High Court: Banks Should Prevent Withdrawals of Erroneously Deposited Funds in Customer Accounts

Brief Facts of the Case
On 15 August 2022 a lady by the name Alice, intending to make a payment to someone else, erroneously credited KES. 50,600 via Mpesa to another person who happened to be customer of Kingdom Bank. Upon realisation of the error, Alice informed Safaricom requesting a reversal of the transaction. A day after the transaction, Safaricom informed Alice that it had referred the reversal request to Kingdom Bank for resolution and advised her to follow up with the Bank. Based on the evidence provided by the Bank, the amount erroneously credited was withdrawn by its account holder on the same day the amount was received into the account. Consequently, the bank claimed it was not liable to Alice. Alice then successfully filed a claim against the Bank demanding the return of the money in the Small Claims Court. Dissatisfied with the decision, the Bank appealed to the High Court.

Decision of the High Court
The court held that the Bank was accountable for its failure to act promptly and in good faith to rectify the error after being alerted by Alice. Despite Alice’s mistake, the Court held that the Bank having been alerted of the error, had a duty to ensure that it did not facilitate fraudulent transactions and should have taken necessary steps to recover the funds.

The court, despite there being no legal relationship between Alice and the Bank, stated that, “[the process of electronic money transfer] is undertaken on the basis that the money transacted will reach its intended destination and vice versa, that is, that the same would be reversed to its origin in case of an error. In the normal cause of business, the occurrence of erroneous transactions is inevitable and the question is whether the bank acted in good faith with respect to this transaction.”

The court upheld the decision of the trial court that, “money paid by mistake is repayable’’ and that “the bank was under a duty to demonstrate that it took the necessary steps in recalling the money. The Bank’s act of filing statements to show how the money was withdrawn was not sufficient to discharge this duty. The court further stated, “in this case, the customer fraudulently withdrew the money that did not belong to it.” Therefore, the Bank “had a duty to ensure that it did not aid in fraud and it is not enough [for the Bank] to state that the account did not have sufficient funds.”

How Should Banks Protect Themselves in Light of this Decision
The ruling in this case sets an important precedent on the extent of a bank’s duty to take necessary steps to recall money erroneously credited to a customer’s account, even though the mistake for the credit lies with a third-party who is not a customer of the bank. Banks should therefore act promptly to rectify such errors.

Banks can protect themselves by implementing robust procedures for handling erroneous transactions, including prompt investigation and action upon notification of such errors. By ensuring transparency in their processes and demonstrating efforts to aid in the recovery of funds banks can show that they acted in line with their duty, and therefore, avoid liability.

It is necessary for banks to demonstrate that they acted in good faith in such circumstances. In this case, the court said that this had not been demonstrated because all the bank did was to, “file statements to show how the transaction was undertaken or how the money was withdrawn. There was nothing to show that the bank called for the money from its customer. No evidence of its intention to aid the recovery of the money.”

In our view, this case, potentially opens a Pandora’s box of legal complexities. For instance, parties with malicious intentions may exploit banks by orchestrating erroneous money transfers, pocketing the funds and then subsequently reclaiming the same funds from the bank. However, this possibility was not considered by the court.

Should you have any questions regarding the information in this legal alert, please do not hesitate to contact Sonal Tejpar or Shellomith Irungu.

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Contributors 

1. James Mungai – Senior Associate
2. Julius Ochieng – Trainee Lawyer
3. Bettina Okinyi – Trainee Lawyer