McCarthy Limited v Absa Bank Limited

McCarthy Limited (appellant) was a trader in motor vehicles and operated a cheque account at Absa Bank's Pretoria branch. Ms Cordier, a former employee of McCarthy employed as a creditors' reconciliation clerk, perpetrated fraud between November 1994 and March 2003. She created fictitious debts in McCarthy's accounts and caused cheques to be drawn naming as payee combinations of 'Fourie' or 'L Fourie' and 'Leathertech' or 'Leathertech CC'. The cheques were crossed and marked 'not transferable'. Ms Cordier induced Mrs Fourie to deposit 193 fraudulent cheques totaling R14,947,258 to Mr Fourie's account at Absa. Mr Fourie was a person of modest means whose account normally showed only monthly salary/pension deposits and cash withdrawals. Mrs Fourie would deposit the McCarthy cheques and simultaneously withdraw equivalent amounts in cash. Absa acted as both collecting bank (for Fourie) and paying bank (for McCarthy). The tellers and supervisors at Absa approved these transactions repeatedly. McCarthy sued Absa for breach of contract, alleging Absa was negligent in paying the cheques. At the close of McCarthy's case, Goldstein J in the South Gauteng High Court granted absolution from the instance.

• Whether an agreement between a bank and customer for operation of a cheque account includes an implied term that the bank will exercise reasonable care when paying cheques drawn by the customer
• Whether a bank can be liable for negligent payment of cheques based on knowledge acquired in its capacity as collecting bank for another customer
• Whether absolution from the instance was properly granted at the close of the plaintiff's case
• Whether knowledge acquired by a bank's employees when collecting cheques for one customer should be attributed to the bank when paying cheques drawn by another customer
• The proper test for absolution from the instance

The appeal was upheld with costs including costs of two counsel. The order of the court below granting absolution from the instance was set aside and replaced with: 'The application for absolution from the instance is refused. The costs occasioned by the application are costs in the cause.'

An agreement between a bank and its customer for the operation of a cheque account is an agreement of mandate that includes as naturalia the obligation on the bank to pay cheques drawn by the customer with the required degree of care, in good faith and without negligence. Where a bank acts as both collecting bank and paying bank in relation to the same cheque, knowledge acquired by the bank's employees when accepting a cheque for collection (for one customer) may be relevant when determining whether the bank acted negligently in paying that cheque (drawn by another customer). A bank may be found negligent in paying cheques if, based on knowledge possessed by its employees (even if acquired in the course of collecting functions), it ought to have suspected the payee was not entitled to the cheques and should have made enquiry before payment. The test for absolution from the instance is whether there is evidence upon which a reasonable person might find for the plaintiff.

The court noted the difficulty in envisaging how a bank could be negligent when collecting a cheque but not negligent when paying the same cheque, observing that once knowledge is acquired it is known 'whatever hat the person is wearing'. However, the court expressly stated it was not called upon to definitively answer whether knowledge acquired in a collecting capacity must always be attributed when considering conduct in a paying capacity, and that this would depend on the facts of particular cases. The court referenced but did not endorse the approach taken in Nemur Varity Pty Ltd v National Australia Bank Limited, noting that the issue had not been fully argued in that case. The court did not express a view on whether the negligence was causally connected to all losses, noting this was not raised on appeal but observing that a court might find at least some loss was caused. The court noted that there might be generally accepted banking practices not yet in evidence that could demonstrate why knowledge should not be attributed across functions.

This case is significant in South African banking law as it addresses the obligations of a bank when it acts simultaneously as both paying bank and collecting bank in relation to the same cheque. It establishes that knowledge acquired by bank employees in one capacity (collecting cheques for one customer) may be attributed to the bank when considering whether it acted negligently in another capacity (paying cheques for another customer). The case clarifies that the duty of care owed by a bank to its customer when paying cheques is a naturalium of the contract of mandate for operating a cheque account. It also reinforces the test for absolution from the instance. The case demonstrates that banks cannot compartmentalize knowledge acquired in different banking functions when assessing whether they have discharged their duty of care to customers.