Written by ROLANT KULE
On August 16, 2023, the High court delivered its ruling in the highly-contentious matter of Excellent Assorted Manufacturers and Ephraim Ntaganda versus dfcu bank and The Commissioner Land Registration.
Ntaganda was, among other claims, disputing several debits made on his account and that of his company held with dfcu’s predecessor, Crane bank. Ntaganda operated various bank accounts and obtained different loan facilities from Crane bank. It was the Ntaganda’ case that Crane bank on an annual basis drafted and asked him to sign facility letters marked “Renewal” which Ntaganda signed believing that the bank was acting in good faith.
In the said facility letters, the bank imposed various charges and debits which included a charge of 1% as utilization fees; a discretional early repayment fee not exceeding 5%; utilization fees of between 0.50% and 1%; arrangement fees; interest; legal fees; and stamp duty charges, amongst others. In line with these facility letters, Crane bank is said to have deducted an approximate figure of about Shs 3.2bn and $3.2m from Ntaganda’s bank accounts over a period of time.
Ntaganda indicated that he sought professional advice and established that Crane bank had at all times acted fraudulently, in bad faith, and illegally, and had occasioned financial hardship to him. In sum, Ntaganda alleged that Crane bank (and by extension dfcu) had defaulted on its duty of care that it owed to him as customer.
Given that the assets and liabilities (including Ntaganda’s loan portfolio) of Crane bank were taken over by dfcu bank, the suit was brought against dfcu. It was argued for dfcu that Ntaganda was still indebted and that the bank had acted in good faith and that any deductions/debits made on his accounts were for their own benefit, and aimed at reducing Ntaganda’ liabilities to the bank.
The bank’s argument was premised on the fact that all debits and withdrawals or any other transactions made on his accounts were authorised through facility and sanction letters that had been executed between Ntaganda and Crane bank. To this extent, the bank argued that the parties should stick to the bargains made in the various facility agreements executed.
COURT DETERMINATION
The court largely agreed with Ntaganda that dfcu bank, through its predecessor (Crane bank), breached its contractual and fiduciary duties/obligations owed to Ntaganda by dealing with his accounts in an unlawful, unauthorised, and irregular manner.
The court established, among other findings, that several of the debits made on Ntaganda’s accounts, including arrangement fees, legal fees, stamp duty fees, or utilisation fees, among others, were not only unauthorised but also unexplained thus necessitating orders for a refund of such money.
Consequently, the court established that “the principal sums recoverable by Excellent Assorted Manufacturers are $57,000 and Shs 88m. The principal sums recoverable by Ntaganda are $3m and Shs 3.1bn.” When added with accrued interest from the respective dates of the debits until the date of judgment, the sums awarded to Ntaganda and his company totalled $7m (Shs 25bn) and Shs 9.9bn, which makes almost Shs 35bn.
Takeaways from the judgment
It should be noted that the matter not only revolved around bank-customer relations. It also included matters to do with the powers of the commissioner Land Registration (second defendant), competency of witnesses, the liability of guarantors, and equally the question of whether Ntaganda was indebted to dfcu bank.
However, this analysis of the judgment is limited to banking practice. The following are some of the takeaways from the 240-page judgment.
Bank record keeping
Ntaganda argued, successfully, that certain debits were not justified. Indeed, the court found that not all debits on his account were backed by documentation or explanation. According to the court, “the duty of care bestowed on the bank extends to and requires the bank to keep proper records of account.”
It may have been true that Crane bank indeed incurred the expenses that necessitated debiting Ntaganda’s accounts; however, without any source documentation, the court was hardly convinced that such debits were made for Ntaganda’s benefit or in good faith.
Clarity in explaining customer transactions
Ntaganda’s major attack was that some debits were “unexplained or irregular” because they were not sufficiently explained.
The court noted that it was a settled position of the law that where the claimant shows that the withdrawals from his/her accounts were made by the bank in breach of a mandate, the burden shifts to the bank to prove its claim that the withdrawals were for discharging the claimant’s liabilities or otherwise for the claimant’s benefit, and did not occasion loss to the customer.
Shaking the regime of sanction letters
The parties had several sanction letters that stipulated, among others, that “… all legal documentation and registration expenses … surveyors’ charges for surveying land, advocates’ fees for verifying the land titles and the valuers’ fees for valuing the property offered for mortgage shall be debited to [the 2nd Plaintiff] current account.
Please maintain sufficient funds in your current account to cover the charges.” The bank relied on the above clause to justify the debits made on Ntaganda’s accounts but the court was not convinced.
The court established that having a sanction letter is not a blank cheque to debit the customers’ accounts simply because they executed an agreement to that effect. It is the court’s position that even in such a situation, the customer is entitled to notice before any such debit is conducted.
Bolstering the position of the Central bank
The position of the central bank is undoubtedly maintained; it is the regulator. In respect of this case, Ntaganda’s point of contention was that some of the charges debited or charged to their account had never been published as lawful fees by the central bank.
According to the court, “Once a regulator issues and publishes official charges and leaves no room by way of a general clause for imposing charges outside the circular, the understanding is that an entity that is subject to such regulation cannot act outside such regulation.”
So, court went on to observe that “the practice of banks charging fees contrary to what has been endorsed by the regulator, Bank of Uganda, is illegal and dangerous to the economy.”
The position of the court raises two interesting questions; (1) is the central bank the sole determinant of any and all fees that must be charged by the banks in Uganda? and (2) in the absence of any ambiguity, or where the parties fully define a fee, can one renege on their position under a contract simply because the fee was not published by Bank of Uganda?
BoU financial consumer protection guidelines
In 2011, BoU promulgated the “Bank of Uganda Financial Consumer Protection Guidelines 2011” with a view of protecting the consumers of financial products against unscrupulous persons in the banking industry.
The position, as stated by the High court has been that the guidelines do not have the force of law and as such cannot be relied upon. Interestingly, the court, in this case, held that “the correct position is that in the absence of a superior legal instrument, guidelines issued by a regulatory body have persuasive authority and the court is able to derive useful guidance from them”.
The court further held that “the bank was duty bound to follow the guidelines, and not to openly flout them, especially where doing so led to an overt injustice.”
Over time, the legal effect of the guidelines has been doubted but this case brings to life the debate once more, “are the guidelines having the force of law?”
Despite your views on this, the position of the court is that the guidelines issued by a regulatory body have persuasive authority and the court is able to derive useful guidance from them.
Given that they were issued to all supervised financial institutions (SFIs; commercial banks, credit institutions, and microfinance deposit-taking institutions), the same SFIs are therefore, duty bound to follow the guidelines, and not to openly flout them especially where doing so would lead to an overt injustice. Given that there are two High court decisions with varying conclusions on the legal status of the guidelines, it’s perhaps time to clear the air by a higher court or authority.
Customers’ silence about account mismanagement is not acceptance
Where a customer’s account is being mismanaged, there is always a requirement or expectation that the customer will report the suspicious activity within a reasonable time.
What remains disputed is whether the customer’s silence to any mismanagement or unauthorised debits/withdrawals would amount to a submission that whatever happened has been condoned. The court in this particular case arrived at a different conclusion. It pointed out that “when a customer opens up an account with the bank, the bank is under a duty to apply its skill, expertise and all manner of safeguards to ensure that the customer’s money is safe from actions by third parties and other unauthorized persons.”
The position of the court is equally putting the banks in a precarious position. It is a rule of thumb that equity aids the vigilant. Therefore, by the court finding that a customer’s silence does not amount to consent to any account mismanagement, the court might have potentially opened the floodgates to all sorts of claims by Crane bank’s former lethargic customers against holders of Crane bank’s assets and liabilities. This is a situation that will be watched closely.
The golden thread
The judgment of the court, despite having several other principles that it reaffirms, largely rotates on the duty of care owed by the banks to their customers.
The golden thread that runs through the judgment is one that reaffirms the bank’s obligation to notify the customer of and about the developments that are likely to prejudice the customer. The import of the court’s decision is to re-confirm that the bank can hardly act unilaterally even in the midst of seemingly clear instructions executed by the customer.
Therefore, for any bank to be safe in its dealings with various customers, there is a need to keep customers in the know of the developments relating to their accounts.
This is so because when a customer opens up an account with the bank, the bank is under a duty to apply its skill, expertise, and all manner of safeguards to ensure that the customer’s money is safe from actions by third parties and other unauthorized persons.
The author is a lawyer
