Zimbabwean High Court reaffirms sanctity of banker-client relationship

Back to Banking Law Committee publications

Ronald Farai Mushoriwa
Mushoriwa Pasi Corporate Attorneys, Harare
farai@mushoriwapasi.co.zw

Farai Chinyama
Mushoriwa Pasi Corporate Attorneys, Harare
fchinyama@mushoriwapasi.co.zw

Introduction

How a subject must approach a bad law has been the subject of jurisprudential debate for decades. In this case, the question is how a bank must approach a law that abridges its traditional obligations to its client to pay back to a customer the same value as was deposited with it. What happens when such law is then declared invalid by a competent court, and who bears the obligation to compensate? The High Court of Zimbabwe recently passed a far-reaching judgment which addressed at its core the obligations of a bank, in this instance, under banking and constitutional legal jurisprudence. In 2018, through the Exchange Control Directive, R120/2018, the Reserve Bank of Zimbabwe directed that all bank deposits made prior to October 2018 be converted from the then existing US dollar balances into Zimbabwean dollar balances (then known as bond notes and coins), provided that they were not deposited from offshore accounts. The introduced Zimbabwean dollar was pegged at 1:1 with the US dollar and yet in reality, this was a serious overvaluation of the local unit. It left individual and corporate depositors smarting from exorbitant exchange losses. In the case of Penelope Douglas Stone and Another v Central African Building Society, the Reserve Bank of Zimbabwe and the Minister of Finance and Economic Development,^[1] a depositor approached the court seeking an order that the bank be directed to pay him US Dollars and that the directive stating that balances be converted was unconstitutional as it breached, among other rights, his right to property.

Background: the Stone–Beattie case

Owing to hyperinflation which had eroded Zimbabwe’s currency, in 2009, Zimbabwe introduced a multi-currency system as legal tender for settlement of all obligations in Zimbabwe. The bag of currencies included, inter alia, the US$, the euro, South African rand, Chinese yen and the Botswana pula. The USD then became the main currency of reference and in fact the currency of the day within the multi-currency system. Thereafter, Zimbabweans rebuilt their lives and businesses through the new currency, the USD. At the establishment of the multi-currency system, there was no quasi-currency to the USD as the Zimbabwean Dollar had been demonetised.

In 2016, through an Extra Ordinary Government Gazette, the state introduced an amendment to the Reserve Bank Act through the Presidential Powers (Temporary Measure) Act.^[2] The amendment was contained in Statutory Instrument 133/16 and introduced the ‘bond note’ which was to be a quasi-currency with the USD trading at the exchange rate of 1:1. Subsequent to this, the government further amended the Reserve Bank of Zimbabwe Act (hereinafter ‘the RBZ Act’) by the introduction of section 44 through Act number 1 of 2017 which became law on 23 March 2017, recognising the bond note as legal tender in Zimbabwe. Section 44B read: ‘The tender of payment of the bond notes issued by the RBZ, shall be legal tender in all transactions in Zimbabwe as if issuance of the bond note was issuance of the United States dollar.’

As at October 2016, the applicants had a credit balance of US$142,000.00 and in pursuance to the enactment, the Respondent bank converted these to the new Zimbabwean dollars for settlement of its obligation to the depositor. The applicant refused settlement in Zimbabwean Dollars, arguing that a relationship of banker and client existed between them and the bank, thus they were entitled to be paid the USD they deposited or an actual equivalent, regardless of what the new law provided. The learned judge in the case held that:

‘Banking law would be meaningless if a person deposited a certain sum of money or has money credited into their account only to be told when they demand withdrawal that they can only be paid in some other means of exchange whose value is determined by authorities without recourse to the holder of the account. A debtor cannot unilaterally change the value of a debt.’

The banker–client relationship

The relationship between banker and client has its foundation in contract law.^[3] This contractual relationship has, depending on the particular circumstances, been variously described as a sui generis relationship; as one of deposit; depositum irregulae; mandatum; mutuum; debtor and creditor and as agency.^[4] It has been said that, ‘a conspicuously complex collection of juristic relationships’ exists between bank and client relationship.^[5]

Paget^[6] opines that the relationship between banker and client is one of contract, consisting of a general contract which is basic to all transactions together with special contracts which arise only as they are brought into being in relation to specific transactions or banking services.

The characteristic of this relationship and its evolution under Roman–Dutch law were discussed extensively in the South African case of Standard Bank of South Africa v Oneanate Investments (Pty) Ltd^[7] wherein the court held as follows:

‘The law treats the relationship between banker and client as a contractual one. The reciprocal rights and duties included in the contract are to a great extent based upon custom and usage. Historically, the original objective of a depositor was to ensure the safe keeping of his money, over time jurists have considered characterising and explaining the basic relationship as one of depositum, mutum or agency […] It is now [...] accepted that the basic, albeit not sole, relationship between banker and customer in respect of current accounts is one of debtor and creditor’ [emphasis authors’ own].

The case of Foley v Hill^[8] clarifies that the bank makes use of the money that the customer has deposited. Once deposited, it is then the money of the banker; he makes what profit he can, which profit he retains for himself. He contracts, upon receiving that money to repay the customer when demanded a sum equivalent to that paid in his hands.

It follows, therefore, that the most basic element of banking law is that the banker accepts the customer’s money and ‘borrows’ it and promises to repay once demanded. What the Stone–Beattie case sought to answer was the question: what happens where, upon demand at law the bank cannot repay what was deposited to it and what at law purports to be the equivalent is not in truth an equivalent?

The banker–client relationship vis-à-vis the banker–governing state (entity) relationship

The relationship of banker and client is affected by the relationship of the bank and the state. Bank regulation seeks protection of the public and the economy, and to ensure system stability; that is, the safety and soundness of the financial system. Caveat emptor does not apply to financial contracts due to their complexity and to protect consumers against monopolistic exploitation.^[9] After all, a bank is basically, as one researcher put it, a legalised Ponzi scheme that relies on the confidence of the public for its continued existence.^[10]

This regulatory power may, however, be abused, as was the case here. The bank must submit to the authority of the state, in this case, of the Central Bank. Banking law is clear that a bank is under an obligation to ‘comply with the terms and conditions of its registration and with any directions given to it by the Reserve Bank or the Registrar in terms of the Act’.^[11] To this end, a banker is allowed traditionally to refuse a payment instruction which is barred by law.^[12]

In this case, even having taken deposit of USD, the bank was not in a position to pay out USD owing to the Directive, without incurring regulatory and legal penalties. It means that, at law, the bank is bound to follow the regulations governing them as passed by the central bank even when that means breaching the very essence of the banker–client relationship. The court, however, concluded that the role of a bank is not blind subservience, but it was obliged to challenge the law which attacked the very core of the banking relationship. This position commends itself naturally when one considers liabilities to the client attendant on a bank that relies on such a law which is subsequently invalidated.

Who compensates loss to the client?

Where a client has suffered a loss owing to the compliance by its bank with a state directive, it appears that primarily the bank will pick up the tab since it has breached its agreement with its client. However, a secondary liability rests with the Central Bank as it regulates banks and, in this case, legislated the changes in part. In a Zimbabwe Supreme Court decision,^[13] the Central Bank had issued a directive that banks must transfer to it monies they held for the Revenue Authority. The directive later turned out to be unlawful, but two banks had transferred sums amounting to USD4,960,305.70. The Revenue Authority approached the High Court, which ordered that the Central bank reimburse them, and the Central Bank appealed. The Supreme Court held that:

‘It is clear that the unlawful directive issued by the appellant to the commercial banks is the causa sine qua non of the respondent’s loss. Whilst noting that the commercial banks were not obliged to obey the directive because it was unlawful, the fact that they acted in accordance with its demands does not absolve the appellant from liability for the consequences of its unlawful conduct.’

Both Banks and Regulators must therefore be wary about financial losses that follow both ill-conceived interventions and compliance with them, as sanctions may follow both.

Conclusion

The courts have reaffirmed central concepts of banking law which were threatened by bad legislation. Banks must be aware, as parties to a sacred contract, not to obey laws in a manner that exposes them. Instead, they stand as a buffer between client and state and should stand for the principles of their sector when changes to the law threaten the very soul of banking. Central Banks should equally ensure sensitivity in participating in legislation that is violently at odds with the traditional obligations of banks.

Back to Banking Law Committee publications