Case Summaries

Lam Chi Kin David v Deutsche Bank AG

1 December 2010

Media Summary

Lam Chi Kin David v Deutsche Bank AG
Civil Appeal No 41 of 2010

Decision of the Court of Appeal (delivered by Chan Sek Keong CJ)


1     The appellant, Lam Chi Kin David (“Mr Lam”), was a private banking client of the respondent, Deutsche Bank AG (“the Bank”). Mr Lam opened an Advisory Account and a Foreign Exchange (“FX”) GEM Account with the Bank. In connection with these accounts, Mr Lam signed several agreements which included a Master Agreement and a Service Agreement. Pursuant to the Service Agreement, Mr Lam was granted a credit line of USD 200 million, which was secured by his currency deposits held by the Bank under the Security Agreement.

2     The relevant transactions that Mr Lam entered into with the Bank were FX contracts made under a “Carry Trade Investment Strategy”. This strategy involved Mr Lam arbitraging on the interest rate differentials between different currencies. In early October 2008, the relevant exchange rates moved against Mr Lam. On 7 October 2008, the Bank faxed him a letter (“the 7 October 2008 letter”) informing him that his “collateral availability” was “Negative USD 610,000”. This collateral shortfall increased the next day, 8 October 2008, and the Bank faxed another letter (“the 8 October 2008 letter”) to Mr Lam informing him that there was a shortfall approximating USD 2.3 million.

3     On 10 October 2008, the shortfall increased further and this resulted in Mr Lam’s account having “negative equity”. This meant that if Mr Lam’s assets were liquidated on that day, the proceeds from the liquidation would not be sufficient to cover his liabilities to the Bank. This led to the Bank faxing another letter to Mr Lam (“the 10 October 2008 letter”) informing him that the collateral shortfall was USD 5,460,370.02, and requesting that he take “immediate steps to restore the shortfall in Collateral Value by 5 pm Singapore time today”. Later that day, there was a series of telephone conversations between the Bank’s relationship manager, Ms Cynthia Chin (“Ms Chin”), and Mr Lam. Ms Chin told Mr Lam that the Bank would not close out his account if he could give a commitment to remit additional funds by 13 October 2008. Mr Lam protested, on the basis that he had been promised a 48-hour grace period (“the Grace Period”) for any margin call. Ms Chin acknowledged this, but maintained that the Bank could close out his account immediately. Mr Lam declined to give the commitment, and the Bank proceeded to close out all of his FX contracts.

4     On 13 October 2008, the Bank sent a letter of demand to Mr Lam claiming for the outstanding amount of USD 1,135,239.43. Mr Lam rejected the demand and commenced proceedings against the Bank for damages for breach of duty in closing out all his FX contracts on 10 October 2008. The Bank responded by filing a counterclaim for the outstanding amount. Mr Lam denied liability on the ground that the Bank was estopped from closing out his FX contracts on 10 October 2008 during the Grace Period. In the High Court, the Judicial Commissioner found, as a fact, that the Bank had given Mr Lam the Grace Period. However, he also held that the 7 and 8 October 2008 letters were margin calls, and therefore that the Grace Period expired on 10 October 2008 when the Bank closed out Mr Lam’s FX contracts. In the circumstances, Mr Lam’s claim was dismissed and judgment was entered in the Bank’s counterclaim.

The appeal

5     On appeal, the following main issues were raised for the Court of Appeal’s consideration:

(a) Were the letters dated 7, 8 and 10 October 2008 margin calls?

(b) Did the Bank give the Grace Period to Mr Lam, and if it did, was the Bank therefore estopped from closing out his FX contracts before the expiry of the Grace Period?

6     The Court of Appeal held that the express words of the 7 and 8 October 2008 letters made it clear that they were not margin calls, but were notifications to Mr Lam of his “collateral availability” (the 7 October 2008 letter) and his Advisory Account shortfall (the 8 October 2008 letter). Furthermore, both letters contained a note that stated unequivocally that they were intended “for discussion purposes only”. Any admissions by Mr Lam could not be capable of conferring rights on the Bank under the 7 and 8 October 2008 letters if the letters themselves carried no such rights.

7     As for the 10 October 2008 letter, the Court of Appeal accepted that it was a margin call as it was expressed to be so. However, the court also held that clause 2.6 of the Master Agreement, which provides for the giving of one business day’s notice for the delivery of additional collateral, applied to the 10 October 2008 letter. Since the Master Agreement and the Service Agreement applied to each of Mr Lam’s transactions, clause 2.6 would apply unless it had been excluded by the Service Agreement. There was nothing to this effect in the Service Agreement. Furthermore, the Bank had served the 10 October 2008 letter on the basis that both the Master Agreement and the Service Agreement applied as it referred to them expressly, and the 10 October 2008 letter had expressly requested additional collateral in terms of the ambit of clause 2.6. In the circumstances, there was a breach of clause 2.6 as the Bank failed to give Mr Lam one business day’s notice (from 10 October 2008) to provide the additional collateral.

8     The Court of Appeal also found that promissory estoppel was applicable to the Bank’s promise of the Grace Period and that therefore, the Bank was estopped from resiling on its promise to allow Mr Lam the Grace Period to respond to the 10 October 2008 letter. Since the FX market could be extremely volatile, a 48-hour grace period is a very valuable right to a sophisticated customer like Mr Lam as it gives him more time to decide what to do when a margin call is made. There was sufficient detrimental reliance as Mr Lam changed his position by obtaining a substantial credit line from the Bank, and by providing collateral for the Bank’s benefit. Without the promise of the Grace Period, Mr Lam might not have exposed himself to such large FX contracts. Even if it was arguable that there was no detrimental reliance, Mr Lam was entitled to succeed on the broader principle that where the promisor has obtained an advantage from giving a promise to the promisee, he should not be allowed to resile from his promise. This principle was held to be particularly relevant in the context of private banking where, if banks and financial intermediaries engaged in the business of wealth management cannot be trusted with their word, they should not be allowed to be in this business.

9     For these reasons, the Court of Appeal allowed Mr Lam’s appeal, and ordered that his claim for damages be remitted for assessment by the Registrar on the basis that the Bank was only entitled to close out his FX positions on 13 October 2008 at the earliest.

This summary is provided to assist in the understanding of the Court’s judgment. It is not intended to be a substitute for the reasons of the Court.