Further issues in banking dispute resolution—22

By Paul Kibuuka

In this twenty-second part of our 30-part article series on secured credit transactions, corporate recovery and insolvency and banking litigation, we continue with last week’s discussion of the critical issues in banking dispute resolution.

Banks and financial institutions face pending or potential litigation risks from many individuals and businesses that they deal directly with and even from third parties. However, prior to commencing any court action, it is prudent to consider the additional issues discussed below.

The schedule to the Law of Limitation Act, Cap 89 provides time limits for bringing claims in court. For example, the period of limitation for a suit founded on tort is three years. The time limit for a suit to redeem land in possession of mortgagee—the bank or lending institution—is 12 years.

A would-be claimant has to also watch out for contractually imposed time periods that are common in arbitration clauses. A claimant awaiting outcome from the Bank of Tanzania (BoT) Complaint Resolution Desk or the Fair Competition Commission (FCC) may consider executing standstill agreements with the lending bank to preserve the status quo, or filing court proceedings “protectively” to prevent a time bar of his claim.

Under the Privity of contract doctrine (which means stranger to a contract), a claimant must be in a position to prove its right to sue the bank. Therefore, a bank customer has to prove contract terms under which a credit facility has been or was promised to be issued.

However, even though not any Tom, Dick or Harry can sue a bank, a third party beneficiary may be able to sue on a transaction entered into under contracts relating to trust, transfer of landed property, or the law of agency, all of which circumvent the privity of contract doctrine.

Standard documentation issued by banks typically contains liability exclusions for negligence and other claims. Exclusion clauses like “the bank has not rendered advice, opinion or recommendation” are often the subject of extensive debate.

It is very challenging, but not impossible, to navigate them. Besides having to satisfy the reasonableness test, such clauses cannot exclude statutory liability under the Banking and Financial Institutions Act, 2006 and the related legislation.

The duty of care is one of the key elements of a negligence claim. It is, for purposes of this article, the legal responsibility of the bank to avoid any acts or omissions that could reasonably be foreseen to cause harm to its customers. The judge or magistrate may have to make a determination as to whether the bank owed the claimant a duty to take reasonable care in the circumstances in which the claimant claims the bank was negligent.

A key step is to establish the relationship between the bank and its customer. Did the bank merely give the claimant customer information and not advice to invest in or buy a certain financial product or service? That distinction is very critical.

Once a duty of care is established, it is important to demonstrate that the bank is in breach of its duty of care. Statutory duties imposed on banks are germane to the standard of care in respect of advice given by the bank. Breach is not enough. A claimant must contend with the tough challenge of showing that he relied on the bank’s advice and that if it was not for the advice, he would have acted differently.

Foreseeable loss is recoverable where negligent advice has been rendered; however, how do you convince a court that the loss arising from the bank’s negligent advice was foreseeable? For example, in assessing loss, was it predictable that a slump in the real estate market would occur?

Granted, any financial product or service may expose the bank to multiple risks. However, it can be a significant challenge for a claimant to discharge the burden of establishing why the product or service should not have been sold and showing why information given by the bank was untrue.

This requires hiring expert witnesses yet, in reality, funding the cost of litigation is still an issue for many individuals and businesses. It is perhaps helpful to begin considering the role of litigation financing in the Tanzanian legal industry.

Ultimately, it is hoped that the additional issues discussed above will enable any potential claimant to see the importance of seeking proper and timely advice before filing a claim against a bank or financial institution.