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Grounds publishedDecided 19 May 2011
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Court of Appeal

Skandinaviska Enskilda Banken AB (Publ), Singapore Branch v Asia Pacific Breweries (Singapore) Pte Ltd and another and another appeal

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[2011] SGCA 22Case no. Civil Appeals Nos 121 and 122 of 2009

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  1. Chan Sek Keong CJ (delivering the judgment of the court):

  2. Introduction

  3. [1] These two appeals stem from the elaborate fraud perpetrated over a period of more than four years by Chia Teck Leng (“Chia”), the second respondent in Civil Appeal No 121 of 2009 (“CA 121/2009”). They tell a cautionary tale of how two foreign banks, in their eagerness to secure a banking relationship with Asia Pacific Breweries (Singapore) Pte Ltd (“APBS”), a prominent local blue-chip company, failed to exercise due diligence and extended substantial credit facilities to APBS relying merely (and almost entirely) on representations made by Chia, APBS’s finance manager at the material time. Those representations were subsequently found to be fraudulent.

  4. [2] The appellant in CA 121/2009 is Skandinaviska Enskilda Banken AB (Publ), Singapore Branch (“SEB”), while the appellant in Civil Appeal No 122 of 2009 (“CA 122/2009”) is Bayerische Hypo-Und Vereinsbank Aktiengesellschaft (“HVB”). APBS is the first respondent in CA 121/2009 and the sole respondent in CA 122/2009. Chia did not play any active part in either the proceedings in the court below or the proceedings before this court, having been convicted of 14 charges of (inter alia) cheating (with 32 other charges taken into consideration) and sentenced to 42 years’ imprisonment (see Public Prosecutor v Chia Teck Leng [2004] SGHC 68 (“PP v Chia Teck Leng”)).

  5. [3] APBS is the Singapore subsidiary of Asia Pacific Breweries Limited (“APBL”), the holding company of a group of companies engaged in the production and distribution of beer and other alcoholic beverages throughout the region (“the APBL group of companies”). APBL was set up as a joint venture between Heineken NV of the Netherlands (“Heineken”) and Fraser and Neave Limited (“F&N”), a Singapore company. Both APBS and F&N are well-known blue-chip companies in the region, while Heineken is a Dutch global company that is familiar to all European banks.

  6. [4] Chia was an inveterate gambler and had been visiting casinos since 1994. APBS was not aware of Chia’s gambling history when it employed him as its finance manager in January 1999. Using his position as APBS’s finance manager, Chia devised and successfully implemented an ingenious scheme to cheat four foreign banks (including SEB and HVB, the appellants in the present appeals (“the Appellants”)) of about S$117.1m (of which about S$34.8m has been recovered). In the present proceedings, SEB is seeking to recover from APBS a sum of either US$26,559,371.94 or S$29,468,723.30, while HVB is seeking to recover a sum of US$32,002,332.85. The position of the Appellants is that they lent these sums to APBS, which had authorised Chia to borrow the same. The position of APBS, in contrast, is that Chia had no authority whatsoever to borrow money on its behalf.

  7. [5] Chia’s wily deception of the Appellants for more than four years was facilitated by a combination of APBS’s failure of oversight over Chia’s activities and the gullibility and/or trusting blindness of the Appellants’ officers. The evidence at the trial showed that Chia was able to carry on his fraudulent activities for such a long time without being detected by his superiors because they left him to run APBS’s Finance and Accounting Department (“APBS Finance”) without any supervision. We should point out at this juncture that although there is, in our view, no doubt that the senior management of APBS was derelict in its corporate governance duties, that is not the focus of the present appeals. The question before us is instead who, as between the Appellants and APBS, should bear the losses occasioned by Chia’s fraud. This involves an examination of four areas of law, namely, agency, vicarious liability, negligence and restitution.

  8. [6] The trial in the court below lasted for more than 47 days. It involved 11 witnesses of fact and seven expert witnesses who testified on banking practice and procedure, internal corporate and financial controls, pre-employment screening and computation of accounts. The trial judge (“the Judge”) reserved judgment at the end of the trial, and eventually dismissed the claims of both the Appellants, except for a sum of S$347,671.23 in respect of SEB’s restitutionary claim. Dissatisfied with that outcome, the Appellants have appealed against the whole of the Judge’s decision. The Judge’s factual and legal evaluation, findings and analysis are set out in a comprehensive 219-page judgment accompanied by a further ten-page appendix on the material facts (jointly reported in Skandinaviska Enskilda Banken AB (Publ), Singapore Branch v Asia Pacific Breweries (Singapore) Pte Ltd and another and another suit [2009] 4 SLR(R) 788 (“the HC Judgment”)). We acknowledge the assistance which the Judge’s carefully-reasoned judgment has given us in our examination of the legal issues raised in the present appeals.

  9. Background

  10. Appointment of Chia as APBS’s finance manager

  11. [7] Chia is an accountant by training who worked in various finance-related positions for both international and local companies from 1983 to 1999 prior to joining APBS in January 1999. He moved from being a tax assistant to being a finance manager within the short span of a decade, and was described by the judge at his criminal trial as a “financial wizard” (see PP v Chia Teck Leng at [33]). Unfortunately, he was also a compulsive gambler. By 1998, Chia had accumulated gambling debts exceeding S$1m. It was in those circumstances that Chia applied for the post of Finance Manager of APBS on 25 November 1998. After several rounds of interviews, Chia was offered the job on 23 December 1998 and was to officially start work on 20 January 1999. His new job gave him the opportunity to plan how to defraud various banks (all of which, it may be noted, were foreign banks) by relying on APBS’s corporate standing and on his title of Finance Manager. The title “Finance Manager” is not an established title in the corporate sector, unlike corporate titles like “Finance Director”, “Chief Financial Officer”, “Managing Director”, “Chief Executive Officer”, “Chairman of the Board of Directors”, “President” or “Director”. In the present case, the Appellants were aware that Chia was not a director of APBS, but only a finance manager, a position which prima facie connotes that the office-holder carries out managerial, rather than executive, functions.

  12. Functions of Chia as APBS’s finance manager

  13. [9] Vis-à-vis his financial functions, Chia reported to APBL’s group finance director. Chia’s duties and functions as Finance Manager were set out in two internal documents of APBS, namely: (a) a document entitled “Position Description” (“the Position Description”); and (b) a document entitled “Group Treasury Policy” (“the GTP”), which was first implemented in 1998 and subsequently updated in 2000. Under the GTP, responsibility for borrowing funds for and investing surplus funds of APBS was distributed among the following entities: (a) F&N’s Group Treasury Department (“F&N Group Treasury”), which oversaw all treasury activities within the APBL group of companies; (b) APBL’s Group Finance Department (“APBL Group Finance”); and (c) APBS Finance.

  14. [10] In relation to the investment of APBS’s surplus funds, cl 6 of the GTP provided as follows:

  15. [11] In relation to the borrowing of funds for APBS, cll 3.4 and 3.5 of the GTP provided as follows:

  16. It is pertinent to note that cl 3.4.1 of the GTP did not give APBS’s finance manager any authority to source for credit facilities, but only conferred on him authority to forward (with the approval of APBS’s general manager) any request for credit facilities to F&N Group Treasury (via APBL Group Finance) for review. If the request was found to be justified, F&N Group Treasury would then source for and negotiate the credit facilities sought by APBS (see cl 3.4.2 of the GTP). As can be seen, the raising of credit facilities by the APBL group of companies was subject to an elaborate process.

  17. [12] It should also be noted at the outset that when the Appellants’ officers met Chia to discuss the credit facilities ostensibly sought by APBS, they only knew him as the finance manager of APBS. They had no knowledge of the Position Description and the GTP as those were internal documents of APBS. Their knowledge of Chia’s functions and responsibilities was based on what Chia told them. The Appellants were misled into granting credit facilities to APBS by the fraudulent representations of Chia as to (in essence) his authority as APBS’s finance manager. Chia then misappropriated the proceeds of the credit facilities for his own purposes.

  18. [13] We shall now outline the facts concerning and the Judge’s findings on the manner in which Chia defrauded the Appellants.

  19. Chia’s dealings with SEB

  20. How Chia obtained credit facilities from SEB

  21. (1) The overdraft facility and the foreign exchange facility

  22. [14] Before Chia was due to start work officially with APBS on 20 January 1999, he contacted Mr Eddie Amin (“Amin”), Head of Sales in SEB’s Trading and Capital Markets Department, in late December 1998. Chia knew Amin from their university days and also professionally. Chia told Amin that he had just joined APBS as Finance Manager, and indicated that he was keen for APBS to start a banking relationship with SEB. During a lunch meeting on 28 December 1998, Chia briefly explained his work as Finance Manager, and indicated that APBS urgently required a three-month clean overdraft line of about S$500,000 to address its cash-flow mismatches as well as foreign exchange needs. Chia explained that although APBS’s treasury functions were then carried out by F&N Group Treasury, he had plans to take back these functions for APBS; he would also place a large portion of APBS’s surplus funds on fixed deposit with SEB. In other words, Chia in effect told Amin that when he (Chia) became APBS’s finance manager, he would take back from F&N Group Treasury APBS’s borrowing function, including (by implication) the authority to take out loans. Chia stated in his affidavit (which was admitted in evidence) that he made those false statements to discourage Amin from independently approaching F&N Group Treasury directly. Amin did not at this point ask for any supporting documents to verify what Chia told him.

  23. [15] After the lunch meeting between Amin and Chia on 28 December 1998, SEB’s officers made some preliminary checks on the corporate structure of APBS based on public documents obtained from the Registry of Companies and Businesses (“the RCB”), such as APBL’s annual report for 1997 and extracts of APBS’s company forms. Those documents indicated that the general manager of APBS at that time was Mr Blum, and set out the signatures of APBS’s directors, including those of Mr Michael Fam and Mr Koh Poh Tiong (“Mr Koh”). Chia and Amin (together with the latter’s colleague, Ms Sharon Chow (“Ms Chow”)) met again at Chia’s office on 22 January 1999. By then, Chia had officially started work at APBS. To impress Amin and Ms Chow, Chia brought them to an in-house pub at the office premises of APBS called “The Tavern”, where Tiger Beer, APBS’s flagship beer, was served. At that meeting, Amin handed to Chia SEB’s standard account opening documents to complete, and said that he would seek SEB’s approval for a S$500,000 overdraft (“the OD Facility”) and a US$5m foreign exchange facility (“the FX Facility”) to be extended to APBS as requested by Chia. Those credit facilities were approved by SEB on 1 February 1999.

  24. [16] On 2 February 1999, Amin handed to Chia two letters of offer (“the Letters of Offer”), one relating to the OD Facility and the other, to the FX Facility. He briefly explained the terms of the Letters of Offer and told Chia that approval from APBS’s board of directors (“the APBS Board”) would be required. The next day, Chia returned to Amin SEB’s account opening forms duly completed, together with the following documents bearing APBS’s letterhead: (a) a letter of indemnity dated 25 January 1999; (b) a “Consent for Disclosure of Information” dated 25 January 1999; and (c) a “Certified Extract of Director[s’] resolution passed on 25th January 1999” authorising SEB to open accounts in APBS’s name “in any currencies for transactions relating to deposits” as well as authorising Chia to operate those accounts (“the 25 January 1999 APBS Board resolution”). Also handed over to Amin were the following APBS corporate documents stamped with the words “Certified True Copy” and initialled by Chia: (a) the memorandum and articles of association; (b) the “Certificate of Incorporation of Private Company”; (c) the “Certificate of Incorporation on Change of Name of Company”; and (d) Form 49 (the “Return giving Particulars in Register of Directors, Managers, Secretaries and Auditors and Changes of Particulars”). The speed with which Chia procured the APBS Board’s approval of the OD Facility and the FX Facility did not arouse any suspicion in Amin. As it turned out, the signatures of the directors, viz, Mr Blum and Mr Koh, on (inter alia) the completed SEB account opening forms and the 25 January 1999 APBS Board resolution were forgeries.

  25. [17] In connection with the OD Facility and the FX Facility, Chia opened two accounts with SEB in APBS’s name, viz, a S$ account (“the SEB S$ Account”) and a US$ account (“the SEB US$ Account”). Both of those accounts (“the SEB Accounts”), although opened and maintained in APBS’s name, were operated solely by Chia, who was also the sole signatory for both accounts. After SEB opened the SEB Accounts, Ms Chow discovered that the 25 January 1999 APBS Board resolution had approved only the opening of “accounts in any currencies for transactions relating to deposits” [emphasis added], and not the obtaining of credit facilities. On 3 February 1999, she asked Chia to obtain a fresh resolution of the APBS Board (referred to hereafter as an “APBS Board resolution” for convenience) affirming APBS’s acceptance of the credit facilities set out in the Letters of Offer (ie, the OD Facility and the FX Facility). The next day (4 February 1999), Chia delivered to SEB a document entitled “Certified Extract of Board Resolution Passed On 3 February, 1999”, which (inter alia) purportedly set out APBS’s acceptance of the aforesaid credit facilities. As was the case with Amin, the speed with which Chia obtained the new APBS Board resolution purportedly passed on 3 February 1999 did not raise any suspicion in Ms Chow. That new APBS Board resolution was also forged.

  26. [18] Nine months later, on or about 3 November 1999, Chia requested Amin to increase the OD Facility and the FX Facility to S$3m and US$10m respectively. The increase in the OD Facility was purportedly to meet APBS’s short-term working capital needs, while the increase in the FX Facility was to enable APBS to carry out larger foreign exchange transactions. Chia also wanted the increases approved by 11 November 1999. On the stated date, Amin met Chia in the latter’s office and delivered to Chia SEB’s letter offering APBS an increased overdraft line of S$3m as requested by Chia (SEB’s letter did not mention Chia’s request for an increase of the FX Facility to US$10m, but it appears from para 9 of SEB’s second amended statement of claim filed on 18 March 2008 that that request was acceded to as well (see also [13] of the HC Judgment in this regard)). The next day (12 November 1999), Chia handed to Amin another forged APBS Board resolution headed “Certified Extract of Board Resolution Passed On 12 November 1999”, which purported to approve the increase in the OD Facility.

  27. (2) The money market facility

  28. [19] Approximately seven months years later, in June 2000, Chia asked SEB for a new short-term facility of US$8m to finance the acquisition of equipment for APBS’s subsidiaries in Cambodia and Vietnam. Amin asked for supporting documents, such as a business plan projecting the anticipated cash flow. Chia managed to satisfy Amin’s request with some information given orally. By way of a letter dated 26 June 2000 (“the MM Facility Letter”), SEB offered APBS a US$8m revolving money market facility (“the MM Facility”). Chia signed the MM Facility Letter (supposedly on APBS’s behalf) and delivered to SEB a forged “Certified Extract of Board Resolution Passed On 27 June 2000” which purported to approve the MM Facility.

  29. [20] Subsequently, the MM Facility was increased on two occasions at Chia’s request. The first instance was on or about 6 November 2000, when the MM Facility was increased to US$10m. The reason provided by Chia for requiring the increase was the financing of a joint venture project in Cambodia and Vietnam. When Chia was asked why APBS, a cash-rich company, did not want to use its own cash reserves to finance the project, Chia fobbed SEB off with the explanation that APBS wished to use the interest rate for the MM Facility as a benchmark interest rate for borrowers that APBS would be lending money to. The second increase was in May 2002. Initially, Chia requested for the MM Facility to be increased to US$15m, representing that APBS needed the increase to cover working capital requirements for its factory in Cambodia. At the same time, Chia also asked for a medium-term loan of US$20m to finance improvements to be made to APBS’s bottling line in Singapore. As before, Chia rebuffed Amin’s request for written verification of those projects. SEB agreed to increase the MM Facility to US$15m on 19 June 2002, but did not approve the request for a US$20m medium-term loan. Chia then asked if SEB would consider increasing the MM Facility to US$25m instead, to which SEB readily agreed. On 24 July 2002, SEB delivered to Chia a letter offering to increase the MM Facility to US$25m, which offer was accepted by Chia (again purportedly on APBS’s behalf) on 6 August 2002. Consistent with his modus operandi in relation to the OD Facility and the FX Facility, Chia provided SEB with forged APBS Board resolutions approving the MM Facility and the subsequent increases in that facility.

  30. Unusual features of SEB’s dealings with Chia

  31. (1) Chia was SEB’s sole point of contact

  32. [21] SEB’s officers dealt with Chia alone during the entire duration of the banking relationship which they believed SEB had with APBS, viz, the period from early 1999 to September 2003. They never met or communicated with the company secretary, directors or any other officer of APBS senior to Chia. Although SEB’s officers did ask to be introduced to APBS’s senior management, they never asked themselves why Chia kept putting them off, insisting that he alone would deal with them and that certain communications between SEB and APBS should be directed to him alone.

  33. (2) SEB’s verification of the documents provided by Chia

  34. [22] As per the practice of every bank, SEB had its own due diligence procedures to follow before it could grant APBS the credit facilities requested by Chia (ie, the OD Facility, the FX Facility and the MM Facility (collectively, “the SEB Facilities”)). At the trial, Mr Gerard Lee (“Lee”), Head of SEB’s Credits and Credit Analysis and Administration Department (“Credits”), testified on SEB’s internal procedures in this regard. Lee was an experienced officer, having been Head of SEB’s Counterparty Risk Management Department (“CRM”) from November 1998 to March 2000, Manager of Credits from February 2001 to the end of June 2001 and, thereafter, Head of Credits. His evidence was that SEB had complied with all its internal policies in extending the SEB Facilities to APBS. The Judge found that most of the checks described by Lee were designed primarily to address default risks, and not fraud risks. Further, Lee’s evidence showed that there had merely been paper compliance, and not true compliance, with SEB’s verification procedures. Lee himself had not carried out any verification. Ms Chow, his subordinate, had performed most of the due diligence checks in relation to the SEB Facilities, but not diligently. Furthermore, Ms Chow was not called to testify on what she had actually done. Similarly, Ms Karen Chan, the officer who had handled the verification checks preceding the grant of the MM Facility, was also not called to give evidence. In short, SEB adduced no credible evidence that any of its officers had complied with its own verification procedures or had checked the authenticity of any of the corporate documents handed over by Chia.

  35. [23] In this regard, we should also draw attention to the “Checklist for Opening of Accounts: Local Incorporated Non-Bank Companies” issued by SEB’s CRM. That checklist stated that “[a]ll copies of documents (including translations) [were] to be certified true by Company Secretary, Director, Notary Public, Solicitor or Originals sighted by Officer of [SEB]”. In the case of a new customer, SEB had no prescribed procedure for checking the authenticity of the signature of the customer’s “Company Secretary, Director, Notary Public … [or] Solicitor”, except by visually comparing the signature of the person concerned as shown on documents provided by the customer with the corresponding signature on documents filed in the RCB. SEB’s officers did not ask for face-to-face verification because, in their view, that could be counter-productive since it could antagonise the person dealing with them.

  36. (3) Interaction between SEB’s officers and APBS’s officers

  37. [24] SEB thought it had a normal banking relationship with APBS as it regularly sent credit advices, debit advices, monthly advices and bank statements to APBS. However, those communications were sent to the division headed by Chia, who merely instructed his staff to pass the communications to him. SEB also sent letters to APBS’s official address until 19 May 2003, but was apparently not alarmed by Chia’s instruction (which it complied with) that letters should thereafter be sent to a P O Box address. SEB’s officers were invited by Chia to participate in APBS’s social events, including a tour of APBS’s brewery on 28 September 2000. During the tour, Chia introduced SEB’s officers to one of his colleagues, Patrick Teo, as APBS’s “friendly banker[s]”. Chia and Patrick Teo also played host to SEB’s Global Head of Merchant Banking, Ms Annika Bolin (“Ms Bolin”), when she came from Stockholm to visit Singapore. During that visit, Chia showed Ms Bolin around APBS’s brewery and explained APBS’s business strategy to her. SEB’s officers also worked with APBS’s IT personnel when SEB arranged for an Internet trading station to be set up on Chia’s office computer.

  38. [25] As alluded to earlier (at [21] above), SEB wanted to deepen its relationship with APBS and requested Chia to arrange for meetings between its (SEB’s) officers and the directors or senior management of APBS. All such requests were rebuffed by Chia with excuses. On one occasion, Chia told Amin that it was not necessary for him (Amin) to contact anyone else in APBS except himself (Chia). It never occurred to any of SEB’s officers to question why Chia was so reluctant to introduce them to APBS’s senior management. Thus, SEB’s sole point of contact with APBS was Chia himself. SEB at no time thought this state of affairs unusual for an important corporate customer like APBS, despite the size of the SEB Facilities.

  39. Chia’s “round-tripping” scheme

  40. [26] Chia was able to defraud SEB (and also APBS) by employing a “round-tripping” scheme which he implemented using surplus funds of APBS that were deposited in a genuine account which APBS had with Oversea-Chinese Banking Corporation Limited (“OCBC”). When money borrowed from SEB was due to be repaid, Chia would transfer funds from APBS’s account with OCBC (“the OCBC Account”) to the SEB S$ Account. (In this regard, it should be noted that the money drawn by Chia from the SEB Facilities (including the FX Facility and the MM Facility, which were US$ facilities) was ultimately all paid into the SEB S$ Account specifically.) To cover up the deposits taken from the OCBC Account, Chia created a fictitious account with Citibank (“the fictitious Citibank Account”). Deposits taken out of the OCBC Account were recorded as having been deposited into the fictitious Citibank Account. Chia told his subordinate, one Mr Teo Hun Teck (“Teo”), that the reason for the ostensible transfer of funds was because Citibank offered a higher interest rate than OCBC. He instructed Teo not to inform F&N Group Treasury of the fictitious Citibank Account. Chia also created a fictitious document entitled “Schedule of Fixed Deposits Committed”, supposedly from Citibank, to show that APBS had fixed deposits with Citibank. Upon the “maturity” of the fictitious deposits with Citibank, Chia transferred a sum from the SEB S$ Account to the OCBC Account to give the appearance that Citibank was paying the appropriate interest. Although Chia never showed Teo any fixed deposit advices from Citibank, the latter did not think that anything was amiss. Teo also did not notice that the “interest” on the Citibank “deposits” was being paid into the OCBC Account from the SEB S$ Account, rather than from the fictitious Citibank Account. Eventually, Teo informed one Ms Goh Chee Yee (“Ms Goh”), a representative of F&N Group Treasury, about the fictitious Citibank Account and the fact that no fixed deposit advice had ever been received in respect of that account. Ms Goh, instead of checking with Chia, merely instructed Teo to obtain such advices from Chia.

  41. [27] In addition to the wily actions described above, Chia gave false and misleading information to his subordinates and intercepted all communications from SEB. Further, even though cheques drawn on the OCBC Account required two signatures, Chia had no trouble getting his subordinate co-signatories to countersign the cheques used to transfer funds from the OCBC Account to the SEB S$ Account. Altogether, from 13 December 2000 to 24 October 2002, Chia carried out 27 “round-tripping” transactions between the OCBC Account and the SEB S$ Account. Specifically, S$45m was transferred from the OCBC Account to the SEB S$ Account between 13 December 2000 and 16 October 2002 by way of 18 cheques drawn on the OCBC Account (“the OCBC Cheques”), whilst S$45,347,671.23 was transferred from the SEB S$ Account to the OCBC Account between 16 July 2001 and 24 October 2002 by way of telegraphic transfers (see the table at [130] below).

  42. Chia’s dealings with HVB

  43. [28] Unlike SEB, HVB granted, or attempted to grant, only one loan facility to APBS. Chia used the same modus operandi to obtain a loan facility from HVB. Sometime between late 2000 and early 2001, he contacted HVB’s officer, Ms Tan Hwee Koon (“Ms Tan”), whom he had met earlier when she was working at Sakura Bank (now known as Sumitomo Mitsui Banking Corporation (“Sumitomo Bank”)). Ms Tan had then just joined HVB as a senior officer of its International Desk. Chia must have sensed that Ms Tan, being a new officer, would be anxious to acquire a banking relationship for HVB with a blue-chip company like APBS. Chia and Ms Tan met on 13 March 2001 at The Tavern. At the meeting, Chia asked Ms Tan for a US$10m short-term revolving loan and a US$5m foreign exchange facility for APBS, indicating to her that the loans could be the start of a bigger business relationship between HVB and APBS. However, the meeting was unproductive as HVB declined Chia’s requests because they did not fit in with its lending strategy.

  44. [29] Notwithstanding the abortive meeting between Chia and Ms Tan in March 2001, in August 2002, Ms Tan contacted Chia. By that time, Chia’s gambling debts had mounted. Chia asked Ms Tan for a US$30m three-year term loan for APBS, ostensibly to finance its new bottling line. Ms Tan and HVB’s Head of International Desk, Mr Matthias Zimmermann (“Zimmermann”), met Chia on 8 January 2003 at Raffles Hotel to discuss the proposal. At the meeting, Chia informed Zimmermann and Ms Tan that he was in charge of the finance operations of APBS, and that his job entailed handling all the credit facilities and banking relationships of APBS. Chia also mentioned that OCBC was the main banker for the APBL group of companies, but said that he did not like the services provided by OCBC and wanted to give HVB a business opportunity as he had known Ms Tan while she was working at Sumitomo Bank. In subsequent negotiations with Chia, Ms Tan asked for supporting documents to verify the purpose for which the loan was sought. While he provided some financial data to Ms Tan, Chia did not give her any documents. On her part, Ms Tan eventually dropped the issue.

  45. [30] HVB eventually offered APBS a US$30m three-year amortising term loan (“the HVB Facility”) on certain terms and conditions. On 21 and 24 March 2003, Chia delivered to Ms Tan HVB’s opening account forms, duly completed, and other documents purportedly setting out APBS’s acceptance of the HVB Facility, including a certified extract of the APBS Board resolution purportedly accepting the facility. Those documents were all forged. It was also later disclosed that the loan documentation for the HVB Facility was signed by Chia in his car on 21 March 2003 when he met Ms Tan at the car park of HVB’s office building. In our view, this was a red flag that even the most bullish credit officer could not have missed.

  46. [31] Many of the features present in the manner in which Chia defrauded SEB were also present in the way he defrauded HVB. However, there were at least two differences. First, unlike SEB, HVB had a very short banking relationship with Chia. The HVB Facility was drawn down in one tranche on 25 March 2003, and Chia was arrested a few months later. Second, HVB’s internal verification procedures were more stringent than those of SEB. HVB’s “Corporate Banking Credit Policy, Asia” dated 27 August 2002 (“HVB’s Credit Policy”) stated at para 13.1.1:

  47. Needless to say, para 13.1.1 of HVB’s Credit Policy was ignored by HVB’s officers, who simply accepted at face value whatever documents Chia gave them.

  48. The issues and the findings in the court below

  49. [32] The material issues before the Judge may be summarised as follows:

  50. (a) whether APBS held out Chia as having authority to represent to the Appellants that it had accepted the credit facilities offered by them (collectively referred to hereafter as “the Credit Facilities”) and that the forged APBS Board resolutions which he (Chia) gave them in connection with those credit facilities were genuine (“the Agency Issue”);

  51. (b) whether APBS was vicariously liable for the fraud committed by Chia on the Appellants (“the Vicarious Liability Issue”);

  52. (c) whether APBS owed a duty of care to HVB to have in place reasonable internal controls to prevent and detect fraud, and, if so, whether APBS was in breach of this duty (“the Negligence Issue”);

  53. (d) whether APBS was liable to make restitution to SEB of the sum of S$29,468,723.30 (“the Restitution Issue”); and

  54. (e) apropos APBS’s restitutionary counterclaim against SEB, whether SEB was liable for knowing receipt and/or dishonest assistance with respect to the sum of S$45m transferred from the OCBC Account to the SEB S$ Account (“the Restitutionary Counterclaim Issue”).

  55. As can be seen from the aforesaid list, the issues common to both the Appellants vis-à-vis APBS were the Agency Issue and the Vicarious Liability Issue. The Negligence Issue was relevant only to HVB and APBS, whilst the Restitution Issue and the Restitutionary Counterclaim Issue were relevant only to SEB and APBS.

  56. [33] As mentioned at [6] above, the Judge ruled against the Appellants on all the pleaded heads of claim, except for SEB’s claim in restitution, which she allowed in the amount of S$347,671.23. She made no order on APBS’s counterclaim against SEB in the light of her decision on the Restitution Issue. Her rulings and reasoning on the various heads of claim are summarised in the headnote of the HC Judgment, as follows (see the HC Judgment at 789–791):

  57. The issues to be dealt with in the present appeals

  58. [34] The Judge’s factual findings are largely not in dispute in the present appeals, which focus substantially on the legal consequences of those findings. The issues which we have to deal with are the same as those raised in the court below (as listed at [32] above). We shall address these issues in turn, beginning with the Agency Issue.

  59. The Agency Issue

  60. The Appellants’ arguments

  61. [35] The Agency Issue, to recapitulate, is whether APBS held out Chia as having authority to represent to the Appellants that it had accepted the Credit Facilities and that the forged APBS Board resolutions which he gave them in connection with those credit facilities were genuine. As SEB adopted HVB’s arguments before this court on this issue, we shall treat HVB’s arguments in this regard as the Appellants’ joint arguments.

  62. [36] According to the Appellants, the Judge misunderstood their case against APBS on the Agency Issue, and this affected her decision on the issue of ostensible authority. The Appellants submit that their case in the court below was not that Chia had actual and/or ostensible authority to obtain credit facilities from banks on APBS’s behalf. Rather, their case was that Chia, as the most senior finance officer in APBS, had authority, whether actual, usual or apparent (ie, ostensible), to make representations on behalf of APBS, including representations that APBS had accepted the Credit Facilities and that the forged APBS Board resolutions which he gave them were genuine. The Appellants argue that this proposition is on all fours with the decision of the English Court of Appeal (“the English CA”) in First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194 (“First Energy”). They contend that what First Energy decided was that although the senior manager of the Manchester office of the defendant bank in that case had expressly told the plaintiff customer that he had no authority to sanction the credit facility sought by the plaintiff, he had, by virtue of his position as the senior manager, apparent authority to communicate to the plaintiff that the defendant’s head office in London had given approval for that credit facility. In essence, the Appellants argue, the English CA held in First Energy that the law recognised that in modern commerce, an agent who had no apparent authority to conclude a particular transaction on his principal’s behalf might sometimes nonetheless be clothed with apparent authority to make representations of fact about that transaction, including the representation that his principal had approved that transaction.

  63. [37] The Appellants have also made the following points in relation to First Energy:

  64. (a) First Energy illustrates that a rigid requirement for a holding out in the form of an unequivocal and express representation by the principal directly to the third party is wholly inadequate and inapt when applied to the complexities of transacting with impersonal corporate structures which must deal through agents in today’s commercial world.

  65. (b) In reality, one would be hard-pressed to find an unequivocal and express representation by the principal directly to the third party, and it would often be the case that the representation is instead implied by the principal’s conduct in clothing the agent with the trappings of authority by placing him in a certain position in the organisation.

  66. (c) The Judge erred in law in failing to give sufficient weight to the decision in First Energy and in directing her mind singularly to the question of whether there had been an express representation from APBS to the Appellants as to Chia’s authority. In so doing, the Judge failed to appreciate the relevance and importance of First Energy, where the emphasis of the court’s legal analysis, instead of being placed (as per the traditional position) on the need for an unequivocal and express representation by the principal to the third party, shifted (rightly, in the Appellants’ view) to the reasonable expectations of the third party as they would objectively appear in the context of commercial convenience and modern-day dealings.

  67. (d) The position adopted by the English CA in First Energy is in line with the principle of fair risk allocation and recent developments in case law. First Energy has been applied in Singapore in a number of cases (eg, in Hongkong & Shanghai Banking Corp Ltd v Jurong Engineering Ltd and others [2000] 1 SLR(R) 204 (“Jurong Engineering”) and Lee Feng Steel Pte Ltd v First Commercial Bank [1996] 3 SLR(R) 64), and also recently in England in Alan Lovett, Geoffrey Lambert Carton-Kelly v Carson Country Homes Ltd, Barclays Bank Plc, Registrar of Companies, Andrew Alexander Jewson, Edward Charles Carter [2009] EWHC 1143. The principle laid down in First Energy has also been applied in the Australian case of Pacific Carriers Limited v BNP Paribas [2004] HCA 35, where the High Court of Australia acknowledged that a kind of representation often arising in business dealings was one which flowed from vesting an officer of a company with a certain title or status and equipping him with certain facilities. Such a representation, the court noted, might result in the principal permitting the agent to act in a certain manner without proper safeguards against misrepresentation.

  68. The decision in First Energy

  69. [38] As the Appellants’ case on Chia’s authority to make the fraudulent representations which were made is founded upon the authority of First Energy, we now examine this case in detail to see what the English CA actually decided and what the basis of its decision was. Before doing so, we should reiterate the established principle (which the Appellants do not dispute) that the law does not recognise the notion of what is commonly termed a “self-authorising” agent – ie, under the law of agency, an agent who has no authority, whether actual or ostensible, to perform a certain act cannot confer upon himself authority to do that act by representing that he has such authority. This principle is well illustrated by the House of Lords’ decision in Armagas Ltd v Mundogas SA [1986] AC 717 (“Armagas”).

  70. [39] In Armagas, the plaintiff (“AL”) negotiated to purchase a ship from the defendant (“MSA”). AL planned to let the ship back to MSA on a three-year charterparty so as to finance the sale. The sale was brokered by an agent (“J”), who stood to gain if the deal went through. At all material times, J communicated with one Magelssen (“M”), who was MSA’s vice-president (transportation) and chartering manager, regarding the sale. M told J that MSA would only enter into a one-year charterparty. J then offered M a bribe, and M signed a three-year charterparty to the satisfaction of AL. M also signed a one-year charterparty so as to mislead MSA. The ship was duly let to MSA, which returned it after one year. AL thought the charterparty was for three years and therefore sued MSA for breach of contract. AL argued that M had either implied actual authority or apparent authority to sign the three-year charterparty on MSA’s behalf. The House of Lords held that notwithstanding M’s appointment as MSA’s agent in relation to the sale of the vessel, that position did not carry any usual or customary authority to sign a three-year charterparty; neither was there a representation by MSA that M had such authority. The only representation made was that made by M himself. In the circumstances, the House of Lords dismissed AL’s claim against MSA.

  71. [40] In his judgment, Lord Keith of Kinkel, after expressing his agreement with Robert Goff LJ’s observation in the English CA (viz, that it was most unlikely to be the law that a principal would be bound in a situation where its agent, who had no ostensible authority to enter into a particular transaction on its behalf, wrongly asserted after negotiations that he had gone back to the principal and had obtained actual authority to enter into that transaction (see Armagas at 731)), said (at 779 of Armagas):

  72. [41] Subsequently, the English CA found First Energy to be such an “unusual and peculiar case” (per Lord Keith in Armagas at 779). The plaintiff in First Energy (“FE”) specialised in the replacement of old-fashioned heating systems with a more economical form of space heating. In order to make its product financially attractive to customers, FE allowed its customers to pay for the installation of the new system by instalments. FE sought financing from the defendant bank (“HIB”), which had its head office in London and which also had a branch office in Manchester. FE negotiated with the senior manager of HIB’s Manchester office (“Mr J”), who had authority to sanction large credit transactions and sign facility letters. However, at an advanced stage of the negotiations, Mr J informed FE that he had no authority to sanction a credit facility of the amount asked for by FE.

  73. [42] Thereafter, HIB sent FE a facility letter, signed by its managing director and by an assistant director (“Mr P”), offering a £2m credit facility for five years. However, this facility letter did not come into force. Since FE required financing for an initial project, the parties instead entered, successfully, into an ad hoc arrangement whereby HIB provided interim hire purchase (“HP”) financing to FE for that initial project only. While discussions (which were known to Mr P) were ongoing between FE and Mr J to implement a more permanent financing agreement, FE secured three more projects. With respect to those three projects, Mr J wrote to FE on 2 August 1990 offering three more interim HP facilities as well as attaching the relevant agreements (“the 2 August HP Agreements”) for FE’s completion. FE subsequently returned the 2 August HP Agreements duly completed. In the meantime, HIB’s senior management decided that HIB should not be financially involved in FE’s ventures, including the three projects which were the subject matter of the 2 August HP Agreements. FE, which was left without financing by that decision, sued to enforce the 2 August HP Agreements. The trial judge ruled in FE’s favour, whereupon HIB appealed.

  74. [43] The English CA dismissed HIB’s appeal. It held, on the particular facts of the case, that:

  75. (a) Mr J’s position as the senior manager of HIB’s Manchester office was such that Mr J was clothed with ostensible authority to communicate that HIB’s head office had approved the 2 August HP Agreements;

  76. (b) the fact that FE knew that Mr J’s actual authority to offer credit facilities on HIB’s behalf was limited did not necessarily mean that Mr J’s authority to communicate decisions on HIB’s behalf vis-à-vis credit facilities was also limited; and

  77. (c) the trial judge was entitled to find as a matter of fact that Mr J possessed ostensible authority to communicate the approval by HIB’s head office of the 2 August HP Agreements.

  78. Accordingly, the English CA upheld the trial judge’s decision that HIB was bound by the 2 August HP Agreements.

  79. [44] Each member of the English CA in First Energy delivered a separate judgment. Steyn LJ began his judgment by observing that a decision to the contrary effect (viz, that HIB was not bound by the 2 August HP Agreements) would “frustrate the reasonable expectations of the parties” (at 196) and would, moreover, “be based on an unreal premise as to the way in which commercial men transact[ed] business of the particular kind involved in th[at] case” [emphasis added] (at 196). He held (at 204) that “the law recognise[d] that in modern commerce[,] an agent who ha[d] no apparent authority to conclude a particular transaction [might] sometimes be clothed with apparent authority to make representations of fact [apropos that transaction]”. He distinguished the decision in Armagas on the basis that it dealt with specific authority as opposed to general authority, and stated (at 203) that that decision did not foreclose the possibility of an agent having ostensible authority to communicate his principal’s approval of a transaction even though he (ie, the agent) himself had no authority to enter into that transaction.

  80. [45] Evans LJ distinguished Armagas on the basis that the agent there (ie, M) had no authority either to enter into the relevant transaction or to communicate his principal’s (ie, MSA’s) approval of that transaction. In contrast, in First Energy, Mr J, by virtue of his position as the senior manager of HIB’s Manchester office, had general authority to communicate decisions made by his superiors, and therefore had authority to communicate the specific representation that HIB’s head office in London had sanctioned the 2 August HP Agreements. Evans LJ also expressed the view that such a decision would reflect the practical realities of the commercial world.

  81. [46] Nourse LJ agreed with the reasons given by both Steyn and Evans LJJ. He added that “[a] question of ostensible authority [was] primarily one of fact” (at 207), and held that on the facts, the trial judge’s conclusion in FE’s favour was “the only one to which [the trial judge] could have come on the evidence before him” [emphasis added] (at 207). He further stated that HIB’s proposition – viz, that “[FE’s] knowledge of [Mr J’s] inability to sanction any facility was just as much knowledge of [Mr J’s] inability to communicate head office’s approval of a facility” (at 207) – involved “a non sequitur which offend[ed] both commercial reality and common sense” (at 207).

  82. [47] In their judgments, all three members of the English CA in First Energy expressly stated that their rulings were entirely consistent with Armagas. Accordingly, First Energy is distinguishable from Armagas only on the facts. As far as we can see, the distinguishing features are as follows:

  83. (a) Armagas involved a situation where it was not difficult for AL to check with MSA regarding M’s authority. In contrast, in First Energy, given that Mr J was the senior manager of HIB’s Manchester office, it would be impractical to expect each customer of HIB’s Manchester office to check with HIB’s head office in London regarding Mr J’s authority.

  84. (b) In First Energy, both the trial judge as well as the English CA effectively found as a fact that Mr J had ostensible authority to make the specific representation that HIB’s head office in London had approved the credit facility sought by FE. In contrast, in Armagas, M was found not to have any authority, whether ostensible or otherwise, to enter into a three-year charterparty on MSA’s behalf.

  85. (c) Armagas concerned an agent who had limited authority, whereas First Energy concerned an agent who effectively had wide-ranging authority to perform a variety of tasks, including that of conveying his principal’s approval of the transaction in question.

  86. [48] Steyn LJ’s approach in First Energy was influenced in part by Kerr LJ’s general observations on the nature of apparent authority in Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd, and P S Refson & Co Ltd (The “Raffaella”) [1985] 2 Lloyd’s Rep 36 (“The Raffaella”). Kerr LJ’s observations went further than those of Lord Keith at 779 of Armagas (reproduced at [40] above; see also First Energy at 203 for Steyn LJ’s comments on Kerr LJ’s observations in The Raffaella). However, what had an even greater influence on Steyn LJ’s approach in First Energy was Browne-Wilkinson LJ’s reasoning in The Raffaella (at 43), as follows:

  87. [49] In The Raffaella, the plaintiff (“EIFT”) contracted to buy a cargo of cement from the first defendant (“Soplex”). Soplex intended to fulfil that contract by purchasing a vessel together with her cargo of cement. The second defendant (“Refson”), the trading bank which acted as Soplex’s banker for the transaction, issued a guarantee in favour of EIFT promising to make irrevocable payment if the vessel did not arrive at the designated port by the stipulated date and/or if the cement supplied by Soplex did not meet the contractual standard. The guarantee was signed only by Mr Booth, Refson’s documentary credits manager, who did not in fact have actual authority to sign the guarantee on Refson’s behalf and who also concealed the giving of the guarantee from his superiors. EIFT subsequently made a claim under the guarantee. Refson denied liability, contending (inter alia) that Mr Booth had no authority to sign any guarantee which would be binding on it. This argument was rejected by the trial judge, who held Refson liable under the guarantee. On appeal, the English CA (consisting of Lawton, Kerr and Browne-Wilkinson LJJ) affirmed the trial judge’s decision. It held that on the facts of that case:

  88. (a) Mr Booth had apparent authority to sign the guarantee on behalf of Refson as the latter had held out Mr Booth as being a manager of the kind who dealt with its affairs generally and who could reasonably be expected to have general authority; and

  89. (b) the evidence taken as a whole was sufficient to entitle the trial judge to find that Mr Booth had been held out by Refson as having apparent authority to sign the guarantee issued in favour of EIFT.

  90. [50] Kerr LJ also said that the issue before the court “raise[d] no question of principle[,] but merely the proper inference to be drawn from the evidence” (see The Raffaella at 43). He held that “Mr. Booth had Refson’s actual authority to do everything on which [EIFT] rel[ied] as clothing him with the apparent authority to sign the [guarantee] without the addition of any other signature” (see The Raffaella at 43–44).

  91. Our ruling on the Agency Issue

  92. [51] It is clear from the foregoing examination of The Raffaella and First Energy that in both cases, the court’s decision was based on a specific finding of fact that the principal concerned had held out its agent as having authority to make, in relation to the transaction in question, representations of the class or kind of representations that the agent actually made, even though the agent knew he had no actual authority to enter into the transaction itself. In particular, it was made abundantly clear in First Energy that Mr J, as the senior manager of HIB’s Manchester office, had overall responsibility of that office. In such circumstances, it made good commercial sense that a customer of HIB’s Manchester office should be able to rely on what was conveyed to him by Mr J. In contrast, in the present case, Chia was merely the finance manager of APBS, a title which does not connote the possession of any specific authority. The senior management of APBS, including the APBS Board, was also within easy reach of the Appellants. In the circumstances of the case, the Judge found as a fact that APBS had not held out to the Appellants, whether by its actions or by Chia’s position as Finance Manager, that Chia had any authority to make on its behalf any representations of the class or kind of representations that Chia actually made. The Judge’s finding is purely one of fact; therefore, unless the Appellants are able to show that this finding of fact is plainly wrong or is against the weight of the evidence, their appeals based on apparent authority must fail.

  93. [52] The Appellants rely on the following evidence as amounting to a holding out by APBS of Chia’s authority to represent that APBS had accepted the Credit Facilities and that the forged APBS Board resolutions provided by Chia were genuine:

  94. (a) Chia, apart from being the most senior finance officer in APBS, was a member of APBS’s senior management as stated in the Position Description.

  95. (b) Ms Tan had dealt with Chia previously in 2000, when she was at Sumitomo Bank, in relation to credit facilities sought on behalf of APBS. Thus, in her dealings with Chia after she joined HVB, she had every reason to believe that Chia was similarly authorised by APBS to request for credit facilities on its behalf.

  96. (c) Chia had unlimited authority to operate and control the OCBC Account, except that he was a co-signatory.

  97. (d) Chia had authority to open fixed deposit accounts in APBS’s name for the purposes of investing APBS’s temporary surplus funds, and also had a compliance function with respect to the covenants and obligations of APBS under credit facilities which it took out. Both of those areas of work would require Chia to communicate with banks.

  98. (e) Chia frequently dealt with banks and acted as the point of communication between APBS and banks. In fact, Mr Brand Jan van den Berg, an APBL director, had told Zimmermann (HVB’s Head of International Desk) on one occasion that Chia was the appropriate person in APBS to discuss banking facilities with.

  99. (f) Chia had wide powers with regard to his subordinates as well as APBS’s facilities and properties. He had met and entertained SEB’s officers at APBS’s premises, and had shown them around the premises. Further, he had allowed SEB’s officers to set up SEB’s Internet trading system on his own office computer with the assistance of APBS’s IT personnel.

  100. [53] In the court below, the Judge, after considering all of the above factors, held that they were insufficient to show that APBS had held out Chia as having authority to make the false representations which he made to the Appellants. We are substantially in agreement with her ruling. Accordingly, as far as the facts are concerned, the Judge was entitled to find on the evidence that APBS did not hold out Chia as having the authority contended by the Appellants, ie, actual and/or ostensible authority to represent that APBS had accepted the Credit Facilities and that the forged APBS Board resolutions which he provided in connection with those credit facilities were genuine.

  101. [54] In view of our finding that APBS did not make the holding out submitted by the Appellants, the principle laid down in First Energy – viz, that an agent who has no authority, whether actual or apparent, to conclude a particular transaction on his principal’s behalf may nevertheless have apparent authority to represent that his principal has approved the transaction – has no application in the present case. It is accordingly not necessary for us to decide whether that principle should be accepted as good law in Singapore. However, given the importance of First Energy to the Appellants’ arguments and given, also, that the principle laid down in that case is likely to surface again in our courts, we think it desirable that we state our views on the case.

  102. Our observations on First Energy

  103. [55] As mentioned at sub-para (d) of [37] above, First Energy has been applied in Australia, and was recently followed in England. In addition, as the Judge observed (at [115] of the HC Judgment), First Energy has also been relied on in Singapore in Jurong Engineering by the High Court for the principle that (see Jurong Engineering at [68]):

  104. [56] With respect to the above passage from Jurong Engineering, the Judge said (at [116] of the HC Judgment), without coming to any conclusion on the correctness of the principle set out therein:

  105. [57] There are four observations which we wish to make apropos First Energy. The first is that, as mentioned at [47] above, the English CA did not consider that its decision departed from established authority. If the English CA’s view is correct, then First Energy would be considered good law here. It may, however, be that First Energy is not in fact consonant with established authority, but is instead a radical departure from the traditional conceptual basis of the doctrine of apparent authority as well as inconsistent with Armagas (as suggested by the Judge at [116] of the HC Judgment and by Prof F M B Reynolds in “The Ultimate Apparent Authority” (1994) 110 LQR 21). In this regard, we note that criticism of First Energy has been made in (inter alia) Peter Watts & F M B Reynolds, Bowstead and Reynolds on Agency (Sweet & Maxwell, 19th Ed, 2010), which states (at para 8-023) that that case “involves a departure from the basic principles of apparent authority, for which no general justifying principle seems ready [at] hand”, as well as Tan Cheng Han, The Law of Agency (Academy Publishing, 2010), where the learned author opines that First Energy “was an example of a difficult case possibly making bad law” (at para 5.047) and that “courts should be slow to adopt the approach in First Energy … unless there are exceptional facts” (at para 5.043). If these criticisms of First Energy are justified, then that decision should not be followed by our courts. Therefore, if it becomes necessary in a future case for a Singapore court to decide whether or not First Energy is good law in this country, the court will have to first identify, in so far as is possible, what principle (if any) was established in First Energy that is not (according to the English CA) inconsistent with Armagas.

  106. [58] Our second observation is that, as mentioned at [48] above, in First Energy, Steyn LJ followed in the footsteps of Browne-Wilkinson LJ in The Raffaella. Referring to Browne-Wilkinson LJ’s analysis of apparent authority at 43 of The Raffaella (reproduced earlier at [48] above), Steyn LJ said that that passage “[threw] light on the approach [which the court] ought to adopt” (see First Energy at 204). He concluded (likewise at 204):

  107. In other words, as we pointed out earlier (see sub-para (b) of [47] above), Steyn LJ (and, likewise, the other two members of the English CA in First Energy) specifically found that Mr J had ostensible authority to represent that HIB’s head office in London had approved the 2 August HP Agreements. If the decision in First Energy is so understood, then it should pose no doctrinal difficulty.

  108. [59] Our third point is that in First Energy, the English CA treated Mr J’s representation (viz, that HIB’s head office in London had approved the 2 August HP Agreements) as merely another representation, like any other representation that an agent may be authorised to make. In our view, however, a representation by an agent that his principal has approved a transaction is not like other representations. A representation as to the principal’s approval of a transaction goes to the heart of the agency relationship. While an agent may possess authority (whether actual or ostensible) to make general representations pertaining to a certain transaction (such as, for example, a representation about the condition of the goods involved in a sale transaction), this authority, in a situation where the agent does not also possess authority (whether actual or ostensible) to enter into the said transaction on the principal’s behalf, cannot include authority to make the specific representation that the principal has approved that transaction. To argue that an agent has authority to represent that his principal has approved a transaction – which is, in effect, authority to bind the principal to the transaction – because he (the agent) has authority to make general representations about the transaction and, hence, also has authority to represent that his principal has approved the transaction is contrary to the established principle that there cannot be self-authorisation by an agent. Of course, if an agent has been conferred authority, whether actual or ostensible, to make the specific representation that his principal has approved a transaction (which authority Mr J was found to have in First Energy), he would also have been vested with at least ostensible authority to enter into the transaction on his principal’s behalf. But, if the agent merely has authority to make general representations about the transaction and does not have any authority (whether actual or ostensible) to enter into the transaction on the principal’s behalf, it is not possible for him to give himself such authority by falsely representing that his principal has approved the transaction, which representation carries with it the implication that the principal has given him (the agent) the requisite authority to bind the principal to the transaction.

  109. [60] Our fourth observation is that from an economic point of view, there is a significant difference between the commercial relationship of the parties in First Energy and that of the parties in the present case. In First Energy, FE needed financing to develop its business. Mr J, the senior manager of HIB’s Manchester office (who, in Steyn LJ’s view (at 197), had greater general authority than the general manager of HIB’s commercial department in London), offered credit facilities to FE because he wanted HIB to invest in FE’s business. Cutting off FE’s credit facilities would probably have caused to FE more harm than the harm which validating those facilities might have caused to HIB; in fact, HIB might not necessarily have incurred any loss despite being held liable to honour the 2 August HP Agreements. The situation in the present case is the converse – APBS is bound to suffer serious losses (which have already materialised) if it is held liable for the fraudulent representations of Chia that (inter alia) APBS had accepted the Credit Facilities, which facilities APBS in fact never needed. We note, by way of further comparison, that in The Raffaella, Refson benefited from the transaction (viz, Soplex’s purchase of the ship in question and her cargo of cement) as it acted as Soplex’s banker for that transaction. This point is, of course, not decisive of the issue at hand, but, in our view, it is a relevant factor in determining whether the loss occasioned by an agent’s fraud or unauthorised conduct should be borne by the principal or by the third party who deals with the agent, where both the principal and the third party are innocent parties.

  110. [61] For the foregoing reasons, it is our view that First Energy should be understood as a case that was decided on the basis of the wide-ranging authority that Mr J, as the senior manager of HIB’s Manchester office, was found to have. Different kinds of agents have different authority in different settings. In the present case, it cannot be said that the Judge was wrong in declining to accord to Chia the same extent of authority as that accorded to Mr J in First Energy. There was little evidence, unlike in the case of First Energy, to demonstrate that Chia possessed ostensible authority to make representations that APBS had accepted the Credit Facilities. Chia was only a finance manager of one company in a large corporate group, a position that would carry with it less general authority than the position of a general manager (in this regard, it should be noted that APBL had a group general manager), a finance director or a managing director. Furthermore, Chia’s authority as Finance Manager was not well known to the commercial world, and was certainly unknown to both the Appellants, which knew only what Chia had told their officers. Given these circumstances, there was no reason for any lending bank to assume, based on the appearance of things, that Chia had authority to represent that APBS had accepted credit facilities offered by the bank.

  111. The Vicarious Liability Issue

  112. [62] We turn now to the Vicarious Liability Issue, where the question to be determined is whether APBS should be held vicariously liable for Chia’s fraud on the Appellants. In our discussion of this issue, we shall, for convenience, use the terms “employer” and “employee” to also denote a principal and an agent respectively.

  113. [63] In analysing the Vicarious Liability Issue, the Judge considered the relevant leading authorities to be Lloyd (Pauper) v Grace, Smith & Co [1912] AC 716 (“Lloyd v Grace Smith”) and Armagas. She stated (at [194] of the HC Judgment):

  114. Applying the aforesaid principle, the Judge rejected the Appellants’ case on vicarious liability because (see [198] of the HC Judgment):

  115. The Appellants’ arguments

  116. [64] Before this court, the Appellants’ case on vicarious liability is that the Judge should not have relied on the principle laid down in Lloyd v Grace Smith (and reaffirmed in Armagas) as it has been superseded by what is commonly termed “the ‘close connection’ test” (also known as “the Lister test” because the test was first applied in England in the House of Lords case of Lister and others v Hesley Hall Ltd [2002] 1 AC 215 (“Lister”)). The “close connection” test is currently the accepted test in English law for establishing vicarious liability. The Appellants argue that on the basis of the “close connection” test, APBS is vicariously liable to them for Chia’s fraudulent acts as there was a close connection between those acts and Chia’s employment as APBS’s finance manager. APBS’s counter-argument is that the “close connection” test should be confined to sexual abuse cases involving young and vulnerable victims, and that, in any case, APBS would not be vicariously liable for the fraudulent acts of Chia even if the “close connection” test were applied. It should be noted that in the court below, the Judge did not consider it necessary to rule on the applicability or otherwise of the “close connection” test. (Her view was that the House of Lords in Lister adopted the “close connection” test, which was “a looser test of connection between the [tortious] acts in question and the employment” (see the HC Judgment at [199]), because that case involved the sexual abuse of young and vulnerable victims in circumstances where victim compensation was a legitimate policy consideration and where the ability of the employer to pay compensation militated against shielding it from liability.)

  117. The origin and development of the “close connection” test

  118. [65] It is not necessary for us to either examine or discuss in detail the origin of the “close connection” test. There is a great deal of judicial pronouncement and academic writing on it. It suffices to say that according to the House of Lords in Lister (at [36]–[37] per Lord Clyde and at [69]–[70] per Lord Millett), the “close connection” test is merely a reformulation of what we shall hereafter call “the Salmond test” (ie, the test first enunciated in John William Salmond, The Law of Torts (Stevens & Haynes, 1907)), which common law courts have applied for decades, and not a radical departure from it. This test, as currently restated in R F V Heuston & R A Buckley, Salmond and Heuston on the Law of Torts (Sweet & Maxwell, 21st Ed, 1996) (“Salmond and Heuston”) at p 443, rests on the principle that:

  119. [66] The first limb of the Salmond test is uncontroversial. However, the second limb has always posed difficulties in terms of application. In particular, it is often difficult to determine whether the tortious act in question is an unauthorised mode of doing an act authorised by the employer, or an act outside the scope of the employee’s employment altogether. As P S Atiyah commented in Vicarious Liability in the Law of Torts (Butterworths, 1967), the Salmond test is (at p 172):

  120. [67] While the Salmond test may produce just results in cases of negligence, it has been recognised for a long time that it may not do so in cases of intentional torts. This is because it is often difficult to regard a deliberate attempt by an employee to commit a tort (and thereby contravene the terms of his employment) as an “unauthorised mode of doing some act authorised by the master” (see Salmond and Heuston at p 443), even though justice demands, under certain circumstances, that the employer should be made liable. Indeed, the Salmond test has been criticised as being artificial and inadequate in determining vicarious liability for intentional torts.

  121. [68] The difficulty with the Salmond test has been most strikingly brought home in cases involving sexual abuse of young and vulnerable victims by employees of social welfare homes. Such cases have recently increased in Canada and England. Up to 1999, the English courts applied the Salmond test in its traditional formulation (see, eg, Trotman v North Yorkshire County Council [1999] LGR 584 (“Trotman”), where the English CA, applying the traditional formulation, held that a school was not liable for the indecent assault committed by its deputy headmaster on a pupil who shared a room with him while they were on a school-sanctioned trip as what the deputy headmaster did was not an unauthorised mode of performing an authorised act, but an independent act outside the scope of his employment).

  122. [69] The English CA’s approach in Trotman was rejected by the Canadian Supreme Court in The Children’s Foundation, the Superintendent of Family and Child Services in the Province of British Columbia and Her Majesty The Queen in Right of the Province of British Columbia as represented by the Ministry of Social Services and Housing v Patrick Allan Bazley [1999] 2 SCR 534 (referred to hereafter as “Bazley v Curry”, as this case is more commonly known), where, on substantially similar facts, the court declined to follow Trotman and held the employer liable. The court (per McLachlin J) said (at [24]):

  123. The court propounded a new test – viz, the “close connection” test – as follows (at [41]):

  124. Since then, the courts in Canada have applied the “close connection” test to all cases involving religious bodies whose employees (ie, priests, deacons, etc) have sexually assaulted or abused young and vulnerable victims under their charge.

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