21 May 2010 by

The Road to Kroonstad Prison (and the obligation of a bank to perform its functions without negligence)

A decision was recently handed down in the Supreme Court of Appeal (SCA) in the matter of McCarthy vs Absa Bank 2010 (2)(SA) 321 SCA. This decision is interesting because of the underlying background and relevant facts, and because of the position clarified by the court relevant to the contractual relationship between a bank and its cheque account customer, and the requirement that the bank must perform its mandate with the required degree of care, good faith and without negligence.

Ms Cordier was, at all material times, employed by McCarthy as a creditor's reconciliation clerk. As a result of her greed (which got the better of her and caused substantial losses to McCarthy), she is now a long term guest of the South African government at its Kroonstad prison facility.

From time to time, Ms Cordier created fictitious debts in the accounts of her employer, and caused cheques to be drawn and signed by authorised signatories of McCarthy for the payment of those fictitious debts. Ms Cordier was acquainted with a Mrs Fourie, who was persuaded to assist Ms Cordier in her dishonest scheme. The named payee on the cheques prepared by Ms Cordier was generally reflected as "Fourie" in conjunction with the name "Leathertech" (the latter name being the name of a firm with which McCarthy regularly conducted business). Mrs Fourie, like McCarthy, held her bank account at Absa. Once or twice a month, Mrs Fourie would arrive at Absa with a fraudulent cheque and deposit slip, obtain the approval of a supervisor for the proposed transaction, present the documents to the teller, and then leave with a substantial sum in cash. By the time the fraudulent scheme was uncovered, cheques had been deposited and cashed in amounts totalling more than R14 million.

Absa initially successfully resisted McCarthy's claim in the court a quo, where absolution from the instance was granted. On appeal, however, Nugent J A took a different view of the matter. Nugent J A emphasised that, on a proper reading of McCarthy's particulars of claim, it contended that Absa had breached its mandate which required Absa to exercise reasonable care when paying McCarthy's cheques. Put differently, the thrust of McCarthy's case was that Absa paid the cheques negligently in that it ought to have suspected that Mrs Fourie was not entitled to the cheques and should therefore have made enquiries before paying the same.

The SCA held that, where an agreement exists, such as existed between McCarthy and Absa (where McCarthy had a cheque account with Absa), there is a duty on the bank, when paying cheques, to not only strictly adhere to the customer's instructions, but also to perform its duties with "the required degree of care, generally, in good faith and without negligence". The question as to whether or not a bank is in fact negligent will depend on what is known to the bank at the time that it performed the particular transaction.

The negligence or otherwise of Absa was not a question determined by the Supreme Court of Appeal in its judgment, as the finding in the court a quo had been made pursuant to an application for absolution. The principle and standard to be applied has, however, been clarified and determined. It will now be for the trial court to determine whether, on the facts, negligence can be established on the part of Absa (in which event liability will follow).

Jonathan Witts-Hewinson, Director
Dispute Resolution: Litigation, Arbitration and Mediation

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