The termination of the bank-client relationship in South African banking law

The above-listed obligations of the bank and its client are not exhaustive but vary depending on the contract between the parties.

The above two sections have considered the nature of the BC relationship and the duties of both the bank and its clients. In what follows, a discussion on the termination of the BC relationship is considered and whether the bank can unilaterally cancel banking contracts unilaterally.

4 1 1 Breedenkamp v Standard Bank of South Africa (Breddenkamp I):32 The interim interdict application

In casu, the United States government listed the applicant (Breedenkamp), Breco (the company) and other certain entities as specially designated nationals (“SDN”).33 This came because of allegations against Breedenkamp that he was involved in various illicit activities such as tobacco trading, arms trafficking, oil distribution, diamond extraction and of being a confidant and financial backer of Zimbabwe’s President Robert Mugabe.34 Subsequent to this SDN listing, the US enforcement authorities imposed sanctions on the applicant, Breco and other entities.35 In terms of US law, US nationals, including juristic persons, are strictly precluded from dealing with SDNs. The Standard Bank of South Africa (“Standard Bank SA”) became aware of these facts and upon issuing thirty (30) days’ notice of termination of the banking services with Breedenkamp, decided to cease its contract with Breedenkamp, Breco and other entities. The bank derived its powers to unilaterally terminate the contract from the “general terms and conditions for all accounts”,36 entered by both parties and in terms of the Code of Banking Practice. In terms of these general terms and conditions, the bank could terminate any account, for any reason, by providing a written notice to such effect. In addition, the bank could at any time amend the terms and conditions of the BC contract by giving a written notice to the customer. The code of banking practice also empowered the bank to close its customer’s bank account if it had reasons to believe that the account was being used for any illegal purposes.37 Therefore, Standard Bank SA relied amongst other reasons on these provisions to cancel its BC relationship after it became aware of the applicant being listed as the SDN by the US government.

Three initial reasons were advanced by the bank for the closure of the applicant’s accounts. First, that the US government as a specially designated person listed the applicant.38 Second, that these allegations might impaired Standard Bank SA’s reputation.39 Third, certain business risks could arise should the bank continued offering banking services to Breedenkamp and SDN.40 In response to the intended closure of the bank accounts, the applicant approached the court for an interim interdict to restrain Standard Bank SA from cancelling the contract between the parties pending the finalisation of the matter.41 The applicant contended that the closure had drastic effects on his business since it would be difficult, if not impossible, to conduct business without banking facilities.

Jajbhay J granted the relief based on several grounds. One of these grounds was that the bank did not have a unilateral right to cancel the contract as it claimed to have under the general terms and conditions, nor did the Code of Banking Practice confer such right. The court considered the evidence before it and concluded that the general terms and conditions were adopted after the accounts of the applicant were already opened therefore it seemed unreasonable for the bank to apply them to these specific bank accounts.42 Furthermore, the applicant denied that he had received the terms and conditions.43 The court was not prepared to entertain this denial by the applicant. The court also referred to these general terms and conditions and concluded that they were not sufficient to entitle the bank the right to cancel the banking service contract.44

The court also pointed out that Standard Bank SA only communicated its reasons to terminate the contract after it had already closed the bank accounts of the applicant. As such, the applicant’s bank accounts were closed based on mere perceptions and not on the facts.45 After evaluating clause 4.10 of the Code of Banking Practice the court concluded that, the Code did not expressly or by necessary implication entitle the bank to terminate the contract.46 Jajbhay J further mentioned that the Code expressly provided that it could not be used in a court of law and it was not legally binding between the bank and its client.47 Hence, the court concluded that the Code did not entitle Standard Bank to close the account of the applicant.48 Consequently, the court ruled the applicant was entitled to an interim interdict pending the finalisation of the matter.

4 1 2 Breedenkamp v Standard Bank of South Africa (Breedenkamp II):49 The main application

In the main application, the applicant challenged the manner in which Standard Bank SA had terminated the contract. The constitutional attack was directed at the issue of fairness in that Standard Bank SA termination violated the standard of fairness as set out in the constitution. Both parties had agreed that should the court find that the termination had offended a constitutional right, Standard Bank SA could not therefore exercise the right to cancellation.50 As a result, the court had to determine if the cancellation clause in itself offended the constitution and whether the exercise of right to terminate contract was fairly exercised as submitted by the applicant.51 The court held that to determine fairness the court should consider two considerations. First consideration involves the weighing up the public policy as informed by the constitution that requires freely and voluntarily compliance with contractual obligation - the maxim pact sunt servanda. As the court correctly stated that this principle entails parties’ self-autonomy that contract entered freely and voluntarily must be honoured even to one’s own detriment. It seems that if the contract is prima facie contrary to public policy the question of enforceability would not arise. If the court is satisfied that the clause in question is reasonable - in that the clause does not offend one or more of the constitutional rights, then the second consideration entails an enquiry into the surrounding circumstances precluded compliance with the clause - a subjective test.52 The focus in this subjective approach is on the manner in which either party has exercised his\her right of cancellation, whether it violated the right to freedom of contract or dignity of the claimant.53 The question in this regard is whether it was factually possible to enforce the contractual clause or to expect the other party to comply with BC contract. Therefore, the applicant is required to show that exceptional circumstances exist to justify his non-compliance.

It should be noted that the applicant had to lead evidence to prove that Standard Bank SA cancellation was unreasonable considering the relevant facts.54 If the applicant successfully convinced the court that the clause could not reasonably be enforced considering the circumstances, such clause would not be enforceable. However, it should also be noted that courts are reluctant and cautious to interfere with the contractual relationship between individuals,55 unless the contractual terms and conditions concerned are objectively or subjectively unreasonable. This is because of the parties’ right to freely arrange their affairs. Accordingly, parties may arrange their affairs and conclude contracts that will be binding between themselves, the pacta sunt servanda principle. This entails that unless the contrary is proven, parties are bound by the general terms and conditions of their contract.

It was accepted that Standard Bank SA termination of the contract did not directly violate the applicant’s right to freedom of contract, dignity or trade.56 However, the applicant further submitted that should the court find that the cancellation had not directly infringed his constitutional values; the court ought to consider that the termination violated the fairness principle. In this regard, the applicant relied on the fairness principle in that, Standard Bank SA unfairly exercised its right of termination taking into account that the applicant had no sufficient time to move his business to another bank. Furthermore, other banks were not prepared to accept him and therefore it was fair to sustain his relationship with Standard Bank SA. Subsequently, the applicant sought the following reliefs. One, that the bank is prohibited from cancelling the contract without good cause.57 Two that the bank is “interdicted and restrained from cancelling the account contract unless and until good cause arises.”58 The applicant’s contention was that prior to the conclusion of the contract, Standard Bank SA was in a “privileged position” to impose standard-term clauses in the contract.59 According to the applicant, this might have constituted an unequal bargaining position between the parties and it probably influenced the voluntariness of the applicant to enter into the contract regarding the bank account. Lamont J held that the unequal bargaining power prior to the conclusion of the BC contract did not on its own render the contract unenforceable. According to the court, this might however have had a bearing on the weight that would be attached to the terms of the contract and the extent to which the parties were able to act with dignity and freedom.60

Moreover, the applicant argued that the BC contract contained a variation clause entitled the bank to change the terms and conditions from time to time. Subsequently, this empowered the bank to amend the terms from time to time. It can be argued that this seems to perpetuate the unequal bargaining power in that the client has no choice but to contract with the banker because of the need of the client’s vulnerable position for banking facilities. If the applicant was not satisfied with the terms of the BC contract or their amendments, he had two options at his disposal. First, the applicant could have negotiated with the bank on different terms.61 Second, the applicant would be able to terminate the account contract himself.62 The applicant further argued that the imbalance was further perpetuated by the strict requirements that the he had to comply with. Furthermore, the South African banking sector has a limited number of banks.63 For these reasons, the applicant contended that Standard Bank SA was in indeed in a privileged position. The court accepted that banks do impose standard form contracts, but the evidence before the court did not prove that this constituted an aggravating factor in the present matter.64 It seems that the court was prepared to accept that the parties were not on equal bargaining position provided evidence could support such conclusion. It is submitted that in the banking sector such as South Africa’s one with few major banks, it seems difficult to justify that the parties would be on equal footing. This is because amongst other reasons, BC contracts tend to contain standard clauses that cannot easily be changed unless the banker grants such permission. The court continued to consider the applicant’s contention and it held that the applicant was a strong entity that would have influenced Standard bank SA in one way or another. To put it differently, the applicant was “no shrinking lily”.65 Accordingly, the court concluded that the facts did not show that the applicant “was at a bargaining disadvantage or in a position of inequality” vis-à-vis the bank66 It seems likely that the court would reached a different conclusion had the facts proven that the bank was in a more favourable position. In other words, the court would have granted the interdict stopping the bank from cancelling the BC relationship if the facts proved otherwise.

The applicant also submitted that it was fair for Standard Bank SA to have the applicant as its client because other banks were not willing to do business with him.67 The court accepted that the unbanked position of the applicant impaired his dignity, integrity and respect to carry on trade as a respectable member of society.68 However, the court further examined the submission and concluded that the applicant had to prove that the cancellation by Standard Bank SA rendered him unbanked.69 According to the court, the applicant had failed to discharge such onus. In other words, the applicant had failed to establish that other banks could not take him on as a client because of the unilateral cancellation by Standard Bank SA.

The court further held that fairness principle also entailed the bank’s right to choose which person it wanted to contract with.70 Moreover, the bank had a duty to comply with and uphold banking regulations. As such, the court ruled that the process was procedurally fair. Substantively there was a proper rationale for the decision to terminate.71

4 1 3 Breedenkamp v Standard Bank of South Africa:72 SCA Judgment

The appellant appealed against the judgment of the High Court that the termination of banking facilities was fair and lawful. In the appeal case, the appellant based his argument squarely on the fairness principle.73 The appellant submitted that the Barkhuizen principle that pacta servanda sunt is not “a sacred cow that should trump all other considerations”,74 was applicable regardless of whether the contract violated public policy or not. According to the appellant, the absence of public policy violation did not mean that the contract was enforceable. As such, the appellant submitted that the enforcement of the contract must also be fair and reasonable. The court rejected this contention as follows:

“[...] I do not believe that the [Barkhuizen] judgment held or purported to hold that the enforcement of a valid contractual term must be fair and reasonable even if no public policy consideration found in the Constitution or elsewhere is implicated [...]”.75

The court further relied on the dictum of Ngcobo J in the Mohlomi case that parties in a contract have self-autonomy or the ability to regulate their own affairs.76 Accordingly, the question of enforceability comes into play only if it can be shown that the terms of the contract are unreasonable. Hence, it meant that it would be objectively or subjectively impossible to enforce them. According to the court, since the contractual terms were valid, it was unnecessary for the cancellation process to be fair and reasonable as perceived by the appellant. Consequently, the appellant could not solely rely on fairness as a freestanding requirement to sustain the bank-client relationship.77

The court opined that the issue to be decided was whether Standard Bank SA had complied with the termination requirements as agreed in the BC contract. Harms DP considered that in terms of the general terms and conditions the bank first had to issue a reasonable notice if it sought to terminate the contract. Second, it must have had a good cause for the termination of the contract. On the reasonable notice requirement, it was undisputed that the bank had given the appellant a reasonable notice to cease the bank-customer relationship. Based on the good cause requirement, the court held that the bank had exercised its right of cancellation lawfully as permitted by the BC contract. In other words, the bank was at liberty to terminate its contract emanating from the agreement between the parties. More so, the bank made its decision to cancel the banking contract based on the listing of the appellant and considered the reputational and business risk related thereto. The court remarked that whether or not these were the right factors to be considered was not for the court to decide. It was held further that Standard Bank SA was right to rely on the reputation of the appellant when closing the bank accounts since this had a bearing on the BC relationship.78 Hence, the bank had exercised its right of termination in a bona fide manner.79 Accordingly, the appeal was dismissed.