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Banking Law Cases1 Study Unit 3:RELATIONSHIP BETWEEN BANKER AND CLIENT - CONFIDENTIALITY FirstRand Bank Ltd v Chaucer Publications:Facts of the case:The respondent published a series of articles; from the said articles the applicant claimed defamation for itself as well as some of its clients. Appli...

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Study Unit 3: RELATIONSHIP BETWEEN BANKER AND CLIENT - CONFIDENTIALITY FirstRand Bank Ltd v Chaucer Publications: Facts of the case: The respondent published a series of articles; from the said articles the applicant claimed defamation for itself as well as some of its clients. Application was made for the respondent to be interdicted for making public through its publications the identities of its clients along with the names of their trusts, which were referenced in the respondents’ articles. The applicant used S38 (a) and (c) of the constitution to protect their rights to privacy and further averred that it had locus standi at common law. This was opposed by the respondent on the ground that the applicant was not entitled to bring application on behalf of its clients in the form of a class action. The decision of the court: When one looks at public policy, the relationship between a bank and its client must be a confidential one. The privilege of disclosure belongs to the client and not the bank, thus only the client can invoke this privilege and demand that the bank keep all their dealings confidential / private. It was argued that the publication of the names of the clients might infringe the banks right to privacy and its confidential relationship with its clients. It was further held that common law did not allow for a class action, thus no locus standi at common law was established. The bank tried to prevent its clients from being defamed, but a mere publication of client’s names as clients of certain banks does not infringe the right to privacy of the bank or of the client. Class action was not possible, because each client could have interdicted the respondent for the publication. The application was dismissed due to the fact that the bank failed to establish locus standi.

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RELATIONSHIP BETWEEN BANK & CUSTOMER IS ONE OF DEBTOR & CREDITOR Standard Bank of SA Ltd v Oneanate Investments (Pty) Ltd 1995 (4) SA 510 (C) Held that each transaction undertaken on a credit card is repayable

from the moment the advance is made and that prescription begins to run as soon as the advance is made. A debtor who is indebted to a creditor in respect of more than one debt may, when making a payment, indicate, expressly or tacitly, how the payment is to be allocated. The creditor is not always bound to accept the payment on the basis tendered. Where the debtor fails to indicate how the payment is to be appropriated, the power of appropriation passes to the creditor, who may then appropriate the payment, provided he does so immediately and that he communicates his choice to the debtor within a reasonable time. The creditor’s power is not unlimited, and he cannot act inequitably. Failing appropriation by the debtor and creditor, the common law has developed a set of residual rules, which guide the Courts, unless it is found that the parties or the circumstances have expressly, or tacitly excluded one or more of them. Since the common-law rules seek to appropriate payment on the principle of appropriating first to the debt which is most onerous to the debtor, where capital and interest are owing as part of the same debt (as is the case where the interest accrues as an accessory to the capital), payments are credited, first, to discharge interest and then only to pay the capital. In duplum rule, reduce the interest recoverable by the creditor to an

amount equal to the now-reduced capital amount. The Courts held that the law could not tolerate such a situation and ruled as follows: “In the absence of effective appropriation by the customer or the bank, the rule in duplum rules. As soon as, and for as long as, the in duplum rule suspends the further running of interest, all credits to the account should be appropriated to pay the interest before they are applied to pay the capital.” It is thus clear that where the debtor and creditor cannot come to an arrangement, credits should be appropriated towards interest first and then capital to ensure that the debtor does not get an unfair advantage. Facts: The Bank lent Oneanate (O) an overdraft of R1.2 million, interest was charged at an annual rate of 2% above the banks prime rate. A written agreement was concluded between the respondent and a trust as sellers and 2 brothers as buyers for the sale of shares – the number of shares wasn’t fixed but it was expected to amount to approximately R600 000.

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The buyers nominated a company to help buy the shares and make payment to O. The bank was approached to assist them in paying for the hares. A current account was opened for the company and an overdraft was organized. In May L a manager of O instructed the bank to debit the companies account and credit their account with R600 000 and interest. When the buyers discovered what happened they required the transaction to be reversed since none of the companies signatories had authorized the transfer. At this point there was no agreement on how many shares were being sold and for what price and the buyers had already taken steps to cancel the agreement. O instructed the bank manager not to reverse the debit. There was a 2nd demand from the buyer to reverse and for the companies account to be closed. The supervisor of the branch told him to transfer the company’s overdraft and accumulated interest back to the respondents account. 2years later a summons was issued from the bank demanding repayment of the overdraft plus interest The respondent raised a number of defences:

Ø฀ Part of the money had been repaid = Oneanate stated that the bank was not entitled to reverse the entry. Ø฀ Certain amounts debited from the account had prescribed Ø฀ Other defences related to the quantification of any amount for which they might be liable to the bank.

Looking at these defences – questions the banks way of capitalizing interest on an overdraft in terms of the in duplum rule. Because they argued that the bank wasn’t entitled to reverse the credit, they made a claim for such interest payments. They argued that there has been no term in the overdraft agreement in terms of which the bank was entitled to reverse the credit without the required authority and that the proper remedy would be for them to reclaim payment in terms of a condictio for undue enrichment The court a quo: found in favour of the bank" on the question of the reversal of the credit. BUT it found in favour of O in terms of the fact that certain portions of the plea of prescription, the capitalization issue and the appropriation of payments. Court a quo made a final order in terms of which the defendant was ordered

to pay to the plaintiff the sum of R388 569,46 together with interest thereon at the rate of 15,5% per annum from the date of the judgment to date of payment. The defendant was also ordered to pay 70% of the plaintiff’s costs subject to certain qualifications, which are not relevant to this appeal.

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On appeal it was held: based on the parties conduct – the credit to O’s account had been conditional on a recognition of a debt and O would have used such amount to make payment in terms of the overdraft. The conduction doesn’t apply as the company hadn’t paid the O and O hadn’t paid the bank The onus of proving payment rests on the respondent The bank appeals, with the leave of the court a quo, against Ø฀ Ø฀ Ø฀ Ø฀

Its disallowance of part of its claim, with regard to prescription The practice in regard to capitalization of interest, The application of the in duplum rule and The costs order

In the court a quo if the bank wasn’t entitled to reverse the credit entry the defendant’s liability on its overdraft would have been fully discharged The in duplum rule provides that interest stops running when the unpaid interest equals the outstanding capital. When due to payment interest drops below the outstanding capital, interest again begins to run until it once again equals that amount. When summons was served the interest element of the claim did not exceed

the amount of the outstanding capital and, for that simple reason, the application of the rule did not arise at that stage. Because of the delays in the litigation the in duplum rule only became of concern later during the case The rule is based on a public policy designed to protect borrowers from Exploitation by lenders = it cannot be waived by borrowers and cannot be altered by banking practice The appeal succeeds with costs such costs to include costs consequent upon the employment of two counsels.

The order of the court a quo is set aside and substituted with The following order: 1. The defendant is ordered to pay to the plaintiff the sum of R987 762,03 together with: a. Interest on the sum of R987 612,03 from 26 November 1990 to 11 December 1990 at the rate of 23 per cent per annum; b. And thereafter interest on the sum of R987 762,03 plus interest from 12 December 1990, at the agreed rate of 2 per cent per annum above the plaintiffs ruling prime rate of interest from time to time.

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2. The defendant is ordered to pay 70% of plaintiffs costs, which costs shall include the costs incurred in pleading to the defendant's conditional claim in reconvention.

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CANT USE MONEY IN BANK ACCOUNT AS SET OFF Joint Stock co Varinskoye v Absa Bank and others: Facts of the case: The 1st respondent (ABSA) appropriated money which was credited to the account of the 6th respondent as set off of the amount due by the 6th respondent to ABSA. The appellant instituted proceedings for orders: • Declaring that the right to the money appropriated vested in them • That ABSA must repay the amount appropriated to them. The purpose of the account was to pay subcontractors appointed by the appellant. ABSA was well aware of the use of the account, because of ABSA’s appropriation; the appellant had to pay what was due to the subcontractors out of his own funds. ABSA resisted the applicants claim, claiming that the money deposited into the said account became ABSA’s property and only the 6th respondent may contest the appropriation. The decision of the court: The application was dismissed by the High Court and the appellant subsequently appealed against the decision to the Supreme Court of Appeal. The Supreme Court held that it’s an error that only an account holder could assert a claim to money held in its bank account. The funds in such account could possibly belong to someone other than the account holder himself or the bank itself. The court also held the 1st respondent was aware of the purpose of the account and that the 6th respondent had no involvement or interest in the funds held in the account. The bank and 6th respondent can be seen as agents to hold the funds in the account for the said purpose, thus resulting in no possible question of set-off against the funds in the account. The appeal was successful; the order of the court a quo was set aside and replaced with an order declaring that the rights to the funds in the said account vested in the applicant which resulted in an order to the bank to effect payment to the applicant of the amount appropriated plus interest.

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DUTY OF CARE: Durr v ABSA Bank and Another: Facts of the case: The appellant lost in excess of R550 000 after taking investment advice from the 2nd respondent which advice he gave to the appellant and some family members. The appellant and her family felt that a large company like the 1st respondent would employ financial experts who would be able to give sound advice to prospective clients. The 2nd respondent never made any requests nor did he ask any advice from people with the necessary skills to draw up a risk assessment about the company the appellant was about to invest in regardless of the fact that these people were readily available to him. The decision of the court: On appeal it was held that one must look at two questions: 1. What was the level of skill and knowledge required, and 2. Whether the standard against which that skill and knowledge should be judges was that of an ordinary broker or that of a regional manager of the broking division of a bank professing investment skill and offering expert investment advice. It was held that when deciding what is reasonable, due regard must be given to the general level of skill and diligence possessed and exercised at the time by the members of the branch to which the practitioner belongs. What is reasonable will ultimately be decided by the court. The basic rule to establish negligence on the part of the 2nd respondent is as follows: Lack of skill and knowledge is not per se negligent; it is however negligent to engage voluntarily in potentially dangerous activity unless one has the skill and knowledge associated with the proper discharge of the duties connected with such activity. The 2nd respondent gave advice to the appellant that was in effect the potentially dangerous activity of money lending. The court established a duty on the respondent to have investigated the creditworthiness of the “investment company” involved. The 2nd respondent failed this duty. He should have warned the appellant and her family members where his skills ended, in order for them to understand and appreciate the dangers involved in investing upon his advice. He should thus not have given advice that he was not qualified to give. He had a duty to seek assistance, which was available to him before making any recommendations with regards to the said investment. The court held in light of the facts before it that the 2nd respondent had not performed his duty and as a result had been negligent. The 1st respondent

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was found to be liable for the 2nd respondents conduct because it had accepted vicarious liability.

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DUTY OF CARE Zamzar Trading v Standard Bank of South Africa: Facts of the case: The plaintiff entered into a fraudulent scheme to claim a refund of VAT input on alleged supplies of non-existing goods to it, which the plaintiff allegedly exported which would result in a zero-rated VAT transaction. The defendant debited the account of the plaintiff in order to discharge a supposed obligation to S (a 3rd party) which rose from the fraudulent scheme. As a result of the payment by the defendant to the 3rd party the plaintiff was liquidated. The plaintiff proceeded against the defendant claiming that there was no enforceable obligation between itself and the 3rd party, only the fraudulent scheme. This resulted in the discharge by the defendant of the plaintiffs’ indebtedness to the 3rd party being of no legal force, because the debts should never have been raised. The plaintiff averred that the defendant by making payment to the 3rd party and debiting its account, gave effect to the dishonest agreement and further that public policy demanded that such payment be ignored. The decision of the court: The court held that a bank which was unaware of a contractual relationship between one of its customers and a 3rd party (which was illegal) and further had no knowledge of the unlawfulness of the 3rd party’s activities could not be held liable to repay money which it had at some stage held legally for its customer. It was held in order to hold someone liable regardless if it / he had knowledge of the wrongdoing; the party had to have actually acted wrongfully before it could be held liable. Public policy does not require a bank to be liable in these circumstances, because to be liable in such circumstances will result in the destruction of banking practice as it is know today.

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Study Unit 4: INSURE CONTENTS OF SAFE KEEPING BOX Mensky v ABSA Bank: Facts of the case: The plaintiff entered into a written agreement of depositum with the defendant in terms of which she rented a safety deposit locker. She placed jewellery and foreign currency in the safety deposit box. In terms of the agreement the defendant undertook to exercise reasonable care for the security of the locker area, this was a common cause of the agreement, but a specific term of the agreement was that the client had to insure the content of the safety deposit box. The plaintiff argued that this term was not applicable, because loss occurred while the locker was removed by the defendant during the defendants’ relocation to new premises. The court had to consider the nature and scope of the defendants’ contractual obligations, the effect of the specific term, if the defendant had breached its obligations, if the defendant was liable for breach of contract and to what extent the plaintiff must prove that she suffered a loss. The decision of the court: The court held that in this instance there was no material difference whether the contract was one of depositum or lease. Should it be a lease, it was still the defendants’ obligation to keep the locker in the safe at the designated premises. The court had to decide if the specific term (the exemption clause) applied. The provision of safety deposit lockers was found not to be a profitable enterprise for the defendant and the risk on the banks insurers would be enormous as they would not know how big the risk was they were undertaking. The plaintiff however knew what the content of the box was, so could easily obtain a valuation and the necessary insurance. The insurance liability was expressly allocated by the contract. This resulted in the plaintiff being liable for all risks of loss or damage which could be insured. The plaintiff as a result had no claim against the defendant and the claim was dismissed with costs.

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THEFT OFF CONTENTS OF SAFE KEEPING BOX BY BANK EMPLOYEE First National Bank of South Africa v Rosenblum and Another: Facts of the case: The respondent sued the appellant for damages arising from theft of the contents of a safe deposit box held by the appellant for the 1st respondents use, subject to a small annual fee. The appellant tried to avoid liability in that terms of the contract expressly excludes liability. The relevant term stated that the appellant “will exercise every reasonable care, it is not liable for any loss or damage caused to any article lodges with it for safe custody whether by theft, rain, flow of storm water, wind, hail etc.” It was placed beyond doubt that the appellant’s staff had stolen the safe deposit box or allowed someone else to steal it. The staff acted with gross negligence or negligently regarding the control of the keys safeguarding the place where the deposit box was kept, thus making it possible for the box to be stolen. The respondent felt the exclusion of liability on theft didn’t cover the possibility of the appellant’s staff engaging in theft whilst acting within the course and scope of their employment. This consequently meant that gross negligence as well as negligent acts or omissions committed by the appellant’s employees had not been excluded. The clause thus dealt only with loss beyond the control of the appellant. The decision of the court: Although there was no direct reference to the bank’s employees in the relevant clause, it seemed obvious that they were included in it. The bank, as an artificial non-human entity was incapable of being negligent itself. The negligence of human beings acting as the banks controlling mind was attributed to the bank and it could also be held vicariously liable for negligence of ordinary emplo...