Standard Chartered Bank Kenya Ltd v Intercom Services Ltd & 4 others
Court of Appeal at Nairobi
November 19, 2004
Gicheru CJ, Githinji JA & Onyango Otieno Ag JA
Civil Appeal No 37 of 2003
(Appeal from the judgment of the High Court at Nairobi (Visram J) dated 18th November, 2002 in HCCC No 761 of 1988)
Contract – bank and customer relationship – collecting banker – duty of confidentiality owed by a bank to its customer – origin and scope of that duty – circumstances in which the bank can disclose the customer’s confidential information – extent of inquiries that a bank is entitled to make where it suspects that the customer is not the true owner of a cheque.
Illegality – claim founded on illegality – how court should deal with the issue of illegality where it is pleaded or where it arises in the course of the proceedings.
Company law – lifting the corporate veil – independence of a corporate body from its members – corporate bodies sharing one managing director holding bank accounts in one bank – suit against bank for breach of confidentiality arising from the handling of the account of one of the corporate bodies – managing director being party to the suit in his name – whether proper to consider whether each entity had a cause of action against the appellant – whether proper to regard the managing director as the alter ego of the corporate bodies.
The dispute in the superior court was essentially between a banker, the appellant, on one hand and four of its customers (the 1st, 2nd, 3rd and 4th respondent companies) and a third party (the 5th respondent) who was the Managing Director of the companies on the other hand. The respondents claimed that the appellant Bank, in making enquiries about a cheque for a large amount deposited with it for collection, had breached the duty of confidentiality owed to them by disclosing the information about the cheque to third parties. Visram J found that the appellant Bank, in dealing with the cheque, had been abnormally suspicious and pursued its inquiries recklessly, causing damage to its customers. He consequently entered judgment on liability in favour of the respondents. The appellants brought this appeal against that decision.
Held:
1. The law requires a court to determine a case on the issues that flow from the pleadings and to pronounce judgment on the issues arising from the pleadings or from issues framed for the court’s determination by the parties. Also, parties are generally confined to their pleadings unless the leadings are amended during the hearing of the case.
2. The evidence before the superior court did not support the pleading in the plaint that the manager of the Westlands branch of the appellant and another employee as agents of the bank both informed the police that the cheque for Ksh 17,007,568/25 had been unlawfully obtained. The High Court failed to make a finding specifically answering that issue.
3. The Chief Inspector of the appellant Bank, who had been referred to a Mr Ongoro by an officer of the Central Bank, was under the impression that the said Mr Ongoro was in the Exchange Investigation Branch of the Central Bank carrying out his duties there but not in his capacity as a police officer. There was no evidence that he had complained against the fifth respondent as having committed any criminal offence or that he (the fifth respondent) was suspected of having committed any offence. Therefore, there was no support for the High Court’s finding that the Bank’s Chief Inspector had meant and intended to direct his inquiries to the police.
4. The High Court was right that a bank and particularly a collecting bank, as the appellant was, owes a duty to its customers to ensure fiduciary, mutuality and confidentiality and that notwithstanding that duty, a bank has a duty to make inquiries to protect the owner of a cheque itself and any other that may be affected by the consequences of the bank’s negligence.
5. The Bank’s duty which is a legal duty arising out of contract, is not an absolute duty but a qualified duty. The customer and the Bank in their relationship have one of the implied terms of their contract which is that the Bank would abstain from disclosing information as to the affairs of the customer without the customer’s consent.
6. The nature of the inquiries that the banker should make, and what facts are sufficient to cause him reasonably to suspect that the customer is not the true owner of the cheque, must depend on current banking practice and the extent to which the inquiry should go depends on the circumstances of each case.
7. But in law, there are exceptions or qualifications to the implied contract that the bank should not disclose its customer’s secrecy. Some of these exceptions are where the Bank has a duty to the public to disclose; where disclosure is under compulsion of law; when the interest of the bank requires disclosure and where disclosure is made by the express or implied consent of the customer.
8. The appellant Bank’s working manual demanded that circumstances such as those that presented themselves in this case needed to be investigated. The circumstances that existed in this case left the Bank with no option but to inquire into the account.
9. The High Court, after finding that the appellant was in the circumstances entitled to make inquiries, erred in stating that such an inquiry was to be limited. It was not enough to inquire from the customer, the paying bank and the drawer only or that any other inquiry could only be carried out with the consent of the customer.
10. Where a bank is faced with a cheque from a body corporate or a government, the Bank’s duty to inquire into the validity of the cheque goes beyond the mere signatories to the cheque and beyond the paying bank and the customer. In this particular case, the inquiry did not go beyond what was necessary to establish the truth.
11. In a case where the signatories to a cheque are mere agents of the drawer of the cheque, the duty to make inquiry in full is more pronounced for the very reason that there would be nothing to stop the signatories to the cheque from conspiring with the customer to defraud the true owner of the cheque – in this case the tax payer. In such a case, the signatories to the cheque, being possible ultimate beneficiaries would mislead the Bank by accepting on inquiry that the cheque is good.
12. It was the duty of the High Court, under the Civil Procedure Rules order XX rule 4, being the trial court, to carefully analyze the contradictions and inconsistencies in the evidence of the witnesses as to whether the second or the fifth respondent had carried out any exports to entitle them to the amount contained in the Kshs 17 Million cheque.
13. The High Court was duty bound to find out whether or not on the evidence before it, illegality was disclosed and it was wrong to hold that the decision of the High Court on a criminal appeal bound it in law and restrained it from making its own finding in a civil court on the question of illegality. Even if that judgment was conclusive on the innocence of the fifth respondent, under section 45 of the Evidence Act, it would not be a conclusive proof of what it said.
14. The evidence before the High Court showed that the respondent’s case was tainted with illegality in that it was a claim based on what could very well have been an illegal transaction.
15. If illegality is on the face of the contract upon which a claim is based, then the Court will deal with that question of illegality irrespective of whether it is raised in the statement of defence or not but if illegality is to be discovered from some evidence that the defendant has knowledge of, then illegality should be pleaded so that the plaintiff is pre-warned on the issue and it is only then that the Court can act on it.
16. (Per Githinji JA) The defence of illegality was not pleaded as required by the Civil Procedure Rules and no issues were framed. The issue of illegality had been raised at the trial as an afterthought.
17. A limited company has its own legal existence independent of its members and it is not proper except in specific cases for a court of law to use its powers to pierce the corporate veil. Each of the first four respondents was a limited liability company and thus a body corporate with its own entity and the High Court was enjoined to consider whether each had a cause of action against the appellant. It was not proper to lump all of them together with the fifth respondent and maintain that what happened to the fifth respondent in his personal capacity legally affected all his companies on the basis that he was the alter ego of all the companies.
18. If the complaint arose from breach of contract, then the party to the contract who could have enforced the contract was the first respondent, an independent corporate entity capable of suing and being sued in its own capacity and which indeed did sue. The fifth respondent, and for that matter the other respondents, upon whose accounts no inquiry was made could not seek to enforce that contract.
19. (Per Githinji JA) The appellant Bank, as a collecting bank, did not breach the contractual duty of confidentiality; in any case the duty of confidentiality was owed only to the 1st respondent for whose account the cheque was collected and that financial losses claimed were too remote and irrecoverable from the appellant bank having not been caused by the alleged breach of contract but by a new and independent intervening force, namely, the prosecution of the 5th respondent and the freezing of the account.
Appeal allowed, Respondents’ suit dismissed, costs of the appeal and of the suit in the High Court awarded to the Appellant.
Cases
1. Bissell & Co v Fox Brothers & Co (1884) 51 LT 663
2. Lloyds Bank Ltd v Chartered Bank of India, Australia and China [1928] All ER 285; [1929] 1 KB 40
3. Bodenham v Hoskins [1843-60] All ER 692
4. Galaxy Paints Co Ltd v Falcon Guards Ltd [2000] 2 EA 385
5. Tournier v National Provincial & Union Bank of England Ltd [1923] All ER 550; [1924] 1 KB 461
6. Marfani & Co Ltd v Midland Bank Ltd [1968] 2 All ER 573; [1968] 1 WLR 956
7. Nyaga, Jediel v Silas Mucheke Civil Appeal No 59 of 1987
8. North Western Salt Company Ltd v Electrolytic Alkali Company Ltd [1914] AC 461; [1914-15] All ER 752
9. Holman v Johnson [1775-1802] All ER 98; (1775) 1 COWP 341
10. Salomon v Salomon & Co Ltd [1897] AC 22
11. Burns v Edman [1970] 1 All ER 886; [1970] 2 QB 541; [1970] 2 WLR 1005; [1970] 2 WLR 1005; 119 SJ 356
12. Mistry Amar Singh v Serwano Wefunira Kulubya [1963] EA 408; [1964] AC 142; [1963] 3 All ER 499
13. Scott v Brown Doering McNab & Co (1892) 2 QB 724
14. Heptulla v Noormohamed [1984] KLR 580
15. Odd Jobs v Mubia [1970] EA 476
16. London Bank of Australia Ltd v Kendall [1920] 28 CLR 401
17. Commissioners of Taxation v English, Scottish & Australian Bank [1920] AC 683
18. Galoo Ltd (in liquidation) v Bright Grahame Murray (a firm) [1994] 1 WLR 1360; [1995] 1 All ER 16
19. Thackwell v Barclays Bank PLC [1986] 1 All ER 676
20. Lipkin Gorman (a firm) v Karpnale Ltd [1992] 4 All ER 512; [1987] 1 WLR 987; [1991] 2 AC 548; [1991] 3 WLR 10
21. Adams v Cape Industries plc [1990] 1 Ch 433; [1991] 1 All ER 929; [1990] 2 WLR 657
22. Eldler v Auerbach [1950] 1 KB 359
23. Snell v Unity Finance Co [1963] 3 All ER 50; [1963] 3 WLR 559
24. Birkett v Acorn Business Machines Ltd [1999] 2 All ER 429
25. Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] LRC (comm) 47; [1985] 2 All ER 947; [1986] AC 80; [1985] 3 WLR 317
26. Martin v Watson [1996] 1 AC 470; [1995] 3 All ER 559; [1995] 3 WLR 318
27. Hadley and another v Baxendale and others [1854] 9 Ex 341 28. Egbema v West Nile District Administrator [1972] EA 60
Texts
Cranstons, R (Ed) (2002) Principles of Banking Law Oxford: Oxford University Press 2nd Edn. Chapter V p 5
Statutes
1. Local Manufacturers (Export Compensation) Act (cap 482)
2. Civil Procedure Act (cap 21) section 26
3. Civil Procedure Rules (cap 21 Sub Leg) order XX rule 4
4. Limitation of Actions Act (cap 22)
5. Customs and Excise Act (cap 472)
6. Cheques Act, 1957 [UK] section 4
7. Accountants Act (cap 531)
8. Companies Act (cap 486)
9. Cheques Act (cap 35) sections 3(2), 4
10. Bills of Exchange Act (cap 27) section 80
11. Police Act (cap 84) 12. Evidence Act (cap 80) section 45
Advocates
Mr G O Oraro for the Appellant;
Mr M Kilonzo & Mr Wandabwa for the Respondents
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