Tuesday, 1 July 2008

BANK TO PAY DAMAGES FOR WRONGFUL DISHONOUR OF CHEQUES

 By Michael M. Murungi, Advocate

 Bank of Baroda (Kenya) Ltd v Timwood Products Ltd [2008] eKLR
(http://www.kenyalaw.org
)

 Court of Appeal at Nairobi

 R.S.C. Omolo, P.K. Tunoi & E.M. Githinji, JJ.A

 May 30, 2008

 The Court of Appeal has confirmed a decision of the High Court
awarding damages against a commercial bank for wrongfully dishonoring
the cheques issued by its customer. On November 10, 2000, the High
Court had awarded Timwood Products Ltd over Kshs. 3 Million for loss
of business credit, reputation and loss of profit against the Bank of
Baroda after the company had sued the bank for wrongfully dishonoring
18 cheques.

 Timwood had been a long-standing customer of the bank. Early in
1996, a management dispute broke out between two groups of its
directors, the Patels and the Bakranias. Mr. A. Patel was one of the
shareholders/directors who had previously served as the chairman of
the company. At the height of the dispute and out of the fear that
that the company s finances might be applied without the consent of
the Patels, he wrote two letters advising the bank to freeze the
company's accounts. Though the dispute found its way into the High
Court, the parties came to a settlement and on May 31, 1996, they
recorded a consent agreement before the Court. One of the terms of
that consent was an order of injunction restraining the Bakranias
from paying out the funds of the company without the authority and
signature of Mr. Patel. This order was served on the bank.

 As it turned out, the bank s interpretation of the order and the
actions which it took with regard to the company s account on the
faith of that interpretation became the subject matter of further
litigation between the company and the bank. As far as the bank was
concerned, the effect of the order was to freeze Timwood s bank
accounts. On that basis, the bank declined to honor a total of 18
cheques totaling to Kshs. 646,258.85 drawn by the company on its
current account. The statement of dishonour simply stated  payment
stopped . This was despite the fact that there were sufficient funds
in the company s account to settle the cheques. As far as the bank
was concerned, since it had been served with the court order, then,
even though it was not a party to the case in which the order was
made, if it had ignored the order and honoured the eighteen cheques
it could have been cited for contempt of court for aiding and
abetting the disobedience of the order.

 That was the argument that the bank put forward through its lawyer,
Mr. Fraser, while defending itself in a case filed against it by the
company for damages for breach of banking contract, loss of credit
and business reputation and loss of profit on account of the wrongful
dishonor of the company s cheques.

 In answer to these contentions, Mr. Nagpal, who led the company s
team of lawyers, submitted that the court order did not freeze
Timwood s bank accounts at all. Rather, the effect of the order was
that before any payments could be made on any cheques drawn on the
account, the bank had to be satisfied that Mr. Patel had
countersigned against the cheques or that he had had sufficient
opportunity to countersign them. He submitted that there was nothing
to show that the cheques had not been countersigned or that Mr. Patel
had not had sufficient opportunity to sign them and therefore, the
bank s action was wrong.

 The High Court (the late Mr. Justice Hewitt) had entered judgment in
favour of the company and ordered the bank to pay to it Kshs. 3
Million for loss of credit, loss of business reputation and loss of
profit and a further Kshs. 80,000 for losses arising from currency
fluctuations on Timwood s forex bank account. The bank appealed
against the decision and the company filed a cross-appeal seeking
punitive damages against the bank.

 The appeal was heard by R.S.C. Omolo, P.K. Tunoi and E.M. Githinji,
JJ.A. In their unanimous decision, they first observed that where
third parties such as banks are served with or are otherwise notified
of the existence of an injunction either freezing an account or
prohibiting the doing of some act, the bank's only duty is to the
court and it runs the risk of punishment for contempt of court if it
does not comply. This is so particularly where there is no relevant
communication or act between the bank and the party who obtains the
order or any reliance by that party on the bank so that the bank
cannot be understood as having voluntarily assumed responsibility for
its actions so as to give rise to a duty of care towards the party.

 However, on the evidence in this case, the Court of Appeal agreed
with Timwood s advocate that the Court order served on the Bank of
Baroda did not have the effect of freezing the company's bank
accounts. In the Court s opinion, the bank had no basis for
dishonouring the cheques and damages could be awarded for the
wrongful dishonour of a cheque by a bank.

 The Court then looked at the grounds of appeal challenging the
measure of damages awarded to Timwood. It clarified that loss of
profits is a special quantifiable damage which lends itself to easy
calculation and it ought to be specifically claimed and proved. Being
a special damage, it may not be lumped together with loss of credit
and business reputation which are in the nature of general damages
not capable of immediate objective quantification. However, the Court
found that Timwood had failed to prove its claim for loss of profits.

 In the Court s opinion, the award of Kshs. 3 Million on the
compendious head of loss of business credit, reputation and loss of
profit was not so high as to call for any varaition. That award would
stand. As for Timwood s cross-appeal, the Court observed that punitive
or exemplary damages are awarded only where there is oppressive,
arbitrary or unconstitutional action by servants of the government;
and where a defendant's action was calculated to procure him some
benefit, not necessarily financial, at the expense of the plaintiff.
Timwood was not entitled to any further award of damages. Save for a
slight adjustment on the award of interest, the bank s appeal was
dismissed and the decision of the High Court was confirmed.

 Download Case
<http://kenyalaw.org/Downloads_FreeCases/civil_appeal_132_of_2001.pdf>

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 © Copyright 2008 Kenya Law Reports

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