Equity Bank (Kenya) Limited v Don Ogalloh Riaro & another [2019] KECA 317 (KLR)
The bottom line
#Kenya's Court of Appeal confirmed that banks can be held liable for letting fraudsters misuse accounts, even accounts belonging to advocates.
What this practically means
#Executive summary
#Questions the Court framed
#The issues the Court set itself to decide, in its own words.
- 1.Whether the trial judge erred in finding that the appellant Bank owed the 1st respondent a duty of care.
- 2.Whether the trial judge erred in failing to find that the 1st respondent and his advocate were liable in contributory negligence.
- 3.Whether the judge erred in finding that the appellant was negligent and that the said negligence imposes liability upon the appellant to the 1st respondent.
- 4.Whether the Central Bank of Kenya Prudential Guidelines are binding and applicable to the facts of this case.
- 5.Whether the learned judge properly interpreted and applied the provisions of Section 82 of the Advocates Act and Section 18 of the Proceeds of Crime and Money Laundering Act.
- 6.Whether the judge erred in ignoring the decision of this Court in Kim Jong Kyu – v- Housing Finance Company Limited & 2 others [2015] eKLR.
Key legal issues
#Whether CBK Prudential Guidelines have legal force
The Guidelines, issued under Section 33(4) of the Banking Act, are statutory instruments with legal force and are enforceable against banks.
The court applied the Statutory Instruments Act definition of a statutory instrument, which expressly includes guidelines issued in execution of a power conferred by an Act of Parliament. Since the Guidelines were issued pursuant to Section 33(4) of the Banking Act, they fall squarely within the definition and therefore carry legal force, notwithstanding the appellant's argument that they were neither statute nor subsidiary legislation.
Duty of care owed by a bank to a non-customer third party
A collecting bank owes a duty of care to the drawer of a cheque; allowing cheques drawn in favour of a law firm to be deposited and encashed in an advocate's personal account, coupled with large unexplained cash withdrawals, established such a duty and its breach.
The court found the appellant was a collecting bank and, drawing on comparative authority, held that a collecting bank owes a duty of care to the drawer to ensure the payee is the person named. The pattern of cheques drawn in favour of firms being deposited into a personal account and large over-the-counter cash withdrawals gave the bank sufficient grounds for suspicion which it ignored, breaching both the duty of care and the Prudential Guidelines.
Effect of Section 82(1) of the Advocates Act
The proviso in Section 82(1) does not exempt a bank from liability in negligence in respect of an advocate's account; obligations arising at common law apart from the Act survive the section.
The court held that the phrase 'or obligation to which it would be subject apart from this Act' in the proviso must be given legal effect. The liability of the bank here arose not from the Advocates Act but from a common law duty of care owed to a third party. Accordingly the statutory protection for banks does not waive the obligation to inquire into suspicious transactions in an advocate's account.
Contributory negligence of the 1st respondent and his advocates
No evidence was led to establish contributory negligence on the part of the 1st respondent or his advocates; contributory negligence can only be pleaded against a party to the suit.
The appellant never enjoined the 1st respondent's advocates to the proceedings, and its single witness gave no testimony on contributory negligence. On re-evaluation of the first appeal, the court found no error in the trial court's conclusion that no evidence supported apportionment or contributory negligence.
Legal principles established
#- CBK Prudential Guidelines, issued under Section 33(4) of the Banking Act, are statutory instruments with legal force and are binding on licensed banks.
- A collecting bank owes a duty of care to the drawer of a cheque to ensure the payee is the person named in the cheque, and such duty may be owed to a non-customer third party.
- The proviso in Section 82(1) of the Advocates Act does not absolve a bank from liability in negligence in relation to the operation of an advocate's account; the obligation to inquire into suspicious transactions is not waived.
- Section 18 of the Proceeds of Crime and Anti-Money Laundering Act, dealing with advocate-client privilege, is inapplicable to bank-customer or bank-third party relationships and does not bar a bank's duty to inquire into suspicious transactions.
Court orders
#- 1.The appeal is dismissed with costs
The bench
#One judgment of the whole court — no separate or dissenting opinions.
- On appeal from
- High Court of Kenya at Nairobi
- H.C.C.C No. 299 of 2011
- Jurisdiction invoked
- First appeal to the Court of Appeal under the Court of Appeal Act / Article 164 of the Constitution (appellate jurisdiction over the High Court)
Relief refused
#Allowance of the appeal with costs
The Court found the appeal had no merit on all grounds, including duty of care, negligence, causation, contributory negligence and Section 82 of the Advocates Act.
Costs
Appeal dismissed with costs.
Quotable passages
#Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.
For the foregoing reasons, we find this appeal has no merit and is hereby dismissed with costs.
we find that the CBK Guidelines having been issued pursuant to Section 33 (4) of the Banking Act is a statutory instrument with legal force.
A collecting bank owes a duty of care to the drawer of a cheque to ensure that the payee is actually the person named in the cheque.
the proviso in Section 82 (1) of the Advocates Act does not absolve a bank from liability in negligence or wanton and deliberate recklessness in relation to the operation of an advocate’s account.
We thus find Section 18 of PROCAMLA is inapplicable to the facts of this case.
We thus find no fault or error in the conclusion by the trial court that no evidence was led to prove apportionment or contributory negligence.
Issues in the judgment
#The judgment renders the appellant's name inconsistently as 'Caparao Industries Plc' in the appellant's submissions and 'Caparo Industries Plc' in the court's analysis; also 'Kenya Grange Vehicle Limited' and 'Kenya Grande Vehicle Limited' appear inconsistently.
The abbreviation of the Proceeds of Crime and Anti-Money Laundering Act appears both as 'PROCAMLA' and as 'Proceed of Crimes and Anti-Money Laundering Act' in the memorandum of appeal.
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Equity Bank (Kenya) Limited v Don Ogalloh Riaro & another [2019] KECA 317 (KLR)", Case Analysis (2019). Civil Appeal No. 133 of 2017. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2019/317/eng@2019-10-11
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.