The plaintiff, Ms Luk, was a customer of the defendant bank, CMB Wing Luk Bank (“the Bank”). Ms Luk was a victim of a fraudulent investment scheme that was conducted by an employee of the Bank, Ms Liu. Ms Liu was employed as a manager at the Bank and was in charge of securities at its North Point Branch. Ms Luk was introduced to Ms Liu through her feng shui master (who so happened to be Ms. Liu’s brother). Ms Liu told Ms Luk about her high-yielding investment scheme, which she stated was only available to employees of the Bank. Ms Luk, who was attracted by the internal investment scheme, transferred around HKD35 million over the span of 3 years to Ms Liu with the understanding that her money was being placed into the scheme. Ms Luk had also received various payments of around HKD11.3 million from the scheme, which prompted her to continue her investments. Ms Liu had also forged receipts for the scheme which were printed on the Bank’s letterhead, therefore further leading Ms Luk to believe that the scheme was genuine.
Ms Liu was later convicted of three counts of fraud in 2015 and sentenced to almost 10 years in prison. However, Ms Luk was not able to reclaim the money that she had lost. Ms Luk therefore brought this claim against the Bank as she believed that they were vicariously liable for all of her losses due to the employee’s fraud. The court therefore had to determine whether the Bank could be held liable for the employee’s actions.
Decision and Finding
Ms Luk had submitted that the relevant test for determining vicarious liability in the context of this relationship (i.e. of master and servant between the Bank and Ms Luk) is the ‘close connection’ test as laid down by the Court of Final Appeal in Ming An Insurance Co (HK) Ltd v Ritz Carlton Ltd (2002) 5 HKCFAR 569. However, the Bank argued that in this case, where the principal is bound by the fraudulent representations of an agent, the test for vicarious liability should be the test for authority. The court agreed with the Bank that in this case, it is likely that the test for authority would be more appropriate and that the focus will be on ostensible or apparent authority (rather than actual authority). Apparent authority is found where a principle, by words or conduct, has represented to the third party that the agent has actual authority to enter into the kind of transaction in question, and the third party enters into a transaction in reliance on that representation, which reliance must be reasonable.
The Court found that as Ms Luk had met Ms Liu on various occasions at the branches of the Bank, and Ms Liu was wearing bank staff uniform, Ms Liu would be apparently responsible for securities services as her job entails. However, it was noted that Ms Luk had understood that this investment scheme was ‘internal’ and those who were not a member of the Bank’s staff were not eligible to participate. Therefore, Ms Luk would understand that the Bank could not have intended to offer, or have authorised its staff to offer on its behalf, the internal investments to outsiders such as Ms Luk .
The Court therefore determined that the Bank was not vicariously liable for the acts of Ms Liu.
Points to note
Although the close connection test has been used in cases as the relevant test to determine vicarious liability, it is understood from this case that this principle may not always be appropriate and the relevant test depends on the facts of the case. In this case, the Bank successfully argued that the appropriate test was one relating to authority. This case provides comfort to banks that they are not obligated to take active steps to investigate or identify whether there is an underlying purpose of a bank transfer if the instructions to transfer payment provided by the sender (customer) are genuine.