FirstRand Bank Limited v The Spar Group Limited

Spar Group Ltd, a franchisor, took over the operation of three retail outlets from its franchisee, Umtshingo Trading 30 (Pty) Ltd, after perfecting a provisional notarial bond due to the franchisee’s default. During the takeover period, Spar traded the businesses for its own account. However, electronic card revenues generated by Spar continued to be deposited into Umtshingo’s existing bank accounts with FirstRand Bank (FNB) because the franchisee refused to consent to changing the linked speedpoint devices and FNB would not act without consent or a final court order. FNB was aware that the funds deposited into the accounts were generated by Spar’s trading and that neither Umtshingo nor its controlling mind, Mr Paolo, had a legitimate claim to them. Despite this knowledge, FNB allowed Mr Paolo to withdraw funds from two accounts and applied set-off in respect of Spar-generated funds to extinguish Umtshingo’s debts to the bank. Spar sued FNB to recover the misappropriated and set-off funds.

The appeal was dismissed with costs, including the costs of two counsel, and the order of the full court holding FNB liable to Spar in respect of all four claims was confirmed.

This judgment is significant for South African banking law as it delineates the limits of a bank’s right of set-off where third-party funds are concerned. It establishes that banks may incur delictual liability where they knowingly permit or facilitate the misappropriation of funds by their customers, and confirms that banks can be co-wrongdoers in theft where they fail to act despite knowledge of the true ownership of funds.