The unilaterally closing of an individual bank account by a South African Bank – the Gupta-saga.

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 this 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.

FirstRand Bank was the first bank to close the accounts of Oakbay Investments a company controlled by the Gupta brothers, FirstRand bank base their decision for closing the bank accounts of the business family linked to allegations of influence in President Jacob Zuma’s government on suspicions of money laundering.

In an affidavit dated 29 November that was files in court, FirstRand Chief Executive Officer Johan Burger said his company had closed Oakbay bank accounts to comply with international regulations.

“These practices and standards require us to take steps to prevent FirstRand being used for money-laundering and other unlawful activities,” Burger says in the court papers.

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.

Relationship between a bank and its customer

The relationship between a bank and its customer is based on contract, the types of contracts that a bank may enter into with its customer is one of mandate, loan for use, deppositum and deposit taking. I will give an example through the case of Bredekamp v Standard Bank 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 honouring 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.

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.

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 giving 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 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 Bedenkamp case discussed below.

Supporting case law and articles

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 factual background of the Bredenkamp case as provided for in Schulze (2011) 32 Obiter 211-223 is as follows:

On 25 November 2008 the American Department of Treasury’s Office of Foreign Assets Control (“OFAC”) listed Bredenkamp and the other applicants as “specially designated nationals” (“SFNs”). This meant that they became subject to the sanctions imposed and enforced by OFAC. On the following day Standard Bank became aware of Bredenkamp’s listing and that OFAC suspected Bredenkamp of “being involved in illicit business activities including tobacco trading, arms trafficking, oil distribution, diamond extraction and of being a confidant and financial backer of Zimbabwe’s Robert Mugabe”.

During December 2008, Standard Bank decided to terminate the relationship between it and Bredenkamp and to close the accounts, which Bredenkamp had with Standard Bank. There were three reasons why Standard Bank decided to close Bredenkamp’s accounts:

  1. The mere fact of the OFAC designation of Bredenkamp and the other three applicants;
  2. The risk that Standard Bank’s reputation may negatively be affected should it continue to have Bredenkamp as a customer; and
  3. There were certain business risks for Standard Bank should it carry on granting banking facilities to Bredenkamp and the business entities under his control because of his listing as a SFN.

Standard Bank argued that the contract between itself and Bredenkamp contained a clause, express or tacit, in terms of which itself had the right to terminate the contract for good cause, bad cause or no cause at all (hereinafter “the lex commissoria”).

Bredenkamp applied for an interim interdict to prevent Standard Bank from closing his bank accounts and thus to retain the status quo.

The question before the court was still whether Standard Bank had the right to terminate the bank-customer relationship (ie, the agreements between it and Bredenkamp) and to close Bredenkamp’s bank accounts unilaterally.

The court held that the decision by Standard Bank to terminate its relationship with Bredenkamp was not reasonable and granted the relief sought by Bredenkamp.

Some of the reasons for the court’s decision was that Standard Bank is one of the major banks in south Africa and have oligopoly in the market hence the Bank uses its position of power to impose standard – form contracts on their customers. Such powers would be exercised oppressively and there was undeniably an element of oppression when a bank decided to terminate the contract without good cause.

In the main application in Breedenkamp v Standard Bank the court rejected reasoning when allowing the interim application in the interlocutory application. In the main application, the court confirmed a bank’s right to terminate the relationship between it and its customer unilaterally, provided that certain requirements are met.

In this case the parties contracted in an equal footing despite the fact that the contract was a standardised contract of the bank. Bredenkamp is a well-established and influential businessman; he was an international commodities trader who represented a multi-national entity in great wealth.

The court further held that there is no evidence that the closing of Bedenkamp’s accounts with Standard left him stranded without another bank to use. As far as Bredenkamp’s integrity was concerned, the court held that a bank is entitled to rely on the integrity of its customers to conduct their business legally. A bank also has certain obligations and regulations to comply with, in terms of national and international legislation. Failure to comply with these regulations may have serious legal consequences for a bank.

The application was dismissed with costs, and Bredenkamp appealed to the SCA.

During the appeal Bredenkamp and others contended that the closing of their bank accounts was unfair because it was unlikely that they would be able to obtain other banking facilities. They relied on a Constitutional Court judgment 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 Barkhuizen judgment; such an interpretation of the Barkhuizen case would lead to all types of absurdities and impracticalities. For example, a debtor would be able to argue that it would be unfair of a creditor to call up a loan on the due date because the debtor is unable to repay the loan and that enforcement could lead to the latter’s sequestration. The court concluded that in any event, the closing of the accounts was not unfair under the circumstances of the case, and the application was dismissed.

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 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.

Recent events

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.

The authority will also determine the disclosures that has to be made to the customers and could oblige the financial institution to report any refusal, withdrawal or closure of a product or service to the financial sector regulator.

In terms of the amendment, the standards set by the authority will have to take into consideration international standards and practices and be subject to the requirements of the Financial Intelligence Centre Act and other the laws governing the financial sector.

These recent 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 Tshivhase