[2004] KECA 163 (KLR)

IN THE COURT COURT OF APPEAL

AT NAIROBI

CIVIL APPEAL NO. 37 OF 2003

STANDARD CHARTERED BANK KENYA LIMITED …..…......…….. APPELLANT

AND

INTERCOM SERVICES LIMITED ………………....….……. 1ST RESPONDENT

INTERSTATE COMMUNICATIONS SERVICES LTD........… 2ND RESPONDENT

SWIFTAIR (K) LIMITED ………….……….…….…...….…… 3RD RESPONDENT

KENYA CONTINENTAL HOTEL LIMITED ……..........…..… 4TH RESPONDENT

JAMES KANYITA NDERITU …..……………………....……. 5TH RESPONDENT

JUDGMENT OF ONYANGO OTIENO, AG. J.A:

. In his judgment dated 18th day of November, 2002, the learned judge of the superior court, Visram J entered judgment on liability in favour of Intercom Services Limited, Interstate Communications & Services Limited, Swiftair (K) Limited, and Kenya Continental Hotel Limited (all of which I will refer to as the first, second, third and fourth respondents respectively in this judgment), and James Kanyita Nderitu (to whom I shall refer as the fifth respondent) against Standard Chartered Bank PLC (to which I will refer as the appellant in this judgment) with costs which would be based on the quantum of damages to be determined later. This was because, the parties, as is clear from the proceedings, did agree in the course of the hearing that the decision be first made on liability only.

In the original plaint dated 1st March, 1988, the first four respondents were customers of the appellant at Westlands branch, Nairobi while the fifth respondent was the Managing Director of each of the four respondents. It is pleaded in that plaint that on or about 25th May, 1985, the first respondent deposited a cheque for Ksh17,007,568/25 into its account and the same was credited to its account at the Westlands branch of the appellant. The respondents claimed in the plaint further, that despite the express contractual understanding between the appellant and the respondents that strict fiduciary mutuality and confidentiality would be maintained, the agents and/or servants of the appellant namely Amos Yiesel and Hutton Ayodi in breach of the same fiduciary relationship informed the police that they suspected that the same cheque was unlawfully obtained, as a result of which the fifth respondent in his official capacity as the Managing Director of each of the respondents, was charged and prosecuted in Criminal Case No 1716 of 1985 thereby causing the respondents’ business inoperative and all the respondents suffered damages as the respondents’ accounts were also frozen and that resulted in the closure of their business. In that original plaint, the respondents claimed general damages, costs of the suit and interest at court rates.

That plaint was amended six times. The first amendment was dated 2nd December, 1993, over five years later and the sixth further-re-amended plaint was dated 26th September, 2000. That was the plaint that came up for hearing. That further-re-amended plaint which the superior court referred to in its judgment as the “plaint” carried extensive amendments to the original plaint. It described the business that was being carried out by each respondent; it amended the amount that was deposited into the first respondent’s account, and it pleaded particulars of loss and damage in respect of 1st, 2nd, 3rd and 5th respondent extensively. That plaint ended with a claim for:

“(i) General damages,

(ii) Special damages as particularized in the plaint at paragraphs 18A, B, C and D and

(iii) Costs of the suit.”

The appellant, as would be expected, also filed several amended statements of defence ending with the further-re-re-amended defence dated 23rd June, 2000. That re-re-amended defence was the one treated as the defence and was the defence heard. In that defence, the appellant admitted that the first respondent opened an account at its Westlands branch on 17th May, 1985; the second respondent opened an account at the same branch on 5th May, 1985; the third respondent opened an account at the same branch on 30th March, 1985, and the fourth respondent opened an account at the same branch on 28th March, 1985, whereas the fifth respondent did not open or hold any account with the appellant at the material time. The appellant also admitted in that defence that the first respondent deposited a cheque for Ksh 17,007,568/25 drawn on Customs and Excise Department at its account with Kenya Commercial Bank Limited in favour of the same first respondent on 25th May, 1985, but contended that as that was payment of export compensation, claims governed by the provisions of Local Manufacturers (Export Compensation) Act Cap 482 Laws of Kenya and as the voucher issued by the defendant was in respect of a different party being the second respondent and as there was a discrepancy between the amounts on the cheque and on the voucher, it was entitled to make inquiry about the cheque. The respondent further maintained that if there was any express or implied contractual understanding between the parties that strict fiduciary mutuality and confidentiality would be maintained, then the same was qualified by the appellant’s duty not to act contrary to public interest; the appellant’s right to protect its own interests; the appellant’s duty to exercise reasonable care in effecting payment of cheques to make such inquiries as might in the circumstances be appropriate and practical and the appellant’s duty to act in good faith and without negligence. The appellant also denied informing the police that the said cheque was unlawfully obtained and maintained that its agents and/or servants had merely made necessary inquiries of the Customs and Excise Department and Central Bank which are public bodies performing requisite statutory functions as to whether the said cheque and the details thereof were in order or not as the name of the payee on the cheque and the amounts were different from the name and amount in the voucher. The appellant further enumerated various reasons as to why it made the same inquiries and went on to state that the officer at Central Bank to whom the inquiry was made is the one who referred the inquiry to Fraud Investigation Department attached to Central Bank who carried out their independent investigations and preferred criminal charges against the fifth respondent. It denied knowledge of the circumstances under which the fifth respondent was prosecuted and stated that the Bank accounts of the first, second, third and fourth respondents were frozen pursuant to a High Court order in HCCC No 2156 of 1985. Later, consent orders were entered in respect of the accounts of the first, second, and third respondents. The appellant denied liability and being in any way liable for the loss and damages allegedly incurred by the respondents. Lastly, the appellant pleaded that the re-amended plaint disclosed no cause of action against the defendant; that the respondents were not entitled to interest by virtue of section 26 of the Civil Procedure Act and that the claim of interest was bad in law as the respondents had claimed loss of profit and that damages claimed were remote and not recoverable in law. The above are but brief summary of the pleadings in this entire case.

The record shows that interlocutory applications were heard by Mbogholi Msagha, J and that after the issues were framed and agreed upon by parties, the suit proceeded to hearing before Mbogholi Msagha, J who after hearing eleven witnesses, and in the course of hearing the 12th witness declined to proceed with the hearing of the case as he was engaged in murder trials and the then Chief Justice directed the hearing to proceed before Visram, J who heard the rest of the case to its conclusion. In his lengthy judgment on liability, the learned judge in holding the appellant liable, concluded as follows:

“All in all, I have come to the conclusion that the Standard Chartered Bank, the defendant in this case, in dealing with the Sh 17M cheque acted in an abnormally suspicious manner, pursuing its inquiries about the cheque rather recklessly and relentlessly with impunity, and in total disregard of the interests of its customers, causing them enormous damage.

I have no doubt that the Bank went too far, much too far, than was reasonably expected of it, and it must now be held responsible for the consequences of its actions. In the circumstances, I find that the Bank is liable to the plaintiffs for the loss sustained by them as a result of the Bank’s breach of its duty not to disclose the affairs of its customers.

Accordingly, I enter judgment on liability in favour of the plaintiffs against the defendant with costs to be based on the quantum which shall be determined at the next stage of this trial.”

He then proceeded to direct that the case be set down for the assessment of damages before any judge of the superior court.

The appellant felt aggrieved by the same decision and has now come to this Court on appeal having preferred 39 grounds of appeal. As the same grounds are numerous, I do not find it appropriate to reproduce them in this judgment. I will however endeavour to give a summary of the same grounds as I feel the nature of this case demands the same. The grounds were in a summary form, that the learned judge of the superior court erred in law and failed to determine whether the respondents proved the case as pleaded in paragraphs 12 and 13 of their further re-amended plaint which was that the appellant had made a false report to the police that the subject cheque was unlawfully obtained; that the learned judge erred in fact and in law in equating a report made to the Central Bank to that made to the police; that the learned judge failed to accept that there was no evidence that the appellant’s servants ever reported to the police that the subject cheque was unlawfully obtained; that the learned judge erred in law in holding that enquiries made by the appellant of Central Bank and information and documents provided to Central Bank amounted to the appellant being in breach of any contractual duty of confidentiality that the appellant owed to the respondents; that the learned judge erred in law in holding that the issues of whether the subject cheque was obtained by fraud could not be revisited in Civil Court as the fifth respondent had been acquitted on appeal by Criminal Court; that the learned judge erred in law in holding that the enquiries made by the appellant of the Central Bank of Kenya and documents and information provided to the same Central Bank were unlawful and unjustified; that the learned judge erred in law in holding that the inquires made by the appellant of the Central Bank of Kenya and/or information and documents provided by the appellant to the Central Bank amounted to or were capable of amounting to a breach of the alleged or any contractual duty of confidence owed by the appellant to the respondent except to the first respondent; that the learned judge erred in law in holding as he did that he should disregard the separate legal personalities of the first to fourth respondents and treat the appellant as owing contractual duty to the fifth respondent as the “alter ego” of the other respondents, as neither the pleadings nor evidence established sufficient ground for “piercing the veil of incorporation”; that the learned judge erred in law in holding that the alleged losses suffered by the respondents consequent upon the decision and/or the action of the prosecuting authorities and/or the Courts of Kenya were caused in law by any of the matters complained of against the appellant; that the preliminary finding that the action was not statute-barred as a result of the respondents’ failure to obtain the summons for appearance until 1993, more than 6 years after the cause of action arose was contrary to the provisions of the Limitation of Action Act Chapter 22 of the Laws of Kenya; that the learned judge erred in law in disregarding the evidence of illegality which was adduced in court; that the fifth respondent’s admission that some of the goods allegedly exported were not exported and that most of the alleged consignees’ denial of goods for which the compensation was claimed and paid with the subject cheque was clear evidence of fraud and breach of both Customs and Excise Act Cap 472 and Local Manufacturers Export Compensation Act Cap 482; that the learned judge erred in law and in fact in disregarding the evidence on record showing that the cheque for Ksh 17,007,568/=, the subject matter of the case was intimately connected with the fictitious entries in the claim form submitted to Customs & Excise Department which had indicated that non existent and false aircrafts and motor vehicles had transported goods for which compensation was being claimed and the learned judge further disregarded the evidence that the claim was based on alleged profit and loss accounts prepared by a fictitious firm of accountants and auditors in contravention of the Accountant Act Chapter 531 of the Laws of Kenya and Companies Act Cap 486 of the Laws of Kenya; that the learned judge avoided the evidence adduced in court by police officers that investigations revealed probable and sufficient cause for charging the fifth respondent with a criminal offence in respect of the claim the subject of the suit; that he failed to give proper consideration to the evidence adduced by the police officers as witnesses in the case; that the learned judge erred in law in accepting the evidence in chief of the fifth respondent in disregard of the evidence of the same witness in cross-examination and the documents which contradicted the said evidence in chief; that the learned judge erred in law and in fact in finding that the inquiry made by the appellant’s servants of Customs and Excise Department in connection with the cheque was sufficient to discharge the appellant’s statutory obligation whereas no such evidence was adduced before the Court; that the learned judge erred in failing to properly evaluate the relationship between the Manager and the fifth respondent; that the learned judge erred in fact and in law in his appraisal and assessment of the evidence of Harrison Charles Kimeria (PW 15); that the learned judge erred in law and in fact in his consideration of the proceedings against the fifth respondent in Nairobi Criminal Case No 1716 of 1985 which were produced in evidence before him; that the learned judge erred in finding that Kimeria had powers to alter a payee of a claim upon a request by a claimant despite the provisions of the Act prescribing the procedure for such payments; that the learned judge misdirected himself in fact and in law on the issue of what constitutes relevant inquiry by a bank in the course of clearing a cheque and the extent of liability by a bank if any in respect thereof where breach of confidentiality is disclosed; that the learned judge erred in finding that the appellant became liable for all the losses, damages and consequences and claims made by the respondents emanating from the suit filed by Customs & Excise Department merely because the appellant’s servant accompanied police officer to Attorney General’s Chambers or communicated with counsel representing the Commissioner for Customs in HCCC No 2156 of 1985 notwithstanding that the appellant was not a party to the same suit; that the learned judge erred in law in applying the decision in the cases of Bissell & Co vs Fox Brothers & Co(1884) 51 LT 663 varied (1885), 53 LT 193, 3 Digent 241, 684, Lloyds Band Ltd vs Chartered Bank of India, Australia and China[1928] All ER 285, as the facts in those cases are distinguishable from the facts in the instant case; that the learned judge erred in finding that a clearing bank was only entitled to make inquiry with true owners of the cheque who he defined as the person who would be kept out of his money if the proceeds of the cheque is paid to a wrong person; that the learned judge was wrong in law in limiting the definition of a true owner of a cheque pursuant to the provisions of section 3(2) of the Cheques Act; that the learned judge erred in finding that section 4 of the Cheques Act was consistent with section 80 of the Bills of Exchange Act Cap 27 of the Laws of Kenya; that the learned judge misdirected himself in law, in equating the duties of a paying bank to that of a clearing bank and thereby presumed that once the paying bank honoured the cheque, and confirmed its validity, any further inquiry by a clearing bank was in breach of confidentiality; that the learned judge erred and misdirected himself in finding that it made no difference who the drawer of the cheque was, or for what purpose the cheque was drawn; that the learned judge erred in failing to appreciate that the signatories of the subject cheque signed it as agents of the Customs and Excise Department, in respect of incremental export compensation pursuant to the Act and that warranted more attention than a cheque drawn on a personal account; that the principles established in the case of Bodenham vs Haskins[1843-60] All ER are not applicable to this case and the learned judge erred in law in evoking the same principles; that the learned judge erred in law and in fact in the assumption that a clearing bank can only make inquiry in the event of an error on the face of the cheque; that the validity and circumstances pertaining to the issuance of the cheque were wholly intertwined with the Act that it was wrong to determine the suit in total disregard of the Act; that the finding that the respondents had been permitted to utilize the proceeds of the cheque was not a proper finding; that the concept of forseability of loss was not pleaded and the learned judge erred in law in introducing the same concept in the judgment; that the learned judge erred in law by assuming that the fact that the respondents had claimed that there was a breach, entitled them to a remedy irrespective of whether their claim disclosed a cause of action known to law or otherwise; that the learned judge erred in law and in fact in treating all the respondents as a single entity and treating the contract between the appellant and the first respondent as applicable to all other respondents; that the learned judge erred in law and in fact in finding that the fifth respondent acquired some legal status independent of the other respondents merely because he was the only person the appellant dealt with in connection with the accounts ignoring the fact that a company acts through its directors or agents; that it was not proper for the learned judge to find that the appellant was liable to the fifth respondent because the appellant intended to deal with him and not his companies and at the same time find that the appellant was liable to each of the other respondents for interfering with their accounts and that the learned judge erred in his assessment of the evidence of Mwaniki Ndegwa (PW 8) and further erred in disregarding the same evidence and substituting therefore his own finding on the conduct expected of a prudent clearing bank in dealing with a cheque deposited by its customers for clearance.

The learned counsel for the appellant, Mr G O Oraro, and the learned counsel for the respondents, Mr M Kilonzo and Mr Wandabwa, all addressed the Court extensively and I feel indebted to both for the wellresearched submissions. These submissions lasted several days and it would be unfair for me to pretend to reproduce the same fully in this judgment.

I will refer to the same as may be appropriate in the course of the judgment. However, the learned judge of the superior court, did reproduce in his judgment the two sets of issues that were before him, one signed by advocates for one party only and one signed by the advocates for both parties. Having reproduced both sets of issues, he proceeded to adopt for the purposes of his judgment, the issues that were signed by both parties. The two learned counsel before us did not raise any issues with that procedure adopted by the learned judge and on my part, I do feel the judge was plainly right in doing so as the set of issues signed by both parties clearly was the issues agreed upon by both parties and one would have expected the case of each party to have been geared towards meeting the same issues. The issues agreed upon by both parties were whether or not the fifth respondent was the Managing Director of the other respondents; whether or not there was an express contractual understanding between the appellant and the first four respondents, and if so, what were the terms of the express contractual understanding; whether or not the express contractual understanding was qualified as outlined in paragraph 5 of the defence; whether or not the appellant’s servants and/or agents informed the police that they suspected the cheque submitted by the first respondent was unlawfully obtained; whether or not the appellant was lawfully justified to make enquiries so as to fulfill its duty to protect itself and others from fraud or crime and whether this inquiry was in breach of a banker-customer’s relationship; whether the appellant owed all or any of the respondents a fiduciary duty, and if any was owed; did it breach its fiduciary duty; whether the 5th respondent was charged in Criminal Case No 1716 of 1985 in his official capacity as the Managing Director of the other respondents; whether the business of the 1st, 2nd, 3rd and 4th respondents was rendered inoperative as a result of the 5th respondent’s prosecution, and suffered damages as a result of that prosecution; whether the 5th respondent was subsequently acquitted; whether freezing of the bank accounts of the first four respondents caused them considerable and enormous financial difficulties and hardships resulting in the closure of their business as alleged and whether they suffered damage and loss; whether services of summons and plaint on the appellant five and a half years after institution of the suit is contrary to the provisions of section 4(1) of the Limitation of Actions Act (Cap 22) and 2 years after the prescribed limitation period is an abuse of the process of the Court and unlawful and is scandalous and/or might have prejudiced, embarrassed and delayed the fair trial of the suit; whether the amended plaint disclosed a cause of action by the 5th respondent against the appellant and by the 1st, 2nd and 4th respondents against the appellant and whether the respondents are entitled to general damages.

As is already stated above, the appeal before us is only on liability and the issues on damages are not relevant but I have included them so as to ensure that the entire issues that were before the court and were relied on by the superior court are not omitted, except issue No 13 which dealt with service of notice of intention to sue of which relevance, I do feel, is no longer an issue.

I have anxiously considered the appeal which I do accept raises weighty legal issues as well as factual issues. The brief summary of the salient aspects of the entire case may unravel the legal and factual complexities that do arise in this appeal. From the evidence as appear in the record, the salient facts of this case are that the fifth respondent, together with his wife are the share holders and directors of the first, second, third and forth respondents. The fifth respondent is the Managing Director of all the companies. On 28th March, 1985, account for the fourth respondent was opened with the appellant at its Westlands Branch. The deposits in that account; according to the fifth respondent in his evidence in crossexamination, never exceeded Ksh 300,000/=. On 5th May, 1985 an account for Interstate Communications Services Limited, the second respondent, was opened with Ksh 5,000/= and on 17th May, 1985 an account for Intercom Services Limited, the first respondent, was opened with Ksh 5,000/=. Almost immediately thereafter, Ksh 4,203/75 was withdrawn from the same account of the first respondent leaving a balance of Ksh 306/25. On 20th May, 1985, the fifth respondent, as managing director of the second respondent applied for Incremental Export Compensation. In the application form, he had applied for Ksh16,864,084/50, but apparently the Customs and Excise Department who were dealing with the same application adjusted the figure to Ksh 17,077,568/25. On 23rd May, 1985, he deposited into the same account of the first respondent Ksh 160,111/ 95 but at the same time wrote a series of cheques and the balance in that account was reduced to Ksh 23,771/95. In the meantime, his application for Incremental Export Compensation apparently matured and a cheque for Ksh 17,077,568/25 was prepared by Customs and Excise Department for payment. The fifth respondent wrote a letter to Customs and Excise Department asking for that payment (which was to be made to the second respondent) to be made to the first respondent. That letter was received by Customs and Excise Department on 24th May, 1985, the same day the claim form for the Incremental Export Compensation was also received. Customs and Excise Department apparently prepared a cheque in the name of the first respondent the same day, 24th May, 1985, but that cheque was for Ksh17,007,568/25 and not for the amount of Ksh17,077,568/25 as calculated by the same Customs and Excise Department to be the amount due, notwithstanding that the claim was for Ksh 16,864,084/50. Customs and Excise Department also prepared a voucher to accompany the same cheque. That voucher which was provided by the fifth respondent was however in the name of the second respondent and thus the name in the voucher also differed from the name in the cheque. That voucher specified in its body what the payment was for and that was that it was for Incremental Export Compensation. The voucher also reflected different amounts as the total read Ksh 17,007,568/25 whereas the sum reflected elsewhere in the same voucher read Ksh17,077,568/25. Further facts show that the letter written by the fifth respondent seeking that the payment be made in the name of the first respondent instead of the second respondent had in its letterhead both names of the first and second respondents.

Further, the cheque for Ksh 17,007,568/25 was put into the account for special clearance. The Branch Manager of the appellant’s Westlands Branch, one Mr Yiesel, was known to the fifth respondent and is alleged to have encouraged the fifth respondent to open accounts for his companies with the appellant. When Yiesel noted the various anomalies in the cheque and voucher, he contacted a Mr Ngugi of the Customs and Excise Department. Ngugi told Yiesel that the cheque was valid and the shortfall of Ksh 70,000/= would be met by another cheque so as to have the amount tally. Another employee of Customs and Excise Department, Mr Kimeria, who was the Chief Accountant stated that although at the time the cheque was issued there was no sufficient amount in the account, arrangements would be made to ensure sufficient money was available. But apparently, Yiesel was not satisfied with the same and as the amount was then considered very large, he contacted his head office formally on 27th May, 1985. This was consistent with the appellant’s standards operating manual. That manual outlined the procedure that inquiries should be made about cheques with unusually large amounts. Mr Naptali Ayodi (DW 1) who was then (1985) the appellant’s Chief Inspector of all branches was handed over the matter. He knew export compensation was handled by the Exchange Control Department of Central Bank of Kenya. He also noted that the payment was not made through appointed dealers as was required under the Local Manufacturers Compensation Act. He then decided to inquire from the Exchange Control Department, Central Bank of Kenya about the discrepancies, as according to him there was no evidence that the account holder was an exporter. According to him, he enquired from one Karani of Central Bank of Kenya if the account holder was an exporter. Karani did not respond instantly but contacted him by telephone later and asked him to contact another department, which happened to have been the Investigation Branch headed by one Ongoro. When he contacted Ongoro, Ongoro sent two police officers who went to his office (Ayodi’s office) and took the cheque and payment voucher. Ongoro’s team went together with Ayodi to the Westlands branch of the appellant for investigations, and having introduced Ongoro’s team to Yiesel (Bank Manager), Ayodi says he left them to carry out their investigations. These investigations resulted in the fifth respondent being charged with criminal offences before the subordinate court in Criminal Case No 1716 of 1985 in which he was convicted but on appeal to the High Court, he was set free. During the hearing of the same criminal case, the accounts held by the respondents in the appellant’s banks were also frozen for sometime till the appellant filed civil proceedings in the High Court – HC Misc Application No 168 of 1985. Following that application, the State also filed a Civil Suit, HCCC No 2156 of 1985 through Commissioner of Customs but that suit was by consent of parties settled and the monies in dispute released to the respondents.

These were the salient aspects that gave rise to this suit which was filed in the superior court. I need to add here however, that unknown to the appellant’s employees, at the time the accounts for the first, second, third and fourth respondents were being opened with the appellant’s Westlands Branch, the fifth respondent was facing a criminal charge of failure to remit foreign currency into the country in relation to export compensation. He had been charged with that offence sometimes about August 1984, and so the claim of Ksh 17,007,568/25 was lodged while that case was pending against him. That was Criminal Case No 4139 of 1984 in the subordinate court. As I have stated above, those were the salient aspects of the case that triggered the entire suit. I cannot vouch that, I have covered every aspect but the records show that the entire case is based on the above evidence save that there was also complaint by the appellant of late service of the summons.

Mr Kilonzo, the learned counsel for the 3rd, 4th and 5th respondents, and Mr Wandabwa, for the 2nd respondent, both in effect submitted that as the cheque for Ksh 17,007,568/25 was clearly written out and showed its true owner as Kenya Customs and Excise Department, any inquiries about the cheque would only be made with the same true owner of the cheque and any inquiries made from persons whose name did not appear as the drawer was a violation of the law. According to the respondents, the Central Bank of Kenya was a third party and consent of the customer (in this case the first respondent), was required before making any inquiries from the Central Bank. They contended that in the appellant alerting the Central Bank on this matter, the appellant was in breach of confidentiality and in their opinion, the appellant went further and requested the Central Bank to take legal action and that was violation of customer/bank fiduciary relationship. This was done, according to Mr Kilonzo without the consent of the fifth respondent and was done notwithstanding that neither the Customs and Excise Department, the drawer of the cheque nor the Kenya Commercial Bank which was the paying bank had raised any complaint about the subject cheque. He contended that matters went beyond the boundaries of protection of public interest, the appellant’s interest, and interest of the owners. In Mr Kilonzo’s submissions, once the appellant’s servant, Naphtaly Ayodi had talked to Kimeria of Customs and Excise, and had been told the cheque was validly issued, he should have ended there and there could have been no problem. He made other submissions but the above constituted the central point of his submissions.

Mr Oraro, for the appellant, on the other hand while conceding that the law requires banks to respect and ensure that no bank customer’s confidence is breached, and while accepting that the appellant in this case had strict fiduciary responsibility to maintain fiduciary mutuality and confidentiality, maintained that the inquiries made were justified in the circumstances of this case and did not breach any fiduciary mutuality and fiduciary confidentiality between the appellant and any of the respondents. He also urged other matters which, though were important, were nevertheless on the periphery of this main question. Counsel, as I have stated, did make every endevour to help the Court, and their arguments were supported by several authorities.

The learned judge of the superior court, having considered the matter before him in what I may, with respect, term detail, addressed himself as follows:

“The question that is uppermost in the mind of this Court is whether the Bank, in the face of what everyone agrees was an unusual transaction, was entitled to make inquiries about the cheque.

My unequivocal answer is “yes” most definitely “yes”. A bank is under a duty to act with reasonable care, to protect the interests of the true owner of the cheque, as per their banking practice. In this case, it simply had no choice, but to make inquiries. It receives a cheque that is unusually large, for deposit in an account that is unusually “new”, supported by a voucher that has glaring and unusual discrepancies. So what is it to do? However, the most fundamental issue before this Court is the extent to which such inquiries can and should be made. How far can a bank go in its pursuit to find the “truth”. Where do you draw the line? So, was the Bank entitled to make the enquiries that it did, and in the process make the disclosure that it did?”

He proceeded to analyze and evaluate the evidence. Having so done, he found that the appellant acted in an abnormally suspicious manner, pursuing its inquiries about the cheque rather recklessly and relentlessly with impunity and in total disregard of the interests of its customers, causing them enormous damage. He concluded as I have stated above that the Bank went too far, much too far than was reasonably expected of it and found the appellant liable. This was mainly on ground, as he found, that after the money was released to the respondents, the appellant still continued with the inquiries.

It is not in doubt that the 1st, 2nd, 3rd and 4th respondents were customers of the appellant. The appellant conceded this. It was also clear from the record, that the fifth respondent was not a customer of the appellant.

I think the starting point is as to whether the Bank made a report as alleged in the pleadings and if so, then to whom was the report made. I proceed in that manner because, being a first appellate court, I am in law enjoined to peruse, analyze, and re-evaluate the evidence which was adduced before the superior court, always putting in mind that the superior court had the advantage of seeing and hearing the witnesses and seeing their demeanour and so allowance must be given for the same.

In the plaint that was before the Court, at paragraph 12, the plaintiffs stated:

“12. On the 28th May, 1985, the then Manager of the defendant’s Westlands Branch, Mr Amos Yiesel, together with Mr Hutton Ayodi, both being agents, and/ or servants and employees of the defendant informed the police that the said cheque was unlawfully obtained.”

This, in law, is what the plaintiffs set out to prove, and this is confirmed by the issues which were before the superior court. Issue No 4 stated as follows:

“4 Whether the defendant’s servants and/or agents informed the police that they suspected the cheque submitted by the 1st plaintiff was unlawfully obtained.”

The learned judge, in considering this issue which I think was the mainstay of the entire case, made the following finding:

“The next issue is number (4) above. It has been seen that the inquiry made to the Central Bank was in fact an inquiry to the police since the Department concerned was in fact manned and staffed by police officers. It cannot be otherwise when one considers the fact that the bank had treated the whole case from the beginning as a criminal act. It is no wonder that in the civil proceedings that ensued the Attorney General relied a great deal on the testimonies of the police when real aggrieved party, Customs and Excise, appeared not to be interested in the matter.”

Mr Oraro, the learned counsel for the appellant, submitted that the learned judge’s answer to that issue did not address the issue. I feel that submission, cannot, with respect, be faulted. The issue was in my mind clear, and that was whether the appellant’s servants or agents (in this case Ayodi or Yiesel) informed police that they suspected the subject cheque to have been unlawfully obtained. That was the genesis of the entire case and its proof or non proof would have affected the final decision of the entire case. Mr Nderitu (PW 12) who is the fifth respondent gave evidence on what the appellant told the police. He said:

“The action taken by the Bank officials was the giving of malicious information to the police regarding my operation and those of the plaintiff companies at the Standard Bank – Westlands, which resulted to my being prosecuted and all these companies coming to a complete halt. Further the information by both the Manager Westlands Branch and Mr Ayodi, to the police that the payment of the 17 million to Intercom Services Ltd was a fraud, was very injurious.”

That evidence is not consistent with the pleadings which I have set out hereinabove. However, in his further evidence, he improved on that and stated:

“They informed the police that there was a cheque I deposited of Ksh 17 million into the account of Intercom Services Ltd – Westlands Branch, and further alleged that that cheque was unlawfully obtained.”

But even that amendment did not prove the pleading which was that they informed the police that the cheque in question was unlawfully obtained as he was merely reporting what the police had said. In cross-examination, he said –

“They reported they suspected the operations of the accounts.”

That is what prompted the allegation. All these are in their testimonies and statements. The report by officer of Standard Bank prompted investigations of all the companies. I do not know if they reported Intercom should be investigated. I do not know if the Bank told the police how to investigate. May be they reported only about Intercom but that report prompted investigations in respect of all others.”

Thus, the fifth respondent, it would appear from the foregoing, was not certain as to what report was made that prompted him and his companies to take action, or at least he did not come out clearly as to what report was made, although in the plaint the pleading is that the agents of the appellant reported that the subject cheque had been unlawfully obtained.

The respondents’ witness, Zaverio Bundi (PW 13) had a different version of the report made to them. Zaverio was Superintendent of Police. He was at the relevant time attached to Central Bank of Kenya (CBK) Investigation Branch, although his employer was Kenya Police. His evidence on this issue was that sometimes in May, 1985 he was called by Ongoro who was then their officer-in-charge. He found some of his colleagues and Ayodi from the appellant bank. He stated as follows on this issue:

“I was told that is the one who reported that there was a cheque, which was for over Ksh 17 million deposited in Standard Bank Westlands Branch, whose payee was Intercom Services Ltd.

The voucher which was accompanying the cheque was in the name of Interstate Communications Services Ltd. Mr Ayodi said the payee’s name differed from the name in the voucher. He also said the amount in the voucher differed with that shown in the cheque. There was a short fall of Sh 70,000/= from that shown in the cheque.”

One has to accept that this was not the original report Ayodi made as that original report was apparently made to Karani of Central Bank and to Ongoro, after Karani had referred Ayodi to Ongoro. However, even this report which was made to Bundi and his colleagues in Ongoro’s office, does not bear out the pleading. It is a simple report itemizing the discrepancies in the cheque and voucher and in the voucher itself. Joseph Ngala Chai (PW 16) stated that Ayodi told him they were suspicious as to how Ksh 17 million had been obtained and he stated the reason given to him by Ayodi as to why the appellant was suspicious as to how the cheque had been obtained, and Araka James Oyamo talked of Yiesel of the appellant Bank having strong suspicion that the cheque had been fraudulently obtained, giving reasons for his suspicion. And what did Ayodi say on this issue? Ayodi was the only witness for the appellant. He stated as follows in his evidence in-chief before the superior court:

“I know export compensation was handled by CBK. I do not know what CBK handled. I decided to inquire from CBK about discrepancies, because there was no evidence on account that account holder was an exporter. At that time CBK controlled all foreign transactions. I inquired of Mr Karani at CBK who I knew from my work. To my knowledge, he was with CBK. I wanted to know if account holder was an exporter. I told him about the problem and reason for inquiry. He phoned me later and asked to contact another Department at CBK (Ongoro) when I phoned. I gave the name of customer. I contacted Ongoro at CBK. Until then I did not know Ongoro as a person – only that he was at CBK. I rang Ongoro to determine if he was a genuine exporter.”

In cross-examination, he was asked why he telephoned Ongoro and his answer was:

“To find out if Nderitu was an exporter.”

and in re-examination, he said:

“When I phoned Karani – I asked him whether the plaintiff was an exporter. He gave no response, but called back 2-3 hours later and asked me to report to Ongoro – exactly what I had told him. At that point I had no option but to ask Ongoro.”

Amos Yiesel, the Westlands Branch Manager of the appellant, did not give evidence in the superior court. I have gone into details on this issue, because as I have indicated above, the issue that triggered Karani of Central Bank to refer Ayodi to Ongoro, and the exact report made to Ongoro by Ayodi which triggered the Exchange Control Investigation Branch at Central Bank to investigate the entire saga is, in my mind, crucial to the entire case. From the extracts of evidence I have reproduced hereinabove, it would appear clearly that the evidence before the superior court did not support the pleading at paragraph 12 of the plaint that Amos Yiesel, together with Hutton Ayodi both informed the police that the cheque for Ksh 17,007,568/25 was unlawfully obtained. The learned judge of the superior court, in his judgment set out the facts that he found to have emerged from what he rightly called “extensive evidence of witnesses available” in the case; but, unfortunately whereas he found as a matter of fact that the appellant’s officers made inquiries with Customs and Excise, KCB – Moi Avenue, the Banker of Customs and Excise, and Central Bank of Kenya as well as with Exchange Control Investigation Department, which he found to be a police office, and to which he found that Ayodi meant and intended to direct the inquiries, the superior court did not make a specific finding as to the exact inquiry made and whether the inquiry made as given in evidence proved the pleadings that were before the Court. Consequently, the issue which was framed as issue No 4 in the accepted issues, namely whether the appellant’s servants and/or agents informed the police that they suspected the cheque deposited into the first respondent’s account was unlawfully obtained was not, in my view, answered. The learned judge did not make a finding on whether the appellant’s agents made a report to the police that they suspected the cheque was unlawfully obtained. All he did make a finding on was that Ayodi made a report to the police and that Ayodi meant and intended to direct those inquiries to the police and that was to him enough to conclude that the appellant went too far in its inquiry particularly as it did so after releasing the funds to the respondent. The law, as I understand it, is that the Courts would determine a case on the issues that flow from the pleadings and judgment would be pronounced on the issues arising from the pleadings or from issues framed for courts’ determination by the parties. It is also a principle of law that parties are generally confined to their pleadings unless pleadings were amended during the hearing of a case. In the case of Galaxy Paints Co Ltd vs Faccon Guards Ltd[2000] 2 EA 385, this Court stated as follows:

“It is trite law, and the provisions of order XIV of the Civil Procedure Rules are clear, that issues for determination in a suit generally flow from the pleadings and unless pleadings are amended in accordance with the provisions of the Civil Procedure Rules, the trial court, by dint of the provisions of order XX rule 4 of the aforesaid Rules, may only pronounce judgment on the issues arising from the pleadings or such issue as the parties have framed for the Court’s determination.”

It is true, and as I have stated above, that in this suit, the plaint was amended several times, but it is also clear that by the time the suit was heard, the last amendment had been made and no amendments were made during the actual hearing which could have interfered with the above principle. Indeed the issues that were framed before the hearing remained the same. It is difficult to see why the learned judge did not address himself to the question as to what report was made that was claimed by the respondents to have breached fiduciary mutuality and confidentiality.

The next matter which I feel needs to be considered before others is whether the alleged report was made to the police by Ayodi knowingly and meaning to or intending the inquiries to be made to a police officer. The learned judge, made a finding as follows:

“It is clear to this Court that Mr Ayodi meant and intended to direct these inquiries to the police based at the Central Bank. “Clearly, following his inquiry and report, a major investigation began.”

Ayodi’s evidence on this issue is that he initially made inquiries with Mr Karani of Central Bank as Central Bank was the body handling export compensation. He had seen the voucher that was issued by Customs and Excise Department in respect of the payment for the subject cheque and noted that the payment was in respect of export compensation whereas there was no evidence on the account of the first respondent that it was an exporter. Ayodi was himself, the appellant’s Chief Inspector of all branches and was dealing with complaints including those of forgeries. When Yiesel informed him of the cheque which was for a large sum of money, he carried out certain internal inquiries and then telephoned Karani at the Central Bank of Kenya. He says it was Karani who later after about two to three hours told him to contact Ongoro who was at the Exchange Investigation Branch within the Central Bank. There is no evidence that Karani told him that Ongoro was a police officer. He then contacted Ongoro. Up to that time, there was no evidence that he knew that he was contacting a police officer and he said in his evidence in chief as follows:

“I told him about the problem and reason for inquiry. He phoned me later and asked me to contact another Department at CBK (Ongoro) when I phoned. I gave him the name of the customer. I contacted Ongoro at CBK, until then I did not know Ongoro as a person – only that he was at CBK. I rang Ongoro to determine if he was a genuine exporter.”

And in cross-examination he said:

“Ongoro’s office was an arm of CBK, not police. I knew Ongoro was a police officer attached to CBK.”

My understanding of this evidence is that this witness knew that Ongoro was in Exchange Investigation Branch of the Central Bank, carrying out his duties there but not in his capacity as a police officer who could take up a report, arrest and have a suspect prosecuted. Thus he did not view Ongoro as carrying out duties of a police officer as is generally known to ordinary persons. He then thought his inquiry as to whether the 5th respondent was an exporter would be investigated by the Central Bank’s Exchange Investigation Department in the normal way. I find it difficult to appreciate the learned judge’s finding that Ayodi meant and intended to direct his inquiries to the police.

That brings me to the next point, which is at the very core of the entire case and that is the question covered by issues No 5 and 6, which are:

“5. Whether the defendant was lawfully justified to make enquiries so as to fulfill its duty to protect itself and others from fraud or crime and whether this inquiry was in breach of a banker-client relationship.

6. Whether the defendant owed all or any of the plaintiffs a fiduciary duty, and if any was owed, did it breach its fiduciary duty.”

The learned judge, in considering this issue did agree in some part of his judgment I have reproduced hereinabove that the appellant had a duty to act with reasonable care to protect the interests of the true owner of the cheque as per banking practice and in this case, he agreed that the appellant had no choice but to make inquiries. One has to put in mind that the appellant was a collecting bank and the duty attributed to it was on that basis. He however, felt that the most fundamental issue before the Court was the extent to which such inquiries can and should be made. He posed a question which he then proceeded to answer and that was – “How far can a bank go in its pursuit to find the truth? When do you draw the line?” This, in my mind, introduced a new issue hitherto not framed among the issues that were before the Court, but a valid issue, for the conduct of the case, left this question to the Court. The learned judge in his judgment I have referred to hereinabove did consider only the inquiry necessary to protect the interest of the true owner of the cheque. In my view, the protection goes further than the true owner of the cheque. I do agree that, generally, the learned judge of the superior 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. He was also right that notwithstanding that duty, a bank has a duty to make inquiries to protect the owner of the cheque, itself and any other that may be affected by the consequences of bank’s negligence. Mr Kilonzo, in his submissions part of which I have referred to above, contends that the inquiry to be carried out by the Bank is limited and cannot go to the extent the inquiries in this case went. The learned judge considered and found that in this case the inquiry by the appellant went “too far, much too far,” because among others, it continued after the release of money to the respondents.

The Bank’s duty to secrecy regarding a customers’ account and matters relating to it is never in dispute. The banks, whether collecting banks or paying banks, have a duty to ensure that customers’ account and matters relating to it are kept secret or are made confidential. There is no doubt about that for it is on that understanding that anybody either as individual or as a corporate body would ever think of putting his money in a bank.

Further, if the same confidentiality was not assured, many crimes would be committed as a consequence of knowing what one has in his or its account, and further, commercial transactions would not flourish.

In the case of Tournier vs National Provincial and Union Bank of England Ltd[1923] All ER 550, Banker LJ stated as follows:

“The case of the Banker and his customer appears to me to be one in which the confidential relationship between the parties is very marked. The credit of the customer depends very largely upon the strict observance of that confidence.”

However, as rightly accepted by the superior court, the same duty which is a legal duty arising out of contract, is not an absolute duty. It is a qualified duty. I say the duty arises out of a contract because as Lord Atkin LJ states in the same case of Tuornier vs National Provincial and Union Bank of England, Ltd, 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. Accepting that position and accepting that the duty to maintain confidentiality is not absolute but is qualified, the next question that comes to mind is to what extent does the duty go – or put another way - what are the qualifications of the same duty. The learned judge having accepted that the appellant was under a duty to make inquiries about the subject cheque as I have stated above, posed the question as to what extent the Bank could make such inquiries and found that in this case, the Bank went too far. Mr Kilonzo, in his submissions conceded that the appellant could make inquiries with Customs and Excise Department and with the customer and the paying bank but contended that in alerting the Central Bank of Kenya to investigate the matter, the appellant was clearly requesting Central Bank to take legal action and that was in violation of confidentiality. He also posed the same question in his submission as to how far should a bank go in protecting its interest and answered the same question by maintaining that, if the appellant had confined his inquiries to the customer and the paying bank, there would have been no problem, but in contacting the Central Bank and the police, the appellant went too far and was liable. In considering this issue, I think the statement of Diplock, LJ in the case of Marfani & Co Ltd vs Midland Bank Ltd[1968] 2 ALL ER 573 and particularly at page 579 commends itself to me. The principles he set out in that part of his judgment was as follows:

“What facts ought to be known to the Banker, ie what inquiries he should make, and what facts are sufficient to cause him reasonably to suspect that the customer is not the true owner, must depend on current banking practice and change as practice changes. Cases decided thirty years ago, when the use by the general public of banking facilities was much less widespread, may not be a reasonable guide to what the duty of a careful banker, in relation to inquiries as to facts which should give rise to suspicion, is today.

The duty of care owed by the Banker to the true owner of the cheque does not arise until the cheque is delivered to him by his customer. It is then, and then only, that any duty to make inquiries can arise. Any antecedent inquiries that he has made are relevant only in so far as they have already brought to his knowledge facts which a careful banker ought to ascertain about his customers before accepting for collection the cheque which is the subject matter of the action, and so have relieved him of any need to ascertain them again when the cheque which is the subject matter of the action is delivered to him. What the Court has to do is to look at all the circumstances at the time of the acts complained of, and ask itself were those circumstances such as would cause a reasonable banker possessed of such information, about his customer as a reasonable banker would possess, to suspect that his customer was not the true owner of the cheque.”

The learned judge was fully alive to the above requirements and he reproduced part of the above decision I have reproduced hereinabove. The extent to which the inquiry should go, according to the above case, depends on the circumstances of each case. As a first appellate court, I am also enjoined to peruse and analyze the same circumstances that existed in this case subject to limitations I have stated above, to be able to come to my own conclusion as to whether or not the appellant went too far in its enquiry. But first, I need to state that in law, there are exceptions or qualifications to the implied contract that the Bank should not disclose 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; where disclosure is made by the express or implied consent of the customer – (see Tournier vs National Provincial And Union Bank of England, Ltd[1923] All ER 550 at page 554. Under those circumstances, the duty put upon the Bank not to disclose customer’s secrecy may be waived. The giving rise to the inquiries must meet the qualifications above.

In this case, each of the first four respondents had the same two directors namely the fifth respondent and his wife. Each of the first four respondents opened accounts with the appellant on dates very close to the date the subject cheque was deposited into the first respondent’s account with the first respondent opening account on 17th May, 1985 with an initial deposit of Ksh 5,000/=, later Ksh 100,000/= was deposited into the account. Some withdrawals were made as stated above. After only seven (7) days, an amount of Ksh17,007,568/25 was deposited into that account. The amount in the body of the cheque was Ksh 17,077,568/25 whereas the amount in figures was Ksh 17,007,568/25 thereby making a difference of Ksh 70,000/ =. When inquiries were made, a voucher in support of the cheque was shown to the appellant’s employees and that voucher indicated that the payment was for incremental export compensation payment to the second respondent, Interstate Communications Services Ltd. This created more confusion on the matter. Further, that cheque for that large amount was to be cleared by way of special clearance. When Ayodi made inquiries with the drawer of the cheque, Customs and Excise Department, he was told that the cheque was valid although there was not enough money in the account at Kenya Commercial Bank (the paying bank) to meet the account. He was told that arrangements would be made to transfer some money into that account and that as to the short fall between the amount in words in the cheque and the amount in figures, another cheque would be prepared to meet the same. Ayodi obviously noted that the drawer of the cheque was Customs and Excise Department of the Government of Kenya and so the drawer of the cheque was in fact the Government of Kenya, and that the Customs and Excise personnel signing the same cheque were doing so on behalf of the Government of Kenya. Further, the payment, according to the voucher in support of it was being made in respect of Incremental Export Compensation, under the Local Manufactures Compensation Act (now repealed) which required payments such as compensation to be remitted through dealers (banks) into the exporter’s bank, yet in this case the cheque was issued directly from Customs and Excise to the fifth respondent who deposited it into the first appellant’s account. Those were the circumstances that faced Yiesel and Ayodi as on 28th May, 1985.

The appellant’s working manual (which was produced into the Court) demanded that circumstances such as those that presented themselves in this case needed to be investigated. Ayodi, as the Inspector at the appellant’s bank, having considered all these circumstances, said he contacted Karani to find out if the fifth respondent was an exporter. In the mind of the 210 Kenya Law Reports [2004] 2 KLR 1 5 10 15 20 25 30 35 40 learned judge of the superior court, this was proper and I, with respect, agree. The circumstances that existed as numerated above left the appellant with no option but to inquire into the account. In my mind, that Ayodi did not get the consent of the fifth respondent does not put blame on him as some of these inquiries may very well have been interfered with if the Managing Director of the customer, namely the fifth respondent, was informed in advance. Ayodi, contacted Karani of Central Bank of Kenya. When one considers the evidence that at that time Central Bank of Kenya was in control of the foreign exchange and in fact had Exchange Control Investigation Branch sited within its building, one cannot fault Ayodi in making inquiries with the Central Bank. I note that he did not at first contact Exchange Investigation Branch. He contacted Karani who was an employee of the Central Bank and explained his problem to Karani but it was Karani who told him later after two to three hours that he should contact Ongoro, the in-charge of Investigation Branch. He contacted Ongoro but it must be observed that at the time he contacted Ongoro on matters that concerned whether or not the 5th respondent was an exporter, he (Ayodi) did not know that the fifth respondent was already having a criminal case against him as concerning foreign exchange matters. It is also apparent from the evidence, that as Karani had told him, he reported to Ongoro the same inquiry as to whether the fifth respondent was an exporter. There is no evidence that he complained against the fifth respondent as having committed any criminal offence or that he (the fifth respondent) was suspected of having committed any offence. Ongoro, however, being a police officer in-charge of investigations, commenced investigations that led to the fifth respondent being prosecuted on several criminal charges. During the same investigations, Ayodi’s statement was taken and he took the investigation team to Westlands Branch. That was, in my mind, responding to police investigations as is required under Police Act.

The learned judge in feeling that the appellant went too far in its inquiries did not state how far he should have gone though he agreed that the appellant, in the circumstances that were before it, was entitled to make inquiries but he felt that as the money had been released to the respondents, the appellant should not have gone any further. In my mind, the learned judge in seeking to limit the appellant, after accepting that the inquiry to be made depended on circumstances that existed, was plainly wrong. It would be a contradiction to state that circumstances would dictate whether inquiries needed to be made into customer’s account by his Bankers and with the same breath say that such an inquiry would be limited. Once circumstances warrant inquiry, then the results of such inquiry must satisfy the Bank that the customer is indeed entitled to the proceeds of the cheque.

Otherwise, there would be no need of carrying out any inquiry if the same inquiry would be limited even before the results are realized. In any case the Bank would be taking a risk if it started the same inquiries and stopped them without any results. In a case such as the one before us, I cannot, with respect, agree with Mr Kilonzo, that it was enough to inquire from the customer, the paying Bank and the drawer only and that any other inquiry could only be carried out with the consent of the customer. That scenario would be adequate and acceptable in a case where the Bank is dealing with a cheque issued on a personal account where the drawer is the only owner of the proceeds of the cheque so that once he assures the Bank that the cheque he drew in his account to a customer is a good and valid cheque, then the inquiry ends there as no other person would suffer if it turns out that the cheque is not a good one. Here, however, the signatories to the subject cheque were mere employees of the Customs and Excise Department. The person who stood to lose in case of the cheque being bad would be the Government of Kenya or the public and not the signatories. Thus, under these circumstances, it was in the interest of the true owner of the cheque and the public to make the inquiry. What I am saying is that 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. I do not, with respect, agree with the learned judge that it makes no difference who the drawer of the cheque is. Further, in my mind, even if part of the money had been released to the customer, the inquiry was still necessary to safeguard whatever still remained and for the purposes of tracing any that had been withdrawn if the customer was found not to be entitled to it. I would thus hold the view that 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 case, the appellant had before it a cheque in the name of a different person from the person to whom it was to be paid according to the voucher. It was a cheque issued by the Government, on an account which had no sufficient money. It was deposited into an account which had been opened only seven days previously. It was at the relevant time a cheque for a large amount of money which the account had never transacted. The amounts in words in the cheque and in figures differed. It was indicated in the voucher that it was payment for Incremental Export Compensation. The depositor of the cheque had not been a customer of the appellant for a long time to enable the appellant know whether or not he was an exporter. Under these circumstances, in my view, not only an inquiry to Karani of Central Bank was proper but also an inquiry with whoever Karani of Central Bank referred Ayodi to, which in this case happened to be the Exchange Investigation Branch. Once that proper inquiry was made, matters were no longer in the hands of the appellant as Ayodi could not stop Ongoro and his team from investigating the matter, as to do so, or to attempt to do so, would have ended in Ayodi committing an offence under the law. Ayodi had no authority over the police and could not refuse taking police to Westlands; neither could he stop making a statement with the police. In the case of Jediel Nyaga vs Silas Mucheke– Civil Appeal No 29 of 1987 to which we were referred, this Court quoting with approval the case of Egbema vs West Nile District Administrator[1972] EA 60 stated that police action could not be attributable to the appellant who had no authority over them and went on to state as follows:

“The appellant having reported to the police about the respondent’s action of damaging his crop, the police took over the matter to investigate the respondent for a possible offence. There was evidence that they visited the scene and took some exhibits. Once the appellant gave the report, he ceased to have anything to do with the matter and the respondent became a natural suspect. There was no evidence of malice on the part of the appellant or absence of reasonable and probable cause against the police(sic).

In the result, we find that the appellant who made the report to the police was not responsible for the arrest of the respondent.” In this case, as has been said above, the learned judge found, and I agree, that the inquiry was necessary. My view of the evidence is that it was not directed to police per sebut to the Central Bank who advised that Investigation Branch be contacted and once that was done, Ongoro and his team at Central Bank commenced investigations. I may add here, just to conclude this part of the judgment, that Zaverio Bundi, the Police Officer at CBK Exchange Control Investigation Branch and who investigated this matter stated in cross-examination as follows:

“We charged him after the investigation, although it was before we went to Zaire and Sudan. We had sufficient evidence that is why he was convicted.”

In conclusion, on the question of whether or not the appellant went too far in its inquiry, my view is, first, that the circumstances of the case before the Court is what would determine whether or not the Bank can make inquiries on the account of a customer and determine on whether the case falls within the exception to the law against disclosure. Secondly, the inquiry to be made where the true owner of the cheque is an individual must be distinguished from a case where the true owner is a corporate body or a government and the subject cheque is signed by agents. Thirdly, that in this particular case, the inquiry did not go beyond what was necessary to establish the truth and the report allegedly made to Ongoro was meant to and was initially made to Central Bank who referred the appellant’s agents to the Exchange Investigation Branch of the Bank and finally that once the proper inquiry of finding out whether or not the fifth respondent was an exporter was made to the Exchange Investigation Branch, the appellant no longer had any control over Ongoro and his team and could not be held liable for whatever the same investigation resulted into.

The next point urged was that, during the hearing of this case before the learned judge, evidence was adduced to show that the claim which solicited the subject cheque was an illegal claim in that the auditors who computed the amount on which the claim was based were either non existent or not qualified; that the claim was based on Incremental Exchange Compensation whereas some of the exports claimed to have been made were not made and that the fifth respondent was not a registered exporter. It was conceded by the appellant that illegality was not specifically pleaded by the appellant in its statement of defence but it was his contention that the issue of illegality needed not be pleaded as it was a matter on which the Court was duty bound to act on once it was brought to its notice whether it was pleaded or not. The learned counsel for the respondents maintained that illegality was not pleaded and in any case the fifth appellant was on appeal acquitted of the offences with which he was charged. The learned judge, in considering this aspect of the matters before him observed as concerns the prosecution of the fifth respondent after investigation as follows:

“What should be noted about that trial is that most of the prosecution witnesses called from the Customs and Excise – which was in real sense the complainant, exonerated Mr Nderitu, and expressly refuted that he was guilty of the wrong doing alleged.”

And he then referred to certain parts of the evidence in the trial court given by four of these witnesses in the criminal trial. The learned judge further referred to several other cases that faced the fifth respondent some of the respondents and evidence given both before the trial court in the criminal case hearing and before the superior court as regards other civil matters as well as the criminal appeal before the superior court arising from conviction of the fifth respondent by the trial court and ended up stating as follows:

“Their general testimony before that Court and in this Court was somewhat contradictory and in some instances inconsistent as to whether Mr Nderitu’s companies had carried out any exports to entitle him to the amount contained in the 17M cheque. This matter was picked out in detail by the Bank’s counsel and received a lengthy address in the written submission filed on behalf of the defendant and I propose to deal with it at a later stage.”

Later, in his judgment, when considering issues, the learned judge in considering issues numbers 7 and 9 which dealt with whether the fifth respondent was charged in Criminal Case No 1716 of 1985 in his official capacity as the Managing Director of the 1st, 2nd, 3rd & 4th respondents and whether he was subsequently convicted, the learned judge stated that as to those issues, it had already been seen that indeed, the fifth respondent was charged, convicted and sentenced in Criminal Case No 1716 of 1985 but later acquitted in HC Criminal Appeal No 539 of 1988. The next relevant finding the learned judge made that could be considered a finding on question of illegality or otherwise of the transaction is when he said:

“The case put forward by the Bank was that the 17M cheque represented a statutory payment made by a government agency, implying accordingly, that a higher duty of care was owed. To my mind, this is an academic distinction. It makes no difference who the drawer of the cheque is. It makes no difference for what purpose it was drawn. The concern of any banker when collecting a cheque for its customer is limited to ensuring that the customer is in fact entitled to it.” (Underlining supplied)

I have dealt with the distinction that should always be there between the standard to be applied in case of a cheque drawn on a personal account where the loss to the owner of the cheque is confined to the same individual and a cheque drawn on behalf of a corporate body or a government, like in the case before us where the need to protect the interest of the share holders or the public as the case may be also arises and has to be considered to avoid losses due to possible conspiracy between the signatories of the cheque and the customer.

Back to the question of illegality. I have perused the entire judgment of the learned judge, and I cannot see where he dealt with the contradiction and inconsistencies as he had proposed to do at a “later stage”. In the part of his judgment I have reproduced hereinabove, he appreciated that the testimony of the witnesses on this issue of illegality before the trial court and before him was contradictory and in some instances inconsistent, and he proposed to deal with the same together with the submissions on the issue but he never dealt with them. Order 20 rule 4 of the Civil Procedure Rules states:

“4. Judgments in defended suits shall contain a concise statement of the case, the points for determination, the decision thereon and the reasons for such decision.”

It was the duty of the learned judge, 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 17M cheque. This was in fact most important in this case because if it was found that the second or the fifth respondent had not carried out exports that would have entitled them to claim 17M, or if it was found out as a result of critical analysis that the fifth and/or the second respondent was not an exporter, then the appellant would have been vindicated in its inquiry as to whether Nderitu was an exporter and the same inquiry would have become relevant and the appellant’s doubt, whether or not Nderitu was an exporter which necessitated the inquiry would have been founded. How did the learned judge go about the issue having not dealt with the contradictions and inconsistencies in the evidence of the relevant witnesses? The learned judge stated:

“The case advanced by the Bank was that the payment of which the 17M cheque was drawn was in respect of export compensation to which Mr Nderitu’s companies were not entitled. That this amount was in respect of “exports” that were never made. Great attention was drawn on The Local Manufacturers (Export Compensation) Act (Cap 482) (Repealed) to show that Mr Nderitu’s companies were not eligible for such compensation. In my view, it is unnecessary for this court to investigate that matter. This Court cannot turn itself into a tribunal to investigate whether a fraud was committed on the Government. That was for the criminal court to do so, and Mr Nderitu was eventually found innocent of any wrong doing.” (Underlining supplied)

Thus the learned judge of the superior court felt that as the fifth respondent’s criminal appeal had been allowed, he had been found innocent of any wrong doing and it became unnecessary for the superior court to investigate the issue of illegality. I do, with respect, feel the learned judge in coming to that conclusion and in declining to consider the evidence before him on the question of illegality, was in error. The learned judge was clearly duty bound to find out whether or not on the evidence before him, illegality was disclosed and he was wrong to hold as he did that the decision of the High Court on a Criminal Appeal bound him in law and restrained him from making his own finding in a civil court on the question of illegality. First, the judgment in HC Criminal Appeal No 539 of 1988, to which the superior court referred did not declare the fifth respondent innocent. The appeal was allowed in that judgment on three grounds namely that there was variation between the pretences laid in the particulars of the charge and those which the prosecution set out to prove; secondly, that there was duplicity in the charge particularly in respect to the charge relative to false pretences and that there was no proof that information that foreign exchange was received was made by the fifth respondent and there was no evidence that no foreign exchange was received. That Court in fact went as far as considering whether or not to order a retrial in the case but ruled against it. That in effect means that that judgment in the criminal appeal was not conclusive on the question of whether or not the claim that the respondent made was tainted with illegality. Secondly, even if that judgment was conclusive on the innocence of the fifth respondent, it would not be a conclusive proof of what it said. Section 45 of the Evidence Act states as follows:

“45. Judgments, orders or decrees, other than those mentioned in section 44, are admissible if they relate to matters of a public nature relevant to the inquiry, but such judgments, orders or decrees are not conclusive proof of that which they state.”

As I have said, I think the learned judge misdirected himself in thinking that it was unnecessary to consider the question of illegality because the fifth respondent’s appeal had been allowed; that the fifth respondent had been found innocent of any wrong doing and that the superior court was bound by the decision and needed not investigate that aspect of the case. On my own, as a first appellate court, on perusal of the record, the following seems clear to me.

First, the fifth respondent who was PW 12 agreed in cross-examination that in some of the cases in respect of which he made the relevant claim for Incremental Export Compensation, he was not the one exporting and so he did not know if number of transporters was fictitious. He also admitted that the figure he filled out for compensation was Sh16,864,084/ 50 and made no other claim apart from that. The figure of Ksh 17,077,568/ 25 was not his figure and he admitted that he was paid more than he applied for going by the documents. He also accepted that he was not a registered exporter until 26. 4.84 whereas all claims related to a period when his company ie second respondent, was not a registered exporter. He also agreed that his accountants who prepared his accounts for the purposes of the claim were not registered public accountants as is required by law. He admitted that some of the goods allegedly exported by him and of which he made claims were exported using Christian organizations’ invoice, not his invoice so that as far as the importer was concerned, the exporter was the Christian organizations. When it was put to him that it was not true he had exported goods and that he sold the goods locally to Christian organizations, his answer was:

“Yes with export documents and I ensured they left the country. I did not know the consignee, who did not know me. I had no direct contact with the consignee, who did not pay me foreign exchange.”

And when it was put to him that he gave fictitious name and address, his answer was:

“I had no reason to dispute those which I got from Christian organizations. I agree some postal addresses given were in places where postal services did not exist. P 993 shows we got paid here and delivered it in Nairobi to Christian organizations who then arranged export.”

Further, he was not able to challenge the allegation that the vehicles mentioned as having been used for exporting goods were fictitious. His answer was that he did not know whether the vehicles were genuine.

The other witnesses called before the superior court also gave evidence that indicated that the entire transaction was not clean. For example, Zaverio Bundi, the police officer who investigated the matter stated as follows:

“We had sufficient evidence that is why he was convicted.”

When asked why the police charged the fifth respondent, his answer was:

“Because he had not received some foreign exchange. Some claims were right and others were not..... I did not talk to Kyalo, but I remember Pandya on p 158 he gave evidence that his signature had been forged. PW 27 James Ngugi Njoroge (C 161) gave evidence that claims were forged. He says even the amount was erased. I am not saying there was nothing wrong – that is why we charged him.”

Joseph Ngala Chai (PW 16) also said:

“I was satisfied that Nderitu was properly charged in accordance with the evidence we had gathered. My trip to Zaire was to determine if exports were done and I gave evidence which was truthful. It reflected the true result of investigations. In my evidence at criminal trial, I did not give the Court any name of importer in Zaire who had received the goods. I would have remembered if there were any importers – I agree there were none. In my evidence in court I had said there were some who had received exports, but this is not recorded in the proceedings.”

When asked whether by that last sentence he was disputing the record of proceedings, he kept silent.

The other police witness, Araka James Oyamo (PW 14) who also investigated the case stated in his evidence as follows:

“According to our investigations, we had reason for suspicion that goods had not been exported as few consignees denied this; also mode of transportation used was suspect – eg some aircrafts were small and registration numbers of trucks turned out to be motor cycles, in some cases mode of transport was not indicated. Our investigation on transport proved our suspicion. Therefore mode of transport was confirmed to be false.”

Further, when dealing with his investigations on the goods supposed to have been exported to Sudan, this witness said that motor vehicle stated in the form of export were fictitious and he found goods never reached Sudan and he produced evidence to show that the aircraft never landed at the destination mentioned in the forms for application. Although he later during re-examination agreed that there was no claim that the fifth respondent had not brought in Ksh 118M, he said in his evidence that the fifth respondent had said he sold goods in Nairobi and delivered to the airport. Lastly, on the evidence on illegality, John Moses Ngugi (PW 2), who was an accountant in-charge of Customs – accounts section North Region whose duty was to confirm if payment in respect of Incremental Export Compensation was proper said as concerns the manual for payment as follows:

“I would agree that there is nothing in the manual to authorize payment to any person other than the registered exporter.”

There are many other examples from the evidence on record to show that the claim that resulted into 17M cheque being issued in favour of the second respondent but in the name of the first respondent was not made in strict compliance with the law and that criminal charges were preferred against the fifth respondent in which at least one charge was relevant to this suit. He was convicted in the subordinate court with the same offences and although when he appealed his appeal was allowed in the manner I have stated above, that he was convicted in the subordinate court meant that there was a prima-faciecase established against him. I have also considered the relevant statutes ie the Local Manufactures (Export Compensation) Act, Customs and Excise Act and Companies Act. The evidence that was before the superior court and which should have been considered but was not considered was that at least some of the goods allegedly exported for which claim was made and eventually Incremental Compensation was paid were not exported and that the payment which gave rise to the issue of the 17M cheque was a payment that should have been processed by the dealer as enumerated in the Local Manufacturers (Export Compensation) Act. The net effect of all that is that the claim that was made before the superior court by way of a plaint was tainted with illegality. In other words, it was a claim based on what could very well have been illegal transaction.

Mr Kilonzo, in his submissions referred to the letter dated 14th November, 1981 from Esco Kenya Ltd to Commissioner of Customs & Excise which authorized Customs to pay export compensations direct to the second respondent and informed the Commissioner of Customs and Excise that the second respondent had been allowed to use their (written) Central Bank registration for the CD3 forms belonging to the second respondent and said that the learned judge was right to ignore that question of illegality as in any case it was not pleaded. He submitted further that as the fifth respondent was not found guilty on count 14 which was the relevant count among the charges brought against the fifth respondent, the question of illegality did not arise. I have dealt with the other aspects raised by Mr Kilonzo, but on the question of whether illegality was pleaded or not and the effect of the same, he referred the court to the case of North Western 30 35 40 Salt Company vs Electrolytic Alkali Company Ltd[1914] AC 461 where the Privy Council stated:

“My Lords it is no doubt true that where in the plaintiff’s case it appears to the Court that the claim is illegal, and that it would be contrary to public policy to entertain it, the Court may and ought to refuse to do so. But this must only be when either the agreement sued on is on the face of it illegal, or where, if facts relating to such an agreement are relied on, the plaintiff’s case has been completely presented. If the point has not been raised on the pleadings so as to warn the plaintiff to produce evidence which he may be able to bring forward rebutting any presumption of illegality which might be based on some isolated fact, then the Court ought not to take a course which may easily lead to a miscarriage of Justice. On the other hand, if the action really rests on a contract which on the face of it ought not be enforced, then, as I have already said, the court ought to discuss the claim, irrespective of whether the pleadings of the defendant raise the question of illegality.”

It is clear from that case that 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. On the other hand, Mr Oraro in his submissions maintained that once an issue of a breach of a statute arises to the attention of a court in the course of proceedings, then in the interest of justice, the Court has to down its tools and investigate that because the Court’s fundamental rule is to uphold the law. He relied on the case of Holman vs Johnson[1775- 1802] All ER 98 particularly at page 99 where Lord Mansfield, CJ says:

“The principle of public policy is this: Ex dolo malo no oritur actio. No court will lend its aid to a man who found his cause of action on an immoral or an illegal act. If, from the plaintiff’s own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says that he has no right to be assisted. It is on that ground the Court goes, not for the sake of the defendant, but because they will not lend their aid to such a plaintiff.”

The last sentence of the above quotation clearly implies that the Court would not look at the defendant’s pleadings so as to refuse aiding a plaintiff who bases his cause of action on an illegal act. He went on in the same judgment to include in the cases where the Court would not aid a plaintiff, cases founded on the ground of the plaintiff being guilty of anything which is prohibited by a positive law of the country.

I have considered the rival submissions by the learned counsel as well as the law. I have also considered the other cases such as Burns vs Edman [1970] 1 All ER 886. In Kenya, this Court considering the case of Mistry Amar Singh vs Kulubya[1963] EA 408 quoted with approval Lindley, LJ in the case of Scott vs Brown, Doering, Mcnab & Co(3), (1892) 2 QB 724 at page 728 as follows:

“Ex turpi causa non oritur actio. This old and wellknown legal maxim is founded in good sense, and expresses a clear and well-recognized legal principle, which is not confined to indicable offences. No court ought to enforce illegal contract or allow itself to be made the instrument of enforcing obligations alleged to arise out of a contract or transaction which is illegal, if illegality is duly brought to the notice of the court, and if the person invoking the aid of the Court is himself implicated in the illegality. It matters not whether the defendant has pleaded the illegality or whether he has not. If the evidence adduced by the plaintiff proves the illegality, the Court ought not to assist him.”

It will be observed that the above case of Mistry Aman Singh vs Kulubya was heard and decided many years after the case of North Western Salt Company v. Electrolytic Alkali Company Ltd– in fact after forty nine years. I do feel that the law in Kenya is as is spelt out in the case of Mistry Aman Singh vs Kulubyawhich was later followed by the case of Heptula vs Noormohamed[1984] KLR 580 where it was held that:

“No court ought to enforce an illegal contract where the illegality is brought to its notice and if the person invoking the aid of the Court is himself implicated in the illegality.”

The position in law is, in my view, that once illegality is brought to the notice of the Court, then the Court must investigate it whether it was pleaded in the statement of defence or not. Of course, it goes without any need to say it, that if the plaintiff was not aware of the illegality, then when the defendant raises the same, the Court in order to investigate it properly, may afford the plaintiff time to prepare his evidence to meet the allegation. In my view, the Court, being the custodian of law cannot shut its eyes to an allegation of illegality simply on grounds that it was not pleaded. In this case, the evidence that leads to the conclusion that the transaction was tainted with illegality was all given by the respondent’s witnesses as is demonstrated from the few parts I have reproduced above. The Court had a duty to investigate the same even if the same illegality was not pleaded. In any case, as the evidence was already canvassed by both parties before the Court, even in the ordinary course of approach, the superior court was still enjoined to consider it. In the case of Odd Jobs vs Mubia[1970] EA 476 it was held as follows:

“A court may base its decision on an un-pleaded issue if it appears from the course followed at the trial that the issue has been left to the court for decision.”

In my humble opinion, the learned judge erred in law in declining to investigate the question of illegality which was clearly left to him to decide. As I have stated, he was not right in finding that that issue of illegality had been finally decided by the criminal courts. In fact, in his judgment when summing-up facts, he said he would deal with the controversy as to whether the first two respondents were involved in exporting goods outside Kenya later but he again ended his judgment without considering the same. This was clearly an error. I have reviewed the evidence and analyzed the same as above and I do find that the claim that solicited the subject cheque for Ksh 17M was tainted with illegality as the claim was for Incremental Export Compensation in respect of the alleged exports some of which, the respondents’ witnesses say were never made and on claims which were based on accounts which were prepared by unqualified accountants. In general, there was evidence to indicate that the alleged claims were in breach of the relevant statutes. The superior court ought not to have based its judgment on the same claim and/or complaints arising from the same claim as the claim was tainted with illegality.

The above are enough, in my view to dispose of this appeal. However, there are other grounds of appeal which I need to comment upon albeit briefly. The cheque for Ksh 17M was deposited into the account of the first respondent, a limited liability company which was at the relevant time a customer of the appellant. The cheque, according to the voucher that was issued in support of it, was supposed to be paid to the second respondent, which was also a limited liability company and was a customer of the respondent. The third and fourth respondents were also each limited liability companies and were each customers of the appellant. The fifth respondent was not a customer of the appellant but was, together with his wife, the directors of all the respondents. The inquiry made by the appellant involved the cheque which was deposited into the account of the first respondent only. The Exchange Investigation Branch, on receiving the inquiry took the action as they deemed, and arising from their action, the fifth respondent was arrested and prosecuted for other offences not immediately arising from this transaction and for one offence arising from this action. In the course of the criminal case against the fifth respondent, the police applied to the Court and got an order freezing the accounts of the first four respondents. The respondents filed a judicial review Misc Case No 168 of 1985 in which they applied for an order of certiorarito release the money. The Attorney General defended the same but lost, but before the order of certioraricould be issued, the Government through the Attorney General filed Civil Case No 2156 of 1985 – Commissioner of Customs and Excise against some of the respondents so as to prevent the release of the same money until determination of the second suit. In this suit, the respondents held the appellant responsible for all the losses resulting from prosecution of the fifth respondent; the freezing of accounts of the first four respondents and the civil suit brought against the respondents by the Commissioner of Customs and Excise. At paragraph 11 (a) and (b) of the plaint, the plaintiffs pleaded that the first to fourth plaintiffs were customers of the appellant having operated bank accounts with the appellant since early 1985 and the fifth respondent was the key operator and signatory of all the said bank accounts with the respondent. At paragraph 11 (c) they pleaded the contractual understanding between the first four respondents and the appellant that the appellant would maintain strict fiduciary mutuality and confidentiality in relation to the operations and transactions in the appellant bank. At paragraph 12, they pleaded that the appellant’s agents at Westlands Branch informed the police that the Ksh 17M cheque was unlawfully obtained and at paragraph 13 the plaintiffs stated:

“13. The plaintiffs aver that the said false report was in breach of fiduciary relationship between the plaintiff and the defendant.”

And the respondents went on in their plaint to state that as a result of the report to the police, the fifth respondent was charged in his official capacity as managing director of all the other respondents and they proceeded to blame all the suffering of all the respondents on the inquiry made by the appellant’s agents namely Ayodi and Yiesel. In the judgment of the learned judge, the sixth issue was:

“Whether the defendant owed all or any of the plaintiffs a fiduciary duty, and if any was owed, did it breach its fiduciary duty?”

And issue No 12 was whether the amended plaint disclosed a cause of action by each respondent against the appellant. The learned judge, in his judgment found that Nderitu was in fact the alter egoof the respondent companies and stated:

“The Bank is liable to Mr Nderitu personally, as it is to his corporate entities for any losses sustained as a consequence of the Bank’s unlawful acts.”

This finding was based on the argument that the appellant had not shown that it dealt with, or intended to deal only with the corporate entities and not the individual who was really behind those companies and he gave examples of such dealings. The learned judge of the superior court did not spell out on what contractual duty was the appellant being held liable to the other respondents which though had accounts with the appellant, no direct inquiry was made on their accounts by the appellant. How did the appellant breach fiduciary mutuality and confidentiality in respect of the second, third and fourth respondents? Again, as to the fifth respondent, who admittedly was not a customer of the appellant and therefore the appellant owed him no contractual duty at all to maintain any strict fiduciary mutuality and confidentiality, what cause of action had he against the appellant? I have perused the copies of the charge sheet in Criminal Case No 1716 of 1985 and none of the charges reveals that the fifth respondent was charged in his official capacity as the Managing Director of the first four respondents or of any of them. In my mind, each of the first four respondents was a limited liability company and thus, each was a body corporate with its own entity and the learned judge 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 as the common factor and then maintain that what happened to the fifth respondent on his personal capacity legally affected all his companies on the basis that he was the alter egoof all the companies. It is now settled law that 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. If the complaint arose from breach of contract, then, in my mind, 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 pleaded at paragraph 11 (c) of the plaint for if the breach was on the grounds that the appellant made inquiry to the “police” about the transactions concerning cheque for Ksh 17 million, then that cheque was deposited into the account of the first respondent and not into the accounts of the second, third and fourth respondents and certainly had nothing to do with the fifth respondent who was not even holding any account with the appellant and had no bank/customer relationship with the appellant. The well known case of Salomon v A Salomon and Co Ltd [1897] AC 22 established a legal principle which has been accepted and followed consistently, that a limited company is a legal person independent of its members.

Further, in this case, the alleged sufferings of the second, third, fourth and fifth respondents were, from the facts on the record, direct consequence of the police investigation and their charging of the fifth respondent. All that the appellant did was to make inquiry from the Central Bank of Kenya and the Exchange Control Investigation Branch of the same bank as to whether the fifth respondent was an exporter. That branch then carried out investigations which resulted in a chain of actions such as prosecuting the fifth respondent, freezing accounts of the first, second, third and fourth respondents and other civil cases. These were actions taken by the police, and the Attorney General, and the Court independently of the appellant. It must be observed that most of the charges preferred against the fifth respondent did not arise from the subject cheque of 17 Million. As I have stated hereinabove, the appellant could not be held liable for police action (see case of Jediel Nyaga vs Silas Mucheke– Civil Appeal No 59 of 1987 and the case of Egbema vs West Nile District Administrator[1972] EA 6 (supra). In my view, the second, third, fourth and fifth respondents could not successfully base their cause of action on the contractual obligation that the appellant had towards the first respondent, the customer into whose account the subject cheque was deposited merely on account of the suffering that were allegedly visited upon them by police action which resulted from the investigations carried out independently by the police.

The last point I need to comment upon is the effect of the delay in the service of summons and plaint on the defendant. This was put down as issue No 11. That issue had been raised before another judge of the superior court (Mbogholi Msagha, J) by way of a preliminary objection after one witness was heard. It was canvassed at length for several days from 14th January, 1998, and on 8th May, 1998, Mbogholi Msagha, J delivered what I would consider a lengthy and well considered ruling in which he found that the appellant (then defendant) had waived the irregularity of late service of summons by their conduct, the bottom line of which was the submission to the jurisdiction of the Court and that the irregularity in respect of the late service had been sufficiently explained by the respondents (the plaintiffs). He then dismissed that preliminary objection and the hearing continued. The appellant did not seek leave to appeal and did not appeal against that ruling. The learned judge of the superior court (Visram, J) in his judgment found that that issue was mute as Mbogholi Msagha, J had dealt with it. In my mind, the learned judge was plainly right in coming to that conclusion. I have perused the ruling of Mbogoli Msagha, J on that preliminary objection and I find no basis for interfering with it. In my mind, nothing turns on that ground of appeal.

The sum total of all the above is that I find that this appeal has merit. In the result, I would allow the appeal, set aside the judgment of the superior court, dismiss the suit in the superior court and award the appellant the costs of this appeal and of the suit in the superior court.

Dated and delivered at Nairobi this 19th day of November, 2004.

ONYANGO OTIENO

……………………….

JUDGE OF APPEAL

JUDGMENT OF E.M GITHINJI JA.

This is an appeal against the judgment of superior court (Visram J) given on 18th day of November, 2002 wherein judgment on liability was entered in favour of the five respondents against the appellant with costs and as consequence the Court directed that the case be set down for assessment of damages. That judgment is now reported in [2002] EA 391 and in [2002] 1 KLR 532.

The dispute in the superior court was essentially between a banker (appellant) on one hand and four of its customers (1st, 2nd, 3rd and 4th respondents) and, a third party (5th respondent) 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 the respondent by disclosing the information about the cheque to third parties. The following are the material facts in brief.

HISTORY:

Mr James Kanyita Nderitu (Nderitu), the 5th respondent, is the Managing Director of the four respondent family companies which are referred to hereinafter as Intercom, Interstate, Swiftair and Continental Hotel, respectively. The other shareholder is Nderitu’s wife Hellen Njeri Nderitu.

Mr Nderitu opened four current accounts in the books of Westlands Branch of the appellant Bank as follows:

(a) On 28th March, 1985 an account styled “Kenya Continental Hotel”.

(b) On 30th March, 1985 an account styled “Swiftair Kenya Ltd”.

(c) On 5th May, 1985 an account styled “Interstate Communications and Services Ltd”.

(d) On 17th May, 1985 an account styled “Intercom Services Ltd”.

Mr Amos Jilo Yesiel (Yiesel) was the Branch Manager of the Westlands Branch at that time. On Saturday the 25th May 1985 at about 9 am Mr Nderitu deposited a cheque for Shs 17,007,568/25 dated 24th May, 1985 in the name of “Intercom Services Ltd”. The cheque was issued by Kenya Customs & Excise Department and was drawn on Kenya Commercial Bank, Moi Avenue Branch, Nairobi. Mr Nderitu requested Mr Yiesel that the cheque be presented for special clearance at Kenya Commercial Bank. By 25th May, 1985 the account of Interstate had only one credit since it was opened while the account of Intercom had two credits of Shs 5,000/ = and Shs 160,111/95 on 17th May and 23rd May, 1985, respectively. Mr Yiesel checked the account of Intercom later on 25th May, 1985 and found that the big deposit of Shs 17,007,568/25 was completely out with the run of the account. He decided to trace the source of funds. On the following Monday, 27th May, 1985, he telephoned Mr Nderitu and fixed an appointment with him. He also telephoned Mr Naftally Multon Ayodi (Ayodi), Chief Inspector in charge of Inspection Department of the appellant bank and asked him to send officers in his department to assist in the investigation. Mr Ayodi sent Mr Werunga and Bosire to the Branch immediately, Mr Yiesel briefed them and then left them in the office to see Mr Nderitu.

Mr Yiesel asked Mr Nderitu to produce documents to support the amount of the cheque. Mr Nderitu gave him a payment voucher issued by Kenya Customs & Excise Department. Mr Yiesel showed the voucher to the two Inspectors who took a photocopy and left. Mr Yiesel then went to Kenya Commercial Bank, Moi Avenue to check if the cheque had been paid. He was informed that the cheque had not been paid and that there was a problem with the cheque and that the Kenya Commercial Bank was contacting Customs & Excise Department. The two inspectors took the copy of the payment voucher supporting the cheque to Mr Ayodi. The voucher issued on 24th May, 1985 showed that the payment was in favour of Interstate for Export Compensation (incremental). The voucher had two figures – one for Shs 17,077,568/25 at the top and Shs 17,007,568/25 at the bottom – a difference of Shs 70,000/=. Mr Ayodi rang Mr Yiesel pointing out the discrepancy.

In the meantime, Mr Yiesel rang Mr Harrison Charles Kimeriah, a Chief Finance Officer with Customs & Excise Department who was one of the two signatories to the cheque and enquired whether the cheque was valid and genuine. The other signatory to the cheque was Joseph Christopher Ngatia who was in charge of straight-run Export Compensation in the Customs & Excise Department. Mr Kimeriah confirmed that the payment was authorized. Mr Kimeriah also informed Mr Yiesel that the Kenya Commercial Bank had informed him that there was a shortage of Shs 5,000,000/= in the account but that Customs & Excise had credited the account with the Shs 5,000,000/= and the cheque would be paid. Mr Yiesel relayed this information to Mr Ayodi. Later in the day, Mr Yiesel received a banker’s cheque for Shs 17,007,568/25 from Kenya Commercial Bank. He cleared the cheque and credited the account of Intercom with the proceeds.

Mr Ayodi thought that there was something wrong with the cheque and fearing that the money would be withdrawn at any time decided to inquire about this large payment of Export Compensation. He knew that Export Compensation was handled by the Central Bank of Kenya (CBK) and he contacted Mr Karani of CBK whom he knew before. He informed Mr Karani the reason for the inquiry. Mr Karani referred Mr Ayodi to Mr Ongoro. Mr Ayodi rang Mr Ongoro who was the officer in charge Exchange Control Investigations Branch of CBK. Mr Ongoro took the decision to investigate. On 28th May, 1985, Mr Ayodi accompanied the officers from CBK to Westlands Branch. On 27th May, 1985 a cheque for Shs 300,000/= drawn on the account of Intercom was paid on the same day. On 27th May, 1985 instructions were received from Intercom to transfer Shs 15,000,000/= to a short term deposit on the account of Swiftair. That was done. On 28th May, 1985 Mr Nderitu as a director of Swiftair instructed the appellant Bank in writing to immediately transfer the Shs 15,000,000/= to M/s Investments & Mortgages Ltd for credit to the account of Swiftair. On the same day, 28th May, 1985 Mr. Nderitu as a Director of Intercom wrote to the Manager, Westlands Branch of the appellant Bank intimating, among other things, that Intercom would hold the appellant Bank responsible for any damage that the company may suffer as a result of withholding payments. The Shs15,000,000/= was not transferred to M/s Investments & Mortgage as the appellant Bank was served with an order issued by the Resident Magistrate’s Court Nairobi on 29th May, 1985 on application by CBK’s Exchange Control Investigations Branch. That order in effect froze the bank accounts of Swiftair, Intercom and Continental Hotel until the investigations relating to payment of Shs 17,007,568/25 by Customs & Excise was completed. That is not all, for, on 25th June, 1985 Mr Nderitu was charged before the Chief Magistrate Court at Nairobi in Criminal Case No 1716 of 1985 with 14 offences of obtaining various sums of money from officers of Customs & Excise Department by false pretences. Those charges of fraud were later increased to 31, the last count charging Mr Nderitu with obtaining Shs 17,007,668/ 25 from Harrison Charles Kimeriah on 24th May, 1985 by falsely pretending that a claim represented to Commissioner of Customs & Excise for payment of that money was genuine and valid. Mr Nderitu was convicted on all the 31 offences but the High Court, in Criminal Appeal No 539 of 1988 quashed conviction in all the 31 charges on 30th April, 1992. The appeal was allowed mainly because there was a complete variation between the false pretences laid in the particulars of each charge and the evidence produced by prosecution tending to show that no goods were exported and no foreign exchange was received to warrant the payments. There were other reasons which influenced the superior court such as the defect in the charges, the irregularity in the conduct of the trial and the overloading of the charges. In allowing the appeal, the superior court upheld part of Mr Nderitu’s defence that he sold the goods locally to Christian organizations who assumed the responsibility of physically exporting them and was not therefore responsible for information contained in the export documents. Lastly, although the superior court observed that there was lot of evidence from the prosecution witnesses that there was a lot of foreign exchange running into millions received in respect of exports of goods by Nderitu the Court nevertheless found that there was no attempt to relate the foreign exchange received to the claims listed in the charges. In the final analysis, all the Court could say about the receipt of that foreign exchange was:

“Serious doubt remains as to whether that foreign exchange mentioned by the prosecution witnesses was not in fact received in respect of that very claims which form part of the alleged offences”.

The arraignment of Mr Nderitu for criminal offences was swiftly followed by the institution of High Court Civil Suit No 2156 of 1985on 17th July, 1985 by the Commissioner of Customs & Excise through the Attorney General against Intercom, Interstate, Continental Hotels, Nderitu and Swiftair. In that suit, the Commissioner claimed a total of Shs 28,392,613/ 25 made up of Shs 11,385,045/= as Straight-run Export Compensation and Shs 17,007,568/25 as Incremental Export Compensation allegedly obtained by the defendants in that suit from the Commissioner by means of fraudulent misrepresentation. It was pleaded that it was Nderitu and Interstate who made a false misrepresentation on several occasions that Interstate had exported goods worth Shs 118,000,000/= and that an equivalent foreign exchange was received in Kenya. Subsequently, on 22nd August, 1985, the High Court granted an Interlocutory Order of attachment before judgment of the sum claimed in the suit or part thereof held at Westlands Branch of the appellant Bank. That order was lifted by the Court of Appeal by consent on 26th November, 1985 and replaced with an order that the sum of Shs15,000,000/= in the account of Swiftair be transferred to a fixed deposit account in Moi Avenue Branch of appellant Bank in the joint names of the Commissioner of Customs & Excise and Nderitu and a further order that the balance of Shs 1,665,069/20 be released. On 2nd December, 1992 the suit was marked as settled with no order as to costs with an order that the money deposited in the Moi Avenue Branch of appellant Bank plus accrued interest, total Shs 25,422,778/45 be released to Nderitu.

EXPORT COMPENSATION:

There was no dispute in the trial that the cheque for Shs 17,007,568/25 was for payment of Incremental Export Compensation for years 1982/ 1983 to Interstate under the Local Manufacturers (Export Compensation) Act, cap 482, Laws of Kenya. The Act empowered the Commissioner of Customs & Excise to pay an exporter of locally manufactured legible goods as specified in the Act, compensatory payment calculated in accordance with the schedule to the Act. This was, according to the evidence of John Moses Ngugi and Nderitu, an incentive to registered local exporters to export more locally manufactured goods and earn the country more foreign exchange. According to the evidence of those two witnesses and the provisions of the Act, an application for export compensation had to be made through authorized dealers who were infact commercial banks authorized to deal in foreign currency under the Exchange Control Act (cap 113). If the Bank was satisfied that the application met the requirements of the Act and Regulations it was required to certify that foreign currency had been received from external source and the amount of foreign exchange received and forward the application to the Central Bank for approval of payment. The Commercial Bank which had received foreign exchange from the external source was required to surrender the foreign currency to CBK and upon approval of payment CBK would forward the application to the Commissioner of Customs & Excise for payment from revenue collected on behalf of the Government. This compensation was called straight-run compensation which was paid at the rate of 10% of the value of exported goods.

However, the Finance Act of 17th December, 1982 increased the rate of export compensation from 10% to 20%, 25% retroactive from June, 1982. The Commissioner of Customs & Excise issued “Exporters Manual of Instructions for Claiming Incremental Export Compensation for 1982/ 83” to assist the exporters to make claims for incremental compensation. According to the manual, the calculation of the amount of export compensation to be paid was to be based upon an exporter’s previously received straight-run Export compensation for a given fiscal year.

Mr Nderitu prepared claim for Incremental Export Compensation for Shs 16,864,084/50 dated 20th May, 1985 on behalf of Interstate. The claim was signed by John K Kilimo, shown as Manager of Interstate. The claim was forwarded to the Commissioner of Customs & Excise through a letter dated 20th May, 1985 with a request that the cheque be made payable to “M/s Intercom Services Ltd”. The rubber stamp on the letter indicates that it was received by the Accounts Controller, Customs & Excise, on 24th May, 1985. This is on the same day that the cheque was issued. The Export Compensation was scrapped by the Finance Act, 1993 through various amendments to the Local Manufacturers (Export Compensation) Act. According to the evidence of Anthony Wachira Kamunde (PW9) it was scrapped because of abuse.

PLEADINGS:

Although the suit in the superior court which gave rise to this appeal was instituted on 1st March, 1988 the suit remained dormant until December 1993 when the summons to enter appearance were issued and served on the appellant Bank. This was long after the conviction of Nderitu on charges of fraud were quashed by High Court on 30th April, 1992.

Even then and despite several abortive attempts to amend the plaint, the suit was not perfected until 26th September, 2000 when a Further Re- Amended plaint was prepared. The cause of action as pleaded is that on 28th May, 1985 Mr Amos Yiesiel together with Mr Hulton Ayodi being agents of appellant Bank breached the bank-customers fiduciary duty and the duty of confidentiality by informing police that the cheque for Shs 17,007,568/25 deposited by Nderitu at the Westlands Branch of the appellants Bank was unlawfully obtained. It was pleaded that, as result of that breach, Mr Nderitu in his official capacity as Managing Director of Intercom, Interstate, Continental Hotel and Swiftair was arrested and prosecuted in Criminal Case No 1716 of 1982 but acquitted on appeal; that bail terms in the criminal case restricted Nderitu’s free movement thereby crippling the day-to-day running and operations of the respondents and that the respondents’ bank accounts were frozen thereby causing considerably difficulties and hardships resulting in the closure of the business of Intercom, Interstate and Swiftair. The cumulative loss claimed was Shs 609,614,973/90, the bulk of which comprised trading losses to Intercom, Interstate and Swiftair for the years 1985 to 1992. The claim also included Kshs 241,217,221/90 being net investment loss (opportunity cost) to Nderitu of the frozen funds. In addition, the respondents claimed general damages and interest on Shs 609,614,973/90 at Commercial Bank rates or Treasury Bill rates and loss of exchange rates. In his evidence in the superior court, Mr Nderitu computed the quantum of interest on Kshs 609,614,973/90 based on the Treasury Bill rates to which he was entitled at Kshs 6 billion or alternatively at Shs 3 billion based on the Commercial Bank interest rates.

The appellant Bank raised several defences in its defence (Further Re - Re – Amended defence). As its main defence, it denied that Mr Yiesel and Mr Ayodi informed police that the cheque was unlawfully obtained and averred that the two merely made necessary inquiries of the Customs & Excise Department and the Central Bank being the public bodies performing requisite statutory functions as to whether or not the cheque and the details thereof were in order in fulfillment of its duties (specified) including the duty to act in good faith and without negligence. The appellant Bank further pleaded that the officer of CBK to whom the inquiry was made referred the inquiry to Fraud Investigations Department attached to the Central Bank who carried out their independent investigations and preferred criminal charges against Nderitu although the appellant Bank had no knowledge of the circumstances under which Nderitu was prosecuted.

From the pleadings the parties framed several issues including issues Nos 4 and 5 which reads thus:

“4. Whether the defendant’s servants and/or agents informed the police that they suspected the cheque submitted by the 1st plaintiff was unlawfully obtained;

5. Whether the defendant was lawfully justified to make inquiries so as to fulfill its duty to protect itself and others from fraud or crime and whether this inquiry was in breach of a banker, client relationship”.

FINDINGS OF COURT:

On the 4th issue, the learned judge made a finding that Mr Ayodi by directing inquiries to Exchange Control Investigations Department of the Central Bank which Mr Ayodi knew or ought reasonably to have known that it was manned by police officers Mr Ayodi meant and intended to direct the inquiries to the police based at the Central Bank. On the 5th issue, the learned judge found that the appellant bank had no choice but to make inquiries in the face of an unusual transaction but stated that the most fundamental issue before the Court is the extent to which such inquiries can and should be made. After considering the issue, the superior court made a finding that, in dealing with the cheque, the bank acted in an abnormally suspicious manner pursuing its inquiries about the cheque rather recklessly and relently with impunity and in total disregard of the interests of its customers and in doing so the bank went too far than was reasonably expected of it.

The superior court made further findings. It found it unnecessary to investigate whether Nderitu’s companies had exported goods to be eligible to export compensation saying that the criminal court investigated the issue and eventually found Nderitu innocent of any wrong doing. Further, although Mr Nderitu had no account with appellant Bank and although Swiftair and Continental Hotel had no direct connection with the cheque which led to the enquiry, the superior court held that the appellant Bank was liable to Mr Nderitu personally and to his companies for any losses sustained as consequence of the appellant Bank’s unlawful acts. Finally, the leaned judge found that the fact that the appellant Bank was collecting a cheque for statutory payment by a government agency (Customs & Excise) did not impose a higher duty of care on the appellant as a collecting bank.

GROUNDS OF APPEAL:

Those five fundamental findings form the main subject matter of this appeal. There are 39 grounds of appeal. For convenience and to give an early glimpse of the content of the appeal, I have enumerated below only 14 grounds which, in my view, quite lucidly and comprehensively, portray the appellant’s grievances against the judgment of the superior court thus:

“1. (a) The learned judge erred in law in failing to determine whether the plaintiffs had made out the case pleaded in paragraphs 12 and 13 of their Further Re- Amended plaint, which was that the appellant (“SCB”) “had made a false report” to police that “the said cheque was unlawfully obtained”.

1. (b) The learned judge erred in fact and/or in law in equating Mr Ayodi’s inquiries of the Central Bank of Kenya with a report to police.

2. The learned judge erred in law in holding that the enquiries made by SCB of the Central Bank of Kenya and/or the information provided by SCB to Central Bank of Kenya involved SCB in any breach of any contractual duty of confidentiality that SCB owed to any of the plaintiffs.

3. (a) The learned judge erred in law in holding that, because the fifth respondent (Mr Nderitu) had been acquitted by criminal courts, it was not open to the Civil Court in the present action to investigate the issue whether the cheque had been obtained by fraud.

5. (a) The learned judge erred in law in holding that the enquiries by SCB of the Central Bank of Kenya and/or the information provided by SCB to the Central Bank of Kenya amounted or were capable of amounting to a breach of any contractual duty of confidence which is denied, owed by SCB to any person other than the person for whose account it collected the cheque namely the first respondent (“Intercom”).

7. (a) The learned judge erred in law in holding that the alleged or any losses suffered by Intercom (or by any of the plaintiffs) consequential upon the decisions and/ or the action of the prosecuting authorities and/or the Courts of Kenya were caused in law by any of the matters complained of against SCB.

10. The 5th respondent’s admission in his evidence before the learned judge, that not only were goods not exported but most of the alleged consignees of the goods for which the compensation was claimed and paid with cheque in issue were fictitious was clear evidence not only of fraud but breach of both the Customs and Excise Act cap 472 of the Laws of Kenya and The Local Manufacturers (Export Compensation) Act cap 482.

13. The learned judge further erred by avoiding the evidence of police officers adduced by the respondents, and which disclosed probable and sufficient cause for the 5th respondent to be charged with a criminal offence connected with the 5th respondent’s claim under the Act (cap 482).

24. It was not in law open for the learned judge to extend the obligations of a clearing bank beyond the statutory provisions and the common law by establishing the extent of the inquiries which a clearing bank may make if it had to plead the protection provided by section 3(2) of the Cheques Act.......

28. By finding that it made no difference who drawer of the cheque was or for what purpose the cheque was drawn, the learned judge misdirected himself, both in law and in fact as the authority of the drawer of a cheque can only come from the owner of such cheque. In this case the cheque was drawn on the Customs and Excise Department a department of Government of Kenya pursuant to the Act. Consequently, compliance with the Act was a condition precedent to the validity of the cheque.

29. The learned judge misdirected himself in fact and in evidence by disregarding the evidence before him disclosing that the cheque was drawn by the respective signatories as agents of the Customs and Excise Department in respect of Incremental Export Compensation pursuant to the Act, thereby warranting more attention than a cheque drawn on a personal account as the drawers of the cheque were merely the agents of the Government of Kenya.

30. By invoking the principles established in the case of Bodenham v Haskins[1943 -60] All ER 692 as establishing the obligations of a clearing bank to its customer, the learned judge misdirected himself in law the said case being concerned with the rights of a third party in respect of funds known by the bank to have been deposited for the account of such third party.

36. By treating all the respondents as a single entity for purposes of the claim on liability, the learned judge disregarded the concept of corporate entity and erred in law by disregarding the fact that each of the respondents had separate contractual relationship with the appellant and thereby failed to discern that the cheque was banked into the account of the first respondent who was the only party who could claim breach of confidentiality, if at all.

39. The learned judge erred in his assessment of the evidence led by PW18 Mwaniki Ndegwa on behalf of the respondent who adduced evidence on the conduct expected of a prudent bank in dealing with a cheque in the circumstances pertaining to the suit herein. It was therefore not open for the learned judge to disregard the said evidence and substitute therefore, his own finding on the conduct expected of a prudent clearing bank in dealing with a cheque deposited by its customers for clearance.

Those grounds of appeal can conveniently be classified into five different categories according to their subject matter thus:

(i) Grounds Nos 1 (a) and 1 (b) – relate to the proof of the cause of action as pleaded by the respondents.

(ii) Grounds Nos 2, 24, 28, 29, 30 and 31 relate to the collecting bank’s duty of confidentiality and its scope.

(iii) Grounds Nos 3 (a) and 10 relate to breaches of statute or illegality.

(iv) Grounds Nos 7 (a) and 13 relate to the banks liability for the criminal prosecution of Mr Nderitu.

(v) Grounds Nos 5(a) and 36 deal with the concept of corporate entity as it relates to bank’s liability to respondent companies.

THE LAW:

Before I proceed to consider those grounds, it is appropriate to look briefly at the state of the law on which the respondent’s case was founded. The law on the duty of confidentiality by banks regarding information on customers accounts is comprehensively enunciated in Tournier v National Provincial and Union Bank of England[1923] All ER Rep 550 relied on by both sides. It is an implied legal duty arising from the contract. The bank has a qualified obligation with its customer to abstain from disclosing information as to the customer’s affairs without his consent. But there is no privilege from disclosure:

(a) Where disclosure is under compulsion by law;

(b) Where there is a duty to the public to disclose;

(c) Where the interests of the bank require disclosure.

(d) Where the disclosure is made by the express or implied consent of the customer.

Speaking of the qualification of the duty of confidentiality in that case, Scrutton LJ said at page 558 paragraph H – I:

“It is clear that the bank may disclose the customers account and affairs to an extent reasonable and proper for its own protection, as in collecting or suing for an overdraft; or to an extent reasonable and proper for carrying on the business of the account as in giving a reason for declining to honour the cheques drawn on bills accepted by the customer, when there are insufficient assets; or when ordered to answer questions in the law courts or to prevent frauds or crimes”.

On his part Atkin LJ said at page 561 paragraph C:

“It is difficult to hit upon a formula which will define the maximum of that obligation (not to divulge) which must necessarily be implied. But I think it is safe to say that the obligation not to disclose information such as I have mentioned is subject to the qualification that the bank has the right to disclose such information when and to the extent to which it is reasonably necessary for the protection of bank’s interests, either as against their customer or as against third parties in respect of transactions of the bank for or with their customer or for protecting the bank or persons interested or the public against fraud or crime ......

Under the English Common Law, a collecting banker was under absolute liability under the doctrine of conversion to the true owner of a stolen cheque even when the collecting banker was acting in good faith and without negligence. This absolute or strict liability of a collecting bank was later qualified by legislation and the collecting bank given protection under certain circumstances by section 82 of Bills of Exchange Act, 1882, which was later repealed by Cheques Act 1957 and re-enacted in section 4 of that Act. The Kenya counterpart is The Cheques Act, 1968 chapter 35 which provides in section 3(2):

“Where a banker, in good faith and without negligence and in the ordinary course of business –

(a) receives payment for a customer of a prescribed instrument to which the customer has no title or has defective title; or

(b) having credited the customer’s account with the amount of a prescribed instrument to which the customer has no title or a defective title, receives payment of the instrument for himself, the banker does not incur any liability to the true owner of the instrument by reason only of his having received payment of it and a banker is not to be treated for the purposes of this subsection as having been negligent by reason only that he failed to concern himself with the absence of, or irregularity in, endorsement of a prescribed instrument of which the customer in question appears to be the payee”.

The marginal note to the section reads:

“Protection of collecting banker”.

The repealed section 82 of the Bills of Exchange Act, 1882, and section 4 of the Cheques Act 1957 and the equivalent legislation in the Common Wealth have been interpreted in many judicial decisions. In Karak Rubber Co Ltd v Burden (No 2)[1972] 1 All ER 1210, Brighman J, said in respect of a collecting bank at page 1226 paragraph (a):

“Where a collecting bank is sued by the true owner of the cheque for wrongful payment thereof, the claim is for conversion or for money had and received. There is no contractual relationship between the person who draws the cheque and the bank to which the cheque is handed for collection (unless the collecting bank is also the paying bank). Negligence although not an ingredient of a claim in conversion or for money had and received is however a relevant topic because section 82 of the Bills of Exchange Act 1882 and modern counter part afford a statutory defence to claims by true owners where a banker has collected a crossed cheque in good faith and without negligence on behalf of a customer who has no title or a defective title”.

The onus of establishing circumstances showing absence of negligence is on the banker. It is a matter of defence, and does not give a substantive cause of action. The extent of inquiry must be measured by what in 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 must depend on its own circumstances. (See The London Bank of Australia Ltd v Kendall(1920) 28 CLR 410, at pages 410, 411, 417). The standard of care required is that to be derived from the ordinary practice of bankers not individuals. (See The Commission of Taxation v English, Scottish and Australian Bank Ltd[1920] AC 683 at page 689 and Marfani & Co Ltd v Mindland Bank Ltd[1968] 2 All ER 573). In the latter case, Diplock LJ said in part at page 579:

“What facts ought to be known to the banker, ie what inquiries he should make and what facts are sufficient to cause him reasonably to suspect that the customer is not the true owner, must depend on current banking practice and change as that practice changes. Cases decided thirty years ago, when the use by the general public of banking facilities was less much widespread, may not be a reliable guide to what the duty of a careful banker, in relation to inquiries and as to facts which should give rise to suspicion is today”.

That test was applied with approval in Thackwell v Barclays Bank PLC [1986] 1 All ER 676 at page 687 e – h in relation to the defence afforded to a collecting banker under section 4 of the Cheques Act 1957 (English). That passage was again cited with approval by Parker, LJ in the Court of Appeal in Lipkin Garman vs Karpnale Ltd[1992] 4 All ER 409 at page 439 paragraphs g-j, who, in addition, observed that cases dealing with the question of breach of duty of care by a paying banker to his customer when carrying out customers mandate must be approached with caution as they are no more decisions of fact ie of the application of the law to an endless variety of circumstances. His lordship sounded a further warning in approaching those cases at page 440 paragraph (b) thus:

“In addition, cases relating to a collecting banker being sued in conversion and those relating to a paying banker sued for breach of contract raise different considerations. In the former class of case it is for the banker to establish that he collected without negligence, in the latter the burden is on the customer to prove negligence. The statutory protection is also different in the two types of cases ...”.

In the present case, both counsel relied on the numerous English and Commonwealth decisions in support of their respective case. The decisions referred to fall into two classes. The first class relates to the case where the customer had sued his banker as the paying bank under the bank/ customer contract or under the doctrine of constructive trustee to recover money paid out to third parties from the account in breach of contract or constructive trust. That class of authorities is not relevant to the present case.

In the second class of cases, the true owner of the cheque had sued a bank in tort – (conversion) to recover money paid out by the bank to its customer. The cases of Marfani & Co Ltd vs Midland Bank Ltd (Supra)and Thackwell vs Barclays Bank Plc (Supra)[1896], 1 All ER 676 are good examples of the second class of the authorities.

Similarly, the cases which fall under the second class are not directly relevant to the present case although they provide a useful guide as to the precise nature and scope of the statutory protection of banks under section 3(2) of the Cheques Act, 1968, when faced with suits from the true owners of cheques that they have collected.

The suit from which this appeal arises was unique by its nature. It was not a suit by a customer against a paying banker to recover money paid out in breach of contract or trust. It was also not a suit by true owner of a cheque against a bank to recover money wrongfully paid out to a bank customer or anybody else. It was a suit by four customers and a third party against the appellant Bank for breach of duty of confidentiality where such alleged breach has not resulted in any loss of money in the customer’s account. I say so because all the proceeds of the cheque for Shs 17,007,568/ 25 were ultimately paid to Intercom, in addition to Shs 13 million being accrued interest on the deposit of Shs 15 million in a bank – part of the proceeds of the cheque. Thus, it is important to remember when dealing with this appeal that since there was no suit by the true owner of the cheque for Shs 17,007,568/25 no negligence was alleged against the appellant Bank and the issue in the superior court was not whether it was protected from liability from the true owner under section 3(2) of the Cheque Act.

ANALYSIS:

This is a convenient stage to turn to the five categories of the grounds of appeal.

I will start with the 5th category best expressed by ground No 36. The complaint is that the learned judge disregarded the concept of corporate entity and erred in law by disregarding the fact that each respondent had separate contractual relationship with the appellant Bank and by failing to discern that it is only the first respondent who could claim breach of confidentiality if at all.

The plaint was filed by four companies and one individual – Mr Nderitu. It was pleaded in paragraph 11(c) of the plaint that the duty of the confidentiality was owed to each of the four companies. In respect of Mr Nderitu the plaint merely states that he was the managing director and 50% shareholder in the four companies and that he was arrested and prosecuted as a result of a false report to police that the cheque for Shs 17,007,568/25 – had been unlawfully obtained.

The Bank pleaded in paragraph 31 of the defence that the plaint does not disclose any cause of action by 2nd, 3rd, 4th and 5th plaintiffs against the defendant (appellant).

The learned judge found the appellant Bank liable to the four companies globally for breach of contractual duty of confidentiality without examining the nature and scope of the contract between the appellant Bank and each of it four companies independently. On the issue of the liability of the appellant Bank to Nderitu, the learned judge said in part.

“The evidence before me is overwhelmingly clear that the plaintiff companies were private family companies that were legal outlets of Nderitu business empire. He was in fact the sole signatory of the Bank accounts. He was the only person the Bank dealt with and the only person whose instructions they followed. He was in fact the alter ego of the plaintiff companies. The Bank has not shown that it dealt with or intended to deal only with corporate entities and not individual who was really behind those companies”.

It is a principle of company law of long antiquity enunciated by the House of Lords in Salomon v A Salomon & Co Ltd[1897] AC 22 that a limited company has a legal existence independent of its members and that a company is not an agent of its members.

Mr Mutula Kilonzo, learned senior counsel for 1st, 3rd, 4th, 5th respondents however, submitted, in respect of Mr Nderitu, that the duty of confidentiality is not confined to account holders. He quoted as authority the following passage from Principles of Banking Lawby Ross Cranstons, chapter 5 page 135, 2nd paragraph:

“Whether a person is a customer in the sense of having an account with a bank is legally irrelevant to the many other and more important, issues discussed in this book. The duty of confidentiality is certainly not confined to account holders. Nor is a bank liability for faulty advice or breach of fiduciary duty. Having an account with a bank indicated a contractual relationship, which can obviously found remedies, but so too can the myriad of other contracts which banks make with customer. It is trite point, but worth making; that banks can enter these many other contracts with customers who do not have an account with them”.

That passage does not assist the Court. It is expressed in general terms. It does not specifically deal with the duty of confidentiality between the Bank and people who are not account holders. Nor has it been shown that the appellant Bank, indeed entered into other contracts with Mr Nderitu which gave rise to the duty of confidentiality owed to Mr Nderitu in the collection of the subject cheque.

In Adams v Cape Industries PLC[1990] 1 Ch 433, the Court of Appeal in dealing with the complex issue of the presence of a company in a foreign country through its subsidiary, said at page 536 paragraph F:

“.... save in cases which turn on the wording of a particular statutes or contracts, the Court is not free to disregard the principle of Salomon v A Salomon & Co Ltd[1897] AC 22 merely because it considers justice so requires. Our law, for better or worse, recognizes the creation of subsidiary companies which though in one sense the creatures of their parent companies, were nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities”.

The principal of “alter ego” attributes the mental state of company’s directors or other officers to the company itself in order to fix the company with either criminal or civil liability. The learned judge misapplied the principle as what he was saying, is in essence, that the appellant Bank was liable to Mr Nderitu individually for the wrong committed to his companies because he was the “engine” of the four companies.

It was evident from the plaint, and it has been conceded, that the cause of action was the breach of the contractual duty of confidentiality in the collection of the cheque for Shs 17,007,568/25. That cheque was payable to Intercom and was deposited into the account of Intercom. That cheque belonged to Intercom as a distinct legal entity from the other three plaintiff companies and from Mr Nderitu. It was never claimed that Intercom in depositing the cheque for collection, was acting as agent for anybody. The three other companies were not subsidiaries of Intercom in the sense of common ownership of shares. And even assuming that they were, nevertheless, they would in law be treated as distinct legal entities.

The contract which gave rise to duty of confidentiality in this case was between Intercom and the appellant Bank. It was erroneous and a negation of that contractual duty for the learned judge to hold the appellant Bank liable to other parties who were not privy to that contract.

From the foregoing, I would respectfully agree with the submission of Mr Oraro, learned counsel for the appellant Bank, that the error of law on this aspect was so glaring and fundamental that it went to the root of the decision of the Court. I would also agree that the plaint disclosed no contractual duty of confidentiality in the collection of the cheque for Shs 17,007,568/25 or breach of that duty as between the appellant Bank, Interstate; Swiftair, Continental Hotel and Mr Nderitu.

The first category and the second category of the ground of appeal deal with related issues and should be considered together.

The respondent’s case as pleaded was that the two officers of the appellant Bank informed the police that the cheque for Shs 17,007,568/25 was unlawfully obtained which false report was in breach of both the fiduciary duty and duty of confidentiality. The appellant Bank denied that averment and stated that appellant’s servants made necessary inquiries of the Customs & Excise Department and the CBK being public bodies performing requisite statutory functions as to whether or not the cheque and details thereof were in order. The appellant Bank further averred that it made such inquiry in fulfillment of its rights and duties because of the following reasons:

(i) The plaintiffs had only very recently opened accounts with the defendant.

(ii) The amount of the cheque was extremely large.

(iii) That it is extremely unusual for a customer to open an account and then deposit an extremely large cheque into such account.

(iv) That the defendant was on notice of an irregularity as regards the cheque as the payment voucher accompanying the cheque indicated a different payee and a different amount.

(v) That as a matter of policy the defendant exercises care in dealing with cheques issued by Government Departments.

(vi) The issuance of the cheque did not conform with the regulations promulgated under the Act. (ie Local Manufacturers (Export Compensation) Act.

The appellant Bank further pleaded that the officer in charge of CBK to whom the inquiry was made referred the inquiry to Fraud Investigations Department attached to the CBK who carried out their independent investigations and preferred criminal charges against the 5th plaintiff (Nderitu). The two issues framed in respect of this aspect of the dispute (issues Nos 4 and 5) have already been quoted. As stated before, the learned judge made a finding that by reporting to a department of CBK manned by police officers, Mr Ayodi intended to direct his inquiries to the police based at the CBK and that an inquiry made to CBK was infact an inquiry to police since the department was manned and staffed by police officers. Later in his judgment the learned judge refers the department to which the inquiry was made as:

“Fraud section of the Central Bank”.

It has been contended on behalf of the appellant that this finding that the officers of the appellant Bank reported to the police was erroneous and that the correct position is that Mr Ayodi made the first report to Mr Karani, an officer of CBK and not to police who in turn referred Mr Ayodi to Exchange Control Department. It has further been contended that since it is the Exchange Control Department which used to licence exporters, then, that was the place to go if one wanted to inquire if the person having the cheque was an exporter. On the question of breach of confidentiality, Mr Oraro submitted that there was no breach because this is a case where the two of the four exceptions in Tourniercase apply, namely, that there was a duty to public to disclose and also the interest of the Bank required disclosure. He criticized the learned judge for introducing a new exception to the duty of confidentiality by circumscribing as to how far inquiries can go. It was his view that once it is found that there is a duty to inquire then the inquiry is subjective and that the Courts and lawyers are ill equipped to formulate standards by which banking standards can be carried out. He complained that the learned judge set his own standard without any evidence. Mr Oraro further submitted that for a collecting bank to enjoy the protection of s 3 (2) of the Cheques Act, it must act in good faith and without negligence which tests are similarly subjective.

Mr Mutula Kilonzo, on the other hand submitted, among other matters, that the judge was correct in finding that this was a report to the police as the evidence supported that finding; that it was never the duty of the collecting banker to investigate where the money in the cheque came from or to know the purpose for which the cheque was issued; that the duty to inquire ceased when Mr Kimeriah of the Customs & Excise, the true owner of the cheque, confirmed that the cheque was genuine and also when the bank cleared the cheque and made some payments.

Mr Wadabwa for Interstate, on his part, emphasized that what Mr Ayodi did was not infact an inquiry but a report to an officer in charge of Exchange Control Department.

Firstly, according to Mr Ayodi, the cheque which was for a very large amount was referred to him by Mr Yesiel in accordance with appellant Bank’s operating procedures. The Branch Operating Proceduresdated 1st February, 1993 were produced at the hearing and the trial judge accepted that similar provisions of that document obtained at the material time, that is, May 1985. I have extracted two of the relevant procedures which are under the heading of “Theft & Fraud”thus:

(i) Where there is any doubt that an item received offered for the credit of an account, or for encashment, is the rightful property of the account holder or the person seeking encashment the transaction must be queried and in need (sic) referred to a senior officer.

(ii) Unsual cheques, or those for large amounts out of line with the normal run of the account must be referred”.

Mr Yiesel, the Westlands Branch Manager himself referred the cheque to Mr Ayodi, Chief Inspector of the appellant Bank who was his senior for two reasons, firstly, because this transaction involved a very large amount which was out with the normal run of the account and secondly, because the account was new.

In addition to those circumstances, Mr Ayodi found, as stated before, that there were discrepancies between the cheque and the payment voucher in that the payee in the voucher was Interstate and not Intercom, the payee of the cheque and that the amount payable under the voucher was Shs 17,070,568/25 while the cheques indicated a sum of Shs 17,007,568/25; a difference of Shs 70,000/=. Further, Mr Yiesel informed Mr Ayodi that there was problem in clearing the cheque because the drawers’ account with Kenya Commercial Bank was short by Shs 5,000,000/=. According to Mr Ayodi, he knew from experience that Government would not issue a cheque until funds were in place and when he was informed by Yiesel that he had been told that a separate cheque would be issued for the short fall he found this to be very odd because Government payments go through various procedures. Further the payment voucher indicated that the payment was for Incremental Export Compensation and he knew that Export Compensation was handled by the CBK. He then rang Mr Karani of the CBK to inquire if the account holder was an exporter as the account did not show that the payee was an exporter. Mr Karani did not respond immediately but called 2 – 3 hours later and asked Mr Ayodi to report to Mr Ongoro. Mr Ayodi stated that he rang Mr Ongoro to determine if the payee was an exporter and that Mr Ongoro made a decision to go to the Westlands Branch to investigate.

Mr Ayodi’s evidence at the trial did not show that he intended to report to the police or that he reported that the cheque had been unlawfully obtained. Mr Nderitu did not say in his evidence that Ayodi reported that the cheque was unlawfully obtained. Indeed, in his evidence given on 20th September, 2001, Mr Nderitu said that he did not know what the report said. None of the witnesses who used to work at Exchange Control Investigations Branch of the CBK at that time called by the respondents stated that Mr Ayodi reported that the cheque was unlawfully obtained. Indeed, Zaverio Bundi (PW13) stated that Mr Ayodi merely pointed out to the discrepancies. He said further:

“During all these investigations nobody including the Customs Department complained of the cheque or payment of Shs 17 million being fraudulent”.

Mr Ongoro to whom Mr Ayodi was referred was in charge of Exchange Control Investigations Branch of the CBK. According to the evidence of Mr Zaverio Bundi the Investigations Branch was different from the current Fraud Department. It was not at the material time called “Fraud Department” as the learned judge called it. The evidence of Mr Ayodi was consistent throughout that he enquired from Mr Karani of the Central Bank whether account holder was an exporter and that it is Mr Karani who referred him to Mr Ongoro. Mr Harrison Charles Kimeriah said that Karani was in the Foreign Exchange Department. According to Ayodi even when he was referred to Mr Ongoro he merely inquired from Mr Ongoro whether the account holder was an exporter.

It is the Central Bank which managed the Exchange Control Act. The exporters of locally manufactured goods for the purposes of export compensation under the Local Manufacturers (Export Compensation) Act were to be registered with the CBK. All the foreign exchange earned from exporter had to be surrendered to the CBK. It is CBK which approved all claims for Export Compensation. The Incremental Export Compensation to which the cheque related was paid on the basis of previous export compensation already approved by the CBK for past exports. According to evidence of John Moses Ngugi, at the trial, the Customs & Excise was part and parcel of the Exchange Control Department of the CBK for purposes of export compensation. This cheque constituted a statutory payment.

In my view, it was a gross misdirection to say that Mr Ayodi meant and intended to direct his inquiries to the police based at the CBK. That is not the fair assessment of the evidence. The fair assessment of the evidence is that Mr Ayodi directed inquiries on the cheque to the Exchange Control Department of CBK where Mr Karani was working and not directly to Exchange Control Investigations Branch. That is the Department which had relevant information regarding export compensation. From the foregoing, it is neither factually correct that Mr Ayodi reported to police that the cheque was unlawfully obtained as pleaded or that Mr Ayodi directed the inquiries to police officers at the CBK as found by the learned judge.

In making enquiries about the cheque to CBK did the appellant Bank go “far, much too far” to the extent that it was liable for breach of confidentiality to the payee of the cheque? A collecting bank would not be in breach if it were to show, in an appropriate case, that the disclosure of information about the cheque was in pursuance of its statutory duty as a collecting bank under section 3(2) of the Cheques Act to the true owner of the cheque to act without negligence because such disclosure would be for protection of its own interest – an eventuality which is excepted in Tournier’scase.

In reaching the decision that the appellant Bank went beyond the permissible limits, the learned judge was greatly influenced by a dictaof Kindersley V C in Bodenham v Hoskins[1943 – 60] All ER page 692 at page 694 to which he referred twice thus:

“In a naked case of a banker and customer, the Bank only looks to the customer in respect of the account opened in that customer’s name. Whatever cheques that customer chooses to draw the banker is to honour. He is not to inquire for what purpose the customer opened the account; he is not to inquire what the monies are that are paid into the account, he is not to inquire for which purpose the moneys are drawn out of the account. That is the plain general rule as between banker and customer”.

That passage was referring to the contractual relationship between a paying banker and customer and more specifically to the customer’s mandate to his banker in respect of his current account in credit. That passage was referred to by May LJ in the Court of Appeal in Lipkin Gorman (a firm) v Carpnale Ltd[1992] 4 All ER 409 at page 418 paragraph L as an illustration that, at least in the last century, the customer’s mandate to his paying bankers in respect of his current account were sacrosanct, and without any room for an inquiry. By the very wording of section 3(2) of the Cheques Act which protects a bank if the bank, inter alia,has acted without negligence, that dictacannot apply to a collecting banker. The passage was with respect obviously quoted out of context. Similarly, Mr Kilonzo’s submission that the collecting Bank has no duty to investigate where the money in the cheque came from or to know the purpose for which the cheque is issued cannot be correct in respect of duty of collecting bank to the true owner to avoid negligence. Depending on the circumstances of each case the collecting banker may find it prudent and in accordance with practice of bankers to undertake those investigations to avoid liability in negligence to the true owner of the cheque.

It is true that some money was paid out after the cheque was cleared but the bulk of the money remained with the same Branch of the appellant Bank. The Shs15,000,000/= had been transferred to the account of Swiftair in the same branch but that money could still be followed by the true owner in an appropriate action. The appellant Bank still owed a duty of care to the true owner of the cheque and the corresponding duty to inquire until the bank paid the proceeds of the cheque to its customer. In Marfani & Co Ltdcase (supra). Diplock LJ said at page 580 paragraph 1:

“From the practical point of view of foreseeable loss to the true owner it seems to me to make no difference whether the banker has received payment of the cheque or not, so long as he retains the payment in his own hands and it is capable of being followed and recovered from him by the true owner. The relevant time for determining whether the banker had complied with his duty of care towards the true owner is in my opinion, the time at which banker pays the proceeds of the cheque to his own customer and so deprives the true owner of his right to follow the money into the banker’s hands”.

I have already referred to the cases of Commissioner for Taxation, Kendall; Marfaniand Thackwell. They show that whether a collecting bank will be put on inquiry; the nature of the inquiry and the extent of the inquiry will depend on the circumstances of each case and on the current banking practice. The standard of care is that derived from the practice of bankers. Although the Court is free to examine such banking practice and form its own opinion as to whether it conforms with a standard of care which a prudent banker should adopt, the Court should be hesitant in condemning as negligent a practice generally accepted by those engaged in the banking business (per Diplock LJ)in Marfanicase, page 581 paragraph D).

The respondents called Mwaniki Ndegwa, a banker, to show the practice of bankers generally and, in particular, in the collection of cheques. The witness however conceded that he did not know well the facts pertaining to the case and why the inquiry was made. He also admitted knowing very little about the export compensation. Ultimately he agreed that there is no limitation as to the inquiry and that there is no prescription on how the inquiry should be conducted. As regards the handling of government cheques the witness agreed that the bank has a duty to ensure that the cheque was issued in compliance with the law. He also accepted that a banker is not prohibited from making enquiries from the relevant Government Departments.

Mr Ayodi as a banker considered it prudent to inquire from CBK whether the payee of the cheque was an exporter in order to protect the bank’s interest and the interest of the true owner of the cheque. The cheque of Shs 17,007,568/25 was, according to him, a very large amount which would have had a serious impact on the Bank if it turned out later that the bank was liable to the true owner. The appellant Bank’s practice procedures required that such cheques for unusually large amounts be referred. Mr Nderitu, like other witnesses, agreed that the cheque represented a very large sum of money.

Indeed, Mr Nderitu provided a graphic comparison. He stated that the Shs 17,007,568/25 was in 1985 equivalent to Shs One billion in the year 2001 when he gave evidence. The evidence of Mr Mwaniki Ndegwa does not show that Mr Ayodi’s action was inconsistent with any practice of bankers. Mr Ayodi’s decision should be judged by circumstances known to the appellant Bank on the date he made inquiry at CBK and not on what happened subsequently. The fact that the inquiry triggered off investigations which led to the arrest and prosecution of Mr Nderitu should not blur our objectivity or prejudice our judgment considering that the Government later filed civil proceedings to recover the money in the cheque or other money from the respondents which resulted in a compromise.

As I said earlier, there is no suit by the true owner of the cheque against the appellant Bank. The question whether the appellant Bank would have been liable in negligence to the true owner of the cheque if it had failed to inquire from CBK can only be fully determined in such a suit. It would be speculative, in my view, to say in this suit, that the inquiry to the CBK by the appellant Bank was not for the protection of the true owner of the cheque or bank’s interest when that issue is not before the court.

Mr Ayodi inquired from Exchange Control Department of CBK whether the payee of the cheque was an exporter. He has given sound commercial reasons why that inquiry was necessary. Mr Mwaniki Ndegwa, a banker agreed that there was no limitation as to inquiry nor prescription on how the inquiry should be conducted. He also agreed that a bank has a duty to ensure that a government cheque is issued in compliance with the law and that a banker can make enquiries from relevant Government Departments. That is the only relevant evidence of banking practice that we have received. That evidence does not fault the action that Mr Ayodi took. Indeed, it reinforces Mr Ayodi’s evidence that the inquiry to CBK was justified. The appellant Bank’s operating procedures are a banking practice.

In my view, the test whether the inquiry was necessary and the extent of such an inquiry is not subjective as submitted by Mr Oraro. The test is objective as it is dependent on the current banking practice and not the practice of individuals. As Diplock LJ said in Marfani’scase (supra), the court should be hesitant in condemning as negligent a practice generally accepted by those engaged in the banking business. It has not been shown that the inquiry to CBK was in the circumstances of this case inconsistent with or outside any current banking practice. I would agree that there was no evidence to support the finding of the learned judge that the appellant Bank went beyond the permissible limits. The learned judge in my respectful view erred in so finding.

The third category of the grounds of appeal raise the question of illegality or breach of statutes. By rule 4 (1) of order VI of the Civil Procedure Rules, a defendant should, among other things, plead fraud or any facts showing illegality which he alleges makes the plaintiffs claim not maintainable or which, if not specifically pleaded might take the plaintiff by surprise. The general principles of law on this subject was restated in a summary form by Devlin J in Eldler v Auerbach[1950] 1 KB 359 at page 371 thus:

“Counsel then cited North Western Salt Company Ltd v Electrolytic AlKali Company Ld[1914] AC 461). That case, I think, authorizes four propositions; first that where a contract is ex facieillegal, the Court will not enforce it; whether the illegality is pleaded or not; secondly, that, where as here, the contract is not ex facie illegal evidence of extraneous circumstances tending to show that it has an illegal object should not be admitted unless the circumstances relied on are pleaded; thirdly, that, where unpleaded facts, which taken by themselves show an illegal object, have been revealed in evidence (because, perhaps, no objection was raised or because they were adduced for some other purpose), the Court should not act on them unless it is satisfied that the whole of the relevant circumstances are before it; but, where the Court is satisfied that all the relevant facts are before it and it can see clearly from them that the contract had an illegal object, it may enforce the contract, whether the facts were pleaded or not”.

In Snell v Unity FinanceLtd [1963] 3 All ER 50, Willmer, LJ found the principle of law as stated by Devlin J to be correct page 55 letter G and Diplock LJ at page 59 letter H infact adopted as a correct statement of the law. In that case, although the illegality of a hire-purchase agreement was neither pleaded nor raised in the County Court, the Court of Appeal allowed the amendment of a Notice of Appeal in order to plead the illegality correctly and proceeded to say that the a point of breach of statute (illegality) should as a rule of public policy be taken by the Court below and if not taken the Appellate Court should on its own initiative uphold the provisions of a statute. Similar principles as in Elder’scase (supra) were stated in Bikett v Acorn Business Machines Ltd[1999] 2 All ER 429 where the Court held inter alia,that where allegations or evidence of illegality emerge for the first time at the trial, the Court should act on unpleaded illegality only if it was satisfied that it would not involve any palpable risk of injustice to the claimant by reasons of his inability to rebut the illegality by adducing additional evidence or making more comprehensive submissions.

It was submitted on behalf of the appellant Bank in the superior court and in this Court that the evidence of illegality in this case came from Nderitu and his witnesses at the trial which showed that Nderitu did not export any goods, that the declarations made to customs in respect of aircrafts and motor vehicles used to convey the goods for export were false and that consignees were fictitious. It was further contended that the plaintiffs were in breach of various statutes, Exchange Control Act, Local Manufacturers (Export Compensation) Act and Customs & Excise Act, it would be against public policy to allow Mr Nderitu to benefit from breaches of statute.

On the other hand, it was contended on behalf of respondents in the court below and in this Court, among other things, that the issue of illegality was not pleaded and was raised as an afterthought, that the issue whether the goods left the country was totally irrelevant as respondents claim was for Incremental Export Compensation based on computerized export compensation already paid, that Customs & Excise were satisfied that there was exportation; that there was evidence that foreign exchange was brought in; that illegality was not proved in criminal and civil proceedings and that Nderitu was not charged with breach of Exchange Control Act or any other statute.

The main contention by the appellant Bank at the trial was that the respondents had not exported eligible goods and had not earned the country foreign exchange to be entitled to payment of Shs 17,007,568/25 as incremental export compensation. The learned judge found the issue to be controversial. However, the Court ultimately found it unnecessary to investigate the matter for the reason that the Civil Court could not turn itself into a tribunal to investigate whether or not fraud was committed on the government. The learned judge found it sufficient that the Criminal Court had found Mr Nderitu innocent.

It has not been contended in this case that the contract between Intercom and appellant Bank which gave raise to the duty of confidentiality was ex facieillegal and therefore unenforceable. What the appellant Bank contended is in effect that the cheque which was the basis of the claim for breach of confidentiality was issued as a result of a fraudulent claim.

That would have been a major defence, if successful, to the respondent’s claim. The defence was not however, pleaded as required by the Civil Procedure Rules and no issues were framed. I would agree that the issue of illegality was raised at the trial as an after thought because when the appellant Bank filed the Further Re-Re-Amended defence on 23rd November, 2000 it was aware that Nderitu had been charged with criminal offences including one of obtaining the amount of the cheque by false pretences and had infact been acquitted on 30th April, 1992, about eight years before. There was no good reason why the defence of illegality or fraud was not pleaded. In the absence of the pleadings, the appellant Bank is relying on several aspects illegality the main one being that the cheque giving rise to this dispute was a fraudulent payment since legible goods were neither exported nor foreign currency received. The appellant is also relying on the breach of statutes without clearly relying on any one of them. The appellant Bank is also relying on the fact that Interstate was not registered as an exporter contrary to the statutes. Lastly, appellant is raising as illegality the fact that the accounts in support of the respondents’ case were not prepared by registered accountants. All this gives the appellant a lot of latitude to rely on any of the several aspects of illegality to the prejudice of the respondents. If such a defence had been pleaded the parameters of the illegality or fraud could have been specified and the respondents could have made an appropriate defence.

The learned judge was correct in saying that the question whether eligible goods were exported and foreign exchange earned was controversial. As I have said earlier, the High Court sitting as an Appellate Criminal Court did not finally decide on the issue. It merely said that there was doubt. There is therefore, no final finding that goods were not exported and that no foreign exchange was received. A suit was filed by the Government against the respondent to recover the Shs 17,007,568/25 the proceeds of the cheque but ultimately a compromise was reached and the Government withdrew the suit. It was agreed as part of the compromise that the Shs 15,000,000/= part of the proceeds of the cheque and accrued interest be released to the respondents and a court order was made to that effect. The witnesses called by the respondent at the trial of the suit did not give sufficient or consistent evidence on the issue. The question cannot be justly resolved without reviewing all the evidence including the bulky evidence which was before the Criminal Court. In my view, the issue cannot be conveniently and justly resolved in this Court in the absence of pleadings. Moreover, it would be highly prejudicial and manifestly unjust to the respondents to entertain such a substantial and complex issue without proper pleadings in the surrounding circumstances of this case including the previous criminal and civil proceedings.

Regarding the fourth category of the grounds of appeal I have already found that Mr Nderitu has no cause of action on breach of confidentiality against the appellant Bank.

It was pleaded in the plaint that as a result of the false report to police that the cheque was unlawfully obtained, Mr Nderitu was arrested and prosecuted in his capacity as the Managing Director of the four companies and as a consequence the business of three of the four companies was crippled thereby occasioning financial loss to the three companies. So, although the claim is based on contract and not on the tort of malicious prosecution, Mr Nderitu is blaming the appellant Bank for his prosecution and the financial loss suffered by his companies. The claim smacks of a claim based on the tort of malicious prosecution. As the Privy Council said in Tai Hing Cotton Mills Ltd v Lin Chong Hing Bant Ltd[1986] LRC (comm) 47 there is nothing to the advantage of law’s development in searching a liability in tort where the parties are in a contractual relationship.

Nonetheless, is the appellant Bank responsible for the criminal prosecution of Mr Nderitu? If this suit was based on the tort of malicious prosecution Mr Nderitu would have been required, in order to succeed, to prove, among other matters, that the prosecution was without a reasonable and probable cause. Mr Nderitu was prosecuted on many complex charges after independent investigation by what appears to be a specialized police unit based at CBK. According to Valerie Onyango, Deputy Chief Litigation Counsel at the time, the proceedings were commenced pursuant to a complaint by Central Bank of Kenya and instructions to the Attorney General came from the Central Bank. It was also her evidence that the appellant Bank made it clear that it had no interest in the money although, according to her, it is the appellant Bank which triggered off the investigations. It is the Attorney General who decided to prosecute Mr Nderitu and it has not been alleged that the appellant Bank instigated the prosecution only that its report triggered off the investigations. The witnesses called by respondent at the trial of the suit said that there was sufficient evidence to support the prosecution of Mr Nderitu. And as I have observed before, Mr Nderitu was acquitted mainly because of irregularities and flaws in the criminal prosecution and not purely on a finding that he had exported eligible goods and earned the country foreign exchange in relation to the claims which were the basis of the cheque.

It is true that it is the report by Mr Ayodi to CBK which triggered off the investigation and eventual prosecution of Mr Nderitu but even where a complainant reports the commission of crime to police and police upon independent investigations initiate a prosecution the reporter is not liable for the tort of malicious prosecution unless the report is made falsely and maliciously, (see Jediel Nyaga v Silas Mucheke,Court of Appeal Civil Appeal No 59 of 1987 (unreported) and Martin v Watson[1996] 1 AC 74. There is already a finding of fact that the appellant Bank did not report to police that the cheque was unlawfully obtained. In the circumstances, the appellant Bank is not liable either in tort or in contract for the prosecution of Mr Nderitu.

There remains the question of causal connection between the alleged breach of contractual duty of confidentiality and the respondents alleged financial losses.

According to the evidence of Mr Nderitu, what caused financial losses to the three companies was the freezing of the money and the arrest and prosecution of Mr Nderitu. It is averred in the plaint that the bail terms in the criminal case restricted Mr Nderitu’s free movements thereby crippling the day-to-day running and operations of the companies. It was his evidence that because of his pre-occupation with the criminal cases he could not attend to the businesses of the three companies. The nature and the magnitude of the claim has already been stated.

The Shs 15,000,000/= deposited in the account of Swiftair was frozen through a court order given by the Resident Magistrate on 29th May, 1985. The order was of a short duration for it was replaced by another order issued in civil proceedings on 22nd August, 1985. The order was varied by consent in the Court of Appeal on 28th November, 1985 when it was ordered that the money be transferred to a fixed deposit bank account. It has been submitted on behalf of the appellant Bank and quite correctly in my view, that the freezing of the funds and imposition of bail terms were the municipal actions of the Courts.

The appellant Bank could not be liable for any conceivable financial loss precipitated by the alleged breach of contract. Any financial loss would be considered too remote and therefore irrecoverable unless it actually resulted from the breach and which, in addition, was in contemplation of the parties or put in another way, was reasonably foreseen by the parties at the time of the contract as likely to result from the breach of the contract. Thus the general rule in Hadley v Baxendale[1854] 9 Ex 341 applies in this case. Moreover, a breach of contract would sound in damages only if it were the dominant or effective cause of the plaintiffs losses and not if it had merely given opportunity for the loss to be sustained Galoo Ltd v Bright Grahame Murray[1994] 1 WLR 1360.

The only direct financial loss which the report to CBK could have caused to Intercom, which deposited the cheque into its account or to Swiftair (to whose account part of the money was transferred) could have been the loss of the money as represented by the cheque. It is evident, however, that the money was not lost as it was paid to Mr Nderitu after the termination of the civil proceedings together with the accrued interest, itself a very substantial sum at the time.

In the circumstances of this case, it is not apparent that it was within the contemplation of the appellant Bank and Intercom at the time of the contract that subject cheque would be collected for the account, that an inquiry would be made to CBK; that as a result of the inquiry Mr Nderitu would be prosecuted, that difficult bail terms would be imposed by court; that the account would be frozen and that financial losses to three companies would result. The inquiry to CBK is not the dominant or effective cause of the financial losses claimed. As pleaded, it is the prosecution of Mr Nderitu by police and the freezing of the account, which is a novus actus intervenienswhich is the dominant or effective cause of losses. That new and independent intervening force broke the chain of causation and exonerates the appellant from any liability to compensate the respondents for any financial losses that they may have suffered.

CONCLUSION:

From the foregoing analysis, the inevitable conclusion is that the appellant Bank, as a collecting bank, did not breach the contractual duty of confidentiality; that in any case the duty of confidentiality was owed only to Intercom for whose account the cheque was collected and that financial losses claimed are too remote and irrecoverable from appellant Bank having not been caused by the alleged breach of contract but by a new and independent intervening force. For those reasons, I would allow the appeal with costs to the appellant Bank, set aside the judgment on liability entered against the appellant Bank on 18th November, 2002, and would dismiss the suit with costs to the appellant Bank.

Dated and delivered at Nairobi this 19th day of November, 2004.

E. M. GITHINJI

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JUDGE OF APPEAL

JUDGEMENT OF GICHERU, C. J.

I have had the advantage of reading in draft the judgment of Githinji, J.A. and Onyango-Otieno, Ag. J.A. and I agree with the orders proposed by them.

Dated and delivered at Nairobi this 19th day of November, 2004.

J. E. GICHERU

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CHIEF JUSTICE

I certify that this is a true copy of the original.

DEPUTY REGISTRAR