Bank not liable for loss after employee, mandated to operate a client’s accounts, steals money

Should banks allow staff to be given mandates so that they may operate the accounts of customers? It’s a question that has to be asked in the wake of a new decision by Namibia’s Supreme Court. The apex court had to consider the bank’s liability for funds misappropriated by a clerk who had been given a mandate by a customer to operate the customer’s accounts.

By Carmel Rickard

The story is about Ursula Blaauw, a customer of Bank Windhoek Ltd. She was a very busy woman. Her work included bookkeeping, renting out properties and speculating in livestock. Because of all her business interests, she was often out of town.

Blaauw had a bank-appointed ‘personal banker’, Chrischenda Pallais, whose task was to provide Blaauw with advice about managing her accounts. Then Pallais suggested that she could be even more helpful: if Blaauw signed a mandate form for each of the four accounts she held with the bank, authorising Pallais to act on behalf of Blaauw when she wasn’t able to get to the bank herself, Pallais could save Blaauw a lot of trouble.

Irregular

Blaauw jumped at the chance and completed the necessary mandate forms that were duly processed by the bank.

Just less than two years later, Blaauw received disturbing information from a senior bank employee: some transactions on Blaauw’s accounts seemed to be ‘irregular’, and she should investigate. That’s when she took a close look at what had been happening and noticed that more than N$400 000 was missing from her accounts, ‘misappropriated’ by Pallais.

Blaauw later brought legal action against the bank, saying it was responsible for the actions of Pallais, its staffer, who had taken the money. The bank said that it could not be held responsible for what Pallais had done using the mandates that Blaauw had signed and that Pallais, a senior credit clerk, was not acting ‘within the course and scope of her employment’ when she took the funds.

The high court agreed with the bank and found it was not liable for Blaauw’s loss. She appealed, however, and the supreme court has now delivered its judgment on the dispute.

Collected rent

It turned out that Blaauw knew Pallais personally. She was a tenant of one of the flats owned by Blaauw, and she used to discuss her personal issues with Blaauw who even loaned her money more than once. Pallais had also rented a bar from Blaauw and used to collect the rent from other tenants of Blaauw, and then paid those rentals into Blaauw’s account.

It also emerged that, in August 2014, Blaauw’s daughter told her mother that Pallais had stolen money from her (the daughter). Though Blaauw had by then already signed the mandates allowing Pallais access to her accounts, she did nothing to revoke the mandates, despite this information, because she didn’t believe that Pallais would abuse her position to defraud Blaauw.

Pallais therefore continued to operate Blaauw’s accounts under mandate. For example, Blaauw would sometimes phone Pallais and ask her to withdraw funds from an account and Pallais would later hand the money to her.

Frolic

But the bank argued it wasn’t responsible for Blaauw’s loss. Blaauw had freely signed mandate forms in terms of which she gave Pallais the authority to operate her accounts and to act as her agent in relation to her accounts. This meant that Pallais was acting as Blaauw’s agent, not as an employee of the bank, in relation to all the disputed bank transactions.

In terms of the mandate signed by Blaauw, all the transactions by Pallais, carried out on Blaauw’s accounts, were binding on Blaauw and the bank was entitled to rely on them and act in accordance with the instructions of Pallais.

The appeal judges said Pallais wasn’t ‘going about her employer’s business’ when she misappropriated the money. She ‘acted for her own interests and purposes. She did not act in the furtherance of the bank’s business.’ She was ‘on a frolic of her own.’

Unqualified assurance

What of Blaauw’s argument that the mandates were sanctioned by the bank, and that the bank had approved them? Pallais was the ‘agent’ of Blaauw, said the supreme court, ‘irrespective of how one may define “agent”.’

Blaauw conceded that Pallais couldn’t have misappropriated the money if the mandates hadn’t been in place since it wasn’t part of her duties to sign documents on behalf of clients, or to give instructions on behalf of clients or to withdraw or transfer funds from clients’ bank accounts.

Further, in the mandates, Blaauw ‘bound herself as “surety”, insofar as the bank is concerned, that all acts [by Pallais] shall be binding on Blaauw.’ The client had given an ‘unqualified assurance’ to the bank that she would be bound by the actions of Pallais, the court found.

Risk created

The relationship between Blaauw and Pallais also went beyond that of a client and personal banker, and that’s why Blaauw was ‘very reluctant’ to cancel the mandates even when she heard that Pallais had stolen money from Blaauw’s daughter.

It wasn’t part of the employment duties of Pallais to act as an agent for a client. This meant that, given her knowledge of their personal relationship, when Blaauw signed the mandates, she ‘created a risk’ associated with such mandates. And she ‘enhanced the risk’ when she didn’t cancel the mandates in spite of knowing the personal and financial circumstances of Pallais.

When Pallais misappropriated the money, her unlawful conduct was ‘unconnected with her duties at the bank’ and she wasn’t acting ‘in her capacity “qua servant”.’ There was thus not a sufficiently close link between her misconduct and the purposes and business of the bank for her actions to qualify as those within the course and scope of her employment.

The judges therefore dismissed the appeal, with costs.

Exonerated

For an ordinary reader, however, there’s another question: should a bank allow its own employees to be mandated to operate the accounts of the bank’s customers? However much the bank may be exonerated by the law, an argument could surely be made that there’s something unseemly about such a practice, and that it exposes bank staff to unnecessary pressures and conflicts of interest.