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THE REPUBLIC OF UGANDA
IN THE HIGH COURT OF UGANDA AT
KAMPALA
(COMMERCIAL COURT DIVISION)
HCT-00-CC-CS-0048 OF
2004
BUSONGORA DEVELOPMENT
ASSOCIATION LTD
::::::::::::::::::::::::::::: PLAINTIFF
VERSUS
CENTENARY RURAL DEVELOPMENT
BANK LTD
:::::::::::::::::::::::::::::::::::::::::: DEFENDANT
BEFORE:
THE HONOURABLE MR. JUSTICE YOROKAMU BAMWINE
J U D G
M E N T:
The Plaintiff is a company limited by guarantee and
having no share capital. The Defendant is a Banker carrying on business at its
branch on Entebbe Road, Kampala, and elsewhere in the country. On June 24, 2001
the Plaintiff resolved to open a current account
with the Defendant’s
branch in Kasese, Western Uganda. Four people were selected to be signatories
to the account:
1. Mr. Costa Bwambale Director
2. Mr. Tembo
Peter Director
3. Mr. Bahati Sam Director
4. Mr. Mugisha P.
Dan Director
They were empowered to authorize all payments of the
Association. The mandate to the Bank, especially as regards withdrawals of
funds
from the Account was to be by “either of the 2
signatories”. The General Secretary was to be the Principal
Signatory. The opening of the Account No. 1510350275 actualised on 23/3/2002.
The Plaintiff’s case is that on 29/9/2003, the Defendant wrongfully and
negligently paid out Shs.50,000,000- on their Account
thereby causing a loss to
the Plaintiff. The Defendant’s case is that it acted prudently, honestly
and carefully as a Banker
in paying the cheque.
The following points are
uncontested:
1. That the Plaintiff operated C/A No. 1510350275 in the Defendant Branch at Kasese.
2. That there were 4 signatories to the Account including Mugisha P. Dan, the Principal Signatory. He was also the General Secretary/Co-ordinator.
3. Shs.50m was deposited on the Plaintiff’s Account on 29/9/2003 by the Vice Chairman. It was by cheque. It was deposited at 11 a.m and withdrawn at 1 p.m, same day.
4. Mugisha P. Dan is now at large, being sought by
police.
Two issues were framed for determination:
1. Whether the Defendant was negligent in paying a sum of Shs.50m out of the Plaintiff’s Account.
2. Whether the Plaintiff is entitled
to the reliefs sought.
Counsel:
1. Mr. Mugogo Edward for the
Plaintiff.
2. Mr. Mubiru Stephen for the Defendant.
I now proceed to
make a resolution of the above issues but before I do so, let me comment briefly
on the term negligence.
It is a tort, actionable at the suit of a person
suffering damage in consequence of the Defendant’s breach of duty to take
care
to refrain from injuring him. In the words of Alderson B, in BLYTH
–VS- BIRMINGHAM WATER WORKS CO. (1856) 11 EX., at P. 784, it is the
omission to do something which a reasonable man, guided upon those
considerations which ordinarily regulate
the conduct of human affairs, would do,
or doing something which a prudent reasonable man would not do. So negligence
is really
neglect of some care which we are bound to exercise towards somebody
else. The degree of care which the law requires is that which
is reasonable in
the circumstances of each case. However, persons professing a special skill
must use such skill as is usual with
persons professing such skill. The burden
of proving negligence is on the party alleging it.
I now turn to the
evidence as adduced by both parties. First, the Plaintiff’s
evidence.
PW1 Constantine Bwambale (52) is a businessman of Kasese and a
member of Busongora Development Association Ltd, a micro finance institution
which lends money to people in Kasese. He is its Vice Chairman. He is also a
Vice Chairman of a sister company, Bakwanye Trading
Company, which exports
coffee and cocoa. The latter company lends money to the Plaintiff. Around
15/08/2003, the Plaintiff resolved
that it borrows money to make its account
operational. Money on the account had been lent out to farmers; they were not
expecting
funds soon; and yet their benefactors, the Donors, were about to visit
them. So to make the Plaintiff’s account operational,
they borrowed
money, Shs.50m, which they deposited on the account by cheque on 29/9/2003 in
Kasese. The money was supposed to go
back to Bakwenye Trading Co. Account as
soon as the visit of the donors ended. The donors did not turn up as expected.
The following
day, he went to check on the Account and found that the money had
been removed only two hours after it had been banked. He contacted
the area
Bank Manager who told him that the money was withdrawn by the Plaintiff’s
Secretary Manager from the Bank branch on
Entebbe Road, Kampala. He ascertained
that the whole amount of Shs.50m had been withdrawn from the account by Mugisha
P. Dan, the
Plaintiff’s Secretary General/Co-ordinator/Principal signatory
to the account. He used a cheque purportedly signed by the
said Mugisha and
himself (PW1). Mugisha was believed to be an honest man before this incident.
He had custody of the cheque book
and company stamp. Their protection was the
belief that signatories were honest people and that only cheques bearing genuine
signatures
would be honoured.
PW2 Ezati Samuel (46) is a handwriting
expert. He was given the cheque in question and asked to determine the
genuineness of the
signature attributed to PW1 Bwambale. He came to the opinion
that the two signatures appearing on the cheque attributed to Bwambale
were not
put there by hand. They were not original because they did not have evidence of
fresh or live fluid ink or ball pen ink.
He came to the conclusion that the
signatures were copies of Bwambale’s genuine signature, transferred to the
cheque electronically.
In his view, the impugned cheque was a built up
document.
For the defence, DW1 Tumuhimbise Deus (46) was the
Defendant’s Manager in Kasese at the material time. On 29/9/2003 Bwambale
banked a cheque of Shs.50m on the Plaintiff’s Account. The account was
immediately credited with the same amount, this having
been an internal
transfer, that is, from one account to another within the same branch. Later
that day, he received a call from
one Florence Magembe, an Accountant with the
Defendant’s branch at Entebbe Road. He was asked to confirm whether
Shs.50m had
been banked on the Plaintiff’s account and he confirmed so.
After about 2 weeks, he learnt that the money had been withdrawn
fraudulently.
DW2 Ominya Boniface Aluki (33) was a Banking Officer with
the Defendant, Entebbe Road, at the time. One Mugisha went to him with
a cheque
for payment. He ascertained that there was money on the account. He also
ascertained that the cheque presenter’s
signature was genuine. He sent an
override to his Senior Manager, a way of seeking authorization to pay depending
on the amount
involved. The Manager refused to authorize payment. He called
for the cheque and the payee. Later, he went back, picked the cheque
and paid
him. The Manager did not tell him why he had rejected the override. The
Manager, DW4 Dismas Wandera, said he first declined
to sanction payment because
of the big amount involved and the fact that funds had just been put on the
account and were being removed.
So he sought more details before authorising
payment. He called for the cheque and checked the signatures against the
available
information in the system. He was satisfied that the cheque had been
signed in accordance with the Plaintiff’s mandate to
the Bank. He also
contacted the Accountant in the same branch who told him that she knew the payee
personally and that the area
manager Kasese had confirmed to her the genuineness
of the payment on the Plaintiff’s account. He then authorized payment.
Later, Bwambale went to him and expressed shock at the payment. The cited
Accountant was Florence Magembe, DW3. She said she knew
the payee personally as
their customer as well as a relative to her sister’s husband. On
29/9/2003 he went to her and said
he was expecting a payment. He checked the
Plaintiff’s account and found that Shs.50m had been deposited there.
Because of
the amount involved, she sent an override to the manager who, as we
have already seen, sought verification from their colleague in
Kasese. Upon the
Kasese Manager confirming to them the genuineness of the deposit on the
Plaintiff’s account, she advised
the manager, DW4, to pay and the payee
was indeed cleared for payment. In her view, she did her best because the payee
was personally
known to her and she knew that he was the principal signatory to
the account.
The thrust of the Plaintiff’s case is that the said
payment was never authorized by the signatories to the account as per the
written mandate to the Defendant. That the principal signatory forged the
co-signatory’s signature and colluded or connived
with the Bank Officials
who authorized the instant withdrawal of such hefty sum of money from the
account. Its argument that the
Defendant cannot escape liability is based on
its belief that it was an implied term of the contract between the Defendant as
Banker
and the Plaintiff as customer that the Defendant was obliged and under
duty to observe reasonable skill and care in and about executing
the
Plaintiff’s orders/instructions, including cheques drawn on the
Plaintiff’s Account. It is contended that by paying
the money to Mugisha
without further inquiry the Defendant was negligent and in breach of
contract.
In reply to all the above, the Defendant contends that the said
cheque had the proper requirements to show that the Plaintiff had
mandated the
payment of such a cheque to Mugisha P. Dan. That in any case, what Mugisha did
as Secretary General of the Plaintiff
was in the course of and within the scope
of his employment as such. It is further argued that the Plaintiff as
Mugisha’s
employer was the author of its own loss in allowing him to
access the cheque, to operate the account and to collect payment.
I have
very carefully addressed my mind to the able arguments of both
counsel.
It is perhaps a case without a comparable precedent in this
country. From the evidence of the handwriting expert, PW2, which has
not been
controverted, the two signatures on the impugned cheque were not put there by
hand. They are not original. They are copies
of the genuine signature of PW1
Bwambale which were electronically transferred to the cheque. I accept that
evidence. This therefore
renders the cheque a built up document.
This
now leads me to the issue as to whether the Defendant was negligent in paying
the money out of the Plaintiff’s account.
I have looked at the
Bills of Exchange Act, Cap 68. Section 59 (1) thereof provides:
“(1) when a bill payable to order on demand is drawn on a banker, and the banker on whom it is drawn pays the bill in good faith and in the ordinary course of business, it is not incumbent on the banker to show that the endorsement of the payee or any subsequent endorsement was made by or under the authority of the person whose endorsement was made or under the authority of the person whose endorsement it purports to be; and the banker is deemed to have paid the bill in due course, although the endorsement has been forged or made without authority.”
Subs. 2 applies to a draft or
order, other than a bill or cheque. It is therefore not of any help to
us.
On the evidence before me, I need only to be satisfied on the balance of
probabilities that one or the other of the parties was negligent.
This Court is
cutely aware that Banks always warn customers that cheque books must be kept in
a secure place. Usually, the words
are printed prominently in the cheque book
itself. That is fair enough. Problems arise when the cheque book itself, or a
few cheques
out of it, are stolen and presented to the Bank by the likes of
Mugisha in this case, who has forged the signature of a Co –
signatory.
The answer is not quite obvious. Invariably, the banks plead, and the Defendant
has so pleaded herein, that when a cheque
duly signed by a customer is presented
before a Bank, it carries a mandate to the Bank to pay. I think for as long as
the cheque
has been duly signed by the customer, there should be no problem. In
the instant case, the customer to the Bank was not Mugisha
or Bwambale. These
were mere signatories to the Account. The customer was a company, the Plaintiff
herein. I must stress this
fact because a company is a legal entity distinct
from its members. So what is the law when a Bank encashes a forged cheque or
does
not take steps to ascertain a forgery?
I have already made reference
to S.59 of the Bills of Exchange Act. The Bank appears to be protected if the
payment is in good faith
and in the ordinary course of business.
I am of
the considered view that the Court must draw a distinction between those
situations where the Plaintiff’s cheque is
altered, for example by adding
in additional figures in words, this being accomplished by the customer leaving
spaces which facilitate
the fraud; those cases in which the customer leads the
bank to believe that irregularity is condoned; those cases in which the
proximate
cause of the loss is something that the customer has done which
induces the bank to believe that the collection and payment of the
cheque is in
order; and those cases, like the instant one, where the signatures of the
authorised signatories to the account are forged.
The instant case is
one where the fraudster is still at large, being sought by police. I think it
goes without saying that any signature
on a bill that is forged or placed on the
bill without authority of the person whose signature it purports to be, that
forged or
unauthorized signature is wholly inoperative. It is meaningless and
of no legal consequence for whatever it is worth as far as that
bill is
concerned. The duty of care that the banker owes the customer is clearly
expounded in London Joint Stock Bank Ltd –Vs- Macmillan and Arthur
[1918] AC 777 and a number of other cases. The principle established in
that case is that:
“the contract between banker and customer gives rise to a duty upon the customer to take usual step and reasonable precautions in drawing a cheque to prevent fraudulent alteration thereof which might occasion loss to the banker.”
From the above, the principle relates to
cheques that are drawn in such a way by the customer as to facilitate fraud thus
occasioning
loss to the banker. From the decided cases, for instance The
Kepitigalla Rubber Estates Ltd –Vs- The National Bank of India Ltd [1909]
2 KB 1010, the general principle is that:
“It is the duty of the customer of a bank in issuing mandates to the bank to take reasonable care so as not to mislead the bank; but beyond the care that must be taken in or immediately connected with the transaction itself, there is no duty on the part of the customer to take precautions in the general course of carrying on his business to prevent forgeries on the part of his servants.”
I think this if fairly obvious.
Criminals are criminals. No one ever gets to know what they are thinking until
they strike. There
are very few local authorities on the matter. I have seen
Development Consultants International Ltd –Vs- Nile Bank Ltd HCCS No.
867/1998, unreported, which learned counsel for the Plaintiff has graciously
availed to me. The principle of law stated therein is not any
different from
what I have stated above. Outside the jurisdiction, the Supreme Court of India
considered an almost similar matter
in Canara Bank –Vs- Canara Sales
Corp. & Others Air 1987 SC 1603 reported [1988] LRC (Comm)
5.
In that case, the Chief Accounts Officer of the company (the
account holder), who maintained the company’s accounts and had
custody of
the cheque books, forged 42 cheques for a total amount of Rs 326,047.92 between
1957 and 1961. A suit was filed against
the Bank for wrongfully encashing the
aforesaid cheques. The bank contended that the company was stopped from
claiming the amount
because of its own negligence and also because it acquiesced
in and ratified the payments. It pointed out that the company had not
raised
any objection over a period of 4 years even though it received monthly
statements. The Supreme Court turned down their arguments
and held that the
Bank could escape liability only if it could establish that the company knew of
the forgery. On the issue of the
delay to discover the frauds, the Court
observed that inaction of the customer does not by itself afford satisfactory
grounds for
the Bank to escape its liability.
From the authority above,
the only way the banker can escape liability would be if it can show that the
customer was guilty of some
voluntary act that caused the banker to be misled
into paying the cheque. It is not enough to say that the customer had taken the
employee into his service without sufficient inquiry as to his character or that
the forgery was of such high standard that no ordinary
banker could have
detected it at the time the cheque was presented and/or negotiated. With
respect, it is precisely for this reason
that there are usually added
safeguards, usually by way of Internal circulars to staff, providing guidelines
and assistance to bank
officials to take extreme care and precautions in dealing
with customers’ funds. In the instant case, I have considered the
steps
taken by the Defendant’s servants before they authorized the payment to
Mugisha. This was a case where money was deposited
in Kasese around 11 a.m and
almost at the same time, a person was in Kampala taking it all from the Account.
The hurry, according
to DW4 Wandera, caused him to reject DW2 Ominya and DW3
Florence Magembe’s overrides. In otherwords, his conscience warned
him
that all may not have been well. In these circumstances, it was not enough for
them to inquire from the Kasese Manager as to
the genuineness of the deposit.
The money was on the account for all to see. Having formed the suspicion as
they did, it would
have been sufficient if they had themselves raised PW1
Bwambale on phone or through DW1 Tumuhimbise to confirm the fact of
Mugisha’s
authority to withdraw such a heavy sum of money which had been
deposited in Kasese when he, Mugisha, was already in Kampala. I am
saying so
because the Defendant did not lead any evidence to show that Mugisha or any
other Official of the Plaintiff for that matter
had ever taken funds in that
fashion to raise inference that this was the Plaintiff’s preferred way of
transacting business
on its account.
For the Defendant to succeed in
its defence it must show that the Plaintiff’s loss was attributable to its
own negligence which
must be linked to or immediately connected with the
transaction itself and must have been the proximate cause of the loss. In my
view, the Defendant has failed to establish such negligence. The inexcusable
lapse in Judgment of its officials caused Mugisha to
walk away with such a hefty
sum of money. If Bwambale had been contacted when Mugisha was still before
them, this case wouldn’t
be in Court. He would have been arrested there
and then and the Plaintiff wouldn’t be raising any complaint at all
against
its own Bank. The Plaintiff cannot escape its liability merely because
the state of the art at the time would not easily expose
the forgery on the
cheque. Such a defence is untenable in this computer age, e-commerce and
cyber-crime. There must be assurance
to customers that their money is safe in
the Bank. If the handwriting expert could so easily detect the problem on the
cheque, there
no reason why the Bank cannot employ people of the same
specialized skill to detect electronically scanned and transferred signatures
on
to the bills of exchange. In my view, in case of the slightest doubt, as
happened to DW3 Magembe and DW4 Wandera, the Bank must
apply high-tech methods
to detect such forgeries or else be prepared to make good losses occasioned to
their customers.
In these circumstances, I have come to the conclusion
that the only defence which would have successfully disposed of this matter
in
the Defendant’s favour would have been evidence that the fraud was
committed with the knowledge, actual or constructive,
of the Plaintiff. No such
evidence was adduced in this case. From my analysis above, the Defendant was
negligent in paying the
money as it did.
I would answer the first issue
in the affirmative and I do so.
The 2nd issue is whether the
Plaintiff is entitled to the reliefs sought. I think it is. The law will not
suffer a wrong to be without
a remedy. It is entitled to the refund of its
money that was removed from its account on a forged cheque. It is thus to be
refunded
the sum of Shs.50,000,000- as prayed.
As to the damages for
breach of contract, this of course denotes the kind of damage which the law
presumes to follow from the wrong
complained of. It is trite that one of the
duties of counsel in an action for general damages should be to put before Court
material
which would enable it to arrive at a reasonable figure as general
damages. In this respect, counsel owe a duty to their clients
as well as to
Court so that Court arrives at a reasonable award. In the instant case, all
that Plaintiff’s counsel did was
to lay down the principles on which
general damages are assessed and paid. He did not propose any figure.
I
have considered the Plaintiff’s evidence that its principal business is to
lend, with interest, money to the rural poor in
Kasese. From its own evidence,
the money which the fraudster disappeared with did not belong to it. It
belonged to Bakwanya Trading
Co. It had just been deposited on the
Plaintiff’s account to give a rosy picture of the account to the donors.
The money
had simply been entrusted to the Plaintiff. It was not for its
operations. Accordingly, while I do not accept the defence argument
that the
Plaintiff should have no claim to it, I’m of the considered view that once
the funds are refunded to it, the Plaintiff’s
woes will end. Considering
the position of the fraudster in the company and the manner in which the fraud
was executed, I am inclined
to the view that this is not a fit and proper case
for an award of general damages. I have therefore not awarded any.
As
regards interest, the Plaintiff seeks interest at Commercial rate from the date
of the accrual of the cause of action till payment
in full. From the evidence
of PW1, Bakwanye Trading Co. was a sister company to the Plaintiff. The
Plaintiff was in the habit of
borrowing money from that company. It is not
indicated whether this was with or without interest. In view of the evidence
that
this was money not meant for the use of the Plaintiff and Bakwanye Trading
Company is not party to this case, it is fair that the
decretal amount starts to
earn interest at commercial rate of 25% per annum from the date of Judgment till
payment in full. I so
order.
As regards costs, the usual result is that
the loser pays the winner’s costs. A successful party should only be
denied costs
if it is proved that but for his conduct, the action would not have
been brought. In view of my finding that the Plaintiff was not
involved in the
fraud, it will be paid the costs of the suit.
In the final result,
Judgment is entered for the Plaintiff against the Defendant. The following
orders are made:
i. Refund to it of Shs.50,000,000- (fifty million only).
ii. Interest on (i) at the rate of 25% per annum from the date of Judgment till payment in full.
iii. Costs of the suit.
Yorokamu
Bamwine
J U D G E
08/07/2005
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