either a clear and unambiguous reference to such matters or sufficiently wide language ascertainable by a reasonable person to include such specific liability. In this case, the conclusive evidence clause covered only discrepancies and/or omissions in the execution of the customer s instructions. It was clearly not intended to cover unauthorised transactions executed in the absence of any instructions from the customer. Accordingly, the defendant-bank could not rely on the conclusive evidence clause to exclude its liability to the plaintiff

5 Whether Exclusion of Fraud Is Reasonable Applicability of the Unfair Contracts Terms Act The Court then turned to the question of whether a sufficiently worded conclusive evidence clause would, in any event, be upheld. In this regard, it opined that no sensible bank had sought to incorporate a conclusive evidence clause in its banking documentation to exclude liability for unauthorised transactions fraudulently carried out by its own employees. Furthermore, if a clause expressly contemplated the exclusion of liability for fraud or wilful misconduct by the bank through its agents, it would be confronted with the reasonableness test under the Unfair Contracts Terms Act ( Act ). This provides, among other things, that where a business deals with a consumer, it cannot exclude liability for its own breach unless it is fair and reasonable in all the circumstances to include such a term. Exclusion for fraud would be unreasonable The Court then stated that such a conclusive evidence clause was plainly unreasonable. It explained that the purpose or introduction of conclusive evidence clauses was to enable banks to contractually allocate risks which were better managed by customers, brought about by tainted transactions outside the purview of the bank. Hence, conclusive evidence clauses have been upheld due to the relative ease of detection of forgeries by the customer as opposed to the bank. Bank to bear risk of employees fraud However, using conclusive evidence clauses to allocate the risk of fraud of an employee of the bank to the customer was entirely inconsistent with the core rationale underpinning the court s willingness to uphold these clauses in the first place. This was because the allocation of the risk of fraud of the bank s employees, by reason of the relative ease of detection and control, should rightfully and reasonably be borne by the bank. The Court further opined that to uphold such a clause would be against public policy. Accordingly, even if the clause applied, the Court declined to uphold it

6 Comments Public confidence in testing system is critical This was the first reported case in Singapore in which a conclusive evidence clause was relied upon by a bank to disclaim liability where unauthorised transactions were entered into by a bank s employee. The Court clearly struck the right balance between the freedom to contractually allocate risks and public policy considerations. As noted by the learned Judge, public confidence in the banking system was fundamental to the integrity of the system and was founded upon mutual trust and a reasonable expectation of honest dealings by employees of banks. Shifting the attendant risk and liability for the fraud or wilful misconduct of employees of banks by way of conclusive evidence clauses would strike at the very heart of the presumed integrity of the system. If you would like information on this or any other area of law, you may wish to contact the partner at WongPartnership that you normally deal with or contact any of the following partners: CHOU SEAN YU Head Banking & Financial Disputes Practice Joint Head Restructuring & Insolvency Practice DID: seanyu.chou@wongpartnership.com Click here to see Sean s CV. SIM BOCK ENG Deputy Head Banking & Financial Disputes Practice DID: bockeng.sim@wongpartnership.com Click here to see Bock Eng s CV. Website: Singapore Financial Services / Corporate / Intellectual Property One George Street #20-01 Singapore Tel: Fax: Litigation & Dispute Resolution / Tax 63 Market Street #02-01 Singapore Tel Fax China Shanghai Representative Office Unit 5006 Raffles City Office Tower 268 Xizang Road Central Shanghai, PRC Tel: Fax: Middle East Abu Dhabi Branch Al Bateen Towers Building C3 Office (P1) P.O. Box No Abu Dhabi, UAE Tel: Fax: Licensed by the QFCA Office Amwal Tower, West Bay P.O. Box No Doha, Qatar Tel: Fax: