OK Bazaars (1929) Limited v The Standard Bank of South Africa Limited

Standard Bank's customer, KTC Resources (Pty) Ltd, requested a back-to-back letter of credit to import swimming pool chemicals from Spain. KTC's controller, Malik, provided Standard Bank with an undertaking purportedly from Hyperama (a division of OK Bazaars) confirming that Hyperama had purchased the goods from KTC and would pay Standard Bank. Based on this undertaking, signed by Hyperama's general manager Overton, Standard Bank established an irrevocable letter of credit for USD $210,800.35 in favor of the overseas supplier. However, the undertaking was false - Hyperama had actually purchased the goods from Samarkand (another company controlled by Malik), not from KTC. When invoices were presented showing Samarkand as the purchaser, Malik (on behalf of KTC) accepted the discrepancies and Standard Bank paid the supplier. Hyperama paid Samarkand. When Standard Bank discovered the misstatement, it could not recover from KTC (which went into liquidation) or from Hyperama (which denied liability). Standard Bank sued Hyperama for damages.

• Whether Overton made a negligent misstatement on behalf of Hyperama
• Whether the misstatement caused Standard Bank's economic loss
• Whether the chain of causation was broken by Malik's subsequent acceptance of discrepant documents
• Whether Standard Bank's own failure to detect the discrepancies constituted contributory negligence or broke the chain of causation

The appeal was dismissed with costs, including costs of two counsel. The judgment of the Johannesburg High Court (Gautschi AJ) in favor of Standard Bank was upheld.

A negligent misstatement that induces a bank to establish a letter of credit and thereby suffer economic loss gives rise to delictual liability, even where subsequent acts by third parties (such as acceptance of discrepant documents) are necessary steps in the chain of events leading to loss, provided those subsequent acts were reasonably foreseeable and represented the natural conclusion of the course of events set in motion by the misstatement. A party giving assurances to a bank in a commercial transaction owes a duty to take reasonable care to verify the accuracy of those assurances, particularly where the party knows the bank will rely on them in extending credit. The duty cannot be discharged by merely assuming the correctness of information provided by a third party when independent verification is readily available. For purposes of legal causation (novus actus interveniens), where fraud is reasonably foreseeable given the circumstances of a misstatement, subsequent acts completing that fraud will not break the chain of causation.

The Court made observations about the nature and operation of letters of credit, reiterating established principles: (1) an issuing bank must comply strictly with its customer's instructions and has no general interest in the nature or terms of documents beyond ensuring they conform to the letter of credit; (2) a bank presented with non-conforming documents may refer them to its customer who may accept the discrepancies; (3) once discrepancies are accepted and the beneficiary is advised, the bank becomes entitled and obliged to pay. The Court also noted (obiter) that the issue of Standard Bank's potential fault in failing to detect discrepancies might have been explored if a plea of contributory negligence had been raised, but it was not. The Court observed that a corporation acts only through human agency, and to establish fault would require identifying which specific individual had both knowledge of the undertaking and sight of the discrepant documents.

This case is significant in South African law for clarifying the principles applicable to claims for economic loss arising from negligent misstatements, particularly in the banking and commercial context. It confirms the requirements for such claims as set out in Bayer South Africa v Frost: (i) a misstatement made to the plaintiff; (ii) made negligently and unlawfully; (iii) causing loss; and (iv) damages representing proper compensation. The case is important for its treatment of causation, both factual and legal, particularly regarding when a subsequent intervening act (novus actus interveniens) will break the chain of causation. It confirms that where the intervening act is reasonably foreseeable and represents the natural conclusion of events set in motion by the original wrongful act, it will not relieve the original wrongdoer of liability. The case also demonstrates the strict duty of care owed by parties who make representations to banks in commercial financing arrangements, and that such parties cannot rely on information from third parties without independent verification when they know the bank is relying on their confirmation.