Is a third party liable to a bank under a domiciliation arrangement?

Julius Berger (Nig.) Plc & Anor v. Toki Rainbow Community Bank Ltd. [2019] 5 NWLR (Pt. 1665) 219 at 240, paras. F-G, per Augie, JSC:

“So, a domiciliation payment is an arrangement between the bank and a borrower to domicile a payment due to the borrower from a third-party, with the bank. This arrangement does not release the borrower from his primary obligation to pay back the loan to the bank as at when due; and it does not make the third-party, a party to the loan agreement, such that the bank can sue the third-party on the loan agreement, when things do not work out as planned.”


The scenario which played out in the above case is that a company Managing Director (one Mr. Peter Morkah) applied to the Respondent (Toki Rainbow Community Bank) for a loan to enable it execute a contract awarded to his company (Pit-a-Pat Int’l Nig. Ltd.) by the 1st Appellant (Julius Berger). The Bank agreed to advance the loan on the condition that Julius Berger would domicile the payments due to Pit-a-Pat into the Bank. Julius Berger did not specifically agree to this arrangement.

It happened that Pit-a-Pat failed to repay the loan to the Bank. Consequently, the Bank sued the company and Julius Berger. The Bank contended that Pit-a-Pat assigned the benefit of the contract (i.e., the payment due to the company) between the company and Julius Berger. In other words, that the Bank has now stepped into the shoes of Pi-a-Pat, with the rights to receive payment directly from Julius Berger. According to the Bank, it was wrongful for Julius Berger, through its Contract Manager (Mr. Peter Nwachukwu – 2nd Appellant), to pay the company directly through its Managing Director.  On its part, Julius Berger argued that the arrangement between the Bank and Pit-a-Pat was a mere domiciliation of payment and not an assignment of contract benefits, and not being a party to the arrangement, Julius Berger was not bound by it.

The Supreme Court agreed with Julius Berger. Augie, JSC made the above quoted statement of the law relying on the position as stated by Oguntade, JCA (as he then was) in Peter Tiwell (Nig.) Ltd. v. Inland Bank [1997] 3 NWLR (Pt. 494) 408 at 419:

“A bank, who insists and accepts a domiciliation arrangement, only thereby reduces its risk and has an assurance that the third party, who has agreed to domicile the payment due to a customer with the customer’s bank will not pay the money directly to the customer. A domiciliation arrangement does not specify when the payment will be made and the arrangement does not release the debtor/customer from its primary obligation to pay back the loan to the bank at the agreed time. It does not make the person agreeing to domicile the payment with the borrower’s bank a party to the loan agreement such that the bank can sue him on the agreement, as he would under a contract of guarantee.”

The loan contract that the Bank signed with Pit-a-Pat specifically provides the security  for the loan was “domiciliation from contract proceeds from Julius Berger (Nig.) Plc.” Also, the initial Statement of Claim filed on behalf of the Bank averred that it was domiciliation. Interestingly, the Bank amended its Statement of Claim and replaced “domiciliation” with “assignment”. The Supreme Court was of the view that although the original Statement of Claim cannot form the basis of the Judgment, it however still exists. The apex Court perused both the original and the Amended Statement of Claim and observed thus, per Augie, JSC:

“What can I say? As I see it, if the Respondent (i.e., the Bank) had to climb a ladder from the day it requested for the loan until it got to the trial Court, every rung it steps on would carry a sign that says “domiciliation”. Yet, after it got to the Court, the Respondent jumped off the ladder because, in its view, it was “assignment’ that got it to the Court. Obviously, without the ladder to stand on, it will fall to the ground.”

The Bank also contended that it was a banker and not a lawyer that drafted the relevant contract document mentioning “domiciliation” and that the parties were “all laymen or represented by laymen.” The Supreme Court was not persuaded. Yes, the courts are always inclined to look at the totality of the circumstances to determine the true nature of a transaction, without sticking to particular words used. See Street v. Mountford [1985] AC 809. However, it was difficult to accept that what transpired was an assignment rather than domiciliation, in view of all the available documents and the entire circumstances of the instant case.

Julius Berger had argued that it was not a party to the domiciliation arrangement and no tripartite domiciliation arrangement existed amongst the Bank, Pi-a-Pat and Julius Berger in that regard. The question then is this, could it have made any difference if such tripartite arrangement had existed? Peter-Odili, JSC answered:

“Again to be said is that even if there was such a domiciliation’s agreement it does not make the person agreeing to domicile payment with the borrower’s bank a party to the loan agreement such that the bank can sue him on the agreement as he would under a contract of guarantee.”

What this means is that Pit-a-Pat remains solely responsible for the loan it obtained from the Bank and Julius Berger cannot be held liable for same, either as a primary obligor or as a secondary obligor in the position of a guarantor.

Stephen Azubuike
Author: Stephen Azubuike
Stephen is a lawyer with expertise in Commercial Dispute Resolution and Technology Law practice. He is a Partner at Infusion Lawyers. He has successfully argued cases from the High Courts of various jurisdictions to the Appellate Courts on behalf of financial institutions, other corporate bodies and multinationals. He has worked with a number of startup tech companies. He tweets @siazubuike.
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