UNIT 6 Banking Law

1) Discuss The Bank-Customer Relationship

 The bank is a debtor to the client, but only if the client has money in their bank
account.
 When the client's account has a negative balance, the client becomes the debtor
and the bank is the creditor.

The bank has the duty to:

- follow the client's instructions and make payments as long as there's enough
money in the account to cover those payments.
- carry out instructions from the client that are legitimate and not act on any
fraudulent instructions.
- provide the client with bank statements.
- protect the client's confidentiality, subject to certain exceptions.
- give a reasonable notice before closing the client's bank account if it has a credit
balance.

The client has a duty to:

- be cautious when giving the bank instructions.
- disclose any forgeries.

2) Discuss Credit Cards as a Method Of Payment

 Credit card payments in South Africa are regulated by the National Credit Act of
2005.
 This law applies to credit cards because they work like a type of credit called
"revolving credit."
  Credit card scheme gives rise to three different contractual relationships:

i. Bank and Card holder

- The contract is concluded upon application for credit.
- This contract specifies that the cardholder can use the credit card to buy things
from stores, and the bank will cover these expenses.
- But the cardholder must repay the bank for the purchases they make, along with
any additional charges that may apply.

ii. Bank and Supplier/Merchant

- The bank is responsible for giving money to the supplier or merchant for the
purchases made by a legitimate cardholder.

iii. Supplier & Card holder

- The primary responsibility for payment to the supplier lies with the bank, and the
cardholder is only liable if the bank doesn't fulfil its payment obligation.

3) Discuss Electronic Fund Transfers (EFT) as a Method of Payment

 Electronic Funds Transfer (EFT) is regulated by The Electronic Communications

and Transactions Act 25 of 2002.
 This regulation is in place because EFT is an electronic method of transferring
money, and this law governs various aspects related to electronic transactions
and communications.

 Credit Transfer
- A credit transfer is when a customer instructs their bank to move a certain
amount of money from their own bank account to the bank account of the person
or organization they want to pay.
- E.g., you buy groceries at Woolworths using a debit card.
 Debit Transfer
- A debit transfer is a financial transaction in which a customer gives authorization
to a payee (the recipient or party they owe money to) to instruct the customer's
bank to transfer funds from the customer's account to the payee's account.
- E.g., Debit Order – payments of regular commitments.

LIABILITY OF A BANK FOR UNAUTHORIZED PAYMENTS

• In Diners Club SA (Pty) Ltd v Singh & Another(2004 (3) SA 630 (D)), the
relationship between a bank and its client who had used a credit card issued by
the bank came under the spotlight.

• In a lengthy judgment, Levinsohn J made the same instructive comments

regarding the relationship between the issuer of a credit card, on the one hand,
and the holder of the card, on the other hand.

• This is the first ever reported South African case in which the legal relationship
between a credit card issuer and the holder of the card came up for decision.

• A credit card has been described as an instrument that 'offers a revolving credit
whereby the card issuer allows the cardholder to use the card during a monthly
accounting period to pay for goods and services or to draw cash, up to a
prescribed limit, interest being payable on the amount outstanding at the end of
the monthly accounting period.

A credit card has four main functions. Payment is its primary function.

• Credit cards may either be used as a method of payment where the cardholder
and the merchant are in each other's presence, or they may be used to pay for
goods bought over the Internet or telephone where the parties are not in each
other’s presence.

• Secondly, a credit card also provides credit to the cardholder since he or she only
pays the card issuer for the purchases made with the card at a later stage.
• Thirdly, some credit cards entitle the cardholder to cash personal cheques by
showing their cards at any of the banks used as agencies.

Finally, credit cards issued by banks may be used by the cardholder to effect
cash withdrawals at any branch of the issuer and at automatic teller
machines('ATM') which are linked to the specific network to which the issuer of
the cards belong.

Facts

In 1997 the plaintiff, Diners Club, issued a Diners Club credit card to the two
defendants, Singh and his wife. Over the week-end of 4 and 5 March 2000, 190
successful ATM cash withdrawals were made with Singh's credit card in London.
The proceeds of these withdrawals amounted to some £54 000, roughly
equivalent to R500 000 at that time.

Singh's case was that he had not been in London that weekend, that his card was
at all times in his possession, and that his Personal Identification Number('PIN')
had not been given to anyone else.

Diners Club, in turn, relied on a number of contractual clauses which formed part
of the contract in terms of which they had issued the credit card to Singh

The most important and relevant of these was clause 7.3 which provided that the
cardholder would be liable irrespective of who used his or her PIN.

The agreement further provided that 'cards are issued subject to the prevailing
terms and conditions accompanying the card, of which the Cardholder shall be
deemed to be aware of and to have accepted upon use of the card.
The Decision in Diners Club v Singh

Three main points for decision arose in the Diners Club case.

The first two points concerned two defences raised by Singh against Diners Club's
claim.

The third concerned the constitutionality of the Electronic Communications

Transactions Act 25 of 2002 ('the ACT Act').

Singh's first defence was an alibi; he argued that he was not in London during the
fateful week-end in March 2000.

Further, so he contended, the withdrawals were made with the co-operation of an

'insider' either in Standard Bank South Africa or in the Diners Club organisation.

Singh's second defence turned on the alleged illegality of clause 7.3 of the
agreement between him and Diners Club. He argued that that clause was contra
bonos mores and therefore invalid.

Thirdly, Singh argued that the provisions of the ECT Act had infringed on his
constitutional right to a fair trial.

In the evidence before it, the Court was satisfied that Singh conspired with the
members of a syndicate to provide them with his card and PIN to enable them to
withdraw the money in London. Singh's first defence and the Court's decision on it
do not merit any further comment here.

On legality of the contract, the court acknowledged the principle of South African law
that contracts seriously entered into should be enforced. However, it is equally trite
that in no jurisdiction will all agreements be enforced without exception if such a
contract is against public policy.

The potential unfairness of a contract may constitute a ground upon which a court
may find that one or more of its terms are so unfair that the contract is contrary to
public policy and therefore illegal.

Unfairness in contract may also be dealt with in a variety of other ways, for instance,
in terms of the manner in which consensus is acquired, the legal impossibility of
performance, the disturbance of the balance between performance and counter-
performance, or a remedy such as the exceptio doli generalis.

The court held that the contract was fair, although it placed strenuous conditions on
Mr Sighn. He had exercised his freedom to contract.

The gist of clause 7.3 entailed that the cardholder, Singh, was liable forall purchases
or cash withdrawals made with his credit card irrespective of who used the card and
the PIN.

In considering the fairness of the clause, the Court held that it is trite that a credit
card may be used throughout the world.

The Court reasoned that while it may be said that the clause was one-sided and
favoured the issuer of the card, Diners Club was entitled to protect itself by placing
the risk of wrongful use on its customer.

Importantly, the Court pointed out that Singh had accepted his credit card knowing
that he would be bound by the relevant contractual terms and conditions. Singh was
further under no obligation to do so, nor was he obliged to apply for a PIN.

The Court reasoned further that at the time when Singh accepted the credit card
from Diners Club, he ought to have known, or alternatively have apprised himself, of
the terms applicable to the use of the PIN
LIABILITY OF A BANK FOR UNAUTHORISED USE OF MONEY DEPOSITED
INCORRECT IN BANK ACCOUNT

• First National Bank of Southern Africa v Perry, Nissan South Africa v Marnitz NO
and Absa Bank v Lombard Insurance, 2005 (1, ) SA 441the court had to deal with
unauthorised use of money incorrectly deposited in a bank account.
• An amount of R12,767,468.22 was paid into the wrong bank account due a
clerical error by the bank, making this dream come true for Maple Freight CC.
• Nissan South Africa (Pty) Ltd (“Nissan”) instructed its bank, FNB, to make certain
payments to its creditors. One of the creditors that had to be paid an amount of
R12,767,468.22, was TSW Manufacturing. However, due to a clerical error, the
wrong banking details were furnished, resulting in the payment being made to a
third party’s account namely, Maple.
• First National Bank of Southern Africa v Perry, Nissan South Africa v Marnitz NO
and Absa Bank v Lombard Insurance, 2005 (1,) SA 441the court had to deal with
unauthorised use of money incorrectly deposited in a bank account.
• An amount of R12,767,468.22 was paid into the wrong bank account due a
clerical error by the bank, making this dream come true for Maple Freight CC.
• Nissan South Africa (Pty) Ltd (“Nissan”) instructed its bank, FNB, to make certain
payments to its creditors. One of the creditors that had to be paid an amount of
R12,767,468.22, was TSW Manufacturing. However, due to a clerical error, the
wrong banking details were furnished, resulting in the payment being made to a
third party’s account namely, Maple.
• Nissan obtained a court order to freeze Maple’s account, which according to the
sole member of Maple, Stanley, placed considerable strain on Maple, resulting in
the necessity according to Stanley, to voluntarily liquidate Maple.
• Twenty-three days after the funds were erroneously transferred, the credit
balance in Maple’s account was R10 558 818,05. Stanley and Maple’s liquidators
contended that this amount formed part of Maple’s insolvent estate and is
therefore subject to a concursus creditorum. Only R9,750,000 could be traced
back to the amount transferred from Nissan to Maple.
• Nissan therefore applied to Court for an order.
• Declaring that the amount of R9 750 000 and any interest that accrued thereon
from 20 February 2003 did not form part of the insolvent estate of Maple Freight
CC (in liquidation) ; and directing the first and second respondents to pay the
amount to the appellant, alternatively, FNB.
• The SCA upheld the appeal and held that the order of the Court a quo had to be
replaced with an order declaring that the funds did not form part of the insolvent
estate of Maple.
• The Supreme Court of Appeal held that a bank which had unconditionally
credited its customer’s account with an amount received was not liable to pay the
amount to the customer on demand where the customer came by such money by
way of fraud or theft. If stolen money were paid into a bank account to the credit
of the thief, the thief had as little entitlement to the credit as he had to the money
itself.
• It further held that payment was a bilateral juristic act which required there to be a
meeting of two minds, there was no meeting of the minds in this scenario,
therefore Maple had not become entitled to the funds erroneously credited to its
account.
• Counsel for Nissan submitted that because there was no intention on its part to
pay Maple, Maple had no entitlement as against Standard Bank to the funds
transferred to Standard Bank. They contended, furthermore, that since Maple had
no entitlement to the funds as against Standard Bank, it could not acquire a
greater title as against FNB by transferring the funds to another account with that
bank.
• The Supreme Court of Appeal held that a bank which had unconditionally
credited its customer’s account with an amount received was not liable to pay the
amount to the customer on demand where the customer came by such money by
way of fraud or theft. If stolen money were paid into a bank account to the credit
of the thief, the thief had as little entitlement to the credit as he had to the money
itself.
CLOSURE OF A BANK ACCOUNT AND ITS LEGAL EFFECT

• The BC relationship may be terminated in many ways. These include but

• are not limited to notice by the bank, mental disorder of the client, insolvency of
the client or by mutual agreement.
• It is noteworthy that in practice, it is nearly always the one party or the other
wishes to end the relationship, as such, the BC relationship is terminated
unilaterally.
• This raised the question whether the bank is obliged to provide a reasonable
notice to its client before it unilaterally closes the client’s bank account.
• In Breedenkamp v Standard Bank of South Africa, the United States government
listed the applicant (Breedenkamp), Breco (the company) and other certain
entities as specially designated nationals (“SDN”).
• This came because of allegations against Breedenkamp that he was involved in
various illicit activities such as tobacco trading, arms trafficking, oil distribution,
diamond extraction and of being a confidant and financial backer of Zimbabwe’s
President Robert Mugabe.
• Subsequent to this SDN listing, the US enforcement authorities-imposed
sanctions on the applicant, Breco and other entities.35 In terms of US law, US
nationals, including juristic persons, are strictly precluded from dealing with
SDNs.
• The Standard Bank of South Africa (“Standard Bank SA”) became aware of these
facts and upon issuing thirty (30) days’ notice of termination of the banking
services with Breedenkamp, decided to cease its contract with Breedenkamp,
Breco and other entities. The bank derived its powers to unilaterally terminate the
contract from the “general terms and conditions for all accounts”, entered by both
parties and in terms of the

• Code of Banking Practice. In terms of these general terms and conditions, the
bank could terminate any account, for any reason, by providing a written notice to
such effect. In addition, the bank could at any time amend the terms and
conditions of the BC contract by giving a written notice to the customer. The code
of banking practice also empowered the bank to close its customer’s bank
account if it had reasons to believe that the account was being used for any
illegal purposes.
• Therefore, Standard Bank SA relied amongst other reasons on these provisions
to cancel its BC relationship after it became aware of the applicant being listed as
the SDN by the US government
• Three initial reasons were advanced by the bank for the closure of the applicant’s
accounts. First, that the US government as a specially designated person listed
the applicant.
• Second, that these allegations might impaired Standard Bank SA’s reputation.
• Third, certain business risks could arise should the bank continued offering
banking services to Breedenkamp and SDN.
• In response to the intended closure of the bank accounts, the applicant
approached the court for an interim interdict to restrain Standard Bank SA from
cancelling the contract between the parties pending the finalisation of the matter.
• The applicant contended that the closure had drastic effects on his business.
• It was accepted that Standard Bank SA termination of the contract did not directly
violate the applicant’s right to freedom of contract, dignity or trade.
• The court accepted that banks do impose standard form contracts, but the
evidence before the court did not prove that this constituted an aggravating factor
in the present matter.
• It seems that the court was prepared to accept that the parties were not on equal
bargaining position provided evidence could support such conclusion.
• The applicant had failed to establish that other banks could not take him on as a
client because of the unilateral cancellation by Standard Bank SA.
• The court further held that fairness principle also entailed the bank’s
• right to choose which person it wanted to contract with.
• Moreover, the bank had a duty to comply with and uphold banking regulations. As
such, the court ruled that the process was procedurally fair. Substantively there
was a proper rationale for the decision to terminate