Kitunda Engineering Company Limited & Others vs CRDB Bank Ltd (Civil Appeal No. 63 of 2013) [2014] TZCA 2185 (17 March 2014)

IN THE COURT OF APPEAL OF TANZANIA &LARUSHA (CO RAM : BWANA. 3.A: MANDIA, J.A: And ORIYO. 3.A.1 CIVIL APPEAL N0.63 OF 2013 .APPELLANTS

1. KITUNDA ENGINEERING COMPANY LIMITED
2. JAMES ELINEEMA KANGALU
3. ELINEEMA JAMES KANGALU VERSUS CRDB BANK PLC........................................................................ RESPONDENT (Appeal from the Judgment of the High Court of Tanzania {Commercial Division} at Arusha) (Bukuku, J.) dated the 21st day of March, 2013 in Commercial Case No. 7 of 2010 JUDGMENT OF THE COURT 25th February & 17 th March 2014 ORIYO, J. A.: The appeal arises from a fiduciary relationship between a customer and its banker. Briefly stated and as gathered from the decision of the trial court, the respondent bank, CRDB, induced by fraud, perpetrated by its own employees, allowed the appellants to withdraw by cheque, a sum of Shillings sixty million (60milion) from the account of the first appellant

maintained at the respondent's Arusha Branch. It occurred at the time the withdrawal was authorized and effected, the actual balance reflected in the account of the appellants was Shillings 576,000/= only; a fact which was in the knowledge of the appellants. Subsequent investigations revealed that through the fraud perpetrated in the computer system of the respondent, a sum of Shillingsl78,605,000/= had been transferred from another customer's loan account and credited into the appellants' account. It was the respondent's contention that the amount of Shillings 60.0m/= paid to the appellants was made under a mistake of fact in that the money belonged to the appellants while it was not. The respondent demanded a refund from the appellants, who declined. The respondent unsuccessfully preferred criminal charges against the second and third appellants and others, not parties in this appeal, including some of its own employees. At the conclusion of the trial, all accused persons were acquitted. After the accused were discharged in the criminal trial, the respondent instituted a civil suit against the appellants in the High Court, Commercial Division. Strong evidence was received at the trial court on the collusion between the respondent's employees and some of its 2

customers, the appellants herein inclusive, to fool the bank's payment system. At the end of the suit, judgment was entered in favour of the respondent that the money paid to the appellants was paid under a mistake of fact. The appellants were then declared to have had no legal tittle to the money in the sum of Shillings 60 million they collected from the respondents on 5/2/2009 and were ordered to make a refund. The trial court ordered the appellants to refund the respondent the principal sum of Shillings 60 million together with interest at the rate of 15% from the date of payment to the date of judgment. The appellants were also ordered to pay a further interest on the decretal sum at 7% from the date of judgment until payment in full, together with the costs of the suit. Aggrieved by the decision and orders of the trial court, the appellants have come to the Court with the following five (5) grounds of complaints:-

1. That the tria l Judge erred in iaw and in fact in holding that the defendants, appellants herein breached the duty o f care as against the bank while in actual fact the appellants proved that they withdrew the said sum o f T. shillings 60,000,000/= in good faith.
2. That had it been that the learned Judge carefully analyzed evidence on record she would have concluded

that the respondent's bank was so negligent in authorizing paym ent o f Shillings 60,000,000/= that entailed unbearable financial burden and other injuries to the appellants. In the Alternative < f that even after holding that the respondent's bank proved to be negligent and ought to have done better in detecting irregularities that occurred in their Pugu branch but the court held the appellants to have a duty o f care to the respondents. 3. That the tria l court erred both in law and in fact when it ordered the appellants to refund the respondent the sum o f Tshillings.60,000,000/= plus interest thereon despite abundant evidence and facts that the appellants withdrew the said sum in good faith. 4. That the tria l Judge erred both in law and in fact when it held that the respondents herein had a legal title over the said Tshillings 60 M. in absence o f adequate evidence to prove so. 5. That the tria l Judge erred in law and in fact by disregarding exhibit D1 and evidence by the appellants that they were expecting some money from Japan and relied upon evidence by PW1 and PW4 which was an afterthought and consequently im posed her own opinion in making a finding.

At the hearing before us, the respondent bank had the services of Mr. Deogratias J. Lyimo, learned counsel assisted by Mr. Charles Lauwo, learned counsel. The appellants retained representation by Mr. Duncan Oola, learned counsel who had advocated for them in the High Court. In compliance with rule 106(1) and 106(8) of the Rules, respectively, each party had lodged written submissions in advance. Submitting on behalf of the appellants, the learned counsel informed the Court that his clients had decided to abandon the fourth ground of appeal and (made some highlights) on the remaining four grounds. Having adopted the written submissions, Mr. Oola proceeded to make brief oral submissions, with emphasis on the duty of care the respondent bank owed to its customer, the appellants. He particularly took issue with PW4, one Peter Johnson Chambua, the then CRDB Branch Manager Dodoma, who happened to be at the Arusha Branch on the fateful date, 5th February, 2009 and was consulted by DW2, (the 3rd appellant), to verify on whether the funds they were expecting from Japan had been credited into their account. The learned counsel vehemently criticized PW4 for the negligence he exhibited in attending to the issue. He blamed him for responding positively immediately and went ahead to authorize the 5

payment of shillings 60 million to DW2. Mr. Oola stated that as a seasoned, prudent banker, PW4 was expected to verify and confirm on the source of the funds credited into his customers account amounting to Shillings 178, 605,000/=, before authorizing the payment. In conclusion, the learned counsel submitted that since the respondent bank neglected its duty of care towards its customers, the appellants are not bound to return the principal sum, interest and costs as ordered by the trial court or at all. He urged us to allow the appeal. On the part of the respondent bank, Mr. Lyimo, learned counsel, after adopting his written submissions in Reply, made a forceful submission that in this case, it is the appellants/customers who had breached their duty of care towards the respondent bank when withdrawing the sum of shillings sixty million from the account; an act which was not done in good faith. He cited instances of lack of good faith on the part of the appellants. One, was the appellants' conflicting representations to the respondent on the source of funds expected to be transferred to the account, that is from WILNA, Japan, as per testimony of DW1 or from Dar es salaam as per the testimony of PW4 allegedly as informed by DW2. Two was the appellants'

reaction when informed by the respondent of the fraud perpetrated in its computer banking system and how it created a false credit of shillings 178,605,000/= in the appellants' account from which their cheque of shillings sixty million was debited. Three, the appellants upon learning of the fraud discovered by the respondent, turned uncooperative and declined to make a refund of the money mistakenly paid out to them. In view of this state of affairs, where a banker, induced by fraud, has paid out money to its customer on a mistake of fact, the issue is whether the bank is entitled to recover the money mistakenly paid and all the other reliefs as ordered by the trial court. In order to satisfactorily answer the issue, we begin with the banker/ customer fiduciary relationship. The relationship, in this case was initiated by a Letter of Undertaking signed by the appellants at the time of opening the relevant account. In the Letter of Undertaking which was admitted at the trial as Exhibit "PI", the appellants made the following undertaking "... to be liable to the bank on a ll endorsements o f cheques drawn and paid to the company and to exercise

reasonable care in executing its written orders so as not to m islead the respondent or make forgery easy and to act honestly towards the respondent" It was through Exhibit "PI" that the appellants assumed a legal duty of care towards the respondent bank and the duty of care lasted as long as the appellants maintained that account with the bank. The costumer's duty of care towards the bank is not limited to the local, domestic level, but it is drawn from an internationally recognized practice. The customer's duty of care be summarized as hereunder:- "7776? customer undertakes to exercise reasonable care in executing his written orders so as not to m islead the bank or make forgery e a sy a n d to act honestly towards the banker." See Halsbury's Laws of England 4th Edition, Vol. 3. In the case of Barclays Bank of Kenya versus Jandy [2004] 1 EA 8, under what appears to be similar circumstances, whereby the bank,

acted upon a forged instruction letter and transferred money from one customer's account to another, it was held, inter alia- • "/I bank customer has a contractual duty to exercise reasonable care in executing writing orders so as not to facilitate fraud or forgery. • A bank customer by using the funds in his account warrants to the bank that he has the authority to use them. The custom er in this case breached his warranty o f authority by facilitating, encouraging and assisting in the withdrawal o f funds which did not belong to him, from his account". Making reference to earlier English decisions, the Kenyan Court cited with approval, the decision in Barclays Bank Ltd versus WJS Simmson and Cooke (Southern) Ltd and Another [1977] 1QB677 and held:- "The fact that the bank confirm ed the custom er's account balance did not amount to a positive representation that

the credited funds belonged to the custom er since the customer was aware o f the true position, the money was not paid for any consideration and the balance was, unusual and unexpected." The law is not discriminatory. It imposes a corresponding duty of care on a banker towards it customer. The duty a bank owes to its customer was underscored in Dukhiya versus Standard Bank of South Africa Limited, [1959], EA 958. The then Court of Appeal for Eastern Africa, in a nutshell, stated the bank's duty of care, in the negative, as follows:- "...not to misinform him o f the true state o f his account" And further, a banker is expected to act prudently at all times. Otherwise it is an assumption of risk on the part of the banker not to make inquires, before effecting payments. The facts in Dukhiya's case are distinguishable to the extent that in the present case the appellants received the money from the respondent, well aware that the credit balance of shillings 576,000/= in their account was insufficient to cover the cheque of shillings sixty million presented. It 10

was the evidence of DW1 and DW2 that the money they had expected from Japan did not materialize and subsequently it was discovered that the Contract, Exhibit "D l" was actually not executed by their Japanese partner. And the source of the money the appellants had expected from Dar es Salaam, was not disclosed; either. We do not think, in our view that we will be stretching too far in stating that the appellants received the money from the respondent bank knowingly that it did not belong to them and that the money had been credited to their account as result of some fraud played upon the respondent bank. The appellants knew that they had no good title to that money as property obtained fraudulently does not pass good title, see, Zakaria Baric Bura vs Theresia Maria John Mubiru [1995JTLR 211. In the circumstances we are constrained to agree with the learned counsel for the respondent that the sum of shillings sixty million (60,000,000/=) paid to the appellants was made under a mistake of fact and the respondent is entitled to a refund.

However, taking into account the role played by the respondent bank in the fraudulent transaction, we are unable to agree with Mr. Lyimo and Mr. Lauwo that the respondent is entitled to interest at 15% from 5/2/2009 to the date of judgment and a further interest at 7% on the decretal sum from the date of judgment till satisfaction in full. Instead, we substitute and order interest at 7% from the date of judgment till satisfaction in full. Regarding the costs of the suit, we order that each party bears own costs. We so order. DATED at ARUSHA this 14th day of March, 2014. S. J. BWANA JUSTICE OF APPEAL W. S. MANDIA JUSTICE OF APPEAL K. K. ORIYO