KENYA BANKING LAW

This section gives you details on the Kenya banking law.Below are some topics and a
comprehensive introduction to the Kenya Banking law
 Procedure of licensing baking institutions in Kenya
 Statutory definitions of a bank
 Who is a customer to a bank 
 Banker customer relationship
 Implied duties on banker and customer
 Banks fiduciary duty to the customer
 The banks duty of confidentiality
 Duty of the customer owed to the bank 
 Bankers lien
 Guarantees 
 Circumstances when the security of a bank may be challenged
 An introduction to the Kenya banking laws
What is banking law?
Banking law determines how a bank must operate. Most countries hold broad objectives in
common with one another when regulating banking law. These include privacy protection, credit
allocation, minimizing creditor risk and avoiding total bank failure. Different nations have
different kinds of rules regarding these matters. Some prize stability above all things, while
others prize privacy.

Under the Kenya banking law,the government requires banks to hold certain levels of cash
deposits in order to function. These prevent the bank from borrowing heavily or from lending out
more than it can handle. In theory, such protections in banking law guard consumers from having
their bank go bankrupt due to poor investment. It also theoretically protects the government from
bailing out such banks. Financial crises such as the 2008 global banking collapse prove that
safeguards are in constant need of revision.

The amount of information a bank is required to divulge depends on the nation’s banking law.
Banks are often required to disclose their lending rates and mortgage activities so consumers can
decide if a bank is serving the best interests of the local community. Community investment
includes lending rates for small businesses; it also includes the total amount of small business
loans a bank makes. Nations want their banks to support the operations of their small and
independent businesses.
Accountability and privacy under the Kenya banking law are part of a bank’s duty towards
consumer protection. This also includes protecting consumers who have taken out loans,
mortgages and debit cards. It also regulates how a bank may collect debts such as credit card
debts and foreclose properties when buyers fail to keep up with mortgage payments.

Kenya Banking law also protects potential consumers by requiring banks not to discriminate.
This means that a bank cannot refuse to set up an account on the basis of someone’s age, race,
gender and other factors. The only factor to be taken into account is the potential customer’s
financial position at the time of application.

Government regulations and banking law require banks to cooperate with criminal
investigations. Even many tax havens have signed up to EU regulations to stop money
laundering and other criminal activities. When nations prize customer privacy above all other
things, it means the regulation of their activities is lessened, but it does not mean they support
illegal activities. 

Banking regulations in Kenya

Under the Kenya banking law,bank regulations are a form of government regulation which
subject banks to certain requirements, restrictions and guidelines. This regulatory structure
creates transparency between banking institutions and the individuals and corporations with
whom they conduct business, among other things.

Given the interconnectedness of the banking industry and the reliance that the national (and
global) economy hold on banks, it is important for regulatory agencies to maintain control over
the standardized practices of these institutions. Supporters of such regulation often hinge their
arguments on the "too big to fail" notion. This holds that many financial institutions (particularly
investment banks with a commercial arm) hold too much control over the economy to fail
without enormous consequences. This is the premise for government bailouts, in which
government financial assistance is provided to banks or other financial institutions who appear to
be on the brink of collapse. The belief is that without this aid, the crippled banks would not only
become bankrupt, but would create rippling effects throughout the economy leading to systemic
failure.

Objectives of bank regulation in Kenya

  Prudential—to reduce the level of risk to which bank creditors are exposed (i.e. to
protect depositors)
 Systemic risk reduction—to reduce the risk of disruption resulting from adverse trading
conditions for banks causing multiple or major bank failures
 Avoid misuse of banks—to reduce the risk of banks being used for criminal purposes,
e.g. laundering the proceeds of crime
  To protect banking confidentiality
 Credit allocation—to direct credit to favored sectors
 It may also include rules about treating customers fairly and having corporate social
responsibility (CSR)
Kenya Banking Industry 
The Banking industry in Kenya is governed by the Kenya Companies Act, the Kenya Banking
Act, the Central Bank of Kenya Act and the various prudential guidelines issued by the Central
Bank of Kenya (CBK). The banking sector was liberalised in 1995 and exchange controls
lifted.The CBK, which falls under the Minister for Finance docket, is responsible for formulating
and implementing monetary policy and fostering the liquidity, solvency and proper functioning
of the financial system.
As at December 2008 there were forty six banking and non bank institutions, fifteen micro
finance institutions and one hundred and nine foreign exchange bureaus.
The banks have come together under the Kenya Bankers Association (KBA), which serves as a
lobby for the banking sector’s interests .The KBA serves a forum to address issues affecting
members.

Over the last few years, the Banking sector in Kenya has continued to growth in assets, deposits,
profitability and products offering. The growth has been mainly underpinned by;
 an industry wide branch network expansion strategy both in Kenya and in the East
African community region.
 automation of a large number of services and a move towards emphasis on the complex
customer needs rather than traditional ‘off-the-shelf’ banking products.
Players in this sector have experienced increased competition over the last few years resulting
from increased innovations among the players and new entrants into the market.

LICENSING OF INSTITUTIONS
RESTRICTION ON CARRYING ON BUSINESS IN KENYA-
No person in Kenya can under Kenya law -
(a) transact any banking business or financial business or the business of a mortgage finance
company unless it is an institution or a duly approved agency conducting banking business on
behalf of an institution which holds a valid licence;
(b) unless it is a bank and has obtained the consent of the Central Bank, use the word “bank” or
any of its derivatives or any other word indicating the transaction of banking business, or the
equivalent of the foregoing in any other language, in the name, description or title under which it
transacts business in Kenya or make any representation whatsoever that it transacts banking
business;
(c) unless it is a financial institution or mortgage finance company and has obtained the consent
of the Central Bank, use the word “finance” or any of its derivatives or any other word indicating
the transaction of financial business or the business of a mortgage finance company, or the
equivalent of the foregoing in any other language, in the name, description or title under which it
transacts business in Kenya or make any representation whatsoever that it transacts financial
business

APPLICATION FOR LICENSE- Under Kenya laws,every institution intending to transact

banking business, financial business or the business of a mortgage finance company in Kenya
should, before commencing such business, apply in writing to the Central Bank for a licence.The
Central Bank shall, where it is satisfied as to the professional and moral suitability of persons
proposed to manage or control the institution, certify that such persons are fit and proper persons
to manage or control the institution.
In considering an application for a licence, the Central Bank may require to be satisfied as to-
(a) the financial condition and history of the institution;
(b) the character of its management;
(c) the professional and moral suitability of the persons proposed to manage or control the
institution;
(d) the adequacy of its capital structure and earning
prospects;
(e) the convenience and needs of the area to be served; and
(f) the public interest which will be served by the granting of the licence. 

REVOCATION OF LICENSE- The Central Bank may, by notice in writing to the institution,
revoke a licence if the institution -
(a) ceases to carry on business in Kenya or goes into liquidation or is wound up or is otherwise
dissolved; or
(b) fails to comply with this Act, the Central Bank of Kenya Act or any rules, regulations, orders
or directions issued under any of those Acts or any condition of a licence:
Provided that -
(i) the Central Bank, before revoking a licence, shall give to the institution not less than twenty-
eight days’ notice in writing of the Central Bank’s intention, and shall consider any
representations made to the Central Bank in writing by the institution within that period before
revoking the licence;
(ii) the institution may, notwithstanding that its licence has been revoked, continue to carry on its
business for the purpose of winding up its affairs for such period as the Central Bank may
determine so long as it does not accept new deposits, open new current accounts or make any
loans or investments.

LOCATION OF PLACES OF BUSINESS- No institution should open in Kenya a branch or a

new place of business or change the location of a branch or an existing place of business in
Kenya without the approval of the Central Bank.Before granting an approval, the Central Bank
may require to be satisfied as to -
(a) the history and financial condition of the institution;
(b) the character of its management;
(c) the professional and moral suitability of its management;
(d) the adequacy of its capital structure and earning prospects;
(e) the convenience and needs of the area to be served, and that the public interest will be served
by the opening of a branch or a new place of business or, as the case may be, the change of
location of the place of business.

BRANCHES AND SUBSIDIARIES- No institution should under Kenya laws open a branch or
establish a subsidiary outside Kenya, except with the prior approval of the Minister.An
institution seeking approval under should  apply, in writing, to the Minister through the Central
Bank.Before granting approval under, the Minister may require to be satisfied as to-
(a) the history and financial condition of the institution;
(b) the adequacy of the institution’s capital structure;
(c) the viability and earning prospects of the proposed branch or subsidiary; and
(d) such other matter as may have a bearing on the institution or proposed branch or subsidiary
as the

An institution intending to close any of its branches or subsidiaries outside Kenya shall give
notice in writing to the Minister, through the Central Bank of its intention, at least six months
before the date of the intended closure, or within such shorter period as the Minister may, in any
particular case, allow.

STATUTORY DEFINITIONS OF A BANK

Section 2 of the Banking Act Cap 488 Laws of Kenya defines a Bank to mean a company which
carries on or proposes to carry on banking business in Kenya and it includes the co-operative
bank of Kenya but excludes the Central Bank of Kenya.

Banking business is then defined under Section 2 of the same Act to mean

(a)          The accepting from members of the public of money on deposit repayable on demand or
at the expiry of a fixed period or after notice.

(b)          The accepting from members of the public of money on current account and payment
on and acceptance of cheques.
(c)          The employing of money held on deposit or on current account or any part of it by
lending, investment or in any other manner for the account and at the risk of the person so
employing the money.
United Dominions Trust vs. Kirkwood [1966] 2 QB 431(for an institution to carry out
banking services it must be registered)
A Company (Kirkwood) purchased cars for its business using the money it borrowed from UDT.
The company failed to pay when required to do so.  When UDT sued the company it argued that
UDT was not entitled to recover because it was not registered as a lender uder the Money lenders
Act of 1906 of England. That UDT was not a bank. UDT argued that it was a bank and it need
not have been registered under the Act alleged.

In order to conduct banking activity, a company needs to be regulated by the Financial Services
Authority (a self funding regulator) and comply with the financial Services and Marketing Act
2000.  In order to lend funds, you need to be regulated and this had been stated in many Acts. 
UDT was not regulated and lending unauthorised is a criminal activity.  You cannot enforce
payment of a debt if you are not regulated.  The question was asked in the court, was UDT a
bank?  The Court of Appeal said UDT was not a bank and so it could not enforce repayment. 

The key issue here was: What is the test or approach to be used to define what is a bank?  The
whole idea of a bank was that you take deposits from customers and put it into accounts.  The
bank can then payout funds from these accounts by means of a cheque or otherwise.  Note that
the other factor in this case was that the market in general and other institutions regarded UDT as
a bank.

The usual characteristics of banking under Kenya law are

1.    The conduct of current accounts;

2.    The payment of cheques;
3.    The collection of cheques for customers.

Our own statute banking law definition is largely influenced by the common law definition of
banking as was stated in United Dominions Trust vs. Kirkwood [1966] 2 QB 431T. This case. 
Statutory definition overrides the common law definition as provided for under the Judicature
Act Cap 8.  As far as Kenya is concerned we have statutory definition of bank under the Banking
Act which is applicable in Kenya.
This definition however covers a bare minimum leaving other services provided for by the bank
which are not covered under the definition.  Individuals running the banks that lend money at the
risk of the bank should be held together with the …

FINANCIAL BUSINESS
Financial Business under the statutes means the accepting from members of the public of money
on deposit repayable on demand or at the expiry of a fixed period or after notice; and the
employing of money held on deposit or any part of the money, by lending, investment or in any
other manner for the account and at the risk of the person so employing the money.  This is
everything the statute says is banking business except the acceptance of money on current
account and payment on and acceptance of cheques.

MORTGAGE BUSINESS
This means a company other than a financial institution which accepts, from members of the
public money on deposit, repayable on demand or at the expiry of a fixed period or after notice
and is established for purposes of employing such money, to make loans for the purpose of
acquisition, construction, improvement, development, alteration, or adaptation for a particular
purpose of land in Kenya and the repayment of that loan together with interests and other charges
is secured by a mortgage or a charge over land with or without additional security or personal or
other guarantees.  The provisions of the Banking Act in this regard which is at Section 15 were
amended by Act No. 7 of 2001 which provides that a mortgage finance company may grant other
types of credit facilities against securities other than land and may also engage in other prudent
activities.
The minister has to address his mind to adequacy of capital.  Section 7 of the Banking Act
provides for minimum requirements of capital which may be changed from time to time with
approval of parliament.

If a bank wants to merge or transfer its assets to another institution, again the approval of the
Minister is required under Section 9.  The Minister has to satisfy himself and give approval for a
merger or amalgamation.

WHO IS A CUSTOMER TO A BANK

The relationship between a bank and a customer under Kenya law embraces mutual duties and
obligations and it is therefore necessary to know what in law is a customer.  The statutes do not
define who a customer is.  For example under the Banking Act we have seen an attempt to define
who a bank is but not who a customer is.  Other statutes like the Bills of Exchange Act or the
Cheques Act do not define a customer.  The ordinary meaning of the word customer is a person
who buys goods or services from a shop or business.

In the context of banking, it is difficult to define with exactness who a customer is.  The main
criteria as to whether a person is a customer or not or as to whether the relationship of a banker
and customer exist is whether there exists in relations to that person an account with the bank
through which transactions are passed.  In the case of

THE GREAT WESTERN RAILWAY CO. V. LONDON & COUNTY BANKING CO.
LTD. H.L A.C. 414

The case involved the question of who is a customer for purposes of the Bills of Exchange Act
and Lord Davey at page 420 had this to say
“ it is true that there is not definition of customer in the Act. But it is a well known expression
and I think that there must be some sort of account either a deposit or a current account or some
similar relation to make a man a customer of a bank.”

Lord Brampton in the same case said at page 422

“it is not necessary to say that the keeping of an ordinary account is essential to constitute a
person a customer of a bank.  For if it were shown that cheques were habitually lodged with a
bank for presentation on behalf of the person lodging them and that when honoured the amount
was credited and paid to such person, I would not say that such transactions might not constitute
such a person a customer.”

For a person to be a customer it matters not that the duration of the relationship is short or
protracted in other words the duration when an account has been held is immaterial to the
question of whether the status of the customer has been achieved and that is according to another
English position in the case of Commissioners of Taxation v. English Scottish and Australian
Bank Limited. (1920) A.C. 683

Their Lordships expressed themselves in the following language.  Their Lordships are of the
opinion that the word customer signifies a relationship in which duration is not of the essence.  A
person whose money has been accepted by the bank on the footing that they undertake to honour
cheques upto the amount standing to this credit is in the view of their Lordships a customer of
the bank irrespective of whether his connection is of short or long standing.  The contrast is not
between an habitué and a new comer but between a person for whom the bank performs a casual
service such as for instance cashing a cheque for a person introduced by one of their customers
and a person who has an account of his own at the bank.

Effectively even if all a person has is one transaction, it does not disqualify the person from
being a customer of the bank in the case of

Landbroke v. Todd  (1914) Vol 30 T.L.R

Single first transaction

Woods v. Martins Bank

Makes the point of explaining who a customer of a bank is and it is also relevant to the question
of the responsibility a banker assumes when it advises customers.  The other point made by this
case is that it is not a matter of law but a question of fact as to whether any class of business
amounts to banking business.  It is not a matter of pure law to determine whether a firm at
common law is a bank doing banking business it is a matter of interpretation.  It is a matter of
interpretation to see whether a person is a customer and who is not a customer.

WHAT ARE THE RESPECTIVE RIGHTS & OBLIGATIONS OF THE PARTIES

The nature of the bank customer relationship under Kenya law is contractual. It is a relationship
based on contract and if you were to apply contract law to this question.

Foley v. Hill (1848) Vol H.L

There is an argument that the relationship of a banker and customer consists of a general contract
which is basic to all transactions together with special contracts which arise in relation to the
specific transactions or services that the Bank offers.  The nature of the contract is described in a
leading case of
Joachimson v. Swiss Bank Corporation. 1921 Vol. 3 A.B. 110

Lord Atkin in this case described that contract at page 127 in the following terms

“I think that there is only one contract made between the bank and its customer.  The terms of
that contract involve obligations on both sides and require statements.  They appear upon
consideration to include the following provisions.  The bank undertakes to receive money and to
collect bills for its customers account.  The proceeds so received are not to be held in trust for
the customer but the bank borrows the proceeds and undertakes to repay them.  the promise to
repay is to repay at the branch of the bank where the account is kept and during banking hours. 
It includes a promise to repay any part of the amount due against the written order of the
customer addressed to the bank, at the branch. It is a term of the contract that the bank will not
cease to do business with a customer except upon reasonable notice.  The customer on his part
undertakes to exercise reasonable care in executing his written orders so as not to mislead the
bank or to facilitate forgery. I think it is necessarily a term of such contract that the bank is not
liable to pay the customer the full amount of his balance until he demands payments from the
bank at the branch at which a current account is kept.

The debtor creditor relationship emerges in this quote.

Demand is necessary before the obligation by the part of the bank to pay becomes due.

The passage sums up the nature of the relationship on the contract.

The relationship entails mutual obligations as covered in Joachimson Swiss Bank Corporation

BANKER CUSTOMER RELATIONSHIP

Who are the parties to this relationship?

The Bank on the one hand and the customer on the other hand.  The word Bank and Banker and
to an extent banking business will be used to mean bank.

What is a Bank?
Section 2 of the Kenya Banking Act which defines a Bank as a company which carries on or
proposes to carry on banking business.  Banking business in time is defined under the Act to
mean

1.            The accepting from members of the public of money on deposit repayable on demand
or at the expiry of a fixed period or after notice.

2.            The accepting from members of the public of money on current account and payment
on and acceptance of cheques.

3.            The employ of money held on deposits or on current account by lending investment or
in any other manner for the account and at the risk of the person so employing the money.

That is the statutory definition

Common law meaning of a Banker, bank?

Is it different from that given under statute?

Is the common law meaning relevant in light of the statutory definition?

Certain statutes refer to the terms banks/bankers/banking business without definition.  In some
cases, the definition that one finds in the statutes is different from the statutory definition under
Cap 488 (Banking Act)   an example of this is the Bills of Exchange Act Cap 27 of the Laws of
Kenya.  Under Section 2 of that Act, the definition of Banker is defined in the following terms

“Banker includes a body of persons whether incorporated or not who carry on the business of
banking.  That definition appears on the face of it to be at odds with the definition under the
Banking Act Cap 488 Laws of Kenya.  Firstly because the Banking Act refers to a company
which as earlier pointed out refers to a company that is a corporate body.

Secondly it is at odds for the reason that section 3 of the Banking Act restricts the carrying on of
banking business to institutions which when one looks at interpretation of Section 2 of the
Banking Act will again refer  you to a company.  Where under Bills of Exchange a Bank
includes a company whether incorporated or not the Banking Act only recognizes an
incorporated company.  This could be one of the reason why the common law definition of
Banking remains as to who is a customer and who is not a customer.

Another example of the statute which appears to recognize banks or banking business or bankers,
outside of the ambit of definition under the Banking Act is the Cheques Act Cap 35 Laws of
Kenya.

Cap 35 does not itself define any of those terms bank, banker or banking business but it makes
reference to the term banker.  Section 2 (2) of that Act provides that it shall be read, i.e. the
Cheques Act shall be read and construed as one with the Bills of Exchange Act.  Which therefore
means that the meaning of the word Banker as ascribed under the words of the Bills Exchange
Act would apply under the Cheques Act.

Why it is also relevance to examine the common law meaning of a ‘Banker’ according to the
authors of Paget on Law of Banking is that a Banker at Common Law has a right of lien and set-
off.  Essentially the right to retain until obligations are fully satisfied.

The meaning of the term banker at common law.  Is the meaning different from the statute
meaning

In the case of  United Dominion Trust Ltd v. Kirkwood (1966) 1 All 968

This case is a leading authority on the question of the common law meaning of a Banker.  It is a
court of Appeal decision and the Judges were Lord Denning, Lord Harman and Lord Diplok and
to an extent all three judges differed on the law as well as on the application of that law to the
particular facts of that case.

Lord Denning “Lonsdale motors ltd a private company which ran a garage business in a place
called Carlisle.  The Defendant Mr. Kirkwood was the MD of that company and that he and his
wife were the only shareholders of that company.  The Plaintiff UDT is a large public company
which describes itself as bankers carrying on business at United Dominion House somewhere in
the city of London. It is an important house and lends big sums of money to various people.  It
has a high standard and includes Bank of England amongst its share holders.  It also owns a
wholly owned subsidiary called United Dominion Trust Commercial Ltd. which does a lot of
financing of hire purchase transactions and those two companies have branches in several towns
in England where a single manager acts on behalf of both companies at those branches.  In 1961
Lonsdale Motors desired to buy cars to put those cars in their showrooms for sale and that they
did not have money for that purpose and they therefore went to the branch manager of UDT and
borrowed that money.  And as security for that borrowing they gave bills of exchange in favour
of UDT.  Lonsdale motors then disposed of those vehicles after procuring them to customers
who wanted them on hire purchase terms.  They went again to the branch manager who agreed to
buy the cars from the company and let them out on hire purchase to the customers.  This case
arises from a loan of five thousand pounds which UDT lent to Lonsdale.  The bills of exchange
were dishonoured on presentation and UDT sued the Defendant.

The defendant had no defence to that case except that he raised a plea under the Money Lenders
Act of 1900.  That defence was to the effect that UDT are unregistered money lenders and
therefore they could not recover the five thousand pounds.  UDT in response said “we are not
money lenders but we are Bankers and we can therefore recover this money”

If they are Bankers, they can recover if they are money lenders they cannot recover anything.
In answering that question, Lord Denning at pg 74 set out the characteristics of Banking.

Seeing that there is no statutory definition of Banking one must do the best one can to find out
the usual characteristics which go to make up the business of banking.  In the eighteenth century,
before cheques came into common use, the principle characteristics were that the Banker
accepted the money of others on the terms that the person who deposited it could have it back
from the Banker when they asked for it.  Sometimes on demand at other times on notice and
meanwhile the Banker was at liberty to make use of the money by lending it out at interest or
investing it on mortgage or otherwise.

You notice that those characteristics do not mention the use of cheques or the keeping of current
accounts.  The march of time has taken us far beyond the cases of the Eighteenth Century. 
Money is now paid and received by cheque. 

There are therefore two characteristics usually found in bankers today.

1. they accept money from and collect cheques for their customers and place them to their credit

2. They honour cheques or orders drawn on them by their customers when presented for
payments and debit their customers accordingly.

These two characteristics carry with them also a third namely

3. they keep current accounts or something of that nature in their books in which the credits and
debits are entered.

Lord Denning continues

Page 979  thus far the evidence adduced by UDT would not suffice to show that ….  The usual
characteristics are not the sole characteristics there are other characteristics that go to make a
banker, soundness and probity parliament would not to a ramshackle concern whose methods are
dubious.

Reputation is also an additional consideration in this enquiry.

Lord Harman says It is difficult to define banking business and he identifies the principle
attribute or characteristic by saying that a banker is one who carries on as his principle business
the accepting of deposits of money on current account or otherwise subject to withdrawal by
cheque draft or

He differs with Lord Denning on reputation and says that reputation on its own is not enough.

Lord Diplock on his part says that it is essential to the business of banking that a banker should
accept money from his customers upon a running account into which sums of money are from
time to time paid by the customer and from time to time withdrawn by the customers.  He says
the payment in collection of cheque is also essential.

What therefore is the ratio of UDT v. Kirkwood – it is that the 3 characteristics namely conduct
of current account, payment of cheques and collection of cheques are essential to the carrying on
of banking business and that evidence of reputation is potentially relevant.

IMPLIED DUTIES ON BANKER AND CUSTOMER

Typically the commencement of the relationship in practice is documented in the sense that the
Bank will impose standard terms and conditions on the customer on which that relationship is to
be based.  To the extent that there are express stipulations in that contractual relationship then the
question of whether or not one of the parties to that relationship is in breach of the express terms
is a matter of interpretation of the express terms of the contract. When talking of implied duties
we are not concerned with where those duties have expressly been stipulated under the contract. 
It is also necessary to say that if an express term exists, then the question of implying terms does
not arise.

If for instance the contract says that the bank is at liberty to close an account after the stipulated
time, the question of whether or not the bank has given a reasonable notice does not arise as long
as the parties have contracted and agree to the number of days.  We can only talk of implied
terms where there are no stipulations.

The Kenya Banking Code which seeks to set the standards of banking practice became effective
on 1st October 2001 by the Kenya association of bankers.  It is modelled to a very large extent on
the UK Good Banking Code of Practice.  To an extent this code sets out standards which the
Kenya Bankers Association considers to be standards of good banking practice. 

The question is whether these standards form part and parcel of the Banker Customer
Relationship?

In its introduction, the code states that it is a voluntary code and that it sets standards of good
banking practice for banks choosing to participate in the code i.e. it is voluntary and the banks
have an option of whether to use it or not to use it.
For instance one of the standards imposed is the requirement for banks to give information to
their customers about their accounts, operations etc, this is required by the code of practice of the
Kenya Association of Bankers.

Another feature of the code is with regard to the question of changes in interest rates.  While one
might expect that it would be good practice for banks to inform their customers of changes in
interest rates, the code suggests that there is no obligation for the banks to do so.

Another undertaking is that the written terms and conditions that govern the relationship will be
fair and will set out the customers’ rights and responsibilities in clear and clean language.

They also impose an obligation under the code that a customer’s account will not be closed
without notice to the customer unless there are exceptional circumstances which might prevent
the giving of notice.  The exceptional circumstance would be like if an account has been used to
perpetrate fraud etc.

There is the question of statements – the obligation on the part of the bank to give regular
account statements.

The code stipulates that it is recommended that the customer should check those statements on a
regular basis and if a wrong entry is noted then the customer is required to inform the bank.  If
the express terms and conditions of the contract so provide, then the customer will be bound by
the express terms and conditions and cannot raise a claim against the bank.

Obligation on the part of the customer in the code is to the effect that the customer must himself
exercise care in writing cheques and also in the storing of cheque books, the ATM cards the pin
numbers etc so that should a loss arise and is attributed to the customer’s failure in either filling
out the cheques or handling of ATM cards or Pin Numbers then the Bank will be protected.

There is also the obligation requiring the Banker to keep the affairs of the Customer confidential
and there are exceptions to the rule where the law permits disclosure, where the customer has
authorised disclosure and where public duty or interest demands that there be disclosure and
when it is in the banks own interest to disclose.
Ordinarily the banks will stipulate their terms and conditions and the customers are bound by
these.

What are the implied duties

It is not possible to exhaustively list the duties owed by the Banker and the Customer to each
other.  No case is like the other and in each case the court will be concerned with the particular
facts and the particular circumstances of the case before it and in addressing the question
whether in a particular case a Banker or a customer is in breach of an implied term, or whether a
term should be implied, the court will be guided by the usual principles in law of proximity,
reasonableness and justice and to a very large extent, those principles themselves or the
application of those principles will be guided by the customs and usages of Bankers.

Case law gives a guidance about situations where a duty of care will or will not be found to
exist.  For example, case law has established that a Banker owes a duty of care in giving
financial investment advice.  For instance in the case ofWoods v. Martins Bank the court held
that on the facts of that case it was within the scope of the banks business to advise on financial
matters and that in doing so, the bank owed a duty of care to the Plaintiff to advise him with
reasonable care and skill.  The bank in this case was seeking to avoid liability to the Plaintiff on
the grounds that it was not part of bankers business to advise on financial matters.  The court
found and made the statement that what is to be defined as bankers business is not a matter to be
laid down by the courts as a matter of law.  What constitutes banking business is a matter to be
decided on the facts before the court.

Statement by Samuel J.  “in my judgment the limits of a bankers business cannot be laid down as
a matter of law …”

This case is important for immediate purpose in terms of establishing that a bank that gives
financial advise assumes responsibility of reasonable care and should the customer suffer as a
result of negligent advise then the bank will be held responsible.

At Page 71 Salmon J.  says “I find that it was and is within the scope of the Defendant Bank’s
business to advise on all financial matters and that as they did advise him they owed a duty to the
Plaintiff to advise him with reasonable care and skill in each of the transactions.”

This principle is covered in the case of Hedley Byrne & Co. Ltd v. Heller (1961) All E.R.
Another example where the courts have recognised the existence of a duty of care is the duty  of
a paying banker to protect its customer from fraud i.e. agent, directors, etc and with that duty is
the duty on the part of the bank to meet and comply with the customers’ mandate.  It is an
implied term of the contract between the banker and the customer that the bank will observe
reasonable skill and care in and about executing the customers’ orders and the leading authority
is the case of
Barclays Bank Plc v. Quince care & Another (1992) Vol. 4 All E.R. 363

A bank agreed to lend £400,000 to a company formed to purchase four chemists shops. The bank
imposed a condition that that company i.e. the borrower, be formed for that purpose.  The
Chairman of the new company caused a sum of £340,000 to be drawn out and to be misapplied
for dishonest purposes and almost the entire sum was lost.  As part of the terms of the facility or
on the basis of which the bank agreed to lend £400,000, was that it required a guarantee from a
company called Unichem. 

The bank sued both the company as the principal debtor and the guarantor and the defences
raised there involved the central question or issue whether the bank acted in breach of its duty to
the principal debtor.  The principal debtor contended that the bank acted in breach of the implied
duty of care in the Banker Customer relationship because according to the company (the
customer) the circumstances under which the £340,000 were transferred raised questions in their
submissions in the mind of a reasonable banker as to whether that transaction was in fact
authorised by the customer.  The customer also contended that those circumstances surrounding
the transfer of the funds should
The bank has no business asking for proof at this stage.  But anyway Mr. Nderitu obliged and
produced a payment voucher from the Customs & Excise, for money paid under the Export
Compensation Scheme.  The bank noticed from the payment voucher what it considered
significant discrepancies on the payment voucher not on the cheque namely the amount shown in
words in the payment voucher does not tally with the amount shown in figures and this raises
eyebrows at the bank.  Mr. Nderitu was in fact allowed to use some of the funds in the Intercom
account and he drew some of the money and transferred 15 Million shillings to the account of
Swiftair Kenya Ltd in the same Bank.  Meanwhile the bank commenced a series of enquiries. 
The first enquiry was to Kenya Commercial Bank upon which the cheque was drawn and KCB
confirmed that the cheque was good and hence they made the payment.  The enquiry does not
end there as the bank calls the department of customs and excise and speak to the first signatory
of the cheque who assured them of the legitimacy of the cheque.  They called the 2nd signatory
who also assured them that the cheque was legitimate.   The suspicion did not end there and they
spoke to a Police Officer in the Fraud section of the Central Bank of Kenya.  Mr. Nderitu was
ultimately arrested and charged with a criminal offence of obtaining money by false pretences
and all his accounts were frozen.  He was finally acquitted after a very long battle.

Mr. Nderitu brought an action against the bank on the following

1.            Breach of the bank’s duty to his company by disclosing his account affairs to other
parties;  bank violated its duty of confidentiality.

Visram J. found the bank guilty of violating its duty of confidentiality.  He discussed the law at
great length and analysis the bankers duty of confidentiality and the duties of a collecting bank
and to an extent the duties of a paying bank in as far as the cheque is concerned.  He also
discussed the principle and cites Joachimson with approval and concludes that “that a banker in
these circumstances is not to inquire for what purpose the customer opened the account, he is not
to inquire what the moneys are that are paid into the account and he is not to inquire for what
purpose moneys are drawn out of the account. He also pegs the responsibility of the bank to what
would be considered good banking practice.  I accordingly enter judgment on liability in favour
of the plaintiff.

X Attorney General v. A Banks [1983] 2 All ER 464

Two corporate customers of London Branch of an American bank applied for an injunction to
restrict the bank from producing documents relating to their accounts pursuant to a subpoena
issued by a grand jury and upheld by the United States District Court for the Southern District of
New York.  The court granted the interlocutory injunction to restrain disclosure.  The issue
having arisen on an interlocutory application, it was dealt with in strict conformity with
American cynamid principles.

The court has power to order discovery of documents which would normally be subject to the
obligation of confidentiality owed by a bank to its customer.  Thus in the case of

Bankers Trust Co. v. Shapira

The Plaintiff bank claimed that it had been fraudulently deprived of US$1 Million by two men,
who then placed the money on deposit at the Hatton Garden branch of the Discount Bank
(Overseas) Ltd.  The Plaintiff bank brought an action against the two men and against the
Discount Bank.  The defendant bank was duly served with the proceedings, but it was impossible
to serve the individual defendants, both of whom were said to be on the continent, one of them
being in jail in Switzerland during a fraud investigation by the Swiss police.  The plaintiff bank
claimed as against the defendant bank an order for discovery of the documents relating to these
sums of money.  In his judgment in the court of appeal, Lord Denning said that the Discount
Bank had got mixed up with the wrongful acts of the two men.  The bank was under a duty to
assist the plaintiff bank by giving them full information and disclosing the position of the
wrongdoers.  Though banks had a confidential relationship with their customers, it did not apply
to conceal the fraud and iniquity of wrongdoers.  In the result, the Court of Appeal made an order
for discovery (i.e. disclosure) of the relevant documents.

Libyan Arab Foreign Bank v. Bankers Trust

A relationship between bank and customer is contained in one contract which may encompass a
variety of matters.

L had Eurodollar deposits amounting to over $300 million with the bank.  There were two
accounts, one was held in New York and one at a London branch.  The bank refused to repay the
deposit on L’s demand as a US Presidential order had sought to freeze the accounts.  It became
important to decide whether the contract was subject to English or to New York Law.  it was
held that there was one contract between the parties, although the New York account was subject
to New York law and the London account was subject to English Law.  it was also decided that,
in the absence of any express provision, L was entitled to demand the balance held on the
London account in cash.  This was despite the evidence that it would involve seven plane
journeys from New York to bring over the necessary dollar bills.

The rationale of the exception of the Public duty is that there exists a higher duty than the private
duty owed to the customer.

Status Enquiries (Bankers References) & the Responsibilities that the Banks assume in
answering status enquiries or in giving Bankers References

The bank runs the risk that the person to whom the information is given there is exposure to the
bank and the bank has to ensure that they give correct information.  The person to whom the
information is being given, there is also exposure there since more information than authorised
may be given.
The second danger is that inaccurate information may be given with the result that one loses the
deal that the information was required to aid.

The problem arises from the standpoint or from the perspective of the Customer about whom the
information is given and secondly from the perspective of the person to whom information is
given.  The legal question is whether the giving of information by the bank would give rise to a
ground for liability. 

If the information is false the cause of action is defamation, misrepresentation, negligence, all
these claims could arise.  If you exceed the authority, again you may be in breach of contract and
the relief in all these cases will be damages.

The more problematic area is with regard to the liability the bank may incur with respect to the
person who is the recipient of the information.  Here exposure to a claim of negligence could
arise for misrepresentation.

The 3 ingredients for sustaining a course of action in negligence are

1.            Existence of a duty of care;
2.            Breach of that duty;
3.            Loss resulting from the breach of that duty.

The law imposes a duty on the part of the bank when giving information regarding the credit of a
customer to exercise care and the leading authority for this proposition is the case of

Hedley Byrne & co.  v. Heller & Partners

Bare facts are that the Plaintiffs who were advertising agents booked space and time on behalf of
a customer under a contract making them liable.  The Plaintiffs made an inquiry through their
bankers and the enquiry was with regard to the financial status of the defendant.  As a result of
the answers they got in response to their enquiry, they incurred liabilities which ended in loss. 
The trial judge held that the answer given in response to the inquiry was negligent but that the
defendant’s duty did not go beyond being honest in giving a reply.  The appeal court upheld that
finding on the basis that there was no duty of care in the absence of a contractual fiduciary or
other special relationship and that in the circumstances of the case, no special relationship
existed between the Plaintiffs and the Defendants.
The matter went to the House of Lords which considered the matter and stated as follows:
Lord Morris “If someone who was not a customer of a bank made a formal approach to the bank
with a definite request that the bank would give him deliberate advice as to certain financial
matters of a nature with which the bank ordinarily dealt, the bank would be under no obligation
to accede to the request.  If however, they undertook, though gratuitously to give deliberate
advice, they would be under a duty to exercise reasonable care in giving it.  They would be liable
if they were negligent although there being no consideration no enforceable relationship was
created.  It should now be regarded as settled that if someone possessed of a special skill
undertakes to apply that skill for the assistance of another who relies upon such skill, a duty of
care will arise.”

The relationship that gives rise to a duty of care is not stemming from contract or the existence of
fiduciary responsibility but purely from proximity.

Woods v. Martins Bank – financial advice to a customer

TAKING SECURITY

The issues are if one takes the example of a property registered in the names of Mr. and Mrs. X
have raised a red flag in the eyes of the banker or the circumstances were such that the bank
should have been put on inquiry or a duty to inquire arose on the part of the bank whether that
transfer was in fact authorised by the customer.  It was contended for the customer that in failing
to make such inquiry the bank was negligent.

The court held that the relationship between a banker and a customer regarding the drawing and
payment of the customers’ cheques against the money of the customers in the bankers hands was
that of a principal and agent and that as an agent the bank owed fiduciary duties to the customer
and prima facie was also bound to exercise reasonable care and skill in carrying out the
instructions of its principal.  Accordingly it was an implied term of the contract between the bank
and the customer that the bank would observe reasonable skill and care in and about executing
the customers orders but generally that duty was subordinate to the bank’s other conflicting
contractual duties such as its prima facie duty when it received a valid order to execute the order
promptly on the pain of incurring liability for consequential loss to the customer.

The court in this case is saying that on one hand the bank is under an obligation to honour
cheques that on the face of them appear proper but on the other hand they have an obligation to
protect their customers from loss.
It goes on to say that if the bank executed the order knowing it to be dishonestly given or shut its
eyes to the obvious facts of dishonesty or acted recklessly, in failing to make such inquiries as an
honest and reasonable man would make the bank would plainly be liable.
The obligation of the bank is that it must not act recklessly and if circumstances demands that it
inquires it should inquire and should not knowingly facilitate fraud. It is a balancing act.

BANKS FIDUCIARY DUTY TO THE CUSTOMER

The issues are if one takes the example of a property registered in the names of Mr. and Mrs. X
have raised a red flag in the eyes of the banker or the circumstances were such that the bank
should have been put on inquiry or a duty to inquire arose on the part of the bank whether that
transfer was in fact authorised by the customer.  It was contended for the customer that in failing
to make such inquiry the bank was negligent.

The court held that the relationship between a banker and a customer regarding the drawing and
payment of the customers’ cheques against the money of the customers in the bankers hands was
that of a principal and agent and that as an agent the bank owed fiduciary duties to the customer
and prima facie was also bound to exercise reasonable care and skill in carrying out the
instructions of its principal.  Accordingly it was an implied term of the contract between the bank
and the customer that the bank would observe reasonable skill and care in and about executing
the customers orders but generally that duty was subordinate to the bank’s other conflicting
contractual duties such as its prima facie duty when it received a valid order to execute the order
promptly on the pain of incurring liability for consequential loss to the customer.

The court in this case is saying that on one hand the bank is under an obligation to honour
cheques that on the face of them appear proper but on the other hand they have an obligation to
protect their customers from loss.
It goes on to say that if the bank executed the order knowing it to be dishonestly given or shut its
eyes to the obvious facts of dishonesty or acted recklessly, in failing to make such inquiries as an
honest and reasonable man would make the bank would plainly be liable.
The obligation of the bank is that it must not act recklessly and if circumstances demands that it
inquires it should inquire and should not knowingly facilitate fraud. It is a balancing act.
THE BANKS DUTY OF CONFIDENTIALITY
The duty that the bank owes to the customer under Kenya law is the duty of secrecy.

There are situations when the banks could be in their right to disclose.

A banker is under an obligation of secrecy under the Banking Contract regarding his customers’
affairs.  This obligation is a legal obligation arising out of the contract.  A breach of that duty on
the part of the banker will expose the banker to liability.  In other words a banker is not generally
permitted to disclose the affairs of his customers to 3rdparties.  The duty is not an absolute duty
because there are exceptions when a bank is at liberty to disclose the affairs of the customer.

The leading authority on this subject is the case of

Tournier v. National Provincial and Union Bank of England. (1924) 1 KB 461

It was held in that case that it is an implied term of the contract between a banker and its
customer that the banker will not divulge to 3rd persons without the consent of the customer
express or implied either the state of the customer’s account or any of his transactions with the
bank or any information relating to the customer, acquired through the keeping of the customer’s
account unless the banker is compelled to do so by order of a court, or the circumstances give
rise to a public duty of disclosure or the protection of the banker’s own interests require
disclosure.

The facts briefly

The Plaintiff was a customer of the Defendant bank.  A cheque was drawn by another customer
of the Defendant’s in favour of the Plaintiff who instead of paying it into his own account
endorsed it in favour of another person who had an account at another bank.  On return of the
cheque to the Defendant the manager enquired from the other bank to whom this cheque had
been paid and the information given was that it was paid to a bookmaker.  That information was
disclosed by the Defendant to 3rd persons and the Plaintiff brought an action against the bank and
the holding was that the disclosure constituted a breach of the Defendant’s duty to the Plaintiff
and that although the information was acquired not through the Plaintiff’s account but through
the drawer of the cheque, the information was none the less acquired by the defendants during
the currency of the Plaintiff’s account and in their character as bankers.
The classic statement is by Bankes L.J at page 472

            “In my opinion it is necessary in a case like the present to direct the jury what are the
limits and what the qualifications of the contractual duty of secrecy implied in the relation of
banker and customer.  There appears to be no authority on the point.  On principle I think that
the qualifications can be classified under four heads:
(a)        Where disclosure is under compulsion by law;
(a)          Where there is a duty to the public to disclose;
(b)          Where the interests of the Bank require disclosure;
(c)          Where the disclosure is made by the express or implied consent of the customer.

He goes on to say “the duty of secrecy does not cease the moment a customer closes his
account.  Information gained during the currency of the account remains confidential unless
released under circumstances bringing the case within one of the classes of qualifications I have
already referred to.  Again the confidence is not confined to the actual state of the customer’s
account it extends to information derived from the account itself.”

Tournier v. National Provincial and Union Bank of England (1924) 1 KB 461

Judgment of Scrutton J.

“I have no doubt that it is an implied term of bankers contract with this customer that the bank
shall not disclose his account or the transaction relating thereto except in  certain
circumstances.  The circumstances in which disclosure is allowed are sometimes difficult to
state. I think it is clear that the bank may disclose the customer’s account and affairs to an
extent reasonable and proper for its own protection (as when a bank is collecting or suing for an
overdraft. Or to the extent reasonable and proper for carrying on the business of the account as
in giving a reason for declining to honour cheques when there are insufficient assets or when
ordered to answer questions in the law courts or to prevent frauds or crimes. 
I think also that the implied legal duty towards the customer to keep secret his affairs does not
apply to knowledge which the bank acquires before the relation of banker and customer was in
contemplation or after it ceased or to knowledge derived from other sources during the
continuance of the relation.  The banks can by express agreement provide for circumstances
when the bank may be at liberty to disclose.

Judgment of Lord Atkins

Intercom Services Limited & Other v. Standard Chartered Bank Limited Civil Case No. 761 of
1988  E.A. L. R 2002 Vol. 2 391

Judgment of Visram J.

The facts in this case are that a Mr. James Kanyita Nderitu was a director of 4 companies
Intercom Services Ltd, Inter State, Swiftair, and Kenya Continental Ltd.  In 1985 Mr. Nderitu
received a cheque for 17 Million shillings drawn by Customs & Excise in favour of his company
Intercom Services Ltd.  And he banked it on the persuasion of the Branch Manager of Standard
Bank Westlands and it was common ground or it was conceded that, that cheque represented a
substantial amount of money in those days.  One Saturday Mr. Nderitu went to Westlands
Branch of Standard Chartered Bank and deposited that cheque there.  The account was relatively
new having been opened some 8 days prior to the depositing of the cheque.  The bank accepted
the cheque without raising any questions as it appeared to be proper on the face of it.  The
cheque was specially cleared and on the following Monday the Bank manager telephoned Mr.
Nderitu and informed him that his superiors thought the deposit was somewhat unusual and he
was requested to provide some documentary proof of payment.

DUTY OF THE CUSTOMER OWED TO THE BANK IN DRAWING A CHEQUE

This duty can be expressed under Kenya law in these terms

“a Customer of a bank owes a duty of care in drawing a cheque to take reasonable and ordinary
precautions against forgery.”

The leading authority for this proposition is the case of

London Joint Stock Bank Ltd v. Macmillan (1918) A.C. 777

The bare facts of this case are that a firm who were customers of a bank entrusted the duty of
filling out their cheques to a clerk whose integrity they had no reason to doubt.  The clerk
presented to one of the partners for signature a cheque drawn in favour of the firm or bearer. 
There was no sum on words written on the cheque in the space provided and there were the
figures 2 in the space intended for the figures.  The partner signed the cheque.  The clerk
subsequently tampered with the cheque by adding the words one hundred and twenty pounds in
the space that had been left.  The clerk then presented that cheque for payment at the firm’s bank
and received a hundred and twenty pounds out of the firm’s account.  The question was whether
the bank would then be liable to the firm for that loss that was perpetrated by their own clerk.

The House of Lords held that the firm had been guilty of a breach of duty arising out of the
relation of a banker and customer to take care in the mode of drawing the cheque and that the
alteration of the cheque by the clerk was a direct result of that breach of duty.  And accordingly
the bank was entitled to debit the customer’s account with the amount of that cheque.

Lord Finley summed up that duty at page 789 as follows:

“the relationship between a banker and a customer is that of debtor and creditor with a super
added obligation on the part of the banker to honour the customers cheques if the account is in
credit.  A cheque drawn by a customer is in points of law a mandate to the banker to pay the
amount according to the tenor of the cheque.  It is beyond dispute that the customer is bound to
exercise reasonable care in drawing the cheque to prevent the banker being misled.  If he draws
the cheque in a manner which facilitates fraud, he is guilty of a breach of duty as between
himself and the banker and he will be responsible to the banker for any loss sustained by the
banker as a natural and direct consequence of this breach of duty.”

Sections 3 and 4 of the Cheques act s. 3 (2) that where a banker in good faith and without
negligence and in the ordinary course of business
(a)          Receives payment for a customer of a prescribed instrument to which the customer has
no title or defective title

Protection is essentially being proffered to protect the bank

Section 24 of the Bills of Exchange Act which provides that where a signature on a bill is forged,
or placed thereon without the authority of the person whose signature it purports to be, the forged
or the authorised signature is wholly inoperative.   In other words if the bank honours a forged
cheque and it subsequently turns out the cheque was forged, then the banker bears the loss.

Does the duty of the customer extend to scrutinising bank statements and are the statements to be
deemed to be accurate unless challenged by the customer within a given period.

As a matter of practice the banks will expressly provide that that is the case, in the absence
however of an express agreement with the bank, is such a duty to be implied?  If under the
written terms of the contract there is no agreement that statements will be binding after a certain
time has lapsed.  This was the issue in the case of Tai Hing Cotton Mills Ltd v. Liu Chong Hing
Bank Ltd P.C 1985 2 947

Brief statement of facts

A company was a customer of a bank and maintained accounts with that bank.  The bank
honoured cheques 300 of them totalling approximately 5.5 million Hong Kong dollars.  The
cheques on the face of them appeared to have been drawn by the company and appeared to bear
the signature of the Managing Director of the Company who was one of the authorised
signatories and so the bank honoured these cheques.  It later transpired that those cheques were
not infact the company’s cheques, they were in fact forgeries and the forgeries had been
perpetrated by the company’s own accounts clerk and the question was whether that loss should
fall on the company or on the bank.

The holding of the privy council was as follows:  “that in the absence of express agreement to
the contrary the duty of care owed by a customer to his bank in the operation of a current
account was limited to a duty to refrain from drawing a cheque in such manner as to facilitate
fraud or forgery and that a customer had a duty to inform the bank of any unauthorised cheques
purportedly drawn on the account as soon as the customer became aware of it.  And on the
question whether there was an obligation on the part of the customer to screen statements which
is what the bank had advocated or argued, the court held, that the customer was not under  a
duty to take reasonable precautions in the management of his business with the Bank to prevent
forged cheques being presented for payments nor was he under a duty to check his periodic bank
statements so as to enable him to notify the bank of any unauthorised debit items because such
wide a duty was not a necessary incident of the Banker/Customer relationship since the business
of Banking was not the business of the customer but the business of the bank and forgery of
cheques was  a risk of the service which the bank offered.
It had been suggested in this case that there was a duty owed to the bank by the customer but the
Privy Council stated that the customer was under no duty to scrutinise statements to check if they
are erroneous.

WHEN CAN A CONDITION BE IMPLIED

Conditions that must be satisfied

A term will not be implied into a contract unless it satisfied the following conditions under
Kenya laws:

1.            The term proposed to be implied must be reasonable and equitable.

2.            It must be necessary to give business efficacy to the contract i.e. a term will not be
implied into a contract if the contract is effective without that implied term.
3.            The term must be so obvious that it goes without saying as it were.
4.            The term must be capable of clear expression;
5.            It must not contradict any express term of the contract.

So if the customer has a term to be implied in the relationship, it must meet these 5 conditions.

BANKERS LIEN
Lien under Kenya law is a right to retain property belonging to a debtor until the debtor has
discharged the debt due to the creditor.  This form of protection known as the general lien of
bankers arose from usage of trade from time immemorial and is judiciary recognized. 

The nature of the securities Subject to the lien must come to the bank in its capacity as a banker
and in the course of banking business.  Securities held by a bank or deposited with a bank for
safe custody are not subject to the lien unless there is an agreement between the parties to the
contrary.
Does a lien give the bank the right to sell?  a mere lien gives no power of sale, neither does it
give a ground for applying to court to grant the power of sale.  The method that appears open to a
banker for realising securities held under a lien would seem to be to sue for the debt obtain
injunction for the debt, and then take the securities in execution of that judgment.

The right of lien under Kenya law extends only to the customers own property and not to
property held in trust by the customer for their clients.

GUARANTEES
Problems associated with guarantees under Kenya law.

Extent to which a guarantor remains bound under the guarantee even after the terms of the
principal lending have been varied.

In the Donde Bill there was a proposal to get rid of guarantees,

What is a guarantee?

A guarantee is defined under Kenya law as a written promise by the guarantor to answer for the
debt of another and that other is the principal debtor made to a person namely the lender to
whom that other is already or is about to become liable.

Under the Law of Contract Act Cap 23 the guarantee must be in writing or there must be a
Memorandum of it in writing signed by the guarantor. 

The banks will ordinarily or as part of their requirements for lending purposes require that the
principal borrower should furnish security by providing a guarantor.  This is a common method
by which bankers seek to protect themselves against loss on advances. 

To effectively protect itself the banks will usually frame the bank guarantees so as to apply to all
accounts of the principal debtor whether such accounts are solely in the name of that principal
debtor or whether such accounts are joint accounts or partnership accounts so that if the principal
debtor has two accounts with outstanding facilities at the bank, the bank will ensure that the
language of the guarantee covers both accounts for instance.

The guarantees will also usually be framed in such broad terms so as to extend to the liabilities of
the principal debtor in the capacity of that debtor in principal form or in the capacity of that
debtor as a surety or as a guarantor for lending to another party.

There are situations where the guarantee is given by more than one person i.e. where there is
more than one guarantor to the guarantee.  In that event the guarantee should stipulate whether
the obligation of the guarantors is several or joint and several.  If the obligation be joint only, it
means that if the lender sues one of the guarantors and obtains judgment against that guarantor,
he cannot subsequently bring an action under the same guarantee against the other guarantor. 
But in the case of the guarantee being several  the remedy by the bank can be pursued against
both guarantors at different times.  The caution is that when one is dealing with a joint guarantee
one has to sue all the guarantors.

The banks invariably provide in the language of the guarantee that the liability of the guarantors
is joint and several.

The other measure that a guarantor should take or the other factor that a guarantor should be
alive to is whether the guarantee is limited or unlimited.  If it is intended to be limited meaning
that the liability of the guarantor should not exceed a certain limit, then the guarantor should
ensure that the instrument of the guarantee so provides.

A further distinction is also made between specific guarantees and continuing guarantees.  A
specific guarantee is where provision is made for the advance of a specified sum and the
guarantee is only applicable to that particular advance and it ceases on the repayment of that
amount.  A continuing guarantee is designed to cover a fluctuating or running account and it
secures the debit balance at any time irrespective of payments which clear past advances.

HOW DOES ONE BRING TO AN END THE INSTRUMENT OF GUARANTEE?

Most guarantees will provide that a guarantor wishing to determine the guarantee must give
notice to the lender and pay into the bank the amount that may be due.  The guarantee may
simply provide that the liability of the guarantor will cease upon the expiry of a specified notice
to be given by the guarantor to the bank and upon payment of all outstanding sums notified by
the bank upon receipt of such notice.

The bank has to be careful coz the effect of this is that the guarantor can give notice to the bank
should the bank receive notice that is responds by stating the amount that is outstanding.

DEATH OF A GUARANTOR

Does the death of a guarantor determine a guarantee?  It does not necessarily determine the
guarantee unless provision to the contrary is provided.  The other way to bring the guarantee to
an end under Kenya law is for the principal debtor to discharge his liabilities with the bank and
therefore if the lender releases the principal debtor, it follows also that the guarantor is
discharged.

Mahand Singh v. Ubayi [1939] A.C. 601

This is authority for the proposition that where the creditor releases the principal debtor, the
guarantee is discharged.

This follows the principles in Rees V. Barrington following a case bearing those names.

The other way in which the guarantor may be released is where the creditor agrees to vary the
terms of the lending with the principal debtor to the prejudice of the guarantor.

Holme v. Branskill [1878] 3 QBD 495

This has been followed by our courts in the case of

Harilal and Co. v. The Standard Bank Ltd. [1967] EA 512

In this case, Standard Bank advanced a facility to the principal debtor which was secured by a
guarantee of the wife of the principal debtor.  That was in 1955.  in 1962 the Bank was
dissatisfied in the way in which the account was being operated and it.

CIRCUMSTANCES WHEN THE SECURITY OF A BANK MAY BE CHALLENGED

A contract can under Kenya law be set aside on a number of grounds;

1.            Undue Influence
2.            Misrepresentation
3.            Illegality
4.            Duress

The Application of these principles to Banking i.e. what a banker should safeguard against when
taking security to avoid being liable.

CIBC Mortgages PLC V. Pitts & Another (1993) Vol. 4 All E.R. 433

This is an illustration as to how a problem can arise when securities are being taken.

A debenture is a floating security tied on assets of a company that will crystallise after certain
effects.

The facts in this case were that a husband and wife jointly owned a matrimonial home which was
valued at £275,000 in 1986.  There was an encumbrance on that property in favour of a building
society for £16700.  In 1986 the husband told the wife that he would like to borrow money on the
security of the home and to use the loan to buy shares in the stock market.  The wife was most
reluctant but as a result of pressure, brought upon to bear on her by the husband, she eventually
agreed.  Both the husband and wife signed an application for a loan from the plaintiff in the
amount of a £150,000 for a period of twenty years.  And the purpose of the loan was expressed
in the application to be for the purpose of paying off the existing mortgage with the building
society and for the Purchasing of a Holiday Home.  The Plaintiff agreed to advance the £150,000
for 19 years and the husband and wife signed the Mortgage offer and the legal charge prepared
by the Plaintiff’s solicitors.  The wife did not read those documents before signing them neither
did she receive separate advice about the transaction and nobody suggested that she should in
fact seek advice.  She did not know the amount that was being borrowed, the bank then
proceeded to disburse the loan, the existing mortgage with the building society was paid off and
the balance of the amount of the loan was paid into a joint account in the names of the husband
and wife.  The husband then utilised that money to speculate on the stock market and was in fact
at some stage at least in the books able to convert himself into a Millionaire through his stock
dealings.  The stock market then crashed in October of 1987 and the husband was then unable to
keep up the Mortgage repayments and the Plaintiff then applied for an order for possession of the
matrimonial home. 

The wife contested the application for possession of the matrimonial home on the ground that
she had been induced to sign the mortgage by misrepresentation, duress and undue influence on
the part of the husband.  The judge held that the husband had exercised actual undue influence on
the wife to procure her agreement and that the transaction was manifestly disadvantageous to
her.  But since the husband had not acted as an agent of the Plaintiff and the fact that there had
been a joint advance to both the husband and the wife, the wife’s claim failed.  She appealed to
the court of appeal and the appeal was dismissed on the grounds that the transaction was not
manifestly disadvantageous and therefore the wife could not succeed on undue influence.  And
furthermore the Plaintiff had neither actual or constructive notice of any irregularity.

She then appealed to the House of Lords which held that a claimant who proved actual undue
influence was not under the further burden of proving that the transaction induced by undue
influence was manifestly disadvantageous but was entitled as of right to have it set aside as
against the person exercising the undue influence since actual undue influence was a species of
fraud and a person who had been induced by undue influence to carry out a transaction which he
did not freely and knowingly enter into was entitled to have that transaction set aside as of right. 
However the House of Lords went to hold, although the wife had established actual undue
influence by the husband, the Plaintiff was not affected by it because the husband had not in a
real sense acted as its agent in procuring her agreement and that the Plaintiff had no actual or
constructive notice of the undue influence.  So far as the Plaintiff was concerned there was a
joint application by both husband and wife, the loan was advanced to both husband and wife and
there was nothing to indicate that this was anything other than a normal advance to a husband
and wife for their joint benefit and for that reason the appeal was dismissed.

Look at the Judgement of Wilkinson J. and his discussion of the law in that case.

Under our statutes the requirements is that the signatures of the chargees must be witnessed by
an advocate and he must say that he has agreed.
The circumstances when the security of a bank may be challenged under Kenya law

1. UNDUE INFLUENCE
2. DURESS
3. UNCONSCIONABLE TRANSACTIONS
4. MISREPRESENTATIONS
 
 

UNDUE INFLUENCE
The equitable doctrine of undue influence under Kenya law covers cases in which the particular
relationship of trust and confidence leads the court to presume that undue influence has been
exerted without necessity for proof.  There are those relationships that are based on trust and
confidence where the assumption will be made , i.e. doctor/patient, or advocate/client.

The doctrine also extends to cases outside of such relationships in which the court will uphold
the plea of undue influence if satisfied that such influence has been in fact exerted based on the
evidence.  These will be cases of actual undue influence and the basis of the doctrine is the
principle that the court is justified in setting aside a transaction for undue influence a transaction
that is based on the victimisation of one party by another.

In the case for presumed undue influence it has to be established that a relationship of influence
exists between the parties and that a transaction has taken place between those parties which was
wrongful in the sense that the party in the position of influence has obtained an unfair advantage
from the party subject of the influence.

ACTUAL UNDUE INFLUENCE IS A QUESTION OF FACT

Under what circumstances will the Bank be hit with the notice of undue influence.  When is the
bank affected by undue influence.
Undue influence exerted by a third party over the giving of security will generally not have effect
on the validity of the security given by a bank.  There are circumstances however when the bank
may be affected by such undue influence

1.            Where the Bank has constituted the 3rd Party its agent for purposes of procuring the
execution of the security;  (Agency)

2.            Where the Bank has actual or constructive notice at the time of execution that it has
been procured by undue influence. (Notice)

Bank Credit & Commerce (1990) Vol 1 QB 923

Paget argues that before this decision, there was a tendency on the part of the courts to utilise and
widen the concept of agency for this purpose.  In a typical situation where a bank to which the
husband was indebted sought security in the form of a guarantee from the wife or a legal charge
in the joint names of husband and wife and the bank then left it to the husband to procure his
wife to execute the security but did not take steps to communicate with the wife, it was then
sufficient to constitute the husband the agent of the bank.  This theory is artificial and the
authority is the case of

Barclays Bank v. Obrien

When will the Bank be put on notice?

If at the time of execution of a security the Bank has actual notice or constructive notice that the
security has been procured through undue influence and equity is raised that disentitles the bank
to rely on that security, the circumstances constituting notice required to fix the bank with the
liability for another person’s undue influence will depend on the nature of the undue influence
that is alleged.  Where actual undue influence is alleged, it must be shown that notice of the
circumstances alleged to amount to the undue influence were known to the bank.