Is it permitted for a Bank to unilaterally close accounts of a client?

The Gupta family has been in the media for meddling with the South African Government through their close relationship with President Jacob Zuma, they are being accused of allegedly trying to capture the state. Between December 2015 and April 2016, four major banks in South Africa namely: Standard Bank, Nedbank, Barclays Africa and FirstRand Bank, terminated the accounts of companies controlled by the Gupta family without making their reasons public. The Gupta family requested the then Finance Minister Pravin Gordhan to intervene with the decision of the banks to close their bank accounts. The Minister filed an application to court asking a court to declare that he could not interfere with the decisions by the banks. FirstRand’s court filing is in support of the application by Finance Minister Pravin Gordhan and Barclays and Nedbank followed with filing legal applications similar to FirstRand’s application.

The four banks gave the Gupta family more than a month’s notice and citing the need to comply with international banking rules when dealing with customers and concern over their reputations as the reasons for the closure of their accounts. In his court application Pravin Gordhan included a document from South Africa’s Financial Intelligence Centre listing 72 reports of suspicious transactions totaling R6.8 billion that implicated members of the Gupta family and their companies. This seems to be the basis of the allegations of the Gupta families’ money laundering accusations and the need for the four banks to comply with international regulations.

Considering the type of relationship between a bank and its customer establishes the bases of when termination may occur, the relationship is based on contract, the types of contracts that a bank may enter into with its customer is one of a mandate, loan for use, deppositum and deposit taking. I will give an example through the case of Bredekamp v Standard Bank 2009 (6) SA 277 (GSJ) that will be discussed below. The customer held a number of current accounts with Standard Bank, It is trite that the type of contract which underlies a current account, is that of mandate. In terms of this contract of mandate, the customer lends money to the bank on current account, the bank undertakes to repay it on demand by honoring cheques drawn on it, and to perform certain other services for the customer, such as the collection of cheques, the payment of stop and debit orders, and the keeping and accounting of the customer’s accounts with the bank (Schulze (2011) 32 Obiter 211-223 Page 218)

One of the requirements for a contract is consensus, therefor the bank and the customer need to reach consensus with regards to the contract. Therefore the contract may be terminated in the same way as any other consensual contract. No contract can continue perpetually against the will of either of the parties. This will also be the case where the bank – customer contract is one of mandate. A mandate is dissolved by renunciation on the part of the mandatary (in the case below: Standard Bank). The mandatory (in the case below: Bredenkamp) also has no claim if the mandatary had good reason to terminate the mandate.

A bank is required to give notice to its customer before terminating the contract, the bank or customer may terminate the contract unilaterally, but cannot necessarily be terminated without serving prior notice to the other party. In the light of the fact that the common-law principles of the law of contract apply to the bank-customer relationship, a bank may, in the absence of a cancellation clause (ie, a lex commissoria) only resile from the contract if the breach of contract by the customer is serious (Schulze (2011) 32 Obiter 211-223 Page 220)

Schulze explains terminating a contract between a bank and customer as follows:

   I have already pointed out that the underlying contract between a bank and the holder of a current account is that of mandate. The duties of a party to the contract of mandate include the duty not to cause damage to the other party. I believe that where a customer of a bank conducts his business in a way which poses operational and business risks to the bank, the latter can validly argue that the mandatory (ie, the customer) acts in conflict with this duty (Joubert Die Suid-Afrikaanse Verteenwoordigingsreg (1979) 190 et seq). Such conduct would probably satisfy the test of seriousness and will allow the bank to cancel the contract unilaterally, also in the absence of a lex commissoria.”

In this regard it is safe to argue that a bank may terminate its contract with a customer based on the contract or common law. The customer may breach the contract in any other way or cause disrepute to the bank and that would be a valid reason to terminate the contract unilaterally by the bank. The bank may also terminate the contract due to compliance of national or international regulations, an example is the Bredenkamp case discussed below.

The main question of whether a bank has the right to cancel a contract between it and its customer unilaterally? Was put before the court in the matter of Bredenkamp v Standard Bank South Africa Ltd (2010) 4 SA 468 (SCA); 2010 4 ALL SA 113. Before the matter was heard at the SCA, two lower courts also had to make a decision based on the same question.

The SCA dismissed the appeal by Bredenkamp and others against a judgment of the highcourt. The appellants had sought an order preventing the Standard bank of closing their accounts with the Bank. The high court had dismissed the application. It was accepted that the Bank had, in terms of its contract with the appellants and in terms of the common law the right to close the accounts with reasonable notice. However, the appellants contended that the closing was unfair because it was unlikely that they would be able to obtain other banking facilities. They relied on a Constitutional Court (CC) judgment of the case of Barkhuizen v Napier 2007 5 SA 323 (CC) for the proposition that a party is not entitled to use its contractual rights if it would be unfair to the other party. The court held that the appellants had misconstrued the CC judgment and, in any event, the closing of the accounts was not unfair under the circumstances of the case.

The banks were correct in closing their accounts with the Gupta family, as we can establish from the Bredenkamp case the banks can unilaterally terminate their contracts with a customer. The said banks are merely complying with the national and international regulations of which, if they decide to neglect will amount to be illegal action by the banks. The Gupta family failed to prove that the closing of their accounts by the banks will result in them being unbanked, as that would be a strong reason for the banks not to terminate their contract with the said family.

Further the banks need to maintain their reputation in society, the other reason for the banks decision to terminate their contract with the Gupta family was to maintain their reputation, and manage to keep the existing clients they had, despite the saga occurring around the Gupta family.

Considering recent events The National Assembly’s standing committee of finance has endorsed a National Council of Provinces amendment to the Financial Sector Regulation Bill to require banks and other financial institutions to give reasons for termination of products such as the closure of bank accounts. The Financial Sector Regulation Bill will give effect to the twin-peaks system of financial regulation, leading to the separation of prudential regulation of financial institutions from regulation of market conduct.

In terms of the amendment adopted by the National Council of Provinces select committee, the Financial Sector Conduct Authority will be able at its discretion to lay down rules for financial institutions to follow in refusing, withdrawing or closing financial products or financial services.

These new developments are said to be promulgated in order to protect the consumer, as some customers do not enter into these contracts in an equal footing with the bank, and the bank might use its power to unilaterally cancel the contracts with no reason given to the customer. The banks have a fiduciary duty to the customer and in so doing must always act in good faith.

By Konanani Tshivase
konanani@dyason.co.za