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Duty Of Confidentiality Versus Interests Of Third Party Security Providers
March 2009 | Finance | Business Bulletin
Bernice ONG
Introduction
Conflicts between confidentiality and disclosure obligations manifest most starkly in suretyship transactions, not least in the context of guarantees taken by banks in respect of their customers. Third party security providers would usually want to know the precise nature, scope and extent of the security they are providing, as well as the liability incurred by the customer that they may be exposed to at any given time. While it is essential for such information to be honest, accurate and given with reasonable care, such disclosure would be in direct conflict with the bank’s duty of confidentiality owed to its customer.
Duty of confidentiality
Banks in Singapore have both a contractual and statutory duty to keep the affairs of their customers confidential. The contractual duty is implied from the banker and customer relationship while the statutory duty is imposed by section 47 of the Banking Act (the “Act”) which provides for a general prohibition against disclosure of customer information followed by a limited number of exceptions embodied in the Third Schedule of the Act. What is the impact of this duty of confidentiality on the common law doctrine of implied consent and the limited duty of disclosure?
Implied consent to disclose and the limited duty of disclosure
The most authoritative statement of the scope of the common law duty of confidentiality is from Hamilton v Watson (1845) 12 Cl & Fin 109 which states that, unless the surety questions the bank for information on the customer, it is unnecessary for the bank to make any such disclosure to the surety. However, “where there is anything that might not naturally be expected to take place between the parties who are concerned in the transaction, to the effect that the position shall be different from what which the surety might expect, then disclosure ought to be made voluntarily”. Thus, it would seem that the case alludes to a limited duty of disclosure with reference to any transaction between the bank and the customer which might potentially “subvert the presumed basis of the guarantee”.
The Singapore Court of Appeal in Habibullah Mohamed Yousuff v Indian Bank [1999] 2 SLR 650 accepted and applied the principle requiring a bank to disclose “unusual features” relating to its transaction with the customer to the surety. Section 47(4) of the Act, as it was when the Habibullah case was decided, had excluded information relating to “credit facilities granted by a branch in Singapore or a bank incorporated outside Singapore” from the scope of section 47 of the Act. Thus, the Court of Appeal did not have to consider the impact of the banking secrecy legislation (as it was then) on the common law doctrine of limited duty of disclosure.
Singapore position today?
The High Court recently considered these issues in Susilawati v American Express Bank Ltd [2008] 1 SLR 237; [2007] SGHC 179. The plaintiff executed a third party charge over all moneys in her account with the bank to secure the liability of her son-in-law (the “Borrower”) to the bank. Later, as a result of the Borrower’s inability to discharge his liabilities, the bank deducted a sum of money from the account. The plaintiff brought an action against the bank to recover the money.
Among other things, the High Court noted that:
| (1) | the bank was aware of the potential conflict of interest between the plaintiff and the Borrower, who was a remunerated referral agent for the bank; |
| (2) | the bank’s lack of vigilance had contributed in no small measure to the present dispute; |
| (3) | the information regarding the debts or liabilities that the Borrower was incurring fell squarely within the ambit of banking secrecy laws; and |
| (4) | there was no evidence that the plaintiff had at any time requested such information and/or that it had been denied. |
After examining the principles in common law and interpreting the same in the context of our current statutory regime, the High Court stated that section 47 of the Act effectively negates the doctrine of implied consent to disclosure. Therefore, nothing less than a written consent by the customer or his personal representatives would suffice to lift the prohibition against disclosure. In this particular case, the bank did not have express written consent from the Borrower to disclose information to the plaintiff. As such, the plaintiff’s claim was dismissed.
Interestingly, the High Court also stated that:
| (1) | where a guarantor or surety requests for information, banks are best advised to ensure that it has the customer’s explicit written authority to override its statutory duties of confidentiality. Where there is no express written authority from the customer, the prudent thing would be “to arrange for a joint meeting with the customer and the surety, during which the surety may, in the presence of the customer, ask for information on matters relating to the customer’s affairs”; |
| (2) | alternatively, a person asked to provide security should insist as a precondition that the customer gives his express consent to the bank to disclose his liabilities “both at the time when the security is executed and at periodic intervals”, for so long as the security is in force. Therefore, the practice of obtaining written consent at periodic intervals from the customer is one which banks may consider adopting; and |
| (3) | the court hoped that, in time to come, there would be amendments to the Act or new legislation altogether to strike an appropriate and fair balance between the interests of confidentiality for banks and the protection of guarantors. At the very least, such new legislation would provide a modicum of guidance to banks who find themselves in a similar position to the defendant, to avoid being the recipient of writs from disgruntled guarantors. |
Possible implications and unresolved matters
It has become common practice for banks to include in its legal documentation today clauses which entitle the bank to disclose information about the borrower and the banking facilities and information regarding the moneys or other relevant particulars of the borrower’s accounts with the bank to, inter alia, relevant security parties.
While such disclosure clauses are usually advantageous to the bank, it has yet to be decided whether such disclosure clauses, which are in effect written consent to disclosure from the borrower, allow for the common law doctrine of limited duty of disclosure to apply. In exceptional situations where the bank had such contractual rights of disclosure and where there were ‘unusual features’ in its transactions with the borrower, it is possible that a court may find the bank bound to disclose information to the surety, failing which the security would be rendered unenforceable.
Further, the High Court’s suggestion of obtaining written consent periodically so long as the security is in force in the Susilawati case raises doubts as to whether the disclosure clause would be regarded as sufficient ‘written consent to disclosure’. While such a statement is merely dicta, the possibility that banks may not be fully protected by such standard disclosure clauses from the duty of confidentiality is enough cause for concern. This is particularly so given that it is an offence to act in contravention of section 47 of the Act.
In conclusion, we echo the High Court’s sentiment in the Susilawati case for amendments to the Act or the enactment of new legislation. There is clearly a need for clarity in the laws of banking secrecy and also guidance for banks so that they may avoid suits from disgruntled third party security providers as well as the criminal liability of banks and bank officers pursuant to the Act. In the meantime, banks should exercise caution when disclosing information and be vigilant in situations which might be unusual or where the third party security provider has no control over the liabilities of the borrower.
