English Law Governs Issues Relating To ‘Banks AND Banking’ SC

Court Rejects Claim ‘Failure of Consideration’: Appellant Received Benefit of Loan Performance

Facts of the Case:

The Appellant applied for a housing loan from the Respondent bank, which was approved and used to purchase a property. The Appellant then mortgaged the property to the bank as security. After making a few repayments, the Appellant defaulted on the loan. The Appellant claimed that the bank, in its capacity as a lender, had assured him that the title to the property was clear.

The property’s transfer was handled by the same notary who worked for the bank, but a mistake by the notary led to a title defect. The Appellant argued that this error resulted in a failure of consideration, as the bank failed to provide good and valid title to the property.

Additionally, the Appellant sought damages, claiming the bank had a duty of care that it breached. The Commercial High Court ruled in favor of the bank, and the Appellant appealed, raising issues about the bank’s duty to provide a good title and the legal principles of consideration and duty of care.

“…..The Appellant seeks to make out that there was an obligation on the part of the Respondent to pass good and valid title to the demised premises to the Appellant which did not happen due to the negligence of the Respondent and the Notary appointed by the Respondent. It is on this basis that the Appellant claims that there has been a failure of consideration. This is factually misconceived. The Appellant applied for a housing loan. The Respondent agreed to lend a sum of Rs. 18,200,000/= to the Appellant on the undertaking that he will repay the loan in agreed instalments. Admittedly the loan was received by the Appellant. For failure of consideration to occur, the Appellant should have been deprived of the benefit of the performance of the promise made to him. On the contrary, the Appellant received the benefit of the performance of the promise made by the Respondent, namely the lending of money….” – Justice Janak De Silva

Duty of Care in Banking Transactions:

Assumption of Responsibility Key to Liability

In its decision, the Supreme Court delved into the principle of tortious liability, focusing on the assumption of responsibility rule. The Court explained that a bank can be held liable for negligent advice or actions if it can be demonstrated that the bank took on a clear responsibility to provide such advice.

“…The most difficult question in determining whether a bank has breached any duty of care in tort is to determine whether it has assumed responsibility. The “ultimate question” is whether, viewed objectively, the facts of the transaction show that the bank assumed a responsibility to advise on its suitability. [Fine Care Homes Ltd v. National Westminster Bank Plc and another [2020] EWHC 3233 (Ch) at paragraph 107]…”- Justice Janak De Silva

The Court carefully analyzed the evidence and found no indication in the loan agreement that the bank had taken on any responsibility for advising the Appellant about the property’s title. The Court referred to the Mortgage Bond signed by the Appellant, which confirmed his right and authority to mortgage the property. This bond included a warranty from the Appellant, asserting that the title to the property was valid and unchallenged.

The Court also noted that the Appellant had corresponded with the law firm representing both the bank and the Appellant, acknowledging that the law firm was providing the necessary legal advice concerning the property. Despite this, the Appellant claimed he was pressured by the bank into signing the documents. However, there was no concrete evidence to support this claim. The Appellant had the opportunity to seek independent legal advice but chose not to.

“…Taking the case of the Appellant at the highest, even if it is assumed that the notary was negligent in executing the deed of transfer by failing to properly investigate the title, the liability lies with the said notary and not the Respondent as rightly pointed out by the learned Judge of the Commercial High Court. The Appellant also seeks to rely on the Respondent obtaining all documentation relating to the title to the demised property to be consistent with its obligation to ensure that the Appellant gets good title, and would be able to afford good security for the loan to the bank. Nevertheless, the purpose of taking a collateral as security for the grant of a housing loan and the grant of the housing loan itself must be viewed from different perspectives, that of the Appellant and the Respondent…”– Justice Janak De Silva

English Law Governs Issues Relating To ‘Banks AND Banking’ SC

Banks Can Be Liable for Both Tortious and Contractual Violations Under English Law

The Supreme Court of Sri Lanka recently examined the applicability of English law in banks and banking transactions, determining that banks can be held liable for both tortious and contractual violations. In its judgment, Justice Janak de Silva ruled that such ‘banks and banking’ matters should be decided in accordance with English legal principles.

“….In granting of loans or carrying on any other banking facilities, there may be situations where a question on the liability of a bank may arise under contract as well as tort [See Trans Orbit Global Logistics (Pvt) Limited v. Peoples Bank [S.C. Appeal 92/2020, S.C.M. 13.12.2021)]…”

“…Moreover, Banks have been held liable for breach of contract as well as in tort [See Barclays Bank plc v. Quincecare Ltd. and another [(1992) 4 All ER 363 at 375-6]. Where such questions or issues arise both under contract as well as tort in relation to an action brought against a bank by its customer on a banking transaction, they are all questions or issues which arise with respect to the law of banks and banking, and the law to be administered shall be the same as would be administered in England in the like case, at the corresponding period. I am fortified to adopt this approach upon a consideration of the reasons for introducing English law to specified areas by the Civil Law Ordinance as adumbrated above….” – Justice Janak de Silva.

Transactions Where ‘Banks’ Not Within The Realm of ‘Banking’, Roman-Dutch Law Applies

The Supreme Court of also clarified in this case that not every transaction involving a bank qualifies as a “banking transaction” under the Civil Law Ordinance. The Court stated that there are many cases where a bank is a party to a transaction but the matter does not relate to banking, in such cases, Roman-Dutch law applies.

The application of Sections 2 and 3 of the Civil Law Ordinance was scrutinized by the Court in relation to banking transactions.

The Court further emphasized that under Section 3 of the Civil Law Ordinance, English law applies only to issues directly related to “the law of banks and banking.” The words “banks” and “banking” in Section 3 must be read conjunctively.

“….the two words banks and banking in Section 3 of the Civil Law Ordinance must be read conjunctively. This view is supported by the dicta of Weeramantry, J. De Costa v. Bank of Ceylon (72 N.L.R. 457 at 509) and Wijayatilake, J. in De Costa v. Bank of Ceylon (supra. at 547).

Not every question or issue where a Bank is a party will necessarily require the application of English law. Similarly, not every question or issue which involves banking necessarily makes English law the applicable law. It must be a question or issue with respect to the law of banks and banking.

To that extent, I am in respectful agreement with the decision in Indian Bank v. Acuity Stock Brokers (Pvt) Limited [(2011) 2 Sri.L.R. 149] where it was held that there are many transactions, where the Banks are parties, which do not come within the realm of Banking transactions and regarding which the Roman-Dutch law applies….”- Justice Janak De Silva

Definition of “Banking”

“….In Tennant v. Union Bank of Canada (1894 AC 31 at 46)] it was held that banking is an expression wide enough to embrace every transaction coming within the legitimate business of a banker. In Nimalaratne Perera v. People’s Bank [(2005) 2 Sri.L.R. 67 at 70] Amaratunga, J. adopted this wider exposition and held that:

“By Ordinance No. 22 of 1866, English Law relating to Banks and banking was introduced into Ceylon and in all questions which arise in Ceylon with respect of the law of banks and banking, the law to be administered is the same as would be administered in England in the like case. The expression ‘banking’ embraces every transaction coming within the legitimate business of a banker [Tennant v. Union Bank of Canada (1894 AC 31)]. Maintaining a current account between a bank and a customer and granting a loan or other banking facilities are legitimate businesses relating to banking and accordingly the law applicable is the English Law.”(emphasis added)

I am in respectful agreement with this wider formulation of banking given the legislative history of Section 3 of the Civil Law Ordinance adumbrated earlier…..”

– Justice Janak De Silva

Rights of Parties Must be Assessed:

According to Law Prevailing at the Time of Filing the Case

The Supreme Court also in this case clarified the long-established common law rule, which dictates that the rights of the parties must be assessed as at the date of the institution of the action. This clarification came in the context of the application of English law under the Civil Law Ordinance. The Court emphasized that when English law is invoked, it is the version of English law that prevailed at the time the case was filed—not at a later stage—that must be applied.

“…In my view, the words “at the corresponding period” appearing in Section 3 of the Civil Law Ordinance is insufficient to displace the common law rule that the rights of the parties must be determined as at the date of the institution of the action. Accordingly, where English law is applicable by virtue of Section 3 of the Civil Law Ordinance, it is the English law prevailing at the date of the institution of the action that must be applied to determine all questions or issues that may have to be decided with respect to the law of banks and banking. However, I hasten to add that the position in English law relevant to the questions or issues that arise for determination does not differ depending on the date of the institution of the action and/or a date after the answer has been filed…” – Justice Janak De Silva

English Law Applicability in Banking Law

The List of Important Cases:

Section 2 of Ordinance No. 5 of 1852
Section 3 of Ordinance No. 22 of 1866
Ceylon Government Gazette No. 7,539 dated July 30, 1926
Section 97(3) of Bills of Exchange Ordinance No. 25 of 1927 (Bills of Exchange Ordinance)
Section 98 (2) of the Bills of Exchange Ordinance
People’s Bank v. Yashoda Holdings (Pvt) Ltd. (2009 BLR 167),
Wright and Three Others v. People’s Bank (1985) 2 Sri.L.R. 292 at 295
The Mahakande Housing Company Ltd. v. Duhilamomal and Others (1981) 2 Sri.L.R. 232,
People’s Bank v. Yashoda Holdings (Pvt) Ltd. (2009 BLR 167)
Usman v. Rahim (32 N.L.R. 259)
Mudalihamy v. Punchi Banda (15 N.L.R. 350),
The Government of The United States of America v. The Ship “Valiant Enterprise” (63 N.L.R. 337 at 343)]

Indian Bank v. Acuity Stock Brokers (Pvt) Limited [(2011) 2 Sri.L.R. 149 at pages 155- 6)
Tennant v. Union Bank of Canada (1894 AC 31 at 46)]
Nimalaratne Perera v. People’s Bank [(2005) 2 Sri.L.R. 67 at 70]
De Costa v. Bank of Ceylon (72 N.L.R. 457 at 509
Indian Bank v. Acuity Stock Brokers (Pvt) Limited [(2011) 2 Sri.L.R. 149]
Hong Kong and Shanghai Bank v. Krishnapillai (33 N.L.R. 249 at 253)
Mitchell v. Fernando (46 N.L.R. 265 at 269)
Bank of Ceylon v. Kulatilleke (59 N.L.R. 188)
Daniel Silva v. Johanis Appuhamy (67 N.L.R. 457)
De Costa v. Bank of Ceylon (72 N.L.R. 457)
Henderson v. Merrett Syndicates Ltd. (1995) 2 AC 145
Trans Orbit Global Logistics (Pvt) Limited v. Peoples Bank [S.C. Appeal 92/2020, S.C.M. 13.12.2021)].
Chitty on Contracts [28th ed., (Vol. 1)(1999), pages 38 and 39]
Jayamohan v. Hatton National Bank Ltd. [(2001) 3 Sri.L.R. 392 at 404],