Banking Law

• Citation: (2002) 3 SAL Ann Rev 45
• Published date: 01 December 2002
• Date: 01 December 2002
• Author: POH CHU CHAI LLB (Sing), LLM, LLD (Lond), Advocate & Solicitor (Singapore)

Introduction

4.1 The review of the cases in this area spans over a number of topics including banker and customer, guarantees, performance bonds and letters of credit.

Banker and customer

4.2 A bank acts under the mandate of a customer. Such a mandate is normally given to a bank at the time an account is opened for a customer. The mandate usually identifies the person who is authorised to operate the account. Where a customer is an entity other than an individual, for instance, a partnership or an incorporated company, the mandate to the bank may be changed from time to time in the course of the relationship whenever there is a change in the members of the firm or the composition of the board of directors of the company. Such changes in a firm or company normally mean that the mandate to the bank will similarly have to be changed. Problems may arise when a change in a customer”s mandate is not properly authorised by the firm or company. What is a bank”s own legal position if it acts on the new mandate without having any actual knowledge of the irregularity in the authorisation? Such an issue arose for the consideration of the Singapore High Court in Bok Chee Seng Construction Pte Ltd v Development Bank of Singapore Ltd[2002] 2 SLR 61. Bok Chee Seng Construction Pte Ltd (“BCPL”) was a customer of the Development Bank of Singapore Ltd (“DBS”). The mandate given to the bank at the opening of the account provided that the account was to be operated jointly by the two directors of the company, a Mr Peh Chee Chuan and a Mr Phua Ah Pok. In July 1997, Mr Phua passed a resolution to accept the resignation of the secretary and to appoint a Mr Chua Thong Jiang Andrew as the new secretary of the company. Mr Phua also passed a further resolution to change the mandate to the bank to require only his sole signature to operate the bank account. In December 1998, Mr Peh obtained a court order to declare the resolutions passed by Mr Phua null and void. The company then sought to recover a sum of $186,938.38 from the bank as having been paid by the bank without proper mandate. The bank maintained that it had made the payments in accordance with the company”s new mandate and that the court order did not have any retrospective effect to render the actions of the bank in honouring the cheques, prior to the order, wrongful or unauthorised. In the District Court, it was decided, inter alia, that

even though the new mandate had been declared null and void by the court order, the order did not have any retrospective effect on the bank. The district judge said:

“Even though the court order has retrospective effect, I agreed with counsel for DBS that it was meant primarily to determine the rights of the litigants … Essentially, the court order meant that there was no such resolution of 23 July 1997 at all, that Mr Phua was not authorised to be the sole signatory of the account, restoring Mr Peh”s position as a signatory of the account pursuant to the original mandate. However, it did not follow that a third party would be bound by the court order in the very same way, and to the same extent, as the parties to the action. Certainly, it was not a question before the court, and the court order did not decide the impact of the resolutions vis-à-vis third parties relying on them, such as DBS, while the resolutions were purportedly in force. Further, the court order also did not decide how far, and to what extent, BCS would be bound by the resolutions, while being represented to third parties as proper resolutions of BCS.”

4.3 BCPL appealed against the District Court”s decision. In allowing the appeal, Judith Prakash J decided, inter alia, that the bank”s pleadings did not permit the bank to raise the issue decided by the District Court. Prakash J said at [27] and [39]:

“The Defendants further aver that the service of the Order of Court dated 11 December 1998 on them by Messrs Tan Cheng Yew & Partners by their letter of 5 January 1999 does not retrospectively or otherwise render the acts of the Defendants in honouring the said cheques issued in the aforesaid period unauthorised and/or in breach of the relevant mandate as aforesaid. … I allowed the appeal by BCPL on the basis that the only defence pleaded by DBS was that they acted with authority in that they relied on a valid mandate. Once the court below had held, and rightly so, that the effect of the court order was that the new mandate was null and void from the start, the defence of DBS had to fail since the consequence of the new mandate being void was that it was incapable of conferring any authority on DBS. DBS had therefore acted without authority in paying out on cheques signed singly by Mr Phua.”

4.4 The issue raised in this case concerning a mandate given to a bank which is subsequently nullified for substantive or procedural defect is a matter of significant commercial interest to both the banking community and the public. It is indeed a pity that the High Court felt that it could not take up the point decided by the District Court which very sensibly held that the court order to nullify the mandate did not have any retrospective effect as far as the bank was concerned until the bank had been duly notified of the order. The pleadings of the bank clearly raised this particular issue and this is evident from both the judgments of the District Court and the High Court.

4.5 The decision of the Court of Appeal in Banque Nationale de Paris v Tan Nancy[2002] 1 SLR 29 was considered in (2001) 2 SAL Ann Rev 36 at para 4.20. The Court of Appeal reversed the decision of the High Court in

Banque Nationale de Paris v Hew Keong Chan Gary...