Grindlays Bank International (Z) Limited v Nahar Investments Limited (S.C.Z. Judgment 11 of 1991) [1991] ZMSC 2 (17 February 1991)

GRINDLAYS BANK INTERNATIONAL (Z) LIMITED v NAHAR INVESTMENTS LIMITED (1990 - 1992) Z. R. 86 (S. C.) SUPREME COURT NGULUBE, D. C. J., SAKALA AND CHAILA, JJ. S. 15TH JANUARY AND 18TH FEBRUARY, 1991 (S. C. Z. JUDGMENT NO. 11 OF 1991) Flynote Banker and customer - Employee of customer fraudulently withdrawing money from customer's account - Long standing relationship between banker and customer - Bank not negligent in paying money to employee in reliance on authority from customer. Headnote An employee of the respondent had fraudulently withdrawn money from an account the respondent held with the appellant. The appellant had p87 unsuccessfully claimed the money from the respondent in the High Court. The Court found that the appellant had been negligent in allowing the employee to withdraw the money. The respondent had been a long standing and trusted client of the appellant and the employee was well known to the appellant. On appeal the Court held that the appellant had been misled by the respondent's agent and the fraud alleged had been committed by the respondent's own authorised agent. From the long relationship the appellant had been entitled to repose trust and confidence in the respondent, who had been a good customer. If anyone had breached that trust it had been the respondent through its fraudulent employee. The authority of the respondent had led the appellant to change its position in reliance upon it when the respondent had brought it into contact with the dishonest employee. The appeal was accordingly upheld. Cases referred to: (1) (2) (3) (4) London Chartered Bank of Australia v McMillan [1892] A. C. 292. London Joint Stock Bank Ltd. v McMillan and Arthur [1918] A. C. 777. Uxbridge Permanent Benefit Building Society v Pickard [1939] 2 K. B. 248. Lloyd v Grace, Smith and Company [1912] A. C. 716. For the appellant: For the respondent: L. P. Mwanawasa, Mwanawasa and Co. M. K. Maketo, Christopher Russell and Cook. Judgment NGULUBE, D. C. J.: delivered the judgment of the Court. th January, 1991, we allowed this appeal and said we would give our reasons later. This On 15 we now do. This is an appeal against the decision of a High Court judge who held that the appellant was negligent in allowing a fraudulent employee of the respondent to overdraw on the latter's account resulting in a loss which must be borne by the appellant. The appellant sued the respondent to recover a sum of K50 000 plus interest in the following circumstances: the parties had a long-standing relationship of banker and customer and each enjoyed the full confidence of the other. The respondent maintained two current accounts, one at the Lusaka branch and the other at the Ndola branch of the appellant. It was in evidence that the account at Lusaka was normally healthier than the one at Ndola and when need arose a cheque drawn on the Lusaka branch would be deposited into the account at Ndola to improve the position there. The account at the Lusaka branch was operated by the directors of the respondent while the one at Ndola was operated by an employee named Daya. At the material time, the directors were travelling abroad. They left a pre-signed blank cheque drawn on the Lusaka account with Daya for his official use at his sole discretion should the need arise to replenish the funds at Ndola. The employee filled in the cheque in the sum of K50 000 and deposited it at Ndola in the account on which he was the authorised signatory. The employee made several cash withdrawals from the Ndola account on the strength of the Lusaka cheque which was subsequently returned unpaid because the account at Lusaka had only something in the region of K34 000 in it. Exchange control approval would be needed to overdraw the account and the Lusaka branch endorsed the cheque to that effect. Meanwhile, Daya had already withdrawn sums totalling K50 000 from Ndola and the respondent's position was that the employee had committed a fraud and taken all this p88 money for his own use. The account became overdrawn with the reversal of the whole of the credit for K50 000 earlier deposited. Bank of Zambia approval for the overdraft was obtained ex post facto since the respondent company belonged to non-Zambians and the exchange control regulations required such approval. The appellant itself arranged for such approval to cover the overdraft which arose. The Central Bank also directed that K50 000 made available by the respondent be held in a blocked account pending the resolution of the dispute between the parties as to which one of them should bear the loss occasioned by Daya's fraud. For completeness, we should mention that the evidence indicated that the respondent had never before overdrawn on its account nor required exchange control approval for any overdraft. The learned trial judge agreed with the respondent that the appellant alone was negligent in allowing the overdraft occasioned by the employee's fraudulent conduct and that the loss should, therefore, be born by the appellant who should not debit the respondent or seek recovery from the respondent. On behalf of the appellant, Mr Maketo advanced a number of arguments in his grounds of appeal, supported by heads of argument. In particular, he argued that the case of London Chartered Bank of Australia v McMillan [1] relied upon below was distinguishable. That was a case where an unsolicited overdraft arose as a result of a fraudulent employee under-banking the revenues collected. There was, in that case, a very special and elaborate arrangement embodied in a written agreement between the government agency concerned and the group of banks participating in the arrangement whereby revenue collected would simply be deposited for onward transmission. The bank there kept on remitting the correct amounts when in fact, to their knowledge, less money had been banked and the documents falsified by fraudulent employees on both sides. The Court there found that there was enough material to put the bank on guard that something was wrong. We agree that the case is distinguishable and, as will shortly appear, the respondent here did not seek to rely on that authority. Mr Maketo also argued that this case is similar to that of London Joint Stock Bank Ltd v McMillan and Arthur [2]. He relied on the discussion of the applicable principles which is to be found at pages 830 et seq. In that case, a firm who were customers of a bank entrusted to their clerk the duty of filling in their cheques for signatures. The clerk did not write the amount in words but wrote the amount in figures in such a way that, after he had obtained the requisite signature, he increased the figure and wrote in words such higher sum. It was held to the effect that a customer owes a duty to the bank in drawing a cheque to take reasonable care and ordinary precautions against forgery and where the customer neglects to take such precautions, he must bear the loss as between himself and the banker. The Court in that case discussed the obligations of the bank to the sum indicated on a cheque which is properly signed and which someone with ostensible authority presents for payment. The customer in such a situation is not allowed to plead any limitation on the agent's ostensible authority to deal with the cheque when such limitation is unknown to the bank and not obvious on the face of the cheque. We have considered that case which even Mr Mwanawasa indicated he had no quarrel with; its usefulness lies in supporting p89 the proposition applicable to the present case: the respondent could not be heard to complain about the loss through the fraud of their employee if it happened that Daya had filled in the pre-signed cheque, deposited it, and withdrawn cash which was actually available in the accounts. Mr Mwanawasa, however, draws a distinction: the account became overdrawn, at that stage, in breach of exchange control regulations, though approval was subsequently given. He pointed out that there has been an actual loss through fraud and submitted that this was enabled by the appellant negligently allowing cash withdrawals on the Ndola account before confirmation had been received from Lusaka. Mr Mwanawasa quite properly conceded that had there been no fraud, such as if Daya had used the money on his employer's legitimate business, the respondent could not have complained about the overdraft per se. It was Mr Mwanawasa's argument, therefore, that if the respondent is liable at all, this should be only to the extent of the money in credit which was actually available in the accounts, and the excess should be borne by the appellant. This submission accepted the position that whatever sum had stood to the credit of the respondent would be their own loss if fraudulently taken out by their own employer who undoubtedly had actual authority to transact business on these accounts. As we see it, the fact that an overdraft resulted when the customer's authorised agent presented a cheque for which there were insufficient funds can not of its own be regarded as evidence of negligence on the part of the banker. As already indicated, no cause for complaint on the part of the customer could have been entertained if the employee had used the money on legitimate matters, for the benefit of the employer. There are authorities which have held that drawing a cheque payable at the banker's where there are not funds sufficient to meet it amounts to a request for an overdraft. However, the position of this case appears to have been that the Ndola branch credited as cash the cheque deposited in respect of the cheque drawn on the Lusaka branch. No question of consciously creating an overdraft arose, quite obviously, and this was because, as the appellant's witnesses stated, they were dealing with a long established and well trusted customer through an employee who was equally well- known to the bankers. Mr Mwanawasa relied very heavily on the creation of the uncharacteristic overdraft as evidence of a circumstance which ought to have alerted the appellant. However, we find that the converse could equally be the case, that is to say, the appellant did not expect this particular customer to give a bad cheque and anticipated no problem in receiving funds from Lusaka. They practically said so in their evidence. It is also unrealistic to ignore the fact that the complication which arose in the transaction emanated from the customer's side through their known agent who had full authority, to the knowledge of both parties, to operate the accounts. In the premises, we are unable to support the finding of negligence made below which rested solely on the fact that an overdraft arose in the circumstances to which we have already made reference. We are also unable to accept Mr Mwanawasa's argument suggesting some sort of contributory negligence so that the loss should be apportioned such that the appellant should bear the loss represented p90 by cash disbursed in excess of the funds which were then actually in credit. The plain fact is that the appellant was misled by the respondent's agent and the fraud alleged was committed by the respondent's own authorised agent. From the long relationship, the appellant was obviously entitled to repose trust and confidence in the respondent who was a good customer. If anyone breached that trust, it was the customer through its fraudulent employee. The real issue as we see it, therefore, is which of the two innocent parties in this appeal should bear the loss occasioned by the fraudulent operation of the accounts by Daya? The better authorities are agreed that this is not the type of situation where the employee could be regarded as having been on a frolic of his own. For instance, Uxbridge Permanent Benefit Building Society v Pickard [3] and Lloyd v Grace, Smith and Company [4] and similar cases have established the principle that if the fraudulent conduct of the servant falls within the scope of the servant's authority, actual or ostensible, the employer will be liable. The actual or ostensible authority of the employee in such cases has led third persons to change their position in reliance upon it when the employer has brought them into contact with the dishonest employee. In discussing the principle herein, Lord Shaw stated in Llyod v Grace, Smith and Company at page 740. - ''I look upon it as a familiar doctrine as well as a safe general rule, and one making for security instead of uncertainty and insecurity in mercantile dealings, that the loss occasioned by the fault of a third person in such circumstances ought to fall upon one of the two parties who clothed that third person as agent with authority by which he was enabled to commit the fraud.'' It was for the foregoing reasons that we allowed the appeal, with costs, reversed the learned trial judge and entered judgment for the appellant for the amount claimed in the action. With regard to interest, we take into account the fact that the cause of action arose some 12 years ago, with the writ being issued in February, 1979. The trial did not take place until 1985, with judgment being delivered in May, 1987. The record of appeal was filed only in October, 1990. In addition to the time taken, we note that a sum of money equal to the claim has been lying in a non-interest bearing blocked account on the direction of the Central Bank and neither party can be blamed for this. In these circumstances, we cannot ignore the fact that full interest for such a time-span would be colossal and unjustified. We consider that the justice of the case will be served by limiting the duration of pre-trial interest to three years from the date of the writ, which time we consider adequate for any case which is prosecuted with diligence to have been finalised. The rate of interest claimed on the writ and applicable during that period, which was well before the dramatic devaluations of the kwacha started, will apply, namely 12%. Appeal allowed. _________________________________