Brief Summary

Delict — Liability of collecting bank — Aquilian liability — Bank collected cheque drawn in its own name for attorney's trust account — Liquidators of company in liquidation claimed proceeds, alleging they never reached payee — Court held that collecting bank can be liable for negligence if it acted unlawfully and caused loss to true owner of cheque — Bank's defence that it cannot be liable as collecting bank when cheque drawn on itself rejected — Appeal dismissed, confirming trial court's finding of liability.

Comprehensive Summary

Summary of Judgment

Introduction

This matter concerned an appeal to the Supreme Court of Appeal dealing with the Aquilian (delictual) liability of a collecting bank for the collection of a cheque where the proceeds allegedly did not reach the payee.

The appellant was The Standard Bank of South Africa Limited (the bank). The respondents were Glen William Harris NO and Harry Kaplan NO, cited in their capacities as the joint liquidators of Demodig Plant (Pty) Ltd (in liquidation) (Demodig). JA Du Toit Incorporated (an incorporated legal practice) was an intervening party in the appeal after obtaining leave to intervene.

The liquidators instituted an action in the Transvaal Provincial Division seeking to recover from the bank the proceeds of a cheque made payable to Demodig. The trial court (De Klerk J) held that the requirements for the delictual liability of a collecting bank (as articulated in prior authority) were satisfied and granted judgment for the liquidators. The bank appealed with the leave of the Supreme Court of Appeal.

The dispute related to the collection of a crossed cheque marked “not transferable”, deposited into an attorney’s trust investment account “earmarked” for the payee, and whether the bank’s conduct in collecting the cheque into that account could found delictual liability to the payee’s liquidators.

Material Facts

A cheque dated 17 September 1998 for R397 657,82 was drawn by Barlow Tractor Co (Pty) Ltd (the drawer) on the appellant bank’s Isando branch, payable to Demodig Plant (Pty) Ltd as payee. The cheque was crossed and marked “not transferable”. An invoice from Demodig to the drawer indicated that the cheque was issued in part payment for plant and machinery purchased by the drawer from Demodig.

Demodig had two directors, Cross and Hutchinson. On 18 September 1998, Cross took the cheque to Mr JA du Toit, an attorney who occasionally acted for Demodig. Du Toit’s evidence (treated as largely uncontroverted on the material aspects) was that Cross instructed him to deposit the cheque proceeds into Du Toit’s trust account pending further instructions from Hutchinson.

Du Toit decided to place the funds into a separate trust savings/investment account, rather than a general trust account, because interest would accrue for the benefit of the client. He sent the cheque to the bank’s Randburg branch with a written request to open an investment account in terms of section 78(2A) of the Attorneys Act 53 of 1979, in the name “JA du Toit Inc Trust – Demodig Plant (Pty) Ltd”, and to deposit the cheque into that account.

The bank’s Randburg branch (through its employee Ms Lavagne) complied: it collected the cheque on 18 September 1998 and credited the proceeds to the newly opened account bearing that name. Lavagne’s evidence was that Du Toit was known as an attorney who held similar trust accounts, that the request accorded with prevailing practice, and that she did not consider it necessary to enquire from Demodig about Du Toit’s authority or from the drawer about the crossing.

Afterwards, according to Du Toit, Hutchinson instructed him to transfer the funds to an entity called Botzamo, and Du Toit later disbursed funds in accordance with directions he received from Botzamo. The trial court accepted a theory that Botzamo was fictional and that the arrangement formed part of an asset-stripping scheme, but the Supreme Court of Appeal held that this theory was not part of the liquidators’ pleaded case, was not put to Du Toit in cross-examination, and was not supported by the evidence.

On the evidence the Supreme Court of Appeal considered supportable, the position was that Du Toit received a mandate from Demodig’s directors, acting on behalf of the company, to collect and hold the proceeds in his trust account pending further instructions. The bank collected the cheque and credited the proceeds to the account nominated by Du Toit in that capacity.

Legal Issues

The central issues concerned the application of the extended lex Aquilia to the conduct of a bank that collected a cheque, and in particular whether the liquidators proved the elements of delictual liability as formulated for a collecting bank, including whether the bank received payment on behalf of someone not entitled thereto, and whether the bank acted unlawfully (and negligently) in collecting the cheque.

A further legal issue arose (raised on behalf of Du Toit in the appeal, but disavowed by the bank) as to whether the bank could be held liable “as collecting bank” at all where the cheque was drawn on the same bank (albeit a different branch), and whether the bank’s position as both paying and collecting bank affected delictual liability.

The dispute principally involved the application of legal standards (unlawfulness and the relevant Aquilian requirements) to the established facts, rather than pure questions of fact alone. It also involved evaluation of whether an inference of unlawfulness drawn from the manner of collection of a “not transferable” cheque was rebutted by evidence of the payee’s authorisation.

Court’s Reasoning

The Supreme Court of Appeal began by locating the liquidators’ claim within the established framework for a collecting bank’s Aquilian liability, as described in Indac Electronics (Pty) Ltd v Volkskas Bank. That framework requires proof, among other elements, that the collecting bank received payment on behalf of someone not entitled to it, and that it acted both negligently and unlawfully, causing loss to the true owner.

On the preliminary point raised on behalf of Du Toit, the Court rejected the contention that because the cheque was drawn on the same bank, the bank could not be treated as a collecting bank and therefore could not incur liability on the Indac basis. Relying on Eskom v First National Bank of Southern Africa Ltd, the Court held that for practical reasons a bank may be regarded as acting in both capacities—paying bank and collecting bank—even where different branches are involved and even though the branches form part of one legal entity. The Court reasoned that the collection and payment of a cheque consists of multiple steps and legal acts; there is no conceptual obstacle to the same entity being non-negligent in some steps (for example, as paying bank) and negligent in other steps (as collecting bank). The Court further considered that granting the bank immunity merely because it was also the paying bank would conflict with the rationale underlying the Eskom decision.

Turning to the Indac requirements, the Court addressed whether Demodig was the “true owner” of the cheque. Applying First National Bank of SA Ltd v Quality Tyres (1970) (Pty) Ltd, the Court endorsed the approach that “true owner” carries its ordinary property-law meaning: ownership requires delivery (actual or constructive) and a real agreement (saaklike ooreenkoms) comprising intention to transfer and intention to receive ownership, which may occur through authorised agents. Although there was no direct evidence of the internal intentions, the undisputed context (the cheque issued to Demodig in payment of a debt; receipt by Cross as director) justified the inference on a balance of probabilities that ownership had passed to Demodig. The Court therefore accepted that the liquidators had proved Demodig’s ownership of the cheque.

The Court then focused on the pivotal requirement: whether the bank collected the cheque proceeds on behalf of someone not entitled thereto, and whether the bank’s conduct was unlawful vis-à-vis Demodig. It considered the trial court’s finding that the directors and Du Toit were engaged in an asset-stripping scheme and that they therefore lacked authority to instruct collection in the manner adopted. The Supreme Court of Appeal rejected that factual premise as unsupported and procedurally unfair in the sense that it was not part of the liquidators’ case and had not been put to Du Toit. On the evidence properly before the Court, the supported conclusion was that Du Toit acted under a mandate from Demodig’s directors, and thus as Demodig’s authorised agent, when he instructed the bank to open the trust investment account and to collect and deposit the cheque proceeds into it.

With that factual finding, the Court addressed the legal consequences of collecting a cheque crossed and marked “not transferable” into an account not in the payee’s own name. It accepted that there is authority for the proposition that, as a prima facie inference, collecting a cheque crossed “not transferable” for an account in the name of someone other than the payee may justify an inference of both unlawfulness and negligence, with reference to Volkskas Bank Bpk v Bonitas Medical Aid Fund and Holscher v ABSA Bank en ’n Ander. However, the Court held that the critical question was whether that prima facie inference is rebutted where the bank acted on the instructions of the payee (conveyed through an authorised agent).

In answering that question, the Court analysed the effect of the “not transferable” marking by reference to section 6(5) of the Bills of Exchange Act 34 of 1964, which renders such a cheque “not negotiable” in the sense that the payee’s rights under the cheque cannot be transferred so that another person becomes entitled to enforce payment. The Court distinguished that position from the separate question whether the payee may authorise someone else to receive the proceeds of the cheque. It held that the “not transferable” marking does not prevent the payee from directing how the proceeds are to be dealt with; rather, the payee remains free to deal with the proceeds as it chooses, a proposition supported (in context) by African Life Assurance Co Ltd v NBS Bank Ltd.

Accordingly, where the bank collected the cheque and credited the proceeds to an account nominated by the payee (through its authorised agent), the Court reasoned that the bank could not be said to have received payment on behalf of someone “not entitled thereto”, nor could its conduct be characterised as unlawful toward the payee. Since unlawfulness is an essential element of Aquilian liability in this setting, the absence of unlawfulness was decisive and the bank could not be held delictually liable to Demodig’s liquidators on the pleaded basis.

The Court was invited by the bank to pronounce more broadly that, in light of section 78 of the Attorneys Act 53 of 1979, it is neither unlawful nor negligent for a bank to collect a cheque payable to a client into an attorney’s trust account earmarked for the client even without specific authorisation by the payee, and it was noted that similar considerations might affect estate agents’ and sheriffs’ trust accounts. The Court declined this invitation, holding that unlawfulness and negligence depend on the particular facts, and that it was undesirable to decide abstract or academic issues unnecessary for resolving the case, especially where argument would not have been forensically tested from both sides. In this respect the Court relied on Western Cape Education Department and Another v George.

Outcome and Relief

The Supreme Court of Appeal upheld the appeal.

The order of the Transvaal Provincial Division was set aside and replaced with an order that the plaintiffs’ claims are dismissed with costs.

The appellant was awarded the costs of appeal, including the costs occasioned by the employment of two counsel.

Cases Cited

Indac Electronics (Pty) Ltd v Volkskas Bank [1991] ZASCA 190; 1992 (1) SA 783 (A).

Netherlands Bank of South Africa v Stern NO and Another 1955 (1) SA 667 (W).

Eskom v First National Bank of Southern Africa Ltd [1994] ZASCA 186; 1995 (2) SA 386 (A).

First National Bank of SA Ltd v Quality Tyres (1970) (Pty) Ltd [1995] ZASCA 65; 1995 (3) SA 556 (A).

Volkskas Bank Bpk v Bonitas Medical Aid Fund [1993] ZASCA 68; 1993 (3) SA 779 (A).

Holscher v ABSA Bank en ’n Ander 1994 (2) SA 667 (T).

African Life Assurance Co Ltd v NBS Bank Ltd 2001 (1) SA 432 (W).

Western Cape Education Department and Another v George 1998 (3) SA 77 (SCA).

Legislation Cited

Bills of Exchange Act 34 of 1964 (sections 6(5), 78, and 79 as referred to in the judgment).

Attorneys Act 53 of 1979 (section 78(2A) and section 78 as referred to in the judgment).

Estate Agents Affairs Act 112 of 1976 (section 32, mentioned).

Sheriff’s Act 90 of 1986 (section 22, mentioned).

Rules of Court Cited

Rule of Court 11(1)(b).

Held

The Supreme Court of Appeal held that a bank does not acquire immunity from delictual liability merely because the cheque is drawn on the same bank and the bank therefore acts in both the paying and collecting capacities; the bank may still be assessed for negligence and unlawfulness in its collecting function.

On the facts supported by the evidence, Du Toit acted as Demodig’s authorised agent in instructing the bank to open a trust investment account earmarked for Demodig and to collect the cheque into that account. Although the collection of a crossed “not transferable” cheque into an account not in the payee’s own name may justify a prima facie inference of unlawfulness, that inference is rebutted where the bank acted on the payee’s authority. Since the bank followed the payee’s instructions (through an authorised agent), its conduct was not unlawful towards the payee and the claim in delict could not succeed.

The plaintiffs’ claims were therefore dismissed, and the bank’s appeal was allowed with costs.

LEGAL PRINCIPLES

A collecting bank may incur Aquilian liability to the owner of a cheque only if the recognised requirements are established, including that the bank received payment on behalf of a person not entitled to it and that the bank acted unlawfully (and negligently), causing loss.

A bank may, for practical and legal purposes, be treated as acting in both capacities of paying bank and collecting bank in respect of the same cheque, even when the cheque is drawn on the bank itself and handled through different branches. The fact that the bank is a single legal entity does not preclude separate assessment of conduct across the distinct steps involved in payment and collection.

The marking of a cheque as “not transferable” (rendering it not negotiable under section 6(5) of the Bills of Exchange Act 34 of 1964) prevents transfer of the payee’s rights under the cheque to another party as holder entitled to enforce it, but it does not prevent the payee from authorising a third party to receive and deal with the proceeds of the cheque.

While the collection of a crossed “not transferable” cheque into an account not bearing the payee’s name may raise a prima facie inference of unlawfulness and negligence, that inference may be rebutted where the collecting bank acted in accordance with the payee’s instructions, including instructions communicated through an authorised agent.

Courts should avoid determining abstract or academic questions of unlawfulness or negligence unnecessary for the disposition of the case, particularly where the issue has not been fully tested through adversarial argument from all interested parties.

Standard Bank of South Africa Ltd v Harris NO and Others (359/2001) [2002] ZASCA 107; [2002] 4 All SA 164 (SCA) (13 September 2002)