Disputes over bank's contractual right to freeze customer's account

Introduction

As banks tighten-up their standard terms concerning due diligence on customers and their transactions, it is inevitable that disputes will arise and that some will make their way to court.

This has been a feature of other jurisdictions.(1) It is now being seen in Hong Kong. One such recent case is the Pa Sam Nang & Others v HSBC Ltd,(2) which sheds some light on a bank's contractual power to freeze a customer's bank account, while it carries out due diligence investigations to satisfy itself of its obligations under local and international law relating to (among other things) anti-money laundering considerations. While the judgment is only an interlocutory one (arising out of the plaintiff customer's failed application for summary judgment) it does help illustrate some issues that arise and the difficult position banks can find themselves in, as regards duties to a customer while also maintaining the confidentiality of their investigations.

Background

In light of the increasing legal and regulatory risks regarding money-laundering and financial crimes, it is common nowadays to see in banks' general terms and conditions provisions allowing banks to take necessary actions to discharge their compliance obligations. These actions may include blocking and preventing dealings with the accounts while a bank carries out investigation. 

These terms are usually widely-drafted to allow as much power and discretion to the banks as possible. While it is trite law that it is not for the courts in Hong Kong to rewrite contractual terms (between commercial parties dealing at arm's length), the courts can be asked to ensure that such contractual powers are not abused; for example, by implying a term as to the manner in which a contractual power may be exercised – in particular, that it is not exercised in bad faith. 

Recent Case

In short, in Pa Sam Nang & Others v HSBC Ltd, the principal plaintiff's bank account was frozen by the bank after he was apparently added to the list of Specially Designated Nationals (SDN List) promulgated by the United States. Another plaintiff's account was also frozen (believed to be the principal plaintiff's wife), as was the account of his parents. Subsequently, the parents' account was released and their balance remitted back to them. 

The plaintiff and his lawyers repeatedly asked the bank to release his account but to no avail. The plaintiff commenced a court action against the bank and, in a somewhat bold move, he applied for summary judgment (ie, judgment without trial). By the time the case came before the court, the block on the plaintiff's account had lasted for almost a year. 

Essentially, as a customer of the bank, the plaintiff argued that he was entitled to his credit balance and it was for the bank to justify its actions and condescend to provide details as to why it had put a block on his account. Being an interlocutory hearing, on a summary judgment application, all the bank needed to show was a credible defence; in effect, that it had an arguable defence justifying the blocking of the plaintiff's account.  

In its defence, the bank relied on its contractual right to carry out "Financial Crime Risk Management Activity" (FCRMA), which included taking any action to meet (among other things) its compliance obligations relating to or in connection with the detection, investigation and prevention of financial crime, as provided for in its general terms and conditions. These terms also provided that any liability arising out of the exercise of such right was excluded.  

The court considered the plaintiff's application for summary judgment in two stages: 

1. First, whether there was sufficient basis for the bank to invoke the contractual power to carry out FCRMA in respect of the Plaintiffs' account, and to freeze the accounts in the meantime; and
   
   
2. Second, if the answer was yes, for how long was the bank entitled to freeze the account. 

On the first question, the plaintiff accepted that his being on the SDN List provided a sufficient basis for HSBC to invoke the contractual power to carry out FCRMA in respect of his account. 

On the second question, the court considered the English House of Lords' judgment in Braganza v BP Shipping Ltd and noted that, among other things, contractual discretion could be limited by "concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality".(3) 

Given that the court was only dealing with a summary judgment application, it did not go into a full consideration of the nature of an implied term that may have affected the bank's exercise of a contractual right to carry out FCRMA in the present context. However, the court appears content to have employed an "irrationally" test, which required the consideration of both the decision-making process and its outcome, in considering whether the bank had an arguable defence. 

Based on the available evidence, the court concluded that it was clearly arguable that the bank's exercise of its contractual right was rational in terms of both the decision-making process and its outcome. Therefore, the plaintiff's application failed. 

The plaintiff has made an application for permission to appeal the court's decision.(4) 

Comment

Given the relatively low threshold in opposing a summary judgment application (a credible defence or a triable issue) the outcome in the case is as expected. Indeed, any other result would have been surprising. It is difficult to see how the plaintiff's application for summary judgment could have been granted on the facts, seeing as it raises issues that will require a full trial of the merits. Indeed, it is not entirely clear why the plaintiff's application was not dismissed outright with costs against him, as opposed to the court (as it did) making an order that the bank be allowed to proceed with its defence to trial. 

Interestingly, nothing in the case determines how long a bank in a similar position is able to block an account while it carries out relevant investigations. That is a fact specific question but given the complexity of the case in hand it appears that a year or more may not be unreasonable.(5) 

The judgment in Pa Sam Nang & Others v HSBC Ltd does attempt to recognize some of the practical difficulties that a bank may face in explaining its compliance obligations in order to defend its position. For example, the court considered that it might be difficult for the bank to identify precisely and accurately the compliance obligations actually engaged unless and until the FCRMA (investigation) was completed. Furthermore, it might be inappropriate and undesirable for the bank to disclose the full reasons for its compliance concerns, if to do so would involve disclosure of the results of the investigations conducted so far (or, indeed, for example, compromise any investigation). 

If an appeal does proceed to the Court of Appeal it faces significant challenges. The court at first instance has exercised a discretion, the outcome of which is difficult to fault and the burden on the bank to show a credible defence was met. Indeed, any appeal judgment may well result in more (not less) sympathy for banks in attempting to balance their duties to customers with their regulatory and compliance obligations. 

While the outcome in the case so far is as expected, the case is interesting.(6) The plaintiff appears to be a well-connected and resourceful individual who, no doubt, feels aggrieved by the bank's actions. Indeed, much of the plaintiff's complaint appears to focus on the bank's alleged lack of engagement as to the reasons for its actions. If the case does proceed to trial, it could raise some interesting issues. 

1. For example, see series of cases between Shah v HSBC Private Bank (UK) Ltd, including [2012] EWHC 1283 (QB).
2. [2016] HKEC 573, HCA 1020/2015, March 7 2016. Also see an unrelated writ filed in HCA 712/2016, March 18 2016 and reported in the South China Morning Post on March 20 2016.
3. [2015] 1 WLR 1661.
4. HCA 1020/2015. The leave application is fixed to be heard at 9:30am on April 28 2016. See: http://e-services.judiciary.gov.hk/hr_enq/index.jsp?lang=EN
5. In the context of the time during which a "no consent to deal" by the police in Hong Kong could remain in place, pursuant to section 25A(2)(a) of the Organized and Serious Crimes Ordinance (Cap. 455), the High Court declined to imply a reasonable time requirement: see –Interush Ltd v Commissioner of Police [2015] HKEC 1589 (an appeal may proceed later this year). It is important to note that theInterush case concerned the "no consent to deal" regime under OSCO. Pa Sam Nang & Others v HSBC Ltd concerned consideration of a bank's own general terms and conditions.
6. The case made headlines in the Financial Times, March 15 2016.