Bond Notes and the Return of the Zimbabwe Dollar
This is the second part of this week's BSR. Part 1 dealt with legal battles arising from the directive of the Reserve Bank of Zimbabwe (RBZ) of October 2007, in terms of which all money held in foreign currency accounts was compulsorily transferred to the RBZ. We saw that in the Standard Chartered Bank case, the Supreme Court allowed the customer to recover its money from the bank based on the banker/customer relationship.
In the Trojan Nickel Mine case, the High Court allowed the customer to recover its money directly from the RBZ on the basis that the RBZ induced the mining comopany's bank to breach its contract and alternatively, for unjust enrichment. In the MBCA case, the High Court allowed the bank to bring the RBZ into the legal proceedings brought by its customer so that the RBZ would indemnify it if it were held liable. We saw in those cases, that the courts were highly critical of the conduct of the RBZ which had effectively used its powers to expropriate private property.
The second part of the BSR examines cases that have arisen after the introduction of bond notes in 2016 and subsequent related policies, such as the separation of Nostro foreign currency accounts and RTGS foreign currency accounts and the compulsory conversion of US dollar debts and assets into local currency. There are two sets of cases: first, the cases where citizens tried to raise alarm concerning the detrimental effects of the new policy and sought help from the courts of law and second, cases where citizens sought protection from the courts after suffering actual losses from the policy.
The arrival of bond notes
Following the new multicurrency system which was formally introduced in 2009, all customers’ bank accounts and contracts were denominated in foreign currency, with the US dollar being the currency of choice. However, from 2016, the government introduced bond notes as a surrogate currency which would operate at the command rate of one-to-one value with the US dollar. The President invoked the Presidential Powers (Temporary Measures) (Amendment of Reserve Bank of Zimbabwe Act and Issue of Bond Notes) Regulations, 2016 (SI 133/2016) to introduce bond notes as legal tender. The Presidential Powers Act is a controversial piece of legislation which critics dislike because it gives too much power to the President.
Both experts and members of the public raised several concerns over the new bond notes' policy. However, the government promised that the introduction of the surrogate currency would not affect the value of customers’ foreign currency assets. The Governor of the RBZ pledged to resign if the bond notes failed to hold their value against the US dollar. The RBZ claimed it had a facility from AfreximBank to back up the bond notes. Many were not convinced by the RBZ's undertakings and some took legal action.
Joice Mujuru v President of Zimbabwe and others CCZ 8/18 (Constitutional Court)
The first case was brought by Joice Mujuru, a former Vice President who had recently been sacked from the government. She challenged the constitutionality of the regulations issued under SI 133 of 2016. It should be mentioned that she had made an earlier application in November 2016 just before the bond notes had been released. That application, which was pre-emptive was dismissed at the preliminary stages, with the Constitutional Court holding that it was speculative as bond notes had only just been announced but had not been issued. The second case which came 3 months afterwards, was, therefore, a second bite of the cherry.
Mujuru argued that the regulations were invalid because the President and Parliament had failed in their duties to uphold the Constitution when he invoked powers under the Presidential Powers (Temporary Measures) Act to amend the Reserve Bank of Zimbabwe Act to establish the bond notes as legal tender. She argued that when the President had unlawfully usurped Parliament's power to make primary legislation which was unconstitutional.
The President argued that he had acted lawfully in discharging his obligations under a law whose constitutionality had not been successfully challenged. He argued that Mujuru had used the wrong procedure because she should have challenged the constitutionality of the Presidential Powers (Temporary Measures) Act based on a breach of fundamental rights and freedoms. He argued that based on the presumption of constitutionality, he had acted under a valid law.
The Constitutional Court agreed with the President. As the Court stated, “This Court has on several occasions held that there is a presumption of constitutionality of a law that has not been challenged for alleged unconstitutionality. The court has further held that not only does an unchallenged law compel full obedience but that even a law that is under challenge commands the same level of obedience unless declared invalid.”
In the Court's view, Mujuru's application should have been to challenge the constitutionality of the Presidential Powers (Temporary Measures) Act. The President’ did not have a duty to inquire whether using powers under that law was constitutional. It was a valid law and he had acted lawfully. The matter was therefore dismissed because it was not the proper application. The net effect is that the substantive issue was never heard. By the time the matter was heard, bond notes were already in use. Mujuru and other potential litigants must have realised that further legal challenges would be futile. However, there was another litigant attempted a challenge at the High Court and this is our next case.
Mutandi and another v Minister of Finance and others HH-747-16 (High Court)
The second case was brought by Mutandi and his company which was licenced to provide a money transfer business. It received foreign currency from the diaspora and disbursed it to local recipients. Mutandi and his company were aggrieved by the introduction of bond notes which directly impacted their business. Like Mujuru, Mutandi and his company challenged the legality of SI 133 of 2016.
In response, the government argued that the matter was not urgent. The matter was handled by the Judge President of the High Court, Justice Chiweshe. He agreed with the government that the matter was not urgent and stated that the applicants should have acted earlier. This conclusion sits oddly with the view taken by the Constitutional Court in the first Mujuru case brought in November 2016. The Constitutional Court had dismissed that case because it was premature and speculative. However, Mutandi who brought his case afterwards was now being told by a High Court judge that he had acted too late. It seems there was a never a right time to bring a challenge - go early, and you are told it's too soon and speculative; go later, and you are told it's too late and not urgent.
Justice Chiweshe also rejected the Mutandi application for a second and more substantive reason, namely that the applicants had failed to establish that the bond notes policy would lead to any serious harm. In the words of the judge, “the applicants have not established, to the satisfaction of the court, that the introduction of bond notes would cause them irreparable harm. The third and fourth respondents have clearly spelt out, as monetary authorities, the objectives sought to be met by the introduction of bond notes.” Justice Chiweshe believed the RBZ.
This is what the RBZ had said in its affidavit: “The conclusion reached by the applicants, that the character and value of their banking accounts expressed in United States dollars will be affected is, with respect, simply not correct. Bond notes are intended to operate alongside the currencies within the multi-currency system and will be at par with the United State dollars just in the same way as the bond coins which are already in circulation”. The remarkable nature of these assertions by the RBZ will become more apparent upon consideration of the second set of cases which involve persons who were aggrieved by the effects of the bond notes and related policies.
In his closing remarks, Justice Chiweshe dared to say in dismissing the application, “The concerns of the applicants are not based on any objective facts. What the applicants foresee as the inevitable consequence of the introduction of bond notes is, to all intents and purposes, based on speculation.” There is scant consolation for Mutandi to say "I told you so" to the judge, given what has happened since the coming of the bond notes. The discussion now turns to the cases dealing with the practical and detrimental effects of the policies that started with the introduction of bond notes in 2016.
N.R. Barber Pvt Ltd (Barber) v Zambezi Gas Zimbabwe Pvt Ltd (the “Zambezi Gas” case)
The case was brought in the aftermath of SI 33 which was issued in February 2019. The major purpose of that SI 33/2019 was to provide for the recognition of the RTGS dollar as legal tender and the conversion of all US dollar-denominated local assets and liabilities at the government-decreed rate of one-to-one. This is the legal fiction that the government had maintained since 2016 although it was a variance with the real market rate at which the surrogate currency was trading.
The facts of the dispute were that N.R. Barber Pvt Ltd (Barber) had provided services to Zambezi Gas Zimbabwe Pvt Ltd and had obtained judgment at the High Court when the latter failed to pay for the services. An appeal by Zambezi Gas was dismissed by the Supreme Court. The judgment debt was worth US$3,9 Million. Zambezi Gas then decided to pay the judgment debt in local currency converted at the rate of one to one. Zambezi Gas argued that it was entitled to do so by SI 33/2019.
The High Court had dismissed Zambezi Gas’s case. However, the Supreme Court upheld its appeal holding that SI 33/2019 allowed US dollar debts existing before 22 February 2019 to be converted to local currency at the rate of one-to-one. The judgment was a windfall for Zambezi Gas in real terms because instead of having to pay US$3,9 million, it only had to pay a fraction of that amount given the fact that the local currency had lost value significantly against the US dollar. It was a disaster for N.R. Barber which for the same reason was now receiving a small fraction of its original judgment debt.
That judgment had wider ramifications on the market. It was a windfall for debtors across the country, who could now pay their US-dollar denominated debts in local currency at the ridiculously cheap rate of one-to-one. However, it was a calamity for savers and creditors who had effectively suffered a huge depreciation in the value of their monetary assets in real terms. It meant banks had acted lawfully when they converted US dollar account balances to RTGS denominated balances.
N. R. Barber was naturally aggrieved by the Supreme Court decision. Not long before, the same Supreme Court had ruled in its favour in the main dispute, ordering Zambezi Gas to pay the debt in US dollars. Now, courtesy of a government decree, the value of N.R. Barber's asset had depreciated. Although it had lost the main case, Zambezi Gas had emerged the winner because of the government's new currency policy which had retrospective application. N.R. Barber has sought leave to appeal the matter to the Constitutional Court, and it remains to be seen how that will go. Meanwhile, parties in N.R. Barber's position who have lost monetary assets because of the government decree should consider legal action against the government for the losses they have suffered and against their contractual counterparts for unjust enrichment.
Stone Beattie Studio v CABS and others (2020) (High Court)
This is the most recent case which was decided by the High Court. The facts of the case are very simple. Two partners in a firm of architects, Penelope Stone and Richard Beattie, (hereafter referred to as Stone Beattie Studio) sued their bank CABS, the RBZ and the Minister of Finance and Economic Development demanding payment of money that was held in their account in foreign currency. CABS wanted to pay them in local currency based on an Exchange Control Directive issued by the RBZ. Stone Beattie Studio argued that the directive was unconstitutional.
Like all other Zimbabweans at the material time, Stone Beattie Studio had opened a US dollar account at CABS in 2011. In 2016, when bond notes were introduced, the account had US$142 000. At that time, they instructed their bank that they would not withdraw from or deposit further amounts into that account.
In October 2018, the RBZ introduced Exchange Control Directive RT120/2018 which directed banks to separate customers’ bank accounts based on the source of funds. There would now be a distinction between an RTGS Foreign Currency Account (RTGS FCA) and a Nostro Foreign Currency Account (NOSTRO FCA). In broad terms, the RTGS FCA would be for all funds of domestic origin while the NOSTRO FCA would be for funds from foreign sources.
The directive was a major policy shift since 2016 when bond notes were introduced into the market. Customers had operated a single account. Now, for the first time, there would be a separation of accounts, depicting a difference between the US dollar accounts and the surrogate currency accounts. Implicit in this was a less than subtle suggestion that there was a difference between the two currencies. For the first time, the fiction that the surrogate currency and the US dollar were the same was unravelling, although paradoxically, the policy was still that they operated at par value.
The banks complied with the new directive, automatically converting the US dollar-denominated accounts into RTGS FCA if the funds were sourced locally. Only accounts with foreign-sourced funds were classified as Nostro FCA. The Stone Beattie Studio account at CABS was one of the millions of accounts that were affected by this drastic policy change as it was re-classified as an RTGS account.
This was a calamity for affected customers in real terms. Overnight, an account holding US$142,000 was now classified as holding RTGS$142,000. Officially, there was no difference in value because the government maintained the one-to-one exchange rate. However, in real terms considering the rates on the parallel market, US$142 000 had declined to half its value, at the conservative rate of one-to-two. In this way, Stone Beattie Studio had lost half their savings.
It was against this background that Stone Beattie Studio approached the High Court seeking to recover its apparent losses. The challenge was based on first, the bank’s breach of contract and alternatively, the illegality of the directive.
Stone Beattie Studio argued that they were entitled to payment in the currency in which they had deposited funds into their account. Under the banker/customer relationship, the banker is a debtor and the customer is a creditor. The customer is entitled to payment of the equivalent of the amount they deposited into the account upon demand. They argued that this amount should be in US dollars.
The judge agreed that Stone Beattie was entitled to payment in US dollars based on the banker/customer relationship. The judge reasoned as follows:
“Banking would be meaningless if a person deposited a certain sum of money or has money credited into their account only to be told when they demand withdrawal that they can only be paid in some other means of exchange whose value is determined by the authorities without recourse to the holder of the account … A debtor cannot unilaterally change the value of its indebtedness”
The judge’s reasoning accords with common-sense and financial justice. Certainly, while the government can change currency, the effect should not diminish the value of the customers’ deposit as doing so would amount to unlawful expropriation of private property. However, the judge acknowledged that while ordinarily, the customer could claim from the bank, in this case, there was a problem because of the existence of the directive which compelled the bank to act as it did. The court accepted that as long as the RBZ directive subsisted, CABS had no choice but to comply or it would incur sanctions from the RBZ. For this reason, the court moved on to the next argument.
The legality of the directive
Since the bank had acted lawfully, the next option for the customer was to challenge the legality of the directive under which it had acted. This involved questioning the constitutionality of the directive. The argument was that the directive violated various rights, including property rights and protection of the law. It was also argued that the directive was grossly irrational and illegal.
Justice Zhou agreed with the applicant’s view that the directive was irrational and grossly unreasonable concluded that it was unconstitutional. He reasoned that the directive was not something that a reasonable decision-maker would have issued and that it was arbitrary and retrospective in its application since it affected existing US dollar accounts. In his view, while the RBZ was entitled to make policy changes, such changes should affect the future but not existing balances.
Judges and policy matters: Command v Market
The judge’s reasoning concerning the matter reflected a preference for a more realistic look at currency issues, rather than the formalistic view preferred by the government. For the government, US$142 000 was the same as RTGS$142 000. For Stone Beattie Studio and other affected customers, there was a vast difference and a loss of value. The judge was partial to the view of affected customers, effectively recognising the de facto exchange rate where the RTGS dollar was trading at a lower value to the US dollar. As Justice Zhou stated,
“A decision which reduces US$142,000 to a small fraction of its value cannot be defended in a democratic society founded on the values enshrined in the Constitution of Zimbabwe”.
It was reduced to “a small fraction” because the judge was looking at the reduction in value in real terms as reflected on the parallel market, as opposed to the government’s fictitious one-to-one exchange rate. It is here where the Supreme Court, which tends to take a more formalistic approach might differ with the High Court judge. It will see no difference between US$142,000 and RTGS$142,000.
Inherent in all this is a clash between the judiciary and the executive on a policy matter. The judge’s position demonstrates a preference for the free market ahead of the government’s command approach to the exchange rate. “The value of money is its acceptability and can only be fairly determined by the market”, the judge said. This was a firm rejection of the fixed exchange rate policy which claimed that the two currencies were equal. In this regard, the judge wrote, “Equality of value is not something that can be arbitrarily or capriciously imposed in the manner that the Governor of the first respondent sought to do in relation to the balance in the applicants’ account”. This was a rejection of command economics.
Critics will argue that the judge was wading dangerously into an executive territory, which the judiciary shouldn’t do since that area is best left to policy-makers. However, the judge’s defenders would argue that the policy-making functions are not immune to judicial scrutiny especially when constitutional rights are affected. As the judge pointed out, “This drastic deprivation of existing rights is not what is contemplated by s. 317 of the Constitution of Zimbabwe as regulation of the monetary system, protecting the currency of Zimbabwe and formulating and implementing monetary policy”. Here, the judge was saying the exercise of the RBZ’s policy functions should not lead to the deprivation of property and if it does, the courts will hold the policy unconstitutional.
Ordinary people will undoubtedly find favour with the judge’s sense of justice. It accords with common sense and logic. The judge expresses moral outrage at the injustice of the currency policy when he says, “It is offensive to any sense of justice that a person who holds money in a bank can wake up on any day to be told that his money means something else different from what it has always been”. Most ordinary people and businesses share this moral outrage. He also dismissed the renaming of the account to RTGS FCA as a cosmetic exercise. To put it more bluntly, the judge said the new name was a fraud. He correctly observed that the term RTGS FCA was a ‘contradiction’ since RTGS is not foreign currency. As he pointed out, “one wonders how it [RTGS] could be hosted in a foreign currency account”. Most citizens would share this view. In his view, the directive reflects “insensitivity and unresponsiveness which offends against the values espoused by the Constitution”.
His final words sum up his dim view of the government policy directive: “The Exchange Control Directive is, in my view, illegal, irrational and unreasonable for offending against the rule of law and constitutional values of good governance.” For all the reasons, he ruled that the directive was unconstitutional. Yet for all the common sensical views in the judgment, which most ordinary people would agree with, both the Supreme Court and the Constitutonal Court might take very different view when the matter comes before them. The conservative and formalistic approach taken by the Supreme Court in the Zambezi Gas case, where lawyers accuse it of some-stepping the constituional issues that were raised is an ominous sign.
Reconciling Zambezi Gas and Stone Beattie
Can the two seemingly contradictory cases be reconciled? Zambezi Gas upheld the right to convert pre-22 February 2019 US dollar debts into local currency at the rate of one-to-one. Stone Beattie Studio upheld the right to be paid in US dollars. Both cases illustrate the fact that the concerns first raised by Mujuru and Mutandi in 2016 were well-founded although they were flippantly dismissed by the courts. The courts thought the challenges were speculative and with Justice Chiweshe saying `'What the applicants foresee as the inevitable consequence of the introduction of bond notes is, to all intents and purposes, based on speculation"
The first point is that Zambezi Gas is a higher legal authority because it is a Supreme Court decision whereas the Stone Beattie Studio case is a High Court decision. Where there is a conflict, the Zambezi Gas case takes precedence.
The second point is that there has been an appeal in the Stone Beattie Studio case, which suspends the High Court decision. In any event, there is a view that since it dealt with a constitutional question, the point will have to be confirmed by the Constitutional Court before it takes effect.
The third issue is that in any event, the Stone Beattie Studio case was overtaken by events since it was concerned with a directive which has since been superseded by an Act of Parliament. After the directive, there was SI 33/2019 and the Finance Act (No. 1) and (No. 2), which deal with the same issues but whose validity has not been challenged. In these circumstances, a declaration of invalidity of the directive is tantamount to shutting the stable doors after the horses have bolted. On this view, the appeal will only be of academic interest.
Nevertheless, despite these events, the appeal will allow the Supreme Court to deal with the point of the constitutionality of the directive, which was avoided in the Zambezi Gas case. The risk is that the Supreme Court might dismiss it for mootness because the directive is no longer the governing law. The case reflects the weaknesses of legal processes in a fast-moving, ever-changing and unstable economic environment. It means by the time courts deal with legal disputes and make pronouncements, the matter would have been overtaken by events, making the whole exercise redundant.
What’s to be done?
The question of the constitutionality of currency policies and laws which led to the diminution of citizens’ assets remains a live issue. Millions of citizens lost their assets when US dollar accounts were converted to local currency at the rate of one-to-one, a policy which is out of touch with the reality in the markets. This reduction of value is tantamount to compulsory expropriation of property without compensation. It also deprived citizens of their right to the protection of the law. There is a need for the Constitutional Court to make an authoritative determination of the effect of these currency policies on citizens’ fundamental rights and freedoms.
So far, judges of the High Court have ruled largely in favour of affected customers. This is evident in the recent Stone Beattie Studio case but it was also apparent in the judgments by Justice Mathonsi in the Trojan Nickel Mine case and the MBCA case. The Supreme Court was also sympathetic to the customer in the Standard Chartered case but was less sympathetic in the Zambezi Gas case.
The High Court was dismissive of customers’ concerns regarding the introduction of bond notes in the Mutandi case while the Constitutional Court was similarly dismissive of similar concerns over bond notes in the two Mujuru cases. The Stone Beattie Studio and the Zambezi Gas cases have shown that the concerns of Mujuru and Mutandi were not as unfounded as the courts believed when they brought their cases. Their fears were realised, and millions have carried the costs of the bond notes policy and related policies which followed.
The time is ripe for a test case at the Constitutional Court. It should be a case which requires the court to squarely face the question of whether the conduct of the government, the RBZ and banks under the financial laws violates specific constitutional rights and freedoms. A pronouncement by the highest court in the country would guide the government and other stakeholders.
This is what the government and the RBZ said in an affidavit in the Mutandi case when he tried to challenge the introduction of bond notes: “The conclusion reached by the applicants, that the character and value of their banking accounts expressed in United States dollars will be affected is, with respect, simply not correct. Bond notes are intended to operate alongside the currencies within the multi-currency system and will be at par with the United State dollars just in the same way as the bond coins which are already in circulation”.
This was not believable at the time and it is not surprising that it has turned out to be a lie as N.R. Barber Ltd, Stone Beattie Studio and millions of other Zimbabweans have experienced in the last few years.