Q.
Brief Facts
Blessing is a customer at Bravo Bank. Three days ago, he visited the bank and complained that
he had noticed from his bank statement that three unauthorized withdrawals had been made and
his account debited. Investigations reveal that the withdrawals were made by Moses, Blessing’s
office messenger who stole Blessing’s cheque book, forged Blessing’s signature and
subsequently received the payments. Explain the legal position of Bravo Bank.
Issues
1. Whether Bravo bank will bear the losses of Moses’s forgery on Blessing’s account?
Law applicable
The Bank of Uganda Act Cap. 51
The Financial Institution Act, 2004
The Bill of Exchange Act Cap. 68
Case Law
Resolution of Issues
Issue No. 1
Whether Bravo Bank will bear the losses of Moses’s forgery on Blessing’s account?
Section 3 of the Financial Institution Act, 2004 defines a Bank as “any company licence to
carry on financial institution business as its principal business as specified in second schedule to
this Act and include all branches and offices that company in Uganda.” 1 In the case of United
Dominion Trust Ltd v. Kirkwood, Lord Denning propounded that there are therefore two
characteristics usually found in bankers today. (a) They accept money from and collect cheques
for their customers and place them to their credit (b) They honour cheques or orders drawn on
them by their customers when presented for payments and debit their customers accordingly.
These two characteristics carry with them also a third namely (c) keeping current accounts or
1
the Financial Institution Act
something of that nature in their books in which the credits and debits are entered. 2 A cheque is
define under Section 2 of the Bill of Exchange Act Cap.68, as a bill of exchange drawn on a
banker payable on demand. It is further provided for under the stamps Act that a cheque is a bill
of exchange drawn on a specified bank and not expressed to be payable otherwise than on
demand.3
It is important to note that whereas the definition of a customer according to case law, is also
somewhat difficult to come up with an exhaustive definition. Thus one of the major determinant
factor courts will usually look at is, whether one has an account with the Bank, and the duration
in this instance may not be necessarily important. 4 In the case of Great Western Railway Co. v
London County Banking Co. Ltd, it was held that a person need not to have a series of
dealings with the bank before he acquires the status of customer. He becomes a customer the
moment the bank starts receiving his money which includes cheque and agrees to open account
for him.5 It was also held in Ladbroke v. Todd, the court said; “in the opinion a person becomes
a customer of a bank when he goes to the bank with money or cheque and asks the bank to open
an account in his name, and the bank accepts the money or cheque and is prepared to open an
account in the name of the person; after that he is entitled to be called a customer.”6
It would be sacrosanct, for Bravo Bank to understand that the relationship between a bank and its
customer primarily consist of a general contractual relations which is the basis to all transactions
as established in the case of Mobil (U) Ltd v Uganda Commercial Bank where it was held that
the banker and customer relationship was contractual. 7 In this respect, it would be prudent for
Blessing to know that he owes Bravo Bank the following duties;
1. Duty of reasonable care in drawing cheques
Lord Atkins stated in the case of Joachimson v Swiss Bank Corporation that the customer
undertakes to exercise reasonable care in executing his written orders so as not to mislead the
bank or to facilitate forgery.8 Also in In Mobil (U) Ltd v. Uganda Commercial Bank a cheque
2
(1966) 1 All 968
3
Stamps Act Section
4
(1966) 1 ALLER 968
5
(1901) AC 41
6
(1901) AC 414
7
(1982) HCB 64
8
1921 Vol. 3 A.B. 110
drawn for Shs 10,301 was altered to read Shs 40,301. High Court held that “a customer and a
banker, being under a contractual relationship, the customer in drawing a cheque is bound to take
usual and reasonable precautions to prevent forgery. If a cheque is drawn in such a way as to
facilitate or almost to invite an increase in the amount by forgery, if the cheque should get into
the hands of a dishonest person, forgery is not a remote but a very natural consequence of
negligence of this description.9
2. Duty to inform bank on any forgery customer is aware of otherwise customer bears loss
for the forgery
In the case of Greenwood v Martins Bank Ltd the Court of Appeal held that if a cheque awe
presented to a banker which he rejected as forged, he would be under duty to report this to the
customer and enable him to inquire into and protect himself against the circumstances of the
forgery. This involves a corresponding duty on the customer. To do the same if he is aware of his
cheques being forged.
It would be of paramount importance for Bravo Bank to know that they owe Blessing the
following duties;
1. Duty to honour the customer’s mandate
The customer’s mandate gives the authority for the bank to act in a particular way. Dr.
Weerasooria observes: “In transactions not ordinarily connected with the operation of a cheque
or saving account, the customer’s relationship with the bank is subject to special arrangements
which are normally reduced to writing. These written arrangements are commonly called
‘customer’s authorities’ or ‘mandates’.10 Once the mandate is given by the customer to his/her
bank and becomes binding on the bank, the bank has a duty to act on the said mandate. 11 Any
failure of the bank to act as stipulated in the mandate given by its customer would result in
breach of contract on the part of the bank. When the bank acts outside the authority conferred by
the mandate, effects of such acts will not be binding on the customer and therefore, bank alone
would be liable for any loss incurred thereby.12 Acting beyond the customer’s authority may also
9
(1982) HCB 64
10
W. S. Weerasooria, Law Relating to Banking and Inter-Related Services, Colombo: Institute of Bankers of Sri
Lanka, 1997 at p. 80.
11
Huenerbein v. Federal Bank of Australia (1892) 13 LR (NSW) L 224.
12
See, R. Cranston, Principles of Banking Law, (2nd ed.) Clarendon: Oxford University Press, 2002 at pp.140-141.
amount to breach of contract on the part of the bank. The bank must pay cheques drawn by a
customer in legal form on the branch where the customer’s account is maintained subject to
certain requirements. These requirements include:
1. The cheques should be presented for payment during banking hours or within a reasonable
margin of time after the bank’s advertised hour of closing.
2. There should be sufficient funds in the customer’s account to meet the cheques drawn by the
customer or else a prior arrangement should have been made by the customer with the bank for
the payment of the cheques drawn by him/her.
3. There should be no legal impediments to the payment of the cheques. The cheque is also
required to be drawn in proper form.13
It would be of interest for Bravo Bank to know that when the above requirements are satisfied
the bank is obliged to pay the cheques drawn by its customer and if it breaches this duty the
customer would be entitled to claim for damages from the bank.14
It is however important to note that when there are no sufficient funds in the customer’s account
to meet a particular cheque drawn by the customer, the bank is under no legal obligation to pay
part of the sum for which a cheque is drawn. 15 Apart from this, Lord Chorley points out that “a
banker has no implied authority to accept gifts on his customer’s behalf, although exceptionally
he might do so from an accredited agent.” 16 Dr. Weerasooria sums up the two courses of action
seem to be open to the bank in this context; that is, either dishonor the cheque for want of funds
or exercise discretion to grant the customer a temporary overdraft, since drawing of a cheque
when funds are insufficient to meet it is equivalent to asking the bank for an overdraft. 17 Another
important concern for Banks is the order of payment of cheques. The general rule is that in the
absence of specific instructions to the contrary, a bank is under a duty to pay its customers’
cheques in the order in which they are presented, whether by post or otherwise. 18 Lord Halsbury
13
Section 73 Bills of Exchange Act Cap. 68
14
W. S. Weerasooria, Law Relating to Banking and Inter-Related Services, Colombo: Institute of Bankers of Sri
Lanka, 1997 at p. 82.
15
Carew v. Duckworth (1869) LR 4 Ex 313; Joachimson v. Swiss Bank Corp. [1921] 3 KB 110
16
W. S. Weerasooria, Law Relating to Banking and Inter-Related Services, Colombo: Institute of Bankers of Sri
Lanka, 1997 at p. 89.
17
Cuthbert v. Roberts Lubbock & Co. [1909] 2 Ch 226.
18
W. S. Weerasooria, Law Relating to Banking and Inter-Related Services, Colombo: Institute of Bankers of Sri
Lanka, 1997 at p. 89.
takes the view that the payment of cheques for smaller amounts which could be met by the
available funds should be preferred, since “the smaller the amount of the cheque, the greater may
be the damage to the customer’ credit” Paget and Lord Chorley take a different view, where
Dr. Weerasooria also seems to agree, that “the Bank should pay as far as possible”. In any
event, the bank must act without delay in discharging its obligations to pay its customer’s
cheques. The bank must either pay or refuse the payment by dishonour. It was held in the case of
Freeman v. Standard Bank of South Africa Ltd. [1905] WHC 26 that a request by the bank to
re-present the cheque amounts to dishonour and the bank would be liable if the dishonour is
wrongful. However, Bank is entitled to a reasonable time to ascertain whether the customer has
sufficient balance to meet the cheque presented to the bank for payment.19
3. Duty of secrecy/ confidentiality, i.e a duty not to disclose any information concerning the
affairs of the customer without his consent.
The banker customer relationship has elements of agency and as a general rule an agent owes a
duty of loyalty and confidentiality of his principle. It is provided for under Section 40 (3) of the
Bank of Uganda Act Cap 51 that a banker shall not publish or disclose any information
regarding the affairs of a financial institution or a customer of a financial institution unless
customer consents.20 In Parry Jones v Law Society, Lord Diplock stated that the duty of
secrecy extended even to a banker and customer and subject to the contract. 21 Further, in
Tournier v. National Provincial and Union Bank of England [1924] 1 KB the plaintiff was
unable to meet the payment demands made by tehe branch manager. On one occasion the branch
manager noticed a cheque drawn to the plaintiff’s order by another custodian. The manager then
rang the plaintiff’s employees to ascertain the plaintiffs‟ private address but in the course of the
conversation he disclosed the plaintiffs account being overdrawn. The plaintiff’s contract was
not renewed because of this by the employers. Court of Appeal held the bank guilty of a breach
of a duty of secrecy and awarded damages against it. It was elucidated, the bank’s duty remains
even after the account has been closed. In this case, it was highlighted that the duty of
nondisclosure is a legal one arising out of contract, highlighted the fact that the duty is not
absolute but qualified, and hence providing exceptions thereto. 22 It is however important to note
19
Eddy v. Bank of New South Wales [1877] Knox 299.
20
Bank of Uganda Act Cap 51
21
[1969] 1 Ch 1
22
[1924] 1 KB
that there are some exceptions to the duty of confidentiality between a Banker and customer;
where disclosure is under compulsion of law, Where there is a duty to the public to disclose,
where the interest of the bank requires disclosure and where disclosure is made by the express or
implied consent of the customer.
2. Duty of Skill and care
According to Sections 80 & 82Bills of Exchange Act Cap.68, a Paying Bank is the Bank on
which a cheque is drawn. And Collecting Bank is the Bank which collects cheques and receives
the payment for the said cheques from the paying Bank on behalf of its customer. It is
worthwhile noting that a Bank, whether a paying or a collecting Bank, would not be liable for
payment or collection of, unauthorized, forged, or stolen cheques provided the Bank has
complied with the standards of “acting in good faith” and “acting without negligence. 23 In
establishing “acting without negligence”, the paying Bank is required to show that it has strictly
adhered to the terms of the customer’s mandate. Whether the paying Bank should in certain
suspicious instances, go beyond the customer’s mandate to establish “acting without negligence”
is still unsettled law.24 In the instant case, Bravo Bank only honoured its customer’s mandate by
paying the check to Moses the payee.
In the instant case, it is clear from the facts that the relationship between Bravo Bank and
Blessing is one of a Banker customer relationship. It is worthwhile noting that notwithstanding
the fact that such a relationship is contractual, common law and statutes have stepped into the
relationship in order to safeguard the interests of the customer; as Banks are powerful financial
institutions and their accountability is vital for the economy as well as the society. Inference can
be drawn from the set of facts above that Blessing as a customer of Bravo Bank did not do what
was expected of him i.e. informing Bravo Bank about the earlier unauthorized withdrawals made
on his account. Blessing’s silence amounts to a breach of duty to disclose between a banker and a
customer. Blessing should have informed the Bravo Bank when he received the first notification
of the transactions. Going by the principle laid down in Greenwood v Martins Bank Ltd, it can
be said that Blessing will bear the loss of forgery and not Bravo Bank Hence, silence is a breach
of duty to disclose. Furthermore, Blessing as a customer of Bravo Bank was negligent by not
23
Sections 80 & 82, Bills of Exchange Act Cap.68
24
Barclays Bank Ltd. v. Quincecare Ltd. [1992] 4 All ER 363.
taking a good care of his cheque-book, thus, leading to the forgery. Therefore, it is our averment
that Bravo Bank cannot bear the loss of Moses’s forgery on Blessing’s account because Bravo
Bank acted in good faith as provided for under Section 89 of the Bill of Exchange Act Cap. 68
which is to the effect that a thing is deemed to be done in good faith within the meaning of this
Act where it is in fact done honestly, whether it is done negligently or not. This provision is in
sharp contrast to Section 24 of the Bill of Exchange Act Cap. 68 where forgery of a drawer's
signature renders the cheque wholly inoperative. The rationale for this may be because, the
Banker has the specimen signature of the drawer and must assume greater burden under Section
24 of the Bill of Exchange Act Cap. 68 whereas the banker does not have the specimen
signature of endorser hence the less burden under Section 56 (1) of the Bill of Exchange Act
Cap. 68.25 And in any event, Bravo bank is under Section 59 of the Bill of Exchange Act Cap.
68. We hereby conclude that Bravo Bank will not bear the losses of Moses’s forgery on
Blessing’s Account and therefore resolve this issue in the Negative
Q.2
Brief Facts
Maureen saved money to open a Financial Institution. Currently she has 10 million shillings in
the Bank. She has come to seek advice on the type of Financial Institution she can open and the
procedure thereof.
Issues
Whether Maureen can open a financial institution with an amount of 10 million shillings?
Law applicable
The 1995 Constitution of the Republic of Uganda, as amended
The Bank of Uganda Act Cap. 51
The Financial Institution (Amendment Act), 2016
25
The Bill of Exchange Act Cap. 68
The Financial Institution Act, 2004
The Bill of Exchange Act Cap. 68
Case Law
Resolution of Issues
Issue No. 1
Whether Maureen can open a financial institution with an amount of 10 million shillings?
Section 2 of the Financial Institution Act, 2004 defines a financial institution as a company
licensed to carry on or conduct financial institutions business in Uganda and includes a
commercial Bank, merchant Bank, mortgage Bank, post office savings Bank, credit institution, a
building society, an acceptance house, a discount house, a finance house or any institution which
by regulations is classified as a financial institution by the Central Bank. 26 It would be of
paramount importance for Maureen to know that the supervision of Banking business in Uganda
is preserve to the Bank of Uganda. The mandate of the Central Bank is derived from Article 161
(1) of the 1995 Constitution of the Republic of Uganda, as amended. The Article thereof
states that the Bank of Uganda shall be the central bank & shall be the only authority to issue the
currency of Uganda. Article 162 (1) of the 1995 Constitution of the Republic of Uganda, as
amended provides that the Central Bank shall have the following duties;
(a) Promote and maintain the stability of the value of the currency of Uganda
(b) Regulate the currency system in the interest of economic progress in Uganda.
(c) Encourage and promote economic development and the efficient utilization of the resources
of Uganda through effective and efficient operation of a banking credit system.
(d)To all such things not consistent with this article or may be prescribed by law.
Further, Article 162 (2) of the 1995 Constitution of the Republic of Uganda, as amended
states that in performing its functions the Bank of Uganda shall conform to this constitution but
shall not be subject to the direction or control of any person or authority. 27 Also, Section 4 (1) of
26
the Financial Institution Act, 2004
27
The 1995 Constitution of the Republic of Uganda, as amended
the Bank of Uganda Act Cap. 51 illustrates that the functions of the bank shall be to formulate
and implement monetary policy directed to economic objectives of achieving and maintaining
economic stability.
It would as well interest Maureen to know that before she can open a financial institution, there
are requirements she should fulfil and this includes the following;
1. Licensing
As per Section 2 of the Financial Institution Act, 2004 “license” means a license issued under
section 12 of this Act. The FIA 2004 makes it an offence for any person to transact any deposit
taking or other Financial Institution Business in Uganda without a valid license granted for that
purpose. A person eligible to apply for and be granted a financial institution business license if
that person is a Company within the meaning of the Financial Institution Act, 2004. A company
is defined under Section 2 of the Companies Act, 2012 to mean a company incorporated or
registered under the Companies Act and includes the Uganda Development Bank, a building
society and any institution classified as a Financial Institution under the Act.28
Moreover, it would be essential to explain to Maureen how she can obtain a financial institution
license which includes the following;
Section 11 of the Financial Institution Act, 2004 provides for factors to be considered in
making a decision to grant a licence. The section thereof states that; the Central Bank shall, in
considering an application for a licence under section 10 of this Act, require to be satisfied as to
(a) the financial condition and history of the applicant; (b) the nature of the business of the
applicant including the range of services and products proposed; (c) the competence and integrity
of the proposed management; (d) the adequacy of the applicant's capital structure, earning
prospects, business plans, financial plans; (e) the convenience and needs of the community to be
served; (f) geographical locations and branch distribution network of the proposed business; (g)
whether the directors and officers of the applicant are fit and proper persons for the purpose of
transacting business as a financial institution, according to the criteria set out in the Third
Schedule to this Act and such other criteria as the Central Bank may determine; (h) the structure
28
the Companies Act, 2012
and shareholding of the group of companies of which the applicant forms a part or intends to
form a part.
Furthermore, it is important for Maureen to know that there are various types of license. The
various types of licence are as follows;
Section 10 (3) of the Financial Institution Act, 2004 stipulates that the following classes of
licences shall expressly be included in the provisions of this law, the permitted main financial
services provided or businesses conducted, particulars of which are more elaborately specified in
the Second Schedule to this Act as (a) the business of a commercial bank( Class 1); (b) the
business of a post-office savings bank( Class 2); (c) the business of a merchant bank( Class 3);
(d) the business of a mortgage bank( Class 4); (e) the business of a credit institution( Class 5); (f)
the business of an acceptance house ( Class 6); (g) the business of a discount house( Class 7); (h)
the business of a finance house( Class 8). It should however be noted that Section 4(b) of the
Financial Institution (Amendment) Act .2016) created classes 9 and 10. The 2nd Schedule
of the Financial Institution Act, 2004 as amended in 2016 provides in detail the functions
performed by each of the above institutions. 29
Conversely, it should be brought to the attention of Maureen that Section 10 (6) of the Financial
Institution Act, 2004 provides that the application for a license under subsection (1) of this
section must be accompanied by the following: (a) the applicant’s memorandum and articles of
association or other instrument under which the company is incorporated and its certificate of
incorporation; (b) a certified copy of the resolution of the board of the applicant authorizing the
preparation and submission of the application; (c) a sworn declaration for all individuals
proposing to become directors, shareholders, controllers or managers, issued in a form specified
by the Central Bank in regulations made under this Act. Subsection 7 of Section 10 of the
Financial Institution Act, 2004 illustrates that where an application under subsection (1) of this
section does not provide all the relevant information or if clarification is necessary, the applicant
may be called upon to provide that information or clarification to complete the application.
Subsection 8 of Section 10 of the Financial Institution Act, 2004 stipulates that any person
who, in relation to an application for a licence under this Act, knowingly or recklessly provides
the Central Bank or any other person with information which is false or misleading in a material
29
the Financial Institution Act, 2004, the Financial Institution (Amendment) Act .2016)
particular, shall for purposes of this Act, cease to be a fit and proper person, without prejudice to
that person being prosecuted under this Act.
Additionally, Maureen should understand that processing of the application is provided for under
Section 12 of the Financial Institution Act, 2004. The section thereof states that; (1) the
Central Bank is obliged to investigate and prepare a detailed report in respect of the application
within six months after receipt of the same. (2) After expiry of the 6 months, the central bank
should make the decision whether or not to grant the licence within 14 days.
It is also important, for Maureen to take note of the fact that after issuing the license, a financial
institution should not engage in any business other than that specified in its license. Section 13
(1) of the Financial Institution Act, 2004 provides for licence fees. The section thereof states
that the applicant shall, upon being granted a licence under this Act, pay a fee prescribed by the
Central Bank by notice and the holder of the licence shall after that pay an annual fee prescribed
by the Central Bank on or before the 31st day of January of each year. It is worthwhile noting
that Financial institutions which were licensed before commencement of the Financial Institution
Act, 2004 (26TH /03/04) were required to submit their licenses to the central bank within 3
months for classification. The revocation of licence is provided for under Section 17 of the
Financial Institution Act, 2004.
In the instant case, it would be significant for Maureen to note that Section 26 (1) of the
Financial Institution Act, 2004 reiterates that a person proposing to transact financial institution
business in the capacity of a Bank in Uganda shall have a minimum paid-up cash capital of not
less than two hundred thousand currency points invested initially in such liquid assets in Uganda
as the Central Bank may approve. According to the First Schedule of the Financial Institution
Act, 2004, a currency point is equivalent to twenty thousand shillings. Section 27 (1) (a) of the
Financial Institution Act, 2004 is to the effect that a core capital of not less than eight percent
of total risk adjusted assets plus risk adjusted off balance sheet items as may be determined by
the Central Bank by statutory instrument. (b) A total capital of not less than twelve percent of its
total risk adjusted assets plus risk adjusted off balance sheet items as may be determined by the
Central Bank by statutory instrument. Section 28 (2) of the Financial Institution Act, 2004
illustrates that subject to subsections (1) and (2) of section 26, the minimum holding of liquid
assets under this section shall be expressed as a proportion of the demand and time liabilities of a
financial institution and shall not exceed thirty percent of such demand and time liabilities.
Looking into the facts of the instant case, and Section 26 (1) of the Financial Institution Act,
2004, I hereby advice Maureen that she cannot open a financial institution because she does not
have the amount of capital required to open a financial institution. Therefore, I resolve this issue
in the negative.30
30
the Financial Institution Act, 2004
