The relationship between a bank and its client is based on contract. The contract entered into between the bank and its client will vary depending on the services required by the client and contains elements of, inter alia, mandate. Despite this contract of mandate, the bank’s right to terminate a contract it has entered into with its client has recently come under the spotlight and has been challenged in the South African courts.
The code of banking practice:
The code of banking practice is a voluntary code that regulates the relationship between banks and their clients setting out the minimum service and conduct standards that banks’ clients can expect from their bank and applies to all banks operating in South Africa (“Code of Banking Practice”), the Code of Banking Practice states that banks are required to act fairly, reasonably and ethically towards its clients and provide reasonable notice prior to closing a customer’s account. The bank may however close an account without prior reasonable notice in the following instances:
- when it is compelled to close an account by law;
- when it is compelled to close an account by international best practice;
- the account has not been used for a significant period of time; or
- there is reason to believe the account is being used for any illegal purposes.
The courts’ position:
The courts have confirmed the position as set out by the Code of Banking Practice by further clarifying the bank customer relationship and, inter alia, the obligation of a bank to retain a client who is unlikely to be accepted as a client by other banks, the unequal bargaining position between the bank and its client at the time of entering into a contract and the statutory and regulatory obligations of a bank in upholding the integrity of the financial system. These 3 (three) points are examines further below:
The obligation of a bank to retain a client who is unlikely to be accepted as a client by other banks:
In Bredenkamp and Others v Standard Bank of South Africa Ltd 2010 (4) SA 468 (SCA) it was argued that one bank’s decision to close an account with its client will cause other banks to refuse to bank with that client. The court found that the cause for the refusal to bank with the client is the client’s blacklisting and not the decision to close the client’s accounts. A bank cannot therefore be obliged to retain a client because other banks will be unlikely to accept the person as a client. There is no constitutional right nor public policy consideration which justifies an obligation on the bank to retain a client on this basis.
The unequal bargaining position between the bank and its client:
The unequal bargaining position between the bank and its client has also been addressed by the court in Bredenkamp and Others v Standard Bank of South Africa Ltd and Another 2009 (6) SA 277 (GSJ). The court found that the customer is treated as a person of equal bargaining power and a court should only intervene in the determining whether reasonable notice has been given to the customer.
The statutory and regulatory obligations of a bank:
In the more recent case of Annex Distribution (Pty) Ltd and Others v Bank of Baroda 2018 (1) SA 562, the court confirmed the bank’s right to terminate a contract with its customer through reasonable notice or as provided for by the contract between the bank and its client. The bank is subject to a number of national and international statutory and regulatory obligations whereby the bank is obliged to uphold the integrity of the banking system by combating inter alia, money laundering, dishonesty and corruption. The bank faces far-reaching consequences of failing to comply with its statutory and regulatory obligations, as a result, the court confirmed that the bank does not have an obligation to provide reasons for termination and may do so merely on the basis of reputational or business risk.
The courts have confirmed the principles set out in the Code of Banking Practice and they are allowed to terminate contracts with their clients by means of reasonable notice or in terms of contract. A bank, similarly to any other contracting party, cannot be forced to remain bound to a contract which poses a risk to their reputation or business.
05 August 2019