COMMENTS ON THE LEGAL PRACTICE BILL
DEPARTMENT OF PRIVATE LAW
Ms Dalita Ramwell
The preamble of the Bill sets out what it sets out to achieve, namely:
1. transformation and restructuring of the profession into a unified and
demographically representative profession
2. that the values underpinning the Constitution and the rule of law are
embraced and upheld
3. ensure affordability of legal services
4. regulation of the legal profession in the public interest in a single statute
5. remove entry barriers to the profession
6. strengthen the independence of the legal profession
7. ensure accountability of the legal profession to the public
What are the main effects of the Bill currently:
It provides for:

a unified Legal Council, a transitional council and an umbudsman

legal practitioners (being both advocates and attorneys) being able to practice
freely throughout the RSA (no provincial re-enrolment)

legal practitioners (both advocates and attorneys) may appear in a court of
law

only legal practitioners may render legal services for reward (although later in
section 35 of the Bill it provides that non- profit organizations may charge for
legal services)

compulsory community service by legal practitioners, failing which their right
to practice is in jeopardy
Specific potential problem areas
Section 1 defines an attorney as “a legal practitioner practicing with a fidelity fund
certificate.” Given that a legal practitioner is defined as either an attorney or an
advocate, then that necessarily means that an attorney who fails to obtain a fidelity
fund certificate in a specific year, is automatically an advocate.
“Trust account practice” means a practice conducted by one or more attorneys who
are in terms of this Act, required to hold a Fidelity fund certificate” i.e. what used to
be an attorneys practice. However, some legal practitioners do not need fidelity fund
certificates and if a sole practitioner then in a particular year does not get a fidelity
fund certificate for whatever reason, does his firm then change from a trust account
practice to something else?
Section 3 sets out the purpose of the Act which mostly corresponds with what
preamble above, but includes: (d) to protect and promote the public interest.
“Public interest” has developed a specialised and specific meaning in international
law and I am not sure that this is really what the legislator means here, but there is
no definition of the public interest in this bill. Perhaps there should be a reference to
the public interest as in the SA Constitution. (There are also theoretical philosophical
problems with the “public interest” concept. Must an interest be universal to be
accepted as worthy of protection as a public interest? Few interests would then
qualify as in the public interest. If universal acceptability is not required, but only
preponderance of public, it necessarily leads to the marginalisation of minority
interests.)
The definition of the legal practitioner means and advocate or attorney registered as
such in terms of section 30 of the Act, and section 2 provides that the Act applies to
legal practitioners. Similarly section 4 provides that the Legal Practice Council will
have jurisdiction over all legal practitioners – yet later in the Act it deals legal aid
clinics, non profit organisations and even legal advisers and in some instances
specifically excludes state legal practitioners from the operation of the Act. Are these
persons then also subject to the general provisions of the Act?
Section 5 sets out the objects of the Legal practice Council. Subsection 5(b) aims to
ensure that legal fees are reasonable and promote access to legal services. Section
5(d) stipulates that one of the objects of the Legal Practice Council is to regulate
legal practitioners. It is debatable whether it is wise to fix prices in this manner in a
largely capitalist economy. That such price fixing only applies to registered attorneys
and advocates seems undeniably discriminatory. It also risks benefitting only the rich
and not the poor, whom it is designed to assist. For instance, in an ordinary capitalist
system different legal practitioners would charge different fees depending on their
experience and expertise and client base. If fees were then capped, the cheapest
attorneys would still be under the cap and still charge the same (or possibly more up
to the maximum of the cap), while the most expensive legal practitioners, who
perhaps mostly work for corporate clients would be obliged to reduce their fees –
benefitting only their wealthy clients. The same applies to conveyancing – the person
purchasing a R200 000 house would still have to pay a reasonable fee to make it
worthwhile for the legal practitioner to undertake the work, otherwise he would simply
decline the instruction. Let us assume that a reasonable fee for such work is R10
000 on this R200 000 house. But the R20m purchaser would pay the same capped
fee. The Bill does not prescribe how the reasonable fees will be achieved, and that is
perhaps the key issue.
Section 12 provides for circumstances where a member of council must vacate
his/her office (misconduct, incapacity, etc). I suggest that since the Council consists
of 16 legal practitioners, 1 academic, 3 minister appointees and 1 Legal Aid SA
appointee, if one of the 16 legal practitioner members were to no longer be a legal
practitioner, he/she should vacate the seat on the Council.
Section 14 provides for the dissolution of the Council and the appointment of an
interim Council. Section 14(6) provides that the chairperson of the interim council
may of his own accord or at the request of at least 5 members, convene a special
meeting and at such meeting 5 members shall be a quorum. This seems to create
the potential for a relatively small number of members to “highjack” the council and
pass undemocratic resolutions.
Chapter 3 – Regulation of legal practitioners
Section 24 seems to provide for a dual system for enrolment as a legal practitioner.
(either in terms of section 24(2) by the High Court if the applicant is a South African
citizen or permanent resident and meets certain requirements or alternatively, in
terms of regulations to be drafted by the minister for foreign legal practitioners
(section 24(3)). It may perhaps depend on the contents of the regulations to be
drafted, but it appears as though admission as a South African citizen (via court) is a
more onerous and perhaps expensive process. This seems to be contrary to the
objects of the Bill of removing entry barriers to the profession.
Section 28 provides for the assessment of legal practitioners. There appears to be
no differentiation between the assessment of Advocates and Attorneys – just legal
practitioners generally. (This seems to be born out by section 32 which provides for
conversion from advocate to attorney and vice versa with a simple administrative
process - no additional exams). One generic assessment for all legal practitioners is
problematic because the attorney’s work is of a much more varied and wider scope.
It requires amongst others, vocational training about accounting, estates and the
business management of an office, while the Advocate’s focus is mainly litigation. If
assessment of legal practitioners were to be done generically for both, some aspects
would have to be neglected.
Section 34 provides for the forms of legal practice being for attorneys:
-
for their own account
as part of a commercial juristic entity
as part of a non-profit juristic entity
as part of Legal Aid SA
as a state attorney
Advocates can practice:
-
alone for their own account (but not in partnership or in any fee sharing
arrangement)
as part of non-profit juristic entity
as part of Legal Aid SA, at a public interest legal centre or a as a state
advocate.
My problem here is two-fold. Can this bill still regulate persons who are not in private
legal practice? What would be the incentive for non-practitioners to comply?
Secondly, section 34(7) dealing with a non-profit jurisitic entity, prohibits any part of
such non profit juristic entity’s fees being distributed – but can they charge fees for
legal work?
Section 34(8) provides for legal aid clinics which must provide free services and
prohibits them from administering and distributing insolvent or deceased estates,
judicial managements and Road Accident Fund claims. It is not clear to me what the
motivation for this prohibition is, especially with regard to deceased estates, which
must necessarily be a legal minefield in the poorer, polygamous communities.
Section 35 provides the criteria for the legal practitioner’s fee structure, eg
importance, significance, complexity and volume of work. It omits, however, seniority
and experience of the practitioner as a criterium. It is the basis of any professional
work that the more experienced and specialised the professional, the more they may
charge.
Section 37 provides for disciplinary bodies and refers specifically that it applies to
legal practitioners, candidate legal practitioners or juristic entities. Are legal aid
clinics then excluded from such disciplinary action? (Similarly section 38 dealing with
complaints of misconduct and section 40 dealing with disciplinary hearings and
remedial action.)
Section 49 deals with the powers of the ombudsman and particularly reports.
However, it is not clear to me whether such reports will be made public and whether
such reports will actually also be made available to the complainants.
Chapter 6 deals with the Attorneys’ Fidelity Fund. Section 56 in particular
provides that the fund is liable to reimburse persons who suffer pecuniary loss of
money given to a trust account practice in the course of practice as an attorney.
Does this apply only attorneys and not to non-profit juristic entities and legal aid
clinics who even if they do not charge fees, will collect money from the public to
cover disbursements?
Chapter 7 that deals with the handling of trust moneys in section 84 refers to “every
attorney, other than an attorney in the full time employ of the state, state legal
adviser, state law advisor ...” This seems to indicate that earlier references to
attorneys in the Act, included all of these categories of state legal practitioners. If this
is so, then it seems state attorneys and advocates can and must do everything that
private legal practitioners can.
Section 85 deals with the application for and issue of a fidelity fund certificate and
provides criteria for determining the amount contribution such attorney legal
practitioner must make. It does not, however, mention the attorney’s past claims
record as a criteria. Surely where a practitioner has been the cause of prior claims
against the fund, such attorney’s contribution should be “loaded”?
Section 93 provides for penalties where “Any person who in a practice, without the
written consent of the Council, employs in any capacity any person who has been
struck of the roll or suspended from practice… shall be guilty of an offence.” It is an
offence to employ such a person even as a secretary or tea girl? This makes it
almost impossible for such an ex legal practitioner to earn any kind of living, which
seems unconstitutional.
Section 94 dealing with regulations, refers to a framework for the creation of “limited
liability legal practices”. What is this? There is no definition for this.
Chapter 10 deals with the creation and operation of a transitional South African
Legal Practice Council. The question that arises relates to the need for such a
Transitional Council. Why not go from ordinary Law Societies to the Legal Practice
Council? The answer seems to be contained in section 97. It merely postpones the
problems and disputes that could not be resolved thus far, in that the Transitional
Council must advise the Minister on problematic and controversial issues, eg
practical vocational training for candidate legal practitioners, fee structures for legal
practitioners, and most importantly, the Transitional Council must, within 24 months,
“negotiate with and reach an agreement” with the attorneys’ and advocates’
professions in respect of the transfer of their assets, rights, liabilities, obligations and
staff. To provide that parties must reach an agreement seems contra bones mores
and unenforceable. Furthermore, taking over the assets of private institutions,
operating more of less like a club, where all the members have a shared interest in
the assets, seems to indicate a deprivation or expropriation, with all the Consitutional
implications of that.
Section 113 deals with existing advocates, attorneys, conveyancers and notaries
and provides inter alia that the registrar of the high court must as soon as possible …
furnish a list of the names on the roll of attorneys, conveyancers, etc. I am not sure I
understand the point of this. The Law Societies already have these lists and in any
event that would not be comprehensive since legal advisers are not required to be
admitted by Court.
General Comments – does the Bill achieve what it sets out to do in the
preamble?
An estimated eighty per cent of the bill deals with administrative issues – constituting
the Legal Practice Council, the Transitional Council and the Ombud - who may
serve, how appointed, when and how they will meet, how they will be funded, how
they will discipline, etc . It seems that the Bill addresses the regulation, unification
and disciplining of the legal profession in detail. Likewise, transformation and access
to the profession are addressed. The values underpinning the constitution are often
implied, but not specifically referred to, eg reference to the public’s interest.
However, the compulsory take-over of the current Law Society and Bar Council
assets seem to be contrary to constitutional values. The difficult issue of affordability
of legal services is addressed, but in such a vague manner that it merely postpones
the issue and leaves it to be dealt with by administrative rather than legislative
decisions. Most concerning, however, is that I did not find any provisions that may
strengthen the independence of the legal profession. On the contrary, the over
regulation seems to have the opposite effect.
COMMENTS ON: THE LEGAL PRACTICE BILL
DEPARTMENT OF JURISPRUDENCE
Prof Magda Slabbert
Generally I think that what is envisaged with the Bill is good, especially to ensure that
legal services are affordable and within the reach of the citizenry.
The following are concerns:
1. Paralegals are not addressed in the Bill.
2. I think there can be a unified statutory body but there should not be fusion
between the professions of attorneys and advocates.
3. Competent persons should be appointed to the Legal Practice Council and
not political figures with the right connections.
4. Should non-practising lawyers also pay an annual fee?
5. Section 7(1)(b): Why only ONE teacher of law to be represented on the
Council?
6. Section 7(1)(c): I have a problem with the words “fit and proper” it is vague
very subjective and discretionary. I would like an explanation of what is
considered being a “fit and proper” person. (Same with section 8(1)(b),
section 24(2)(c) and section 48(2)).
7. I think the term of three (3) years for council members is not enough. It should
rather be five (5) years to work effectively.
8. Regional Councils? Will it be based on provinces or where there are High
Courts? Explanation is needed.
9. The four year LLB is a major concern. Few students achieve success within
four years but apart from obtaining the degree they are not ready for practice.
10. I would also make pupillage for advocates compulsory. At this stage it is a
choice and students only do the pupillage if they want to be part of a Bar
Council.
11. A single Code of Conduct for lawyers will not suffice, there should be separate
ones for attorneys and advocates as their respective roles differ.
The following are positive issues envisaged in the Bill:
1.
2.
3.
4.
5.
6.
Chargeable fees will be determined.
Community service for candidate legal practitioners.
An office of Legal services Ombudsman.
Procedures for the resolution of complaints against legal practitioners.
Continuous professional development of legal practitioners.
The easy conversion of a person’s registration from attorney to that of
advocate.
7. Advocates may receipt brief directly from the public under certain
circumstances – section 34(2)(b).
Disciplinary bodies – as long as they function effectively.
COMMENTS: LEGAL PRACTICE BILL
DEPARTMENT OF MERCANTILE LAW
Prof Heinrich Schulze
1. Preamble
The reference in the Preamble to the removal of ‘any barrier for entry to the legal
profession’ is too wide. It should preferably be omitted, alternatively, amended to
proclaim that only those barriers which are unnecessary, have to be removed.
Some barriers are necessary, others not. Only those barriers which are outdated or
not in pace with modern requirements should be removed. The Preamble should be
worded accordingly.
2. Section 6(1)(d)
The wording of s 6(1)(d) is too restrictive. Negotiable instruments and the electronic
transfer of funds are by no means the only, or even the two most important examples
of methods or instruments of payment. The wording of s 6(1)(d) should be couched
in such a way that it encompasses all forms of money, and not only two examples of
money/payment.
3. Section 91(1)(a)
The structuring and wording of s 91 do not make sense.
Section 91(1)(a) provides that a bank will not be deemed to have knowledge (by
reason only of the name or style of the account) that the account holder (ie, the legal
practice) of a trust account is not entitled to all the money deposited in the account. It
is not clear why banks are afforded this special protection. It a bank knows that
money is held in a trust account (the name of the account will in all cases be selfexplanatory) it is fair to accept that the bank will know that (not all) the money in the
trust account ‘belongs” to the account holder. As it is presently worded s 91(1)(a)
creates the impression that it deals with a bank’s right to set-off. If so, why not
mention it specifically? If not, with what does it deal then?
It would seem that s 91(1)(a) attempts to require something more before a bank will
be deemed to have knowledge about the nature, rights and duties of the parties
involved in a bank/trust account holder relationship. However, it does not specify
what this additional requirement is.
Section 91(1)(b), in turn, provides that the provisions contained in s 91(1)(a) do not
relieve the bank from any liability or obligation ‘which legally exists’. What type of
liability or obligation does s 91(1)(b) refer to?
On the face of it, ss 91(1)(a) and (b) are in conflict with each other.
Further, the provisions contained in s 91(2) seem to contradict those in s 91(1)(a).
Section 91(3), in turn, seems to contradict the provisions contained in s 91(2).
In terms of the common law a bank has the right of set-off or combination of
accounts. Does s 91 aim to alter the common law? And if so, to what extent? If not,
why has s 91 been included in the Bill in the first place?
The common-law right of set-off of a bank came under scrutiny in three recent
decisions. Did the legislature take these three decisions into account when drafting s
91? If not, it should perhaps reconsider the wording of s 91, and more importantly,
also reconsider whether the inclusion of s 91 in the Legal Practice Bill is necessary
at all.
In passing: It is trite that money which is deposited in a current bank account
becomes the property of the bank. The client, in turn, has a personal claim against
the bank for a similar amount to be paid on demand by honouring cheques drawn on
it or to perform other payment functions (see Malan on Bills of Exchange, Cheques
and Promissory Notes in South African Law 5th ed by FR Malan, JT Pretorius & SF
du Toit ¶ 217).
In three recent cases the court considered the parameters of the trite principle that
money in a bank account becomes the property of the bank (see Joint Stock Co
Varvarinskoye v Absa Bank Ltd & others 2008 (4) SA 287 (SCA); Echo Petroleum
CC v Sky Petroleum Ltd and Another (Case No 45809/2008) 28 October 2010
(GNP) (which was set aside on appeal: Standard Bank of South Africa v Echo
Petroleum CC (Unreported case 192/2011 22 Mar 2012 (SCA)); and Absa Bank Ltd
v Intensive Air (Pty) Ltd and others 2011 (2) SA 275 (SCA)).
In Joint Stock the court considered the right of a bank to appropriate monies which
are held on account with it. The facts were as follows: MDM (Pty) Ltd (‘MDM’) (who
was the sixth respondent in the present case) was a client of and held a bank
account with Absa Bank (‘Absa’). MDM became in debt with Absa. On 10 December
2005 Absa appropriated an amount of R28 244 780,59 standing to the credit of an
account held by MDM with Absa (paras 1, 16-18).
MDM was not entitled to the money held in the account. The money was deposited
into MDM’s account by the appellant (‘Joint Stock’). Joint Stock was involved in a
contract of work in terms of which MDM was appointed as lead contractor. It was
concerned about MDM’s reputation of repeated failures to pay subcontractors money
it had received from previous employers in terms of construction or engineering
contracts. Joint Stock had an interest in ensuring that subcontractors would be paid,
to enable delivery of plant and equipment within schedule and thus to keep the
project on track. A safeguard was therefore built into the contract to address this
concern. This was done by the insertion of a clause in the contract which provided
that Joint Stock would pay money into MDM’s account for the sole purpose of paying
sub-contractors. The contract between Joint Stock and MDM contained detailed
provisions on the circumstances in which MDM would be allowed to withdraw money
from the account to pay the sub-contractors. The contract further provided that under
no circumstances would MDM have direct access to the funds in the account. Absa
was aware of this arrangement between Joint Stock and MDM (paras 23-24).
Seven months before the appropriation by Absa, MDM executed a document in
terms of which they agreed that any credit balance on any of its accounts with Absa
may at any time, in the discretion of Absa, be set-off against any money owed by the
sixth respondent to Absa. Ten days before to Absa appropriating the money in the
account MDM and two other companies entered into a deed of cross-suretyship,
whereby they bound themselves, jointly and severally, as sureties and co-principal
debtors in favour of Absa for payment, on demand, of any sum or sums of money
which any of them may owe Absa from whatever cause arising (paras 24-25).
The court disagreed with Absa’s contention, that it is a universal and inflexible rule
that only an account holder may assert a claim to money held in its account with a
bank. It held that the proposition that money deposited in an account becomes the
property of a bank does not necessarily militate against a legitimate claim by another
party (para 31).
Absa had knowledge of the source and purpose of the funds deposited in MDM’s
account. Absa and MDM had thus agreed to act as Joint Stock’s agent to
‘warehouse’ the money in MDM’s account with Absa (para 36).
The rights to the monies which stood to the credit of MDM’s account with ABSA
vested in Joint Stock (para 48). Absa was accordingly not entitled to appropriate the
money in MDM’s account.
In Joint Stock the court thus held that it was not a universal and inflexible rule that
only an account holder may assert a claim to money held in an account with a bank.
It has been suggested that this finding of the court merely confirmed the existing
legal position as evidenced in earlier case law, including McEwan, NO v Hansa 1968
(1) SA 465 (A) and Dantex Investment Holdings (Pty) v National Explosives (Pty) Ltd
(in Liquidation) 1990 (1) SA 736 (A). These cases, as well as the judgment in Nissan
South Africa (Pty) Ltd v Marnitz & Others (Stand 186 Aureport (Pty) Ltd Intervening)
[2006] 4 All SA 120 (SCA), illustrate that the concept of money deposited in a bank
account becoming the property of the bank did not necessarily militate against a
legitimate personal claim by a third party to the money).
In its majority decision the court emphasized the importance of the fact that Absa
had prior knowledge of the source and purpose of the funds in the account. Put
differently, at the time when it appropriated the money in the account, Absa was
aware of the fact that MDM was not entitled to the money held in that account (para
39).
In Echo Petroleum CC v Sky Petroleum Ltd and Another (Unreported case
45809/2008) 28 Oct 2010 (GNP)) the court held that if a bank knows or ought
reasonably to know that moneys deposited in an account actually belongs to a third
party, it may not appropriate the money as part of a set-off for a debt which the
account holder owes the bank.
The facts were as follows: Echo claimed payment of R710 000 which was
confiscated by the second respondent, Standard Bank (‘the Bank’) from the bank
account of the first respondent (‘Sky’). Echo traded as a fuel retailer and acquired its
stock from Sasol through Sky. Sky was a licensed fuel trader and it held a number of
bank accounts with the Bank, including the so-called ‘253 account’ in terms of which
Sky had an overdraft facility. Echo regularly deposited money in Sky’s so-called ‘602
account’ for fuel purchased from Sasol (paras 1-4).
Sky ran into financial difficulties and failed to repay its overdraft on the ‘253 account’.
On 22 June 2008 the bank sent Sky an ultimatum. In the letter the bank expressed
the right to cancel its agreement with Sky. The bank stipulated 31 July 2008 as the
last day for Sky to honour its obligations in terms of the agreement, failing which the
Bank would cancel the agreement (paras 4-6).
The Bank did not cancel the agreement on 31 July 2008. On 1 October 2008 Echo
ordered fuel to the value of R710 111 from Sky and duly transferred the money into
Sky’s ‘602 account’. Shortly after the amount was deposited in the ‘602 account’, on
the same day, the Bank stopped Sky’s access to the ‘602 account’. Sometime after 2
October 2008 the Bank transferred the amount deposited by Echo to Sky’s ‘253
account’. The purpose of the transfer was to offset the debt which arose as a result
of the unpaid overdraft (paras 6-7).
As a result of the Bank’s actions Sky could not order from or pay Sasol for the fuel as
per their arrangement. Sky was later liquidated. Echo claimed the amount from the
Bank. Echo alleged that the money deposited into Sky’s account was never meant to
become the property of Sky (or the Bank) but that the account was meant to be a
conduit for Sky to pay Sasol for fuel Sky bought on behalf of Echo (para 10).
Echo further argued that at the time the Bank transferred the deposited amount from
the ‘602 account’ to the ‘253 account’ , the Bank knew or reasonably should have
known the money was intended for the purchase of fuel and not to the credit of Sky.
As a result the Bank unjustifiably enriched itself at the expense of Echo (para 18).
The Bank, in turn, alleged that the account through which Sky conducted its fuel
purchase business was a general account and could thus not be classified as a trust
account to warehouse monies deposited by third parties (such as Echo). The issue
to be decided was thus whether Sky received the deposit for its own account, or as
agent for Echo (para 19).
The court held that although the ‘602 account’ was not named a trust account, it was
the only one of Sky’s accounts through which it conducted its fuel selling business.
Not naming it a trust account did not alter this fact (paras 27-28).
The court further pointed out that ‘overwhelming evidence’ existed that the Bank
knew or should have known that the deposits which Sky’s clients made into the ‘602
account’ were intended for the purchase of fuel by Sky on behalf of its clients. The
nature of the transactions as reflected in the bank statements indicated that the
deposited amount was in transit and on each occasion deposited and paid out to
Sasol within 24 hours. Sky’s ‘602 account’ was thus nothing more than a conduit to
facilitate payment to Sasol (paras 35-36).
At least as from 22 June 2008 the Bank was aware of Sky’s financial difficulties. The
Bank had access to and monitored Sky’s accounts. Echo’s deposit on 1 October
2008 was one of a long list of similar transactions and was thus not an isolated
occurrence (paras 39 and 46).
In applying the principle laid down in Joint Stock v Absa Bank 2008 (4) SA 287
(SCA), the court in Echo Petroleum held that a deposit into Sky’s ‘602 account’ was
intended for the purchase of fuel on behalf of Echo. It was never meant to be for the
credit of Sky (para 49).
The Bank thus enriched itself by confiscating an amount it knew was not deposited
to the credit of Sky. The Bank was ordered to pay Echo R710 343,10 plus 15,5%
interest per annum, calculated from 1 October 2008 to date, plus costs (ibid).
The decision in Echo Petroleum merits a number of comments.
The court in Echo Petroleum correctly distinguished it on the facts from the decision
in Joint Stock. In Joint Stock the bank was expressly informed beforehand, when the
account was opened, that its purpose was to warehouse money for the payment of
third party contractors. In Joint Stock the bank thus had real and prior knowledge
that the money in the account was never meant to be for the credit of the account
holder.
I believe that the court in Echo Petroleum relied on a very generous interpretation of
the dictum in the Joint Stock case to also include cases where subsequent
knowledge was imputed to the bank. In this case the court held that the bank ‘knew
or should have known that the deposits … [were never meant to be for the credit of
Sky]’ (own emphasis) (para 35).
In Echo Petroleum the bank was never expressly informed about the fact that the
account would be used to warehouse money for the payment of Sasol. However, the
court imputed such knowledge to the bank on the basis of what it described as
‘overwhelming evidence’ that ‘the bank knew or should have known’.
The court thus held that either prior real knowledge (Joint Stock) or subsequent
constructive knowledge (Echo Petroleum) on the part of the bank about the
‘warehouse nature’ of an account is sufficient to withstand any claim from the bank to
the money.
From the information contained in the report of the case it is not clear cut whether
there was indeed constructive knowledge on the part of the bank about the
‘warehouse nature’ of Sky’s ‘602 account’. It would place an extremely onerous duty
on a bank to expect it to investigate the accounts of all its clients which experience
financial difficulties, and to decide, on the basis of these investigations, whether or
not these accounts are used for warehousing money on behalf of third parties.
The court in Echo Petroleum further made a highly contentious statement regarding
the operation of set-off. In par 45 of its decision it held that ‘[t]here was clearly no
intention [on the part of the bank] to give timeous notice or warning [to Sky] of the
possible confiscation [ie, set-off] of [the] amount deposited by third parties’ (own
insertions). Suffice it to mention here that it is a well settled principle that set-off
operates automatically and does not require notice by one party to the other of the
former’s intention to set-off one claim against another.
Finally, the Echo Petroleum case emphasises the need for banks to update their
agreements with clients. Banks should ideally include a provision in the bank-client
agreement that unless the bank is informed beforehand, in writing and in express
terms, that funds in a certain account is held by a client on behalf of a third party, the
client unconditionally consents to the common-law principle that all money deposited
in that account will become the property of the bank.
The decision in Echo Petroleum has been set aside on appeal (see Standard Bank
of South Africa v Echo Petroleum CC (Unreported case 192/2011 22 Mar 2012
(SCA)). Suffice it to mention here that according to the SCA, the mere fact that a
bank has been informed of a special arrangement between an account holder and a
third party that the credit in the account stands to the benefit of the third party, the
latter does not have a vindicatory right to the money in the account. Something more
than mere knowledge on the part of a bank is required before a third party will have a
vindicatory right to money deposited with the bank. What is required is an agreement
between a bank and an account holder that the credit in an account stands to the
benefit of a third party.
The third case which dealt with the question of ownership of money in a bank
account, is that of Absa Bank v Intensive Air (supra). In this case the court held that
if a bank does not have knowledge that moneys in an account holder's account
actually belongs to a third party, it may appropriate the money as part of a set-off for
a debt which the account holder owes the bank.
The facts in Intensive Air were as follows: A certain Louw was the sole owner and
director of a private airline company, under the name Intensive Air (‘the company’).
Initially the company operated only as an ambulance service. The company was
later extended to also include air passenger travel services which sold tickets to the
general public (paras 1-2).
Louw and the company held various bank accounts with Absa Bank. One of these
accounts was a personal account which Louw opened some time before the
company had started its air passenger service operations (paras 3-4).
All moneys earned from ticket sales of the company’s passenger service were paid
into Louw’s personal account. Louw devoted these funds to the payment of company
and personal expenses. Louw was indebted in his personal capacity to Absa for the
sum of R25 million which he had borrowed to purchase aircraft in his personal name,
which aircraft he leased to the company (paras 6-7).
When the company was liquidated, Absa appropriated the money in Louw’s personal
account by set-off against the debts he owed to Absa(para 9).
The liquidators of the company challenged the validity of the set-off. They argued
that the payment of the company’s ticket sales into Louw’s private account were
dispositions without value by the company to Absa (para 10).
The court a quo relied on the decision in Joint Stock and held that the liquidators had
established that Louw had conducted the air service venture through the company
and not in his own name. The funds deposited into the ticket account were thus
those of the company and ‘belonged’ to the company. As a result the bank was not
entitled to set-off any credit in the ticket account against any claim it might have
against Louw personally (paras 16-17).
On appeal the SCA held that the general rule provides that money paid into a client’s
account becomes the property of the bank, subject to the client’s claim to any credit
in the account (para 20).
Normally, so the court reasoned, only the account holder is entitled to claim money
in an account held in his personal capacity. A third party is only entitled to such funds
if a special arrangement has been made with the bank that the money will be held on
behalf of such third party; or in cases where the third party is able to show that
money credited to another’s account ‘belongs’ to the third party, for instance in cases
where stolen funds can be traced to a credit in another’s bank account (para 20).
English law too, prohibits set-off where the accounts are not held in the same right,
for example, where the one account is a trust account. Knowledge of the fiduciary
nature of an account will preclude the ban from utilising the account for its own
benefit, as by combining it with the customer’s overdrawn private account (see
Paget’s Law of Banking 12th ed by Mark Hapgood (2002) 608).
It held that the court a quo had overlooked the specific circumstances that prevailed
in the Joint Stock case. There, the bank had been expressly informed that the
moneys standing to the credit of an account conducted in the name of its client, were
held specifically to provide a fund from which third parties would be paid (para 23).
In the present instance no special arrangements had been made with Absa to treat
the funds in Louw’s personal account in any way other than those of the account
holder. There was further no suggestion that Louw’s arrangements in respect of the
company finances were in any way untoward. There was no evidence that Louw’s
agreement with Absa was anything other than an ordinary banker-client relationship,
with the result that the liquidator’s claim had to be dismissed (para 26).
The appeal was allowed with costs (para 30).
The decision in Intensive Air merit comment. It will soften the effect of the Joint Stock
case insofar as the principle laid down in the latter case will only apply where there
was prior knowledge on the part of the bank.
In Intensive Air the court emphasised the importance of the fact that Absa had no
prior knowledge of the source of the funds in the personal account. At the time when
Absa appropriated the money in the account through set-off, it was unaware of the
fact that the money in the account did not belong to the account holder, but to his
company.
In Intensive Air the court drew a clear distinction between situations where the bank
had prior knowledge that funds in an account belonged to a third party, or were
earmarked to pay third parties (ie, the scenario in the Joint Stock case), on the one
hand, and where the bank was unaware of the fact that the money in the account did
not belong to the account holder (ie, the scenarion in the Intensive Air case), on the
other hand.
Because set-off takes place by operation of law, the bank does not need to
specifically include the right to set-off in its bank-customer agreements (see
Moorcroft op cit ¶ 15.20).
In summary: The common-law position regarding the bank’s right to set-off is
clear. If a bank had prior knowledge of the source and purpose of the funds in
an account, and more specifically, if it had knowledge that a third party (and
not the account holder) has a personal claim against it (the bank) for a similar
amount to be paid on demand it will not be entitled to apply set-off. Real and
not imputed knowledge is required.
From the wording of s 91 it is not clear whether or not this common-law principle is
entrenched by the provisions contained in s 91. And if it is indeed the legislature’s
intention to alter the common-law position, it must do so in clear and unambiguous
terms.