*DISCLAIMER*
The
notes below are adapted from the Kenyatta University,UoN and Moi Teaching
module and the students are adviced to take keen notice of the various legal
and judicial reforms that might have been ocassioned since the module was
adapted. the laws and statutes might also have changed or been repealed and the
students are to be wary and consult the various statutes reffered to herein
THE HISTORICAL
BACKGROUND OF BANKING
The
law of banking dates back to 4,000 BC and can be traced back to Rome, Greece,
Babylon, China, Egypt, Lombardy, Venice and Genoa. The main preoccupation of
businesses resembling banking at the time were of safekeeping deposits of money
and valuables for the rich elite in the earlier cities.
The
merchants also played an important role by looking for safe places for the
custody of the jewellery of which the safest were churches. Priests acted as
bankers, the temples and churches as banking halls and the valuables in form of
gold and silver constituted the items kept. In England, banking dates back to
the Norman conquest mainly carried out by Jews who introduced money lending and
currency. The goldsmiths also played a big role by acting not only as
depositories but also issued receipts acknowledging deposits subsequently used
by the holders to procure goods.
As
a consequence of use of receipts and their circulation, they evolved into
present day currency notes. The system of letter writing by persons who had
deposited goods with the goldsmith requesting handover to other persons
developed to become cheques and what are called in banking law ‘letters of
credit’.
The
letters would request handover of goods to the bearer of letter from whom the
letter writer had probably received service.
A
letter of credit is a facility by a bank normally given to traders enabling
them to purchase without using won money – a financial facility through a
written document authorizing person to whom it is issued to receive certain
services or goods.
Modern
banking goes back to 1826 when there was an economic recess which led to a
crisis in the banking sector in that the banks were not able to meet their
obligations as and when they were due leading to a ‘run on the banks’ – this
occurs when all customers of a bank demand to have all their money paid in
cash. Ordinarily, banks are for safekeeping but in practical terms they invest
the money and keep only a small amount in liquid assets.
Some
banks were able to meet the requirement but most collapsed and thus there was a
need to rethink their roles. Prior to this, there were no regulations and banks
were mainly operated through partnerships limited to six people who had to
raise capital and thus they were constrained. To change this, there was enacted The
Banking Co-Partnership Act also known as the Joint Stock Bank
Act. It led to the incorporation of companies banks as limited liabilities.
A
main characteristic was:
(i) allowed
for unlimited number of partners
(ii) introduced
the concept of limited liability at the root of modern companies
As
a consequence, it broadened the base for access of capital by persons wanting
to form a bank.
The
Joint Stock Bank Act of 1826 laid the legal foundation for the emergence in
banking law of a bank as a company understood within the meaning of
the Company’s Act. It enlarged the capital base and generally extended the
operation’s base of the bank both nationally and internationally.
NOTE; At this point
in time UK banks were created on a provincial/regional basis and the Act
attempted to move from regionalism to banks operating nationally. This enabled
the banks to operate within the general ambit of the Bank of England which had
been created in 1694 with the objectives:-
(i) to
issue currency
(ii) to
raise funds for Government through trading stocks
(iii) to
be charged with Government’s responsibility to operate the main accounts of
Government
The
Bank of England had all along issued notes alongside other notes from regional
banks. Initially, regional banks dealt accounts of the rich landowners and
merchants but following the Act, a legislation was passed in 1833 that made
only the notes issued from the Bank of England legal tender.
The
Current Position In England (UK)
A
new legal framework has been put in place through the Financial
Services and Markets Act of 2000 which is a one-stop point in so far
as banking or financial services are concerned. This act repeals most
legislation relating to banking and financial services and puts into place new
institutions for the regulation of banking and financial institutions.
Besides
it, there’s the 1985 Trustee Savings Bank Act which deals with
a specific kind of bank referred to as Trustee banks and then there is the
‘National Savings Bank Act’ which confirms this bank as an entity supervised
directly by the Director of Savings. It is supposed to mobilize savings from
the general populace (It’s equivalent here would be Postbank).
The
Building Societies Act deals with Building Societies and was enacted
in 1986 with an amendment in 1997. In Kenya, we have
(i) The
Banking Act - the central legislation in banking
(ii) The
Central Bank Act – establishes the Central Bank
(iii) The
Building Societies Act – deals with building societies
(iv) The
Companies Act – deals with companies estbd under the Act
(v) The
Co-operatives Act
TYPES OF BANKS
Generally
speaking, there are two types:-
i) Savings
Bank
ii) Commercial
Banks
Savings Banks
Savings
Banks generally are meant for the general public, to collect deposits from the
lower cadre of society where a lot of resources exist but may not be tapped.
They are thus closely supervised and in most cases have statutory regulations
of their operations. The assumption is that the people dealing with such banks
do not understand their rights and may be exploited.
Commercial
Banks
They
are divided into two:-
i) Deposit
banks
ii) Merchant
banks
Deposit banks exist to collect large
sums of deposits from the public and from the merchants through borrowing and
then lending out such money for an interest. The understanding is that they
will eventually return the money borrowed from this persons and thus they:
i) use
money borrowed from customers for purposes of investment
ii) promise/undertake
to return the money to the depositors at an interest or on such terms as is
agreed between them and the customers or depositors.
Such
banks also operated as Banks of Issue until 1833 when the role
of issuing notes/currency was vested absolutely with the Bank of England.
Merchant
banks mainly
use their own money and borrowed money to a limited extent for purposes of
financing business. They’ll normally finance specialized types of business(es)
in which they have exceptional type of expertise such as financing of foreign
trade of provision of loans at national and international levels.
To
some extent, their operations include those of Deposit banks.
Although
these merchant banks tend to finance businesses, they are in essence
corporations.
They
will not normally open accounts for any member of the public but for specific
groups of people.
They
will also not normally issue chequebooks to their customers.
SERVICES
RENDERED BY BANKS
1. The
most important service rendered by the banks is that of honoring of cheques
presented to them for payment either by the customer himself or persons to whom
the customer may issue such cheques.
2. Safekeeping
of customer’s valuables.
3. Acting
as references to customer’s financiers or persons who may generally be
interested in the financial standing of a particular customer. (Townier v
National Provincial and Union Bank[1924] 1 KB 461)
4. Investment
advising.
5. Executors
and trustees or administrators of estates
6. Providing
foreign currency
7. Issuing
letters of credit
8. Banks
will also provide loans and overdrafts to their clients where banks will also
need security in form of mortgages, liens, pledges, charges and bailments.
NOTE; In providing
these services banks may incur liabilities towards third parties and to
minimize this most banks have specialized departments dealing with these
matters.
PARTIES TO THE
TRANSACTION
Customers
may be artificial or natural with special regards to certain types e.g.
infants, trustees, executors etc.,
In
the operation of the account there will be instruments like cheques, negotiable
instruments, letters of credit, promissory notes etc and the account which will
form a strong basis for the relationship between bank and customer/client.
DEFINITIONS IN
THE LAW OF BANKING
No
legislation including the current Acts in the UK defines bank, banker or banking
business in such a manner to indicate what they are about. Each legislation
defines the bank/banking business for specific purposes.
At
common law, a bank was defined as an institution set up for the purposes of
carrying out the business of banking.
For
a long time however, common law did not define what banking was all about. The Bills
of Exchange Act s.2 defines bank as to include ‘a body of persons
whether incorporated or not who carry out the business of banking.’
This
definition would have been adequate then but for now it cannot work since there
is a requirement that for an institution to operate as a bank it must be
registered as a company under the Companies Act so in so far
as the law is concerned only the first set (incorporated bodies) would qualify
as banks. Courts have also tended to come up with definitions both of banking
and banking business.
Woods
v. Martins Bank [1959] 1 QB 55
The
issue was whether the giving of investment advice constituted banking business.
The court held, that indeed the provision of investment advice would constitute
an individual/institution into a bank.
SAMWEL
L.J. said “the limits of a banker’s business cannot be laid down as
a matter of law. The nature of such business must in each case be a matter of
fact and accordingly it cannot be treated as if it were a matter of pure law.”
The judge concluded that an institution that constitutes a bank in one country
or at one point in time may be a bank in that place and at that point in time
and not a bank in a different place and time. An institution which therefore
qualifies to be a bank in Kenya may not thus be so in Uganda.
NOTE; An
institution’s reputation and presentation to the public may determine whether
such an institution is a bank or not so that in the case of United
Dominion Trust v. Kirkwood [1966] 1 All ER 968 Denning L. stated:
“The
fact that member of the public trusted United Dominion Trust as a bank was in
itself sufficient to have such institution be qualified to be classified as a
bank.”
Generally
therefore, the meaning varies though a bank must carry out certain basic
functions associated with banks:-
- Must
accept deposits from customers
- Must
be able to pay customer’s demands from those deposits either to the
customer himself or to persons they have requested to be paid normally in
form of a cheques
- Should
be able to give back the money when the customer demands
Re Shields
Estates [1901] Irish Reports 173
Fitzgibson
J., in his judgment said:
“the
business of banking from the banker’s point of view is to traffic with the
money of others for the purposes of making a profit”; and in
Commissioner
of State Savings Bank of Victoria v Permewan Wright & Co
Isaacs
J., described the business of banking as:
“the
collection of money by receiving deposits repayable when and as expressly or
impliedly agreed upon and the utilization of the money so collected by lending
it again in such sums as are required.”
WHAT IS BANKING
BUSINESS?
Neither
the Banking Act nor the Central Bank of Kenya Act initially
defined what was banking business. The Bills of Exchange Act(CAP 27) however
did define what banking is and what bank means in section 2.
A
bank “includes a body of persons whether incorporated or not who carry out the
business of banking.” Two types of institutions can do this:
- Companies
formed under the Companies Act
- Unincorporated
associations which includes partnerships
Under The
Banking Act a bank means “a company which carries on or proposes to
carry on banking business in Kenya and includes the Co-operative Bank of Kenya
Ltd but does not include Central Bank.” There is thus an apparent contradiction
(non incorporated bodies are not companies under the Act) as between the Banking
Act and the Bills of Exchange Act but the difference
is reconciled whereby when you look at the Companies Act it refers to
institutions which had operated as companies before 1948 to continue operating
as they were and as such there are partnerships operating as banks.
S.2 of the
Banking Act
Banking
business means:-
(i) The
acceptance from members of money on deposit on condition that such money is
repayable on demand or at the expiry of a fixed period after notice.
(ii) The
acceptance from members of the public moneys on current account and acceptance
of cheques.
(iii) Involving
the employing of money held on deposit or on current account or any part of the
money by the bank for lending or investment or for any other use at the risk of
the person so employing the money.
Summarily,
for an institution to carry out banking business, it must receive monies from
the public; pay out that money to the depositors; employ the money to other
use.
The
CBK Act (Cap 491)
A
bank is:
“a
body corporate or other body of persons carrying on whether on their own behalf
or as agents of other banking business within the meaning of the Banking Act
whether in Kenya or elsewhere, the business of banking..
The
Bank of England Act
Defines
banks in the light of the controls that the Bank of England has over those banks.
THE
COMMON LAW DEFINITION
s.2
of the Banking Act is a reflection of the common law definition which actually
was a ruling derived from
United
Dominion Trust v. Kirkwood (1966) All ER 963
The
company was involved in money lending activities, issuance of securities and
discounting bonds, making out payments in return for cheques but had not been
established as a bank and it had not manifested itself as carrying out banking
business. This decision came just after Dr. Hart had in his Law of
Banking offered the definition of a banker or bank as a person
carrying on the business of receiving money and collecting drafts (cheques) for
customers subject to the obligation of honouring cheques drawn upon them from
time to time by the customer to the extent of the amounts available on their
current accounts.
A
bank thus:
- Receives
money
- Collects
drafts/cheques
- Honours
cheques drawn by customers – pay out money in exchange for the cheques
The
Dominion Trust case drew
three different opinions from the judge who presided over the case – Denning
L., Diplock LJ., Harnan J.,
Denning
L identified
basically two characteristics which must exist before an institution can be
said to be carrying on banking business:
i) such
institution must accept money from and collect cheques for their customers and
place them to their credit
ii) such
institution must be able to honour cheques drawn on them by their customers
when presented for payment and debit their customer accordingly
THE
BANKER CUSTOMER RELATIONSHIP
This
revolves around the questions:
i) Who
is a customer?
ii) Who
is a bank or a banker?
iii) What
obligations and rights do those two people have towards each other?
See:
Joachimson v. Swiss Bank Corporation
The
banking relationship revolves around the banker and the customer. An
effective understanding of these two parties is important.
Who
is a customer?
Like
bank and banker, none of the statutes which are available offers a definition
of who a customer is. The Bills of Exchange Act makes reference to customers in
so far as they are involved in the encashment of cheques with banks. A
customer here is strictly, telling us who qualifies to write a cheque and who
the bank may pay as a customer. Consequently, we have to go back to common law
in order to get some directions on who a customer is .
Generally,
a customer has been said to be any person whether incorporated or not who has
some kind of account with a bank.
Note: Banker-customer
relationship will arise as soon as a person opens an account with a bank
L.C.
Mather in
his book on Banker-Customer relationship and the accounts of
personal customers says while comparing the meaning of a customer in banking
law with that of other meanings of customer –
“The
Banker – Customer differs somewhat from the normal undertakings of the term in that
the word customer usually denotes a relationship resulting from habit or
continued dealing.”
It
will be difficult sometimes to define or precisely to identify a person or a
customer of a bank because under normal circumstances the services provided by
the bank are of different types. They are the kind of services that may involve
a one day, two days, weeks or years dealings.
The
determining factor as to whether or not the relationship is that of bank and
customer will be the existence of some type of account either a credit account
or a deposit account in favour of the person who claims to be a customer of the
bank.
Commissioner
of Taxation v. English Scottish and Australian Bank [1920] AC 683
The
court held that the word ‘customer’ signifies a relationship in which duration
or longevity of that relationship is not of the essence. i.e. to establish that
one is a customer of a bank it is not necessary for one to show that he has
dealt with the bank for two or three years. It is enough to show that they had
a relationship with that particular bank.
The
House of Lords held:
“the
customer whose money has been accepted by the bank on the footing that they
undertake to honour cheques upto the amount standing in his credit is a
customer of the bank in the sense of the statute (the Bills of
Exchange) irrespective of whether his connection is of a short or long time.
On
the other hand, in the case of:
Great
Western Railway Company Ltd v. London & County Banking Corporation (1901)
AC 414
(Higgins
held one will not be a customer because he had no account with the bank though
it paid him a cheque)
A
Mr. Higgins who was a clerk with Great Western Railway Co. fraudulently
obtained a cheque from his employer and fraudulently cashed it with the defendant
bank. Higgins had dealt with the bank over a period of years and had during
that time encashed cheques with the defendant and was therefore fairly well
known with them.
The
cheque in question was a crossed cheque and was marked ‘Not negotiable’.
Ordinarily this cheque would not have been paid across the counter.
QUESTION:
Was the bank right in paying Higgins that cheque?
HELD:
The Bank was not right in paying this cheque. It having been a crossed cheque
anyway. Another issue was whether the mere encashing of cheques by
Higgins across the counter over years at the defendants bank constituted
Higgins a customer of the Bank.
HELD:
Higgins was not a customer because although it is true that there is no
definition of a customer in the Act, but it is a well know expression and I
think that there must be some sort of an account either a deposit or a current
account or some similar relation to make a man, a customer of a bank.
- Therefore,
once an account is opened, the relationship of a banker and the customer
is established.
- The
relationship begins as soon as money is deposited on the account or
cheques are deposited on the account for payment.
- It
will not be necessary once the account is opened to show that the account
has actually been operated. The position was further elaborated in:
Ladbroke
& Co. v. Todd (1914) TLR 433
Upto
the time this case was decided, although the general position was that an
account was needed for the existence of a bank-customer relationship. This case
breaks from the tradition of presuming some kind of continued relationship
between two people in order that one may be a customer and the other a bank.
This
continuity supplemented the existence of a bank account without going against
the principle that a person did become a customer by simply having an account
opened for him.
FACTS;
A person stole a cheque and opened an account with the defendant bank under the
name of the payee of the cheque. The thief had the cheque cleared and he
subsequently withdrew money from the account. The rightful owner of the cheque
brought an action against the bank and the bank argued that the mere opening of
an account by the thief at their branch did not constitute the thief a customer
of the bank and that therefore the bank could not be responsible for having
paid to a customer of the bank in good faith as provided for in s.82 of the
Bill of Exchange Act.
HELD:
The thief became a customer of the bank the moment the bank agreed to open an
account in his name.
Woods
v. Martins Bank (1958) Vol 3 All ER 166
It
introduces the idea that a person may in fact become a customer of a bank even
though the bank has not opened an account for him.
FACTS:
Woods sought the advice of the managers of one of the defendants branches
regarding investments of £5,000 in a company that was a customer of the
defendant bank. The manager of the branch then dictated a letter to
the customer Woods by which Woods authorized some money to be transferred to
the defendants so that they could use it for investments in the company i.e. he
authorized them to purchase shares for him in the company. The amount involved
by far exceeded, the £5,000 initially given by the plaintiff. He sued the bank
for the duty to take care and skill in the investment of his money. The bank
argued that they did not owe the plaintiff any duty because he was not a
customer of the bank.
HELD:
As per Salmon J., that:-
“In
my view, the defendant bank accepted instructions contained in this letter as
the plaintiff’s bankers and that at any rate from that date the relationship of
banker and customer existed between them.”
Stoney
Santon Supplies (Coventry) Ltd v. Midland Bank Ltd (1965) 109 Solicitors
Journal 255
An
account was opened in the name of Stoney Santon Supplies Ltd by a Mr. Fox who
purported to act for the company although he neither had the authority of the
company nor had he been acknowledged by the directors of the company to open
such an account. He forged the signature of the chairman and secretary
of the company for opening account and also the mandate for the signatures to
the cheques. He deposited the cheques in the account and
subsequently forged cheques to draw out money from the account. The company
went into liquidation and the liquidator in his dealings found the anomalies
and wanted the bank to pay back £10,000.
ISSUE:
Whether the liquidator would succeed against the bank.
HELD:
Although the account had been opened in the company’s name, the circumstances
in this case were such that there could not have been a banker-customer
relationship. The position would have been different if the bank had actually
authorized Fox to open the account.
THEREFORE,
in summary a customer of a bank is:
- A
person will be a customer when it can be established that such a person has an
account with the bank or as in Woods v. Martins Bank the
nature of the relationship between that person and the bank is such that it
constitutes that person a customer of the bank.
What
is conclusive, however, is that a person will not be a customer of the bank
just because he/she has held casual dealings with the bank no matter how long
that dealing may have been.
The
relationship between the bank and a customer is based on a contract between the
bank and a customer. Ordinarily, a contract can be based on either
express terms or implied terms but in most commercial cases the contract will
be based on a mixture of the two.
In
so far as the banker customer relationship is concerned, the relationship is
built basically on implied terms between the banker and customers. This
position was clearly illustrated in:-
Joachimson
v. Swiss Bank Corporation
The
implied terms in a Banking Contract (Bank-customer) relationship are as
follows:
- The
bank is under an obligation to receive the customer deposits and
collect cheques on his behalf.
- The
bank is also under an obligation to comply with the customers written orders
provided always there are sufficient funds in the customer’s account.
- The
bank is obligated to repay the entire balance on a customer’s account on
demand by the customer made during normal working hours.
- The
bank is obligated to give reasonable notice to the customer before closing
his account.
The
customer has an obligation:
- To
demand for payment of balances on his account before the bank can actually
pay or become liable to the customer for non-payment.
- To
draw his cheques in such a manner as not to allow for fraudulent
alterations
- To
pay a reasonable commission for the services rendered by the bank for
keeping the account.
NOTE:
The
Banker – Customer relationship will vary according to the types of transactions
that the bank carries out for customers.
There
are situations in which a bank may operate as an agent of its customer. This
role, the bank performs e.g. when it collects proceeds of cheque and credits
the customers account. In this capacity, the bank will be acting as an agent of
the customer.
In
some cases, a bailor-bailee relationship exists between banks and its
customers. This will happen where a person deposits his goods or valuables with
a bank for safekeeping-dealing.
It
may also carry out functions of a mortgage by giving out money to a person in
return for securities that a customer may deposit. The more accepted way of
looking at the bank-customer relationship is to look at it as a debtor-creditor
relationship in that as L.C. Mather says, a banker is basically one who
receives money on deposit or current account from customers and lends part of
the money to other customers.
To
be able to do this, the assumption is that the bank must have full control over
the money that is deposited with it. Thus it cannot hold it as an agent or
trustee because in the case of a trustee he has to use the money entrusted to
him with regard to instructions given.
Because
of this consideration, the relationship that is created between the banker and
the customer being the creditor and the bank being the debtor.
THE
NATURE OF THE BANK-CUSTOMER RELATIONSHIP
This
was first considered in full in the case of:
Foley
v. Hill (1848) V.2 House of Lords 281 V.9 ER 1002
A
customer brought an action against a bank requiring the bank to account for all
monies it had received on the ground that the relationship between B & C
was like that of principal agent and therefore the customer was entitled to an
explanation of what happened to his money. The customer had argued inter
alia that the relationship between the bank and him had created a
trust and made the bank accountable to him.
ISSUE:
Was the relationship between the B and C that of Principal and Agent?
HELD:
The relationship created in this case is that of debtor and creditor. It
observed that “money paid into a bank is money known by the principal to be
placed and therefore for purposes of being under the control of the banker,
it’s then the bankers money. He deals with it as his own, makes what profits he
can which he retains to himself. He has contracted having received that money
to repay to the principal when demanded a sum equivalent to that paid into his
hands.”
Foley’s
case is important for the following reasons:
- It
holds that the bank does not hold a customer’s deposit as an agent. This
is important because it removes from the bank the necessity to account to
the principal for the use of the money deposited by a customer.
- It
does not hold the banker to be a trustee and therefore the banker will not
be bound by the usual strict rules that a trustee has or is bound by in
respect of trust money.
- It
generally absolves the bank from being a bailee except in those
circumstances where the bank has actually been so appointed by the person.
Note: However, this
will not bar the bank from acting as a trustee, agent or bailee in
specific instances where the bank is called upon to exercise those functions.
The
nature of the Banker-customer relationship was summarized by Atkin L in Joachimson
v. Swiss Bank Corporation as follows:
“The
question seems to turn upon the terms of the contract made between B and C in
the ordinary course of business when a current account is opened by the bank.
It is said on the one hand that it is a simple contract of law. It is admitted
that there is added or super added an obligation of the bank to honour the
customer’s drafts to any amount not exceeding the credit balance at any
material time.”
i.e.
-
Based on implied terms
-
Bank receives deposits from the customers
-
Bank should meet customer’s payments and demands so long as there is sufficient
funds in the customer’s account.
Qn:
What is the nature of the Banker-Customer relationship?
Atkin
L concluded it as a debtor-creditor relationship with the bank having an
obligation to honour drafts that have been issued by the customer.
The
position was agreed to by Goddard L, C.J., in:
R
v. Davenport (1954) Vol 1 All ER 602
The
secretary to the company fraudulently inserted the names of his personal
creditors as beneficiaries or payees of cheques properly drawn on the account
of the company by two directors of the company and counter-signed by him. He
had the cheques paid and when his fraud was discovered, he was tried and
convicted of theft.
Qn:
Was the ownership of the money that had been paid into the bank the
secretaries? Or was it the banks?
Goddard
L held unhesistantly that the money in account belongs to the bank and not
Davenport, the thief. He said, “ I think the fallacy that led to the charge of
stealing money was this: It was thought that because the master’s account
became debited that was enough to make a theft.. but although we talk about
people having money in a bank, the only person who has money in the bank is the
banker. If I pay money into my account by cash or cheque, that money at once
becomes the bankers. The relationship between B & C is that of debtor and
creditor.
See: Lloyds
Bank Ltd v. Bundy (1974) V. 3 All ER
Summary:
The
relationship between B & C is that of debtor and creditor but subject to a
number of other obligations that are imposed upon the bank, the major one being
that of honouring cheques provided that there is sufficient money in the customer’s
account to meet the cheques in question.
The
relationship between a banker and customer can be in existence even if an
account has not been opened. The debt accrues from the time the relationship
between the B & C comes to effect. The debt is due for payment only when a
customer has made a request for payment to the bank and the bank either pays or
fails to pay in which case the customer can start proceedings against the bank.
Joachimson
v. Swiss Bank Corporation where a debt is owed by a bank,
it does not become due and payable until the customer actually makes a demand.
OBLIGATIONS
OF THE PARTIES TO THE BANKER – CUSTOMER RELATIONSHIP
A
number of obligations are imposed on both parties. The most important of these
obligations is the obligation on the bank not to disclose any information
relating to the customer’s account unless the customer has specifically
authorized its release or the bank has good reason to disclose.
These obligations plus others attach immediately to B-C relationship when put
in place.
Other
duties the bank owes to its customer’s include the duty to:
- Comply
with the customer’s mandate
- Inform
the customer of any known or possible attempts of forgery relating to his
account.
- Receive
money and collect cheques on behalf of the customer.
- Allow
the customers to draw money on the account at the branch at which the
customer has the account.
- Issue
a customer with a cheque book or pass book and to provide the customer
with regular statements.
- Duty
of care and skill
- Give
the customer’s reasonable notice before ceasing to carry out business with
him/closing his account.
Duty
of confidentiality
The
fact that a bank owes its customer, it’s responsibility not to divulge
information relating to the account goes to the very beginning of banking law
was first recognized in:
Tassel
v. Cooper (1850) CB 509
Although
this case did not discuss the duty in detail or give the kind of significance
to the duty that it carries in banking it none the less did recognize that
information between the banker including advices that the bank gives to the
customer are confidential.
The
case of Forster v. Bank of London also helps in illustrating
this point. A holder for value of a bill for £530 presented the bill at the
defendant’s bank for payment. He was told by a cashier at the bank that the
balance on the account of the drawer of the bill at the bank was insufficient
to take tune of £104. The holder of the bill then paid the £104 into the
account and had the bill paid. When the holder of the account knew of it, he
sued the bank for breach of secrecy and the court held that the bank was
actually in breach and plaintiff was entitled to damages.
Hardy
v. Veasy (1868) LR 3 Exchequer 107
The
plaintiff was arranging for a loan from a money lender. It was found out by the
court that the proceeds of the loan would have been used to smoothen/sort out
the plaintiff’s account with his bank. The bank somehow passed information to
the money lender which information led him not to give the loan and
the plaintiff sued for damages and the court held that he was entitled to
damages.
Although
the above three cases discuss the principles of confidentiality in banking they
do not go far enough in determining what the rights of the plaintiff and
defendant are, how they accrue, how the parties are released from the
obligations.
The
case of Townier v. National Provincial and Union Bank of England Ltd gives
the closest expose in so far as the law relating to the confidentiality of
information had by a banker with regards to its customer concerns.
Townier
had an account with the defendant bank and he overdrew on the account but made
arrangements with the manager of the branch to pay the money owed in
installments but he failed to do so. The manager of the bank being worried by
the failure to honour obligation telephoned Townier in his office, but Townier
was not in office. The person he talked to asked to know why; in the process he
mentioned that Townier’s account was overdrawn and some of the cheques Townier
had written in relation to that account had been drawn in the name of
bookmakers or gambling. When Townier’s employer heard that he was actually
involved in gambling they dismissed him. Townier sued and claimed defamation
(slander), the bank was in breach of confidentiality. The court had no
difficulty in finding that the bank was actually in breach. Atkins L in his
judgment said, “I further think that the obligation not to divulge information
extends to information obtained from other sources that the
customer’s actual account if the occasion upon which the information was
obtained arose out of the banking divisions of the bank and its customers, for
example, with a view to assisting the bank in conducting the customer’s
business or in coming to decisions as to it’s treatment of it’s customer.”
From
the quotation:
- The
obligation is not restricted to information on the customer’s accounts
- The
obligation extends to information which a bank may receive from another
bank or other banks regarding the customer but which it receives in it’s
capacity as the customer’s banker.
Bankes
L.J., on his part decided it was the position that the duty to keep as
confidential information relating to the customer’s account is a legal duty and
that this duty is not an absolute duty but one that can be qualified. As to the
actual duration of the relationship he said.:
“It
is more difficult to state what the limits of the duty are either as to time or
as to the nature of the disclosure. I certainly think that the duty does not
cease at the moment the customer closes his account. Information gained
during the currency of the account remains confidential unless released under
circumstances bringing the cases of qualification (exception) into play.
The
significance of this duty lies in the fact that the customers credit stand will
depend to a large extent upon the banks holding in strict confidence the
information they have coz the question of whether or not a customer will be
treated as credit wise depends to a large extent on what his bank has to say
about him.
According
to Atkins L, therefore he summarises by saying:
“It
seems to me inconceivable that either party would contemplate that once the
customer had closed his account the bank was at liberty to divulge as it
pleased the particular functions which it had conducted for the customer while
he was such.”
The
case of Townier really emphasizes the importance of the duty of confidentiality
by the bank with respect to the customer’s account. However, Bankes L.J.,
listed a number of exceptions to this rule:
a) Where
a bank is under a legal duty or obligation
b) Where
it is in the public interest to disclose
c) Where
disclosure is in the interest of the bank
d) Where
a customer has given his consent to the disclosure
A) Bank
under a legal duty or obligation to give information
This
is looked at from the following perspectives:
i) where
the bank has to give evidence in court. In most jurisdictions there is always
allowance for the fact that persons (artificial or natural) comply with the
court order. Where a court issues an order requiring the bank to give evidence
in respect to a particular offence or cause of action the bank will have no
obligation than to obey the order. Provided for under the Books of
evidence under the UK, Drugs trafficking offences Act UK, Criminal Offences Act
UK.
This
position also obtains in this country.
Under
the Evidence Act, Income Tax Act, there are instances where banks are required
to produce Books of account in court and in the event expose a customer’s
account information to scrutiny.
ii) Where
an authorized official requests information from the bank claiming statutory
authority. Unlike the first instance this would make the bank liable to the
customer if the official doesn’t have authority. Therefore, one should carry
out thorough clarification before giving information if it is to avoid
liability.
iii) Where
there is neither a court order or an official request. There is no outright
compulsion on the part of the bank to give information but it would constitute
an offence if the bank has some information but it does not provide it and an
offence is committed – there is suspicion.
Nderitu
v. Standard Chartered Bank
Court
found that there was no breach. The safest situation in which a bank may
disclose is that in which there is a court order.
B) Public
interest to disclose
A
bank will be under an obligation to disclose information regarding the
customer’s account in circumstances where there is suspicion that the operation
of the account is likely to prejudice public security.
This
relates to disclosures in cases of:
· Preservation
of state security
· War
Under
normal circumstances citizens of a particular country at war
with
another should not engage in any kind of trade with the
aliens.
Where
such happens and the person happens to be a customer of a
particular
bank, it may disclose this information and not be in breach
of
the duty of confidentiality. This was discussed in:
Libyan
R. Foreign Bank v. Bankers Trust Co. (1988)
Which
involved the confiscation of Libyan assets by the US following the shooting by
Libyan citizens of an aircraft over a town called Lockerbie. Bankers Trust Co.
had given information regarding Libyan Arab Foreign Bank to the
Federal Reserve Bank of the US. Qn: whether or not there was a breach? The
court did not decide on this issue although it was clear that there was in fact
a breach of the duty of confidentiality and “the bank was exempted under the
helm of public interest.”
C) Disclosure
in the interest of the bank
This
will arise where the bank has to prove it’s own case against a customer e.g
where a bank has given a loan to a customer but he refuses to acknowledge it.
The bank may disclose the contents of the customer’s account as evidence to
show that the amount is owed. This was discussed in:
Sutherland
v. Barclays Bank Ltd V.5 Legal Decisions affecting bankers 163
Where
Du Parq L.J., held that a bank will be acting within it s rights where ti makes
a disclosure in order to sustain it’s own action. This case also illustrates
situation where a customer gives consent.
FACTS:
Plaintiff held an account with the defendant. She drew a cheque on the bank
which was returned by the bank on account that there were no sufficient funds
in the account. Mrs Sutherland was unhappy and explained the situation to the
husband who adviced her to discuss the matter with the bank. She telephoned it
and in the course of the discussion the husband took the phone and asked the
manager what the problem in relation to the account was. The manager explained
that the bank had returned a cheque by the wife to a dressmaker on account that
there were no sufficient funds on the account. The manager also explained that
she had been drawing cheques on the account in favour of a bookmaker. The husband
got angry. The wife on learning this, sued the bank on ground that the bank was
in breach of it’s duty of confidentiality. The bank pleaded that they were not
liable coz either they had acted in their public interest or they
had acted with the consent of the wife.
HELD:
Yes, there was consent by having let the bank talk to her husband , and that
the bank had acted in it’s interest.
It
was noted that the bank was authentic coz Sutherlands husband had an account
with the bank in which the wife withdrew and by making the disclosure the bank
protected itself in case the wife withdrew further in favor of the bookmaker.
D) Customer
gives consent
It
can either be express or implied.
Where
there is express authority no problem arises but where the bank claims implied
authority then the issue should be looked at on a case to case basis. As
in Sutherland’s case it will depend on the position of the customer
in each case.
Hannah
Insurance Co. of Israel v. Mew [1993] Vol. 2 Lloyds reports 243
When
Coleman J said that the bank should be able to disclose the information if to
withhold it would or might prejudice the bank in the establishment or
protection of its own legal rights vis a vis the customer or third parties. The
essence of the matter is that it might need to disclose the information either
as the foundation of a defense to a claim by a third party or as the basis of a
cause of action against the third party.
Duty to honour
the customer’s mandate
When
a customer opens an account with the bank he gives a mandate to the bank to
apply whatever monies the customer may deposit with the bank in accordance with
instructions from the customer. A bank is therefore under a duty to ensure that
it complies with the customer’s original mandate which includes having to
honour cheques or orders authorized by the customer through his signature.
Where
the bank fails to honour it will be held liable to the customers and if the
customer has made a loss then the bank will pay damages to the customer.
In
deciding whether or not to meet a customers mandate a bank may where the
customer has more than one account with the bank at a particular branch combine
the accounts in order to decide whether or not there are sufficient funds to
meet the customer’s demand. However, the basic obligation of the bank is to pay
from the account against which the cheque or order or draft is drawn.
Barclays
Bank Ltd v. Okarnahe 1962 V.2 Lloyds LR 95
Bradford
Old Bank Ltd v. Suttcliffe 1918 V.2 KB 133
These
two cases illustrate that:
- Combination
is possible but as decided in the case of Barclays Bank Ltd v.
Okarnahe such combination may be ruled out by an express
agreement between the parties.
- In Bradford
Old Bank Ltd v. Sutcliffe the court held that combination is
possible although it can be excluded by an implied term of the contract.
Combination
will not be possible where money has been deposited on an account for a
specific purpose and the bank is aware of that particular purpose e.g. the
money is trust money, money held by a person as a solicitor, administrator
Where
a bank dishonours a cheque without any reasonable cause it will be held liable
to the customer and the amount of damages payable will depend on the customer
that one is dealing with.
Gibbons v.
Westminster Bank [1939] V.2 QB 882
Held: Where the
account in question is that of a trader, the bank stands to pay substantial
damages to the customer especially where the dishonour leads to the customer
having to lose trade deals or his general credit worth standing, his
respectability as a trader.
It
observed that this might not be the case, as those given to traders. The word
traders in this case was taken to exclusively mean merchants. Qn. Whether
it can only be restricted to commercial merchants e.g. whether if a respectable
man should not draw substantial amounts from his account? If it bounces can he
claim substantial damages?
Apart
from suing for damages, a customer who is injured may also sue for libel under
the law of torts and the general law of torts takes effect. The amount of
damages depends on the ability of the customer to prove that he lost.
This
notwithstanding there will be circumstances where the bank may refuse to honour
the customer’s mandate and not be held liable. A bank will not be held liable:
i) Where
the customer’s order/instructions are unclear
ii) Where
a cheque is presented long after the time/after an unreasonably long time from
the date of issue of the cheque (refusal of payment in respect of stale
cheques) A bill or cheque must be presented in a reasonable time from the date
of issue. Any cheque presented within six months will be honoured. Where a
cheque is stale, the onus is on the bank. The bank can remedy the stalemate by
consulting the customer – the bank wouldn’t like to dishonour the cheque on a
technicality or lack of signature.
iii) The
bank will also be exonerated from liability where payment of the cheque would
result in breach of the duty of care owed to the customer by the bank. E.g. the
bank is supposed to ensure that it has been properly drawn and if it suspects
otherwise it is under no obligation to pay.
iv) Where
there is a restraint order issued by a court e.g Shaw v. D.P.P – accounts
restrained coz of immoral money, prostitution
v) Where
there is a garnishee order (order granted by the court to a person who is
indebted to attaching the property of a third party who is holding on behalf of
a debtor. Where there is such an order, the bank will be entitled not to make
payment.
Rogers v. Whiteley [1892] AC 118
A
garnishee order will not apply in so far as trust accounts are concerned
especially where the bank knows that the account is held by a customer as such.
vi) In
cases of Mareva injunctions – A Mareva injunction freezes the
customer’s asset where there is danger that the customer will spend or
otherwise dissipate those assets to avoid execution of a judgment that has been
made against him or is likely to be made against him i.e. it is basically to
restrain a person involved in a legal suit likely to be involved in
compensation from disposing off any assets to be used in discharging
compensation in that suit.
However,
the bank has to show that it was actually aware of that injunction.
vii) Where
there is a winding up order. A winding up order has the effect of restraining
dealings with respect to the organization whose business is being wound up, in
respect of selling or disposal of that property.
Since
the bank’s duty to honour the customer’s obligations are based on agreement,
express or implied, the banks mandate terminates where in the case of cheques
there is countermounting of the cheques (the stopping of payment of the cheque
by the customer) or in respect of the entire mandate when the bank has notice
of the customer’s debt.
S.15
of Bills of Exchange Act deals with cheques
Curtis v.
London City and Midlands Bank Ltd [1908] V.1 KB 293
Illustrates
what is a countermount.
The
person who had issued a cheque, decided that he would stop the payment of that
particular cheque. He sent a telegram to the bank against whom the cheque had
been issued and the telegram arrived after the bank had closed but it was left
by the messages in the letterbox of the bank. The bank meanwhile payed the
cheque. Two days later, they found the telegram. Qn. Whether
the telegram was an effective countermount?
Held: For there to be
a countermount, there must be effective communication. There wasn’t such
communication.
The
duty to inform the customer of any forgeries in relation to the customer’s
account
The
mandate of the customer is signified by a sign by the customer to the bank a
specimen which is kept by the bank. Any species of cheque which bear the
signature of the customer will be presumed to be bonafide instruction by the
customer for the bank to pay. However, the bank should make sure the sign is
not forged or not written in such a way to personate forgeries.
It
is the responsibility of the customer to ensure that whenever there is a
forgery or loss of a cheque book to inform the bank immediately to take
precautions.
The duty to
receive money and to collect cheques on behalf of the customer and credit the
amount received on the customer’s account
Accompanying
this duty, is the obligation of the bank to allow the customer to draw money
from his account from the branch where he holds the account.
Only
caveat: the customer will only be allowed to draw if there are sufficient
funds; where there are no funds where the customer has made credit facilities
for his account with the bank.
To
facilitate the withdrawal of money from the account and an inspection of the
customer’s account the bank is under an obligation to issue the customer with a
cheque book in cases of current account or pass book, in instances of saving
and deposit account. The cheque book acts as a means of drawing money from the
account and also as a way of drawing money from third parties who owe the bank.
The
pass book:
a) Is a
way though which the customer pays money
b) A
record of the customer’s transaction
The
bank will also be under obligation with regular statements/breakdowns of
transactions relating to the customer’s account.
Question
has arisen whether once the bank issues the customer with a statement the
customer is under an obligation to actually read it. The conclusive legal
position as decided in:
Tai Hing Cotton
Mills Ltd v. Lieu Chong Hing Bank Ltd & Others [1986] AC 80
The
legal position as articulated in this case although the bank is under an
obligation to provide the customer with regular statements in respect of his
account the customer is not under any legal obligation to read such statements.
Similarly
held in:
Greenwood v.
Martins Bank
The
fact the customer is not under any obligation to read doesn’t mean the bank is
relieved from its obligations.
Duty of care
and skill
A
bank exercises a duty of care and skill in circumstances where:
a) It
acts as an agent
b) It
is acting as a trustee
Acting as an Agent
Although
ordinarily the relationship between the bank and a customer is of creditor and
debtor, there are circumstances where it acts as agent for customer. This is
where the bank pays the customers cheques and collects cheques on behalf of the
customer.
Where
the bank undertakes the duty, it has to exercise the normal responsibilities of
care and skill that are expected of an agent in agency relationship.
Only
in such circumstances will it exercise care and skill
Lipkin Gorman
v. Karpnale Ltd [1989] V.1 WLR 1340
A
man called Cass was a partner in a firm of solicitors and he drew cheques on
his solicitors account for his own use. He had authority to sign cheques in
respect of his account. All the cheques that were drawn by him totaling
£200,000 were paid by the bank. It was established that the bank knew that Cass
was drawing cheques largely for the purposes of gambling and that the method of
paying the cheques was irregular. The bank never informed the solicitors and
they subsequently discovered the fraud and they brought an action against the
bank and the gambling house. Qn – Whether the bank among other
things was negligent and in breach of its duty as an agent of the customer.
Held:
(1) The
bank – customer relationship is a debtor – creditor relationship
(2) As
a consequence the command/instruction of the customer are sacrosanct.
May
L.J. noted that “In the absence of any notice of fraud or irregularity, a bank
is bound to honour its customer’s cheque.”
As
a consequence therefore of this decision a bank as agent for payment or
collection of customers cheques must act with care in order to avoid injuries
to the customer.
A
bank will also be acting as an agent and be required to exercise the duty of
care and skill where it GIVES PROFESSIONAL ADVICE TO ITS CUSTOMERS.
Acting
as Trustee:
Ordinarily
a bank does not act as a trustee to its customers but a bank may become a
constructive trustee where though it has not been appointed as a trustee, it
becomes involved in the affairs of a trust and therefore becomes liable to the
beneficiaries just as if it had been appointed as a trustee in the initial
stages.
According
to Ladlaw in his book on “The law relating to Banking
Services” a bank may become a constructive trustee if it permits
unauthorized signatories to withdraw funds where it knows the funds are being
misapplied.
Belmont
Finance Corporation v. Williams Furniture Ltd No. 2 [1980] V.1 All ER 393
As
regards instances when a bank may be liable as a constructive trustee
CUSTOMERS
DUTIES TOWARDS THE BANK
Duty
to exercise care when drawing cheques so as to prevent
forgery or alteration: London Joint Stock Bank v. McMillan & Arthur where
it was held that if a customer fails to exercise reasonable care when drawing
cheques so as to prevent forgery, he will be estopped from denying the
genuineness of the signature.
Duty to pay reasonable bank charges and
commission
Banking
Act S.44 – banks are supposed to seek the authority from Finance Ministry in
determining the charges they are supposed to impose on the customer. Basically,
banks charges what is reasonable & there are no legal requirements of
minimum and maximum.
Duty to allow bank to combine his
account
Duty
to permit the bank to exercise the right of lien [read
requirements as to lien – when it may be exercised]
In summary
- The
relationship is basically a contractual relationship but in the initial
stages this contract was “unwritten but currently there is an attempt to
reduce it into writing especially with special types of bank-customer
relationships – involving overdraft facilities, loan facilities. Same is
true where bank offers the customer specialized service especially,
investment advice.
- The
relationship has traditionally remained that of debtor and creditor with
the roles reversing sometimes especially in situations where the customer
borrows money from bank.
The
case of Joachimson v. Swiss Bank Corporation
Summarizes
the nature of bank customer relationship.
Townier v
National Provincial and Union Bank
It
deals with the issue of confidentiality
As
regards the termination of the relationship, according to __________ the
Banker-Customer relationship arises “The moment the parties agree to enter into
a contractual relation with one another and continues until brought to an end
by consent or perhaps by revocation by either party. It is a contract which is
unwritten and undefined by the parties. In other words it is implied.”
Termination of
the contract
In
the final analysis, the following will be considered to terminate the
relationship between the bank and customer.
- Agreement
- Notice
given by one of the parties
- Death
of the customer
- Mental
disability of the customer
- Bankruptcy
of the customer
NOTICE:
Either
the bank or the customer may bring the relationship to an end by giving notice.
In so far as the customer is concerned he may close account by simply
withdrawing the balance on the account so long as the withdrawal leaves in
account sufficient funds to cover any charges and to meet any cheques that the
customer may have drawn and which may have not been presented at the time he
withdrew money from his account.
It
does not appear necessary in law that the customer will give any particular
notice. All the customer has to do is to withdraw any money remaining on the
account and give some indication to that effect. Normally the bank will treat
the account as operational until there is an indication to the effect that the
customer has closed the account.
The
bank must give a customer a reasonable notice before they close that account.
This was clearly articulated by Atkins L.J. in Joachimson v. Swiss Bank
Corporation when he said that: “It is a term of the contract
that the bank will not cease to do business with the customer except upon a
reasonable notice.”
What
is reasonable will vary from one case to another and the longevity of the
notice will be determined by the kind of relationships between bank and
customer. Ordinarily, one month has been taken to be reasonable coz it is
sufficient to give the customer enough time to make alternative banking
arrangements.
Prosperity v.
Lloyds Bank Ltd [1923] TLR 372
The
bank was engaged by the plaintiffs who were an insurance firm to receive
applications and proposals for insurance, process them for the purposes of
establishing a contractual relationship between the applicants and the
insurance firm. The response by the public was so overwhelming and the
publicity associated with it so advanced that the bank decided to terminate the
relationship and gave a one month notice. The plaintiff established that the
scheme had attracted so much attention both nationally and internationally that
one month was not sufficient. Lloyds bank argued that one month was more than
sufficient.
Held: Notice was
insufficient and that the bank was not entitled to close the account.
The
plaintiff had wanted an injunction to restrain the bank from closing the
account but the court held that an injunction would not be an appropriate
remedy in cases relating to closure of account. The appropriate remedy would be
damages where the bank insisted on closing the account. Such notice is
necessary to enable the customer to organize himself for alternative banking.
When a bank can
give notice of termination of account with a credit balance
a) Money
illegally obtained e.g. laundering, drugs
b) Winding
up
c) Merger
NOTE: The issue of
notice or lack of it will not apply in fixed term accounts e.g. fixed deposit
account where the date of maturation of deposit is indicated. It will be
presumed that the account comes to an end on the agreed date. Strictly
speaking, withdrawals on savings account will be done on specified periods;
they therefore bring problems. If you withdraw out of the specified period you
then pay a penalty.
Where
a bank demands on the repayment of an overdraft such a deed does not
necessarily constitute closure of account and the bank will not therefore give
any notice. Similarly, where a bank combines two accounts, the effect of the
combination will be to close one of the but it does not require the giving of a
reasonable notice by the bank.
Garnett v.
Mackewan [1872] LR 8 Exchequer Division 10
National
Westminster Bank Ltd v. Halsowen Press Work and Assemblies Ltd [1972] AC 785
DEATH OF THE
CUSTOMER
Hooley
& Sealey in
their book Texts & Materials on Commercial Law said “Since
the relationship between banker and customer is regarded as personal it will
automatically terminate on the customer’s death, bankruptcy, dissolution of a
partnership or liquidation of a company.”
This
position very aptly summarizes the effect of death on the banker-customer
relationship given that the relationship is dependent on the existence of the
customers mandate/instructions. A dead customer cannot give instructions. Lord
Chorley & Paget in his book on The Law of Banking agree on the above
position.
One
point however arises – must the bank know or have notice of the death? In so
far as the payment of cheques are concerned s.75(2) of Bills of Exchange Act
clearly indicates that the death of customer itself is not enough. It is
necessary for the bank to have received notice to refuse to honour to pay. From
a general point of view the relationship terminates on death.
INSANITY OF
CUSTOMER
It
is argued that since an insane person cannot enter into a valid contract, the
issue of insanity terminating the relationship does not arise.
BANKRUPTCY
To
be looked at when dealing with special types of customers.
THE ACCOUNT
Before
opening an account, the bank must be satisfied of the general characteristics
and standing of the person seeking to open it. To do this, banks will normally
seek to know; applicants employer, nature of employment, kind of remuneration.
This information is given to the bank through a letter of introduction by the
employer.
Where
the prospective customer is self employed the bank must be satisfied as to the
nature of the business and the genuineness of that business.
This
information is important coz the future of the relationship will revolve around
this matter. The case of the unemployed person cannot be very difficult to deal
with. Apart from the information, the bank will seek specimen signature from
the customer which they keep, the mandate (persons who may withdraw), letters
of reference (from persons who know the customer) and general
information/background of customer.
Once
the bank is satisfied it will be possible for the bank to open an account with
that customer and issue him/her either with a pass book or cheque book
depending on the account opened.
Once
opened, an account is basically a statement of the various transactions between
the bank and the customer. It is a facility through which the bank
makes known to the customer the kinds of transactions that have been effected
in his ledger. It is a system of accounting between the banker and the
customer.
There
are different types of accounts which can be opened for the customer which will
vary from bank to bank and time to time. Basically, they can be divided into:
(1) Those
where demand for payment can be made immediately – current accounts
(2) Those
accounts where payment can be made after giving of notice – deposit or savings
account.
Current
accounts and deposit accounts are distinguished in one basic way. Whereas the
drawing of cheques is allowed for on current accounts, no such allowance is
provided for with respect to deposit or savings account.
The
cases of deposit accounts require some notice before withdrawal. Such notice
can be agreed upon in advance or it could be agreed upon between the parties as
the relationship progresses, but in most cases the agreement is arrived at at
the time the account is opened.
By
far, the most important account is the current account because it is the one
that most people:
a) carry
their business transactions
b) make
payments for services rendered
c) banks
collect cheques on behalf of customers
d) banks
make payments to third parties in whose names the customer has drawn cheques
The
bank will have many other different types of accounts; except for special
customer accounts most accounts will take the form of current or deposit
accounts. There will be loan accounts, children accounts, et al depending on
the bank.
The
statement of account of the customer will normally be given either in a
statement or through a pass book both of which are issued by the bank. The
question which arises is ‘are the entries and balances shown in the statements
or in the pass book subject to errors or are they absolute in so far as the
customer is concerned?’
This
issue is important because there are times they will have errors then the
question arises if there is an error of entry must the customer be presumed to
know of such an error? Or is there an obligation on the customer to read his
statement once presented to him by the bank?
Clearly,
any entries in the statement or pass book constitute prima facie evidence
against the bank. They present a correct representation of the status of his
accounts and the customer is therefore entitled to act on the basis of the
statement or pass book.
Given
that the statement is evidence against the bank, there is no obligation on the
customer to read it and as a consequence if a customer honestly relies on an
error in the statement and draws on his account or writes out cheques in favour
of third parties relying on the statement the bank will be estopped from
denying the customer from drawing from that account.
The
legal position: Entries
in a customer’s statement/ pass book are definite and conclusive and a customer
can rely on them honestly unless the bank is able to make adjustments or
alterations before the customer relies on those entries.
Skyring v.
Greenwood [1825] 4 B & C 281
Chatterton v.
London County Bank [1891] TLR
Deals
with forged cheques and the basic issue here is – what happens where forged
cheques are paid on a customer’s account, the customer examines his statement
and returns the statement / pass book to the bank without any indication that
he is aware of the forgery ; is the bank absolved of responsibility?
In
this case, forged cheques were presented to the defendant’s bank in respect of
the plaintiff’s account. The cheques were paid. It was established that the
bank actually sent statements to the customers who actually looked through them
ticking out the entries before returning it to the bank but without indicating
that in fact there were forgeries.
The
bank wanted to raise an estoppel against the customer arguing that since he had
read the account and ticked out the entries he had accepted the forged cheques
and in effect induced the bank to pay further forged cheques.
Held: No duty on the
customer to inspect his passbook or statement and therefore the principle of
estoppel cannot apply. It has however been noted that a bank will only be
bound:
(i) Where
a bank has not corrected the error
(ii) Where
a customer is aware of the error and has in fact acted in bad faith
Generally,
where a bank makes an error in the entries it will be bound by those entries.
MISTAKES IN
RESPECT OF CUSTOMER’S ACCOUNT
When
a customer receives the statement, the presumption is that he will
read the statement and hopefully find out the errors that have been made. There
is no legal obligation on the customer to read the statement, he can either: -
i) Surcharge
the statement i.e. add the items to the statement he believes have been
wrongfully omitted.
ii) Falsify
the statement i.e. having to strike out those items which he thinks are
wrongfully placed there.
These
two processes become a reality in terms of entry of that account once the
customer and the bank have sat together and reconciled those entries. Where
there is an agreement between the two then the account becomes an account
stated. Where there is no agreement, a dispute will arise between the customer
and the bank where the customer complains of the mistakes.
MISTAKES IN
FAVOUR OF CUSTOMER
Where
the mistakes are in favour of the customer, the complaint will only arise where
the bank is denying the customer the right to rely on those entries. Mistakes
in favour of the customer relate to all credits that a bank wrongfully extends
to its customers. The position of the law is, where a bank makes a mistake in
favour of a customer and the customer bona fide relies on that statement so as
to alter his position, the bank will be estopped from denying the customer the
right to access the credit on his account.
Holland v.
Manchester & Liverpool District Banking Co. [1909] Vol 14 Commercial Cases
241
A
customer of the defendant bank was given his pass book and it read to have a
balance of £70, Sh 17 and a pence. On the basis of this entry, the plaintiff
drew a cheque in favour of third party for £67& Sh 11.
When
the cheque was presented for payment, the defendant bank dishonoured it. The
plaintiff brought an action against the bank for damages.
From
the evidence adduced in court, it was shown by the defendant that in fact the
correct balance in favour of the plaintiff was £60, Sh 9 & 9 pence. It was
admitted that the bank clerks had made an error in crediting the customer’s
account.
Held: The defendants
were entitled to ultimately correct the error/wrong entry. But so long as the
errors stood uncorrected and the plaintiff acted on it without any fault on his
part, he was entitled to do so. Therefore, defendants were wrong to dishonour
the plaintiff’s cheque.
Skyring v.
Greenwood
Customer
was a military officer. His account was credited with sums of money which he
was not entitled to. The customer brought this to the attention of the bank and
he continued to give the erroneous credit so when the bank subsequently discovered
that there was an error, they wanted to withhold the customer’s money, the
customer sued.
Held: The money had
been received for the customer’s use by relying on advice a bank, the but since
the customer had relied on their representation and altered his position by
spending more finances on his account.
The
principle of estoppel will not operate unless/until the customer actually acts
on the representation. The bank will be within it’s rights to alter/correct the
error anytime before the customer acts on it and inform the customer of it.
Estoppel will also not apply where the customer knows that there is in fact an
error and the onus of showing that the customer knew lies exclusively with the
bank.
British and
North European Bank v. Zalzstein [1972] V.2 KB92
It
discusses this particular point.
United Overseas
Bank v. Jiwani
United
Overseas Bank mistakenly credited a customers account with the same remittance
twice. The sum of money involved was quite substantial and during the hearing
of the case, it was established that the customer was not expecting any
particular sums of money and the amount involved would not fall within his
normal receipts.
The
question was whether the customer would rely on the mistake with the bank. In
this particular case, the bank was not liable because the plaintiff should have
known that the amount involved was by far higher than his expectation or normal
expectation and should not have acted on it.
MISTAKES WHICH
ARE TO THE DETRIMENT OF THE CUSTOMER
Here
the customer explains that a smaller sum of money has been placed in his
account than actually what he expects. The customer will be complaining that
the bank has debited his account either by cheque etc sums of money in excess
of what he authorized (mandated).
Normally,
where this happens the customer will demand a correction by the bank and in a
majority of cases, the bank will oblige for two reasons:
(1) Because
the bank wants to save its reputation from prospective customers who if they
know of the errors would be hesitant to enter into a relationship with the
bank.
(2) The
bank will also correct because the sums involved will not be substantial and
the bank will not want to engage in litigation so pays out of their reserves.
However,
the bank will always press for litigation in two situations:
(1) Where
the bank suspects collusion with the customer and the bank employee(s)
(2) Where
a fairly long time has elapsed since the error was made before the plaintiff
made a complaint.
A
customer is still entitled to demand the correction of the wrong and as already
indicated, if the bank believes that there is no problem, the bank will make a
correction. This is based on the principle in the Law of Banking that where
there is no fraud problem on the part of the customer, he is entitled either to
benefit from his mistakes/have them corrected in the cases of mistakes to his
detriment.
The
fact that a customer has actually read his statement and returned to the bank
that statement will not bar him from claiming or from benefiting from errors made
and this particular case was clearly illustrated in:
Tai Hing Cotton
Mills Ltd v. Lieu Chong Ching Bank Ltd [1986] AC 80
A
customer of a bank, Tai Hing Cotton Mills Ltd allowed its employees to keep
custody of the company’s cheque books. The employee happened to be a clerk to
the company and on a number of occasions he forged the signature of the general
manager of the company on cheques which he had paid at various banks with which
the company had had an account. The cheques were paid without the company’s
knowledge and when the company discovered the forgeries they sued the banker in
order to have the money paid back. During the hearing it was established that
the company did not have a proper system of checking on the various cheques
that were paid by the company and this resulted in the fact of the company’s
failure to detect the forgeries. The court of first instance i.e. Hong Kong
supreme court held that since the error was a result of the company’s
inefficient control system the banks were not liable and they could therefore
not correct the entries in favour of the customers. However, in an appeal to
the Privy council Scarman L., held that, in the absence of an
express agreement to the contrary the risk of wrongful payments was borne by
each of the three banks. It was also observed by the Privy Council that “the
banks offer a service which is to honour their customers cheques when drawn
upon an account in credit or with an agreed overdraft limit. If they pay out
upon cheques which are not his they are acting outside their mandate and cannot
plead his authority in justification of their debit to his account. The risk is
a risk of service which it is their business to offer.”
The
position in the US is different in the sense that in that country sec 4 – 406
of the Uniform Commercial Code makes it clear that “the customer must exercise
reasonable care and promptness to examine the statement and items attached to
it to discover his authorized signature or any alteration on an item and must
notify the bank promptly after discovery thereof,” In the US therefore, there
is an obligation that the customer must actually look at the statement and
inform the bank of any entries which might be misinterpreted and considered to
be wrong entries.
It
has been argued in the common law system probably the legal position in the US
should be the practical position in the commonwealth countries as it would be
meaningless for the bank to issue statement to the customer unless the
intention was for him to familiarize himself of any irregularities that may be
and inform the bank where there are errors/mistakes.
Once
a customer knows that there is an error in the case of US he will be under an
obligation to indicate this to the bank for verification. At common law, the
position still seems to be that even where a customer detects and fails to
inform the bank he/she will still be in his/her right. The limitation is where
a customer knows that the entry is wrong and remains silent, he cannot rely on
that error once the bank has taken steps to correct it.
In
similar circumstances a customer who knows his chequebook has been stolen has
obligation to inform the bank to take appropriate measures.
Greenwood v.
Martins Bank [1933] AC 51
The
plaintiff’s wife drew a number of cheques on the husband’s account. The
plaintiff (holder of account) discovered the fraud by wife but coz of pleadings
from the wife he decided not to report the matter to the bank. Despite
assurances that she would no longer draw cheques from the account, she went
ahead and did so and when husband discovered he went ahead and reported, she
committed suicide. The bank refused to act. He sued. Question is whether bank
was liable. The court held exceptionally that the plaintiff was under an obligation
to inform the defendant bank of the forgery as soon as he discovered it and
having failed to do so the bank had been relieved of responsibility.
Can
a bank be held responsible on the basis of negligence? In the Tai Hing
case the court argued this particular issue and came to the conclusion
that in a purely contractual situation remedies in tort law would not avail.
More importantly, where a person argues liability in negligence they will be
implying a duty of care on the part of the customer by reading his statement
and since it has already been seen, established that the customer does not have
an obligation to read his cheque book the principle of duty of care will not be
applicable in this particular case.
Charton v.
London County Bank
Summary
1. Banks
must take absolute care to avoid wrong entries on the customer’s ledger for
where entries do occur and they’re either in favour or detriment of the court
the courts will almost invariably rule in favour of the customer.
Brewer
v. Westminster Bank Ltd and Stevens [1952] All ER 650
It
clearly shows the reluctancy of the courts to assist banks in situations where
they’re wrong entries which a customer has relied on.
2. But
it must also be noted that before the courts assist the customer he must show
that he acted honestly and actually relied on the error made by the bank. A
customer cannot claim to have been misled if he was not aware of the error.
British
and North European Bank v. Zalzstein [1927] V.2 KB 92
The article is of much held. Thank you.
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