[2022] KEHC 16180 (KLR)

Barclays Bank of Kenya v Hindafro Enterprises Limited (Civil Appeal 9 of 2016) [2022] KEHC 16180 (KLR) (5 December 2022) (Judgment)

Neutral citation: [2022] KEHC 16180 (KLR)

Republic of Kenya

In the High Court at Murang'a

Civil Appeal 9 of 2016

J Wakiaga, J

December 5, 2022

Between

Barclays Bank of Kenya

Appellant

and

Hindafro Enterprises Limited

Respondent

(Appeal From the Judgement OF Resident Magistrate at Thika Hon. C.A. Muchoki (Ms) dated 18{{^TH}} December, 2015 in Civil Suit No.1299 OF 2010, delivered on 2{{^ND}} February, 2016)

Judgment

1. By a plaint dated November 25, 2010, the Respondent sued the Appellant and stated that on diverse dates and prior to July 31, 2008, one of the officials and/or directors of the company known as Diamond Shield International Ltd approached one of the Respondent Directors by name Zipare to supply the Respondent with Oil products from Mombasa to the business premises at Thika for which they demanded payment to be made into their Bank Account No 030xxxxxxxxx with the Appellant.

2. That on 31st July, 2nd and August 15, 2008 the Respondent deposited a total sum of Kenya Shillings One Million Six Hundred and Seventy One Thousand Five Hundred (1,671,500/=) into the said account but the said Company Diamond Shield International Ltd failed to deliver the oil product to the Respondent as agreed and that subsequently Criminal Investigations and Criminal proceedings were conducted in Thika Criminal Case Number 4944 of 2008 against one Joyce Wanjiru Mwaura a director of the said company who was acquitted as the said company was a non legal entity.

3. It was therefore pleaded that the Respondent money was lost due to the negligence on the part of the Appellant the particulars thereof were pleaded as;-a.Failing to make enquiries on customers opening an account.b.Failing to make enquiries as to the character and circumstances of the customersc.Receiving an account for a customers who does not exist in law.d.Receiving money deposits on behalf of non-legal entity customerse.Colluding with the customers to swindle the Respondent

4. By application dated March 3, 2011, the Appellant denied being liable to the Respondents claim and denied the particulars of negligence contained in the plaint.

5. Based upon the said pleadings the matter proceeded for full hearing and by a judgement thereon dated December 18, 2015 the Trial Court entered judgement for Respondent against the Appellant on the ground that the same failed to comply with the 2006 Central Bank of Kenya guidelines for licensed institutions and sufficient procedure in opening account for Cooperate, Partnership and sole traders and therefore the same was negligent.

6. Being dissatisfied with the said judgement the Appellant filed this appeal and raised the following grounds of Appeal;-a.The trial magistrate erred in law and fact by finding that the Defendant was liable to the plaintiff despite the Defendant not being party to the transaction between the Plaintiff and the 3rd party.b.That the trial magistrate erred in law and fact by finding that the Plaintiff had proved its case against the Defendant on a balance of probabilities.c.The trial magistrate erred in law and in fact in finding that the defendant owed a duty of cate to the plaintiff with respect to the customers it contracts with.d.The trial magistrate erred and in law and fact by holding the defendant liable to the plaintiff based on mere guidelines (Central Bank of Kenya Prudential Guidelines for Institutions licensed under The Banking Act ) which are not binding.

Submission 7. Directions was given that the appeal be heard by way of written submissions which were duly filed. on behalf of the Appellant. It was submitted that the Respondent a Third Party was seeking to lay claim against the Appellant for loss sustained for a fraud that was perpetrated by the Respondents customers whereas the Appellant was not privy to the engagement between the Respondent and the 3rd party Ltd client. It was submitted that the Respondent did not carry out any due diligence before making the said payments and that the Respondent filed to pursue Civil Remedy against Joyce Wanjiru Mwaura who was charged in Thika Criminal Case No 4944 of 2008.

8. In support of the submission which was pleaded on the case Ruwling v Tokaro properties Ltd (1988) AKER 163 to the effect that imposition of liability may even lead to the harmful consequences thus the cure may be worse than the decease. It was contested that encouraging parties who are victims of fraud for the lack of vigilance where consideration is made through the bank to be compensated by the bank which be opening flood gates of claim against the bank for transactions which clearly the victims have been negligent and would make the banks prone to fabricated claim by parties that collude to financially drain the banks consequently inferring the services.

9. Reference was made to the case of Caparo Industries PLC v Dickman (1990)eKLR when the court held that an auditor of Public Company has a duty of care to individual shareholder of the company are to sufficient proximity between them but did not owe a duty of care to potential investor for lack of proximity between them.

10. The Appellant submitted that in the alternative the court should rely on the maxim of equility where between equal entities, the first in order of time shall prevail and that the equity in this case bring fairness, the Respondent was fist in time culpable with its action being the genesis of the loss it had suffered was therefore the action of his own misfortunes.

11. It was further submitted on the issue of foreseeability that the Respondent was not in their contemplation as a person possibly to be affected by his normal trade of banking and that the appellant had to do obligation to carry out due diligence for third parties getting into contractual relations with all its customers.

12. On behalf of the Respondent it was submitted that the Appellant was negligent in its banking conduct was in breach of duty if care imposed by her. It was submitted that the Appellant not only owed a duty of care to its client but also to others settling on any transaction it does in support of which the Standard Chartered Bank Ltd v Intercom Service Ltd & 4 others (2004) eKLR to the effect that the ones of establishing circumstances showing absence of negligence is on the banker and that inquiry must be measured by what circumstance a fair ordered Bankers paying due regard to the existence of banking business in relation to the person depositing the cheque would consider if prudent to go in order to protect the interest of the owner and each case must depend on its own circumstances.

13. It was submitted that the Appellant had a duty of care to third parties in support of the cases of Supreme Court of the Netherlands,9 January 1998, ECLI: NL: HR 1988:ZC2536NJ 1999/285 (Mees Pierson/Ien Bos) Legal Funding 3. 6.2 and Beyond Kenya Ltd & Another v Gulf African Bank Kenya Ltd [2019] eKLR where the court heard that the Bank was negligent by its failure to verify the true identity of purported Directors of the two companies and by failing to verify the documents supplied to them before allowing the purported Directors to open the two accounts.

14. It was submitted that the Respondent would not have incurred loss had the Appellant conducted due diligence while opening an account for this customers in support of which reference was made to Clerk Lindsell or Tort 17th edition page 39-40 Causola in Tort : General properties.

15. It was further contended that the Central Bank of Kenya Prudential guidelines for institutions licensed under the Banking Act were legally binding as issued vide Section 33(4) of the Banking Act in support of which reference was made to the case of Equity Bank(s) Ltd v Don Ogalloh Riaro & Another [2019] eKLR and Marfani & Co Ltd v Midland Bank Ltd [1968] 2 ALLER 573.

Determination 16. From the proceedings and the submissions herein I have identified the following issues for determination in this appeal;-a.Whether the Appellant is liable to the alleged loss to the Respondent.b.Whether the Appellant owed a duty of care to the Respondent.

17. The following facts were undisputed that the Appellant had opened a Bank account to its customer known as Diamond Shield International and according to the evidence PW1 Dadyesehe &abbaan Zibabe Director of the Respondent, they entered into an agreement for the supply of furnace oil in Bulk quantities and the said Diamond Shield through its owner known as Joyce Mwaura upon which they deposited the agreed priceinto the said companies Bank account at the Apellant Thika Branch.

18. The said Joyce Mwaura was subsequently arrested and charged in Criminal Case No 4944 of 2008 and that the Appellant opened the Bank Account for the said Company before it was registered.

19. In finding for the Respondent the Trial Court has this to say;-“It is very clear from the case above that the defendant was negligent in opening the 3rd party account without filling the requisite procedures for verification. Had the defendant exercised due negligence (s) as required the plaintiff herein would have no reason to blame the defendant. I therefore find that the plaintiff has proved its case against the defendant or a balance of probability and allow the prayers as sought in the plaint”.

20. It is not disputed that there was no privy of control between the Respondent and the Appellant and that the Respondent only dealt with the Appellant customer.

21. The relationship between the Appellant and its customer was therefore that of principal and Agent and can only be liable to the Respondent based upon the Agency – Principal principles.

22. The Appellant can only be triable to a third party if it fails to make reasonable inquiries despite having reasonable ground of knowing its customers friend as was stated in Vitalarie (A General partnership v Bank of Nova Scotia (2002) OJ 4902(SCJ) in the case, there was no evidence tendered to show that the Appellant had reasonable ground to know of the customers fraud.

23. The Respondent dealt with the Applicant known principal and the same was able to take action against the same by having its Directors charged with a criminal offence therefore would ought with the Appellants submission that the Respondent had a Civil remedy against the said third party.

24. I find the case of Equity Bank (Kenya) Ltd v Don Ogolla Riaru & Another [2019] eKLR tendered by the Respondent in support of the conclusion that the Central Bank guidelines were being distinguishable since in that case it is a third party who had no account dealing with the Appellant same for the fact that its cheque payable to the Appellants customer was processed through the Appellant.

25. There was no evidence tendered to prove that the Appellant was negligent in the way it handled the processing of the payment link through the third party accounts as there is no dispute that the party was the actual person served by the Respondent in the cheque deposited and that it was upon the Respondent to carry out due diligence on the nature of the business transaction it was entering into and not to shift the blame upon the Applicant having been a victim of alleged fraud committed by a third party without their knowledge of the Appellant.

26. Therefore there was no evidence tendered by the Respondent to prove that the Appellant did not carry out due diligence while opening the bank account for the Third Party herein and therefore the Trial Court finding that the same was negligence was not supported by the evidence on record.

27. I therefore find and hold that the causation here was too remote as the Appellant did not owe an sp.. duty of care to the Respondent to stop the same from entering into business transaction with the Appellants customers and to effect payment thereof through the Appellant and therefore no liability should accrue against the same.

28. The upshot of this is that the Trial Court in finding the appellant matter in negligence was an error as there was no evidence tendered by the Respondent to prove that the Applicant was negligence in opening the Bank Account for the Third Party which the Respondent could .. in the usual manner and the Appellant was not expected to reasonable foresee that the third party its customer was not going to honour the business transaction entered into.

29. I therefore allow the Appellant herein, set aside the Trial Courts Judgement and substitute the same with an order dismissing the Respondents case with costs to the Appellant.

30. It is hereby ordered.

SIGNED DATED AND DELIVERED AT MURANGA THIS 5TH DAY OF DECEMBER, 2022. J WAKIAGAJUDGEIn the presence;-Court Assistant: Carol Mutahi