Understanding Letters of Comfort: Legal Nature and Liability, Lecture notes of Law

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DELICTUAL LIABILITY OF A BANK ON THE BASIS OF MISREPRESENTATION Mini - dissertation submitted in fulfilment of the requirements for the degree Magister Legum in Import and Export Law at the North-West University (Potchefstroom Campus) by Student : Inge Lötter Student Number : 20026970 Successfully completed modules : LLMI 874 LLMI 875 LLMI 876 LLMI 878 LLMI 882 Study Supervisor: Prof SPLR de la Harpe Date: November 2011 A heartfelt thank you to: my parents who provided me with the opportunity to acquire an education and who taught me that education is not a right but a privilege, my family for their interest and support, my fiancé my rock, Hester for her help as text editor and lastly but not the least our Heavenly Father for giving me the perseverance to complete this dissertation. „n Hartlike dankie aan: my ouers wat vir my die geleentheid gebied het om „n geleerdheid te bekom en my geleer het dat „n geleerdheid nie „n reg is nie maar „n voorreg, my familie vir hul belangstelling en ondersteuning, my verloofde my rots, Hester vir haar hulp as taalversorger en laastens maar nie die minste nie ons Hemelse Vader wat vir my die deursettingsvermoë gegee het om hierdie skripsie te voltooi. iii AFRIKAANS SUMMARY Hierdie studie sal spesifiek fokus op die deliktuele aanspreeklikheid van 'n bank waar „n wanvoorstelling met betrekking tot 'n brief van troos die oorsaak is van die skade wat gely word deur 'n kliënt. Uiteindelik is die doel van hierdie studie om die volgende genoemde vraag te beantwoord : Onder watter omstandighede kan 'n bank, met spesifieke verwysing na briewe van troos, deliktueel aanspreeklik gehou word vir skade wat 'n kliënt lei as gevolg van 'n wanvoorstelling deur „n bank? Hierdie studie sal gebaseer word op 'n vergelyking tussen die Suid-Afrikaanse reg en die Engelse reg. Die Engelse reg is 'n statutêre stelsel gebaseer op die "Law of Commons" en het 'n merkbare invloed op die Suid-Afrikaanse reg gehad tot dusver. Hoewel Suid-Afrika 'n derde wêreld land is, is sy bank wetgewing gebaseer op die Engelse wetgewing. Gedurende die afgelope dekade is daar 'n duidelike verandering in die wyse waarop Suid-Afrikaanse howe kyk na die wetlike verhouding tussen banke en hul kliënte. Dit is duidelik dat die howe meer geredelik banke aanspreeklik hou vir die skade wat hulle kliënte lei. (Bernert v Absa Bank Beperk, saaknommer 14.302 / 03, is 'n ongerapporteerde saak wat in die Noord-Gautengse Hoë Hof van Suid-Afrika op 15 Oktober 2008 aangehoor is). Nasionaal en internasionaal het banke 'n groot invloed op die ekonomiese ontwikkeling van 'n land. As gevolg hiervan het die beroep, bankier, 'n beheerde en gereguleerde beroep geword. Nietemin, is die Suid-Afrikaanse bank wetgewing konserwatief en is Suid – Afrika baie huiwerig om hierdie wetgewing te verander met betrekking tot moderne idees en dit sodoende in lyn te bring met die voortdurend veranderende omstandighede van ons tyd. Uit die ontwikkelinge in die saak Bernert v Absa Bank Beperk kan ons lesse leer by die Engelse reg. iv Alhoewel Engeland 'n stelsel van parlementêre soewereiniteit het, terwyl Suid- Afrika 'n konstitusionele demokrasie is, sou dit nogtans aanbeveel word dat die Suid-Afrikaanse howe meer geredelik die besluite wat geneem is deur die Engelse howe inagneem aangesien ons kommersiële reg gebaseer is op die Engelse reg. Dit kan regskoste van die betrokke partye verminder en 'n positiewe uitwerking hê op internasionale handel. Laasgenoemde sal regsekerheid bevorder wat verder daartoe sal lei dat die internasionale handelaars meer geredelik sal wees en veilig sal voel om hul geld in Suid-Afrika in te bring, beleggings te maak in ons land en invoer en uitvoer kontrakte met Suid- Afrikaanse maatskappye te sluit. v KEY WORDS 1. Bank 2. Delict 3. Letters of Comfort 4. Liabilty 5. Misrepresentation 3.3.4 The liability of the collecting bank 44 3.4 Letters of Comfort 46 3.4.1 Background 46 3.4.2 Introduction 47 3.4.3 Liability 49 4. Comparative analyses 50 5. Conclusion and recommendations 56 Bibliography vi – x 1 1 Introduction and research problem „The customer is king.‟1 The former phrase is regarded by the general public as a tired aphorism. 2 Nevertheless, numerous individuals in the commercial world sturdily believe that the said phrase holds the key to success for anyone and or any business that renders a service to another person and or business whether the service is of a public or of a private nature. Nationally as well as internationally banks are regarded as the trustees of the public‟s money.3 Therefore, the business of banking is seen as the rendering of a service to the public. “Le rôle du banquier est de faire commerce de I‟argent.”4 The banker-customer relationship has always been based on the common law and bankers have had to act in good faith to ensure that their customers do not withdraw their funds from the banks.5 Consequently, banks gained a vast influence on the economic development of a country.6 As a result banking has become a controlled and regulated profession.7 Regardless, the South African courts have made many controversial decisions in the past decade with regards to the professional responsibility of bankers. In South Africa it is generally accepted that the legal liability of a bank, when dealing with a financial instrument such as a cheque, is regulated by the Bills of Exchange Act 34 of 1964.8 During the last decade there has been a tendency to hold banks liable on grounds other than those included in the Bills of Exchange 1 Debono J The Customer is king http://jamesdebono.com/the-customer-is-the-king/; Hunter D 2004 The customer is still king http://allafrica/com/stories/200404060666/html. 2 Modjadji L The customer is king, but not in South Africa, says Lauretta. http://www.btimes.co.za/97/0622/btmoney/money8.htm. 3 Malan Professional Responsibility 327. 4 Malan Professional Responsibility 327. 5 Fourie Aspects of Banking Law 2. 6 Malan Professional Responsibility 327. 7 Fourie Aspects of Banking Law 2. 8 Malan et al Malan on Bills of Exchange 34. 2 Act 34 of 1964. In terms of the South African common law liability can, generally speaking, also be incurred by banks in terms of the law of contract and the law of delict.9 The relationship between a bank and its customers is based on contract. If a bank is in breach of its contractual obligations, the customer may have a contractual claim against the bank.10 In principle the customer could also have a delictual claim against the bank, if the five elements of a delict are present.11 The delictual liability of a bank can be based on the breach of a duty of care.12 However, there is still legal uncertainty if and under what circumstances a bank can be held legally liable either on the basis of contract or delict, specifically in the case of misrepresentations. During the past decade there has been a definite shift in the way South African courts view the legal relationship between banks and their customers. It is clear that the courts more readily hold banks liable for damages caused to their customers. (Bernert v Absa Bank Limited, case number 14302/03, is an unreported case heard in the North Gauteng High Court of South Africa on 15 October 2008). This is the latest South African case based on the delictual liability of a bank, where the court held the bank delictually liable because of a misrepresentation.13 The court a quo declared that the customer suffered damages as a result of a misrepresentation contained in a letter drafted by the legal representatives of the bank with regards to another letter, a letter of undertaking (also known as a letter of comfort) that was issued by an employee of the bank. This decision by the court a quo went on appeal.14 The Supreme Court of Appeal of South Africa upheld the appeal and the order of the court a quo was set aside on the basis that the letter that was the cause of the misrepresentation by the bank was not unlawful although it contained a false statement. The reason for the former decision was that the letter that was issued 9 Neethling et al Deliktereg 6. 10 Malan et al Malan on Bills of Exchange 335-337. 11 Neethling et al Deliktereg 4. 12 Neethling et al Deliktereg 144-146. 13 Bernert v Absa Bank Limited paragraph 50. 14 Absa Bank Limited v Bernert (99/09) [2010] ZASCA 36 (29 March 2010). 5 statutes were based on the English Bills of Exchange Act of 1882.24 Although South Africa was unified in 1910, the pre-Union legislation of the former four South Africa colonies regulated all the negotiable instruments until 1964 when a unified and consolidated legislation, today known as the Bills of Exchange Act 34 of 1964, was enacted to achieve uniformity between the four pre-Union colonial statutes. To date the Bills of Exchange Act 34 of 1964 has been amended four times.25 The South African common law which, as previously mentioned, is based on the Roman-Dutch law must be used as background for the interpretation of all South African legislation. Although the Act26 was modelled on the English Bills of Exchange Act of 1882 as well as on the English Cheques Act of 1957, it should not be interpreted with regards to only the English Bills of Exchange Act. The English court decisions should also be taken into consideration when interpreting the said Act. It should be noted that the South African courts are not bound by the decisions of the English courts.27 Section 39 of the Constitution declares that28 : When interpreting the Bill of Rights, a court, tribunal or forum - (a) must promote the values that underlie an open and democratic society, based on human dignity, equality and freedom; (b) must consider international law; (c) may consider foreign law. 2.1.3 Liability in terms of the Bills of Exchange Act 34 of 1964 The basis of liability when dealing with financial instruments is either contract or delict. The liability of a party to a financial instrument depends on the legal 24 Malan et al Malan on Bills of Exchange 34. 25 Malan et al Malan on Bills of Exchange 35. 26 Act 34 of 1964. 27 Malan et al Malan on Bills of Exchange 36-37. 28 Section 39 of the Constitution of South Africa, 1994. 6 capacity of the particular party.29 Therefore, if a person has the legal capacity to incur liability then the provisions of the Act will apply to him or her. The legal capacity of a person is determined by the general principals of contract law.30 Regardless of whether or not one of the parties to a financial instrument does not have the required legal capacity to be held liable for his or her duties and responsibilities in terms of the said financial instrument, the mutual independence of the obligations remains to be effective. Latter statement simply entails that the liabilities of the parties to a financial instrument are not affected by the lack of legal capacity by one or more of the other parties to the said financial instrument.31 There can be various parties to a financial instrument. All of these parties have different rights, obligations and liabilities based on the contractual relationship between one another and the financial instrument itself. A short summary of the basis for liability applicable to the various different parties when dealing with a financial instrument will surely lay a sound foundation for achieving the goal of this study. The liabilities of the following parties to a financial instrument are as follows: 2.1.3.1 Liability of co-debtors32 The liabilities of co-debtors, co-acceptors and/or co-indorsers are not specifically governed by the Act. Although, since 1844 in terms of the South African common law, these named parties to a financial instrument are liable in solidum33 unless it appears otherwise from the face of the financial instrument.34 29 S20(1) 34 of 1964, “capacity to incur liability as a party to a bill is co-extensive with capacity to contract”. 30 Malan et al Malan on Bills of Exchange 221. 31 Malan et al Malan on Bills of Exchange 221-222; S20(2) 34 of 1964, “If a bill is drawn or indorsed by a minor or a corporation having no capacity or power to incur liability on a bill, the drawing or indorsement of the bill entitles the holder to receive payment of the bill, and to enforce it against any other party thereto.” 32 “Co-debtors are two or more persons that signed a negotiable instrument thereby promising to make payment”; Malan et al Malan on Bills of Exchange 223. 33 “Liable jointly and severally”;.Heimstra and Gonin Trilingual Legal Dictionary 207. 34 Malan et al Malan on Bills of Exchange 223 ; S89 34 of 1964. 7 2.1.3.2 Liability of the drawee35 The drawee is not liable in terms of a financial instrument merely because he or she agreed to accept the financial instrument or because he or she is indebted to the drawer.36 The Act provides that the drawee of a financial instrument cannot be held liable if he or she did not accept the said financial instrument.37 When the drawee accepts the financial instrument he or she becomes the principal debtor as well as the final debtor upon the financial instrument. The reason for latter statement being that the drawee, by accepting the financial instrument, agrees to make payment to the holder of the said financial instrument.38 2.1.3.3 Liability of the acceptor39 The concept acceptance with respect to financial instruments is based on a written contract. The liabilities of the acceptor as well as the liabilities of the other parties to the written contract can be gathered from the terms for the said contract itself.40 The Act also contain three “statutory estoppels” that prevent the acceptor from relying on these matters in a defence against the holder in denying the holder in due course his personal rights with regards to the financial instrument.41 35 “The drawee is the party to a negotiable instrument who is instructed by the drawer to effect payment to a specific person”; Malan et al Malan on Bills of Exchange 41. 36 Malan et al Malan on Bills of Exchange 224. 37 S51 34 of 1964; “A bill, of itself, does not operate as an assignment of funds in the hands of the drawee and available for the payment thereof, and the drawee of a bill who does not accept as required by this Act, is not liable on the instrument”; Malan et al Malan on Bills of Exchange 223. 38 S52(a) 34 of 1964 ; Malan et al Malan on Bills of Exchange 224. 39 “The acceptor is the final debtor in terms of the negotiable instrument because payment made by the drawee or acceptor releases the other parties from their duties and responsibilities”; Malan et al Malan on Bills of Exchange 224. 40 S52(a) 34 of 1964; “The acceptor undertakes to pay the bill according to the tenor of his acceptance” ; Malan et al Malan on Bills of Exchange 228. 41 S52(b) 34 of 1964; “(a) the existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the bill; (b) in the case of a bill payable to the drawer‟s order, 10 Usually, the drawee bank can only be held liable if it effected the payment of a cheque or any other negotiable instrument while having knowledge of the fact that the possessor of the said cheque or negotiable instrument was not the true owner thereof.53 The liability of the drawee bank in terms of crossed cheques is not as complex as it is with uncrossed cheques, the reason being that in terms of the provisions of the Act54 the drawee bank that effects payment contradictory to the instructions in the crossing of the cheque shall be held liable to the true owner of the cheque for the loss that he or she suffered with regards to the wrongful payment of the cheque by the drawee bank.55 In other words, a bank, be it the drawee bank or any other bank, that disregards the crossing of a cheque in contravention of the applicable legal norms, pays at its own risk. Latter liability can be categorised as strict liability.56 Accordingly, the question regarding the liability of the drawee bank towards the owner of a cheque is a delictual question.57 2.2.3 The liability of the collecting bank A cheque is more often presented by the holder thereof to his or her own bank58 to collect payment on his or her behalf than it is presented for payment by the payee to the drawee bank.59 The collection of payment by the collecting bank should be effected not only in good faith but also without negligence on its part.60 In order for a bank, or rather a banker, to act in good faith and without negligence, the banker has to apply the duty of care by taking reasonable care in 53 Malan Professional Responsibility 330. 54 S78(4) 34 of 1964. 55 Malan Professional Responsibility 330. 56 Malan Professional Responsibility 330 – 331. 57 Malan Professional Responsibility 333. 58 “The collecting bank therefore also plays an important role in the cheque payment system” ; Malan Professional Responsibility 333. 59 Malan Professional Responsibility 333. 60 Malan Professional Responsibility 335. 11 itself by confirming the financial position of the customer and his or her character. It is stated that bankers should take up the “practice of reasonable men carrying on business of bankers”. 61 The decision is made by the collecting bank whether or not it wants to accept the cheque when a cheque is presented over the counter or is delivered through the post.62 Banks are required to act properly and correctly as everyone has an interest therein. In terms of the South African law there is no concept of liability that is based on exchange and as a result thereof there are no specific measures to protect the collecting bank against a strict form of liability.63 2.3 Letters of Comfort 2.3.1 Background Although letters of comfort are commonly used in South Africa in legal practice as well as in the auditing sphere, there have to date not been many direct references made to letters of comfort in any South African court case, textbook, legal journal or dictionary.64 Therefore letters of comfort, comfort letters or letters of undertaking, as they are also known, are not a very well-known legal or even business instruments. During 1988 an article was published in the De Rebus regarding comfort letters and whether or not they are binding under South African law. Latter article was written by G Radesich and A Trichardt, two South African legal professionals, who formally introduced the letter of comfort and its legal nature to the South African legal profession in general.65 The goal of the said article was to define letters of comfort, discuss the concept of liability and provide guidelines for the drafting of these legal instruments.66 As it is one of the very 61 Malan Professional Responsibility 336. 62 Malan Professional Responsibility 336. 63 Malan Professional Responsibility 337. 64 Radesich and Trichardt Comfort letters are they binding under South African law? 795. 65 Radesich and Trichardt Comfort letters are they binding under South African law? 795 – 799. 66 Radesich and Trichardt Comfort letters are they binding under South African law? 795. 12 few legal references made specifically to this unique legal instrument, I will devote more time to it. 2.3.2 Letters of comfort and guarantees: an introduction and brief comparison A letter of comfort should be seen as a simple alternative to a guarantee. The reason for latter statement being that a comfort letter is a legal instrument that may be given by a parent company to a creditor of its subsidiary company instead of a general guarantee that is usually given under the same circumstances to a creditor.67 There can be various reasons why a parent company would want to issue a letter of comfort instead of a guarantee to a creditor. Although the wording of each letter of comfort differs from the other, the content contained in each letter of comfort basically stays the same.68 When we look at the letter of comfort as a whole the concept “gentleman‟s agreement” 69 comes to mind as the true intention of all the parties to a letter of comfort is not always very clear and certain. Latter „agreement‟ can be defined as follows: 70 A gentleman‟s agreement is an agreement which is not an agreement, made between two persons neither of whom is a gentleman, whereby each expects the other to be expressly bound without himself being bound at all. Nevertheless letters of comfort do not fall exactly within the definition of a “gentleman‟s agreement” as defined above. Therefore each provision contained in a letter of comfort should first be looked at separately and thereafter all the provisions should be considered as a whole before concluding what precisely the 67 Radesich and Trichardt Comfort letters are they binding under South African law? 796. 68 Radesich and Trichardt Comfort letters are they binding under South African law? 796. 69 Radesich and Trichardt Comfort letters are they binding under South African law? 799. 70 Radesich and Trichardt Comfort letters are they binding under South African law? 799, Footnote 12; Straughton J adverted in Chemco Leasing Spa v Rediffuston PLC supra. 15 case of default by the principal debtor a claim for a liquidated amount with a precise and ascertainable figure may be claimed by the plaintiff.76 It is clear that a letter of comfort creates a semblance of an agreement between parties where no actual agreement really exists and will therefore be useful in situations where disagreements arise between two parties with regard to their undertaking. Regardless, the disadvantages of letters of comfort may seem to be more that the advantages as there are legal uncertainty regarding the enforcement thereof by a court of law as well as the damages that a court will award as a letter of comfort is an instrument that creates liability for damages where there has been a breach of contract in a contractual relationship between parties where an obligation in the letter of comfort has been dishonoured.77 2.3.3 Liability The provisions in a letter of comfort contain commitments. Latter commitments may create legal obligations or they may only be a moral commitments between the parties and not create any legal obligations, the reason being that parties often formulate letters of comfort in such a way as not to create any legal obligations because a mere moral commitment between two parties does not appear on the financial statements specifically the balance sheets of a company as it involves no actual money.78 This may create a very dangerous situation if the parties thereto are in disagreement with one another and a dispute arises that can only be settled before a court of law. In such a situation it must be determined whether or not this instrument does contain any legal obligations or not.79 76 Radesich and Trichardt Comfort letters are they binding under South African law? 796. 77 Radesich and Trichardt Comfort letters are they binding under South African law? 799. 78 Radesich and Trichardt Comfort letters are they binding under South African law? 796. 79 Radesich and Trichardt Comfort letters are they binding under South African law? 796. 16 A letter of comfort will only create contractual obligations if the instrument itself is a contract and it can only be seen as a contract if an agreement was concluded between the parties with the intention to create legal obligations. There must therefore be a common intention and/or a consensus should have been reached between the parties to create legal obligations.80 The true intentions of the parties to a letter of comfort can be determined as follows:81 (a) the language used should reflect the mutual intention of the parties; (b) every word should be given its grammatical meaning if the word was not used in a technical sense82; (c) background circumstances should be taken into consideration; (d) if no intention can be determined because the language is too obscure then the instrument should be void as it is vague and embarrassing. Not only can a party be held contractually liable but delictual liability may also or alternatively be present if all the requirements for delict are present. The reason or argument that may be upheld in the case of delictual liability with regards to a letter of comfort is that one of the parties has a legal duty towards the recipient of the letter of comfort to provide the correct information to latter party. Another argument may be that if the one party knew or that same party should have subjectively foreseen who and how there would be responded to information contained in the letter of comfort, the said party may be held delictually liable if it is proven that the information is wrong and the wrongful information caused damages to another party. Although there are still many legal uncertainties with regard to the legal nature of a letter of comfort, latter instrument is used daily in South Africa by various 80 Radesich and Trichardt Comfort letters are they binding under South African law? 797. 81 Radesich and Trichardt Comfort letters are they binding under South African law? 797. 82 Please note : the rules of interpretation has changed since the coming into operation of the Constitution. Thus rules are not necessarily automatically given their grammatical meaning anymore as stated in this article written in 1988 by Radesich and Trichardt. 17 companies and is especially used by international as well as South African banks as a security arrangement for large credit facilities between parties. 2.4 Bernert v Absa Bank Limited (14302/03) [2008] ZAGPHC 33783 2.4.1 Introduction To date there has not been many South African court cases dealing with the delictual liability of a bank on the basis of misrepresentation, specifically where a letter of comfort or a letter of undertaking (as it is more often referred to) is either directly or indirectly involved in the matter. Therefore, the above said matter that was heard in the North Gauteng High Court of South Africa on 15 October 2008 brought some new insight into this uncertain segment of the South African law. 2.4.2 Diagram Rotrax Cars International CC Absa Bank Limited (Close Corporation) Mandate (Issuing Bank) Represented by Bernert (Defendant) (Plaintiff) 51% SH84 and IPR85 Financial document US$6million Joint Venture Agreement (JVA) and Legal Correspondence 83 Hereafter Bernert v Absa Bank Limited. 84 Shareholding or Members interest. 85 Intellectual property rights. 20 2.4.4 Legal question(s) (a) Whether or not the written agreement, the Joint Venture Agreement, between the Plaintiff and the Group was a valid and/or a lawful, enforceable agreement in terms of the South African law;93 and (b) Whether or not the letter, the „Verbiage of a bank guarantee‟, that was issued by the Defendant to the confirming bank was a fake financial document; and (c) Whether or not the letter, the „Verbiage of a bank guarantee‟, that was issued on the letterhead of the Defendant, was issued by an unauthorised employee of the Defendant94; and (d) Whether or not the Defendant can be held delictually liable for the damages that the Plaintiff suffered as a result of the Defendants‟ negligent misstatement?95 2.4.5 Considerations96 2.4.5.1 Delictual liability For the Plaintiff to succeed with his delictual claim against the Defendant he had to proof that the 5 (five) elements of a delict were present.97 The five elements of delict are the following: - a. conduct; 93 Bernert v Absa Bank Limited , ad paragraph 6 and 56. 94 Bernert v Absa Bank Limited , ad paragraph 4. 95 Bernert v Absa Bank Limited , ad paragraph 48,56 and 57. 96 Please note that for the sole purpose of this study, the only considerations that will be discussed are those concerning the legal question stated in 2.6.4 (d) with specific reference to the issuing of an ambiguous financial document (doubtfully referred to by the parties as: a letter of undertaking, guarantee and letter of credit) by the Defendant. 97 Bernert v Absa Bank Limited , ad paragraph 48. 21 b. negligence; c. wrongfulness or unlawfulness; d. legal and factual causation; e. damages. The claim against the Defendant is based upon a negligent misstatement that caused pure economic loss to the Plaintiff.98 The „negligent misstatement‟ was contained in the letter that the legal representatives of the Defendant wrote to the confirming bank. According to the confirming bank and the Group the „negligent misstatement‟ by the Defendant implied that the financial document (a letter that was also misleading in itself as a whole and/or in part) was unlawful and/or unenforceable as it specifically stated that the said financial document was fraudulently issued by an unauthorised employee of the Defendant.99 Latter said „negligent misstatement‟ was an action that was conducted by the Defendant and therefore proof the first element of a delict. To determine whether or not the conduct was negligent, Ranchod AJ referred to the reasonable man or person test. The judge determined that the reasonable man in the position of the Defendant would have foreseen the likelihood that the written agreement between the Plaintiff and the Group would fail as a result of the writing and issuing of the letter by the representatives of the Defendant and would furthermore have safeguarded against such a result.100 Consequently the conduct, in this case the misstatement by the Defendant, was made negligently. „Pure economic loss‟ was caused to the Plaintiff as the Group cancelled their written agreement with the Plaintiff because the Bank and the Group 98 Bernert v Absa Bank Limited , ad paragraph 48. 99 Bernert v Absa Bank Limited , ad paragraph 49 - 51. 100 Bernert v Absa Bank Limited , ad paragraph 53. 22 were misled by the letter they received from the legal representatives of the Defendant. It implied that the said financial document could not be regarded as a formal undertaking as were required from the Plaintiff in terms of the written agreement between the parties. As a result thereof the Plaintiff was blacklisted which furthermore led thereto that no other financial institution would provide the Plaintiff with the much needed finance he required. A conduct is not purely wrongful and/or unlawful because it caused „pure economic losses‟.101 Thus the question to determine the wrongfulness and/or unlawfulness of the conduct is based on whether or not there rested a legal duty on the Defendants to have exercised better care by insuring that the allegations that were made in the letter were as far as possible true and correct to the best of their knowledge. The judge also took into consideration the legal convictions of the community and determined that the community would expect that such a conduct by the Defendants, as mentioned above, should be actionable in a court of law.102 The judge furthermore and finally with regards to the delictual liability of the Defendant determined that factual and legal causality was established by the misstatement of the Defendant.103 2.4.5.2 Letter of Comfort Despite the fact that volumes of evidence were led on the nature of the financial instrument issued by the Defendant, which was indirectly the cause of this dispute between the parties, same was neither defined nor was it characterised by the learned judge Ranchod in his considerations. The only consideration concerning the said financial instrument, that was 101 Bernert v Absa Bank Limited , ad paragraph 54. 102 Bernert v Absa Bank Limited , ad paragraph 54. 103 Bernert v Absa Bank Limited , ad paragraph 55. 25 Therefore, the latter court found that causation was established as the actions of the appellant were factually and legally the cause of the failing of the said transaction.115 None the less, the honourable judge Nugent stated in his considerations during the appeal hearing that he did not agree with the decision of the court a quo that a causative link was established as he was of the opinion that there was no evidence to prove that the transaction between the parties would indeed have been carried out as planned in terms of the written agreement. Therefore judge Nugent determined that the claim against the defendant could have failed on the element of causation alone as it was too speculative to begin with.116 Regarding the second element of delict in question, namely: wrongfulness and or unlawfulness, judge Nugent stated that delictual claims boil down to assessing how the appellant acted when it became aware of the said document.117 The action on which the plaintiffs claim was based, was whether or not the letter that was sent by the legal representatives of the defendant to Emirates Bank was wrongful and or unlawful despite the fact that the statements that was made therein was incorrect. The appellant acted as follows: The appellant retrieved the financial document after it became aware of its circulation by instituting proceedings against the respondents‟ agent, Mr. Franjek, requesting an order from the High Court to compel Mr. Franjek to return the said financial document.118 Thereafter the appellant instructed its legal representatives to write a letter to the Bank, Emirates Bank, advising them that the said financial document was issued by an unauthorised person. The plaintiff claimed that latter action of the appellant was wrongful, in that the letter falsely stated that Mr. Coetzee was authorised to sign the said financial 115 Absa Bank Limited v Bernert , ad paragraph 22. 116 Absa Bank Limited v. Bernert , ad paragraph 22-25. 117 Absa Bank Limited v Bernert, ad paragraph 3. 118 Absa Bank Limited v Bernert , ad paragraph 55 – 57. 26 document although he had the authority to solicit fixed deposits,119 and furthermore the plaintiff claimed that the letter was unlawful as it led to the cancellation of the written agreement between the respondent and the Sheik.120 Therefore the drafting and issuing of the said financial document was also .considered by the appeal court. Mr. Els, an independent broker, attended to the drafting of the said financial document although he was not authorised to do any business on the part of the appellant as he was not an employee of the appellant.121 On the one hand it can therefore be argued that the appellant may not be held liable for the actions of a private individual. Even so, in this particular matter the said financial document, although drafted by Mr. Els, was signed by Mr. Coetzee who was an employee of the appellant.122 Mr. Coetzee stated in his evidence that he gave in the court a quo that Mr. Els advised him that a foreign client requested assurance in writing from the appellant that his money would be safe if he invested it with the appellant. Regardless, Mr. Coetzee was authorised to sign the said document and admitted in doing so. On that basis alone the court a quo ruled that the appellant was liable towards the respondent as the appellant negligently made misstatements which resulted in pure economic loss for the respondent.123 Whereto judge Nugent stated that: 124 I think it goes without saying that whatever authority Mr. Coetzee might have had, he had no authority to issue gibberish that had the potential to mislead, and that the issuing of gibberish that might mislead does not fall within the regular business of a bank. Consequently, the court of appeal declared that the said statements were not made to the respondent but to Emirates Bank. Therefore the loss that the 119 Absa Bank Limited v Bernert , ad paragraph 70. 120 Absa Bank Limited v Bernert , ad paragraph 60 – 61. 121 Absa Bank Limited v Bernert , ad paragraph 34. 122 Absa Bank Limited v Bernert , ad paragraph 46. 123 Absa Bank Limited v Bernert , ad paragraph 66. 124 Absa Bank Limited v Bernert , ad paragraph 73 – 74. 27 respondent led was not incurred from his reliance on the statements.125 According to the court of appeal the factual question that should be answered to decide whether or not the appellant acted wrongful and or unlawful was: whether or not the appellant was obliged to permit Emirates Bank, and any other third party to whom the said document might have been presented, to rely upon the authenticity thereof? The court of appeal answered the latter question by relying on the oral evidence of expert witnesses, Mr. Merritt and Mr. Van Tonder, who provided proof that the said document was without a doubt capable of misleading third parties. Consequently, judge Nugent declared that the appellant was clearly not obliged to allow any third party to rely on the said document if it would mislead them.126 Therefore the court of appeal stated that the action that the appellant took when it became aware of the said financial document could not have led to the failing of the said written agreement between the respondent and the Sheik and furthermore the action could not be declared wrongful or unlawful on the part of the defendant. 2.5.2.2 Letters of Comfort Judge Nugent declared that this matter is primarily based on documents, specifically the letter that was issued on the letterhead of the appellant. Although the court a quo stated that the document was „strange and confusing‟ it was of the opinion that such a document is issued by banks on a regular basis. Whereas the honourable judge Nugent declared in the appeal hearing that: 127 The document when read as a whole, was an aggregation of nonsense, decorated with financial terminology. 125 Absa Bank Limited v Bernert , ad paragraph 66. 126 Absa Bank Limited v. Bernert, ad paragraph 71. 127 Absa Bank Limited v Bernert, ad paragraph 15-16. 30 3.1.2 Legislative history : “ Bills of Exchange Act of 1882” The Bills of Exchange Act of 1882137 was drafted by a member of the English Bar, Sir MacKenzie Dalzell Chalmers, and became law on 18 August 1882 in England, as well as Scotland. The main purpose of the BEA was to codify the various laws that regulated bills of exchange, cheques and promissory notes as there were thousands of case law as well as a few statutory enactments which related to these said financial instruments. The predecessor of the BEA was the Digest of the Law of Bills of Exchange of 1878. It should be noted that the BEA did not replace the common law but only replaced the court decisions and legislations that preceded it. In Bank Polski v KJ Mulder & Co 1942 1 All ER 396 (CA) 398 the BEA was described as “the best drafted Act of Parliament that was ever passed”.138 Therefore, it is no wonder that the BEA was used to structure the South African Bills of Exchange Act 34 of 1964. 3.1.3 Liability in terms of the Bills of Exchange Act of 1882 As discussed in 2.1.3 the basis for liability of the parties to a financial instrument can either be based on contract or on delict depending on the claim and the circumstances that surround the specific matter. As we have already discussed how liability can occur to the different parties to a financial instrument in terms of their contractual relationship towards each other and, as the same applies to the BEA, we will only refer to the definitions, duties and responsibilities as regulated by the BEA pertaining to the most frequently used financial instruments such as bills of exchange and more specifically cheques as this study focuses on the liability of a bank. The reason for this is that the duties and responsibilities referred to create the basis for liability applicable to the various parties to a financial instrument whether the liability is contractual or delictual. 137 Hereafter referred to as : „BEA‟. 138 Malan et al Malan on Bills of Exchange 24. 31 A cheque is a specific bill of exchange, therefore it is important to begin with the definition of a bill of exchange in terms of the BEA: 139 A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future date, a sum certain in money to or to the order of a specified person or to bearer. From this definition all the duties and responsibilities of the different parties to a bill of exchange can be assembled. It is unambiguous that a bill of exchange is addressed by one party to another, a bill of exchange is payable at either a fixed or determinable future date or on demand thereof, and the amount payable is a sum certain in money.140 The most important points that arise out of the above stated definition, but are not dealt with in the definition itself, are: 141 (a) that the bill of exchange can only be „unconditional‟ if the duty to pay is not subject to the occurrence of a unforeseen event and the bill of exchange is expected to embody a general duty of the party to whom it is addressed; (b) that the party to whom the bill of exchange is addressed, does not become liable to meet the terms of the bill of exchange unless he or she accepts the duty by signing the bill of exchange;142 (c) that if the bill of exchange is not complete then the recipient thereof may be at liberty to complete the bill of exchange and the drawer may then be banned from denying the legality and content of the bill of exchange against the drawee bank and certain other parties. Furthermore in terms of the BEA a cheque is defined as:143 139 S 3(1) of 1882 ; Proctor The Law and Practice of International Banking 314. 140 Proctor The Law and Practice of International Banking 315. 141 Proctor The Law and Practice of International Banking 314-315. 142 “Take note that acceptance by a bank of a cheque neither occurs if the bank has assumed liability for the payment of the cheque nor does acceptance occur by the issue of cheque forms” ; Proctor The Law and Practice of International Banking 316. 32 … a bill of exchange drawn on a banker payable on demand … Accordingly, a cheque has two extra requirements that are not applicable to bills of exchange in general. Firstly a cheque must be addressed to a bank and secondly it must be payable on demand thereof.144 It is therefore once again clear that these duties and responsibilities that apply to the different parties to a bill of exchange establish a contractual relationship between the parties. Thus the general principals of the law of contract apply. 3.2 Banker – customer relationship 3.2.1 Introduction To understand the concept „banker-customer relationship‟, we first have to try to define or describe the lawful meaning of „bank‟, „banker‟, „banking business‟ and „customer‟.145 3.2.1.1 Description of a „bank‟, „banker‟ and „banking business‟ To ultimately answer the question : „What is a banker?‟ is not a simple task, the reason being that the business of banking is constantly evolving. Consequently, there is no longer only one type of institution that can be labelled as a „bank‟ seeing that what was universally known to be a „banking business‟ is not convincing anymore.146 To date there have been many common law as well as statutory definitions or rather descriptions given to „banking business‟ and/or „bankers‟, but none of which, in reality, 143 S73 of 1882 ; Proctor The Law and Practice of International Banking 315. 144 Proctor The Law and Practice of International Banking 315-316. 145 Megrah and Ryder Paget‟s Law of Banking 3; Proctor The Law and Practice of International Banking 297. 146 Megrah and Ryder Paget‟s Law of Banking 3. 35 that the duration of the relationship between a bank and a customer is not essential to determine whether or not a banker-customer relationship has been established.154 It should, however, be kept in mind that not each and every transaction between a bank or banker and a member of the public will be granted the status of „customer to the particular person‟.155 3.2.2 Nature of the relationship First and foremost it should be settled that the banker-customer relationship is based on a general contract. The said contract that arises between a banker and his or her customer is an unwritten contract, thus an implied contract, better known as a mandate.156 The mandate between the said parties can be described as that of a debtor and creditor.157 The contract comes into being the instant the said parties agree to enter into a contractual relationship with each other and the agreement will only come to an end by mutual consent or the revocation by either party.158 Although several implied terms of the banker- customer contract have been developed by the courts over the years, the situation with regards to the terms of a banker-customer contract has changed.159 The reason for this is that in this day and age there is a need for lucidity and fair dealing as the customer wants to be properly informed by the banker about the services for which he or she has to pay and the costs that such services will entail. Therefore, if a bank does set out the terms of the banker-customer contract in a written agreement between the parties, the express terms contained newcomer, but between a person for whom the bank performs a casual service, such as, for instance, cashing a cheque for a person introduced by one of their customers, and a person who has an account of his own at the bank.”; Megrah and Ryder Paget‟s Law of Banking 22. 154 Proctor The Law and Practice of International Banking 298. 155 Proctor The Law and Practice of International Banking 299-300. 156 Megrah and Ryder Paget‟s Law of Banking 69; Proctor The Law and Practice of International Banking 302. 157 Megrah and Ryder Paget‟s Law of Banking 69-70. 158 Megrah and Ryder Paget‟s Law of Banking 69. 159 Proctor The Law and Practice of International Banking 302. 36 in the said written agreement will not usually be considerably different from the implied terms which have been developed by the courts.160 In view of the fact that a bank is a financial service provider with the objective of generating a profit out of its business activities, it is only reasonable that its duties, or rather obligations to its customers, are fairly more comprehensive than the obligations of the customers to the bank itself whether or not the terms of the contract are express or implied.161 Consequently, for the purpose of this study, it is necessary to point out some of the core obligations of a bank to its customer and visa versa as these obligations and also any other obligations that may arise out of the banker-customer contract will place a liability on the said relevant party. Therefore, although it is not possible to provide a complete list of each and every obligation and right a bank may incur, the following obligations and rights are but a few that may arise in a banker – customer contract:162 (a) the collection of cheques and the receiving of funds for the account of the customer ; (b) the repayment of the customer‟s account balance on demand at the account-holding branch ; (c) the honouring of the customer‟s written orders against the account ; (d) in order to permit the clearance of outstanding cheques the bank must give reasonable notice to the customer before terminating the bank- customer relationship by repayment of the credit balance to the customer ; (e) unless it is requested by the customer, a bank is not obliged to give advice regarding the tax position of a customer or the insight of a course of action which it intends to take ; 160 Proctor The Law and Practice of International Banking 302. 161 Proctor The Law and Practice of International Banking 303. 162 Proctor The Law and Practice of International Banking 303-304. 37 (f) it is not a requirement that the bank advise a customer when it offers a new product which may offer conditions more beneficial than the current product used by the customer ; (g) there is no obligation on a bank to give notice to a customer of a decision to deny margin finance on future transactions ; (h) the bank has the right to hold over fulfilment of the customer’s instructions whilst there is uncertainty as to their legality and or outcome ; (i) a bank‟s primary relationship is with its own customer, therefore a bank does not have a duty of care to a future beneficiary of an intended payment in the event that the payment is not effected, although it may incur a liability to its own customer for the consequences of its failure to act on instructions ; (j) a collecting bank has no general obligation to protect a paying bank from the theft and/or fraudulent amendments to a cheque. On the other hand, the obligations and rights that the customer may incur in terms of the banker-customer contract have fairly distinct boundaries. The following are a few of the obligations and rights of a customer that may arise out of banker-customer contract:163 (a) the customer has a general duty of care that he or she must exercise when drawing a cheque ; (b) the customer has an obligation to disclose any known forgery to the bank ; (c) the customer has an obligation to protect the bank against the consequences of forgery or fraud relating to their accounts.164 163 Proctor The Law and Practice of International Banking 304-308. 164 “The courts however have been very hesitant to extend the duties of the customer with regard to this obligation” ; Proctor The Law and Practice of International Banking 307. 40 Hedley Byrne & Co. Ltd. v Heller & Partners Ltd 1964 AC 465173 is the decisive case in English law with regards to delictual liability as a result of negligent advice.174 It was determined in latter case that liability depends on the following:175 (a) the conjecture of responsibility by a bank ; (b) an acceptably close relationship between the bank, its customer and/or a third party ; (c) a reliance on a statement made by the bank or rather banker. In the „Hedley Byrne‟ case the bank avoided liability as a result of a provision in the reference. The decision by the English court would appear to be correct, the reason being that, as a matter of policy, a bank should be able to avoid the consequences of giving negligent advice if it provides the parties that received the advice with proper notice that the advice they received was false. Therefore, as a matter of policy, whether this is regarded theoretically as terminating liability or as being exempted from liability, it does not matter and is beside the point. Regardless, it is essential to note that, the crucial problem, the false statement, is made evident by the bank to the parties receiving the advice. Thus, the said parties can not be in any doubt that the bank is washing its hands of the consequences if the advice proves to be inappropriate or wrong. A small print clause in a document given to the customer or third party is not regarded as being appropriate advice as stated above. The English law will in this regard apply the unfair contract terms legislation to determine whether or not appropriate advice was given by the bank.176 173 Hereafter referred to as : „Hedley Byrne‟ case 174 Cranston Principles of Banking Law 184 and 210 – 212. 175 In the „Hedley Byrne‟ case the court took into consideration: the purpose for which the statement was made and communicated to the customer and or third party, the knowledge of the bank with regards to the particular advice that was needed for the specific purpose, the relationship between the bank and the persons relying on the advice, and also the size of the class to which the latter belongs ; Cranston Principles of Banking Law 184 and 210 – 211. 176 Cranston Principles of Banking Law 212. 41 Not only is a bank able to incur liability for negligent advice when it gives false information and/or make a false statement but also in a range of other matters in which a bank becomes involved in such as:177 (i) the failure to pass on information when a bank takes on the task of advising a possible borrower about the risks of a specific facility; (ii) the statements made by a bank that it will make obtainable to a customer sufficient funds to enter into a contract with a third party; (iii) advice about investments; (iv) guarantees that procedures are heading in the right direction and that the bank is positive about an agreement being reached. 3.3.2 Cheques in general As we have already introduced and briefly discussed cheques as an instrument of payment in 2.2.1, there is no need to discuss cheques in detail with regards to the English law as they are international instruments of payment and the basic rules of payment thereof remain the same in each and every country. Nevertheless, it should be noted that during December 2009 the Payments Council Board of the United Kingdom determined that the central cheque clearing system should close by 31 October 2018. This decision will be reviewed during 2016 to make sure that the 2018 target date remains realistic. The decision by the said counsel to manage the phasing out of the cheque as instrument of payment in general, is primarily based on the sudden decline in cheque use in the United Kingdom and the unreasonable cost implication it would have if the use of cheques would be allowed to die a slow death. 178 As a result of the phasing out of cheques as an instrument of payment, the use of electronic payment instruments will increase drastically and consequently lead thereto that regulations such as the Payment Services Regulations 2009 will become even more important in the future.179 177 Cranston Principles of Banking Law 211. 178 Proctor The Law and Practice of International Banking 313 and 321. 179 Proctor The Law and Practice of International Banking 314. 42 3.3.3 The liability of the paying bank In 3.3.1 we considered the liability of a bank in general with specific reference to advice being given by a banker to a customer and or a third party. In the present paragraph we will discuss the liability of the paying bank towards its customer and/or third parties to the transaction. First and foremost, a bank is regarded as a paying bank when its main duties include: (i) meeting cheques and (ii) making payments at the request and account of its customer.180 Before we discuss the circumstances in which a paying bank may be held liable to its customer and/or third parties, we must first acknowledge and point out the various statutory provisions intended to protect the paying bank.181 With regards to payment made „in due course‟, section 59 of the BEA protects the paying bank.182 Regardless, in this day and age the modern systems for cheque clearance make it difficult for this provision to be applied in reality as the paying bank simply receives an electronic message and will often not receive the original cheque until after payment has been made.183 Section 64 of the BEA protects the paying bank in that a cheque which is „materially altered‟ without the consent of the drawer is to be avoided by the paying bank.184 Furthermore, the paying bank is protected by section 60 of the BEA as it will be considered that payment of a cheque was done in due course, when it pays a cheque that is payable to order in good faith and in its regular course of business, even though the indorsement of the payee or a subsequent indorsee made on the instrument is forged or unauthorised.185 Also, if all the requirements stated in section 80 of 180 Proctor The Law and Practice of International Banking 321. 181 Proctor The Law and Practice of International Banking 331 - 332. 182 S59 of the BEA provides as follow : (a) a cheque is discharged by „payment in due course‟ by the bank upon which it is drawn and (b) „payment in due course‟ means payment on or after the date of the cheque to the holder in good faith and without notice that his title to the cheque is defective ; Proctor The Law and Practice of International Banking 332. 183 Consequently, the paying bank does not know the identity of the „holder‟ of the cheque nor can it examine the cheque to determine whether the „holder‟s‟ title may be defective. 184 „Materially altered‟ in this context has the meaning of : a change that was made to the date or the sum payable on the cheque. 185 Proctor The Law and Practice of International Banking 333. 45 payable to order, has the same rights as if the cheque had been indorsed to it. The former implies that the collecting bank could become a holder and given the right to sue the drawer on a cheque accordingly.195 Also, section 27(3) of the BEA provides that if a bank, a collecting bank, has a lien on a cheque it is considered to be a holder for value to the amount of the lien. Thus, as mentioned above, in our modern day and age these provisions will not be applicable with regards to non-transferable cheques.196 On the other hand, section 4 of the Cheques Act 1957 has been amended in terms of the Cheques Act 1992 and is an important source of protection for the collecting bank as the said provision provides that when a banker, who acts in good faith and without negligence, receives payment for a customer of an instrument or has credited a customer‟s account with the amount of an instrument and receives payment for himself or herself and the said customer has no title or a defective title in terms of the instrument, the banker will not incur any liability to the true owner of the said instrument.197 The said instruments of payment may include a cheque (also non-transferable cheques) and or any other instrument issued by a customer allowing a person to acquire payment from the said banker for the sum stated in the document. 198 All in all, there are four potential causes of action on which a collecting bank may incur liability to the true owner of a cheque if a banker collects payment for a person who is not entitled to receive payment in terms of the said cheque.199 We will again only briefly discuss negligence as a cause of action. Therefore, with regards to negligence as a cause of action, it has been held by the English courts in Abou-Ramoh v Abacha 2005 1 All ER (Comm) 247 that a collecting bank does 195 Proctor The Law and Practice of International Banking 342. 196 Proctor The Law and Practice of International Banking 342. 197 Section 4(1)(a) and (b) of the Cheques Act 1957 as amended; Proctor The Law and Practice of International Banking 342. 198 Section 4(2) of the Cheques Act 1957 as amended; Proctor The Law and Practice of International Banking 342. 199 The four causes of action are : (1) conversion, (2) monies had and received, (3) knowing receipt and (4) negligence ; Proctor The Law and Practice of International Banking 346. 46 not owe any duty to the drawer of a cheque collected by the said bank for the account of its customer. The former decision was based on the following grounds:200 (a) there is no assumption of a duty of care between the collecting bank and the drawer ; (b) the obligation of a duty of care might cause conflict between the collecting bank and its own customer as they must perform their contractual duties owed to each other ; (c) the collecting bank has no contact with the drawer of a cheque until it receives the instrument for payment. Furthermore, it has been decided in Yorkshire Bank plc v Loyds Bank plc 1999 2 All ER (Comm) 153 that a collecting bank does not owe a duty to protect the paying bank against losses flowing from the theft and fraudulent changes made to a cheque. Thus, to conclude, the collecting bank will only in exceptionally unusual circumstances incur liability towards the drawer of a cheque when funds are misappropriated as a result of a fraud coordinated by the collecting bank‟s own customer or as a result of the loss or theft of the cheque.201 3.4 Letters of Comfort202 3.4.1 Background Letters of comfort emerged on the commercial scene in the 1960‟s when they attracted the attention of lawyers world wide.203 Even so, letters of comfort only 200 Proctor The Law and Practice of International Banking 347. 201 Proctor The Law and Practice of International Banking 347. 202 Also referred to in English as : comfort letter, letters of support, letters of awareness, letters of responsibility and/or keep–well letters, and sometimes these letters are even seen as letters of intent. In Afrikaans they are referred to as „gerusstellingsbriewe‟. ; Trichardt “Comfort letters are like boomerangs... they tend to come back” 57 footnote 1 ; Trichardt “Comfort letters – quartet of decisions interrupts the judicial quiescence” 162 footnote 1. 203 Trichardt “Comfort letters – quartet of decisions interrupts the judicial quiescence” 162. 47 received the attention of the English courts in 1985 in two court cases, namely : Chemo Leasing Spa v Rediffusion plc204 and Re Augustus Barnett & Son Ltd.205 However, the legal status of letters of comfort was somewhat uncertain in terms of the common law until they were brought into the spotlight in 1988 by the English courts in Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd 1989 1 All ER 785206 where it was held that a letter of comfort was held to be contractually binding on the parties thereto and that it could impose liability on the writer thereof.207 After said court decision, letters of comfort received the attention of various high courts in many common law countries.208 Thereafter, the English Court of Appeal overruled that said decision and stated that the letter of comfort used in the Kleinwort Benson case was not adequately promissory to find a legal obligation because it merely referred to the policy of the holding company with regards to its subsidiary.209 Latter decision opened up a world wide debate. 3.4.2 Introduction A lender is not always in a position to insist that a borrower provide it with a traditional form of security such as a guarantee, mortgage or other form of surety in order to secure a loan.210 Equally, a borrower may also not always be in a position to provide such security as mentioned.211 Therefore, the business world developed, a financial instrument, namely a letter of comfort. Letters of comfort are financial instruments that are often used in business transactions as a replacement or an alternative to traditional forms of security and also to add onto 204 Unreported QBD, 19 July 1985 ; Trichardt “Comfort letters – quartet of decisions interrupts the judicial quiescence” 163. 205 [1986] BCLC 170 (ChD) ; Trichardt “Comfort letters – quartet of decisions interrupts the judicial quiescence” 163. 206 Hereafter referred to as : “Kleinwort Bensen”. 207 Trichardt “Comfort letters – quartet of decisions interrupts the judicial quiescence”163. 208 Trichardt “Comfort letters are like boomerangs... they tend to come back” 54. 209 Trichardt “Comfort letters – quartet of decisions interrupts the judicial quiescence”163. 210 Trichardt “The comfort letter trap” 46. 211 Trichardt “The comfort letter trap” 46. 50 oral representations and preceding dealings between the parties, the way in which the letter of comfort are recognized in a specific trade, profession or business, the parties‟ reasons for issuing and accepting a letter of comfort, the role the letter of comfort played in the transaction) and (iii) if the lender relied on the terms, whether express or implied, in the letter of comfort.225 Furthermore, both of the decisions confirmed that a letter of comfort could lead not only to contractual liability but also to liability based on promissory estoppel or misleading conduct.226 A letter of comfort may therefore in certain circumstances constitute a legal obligation that could cause the parent or holding company to incur liability on behalf of the subsidiary contrary to the objective of the parent company in issuing the letter of comfort.227 4. Comparative analyses As this is a comparative study, the South African law will be compared with the English law in order to see whether or not the South African courts should consider the decisions made by the English courts as lessons that may be learned from the English law. Firstly, it has been established that both the South African legislation, the Act, 228 as well as the English legislation, the BEA, 229 regulate the rights and obligations of the different parties to instruments of payment, specifically negotiable instruments such as cheques. Latter statement does not come as a surprise as the said South African legislation is based on and influenced by the said English legislation.230 Thus, we have established what can be seen as an instrument of 225 Trichardt “The comfort letter trap” 47 – 48. 226 Trichardt “The comfort letter trap” 50. 227 Trichardt “Comfort letters are like boomerangs ... they tend to come back” 54. 228 34 of 1964. 229 The Bills of Exchange Act of 1882. 230 Malan et al Malan on Bills of Exchange 34; 36 – 37. 51 payment and that the liability of the different parties to a negotiable instrument is usually based on contract as a contractual relationship exists between the said parties in both South Africa and England.231 The former statement is important as it will enable us to recognise whether or not a contractual relationship has been established between the parties to an instrument of payment or any other financial document and whether or not the said instrument of payment or financial document can be seen as a financial instrument or document utilised on a day to day basis by a financial institution. Secondly, we now turn to the delictual liability of parties to an instrument of payment. In order to establish whether delictual liability can exist between the parties of an instrument of payment, we discussed the liability of the paying bank and the collecting bank towards their customers where a cheque was used as an instrument of payment between the said parties. We established that in terms of both the South African law and the English law that the question regarding the liability of the drawee bank (the paying bank) and the collecting bank towards the owner of a cheque is a delictual question.232 Accordingly, we learned that a true owner of a cheque or a third party who wants to take recourse against a paying bank would have to rely either on conversion, negligence or a claim based on „dishonest assistance‟ in breach of trust as a cause of action and where a collecting bank is involved, the true owner or third party would have to rely on conversion, monies had and received, knowing receipt or negligence as a cause of action.233 We took a closer look at a few English court decisions234 and established that the relationship between a bank and a customer, which we referred to as the banker- 231 Malan et al Malan on Bills of Exchange 228; 230 – 231. 232 Malan Professional Responsibility 333; Proctor The Law and Practice of International Banking 335 ; Malan Professional Responsibility 337 ; Proctor The Law and Practice of International Banking 346. 233 Proctor The Law and Practice of International Banking 335 ; Proctor The Law and Practice of International Banking 346. 234 Royal Brunci Airlines Sdn Bhd v Tan 1995 AC 378 (PC) ; Abou-Ramoh v Abacha 2005 1 All ER (Comm) 247; Yorkshire Bank plc v Loyds Bank plc 1999 2 All ER (Comm) 153. 52 customer relationship, is based on contract, namely a mandate between the said parties.235 As with all contracts, the parties thereto receive certain rights and obligations in terms of the said contract.236 The said nature of the banker- customer relationship has been recognised by both the South African law and the English law in terms of the common law, case law and legislation. Up to this point, with regards to liability in terms of negotiable instruments, contractual liability, delictual liability and the banker-customer relationship, the South African law and English law are very similar to each other although the English courts have heard more cases where the cause of action is based on an act or omission by a bank on which the bank may be held delictually liable towards its customer or a third party. Thirdly, we turn to letters of comfort. Although the basic nature of a letter of comfort is considered the same in terms of the South African law as in terms of the English law not many direct references have been made to letters of comfort in terms of the South African law to date.237 Notwithstanding, with regards to the English law, the courts have given reference to letters of comfort since 1985.238 The English courts have heard many decisions with reference to letters of comfort ever since their first appearance in 1985. One of the latest cases where reference was given to a letter of comfort was in the Gate Gourmet – case that was heard in Australia and as the Australian law is based on English law this case is of particular importance and may be taken in consideration by the South African courts. Latter court decision confirmed that a letter of comfort could lead not only to contractual liability but also to liability based on promissory estoppel 235 Proctor The Law and Practice of International Banking 302. 236 Proctor The Law and Practice of International Banking 303. 237 Trichardt “Comfort letters are they binding under South African law?” 795. 238 Trichardt “Comfort letters – quartet of decisions interrupts the judicial quiescence” 163. 55 on a day to day basis by a bank as such a instrument or document cannot be binding upon the either of the parties Furthermore, to determine whether or not the instrument or document that was issued by the employee of the defendant, constituted a letter of undertaking (as was intended by the parties) we have to consider the contents of the instrument or document and the intention of the said parties thereto. The appeal court in Absa Bank v Bernert held that : 245 When all the terms are read together the document is a compendium of gibberish. I have no doubt that a document containing gibberish on the letterhead of a major financial institution is capable of misleading third parties as to its meaning… Thus the appeal court was of the opinion that the said instrument or document was not a financial instrument or documents used on a day to day basis by a financial institution. Therefore the instrument or document does not qualify as a letter of comfort because former is seen as a financial document or document used on a day to day business. As discussed, in terms of the South African law the provisions in a letter of comfort contain commitments. Latter commitments may create legal obligations or they may only be moral commitments between the parties and not create any legal obligations.246 It was also determined that according to the English law a letter of comfort may in certain circumstances constitute a legal obligation.247 In the leading English court case Lasalle Bank it was decided that the enforceability 245 Absa Bank Limited v Bernert , ad paragraph 73. 246 Trichardt “Comfort letters are they binding under South African law?” 796. 247 Trichardt “Comfort letters are like boomerangs ... they tend to come back” 54. 56 of a letter of comfort depends on certain factors.248 If we take into consideration the said factors and compare them to the contents of the instrument or document that was issued in the Bernert v Absa Bank Limted case it is clear that the parties could not be held liable in terms of the said instrument or document. The reason for latter statement is that as an instrument or document did contain the word “guarantee” but did not contain the word “contract”, the intention of the parties was not to obtain a guarantee from the bank but it was merely to attain a written undertaking from the bank that the money that will be transferred to the bank will be safe and held in a fixed deposit for a certain period and finally the parties did rely on undertaking in terms of the instrument or document. Consequently, as the parties only requested an undertaking from the bank, thus a letter of undertaking, it was not their intention to create a legal obligation and or contractual liability in terms of the said instrument or document. What is confusing is the fact that the instrument or document contained the word “guarantee” which is in contrast to the intention of the parties as a letter of undertaking and a guarantee are two different financial instruments as explained. Accordingly, the instrument or document could not be seen as a letter of undertaking as intended by the parties as the document was as the judge said in the appeal case “a compendium of gibberish” as it neither constituted a letter of undertaking nor a guarantee that is used on a day to day basis by a bank. 5. Conclusion and recommendations Finally, letters of comfort are constructive and flexible financial instruments to be used in business transactions which have for many years been used in international trade. Considering the recent court decisions world wide, not only in England, but worldwide, and the universal change in the financial wealth of 248 Trichardt “The comfort letter trap” 47 – 48. 57 businesses, legal risk management is a sensible step for banks and people in the business world who have used letters of comfort to make sure that they know the nature and effect of the letters of comfort they have issued or hold. As previously said, legal liability based on a letter of comfort is therefore a genuine possibility. Thus, like a boomerang, a letter of comfort has a tendency to return to its unsuspecting originator and can possibly be a dangerous financial instrument.249 This study has made it apparent that the saying „the customer is king‟ is definitely not a worn-out cliché as it rings more true in this modern day and age than ever before. The last few years South Africa has seen several pieces of legislation that are aimed at the protection, development and advancement of the rights and obligations of customers be initiated and instated. Such pieces of legislation are not only applicable to one specific business sector but have a vast influence on all the various business sectors in South Africa including the banking industry. The National Credit Act250 and the Consumer Protection Act251 are two of the most recently instated pieces of legislation in South Africa that focus on the customer and/or rather consumer and his/her rights and obligations not only in the trade industry but also in the broader commercial sector. Therefore, these two pieces of legislations have a vast influence on the banker – customer relationship. Although South Africa has been seen by many as having a conservative legal system, the said pieces of legislations are proof that South Africa has come a long way in the past few decades since it became a democratic country. South Africa has not only focused on the development of individual rights but has also 249 Trichardt A “Comfort letters are like boomerangs... they tend to come back” 57 ; Trichardt A “The comfort letter trap” 50. 250 34 of 2005. 251 68 of 2008. vii CASES SOUTH AFRICAN CASE LAW A Absa Bank Limited v Bernert (99/09) [2010] ZASCA 36 (29 March 2010) B Bernert v Absa Bank Limited (14302/03) [2008] ZAGPHC 337 (15 October 2008) ENGLISH CASE LAW A Abou-Ramoh v Abacha 2005 1 All ER (Comm) 247 B Bank Polski v KJ Mulder & Co 1942 1 All ER 396 (CA) 398 C Chemo Leasing Spa v Rediffusion plc (Unreported QBD, 19 July 1985) Commissioners of Taxation v English, Scottish and Australian Bank 1920 A.C. 683 Cornish v Midland Bank 1985 3 All 513, 520 G Gate Gourmet Australia Pty Ltd v Gate Gourmet Holding AG 2004 N.S.W.S.C 149 (Sup Ct (NSW)) viii H Hedley Byrne & Co. Ltd. v Heller & Partners Ltd 1964 AC 465 K Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd 1989 1 All ER 785 L Lasalle Bank National Association v Citicorp Real Estate Inc (Unreported July, 18, 2003) R Re Augustus Barnett & Son Ltd [1986] BCLC 170 (ChD) Royal Brunci Airlines Sdn Bhd v Tan 1995 AC 378 (PC) U United Dominions Trust Ltd. v Kirkwood 1966 2 QB 431 (CA) Y Yorkshire Bank plc v Loyds Bank plc 1999 2 All ER (Comm) 153 INTERNET D Debono J The Customer is king http://jamesdebono.com/the-customer-is-the- king/ [Date of use 27 October 2011] ix H Hunter D 2004 The customer is still king http://allafrica/com/stories/200404060666/html [Date of use 22 August 2011] M Modjadji L The customer is king, but not in South Africa, says Lauretta http://www.btimes.co.za/97/0622/btmoney/money8.htm [Date of use 15 November 2011] JOURNALS M Malan FR “Professional Responsibility and the Payment and Collection of Cheques” 1978 De Jure 326 – 345 Malan FR “Professional Responsibility and the Payment and Collection of Cheques (conclution)” 1979 De Jure 31 – 44 R Radesich G and Trichardt A “Comfort letters are they binding under South African law?” 1988 De Rebus 795 T Trichardt A “Comfort letters are like boomerangs... they tend to come back” 2005 26(2) The Company Lawyer 54 – 57 Trichardt A “Comfort letters – quartet of decisions interrupts the judicial quiescence” 2001 9(2) Tilburg Foreign Law Review 162 – 194 Trichardt A “The comfort letter trap” 2004 78(11) Law Institute Journal 46 - 50