A receiving bank that made payments under a cheque to an entity other than the named payee was negligent or fraudulent.

Tile and Carpet Centre Limited v Kenya Commercial Bank Limited & 2 others

HCCC No 209 of 2006

High Court at Nairobi

F Tuiyott, J

April 28, 2020

Reported by Beryl Ikamari

Banking Law - duties of a receiving bank - presentment of a cheque - making of inquiries as to the identity of the payee upon presentment of a cheque - whether a receiving bank, which credited an account of an entity which was not the named payee upon presentment of a cheque, was fraudulent or negligent.

Tort Law - conversion - vicarious liability - whether an employer was liable when an employee allegedly used the employer's imprest account to deposit and withdraw sums of money that were the proceeds of theft.

Brief facts

On July 19, 2005, the plaintiff, paid for and obtained a banker’s cheque from I&M Bank for Kshs. 6,021,101.00 in favour of the Commissioner of VAT for payment of Value Added Tax for the month of June 2005, due from the plaintiff. An unknown person presented the cheque at the defendant's branch in Nakuru and the defendant sent it to I&M Bank for clearance. The I&M Bank cleared the cheque and wrongfully paid out the sum of Kshs. 6,021,101.00 to the defendant and not the Commissioner of VAT.  Due to that wrongful payment, on November 30, 2005, the plaintiff had to make the VAT payments inclusive of a penalty for late payment. It turned out that it was the Kenya Broadcasting Corporation (KBC) that received payment for the sums payable under the banker’s cheque.

Issues

1. Whether a receiving bank was negligent or fraudulent when it made payments under a cheque to an entity other than the named payee.
2. When would an employer be vicariously liable for the acts of an employee which amounted to criminal conduct?

Held

1. The defendant could not argue that the suit could not be maintained because the plaintiff did not produce a resolution authorizing the institution of the suit as the defendant did not plead that as a defence. That defence would only be available if it had been pleaded specifically as required under order 2 rule 4 of the Civil Procedure Rules.
2. There were criminal proceedings in relation to the cheque that was the subject matter of the civil suit. The standard of proof in those proceedings was proof beyond reasonable doubt. The judgment in the criminal trial was in rem in so far as it determined the legal character to be ascribed to the accused persons as to their guilt or otherwise of the criminal charges that they faced.
3. The criminal court found that the stamp on the pay in slip, which was what would be issued after the presentment of the cheque, was forged. It did not make a finding as to whom made the forgery. The bank had to prove to a standard that was beyond a balance of probabilities and below beyond reasonable doubt, that a certain person stole the banker’s cheque.
4. There was no evidence as to how a cheque that was left at National Bank Times Tower Branch Teller No. 3 found its way to KCB Nakuru Branch. It was clear that the plaintiff's loss was a result of fraud and not negligence.
5. The cheque was received as drawn. The payee remained the Commissioner of VAT for A/C Tile and Carpet Centre Ltd but the defendant credited KBC's account with the proceeds of the cheque. The only person to whom sums in the cheque were to be paid, unless it was otherwise endorsed was the Commissioner of VAT.
6. The onus of establishing circumstances showing absence of negligence was on the banker.  It was a matter of defence and it did not give rise to a substantive cause of action.  The extent of inquiry had to be measured by what under the circumstances a fair minded banker, paying due regard to the exigencies of banking business in relation to the person depositing the cheque, would consider it prudent to do in order to protect the interest of the true owner and each case had to depend on its own circumstances. The standard of care required was that to be derived from the ordinary practice of bankers not individuals.
7. Facts that ought to be known to the banker, i.e. inquiries he should make and facts that were sufficient to cause him reasonably to suspect that the customer was not the true owner, had to depend on the existing banking practice and had to change as that practice changed.  Cases decided thirty years ago, when the use by the general public of banking facilities was less widespread, could not be a reliable guide as to what the duty of a careful banker, in relation to inquiries and as to facts which should give rise to suspicion were today.
8. Payment of a cheque to someone who could not verify that the cheque was meant for him or who was not the true owner was not only unlawful and wrong but an act of conversion. The defendant was liable for the loss suffered by the plaintiffs.
9. The details of the banker’s cheque in question were clear. Even if the person who presented the cheque filled in the wrong details on the cheque deposit slip, the defendant had an obligation and was duty-bound to countercheck and verify that the details matched those on the banker's cheque. That was the duty of a receiving bank.
10. The defendant's actions upon receipt of the banker's cheque were not acts of good faith deserving the protection of section 3(2) of the Cheques Act. There was negligence, and perhaps fraudulent conduct on the part of the bank's employees.
11. The defendant did not dispute that it made no report or complaint of tampering of the banker's cheque at any point during transportation by G4S. The criminal court also did not find any G4S employee guilty of any offence. Therefore, G4S could not be faulted.
12. The criminal court found that, with respect to the cheque in question, an employee of KCB and a signatory KBC’s imprest bank account was guilty of multiple counts of stealing contrary to section 279 of the Penal Code and convicted him accordingly. An employer was vicariously liable for the tortuous acts of its employees where they occurred in the course of employment. On occasion an employer could take up vicarious liability on a civil plane arising from the criminal conduct of an employee.
13. The account into which money was paid under the banker’s cheque was KBC's imprest account. Generally, the bank did not dispute that what would be deposited into that account did not exceed Kshs. 100,000, monthly. The deposit was therefore for an unusually large amount. The employee that was found guilty of stealing withdrew the money from the account and his employer did not benefit from that money. Under the circumstances, the court could not ascribe liability on his employer.

Judgment entered for the plaintiff against the defendant with costs to the plaintiff.