The liability of a commercial bank for fraudulent activities of its manager : the NBS bank cases & other related cases

• DOI: 10.10520/EJC177118
• Date: 01 January 2015
• Pages: 37-59
• Published date: 01 January 2015
• Author: Kuenaesele Ramabele-Thamae

THE LIABILITY OF A COMMERCIAL

BANK FOR FRAUDULENT ACTIVITIES OF

ITS MANAGER: THE NBS BANK CASES &

OTHER RELATED CASES

Kuenaesele Ramabele-Thamae*

ABSTRACT

This paper looks at the liability of a commercial bank to third parties where

the manager exceeds his given mandate by fraudulently concluding

transactions that are not within his scope of authority in the name of the

bank for his own benefit. It is shown that on the basis of agency by

estoppel, the bank manager has ostensible authority to bind the bank if it

made a representation to the outside world that the manager had authority

to act bind the bank and the fraudulent transaction is concluded in the

ordinary course of business of the bank. The bank will however not be

bound if the third party knew the transaction was unlawful and one which

the bank would not countenance.

INTRODUCTION

In two related cases involving the NBS bank,

1

one Vito Assante, a

former manager of the Kempton Park branch of NBS bank in South

Africa and an accomplice, Nel Oosthuizen, operated an illegal

scheme in which Assante fraudulently entered into agreements

with a number of investors who unknowingly lent him money at an

interest rate higher than that normally paid by the NBS bank. The

investors believed they were dealing with the bank when in fact

they were being defrauded by the manager. Assante in his position

as the manager signed for the cheque deposits on behalf of the bank

and used the NBS letterhead on letters issued to the investors in

* BSc(NUL), LLB(NUL), LLM(Westminster, London), Lecturer, Department of

Private Law, National University of Lesotho.

1

NBS Bank v Cape Produce 2002(1) SA 396(SCA); SA Eagle Insurance Co Ltd v NBS

Bank 2002(1) SA 560 (SCA).

38 The Liability of a Commercial Bank

which the bank made an undertaking to repay the money while Nel

operated a corporate saver account in the name of his firm of

Attorneys into which the money was deposited. A substantial

amount of money amounting to millions of Rands was thereafter

advanced to property developers nominated by Assante from the

account. Assante’s actions were not within his actual authority as

manager of the bank. NBS Kempton Park was the only branch of

the bank issuing the letters. The scheme operated for more than two

years until a bank in Port Elizabeth raised a query with the NBS

bank headquarters in Durban about the letters issued by Assante to

the investors. Many of the property investments went awry and a

total of up to R134 million was lost by the investors. The issue in

these cases was whether the bank was liable to the third parties for

repayment of their money lost as a result of the unauthorized

actions of the manager. The third parties relied on estoppel as the

basis for their claims. The court a quo found the bank liable. The

court of appeal confirmed the ruling of the lower court in both

cases. The court of appeal outlined the requirements for estoppel

and concluded that the bank as the principal of the bank manager

was liable to the investors for loss of their money because of the

manager’s ostensible authority and the bank was thus estopped

from denying the ostensible authority of the manager despite the

fraud committed and the bank not having gained any benefit from

the illegal and unauthorized conduct of the manager.

The lesson from these cases is that the principal’s liability for the

agent’s unauthorized acts concluded in its name extends to the

agent’s criminal activities from which no benefit was gained by the

principal if it can be shown that the principal created a façade of

regularity and order to the outside world that made it possible for

the agent to pursue his activities in the ordinary business of the

bank.

2

The manager’s unauthorized activities must fall within the

ordinary business of the principal. However, the principal will not

be liable as recently decided in the case of Absa Bank Limited v

Mahomed & Another

3

that, a party who knows that a transaction is

2

NBS Bank v Cape Produce, Ibid.

3

(876) [2012] ZASCA 1 (20 January 2014).