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Overdraft facilities
Finance Bank Zambia PLC v Lamasat International Limited (Appeal No. 175/2017, Appeal No. 27/2018) [2019] ZMCA 14 (7 March 2019);
Headnote
The Appellant and Respondent were in a banker/customer relationship. The Respondent obtained several loan facilities from the Appellant, including a term loan facility obtained to consolidate the existing facilities into a single loan of US$10 000 000. 00. The term loan facility was also meant to settle the balance sum of US$3 408 624.65. The tenor was 60 months, equating to 60 monthly instalments.
During the course of the banking relationship, the Appellant bank was acquired by Atlas Mara Group on 30 June 2016. On 24 January 2017, a letter of demand for the full settlement of the sum of US$12.229 065.63 million was made to the Respondent. The Respondent was to pay the sum owed within 14 days, failure to which a receiver and a manager would be appointed to ensure recovery of the debt.
The Respondent subsequently commenced an action against the Appellant, seeking, amongst other things, an injunction to restrain the bank from prematurely appointing a receiver to manage its affairs. Upon the Respondent filing a defence to the counter claim, the Appellant applied for entry of judgment on admission, deposing in its affidavit that the Appellant had admitted to owing the counter claimed sum of US$12 229 065.63.
The High Court Judge held that granting the judgment on admission would fly in the teeth of his ruling dated 13 July 2017 which held that the issues raised could only be determined at trial. In addition, the Court further stated that granting the remedy and relief sought by would be tantamount to terminating the Plaintiffs’ action without being given an opportunity to be heard as dictated by one of the rules of natural justice audi alterem patem.
The Appellant appealed.
Held:
1. The Court has discretionary power to enter judgment on admission under Order 27 of the High Court Rules. This power is exercised in only plain cases where admission is clear and unequivocal.
2. An admission has to be plain and obvious, on the face of it without requiring a magnifying glass to ascertain its meaning. Admissions may be in pleadings or otherwise. A court cannot refuse to grant judgment on admission in the face of clear admissions.
3. A judgment on admission can be entered before determining whether the admitted sum can be liquidated in instalments. The entry of judgment on admission has no bearing on other claims.
4. An applicant must satisfy the threshold for issuance of interlocutory injunctions, that is: there must be a prima facie case with a probability of success, that the applicant will suffer irreparable injury which would not adequately be compensated by an award of damages and if the court is in doubt, it will decide the application on the balance of convenience.
5. A prima facie case is one in which on the material presented, a court properly directing itself, will conclude that there exists a right which has apparently been infringed by the other party.
6. A debenture security provides for the appointment by the secured creditor upon any default by the debtors or occurrence of specified events, of a receiver with powers to carry on the company’s business with the view of reviewing the company or to the beneficial sale of the entity as a going concern.
7. A debenture holder has the right to exercise its contractual right pursuant to the debenture upon clear default.
8. The court will not normally interfere with the appointment of a receiver under the terms of a debenture holder, unless it is not for the benefit of the holder or the appointment was in bad faith. A debenture often gives power to appoint a receiver and manager in specified events.
9. Parties in a contractual relationship are bound by the contract. The value of the security is not a basis to challenge the appointment of a receiver where the bank intends to realize the security as a debenture holder.
10. A debtor cannot restrain the appointment of a receiver by a creditor pursuant to a debenture, where there is a clear default by the debtor. The default disentitles the applicant from seeking the aid of equity.
Appeal allowed.
Barclays Bank Zambia PLC v Chipepa (Appeal No. 131/2014) [2017] ZMSC 38 (20 April 2017);
The Respondent opened a bank account with the Appellant and was availed a debit card. On 10th July 2010, she purchased an air ticket from Kenya Airways in the sum of K3 471. 50, using the debit card and on 13th July 2010, her account held with the Appellant was debited with the amount of the transaction. Later, on 12th August 2010, a similar amount was debited from the Respondent's account suggesting that the Respondent had purchased another air ticket from Kenya Airways. This prompted the Respondent to approach the Appellant to ascertain the basis upon which it had effected the second debit on her account. The Respondent carried out investigations and was informed by a representative of Kenya Airways that the airline's debit card machine had a fault and had on occasions debited clients twice. As a consequence of this, Kenya Airways was willing to refund the Respondent the amount wrongly debited from her account as long as she presented to the airline a copy of the original ticket purchased in July and her passport to show that she had travelled to Kenya.
Before the second debit on the Respondent's account was effected, her account was overdrawn and was, therefore, incurring interest charges agreed upon by the parties. These charges increased when the second debit was effected notwithstanding that her account continued to receive deposits by way of bank transfers. The Appellant was later prompted to close the account without prior notice to the Respondent. This appears to have aggrieved the Respondent. She took out an action in the High Court claiming that the second debit was without authority and of no effect, and further that interest charged in respect thereof, was similarly without basis and of no effect. The High Court found that there was something seriously wrong in the Appellant's system which, if it had been corrected, would have made the litigation in the matter unnecessary. The learned trial Judge found that the Appellant was negligent because it did not properly check the transactions on the Respondent's account to ensure that they were authorized. She further found that a customer's implied duties are limited to exercising reasonable care in executing written orders, such as cheques, so as not to mislead the bank or facilitate forgery and to notify the bank of forgeries which the customer becomes aware of. She further refused to accept the argument by the Appellant that once a customer had given his PIN or signature to a retailer, then he is at the mercy of the retailer. Her finding was that banks, such as the Appellant, have a duty of care and skill to protect their customers from unwarranted and unauthorized withdrawals. She found that where the bank has paid without the customer's mandate, it is not entitled to debit the customer's account. Having found in favour of the Respondent, the Learned High Court Judge ordered the Appellant to reopen the Respondent's bank account and adjust the amounts therein back to the position the account was in prior to the second debit. She also awarded the Respondent damages to be assessed by the Learned Deputy Registrar and costs, to be taxed in default of agreement. The Appellant appealed.
Held:
1. The use of debit cards, credit cards and other cards in general is governed by three contracts which are autonomous. These contracts are: between the card issuer (creditor/bank) and the card holder; the card holder and the retailer; and the issuer and the retailer. The transaction at Kenya Airways for the purchase of the air ticket created a relationship in the second category of the contracts, that is, between the card holder and the retailer.
2. In regard to the customer's authority or mandate, a system known as "chip and PIN", has been introduced, which enables the customer to enter his PIN onto a pad instead of signing a voucher, thereby giving his bank the authority or mandate to pay. In Electronic Funds Tranfer at Point Of Sale transactions the sale is negotiated and concluded at the point of sale by the card holder and the retailer. The bank is merely an intermediary or facilitator of the transaction by effecting the transfer of the funds from its customer's account to that of the retailer's. This transfer is effected as a consequence of the authority or mandate given to the bank by the customer, by way of the signature on the transactional voucher and or PIN. Where no such authority or mandate has been given, the bank has no authority to debit the customer's account. The principles that govern cheque transactions are also applicable to EFTPOS transactions.
3. In carrying out the customer's instructions, the bank is duty bound to do so with reasonable care and skill, as is the case when it is presented with a customer's cheque. The bank must therefore, be alert to ensure that prior to debiting its customer's account, the authority or mandate is in order or appears on its face to have been given by the customer. Each authority or mandate given to a bank by a customer when he or she enters the PIN on the pad of a debit card machine has its unique code and features. In the case on hand, what is apparent is that the Appellant debited the Respondent's account a second time using the initial mandate given by the Respondent in July 2010.
4. The Appellant was obliged to scrutinize the second request pursuant to which the second debit was effected on 12th August, 2010 to ensure that it had not already acted upon it. This is especially the case because the amount to be debited was similar to the amount debited earlier and in respect of the same retailer. The Respondent cannot, therefore, be said to have given authority or mandate for the second debit or that by giving the first mandate she left her card open to abuse. Consequently, the Appellant ought not to have debited the Respondent's account a second time.
5. The burden of proof becomes an important issue when a customer alleges that he did not use or authorize the use of his PIN (or card) to withdraw or transfer funds. As it is the bank which wishes to debit the customer's account, the normal rule would be that burden of proof is on the bank to prove that it acted in accordance with the customer's mandate. In theory, the bank must prove that (1) the PIN was used, and (2) it was authorized by the customer. The facts surrounding this appeal are that subsequent investigations conducted by the Appellant revealed that it later discovered that the second debit was on account of a faulty machine at the point of sale, being Kenya Airways. This shows that the Appellant did not satisfy the two tests, aforestated, on burden of proof because, not only was the second transaction not authorized by the Respondent, but she did not use her PIN.
6. The fact, in and of itself, that the Respondent opted to pursue the Appellant and not Kenya Airways does not in any way render her hands soiled. She was at liberty to pursue either of the two because she was aggrieved by the acts of both of them.
7. The requirement of notice before closure of an account is only applicable where there is a term to that effect in the agreement governing the relationship between a banker and customer.
8. The Appellant was wrong in debiting the Respondent's account a second time and charging higher interest and commissions. The position is that there has been an infraction of the Respondent's legal rights which entitles her to an award of nominal damages. Although, she did not lead any evidence in the court below which would have assisted the court to determine a monetary figure as damages for the infraction of her legal right by the Appellant, the fact, in and of itself, that there was such an infraction of her legal right entitles her to nominal damages, which we award in the amount of K500. David Chiyengele v Scaw Limited (Selected Judgment No 2 of 2017) followed
9. The court below was entitled to exercise its discretion to award costs by applying the general principle that "costs follow the event".
Contract law - Use of debit and credit cards – Contractual relations that arise therefrom in relation to card issuer, card holder and retailer
Bank - Duty of care - Contractual duty to customer to exercise care and skill - Bank to debit customer’s account only with authority of customer
Bank - Duty of care - Contractual duty to customer to exercise care and skill - Whether principles that apply to cheque transactions equally apply to EFTPOS transactions
Bank – Duty of care – Authority from customer to pay may be by signature or PIN – Whether each payment by a bank to be supported by separate authority from customer
Bank – Unauthorised debit of customer’s account – Whether bank liable
Bank – Unauthorised debit of customer’s account – Whether customer precluded from pursuing bank where third party has admitted liability
Bank – Account – Authority from customer to pay may be by signature or PIN – Whether authority granted by customer in respect of particular retailer leaves customer’s card open to abuse by said retailer
Burden of proof – Allegation by customer that did not authorise use of card or transfer of funds – bank to prove that acted in accordance with client’s mandate
Bank – Account – Whether notice has to be given prior to bank closing an account
Costs – Finding that proceedings were unnecessary - Whether a departure from principle that costs should follow the event
Civil procedure – Damages – Entitlement to nominal damages for mere infraction of a legal right in the absence of proof of loss or damage
Chrismar Hotel Limited v Stanbic Bank Zambia Limited (Appeal No. 155/2016) [2017] ZMSC 20 (3 March 2017);
What precipitated the dispute that ultimately birthed this appeal are some allegedly predatory banking practices undertaken by the Respondent bank in respect of the Appellant's accounts held with it. In the first half of 2008, the Appellant approached the respondent with a view to obtaining some finance leases for certain earth moving and other equipment. The Respondent acceded to the Appellant's request and eight individual, identically worded, finance lease agreements were executed by the parties, each such lease agreement specifying the amount financed together with the finance charges payable for the duration of the facility. The aggregate sum involved in those leases amounted to US$1 7 million and was secured by third party mortgages over Stand Nos 4772/M, Chudleigh, Lusaka and 6982/3, Lusaka. Repayment of the sums due under the leases was to be made in monthly instalments over a period of sixty months ending on 30 May, 2013. At the end of the lease period the total repayment was to be US$ 2 280 121. Default in any monthly payment was to attract interest, calculated daily in arrears on the outstanding amount.
The Appellant's version of events was that it commenced repayments and made a total payment of US$ 2 036 146. 35 up to 30 October, 2012 and thereafter an additional lump sum payment of US$ 377 022. 08 on the 4 December, 2012, bringing the total sum repaid to US$ 2 413 168.43. The Appellant claimed that the Respondent, in breach of the terms of the lease agreements, applied and continued to apply various interest charges together with additional charges and expenses which interest and charges were debited to the Appellant's account without preferring to the Appellant a satisfactory, let alone plausible explanation despite being entreated by the Appellant to do so. The Appellant also complained that contrary to the agreed terms on default interest, the Respondent applied interest at the rate of 17 per centum per annum, besides the additional charges which the parties did not agree to or specify in the finance lease agreements. The Appellant particularised the additional charges applied by the Respondent as being: extension charges, late charges, arrears, overdraft cover charges, interest over and above the agreed base rate and an alleged loan facility. The Appellant further claimed that contrary to the Banking and Financial Services (Cost of Borrowing) Regulations 1995ª, the Respondent applied penal and/or default interest totalling US$ 166 133. Furthermore, the Respondent was said to have employed a method not sanctioned by the finance lease agreements, to compute and demand that the Appellant pays an additional US$
419 515. 84 ultimately refusing to release the securities held in respect of the facility until payment of the sum allegedly due was made.
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ª Sub regulation (1) (a) of Regulation 10 of the Banking and Financial Services (Cost of Borrowing) Regulations, so far as is relevant provides that "A bank .... shall not impose on a borrower any charge or penalty as a result of the failure by the borrower to repay or pay in accordance with the contract governing the loan other than- interest on an overdue payment on a loan."
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The learned judge in the court below found against the Appellant on all its claims except on the issue of VAT and dismissed the action with costs. It is against that judgment that the appeal was launched.
Held
1. A loan is a specified, definite amount advanced to the borrower. It is a matter of special arrangement between a banker and a customer. An overdraft facility, on the other hand, is not a loan in the sum approved which the customer may withdraw at once and which is to be debited against the customer's account. Rather, it is a credit facility enjoyable by the customer on a gradual, as-needs-arise basis to the maximum amount approved by the bank. The limit of the overdraft sum need not be reached by the customer.
2. It is incumbent upon the banker when challenged to explain why it has taken a certain course of action in regard to a customer's account without the customer's concurrence, to justify its action by pointing to a legally sanctioned reason empowering it to do so.
3. The relationship between a banker and a customer is anchored in the authority and the consensual relationship between the parties. That relationship comes into existence by means of a contract to open an account. The terms of that contract, in the majority of cases, are not expressly agreed but are impliedly those usual in the banker-customer relationship. It is not one of the terms of that relationship that the banker will lend to its customer, though there is a tacit understanding that the banker will readily consider a request for a loan from its customer.
4. The common law confers on a bank, when it is owed money, a privilege not available to other creditors - the right of combination or consolidation of accounts. Under this right a bank is entitled to apply a credit balance in favour of the customer on any account against a debit balance on the customer's other accounts with the bank. Garnet v McKewan [1872] LR 8 Ex. 10 cited.
5. The right of combining accounts is exercisable by the bank without giving notice to the customer. Halesowen Presswork Ltd v Westminster Bank [1971] 1QB 1 cited.
6. Although a bank has the common law right of combination of accounts, that right is exercisable only where the customer's debited account is in credit and where no other arrangement to deal with the delinquent account, such as charging of default interest, has been invoked. Such combination of accounts does presuppose that the debited account is in credit, and therefore does not technically exist where the customer's account has no credit balance.
7. Where there is no agreement whatsoever for the creation of an overdraft, what the bank could lawfully do is to debit any of the customer's account which is in credit, but not one without a credit balance and thus create an overdraft over which the customer incurs costs in form of overdraft charges and interest. In addition, the overdraft cover charges were wrongfully debited to the Appellant’s account and ought to be reversed. Musonda v Investrust Bank (Plc) Appeal No. 198/09 followed.
8. The charging of default interest, which was sanctioned by the lease agreement was perfectly legitimate and in accordance with sub regulation (1) (a) of Regulation 10 of the Banking and Financial Services (Cost of Borrowing) Regulations made pursuant to the Banking and Financial Services Act, Chapter 387 of the Laws of Zambia. Any other late charges and overdraft charges are unduly punitive and outside the financial lease agreement. They are penal in character and thus not allowed. MCD Civil and Mechanical Engineering Ltd., Davies Mwenya and Cavmont Bank Limited (Selected Judgment No 4 of 2015) and Union Bank Zambia Limited v Southern Province Cooperative Marketing Union Limited (1995 - 1997) ZR 207 affirmed.
9. When there is a new arrangement and the customer has signed the application, then obviously he is bound, but when the bank wishes for its own reasons to impose a new term on the banker customer contract, it must do so in such a way as to leave no possible
doubt, and it cannot do so unilaterally. The bank's duty in this regard is fourfold; (i) to advise the customer of the new term; (ii) to ensure that that advice is received by the customer; (iii) to ensure that the customer understands the consequences of failure to comply with whatever he is asked to do; and (iv) to make it clear that the bank will not be responsible if he fails to comply. The variation of the contract thus requires knowledge and consent on the part of the customer, and possibly also consideration. Burnett v Westminster Bank Ltd [1966] 1QB 742 cited.
10. In imposing extension charges and restructuring fees of US$ 85 809. 40 without notification, the Respondent bank acted outside the banker customer relationship and the contractual provisions contained in the lease agreements. The extension charges can therefore not hold.
