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How wrongly dishonoured cheque earned NCBA Bank Sh76 million fine

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On April 30, 2009, two partners at a Nairobi law firm, Harit Sheth and Richard Kariuki, drew a cheque for Sh13.23 million in favour of one of their clients, Mark Properties Limited, from the sale of an apartment.

On this day the law firm’s client account at NIC Bank (now NCBA) had Sh29 million —well above the cheque amount.

As is routine from past property transactions with the law firm, Mark Properties Limited on May 4, 2009 banked the cheque in its account at I&M Bank which on that day had a credit balance of Sh37.65 million.

The cheque was then transmitted to NIC Bank the following day even as Mark Properties looked forward to an alert of an extra Sh13.23million hitting its account from Harit Sheth Advocates which it had hired as its sole payee lawyer in two development projects known as Mac Apartments and Mac Gardens in Nairobi. This never happened.

Instead, the property management firm was slapped with a notification of a dishonoured cheque from the law firm concerning an apartment sale within the Mac Apartments, triggering a lawsuit that left the lender at pains to explain why it dishonoured a cheque drawn by a client whose account had sufficient funds.

Bank account

Court proceedings revealed officials of the bank failed to verify the status of the law firm’s bank account before taking the decision.

“There was no justification in declining payment of the cheque. The cheque was duly drawn and executed as per the mandate held by the defendant. More so, there were sufficient funds to effect payment of the cheque. There was no good reason to decline payment and the defendant failed to properly exercise its duty of care to the plaintiffs by failing to carry out the plaintiffs’ instructions,” High Court judge Alfred Mabeya said in a judgement last week.

Harit Sheth Advocates in court submissions said the bank wrote the figure “80” on its cheque to Mark Properties Limited before dishonouring it.

The law firm said the number signified that there were insufficient funds in their client account to meet the payment commitment in the cheque. It further said the publication of the number ‘80’ and  dishonouring the cheque, the bank meant that it did not have sufficient funds in the client account to meet the cheque but was dishonest in taking the decision that is tantamount to professional misconduct.

Harit Sheth Advocates said that the dishonoured cheque led to a loss of business and profits of Sh56,335,282 after Mark Properties Limited declined to contract them on another Sh6 billion real estate venture dubbed Le Mac’ project.

The bank in its defense said that under Clause 18 of the terms and conditions between parties, it was obligated to verify the hefty Sh13.23 million transaction before paying the cheque.

The lender claimed it tried reaching the lawyers but they were unavailable and thus exercised its discretion and declined payment, taking into consideration the colossal amount on the cheque.

It claimed that it was protecting the law firm by declining payment to avoid fraud.

A witness presented by the bank claimed that the code ‘80’ meant that attempt to reach the law firm failed.

The bank,  however, did not inform the payee why the cheque was dishonored. The bank’s witnesses admitted that the lender knew that Mark Properties Limited was Harit Sheth Advocates’ client and that the subject account was a client account.

The lender’s witness further admitted that the law firm had provided its physical address which was about 400 metres from the branch where it held its transaction account.

Further, it emerged that the bank also had the plaintiffs’ mobile numbers, prompting questions on why it did not exhaust the options to reach its customers.

Justice Mabeya said the lender did not prove it contacted the law firm before dishonouring the payment.

Decline payment

“Though the defendant(bank) tried to show that the cheque was a cash cheque under clause 18 and verification was mandatory, it was unable to prove that it indeed contacted the plaintiffs unsuccessfully for verification and thus had grounds to decline payment,” he argued.

Clause 18 of the general conditions that was relied on by the bank says as follows: – “Where a cash cheque is presented not by the customer but by a third party, the Bank may require a confirmation from the customer or from a representative of the Customer before it makes payment. …”

“The above provision in my view only gave the discretion to the defendant to seek confirmation from the plaintiffs. The provision is not mandatory. The defendant is to exercise discretion based on the circumstances such as,  ‘Was the transaction out of the ordinary?’” Justice Mabeya said.

“Was this the first time the plaintiffs were issuing a cheque for such a huge sum or they were in the habit of issuing such cheques on that account bearing in mind that it was a client account? Was anything suspicious with the payment? There was no evidence that was led along these lines. All that was stated was that the amount was huge,” he added.

The judge said dishonouring a cheque on account of alleged insufficient funds had a devastating effect on the law firm.

“It means the advocate is not holding any monies for his clients. And for a client like the payee who had two projects whose legal work was being handled by the plaintiffs and were holding the payees’ funds from the sales so far effected must have been a shocker,” he said.

Defamatory note

“In this regard, it should have been in the contemplation of the defendants that dishonoring a cheque written on a clients’ cheque would have dire consequences on its customers, the plaintiffs. It is no surprise that the plaintiffs lost a valued client like the payee with the attendant loss of business. The loss of instructions from the payee and the consequent loss of fees cannot be said to be so remote as claimed by the defendant. If it were another client who was not affected by the dishonor, such an argument may hold, but not in respect of the payee who was directly affected by the dishonor,” the judge added.

Justice Mabeya said the “80” digit on the cheque was defamatory of the plaintiffs and reprimanded the bank with a Sh76.33 million fine.

“It was false as the plaintiffs’ clients’ account was in sufficient credit. The publication was malicious as there was no effort to confirm clearance of the said cheque. Considering the risk involved, the distance of 400 meters as too short a distance for the defendant not to send a representative to the plaintiffs’ offices to make the confirmation if phone calls, if at all they were made, were not going through. In any event, there was no evidence to show that there was any attempt to contact the plaintiffs,” he ruled.

Cold feet

The Judge said the bank’s action directly negatively impacted the law firm’s chances of future contracts by the real estate firm.

“The fact that the payee grew cold feet to give the plaintiffs further instructions meant that it had concluded that it was risky to deal with the plaintiffs in the mega projects and the heavy financial implications connected therewith. Any reasonable person who got to know the transaction would form the conclusion that the cheque must have been dishonoured due to insufficient funds and not internal issues as suggested by the defendant” the judge said.

“In the end, this court finds that the defendant breached the banker-customer contract, and that the marking of the banker’s cheque ‘80’, meaning “refer to maker” or “refer to drawer” was defamatory of the plaintiffs.”

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