Exemption of Liability Clauses

inSight

14 Apr 2005

Exemption of Liability Clauses

Following guidance from the HKMA, banks have been required to remove from their terms and conditions for safe deposit boxes any exemption of liability clauses that exclude a bank's liability for its own negligence completely or limit such liability to a nominal amount.

I am sure readers are aware of what are called exemption of liability clauses (ELCs). These became the focus of public attention after the incident late last year involving the accidental destruction of rented safe deposit boxes by a local bank. ELCs are commonly used in commercial contracts. They serve to make clear who is responsible for what between the contracting parties in case something goes wrong over the contract. The relative degree of protection offered by ELCs to the respective contracting parties obviously varies according to the negotiating power of the parties. Very often, service providers are in such an influential position that the consumers have no alternative but to accept standard and blanket ELCs that give comprehensive protection to the service providers, to the extent of being unreasonable. Perhaps not unexpectedly, such indiscriminate use of ELCs has attracted increasing attention in the community.

To protect consumers from being subject to unreasonable ELCs, the Control of Exemption Clauses Ordinance was enacted in the early 1990s. Readers may recall the advertisements developed by the Consumer Council about the use of ELCs in standard contracts. The Ordinance provides that a contracting party cannot, by reference to any contract term or to a notice given to the other party, exclude or restrict his liability resulting from negligence in the performance of his duties under the contract, unless the term or notice satisfies the requirement of reasonableness.

Since banks are an important group of service providers in the economy and bank customers are not in a particularly strong position to negotiate with them, we have found it necessary for banks to pay attention to the provisions in this Ordinance. Banks are therefore required under the Code of Banking Practice to have due regard to applicable laws in Hong Kong, including in particular consumer protection legislation, when they draw up the terms and conditions of a banking service. Nevertheless, the safe deposit box incident last year revealed that banks have generally included ELCs in their terms and conditions for such service and some clauses attempt to exclude or limit a bank's liability even in circumstances where the damage is caused by the bank's own negligence. The HKMA considers that such ELCs are inconsistent with the Code and has since requested banks to review their terms and conditions of banking services and to take appropriate action to rectify the situation.

The part of the review covering safe deposit box agreements was completed in November 2004. Based on the review results, the HKMA has issued guidance to banks on the use of ELCs in their terms and conditions of service. In formulating such guidance, the HKMA has to strike a reasonable balance between protecting consumer rights and upholding banks' legitimate interests in managing their business risk.

Specifically, the HKMA has improved industry practice by requiring banks to remove ELCs that purport to exclude a bank's liability for its own negligence completely or limit such liability to a nominal amount. Meanwhile, since the use of ELCs is not prohibited by law, banks should be allowed to use them as long as such ELCs are reasonable and enforceable. We nevertheless consider it important for banks to make ELCs highly transparent to customers, and have therefore required banks to draw customers' attention to any ELCs incorporated in the terms and conditions of service. As a further protection, banks are required to advise their customers to take out insurance as and when appropriate in the use of safe deposit box service.

I am glad that all the relevant banks are taking steps to achieve compliance with this guidance. The majority of the banks have already made appropriate changes to their terms and conditions for safe deposit box service by end-March 2005. The remaining few will complete the revisions within this month.

While banks are required under the Code to ensure that their terms and conditions are fair and reasonable, bank customers should also protect their own interests by understanding clearly the terms and conditions of banking services that they use. Whenever in doubt about the terms or conditions of a banking service, a customer should enquire with the bank concerned.

 

Joseph Yam

14 April 2005

 

 

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