Law, Politics and Finance
Law, politics and finance have had explosive encounters in Zimbabwe over the recent past. The currency policy has been the major point of clashes. The outcome is, more often than not, a source of misery for ordinary citizens and entities doing business in Zimbabwe. Unsurprisingly, the Zimbabwe dollar has been one of the most prominent casualties of the country’s long-running and multifaceted crisis. After becoming moribund in 2009, it has suffered a tempestuous existence since its premature resurrection in 2019.
Even those who only have a remote interest in the Zimbabwean story will be familiar with the country’s record hyperinflation, which peaked at 79.6 billion per cent per month in November 2008. By the time the government intervened to formally introduce a multi-currency system in early 2009, the market had long ceased to use the Zimbabwe dollar as the primary medium of exchange, preferring the US dollar and the South African Rand. Money depends on the trust that it commands in the market. Market participants must believe in it and by 2008, the market had lost trust in the Zimbabwe dollar.
Before the demise of the Zimbabwe dollar, the Reserve Bank of Zimbabwe (RBZ), the central bank, had tried various fire-fighting methods, including repeatedly slashing the ever-growing list of zeroes from the currency and keeping the printing machine in motion. These efforts were to no avail. As soon the central bank slashed the zeroes, they returned with a vengeance, prompting another round of emergency measures which were equally useless.
The Inclusive Government between 2009 and 2013 brought a period of relative calm on the currency front. The US dollar was the currency of choice in the multi-currency system. Although the government was not getting direct financial support, a consortium of donors poured resources through non-governmental channels. Some international banks got soft loans from their parent companies. It was not sustainable in the long run because the country was not producing enough, which meant it was using more foreign currency than it was generating.
However, the situation worsened soon after the highly controversial 2013 elections. There was a flight of capital in the weeks following the controversial outcome which was not accepted by the opposition and by the international community. Without the previous partnership of the MDC, the government lost the goodwill it had gained over the past 4 years and the wheels began to come off once again.
Soon, the country was facing serious cash shortages and long queues formed at banks, with people spending cold nights waiting to withdraw their savings or paycheques. This led to a change in the currency policy, first with the introduction of bond coins in 2014, ostensibly to ease the problem of small change and followed two years later by bond notes, presented as an “export incentive” and a measure to solve the liquidity problem. This new surrogate currency operated at par value with the United States dollar.
Citizens protested against these measures, arguing that they were unsustainable and would lead to losses for bank customers and pensioners. The Governor of the RBZ vouched for the surrogate currency, claiming it was backed by millions of a US dollar facility from the Cairo-based AfreximBank. Details of these facilities have not been disclosed, although the Constitution compels their disclosure to and approval by Parliament.
In October 2018, February 2019 and June 2019, there were further changes to the currency policy resulting in a return to the Zimbabwe dollar and the banning of the multi-currency system. In the past two weeks, the government has introduced two notes of the resurrected Zimbabwe dollar, and its value on the parallel market has plummeted. With inflation in triple-digit figures, Zimbabweans live in constant fear of a return to the dark days of 2008.
Winners and losers
There have been winners and losers in these phases of Zimbabwe’s currency policy. Most of the winners are those that are connected to the politically powerful within the state. The term that is usually used to describe these persons as Politically Exposed Persons (PEPs). These PEPs have access to the cheap foreign currency from the RBZ, which they acquire under the auspices of importers of essential commodities such as fuel, grain and other raw materials. Some of this foreign currency is traded on the parallel market where it fetches enormous profits.
The losers are ordinary people and businesses whose deposits, wages and pensions have lost value overnight as a result of abrupt policy changes. After years of hard work, pensioners are getting a pittance. The majority of those who have lost due to currency policy changes have done nothing about it either due to lack of knowledge or lack of resources to mount any legal challenge. The sheer complexity of the legal process and the might of banks and the state are daunting for many ordinary people, even though the law allows for class actions. A few, however, have been brave enough to take legal action to recover their losses. The majority are companies or individuals who have resources to fight the state and banks. Impoverished pensioners do not have such facilities.
This litigation has resulted in a growing body of currency-related jurisprudence in Zimbabwean courts. Litigation has been either between customers and banks or banks and the central bank. Judges have therefore intervened as arbiters in these legal disputes. This article examines currency-related jurisprudence that has emerged in two phases of litigation – cases relating to events before 2009 and cases relating to concerns over the introduction of bond notes and the Zimbabwe dollar. It also suggests potential litigation to challenge the current policies.
The October 2007 Heist
In October 2007, the RBZ issued a directive to banks in terms of section 35(1) of the Exchange Control Regulations (SI 109/1996). The legal and practical effect of the directive was that all funds held in customers’ foreign currency accounts at banks were transferred to the RBZ.
Explaining the rationale of the directive, the RBZ said it was designed to “boost exporter viability and improve the economy’s accountability for total export and other foreign currency receipts, as well as ensuring judicious allocation of the scarce foreign currency resources”.
It added that “it has become necessary that the Reserve Bank introduces a new frame-work where we pool our resources together without disadvantaging the generators of that foreign currency.” The directive was preceded by a Monetary Policy Statement which laid the ground for what was effectively the expropriation of private property.
While the directive was presented as designed to protect the interests of customers, the practical effect was to deprive them of access to their funds which were given to a government which was desperate for foreign currency. The government was broke. It did not have access to foreign currency. It saw the foreign currency in FCA accounts as an easy resource to expropriate. This act of expropriation resulted in conflicts between banks and their customers and between banks and the RBZ. This part discusses three cases of these conflicts. They are best read like short stories and I present them in that format.
Standard Chartered Bank Zimbabwe Limited v China Shougang International (2013) (Supreme Court)
China Shougang International (CSI), a Chinese company was contracted to refurbish blast furnaces at the now-defunct steelmaker, Ziscosteel in Redcliff. As of 9 October 2007, it had an aggregate amount of US$47,740 in two FCA accounts at Standard Chartered Bank (Standard Chartered). Standard Chartered transferred this amount to the RBZ in terms of the RBZ directive SI 109/1996.
When CSI demanded payment from Standard Chartered, the bank did not pay claiming it had transferred the funds to the RBZ in compliance with the directive. The bank argued that the directive was a supervening impossibility, which made it impossible for it to perform its contractual obligations to the customer under the traditional banker/customer relationship. This prompted the lawsuit by CSI against Standard Chartered.
Was Standard Chartered liable to its customer?
The main issue for the court was whether the bank was liable to the customer for the funds that were transferred to the RBZ under the directive. The court held that the bank was liable based on the banker/customer relationship. “The legal relationship between a bank and its customer whose account is in credit with it is that of debtor and creditor,” the court stated. When a customer deposits their money in a bank account, it is a loan to the bank and the bank is liable to pay it back on demand.
The Court reasoned that the RBZ directive did not extinguish the bank‘s contractual obligation to the respondent. When a customer deposits money in a bank account, the money becomes the bank’s property, which it uses as it pleases and is of no concern to the customer. However, the bank must pay an equivalent amount of the customer’s money upon demand.
Was there a supervening impossibility?
As to the argument that the RBZ directive had made it impossible to meet its contractual obligations, the Court reasoned that the bank had not proved the existence of a supervening impossibility. “The impossibility must be proved, that is, it must be clear from the evidence that performance is impossible, not merely undesirable or uneconomical,” wrote the court. This put the bank between a rock and a hard place. On the one hand, it had no choice but to comply with the directive and transfer the funds to the RBZ, but on the other hand, it had to make funds available to the customer upon demand.
The court reasoned that there was no obligation to comply because the directive was illegal since the directive lacked the necessary statutory authority. In the court’s view, the bank had the option to challenge the directive. “In any event, it would appear that where a ministerial directive is given without statutory authority, obedience thereto will not qualify as a vis major or casus fortuitus,” the court stated. This view places an obligation on the bank to review and challenge the legality of a directive before complying.
The correctness of this view is doubtful given that there is, at law, a presumption of legality of all legal instruments and there is a duty to comply until the law has been set aside by a court of law. This has been confirmed several times by the courts and most recently in the case of Econet Wireless (Pvt) Ltd v Minister of Labour, Public Service, Labour and Social Welfare  ZWSC 31. In that case, the applicant was barred from approaching the courts because it had dirty hands, having refused to comply with the law. Justice Bhunu who delivered the judgment stated,
“… all questioned laws and administrative acts enjoy a presumption of validity until declared otherwise by a competent court. Until the declaration of nullity, they remain lawful and binding, bidding obedience of all subjects of the law”.
The same position had been taken by the court in a 2004 case, Associated Newspapers of Zimbabwe (Pvt) Ltd v Minister of State for Information and Publicity and Others 2004 (1) ZLR 538 (S) in which publishers of the Daily News were barred from challenging the constitutionality of the Access to Information and Protection of Privacy Act. The court said they could not approach it with dirty hands. Therefore, in this case, the court could not have been right to say Standard Chartered had the option of challenging the directive before compliance. That option simply did not exist.
The significance of this case is that a bank is liable to its customer under their banker/customer relationship even in the face of a directive. It places an onerous duty on the bank. When a bank transfers money under a state directive, it is deemed to have done so at its own risk. Based on this decision, banks carry the greater risk of the expropriatory acts of the government through its currency policies.
Trojan Nickel Mine Limited v Reserve Bank of Zimbabwe (2013) (High Court)
Trojan Nickel Mine Limited, is a nickel mining company in Bindura. In October 2007, it had approximately US$1 million in its FCA with BancABC bank. Acting in compliance with the 2007 directive (SI109/1996), the bank transferred the funds to the RBZ. The circumstances were similar to what had happened between China Shougang, Standard Chartered and the RBZ.
Inducement to breach a contract
However, unlike China Shougang, which sued its bank, Trojan Mine went after the RBZ to recover its money, arguing that the central bank had misappropriated its funds. The judge ruled in favour of Trojan Mine reasoning that the RBZ had intentionally induced the bank to breach its contract with its customer. “In our law, it is generally accepted … that an action exists for intentional inducement of a breach of contract,” wrote Justice Mathonsi (as he then was).
The RBZ had interfered in the contract between the bank and its customer, causing the bank to breach its obligations, causing loss to the customer. For these reasons the judge concluded: “To my mind, the defendant intentionally induced Banc ABC to breach its contract with the plaintiff.”
The judge also held that the RBZ was liable on an alternative basis of unjust enrichment. He wrote, “Even if I am wrong in that conclusion, the defendant cannot escape liability on the basis of unjust enrichment. It is now accepted that the general enrichment action is recognised in our law.” The view was that the RBZ had been unjustly enriched by the transfer of funds from the FCA and should, therefore, compensate the customer.
Judicial criticism of the RBZ
As regards the conduct of the RBZ, Justice Mathonsi was quite scathing in his assessment,
“It is common cause that after appropriating the plaintiff’s money, the defendant did not return that money and has not even begun to give any indication as to when, if at all, it will repay the money. It has contented itself with hiding behind the non-existence of a contractual relationship between it and the plaintiff. The proverbial hiding behind a finger. Quite how and why the defendant could come to the conclusion that it can just acquire the money and refuse to repay it to the owner is one of the greatest unfathomable mysteries of this world.”
The judge took a rights-based approach in his assessment of the conduct of the RBZ. He saw the compulsory transfer of funds in foreign currency accounts as a form of unlawful expropriation of private property. He wrote, “There can be no doubt that the right to private property is one of the sacrosanct rights protected by law. There is little doubt that the plaintiff should be protected against the arbitrary deprivation of its equity deposited at Banc ABC, which institution was powerless against the defendant’s directive and is now unable to perform its contractual obligations, namely paying the money to the plaintiff on demand.”
The judge’s view was that the money in a customer’s account is private property which must be protected under rights provided for under the Constitution. Any expropriation of such property must be duly compensated.
It is interesting to note that unlike the Supreme Court in the Standard Chartered case, the judge, in this case, did not think the bank was obliged to challenge the legality of the directive. He saw the bank as “powerless against the [RBZ’s] directive”. This is a sounder position both at law and in practice. As has been argued concerning the Standard Chartered case, the bank has no choice to comply since the directive enjoys a presumption of legality.
Courts must protect deposits
This case is also important in that it shows the role of the courts when dealing with policy-related matters. While acknowledging that the RBZ has control of the policy domain, the judge made it clear that policies must respect individual rights and private contracts: “As a matter of policy, the security of bank deposits should forever be protected by our courts. Indeed it would be an affront to the rights of depositors if ownership of their property stored with banks and the culture of banking money instead of keeping it under a pillow were to be rendered a serious economic hazard and a ruinous activity. Our law, which protects ownership of property, is founded on a rock of wisdom.”
The judge was also clear that the courts had an important role to protect the property of bank customers. He went further and gave his opinion on the economic effects of expropriation of customers’ funds, arguing that it was one of the key factors causing underperformance of businesses. “For that reason, the courts should be clear, consistent and firm in enforcing principles protecting deposits. Needless to say that the expropriation of export proceeds prior to dollarization which has not been compensated is one of the major factors inducing weak balance sheets of businesses resulting in poor economic performance,” wrote Justice Mathonsi.
MBCA Bank Ltd. v Reserve Bank of Zimbabwe and Portland Holdings Ltd (2013) (High Court)
In the third case, cement-manufacturer, Portland Holdings Limited, had sued MBCA for payment of USD 62 223,94 and ZAR 6 764 987.94 which were held in its accounts and had been transferred to the RBZ in terms of the directive (SI 109/1996). MBCA had in turn applied to the court to bring the RBZ into the proceedings, arguing that the RBZ had instigated its alleged breach of contract to its customer. The RBZ was opposing the application arguing that it had no relationship with the customer. Thus, although the RBZ was the beneficiary of the funds transferred from the customer’s account, it was saying it had nothing to do with the matter.
The judge ruled that it was proper to bring the RBZ into the proceedings. It reasoned that even though there was no direct relationship between the RBZ and the customer, it was the RBZ which had benefited from the funds and the MBCA was “entitled to demand some form of indemnity from RBZ, if for nothing, but that it was RBZ which induced it to breach its contract with Portland and also that RBZ wrongfully interfered with contractual rights”. This was the same judge who had ruled in the Trojan Nickel Mine case, holding the RBZ liable to the customer.
Justice Mathonsi reasoned that if the RBZ were not brought into the proceedings, MBCA would have to pay its customer “money which in all fairness, RBZ should pay as it appropriated it.” The judge was clear that the RBZ was the author of the problem and that it should carry the burden to compensate the customer should liability be found. As he stated, “Understandably, RBZ would like to stay as far away from the suit as possible but surely but it is the source of the problem and in my view should participate in the determination of the matter.”
The judge stated that if the precedent of the Standard Chartered case were followed, MBCA would be held liable to pay Portland Holdings, but MBCA would go on to sue the RBZ. As that would be a similar but separate matter, it would cause unnecessary inconvenience to the bank and the court. The appropriate remedy was to allow the RBZ to be brought into the proceedings so that the matters could be resolved at once. This was a victory for the bank which again demonstrated that the court was predisposed to hold the RBZ accountable for its actions.
Two routes: the bank or the central bank
These three cases demonstrate three routes of accountability arising from the government’s currency policy leading to expropriation of funds in customers’ accounts. The Standard Chartered case shows that a customer can take action against their bank. The Trojan Mine case shows that a customer can proceed directly against the RBZ on the basis that the central bank induced a breach of contract or that it has been unjustly enriched. Finally, even when a customer sues their bank, the bank can go after the RBZ for indemnity. The latter route can be taken by joining the RBZ into the proceedings brought by the customer.
The ultimate result is that the central bank will generally be held accountable to compensate a customer, either directly or indirectly through the bank. If this applies to bank customers, the same principle may arguably be extended to parties in other contractual relationships who suffer losses on account of compliance with the central bank’s currency-related directive.
This includes pensioners who have lost immensely as a result of arbitrary currency policy changes. They have vested rights which have been impacted negatively by the currency policies, leaving them impecunious. The only problem is that those who lost as a result of old currency policy changes will struggle because of the defence of prescription. Nevertheless, the next part of this BSR which follows tomorrow will consider the fresh set of cases which have arisen from the bond notes’ crisis.
Return for Part 2 of the BSR which deals with cases arising after the introduction of bond notes and suggestions of what citizens can do to protect themselves in light of the government’s erratic currency policies.