In our newsletter of 17th July, 2020, we discussed the Operational Guidelines on Global Standing Instruction (“Guidelines”) recently issued by the Central Bank of Nigeria (“CBN”), its applicability, its triggering criteria and its potential impact on loan repayments by individual debtors.
The CBN issued the Guidelines for the purpose of ensuring that debtors contractually authorize creditor financial institutions to set-off any unpaid debts by applying proceeds from any or all accounts operated by the customers across all Participating Financial Institutions licensed by the CBN. In today’s newsletter, we discuss in brief detail, some legal considerations which may arise from the application of the Guidelines. Below are some of the key legal considerations which are worthy of note:
What is the effect of a Global Standing Instruction (“GSI”) on accounts operated in joint ownership?
The Guidelines identify various types of accounts in respect of which A GSI can be activated. Whilst the GSI is only applicable to accounts operated by individuals, the Guidelines specifically seek to operate against accounts operated by debtors in conjunction with third parties, notwithstanding that the third parties may not be parties or beneficiaries of contractual relationships between a debtor, who is a joint account owner and the creditor financial institution.
Since the relationship between banks and their customers are contractual- in this case, a debtor and a creditor, the application of the GSI appears to deviate from the general principle of privity of contract which states that a person who is not party to a contract cannot be bound by the terms of that contract.
Consequently, in the absence of any legal agreement or written consent by a joint account holder, it becomes apparent that a question of the legality of the GSI and its application on joint account ownership arises. It is therefore unclear how the GSI will operate in this regard without violation of rights of joint account holders by the creditor.
How can potential disputes arising from a GSI mandate be resolved?
It is not unusual that potential disputes will arise in a debtor-creditor relationship, especially in relation to issues affecting excess bank charges and unauthorised debits. In the Guidelines, reference is made to an Arbitrator being ”… a person appointed to resolve a dispute between two parties by arbitration…” While it is not clear in what instances an Arbitrator may be appointed, or by what means, the language of the Guidelines suggest that an arbitration agreement may exist between Participating Financial Institutions/Bank and debtors and an Arbitrator may be appointed where there is a dispute in connection with an alleged wrongful GSI activation. It is, however, uncertain whether Banks will be compelled to include arbitration clauses in their GSI mandates with customers. Assuming that this is the case, this potentially creates a restriction on the contractual right of parties to decide the forum for settling commercial disputes and ultimately, the rights of parties to the freedom of contract.
Are there any punitive measures against arbitrary activation of a GSI?
In addition to a fixed fine applicable to creditor banks for erroneous GSI activations, the Guidelines also specify that where an Arbitrator rules against a creditor bank for a disputed GSI transaction, the creditor bank shall also pay a fine of N10,000,000 (Ten Million Naira) or 10% of the disputed sum, whichever is greater.
This provision, it is believed will ensure that Participating Financial Institutions adhere strictly to the provisions of the Guidelines and that their powers to activate the GSI are not abused, thereby protecting the interest of debtors.
The ultimate purpose of the Guidelines is to increase creditor confidence by reducing non-performing loans. Prior to its proposed effective date (August 1, 2020), it is important that the highlighted legal issues be duly considered by the CBN to avoid a floodgate of disputes arising from the application of the Guidelines.