Elvis E. Asia, LL.M, MCIArb, Grad.Icsan, ACTI
Legal and Tax Practitioner, Chartered Secretary, Member of the Chartered Institute of Arbitrators (UK) and Writer
The ordinary banking relationship is between the banker and customer. In this age of information technology however, the banks discharges their obligations using various platforms which involve third parties. One of such major platforms is the Automated Teller Machines (ATM) which works with ATM cards issued by banks using third party companies like Master Card International, Interswitch etc. In issuing ATM cards, the customers are given terms limiting the banks’ liabilities. The limitation clause usually refers to the terms of issuance by the third party service providers.
This article examines a recent decision of the Nigerian court (Guarantee Trust Bank v. Motunrayo- Tolulope Aleogena) which considered the extent to which banks can limit their liabilities for dispense errors or pass it to third parties and its implication for banking in Nigeria.
The Claimant operates an account in one of Guarantee Trust Bank branches in Lagos, Nigeria on the basis of which she was issued an ATM card. Whilst in the United Kingdom, she used the ATM Card in Barclays Bank Machine, in Broadway Stratford London to withdraw 800 pounds. Her account was debited but the money was not released to her.
The claimant immediately made a report and she was informed that investigation was ongoing and a refund will be made within 45 days. She instituted an action claiming the sum of N15, 000,000.00 as damages for breach of contract and cost of the action.
The bank’s defence was that the ATM Card is owned by Master Card International and it is not therefore liable based on the limited liability clause as stated in the Master Card Chargeback guide hence, Master Card being the disclosed principal of the ATM Card should be sued and held liable.
The trial court in its judgment held that the Claimants claim for damage succeeds and awarded the sum of N3, 000,000.00 (Three Million Naira Only) as damages for breach of contract and N100, 000.00 as cost of action.
The bank was dissatisfied and appealed to the CA in Lagos. The court was invited to determine whether there was breach of contract and if yes, whether the High Court ought to have considered the defence of limitation of liability raised by the bank. Judgment in the matter was delivered on 1st March 2019.
The decision of the CA
In resolving the dispute, the court applied simple contractual and banking principles.
The nature of banker/customer relationship
The court held that once a customer opens an account and deposits money in the account there exist a customer/ Banker relationship between the customer and the bank. This is a contractual relationship in which the bank is under obligation to honour a request from the customer to withdraw money from the account once the account is funded. Where the bank fails to honour such legitimate request, the bank will be found liable for breach of contract. The bank’s duty to honour the customer’s mandate is not affected simply because of its reliance on a third party to fulfil its obligation. It is also of no moment that the ATM Machine the customer used is not that of the bank in which the account is held.
Privity of contract
The customer was not party to the contract between Master Card international and the bank. More importantly, the exclusion clause in the contract was not brought to the attention of the customer at the time of issuing the contract.
Construction of exemption clauses.
An exemption clause in a contract cannot avail a party who has been guilty of a fundamental breach of the contract. Having breached the fundamental term to honour the customer’s mandate, the bank could not seek to rely on the exemption clause. This is consistent with the leaning of the law in Nigeria (IMNL v. Pegofor Industries Ltd. (2005) that a party guilty of a fundamental breach cannot rely on an exemption clause to escape liability.
The clear import of this decision is that banks are exposed to huge claims with the use of third party information technology services which they do not control. Customers can now institute actions against the banks even in cases of systemic failure provided it resulted in failure of the banks to discharge their contractual duties. Secondly, the argument of banks in some existing cases to the effect that they cannot be held liable because the withdrawal was not done on their ATM machines is now untenable. This is particularly frightening because of large incidence of dispense errors in Nigeria.
Banks would need to look for another line of protection. The court has decided that the customers are not bound by the terms in the contract between the banks and third party service providers.
In reaching the decision the court relied on authorities and principles dealing with the effect of failure to honour cheques and the relationship between issuing bank and a paying bank. The court concluded that when the ATM card is used in another ATM Machine, the account of the customer is debited in his bank and the paying bank will dispense money to the customer as if he is their customer. The bank therefore cannot escape liability because it has the primary obligation to honour the customer’s mandate.
It is difficult to fault the decision of the court on the basis of the facts and circumstances of the case. The decision was heavily influenced by the rather casual manner in which the bank sought to shift liability and take advantage of Master Card Chargeback guide without proper consideration of fundamental principles. There was also no nexus between the exemption clause referred to in the Master Card Chargeback guide and the customer. The way the bank pleaded its defence is likely to limit any chance of the Supreme Court deciding differently if the decision is appealed.
However, it may be too wide and simplistic for the principles of bankers’ duty to honour mandate and the relationship between issuing and paying bank in cheque transactions to be applied to the use of ATMs and other electronic payment systems without consideration of their peculiarities. Also, the liabilities of the bank as espoused by the court may be too onerous in cases where a customer decides to use another ATM machine which may be faulty. There may be network or physical fault with an ATM machine like reject tray full, faulty rollers and clamps, dispensers etc. The way the decision is worded, fault or negligence is not required to hold banks liable.
Given the technical challenges in ATM transactions in Nigeria, this would open a floodgate of claims against the banks. Where a customer’s mandate is not due to the fault of the bank but that of a third party whose platforms the customer consented to use based on set out terms, it may be unfair to invoke the ordinary banking principle of the duty to honour a customer’s mandate without more.
In practice, banks issue what may be described as the standard form contract for the use of ATM and other e-payment platforms and attempt to incorporate the third party card Issuer’s limitation of liability/exemption clauses. This is different from the use of cheques which is built into the main banking contract. The fundamental term of ATM use may therefore be different from the fundamental duty to honour a customer’s mandate or at least, that duty is moderated by the specific terms of ATM use. It is true that the standard form terms of the contract are often not sufficiently explained or brought to the attention of the customers. Their enforceability may therefore be tainted in that regard. This was one of the basis for the decision of the court. The law requires that a party seeking to rely on limitation/exemption clause must have brought it to the knowledge of the other party before the contract is concluded in order for it to be effective. The banks would need to restructure the terms of ATM and other e-payment use and review their relationship with the third party service providers to extract some form of comfort like indemnities.
Whilst the jurisprudential basis of the decision is appreciated, the court may have unwittingly imposed huge obligations on the banks particularly where the ATM used does not belong to the bank and the wrong debit is due to technical issues attributable to third parties without proof of negligence on the part of the bank. It is contended that where a customer decides to use another ATM machine different from the issuing bank, the customer should reasonably know that there may be issues with the ATM machine beyond the control of his bank. In Nigeria, customers are charged for using ATM machines different from the issuing bank’s machine after three withdrawals in a month. This should place an obligation on the paying banks benefitting from the payment.
In the light of the decision of the CA, banks in Nigeria would need to look to other methods of protecting themselves in the event they breach the contract to their customers arising from the fault of third party service providers. It is now settled that they cannot rely on the exemption clauses in the terms of the provision of third party services. There is therefore the need for a proper contract setting out the terms of ATM use between the banks and their customers. Banks may also consider initiating third party proceedings under relevant civil procedure rules. The rules allow a party against who a claim is made to name another party for contribution, indemnity or other remedy or relief connected with the claimant’s claim. The terms of the contract with the third party service providers may need to be reworked to provide indemnity to allow this. No matter how the relationships are arranged however, the fundamental term doctrine remains a great hurdle.
The issues arising from the decision of the court underscores the need for an effective payment system and transfer solutions in Nigeria. The incidence of dispense error due to technical and system problems are too high. Though, the operational and Credit Risks in funds transfer across financial institutions have been substantially mitigated by Nigeria Inter-Bank Settlement System Plc (NIBSS) operations, dispense error seems to have defiled solutions. The time it takes the banks to resolve dispense error issues when ATM cards are used in other bank ATM machines or POS channels is unusually too long. If the banks are efficient in resolving these issues within the time mandated by the Central Bank of Nigeria (CBN) which is 72 hours (24 hours for electronic funds transfer), these claims will not arise or at least, damages will be minimal.
-Strictly Legal Precedents