Banker Customer i

7/31/2019 Banker Customer i

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BANKER CUSTOMER

RELATIONSHIP


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The moment a bank account is opened either by an

individual, a firm or a limited company, the entity becomesthe customer of the bank. To study and get ourselves

familiarized with legal and other implications of this

relationship are extremely important to avoid future

complications and discharge of our responsibilities as an

effective and successful banker.


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The Bills of Exchange Act 1882 (UK) defines Bank asunder:

A banker includes any body or person, whether

incorporated or not, who carry on the business ofbanking.

Sec. 5(b) of Banking Companies Ordinance 1962 definebanking as under:

Accepting, for the purpose of lending or investment ofdeposits of money from the public, repayable on demandor otherwise and withdraw-able by cheque, draft, order orotherwise.


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No statue has defined the term customer. A leading

banking case in which we find an important clue aboutwho is a customer was that ofMatthew v. William Browns& Company (1894), where the court decided that the

stranger who stole the cheque, had no title to it. As such, athief was not a customer. This decision gives an impliedqualification that a course of dealing or a habit of calling atthe bank by the person from time to time for bankingservice is essential for banker customer relationship.

However, in subsequent decisions the court did notrecognize a regular course of dealings for theestablishment of this relationship.


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The SBP Prudential Regulations defines an Account holder

in the following words :

An Account holder means a person who has openedany account with a bank or is a holder of

deposit/deposit certificate or any instrument

representing deposit/placing of money with a

bank/DFI or has borrowed money from thebank/DFI.


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Conclusion :

The Banker customer relationship does not commence

unless both the parties intend to enter to it. Accordingly

there must be some sort of account, either a deposit or a

current account or some similar relationship, to make a

man a customer of a banker. If a person has no account

with a bank and is not about to open an account, the fact

that a bank renders some casual service for him will not

make him a customer.


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answerable to the principal; if he put it into jeopardy, if he

engages in a hazardous speculation, he is not bound to

keep it or deal with it as the property of his principal; he

is, of course, answerable for the amount, he has contracted,having received that money, to repay to the principal,

when demanded, a sum equivalent to that paid into his

hand.


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BANKER & CUSTOMER

RELATIONSHIPDuration is not an element in the relationship between acustomer and the banker :

In the English case of Ladbroke and Todd, 1914 JusticeBailhache held that a person becomes a customer of a bankwhen he goes to the bank with money or a cheque and asksto have an account opened in his name, and the bankaccepts the money or cheque and is prepared to open anaccount in the name of that person; after that he is entitledto be called a customer of the bank. The person becomes acustomer the moment the bank receives the money or

cheque and agrees to open an account. Therefore, neitherthe number of transactions nor the period during whichbusiness has been conducted between the partiesdetermine whether or not a person is a customer.


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BANKER & CUSTOMER

RELATIONSHIPAnother leading case which further reemphasized thisprinciple is of Great Western Railway Co. London andCounty Banking Co. Ltd., where a rate collector habituallyencashed cheques for about twenty years at the counter ofthe defendant bank who had no account with the Bank.

Both the trial judge and the Court of Appeal held that hewas a customer, but the House of Lords took the oppositeview. The Judicial Committee of the Privy Councilsummed up the position as follows:

Their Lordships are of the opinion that the word

customer signifies a relationship in which duration is notof the essence. A person whose money has been acceptedby a bank on the footing that they undertake to honour


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cheques up to the amount standing to his credit is, in theview of their Lordships, a customer of thebank.irrespective of whether the connection is of shortor long standing. Thus a person becomes a customer of

the bank :a) when he opens an account with it;

b) it is immaterial that the account is overdrawn;

c) it is irrelevant whether the account is of the

current type or some other type such as savingor deposit account.


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BANKER & CUSTOMER

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In Stoney Stanton Supplies (Coventry) Ltd. V. Midland Bank Ltd., in

which A forged Bs signature and opened an account in B name

without Bs authority. Subsequently it came into the knowledge of the

B that A has fraudulently opened an account in his name and claimedthat the said account belonged to him and he is entitled to operate

upon the account. Bank refused to accept Bs contention. What

should have been the decision of the court.


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The court held that no relationship came into existence between the

Banker and B. The bank had no relationship of contract with B and

did not owe him a duty of care. Simply opening of an account in Bs

name does not establish a relationship of banker and customer

between the parties.


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BANKER & CUSTOMER

RELATIONSHIPThe relationship between the banker and customer in legalterms is purely contractual in nature, the parties thereto mustbe capable to enter into the contract as per conditions laiddown under section 11 of the Contract Act 1872. This

relationship can be established with the following :i) The applicant must be a major i.e. he must have attained theage of 18 years at the time of opening of account. A minor isnot competent to contract and therefore bankers do not obligethem to open an account with them. However, to encourage

savings and assist in handling legitimate banking transactions,a joint account of minor is allowed to be opened along with hisguardian.


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ii) He should be a person of sound mind. Sec. 12 of he

Contract Act lays down that a a person is said to be of sound

mind for purpose of making a contract if at the time when he

makes it, he is capable of understanding it and of forming a

rational judgment as to its effect upon his interest.

iii) He should not have been debarred from entering into any

contract under any law, like undischarged bankrupt,

proclaimed offender, and alien enemy.


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BANKER & CUSTOMER

RELATIONSHIPOTHER RELATIONSHIPS :

1. BAILOR AND BAILEE : The original bankers i.e. goldsmith, wereproviding to their clients safe custody facilities. However, with thepassage of time it has become a secondary business. When theBanker provides such facilities to his customers, the relationshipbecomes that of a bailor and bailee.

Duties of Bailee:

1. To take care of goods bailed. The question of degree of care is ofparticular importance in case of bailment. The bailee is bound totake as much care of the goods bailed to him as a man ofordinary prudence would, under similar circumstances, take ofhis own goods of the same bulk, quality and value as the goods

bailed. (Sec.151)2. (Sec. 152) The bailee, in the absence of any special contract is not

responsible for the loss destruction or deterioration of the thingsbailed, if he has taken the amount of care of it described in Sect.151.

.


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3. To return the goods. It is the duty of the bailee to return or

deliver the goods, without demand, on the expiry of the time

fixed or when the purpose is accomplished. If he does not

return or deliver as directed by the bailor, or tender the goods

at the proper time, he becomes liable for any loss, destructionof the goods even without negligence during the period it is

detained.

4. As regards the return of goods bailed by two or more joint

owners, the bailee may return the goods to any one without theconsent of the bailors, provided that there is no contract that

delivery must be given to all.


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BANKER & CUSTOMER

RELATIONSHIPPRINCIPAL AND AGENT : The relationship between abanker and his customers is ordinarily that of debtor andcreditor, but he is an agent of customer when he buys orsells securities, collects cheques, dividend warrants, or

promissory notes on behalf of his customer.Who may be an agent : Since a contract made by an agentis in law the contract of principal, it is immaterial whetheror not the agent has legal capacity to make a contract forhimself. The agent is only a connecting link and is not

personally bound by his acts performed on behalf of hisprincipal. The law requires the principal and third party tobe competent to contract.


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BANKER & CUSTOMER

RELATIONSHIPPAWNER/PAWNEE, MORTGAGOR AND

MORTGAGEE :

A pledge is a contract of bailment, whereby one person transferspossession of some article to another to secure the payment of debt or

the performance of promise. A pledge is a security device based upon abailment. When a customer pledges goods and documents with theBank as security for an advance, he becomes the Pawner and theBanker becomes the Pawnee.

A pledge is something between a simple lien and mortgage. In the caseof a lien there is no transfer of interest. In case of mortgage thetransfer of interest in the property mortgaged passes to the mortgagee.He has an absolute interest in the property subject to a right ofredemption by the mortgagor on payment of debt.


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BANKER & CUSTOMER

RELATIONSHIPMortgage :

A mortgage is the transfer of interest in specific immovableproperty for the purpose of securing the payment of moneyadvanced or to be advanced by way of loan, an existing or

future debt, or the performance of an engagement which maygive rise to pecuniary liability. Banks many time extendfinance facility against mortgage of immovable property of theborrowers/guarantor. The person who is offering the securityis called mortgagor and the bank in whose favour the property

is mortgaged is called mortgagee. The banker can exercise hisright to sell the property in case of customers default.

Most popular mortgages among bankers are simple mortgageand mortgage by deposit of title deeds or equitable mortgage.


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Terms of contract between banker and customer :

1.The banker must receive cash and collect the proceeds of such items ascheques, postal orders, money orders and bills of exchange for his customersaccount. When executing such instructions of his clients, he frequently acts as

an agent for his customer. Similar other responsibilities discharged as an agentincludes, purchase and sale of stocks and shares, remittance of funds onstanding instructions etc.

2. The money so received become at once the property of the banker, and he isthereupon indebted to his customer for an equivalent sum; hence the bankerdoes not hold the money as his customers agent or trustee. Accordingly, the

customer has no right to ask how the funds placed by him in his account havebeen used nor can claim the same cash deposited by him originally. He hasonly the right to claim the equivalent amount of cash and his right will berecognized when he demands it through submission of cheque.


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3. Although the banker becomes indebted to his customer, the ordinary

rule that debtor must seek out his creditor does not apply, the bankersduty is to repay the money or any part of it upon demand being madeby the customer. The duration laid under the law of limitation topursue his claim through legal means against the bank in case of

default will commence with effect from the date a demand is made bythe customer.

4. The banker must pay cheques drawn on him by his customer in legalform on presentation, during banking hours subject to availability of

sufficient funds to his credit or the cheques are within the limits of anagreed overdraft and there are no legal bars to payment.


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5. The banker has the right to charge his customer areasonable sum for services rendered.

6. If a customer maintains two or more accounts with hisbanker (a) it is usually an implied term of the contract

between banker and customer that the banker will keepthe accounts separate and (b) if the customer makes apayment to the credit, he has the right to appropriate thefunds to whichever account he chooses.

7. The banker does not owe a duty to his customer, who isseeking to borrow money from him, to advise the customeras to the wisdom of borrowing the money for the specifiedpurpose.


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8. The banker must not disclose to third person without the

consent of the customer, express or implied, either the state

ofcustomers account or any of his transactions.

9. A banker is under an obligation to supply to its

customers a copy of the statement of account, either

prepared manually or through computer system.

10. The customer must exercise reasonable care in drawing

his cheques so as not to mislead his banker or to facilitate

forgery.


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BANKER & CUSTOMER

RELATIONSHIP11. If the customer discovers that the cheques purportingto have been signed by him have been forged, he mustinform his banker, and like wise the banker becomesaware that forged cheques are being presented for

payment, he must inform his customer.12. The relationship between banker and customer may beterminated by mutual consent or unilaterally, by eitherparty.

13. Finally, there are certain events which affect, the

relationship between banker and customer like death,mental incapacity or bankruptcy, the service of courtorder etc.


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BANKERS DUTY OF SECRECY

An important obligation of a banker is to keep his customers affairs secret.

The leading case which established the basic principles ofbanks duty of

secrecy was that of Tournier v. National Provincial and Union Bank of

England. The plaintiff was a customer of the defendant bank. In April

1922, his account was overdrawn by an amount of about Pound 10 and he

signed a document agreeing to pay off this amount by weekly installmentsof one pound. The plaintiff wrote on the document the name and address of

a certain company whose employment he was about to enter as a traveler

on a three month contract.

When the agreement to repay was not observed, the acting manager of the

branch telephoned the company in order to find out the plaintiffs privateaddress, and he spoke to two of the companys directors. The plaintiff

alleged that in those conversation the acting manager had disclosed that his

account was overdrawn and that promises for repayment were not being


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carried out and expressed the opinion the plaintiff was betting heavily, thebank having traced a cheque or cheques passing from the plaintiff to abookmaker. The acting managers version of the telephone conversationdid not differ subsequently from that of the plaintiff. As a result of those

conversation, the company refused to renew the plaintiffs employmentwhen the three months had expired. The plaintiff brought an action againstthe bank for damages for slander and for breach of an implied term of thecontract between him and the bank that the bank would not disclose tothird persons the state of his account or any transaction relating to it.

The undernoted points were considered during trial and decided in the final

verdict of this case :

i) To what information does the obligation of secrecy extend. It clearlygoes beyond the state of the account, i.e. whether there is debit or credit


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balance. It goes to all the transactions that go through the account and tothe securities, if any given in respect of the account . It extend even beyondthat and also include information from other sources than the customersactual account.

ii) Whether the duty is absolute or whether there are any occasion when a

bank is justified in making disclosure concerning customers affair. TheLordship held that it is not absolute but qualified. On principle, he heldthat the qualifications can be classified under four heads namely :

a) Where disclosure is under compulsion of law;

b) where there is duty to the public disclosure;

c) where the interest of the bank require disclosure;

d) where the disclosure is made by the express or implied consent ofthe customer.


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The Banks (Nationalization) Act, 1974, has also made it obligatory for

every Pakistani banker to maintain secrecy about the affairs of the

customers account. Sec. 12(1) of the act lays down that the banks will

observe secrecy and shall not divulge any information relating to the affairs

of its constituents except in circumstances in which it is, in accordance with

the law or practice and usage customary among bankers, necessary orappropriate for a bank to divulge such information.

Legally recognized instances when disclosure is appropriate are discussed

below :

i) Under Compulsion of Law : A banker is often served by an order by a

competent court of law to furnish information about his customers

account. For example Sec. 165 of Pakistan Criminal Procedure Code

authorizes the investigating officer to search record of the bank for any


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information relating to certain offences, provided prior permission has been

obtained from a Session Judge.

Similarly, with the prior approval of the Income Tax Commissioner, anIncome Tax Officer may inspect the books of the banker or call forinformation required by him in accordance with Sec. 144 of the IncomeTax Act.

Sec. 6 of the Bankers Evidence Act of 1891, permits the banker to producecertified copies of the relevant parts of the entries from the ordinary booksof the banker; and the court will be pleased to accept the evidence soproduced.

2. Duty to public disclosure : Sometime the bank is morally bound todisclose the state of customers account, when it came to his knowledgethat the activities of his customers account are against public/nationalinterest. However, in such instances the banker must make himself sure


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that he has sufficient evidence to support the disclosure.

In the Interest of the Bank : The bank may also be disclosing thecustomers state of account when it is required in connection to safeguardhis own interest e.g. suit filed for recovery ofbanks dues. In such an

instance the bank will be filing copies of statement of accounts and otherdocuments in support of his claim. It is also possible that some times thebanker my have to disclose the nature of account in order to defend againstthe charges brought against him.

Express or Implied consent of customer : Such disclosure are made in theinterest of the customer under his express or implied consent. For exampleinformation furnished to auditors for compilation of final accounts orqueries received from business circles about the customers account inconnection with business contracts and ventures.


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It is an established practice among bankers that they provide confidential

opinion on their customers to fellow bankers when requested to do so. It is,

however, not a breach of professional responsibility because it is a

established practice on a reciprocal ground. A banker should be extra

careful when furnishing information about his customer and should confine

such opinions to casual expressions like fair, good, satisfactoryetc.The information should be carefully worded and provided on a plain paper

not bearing signature of any of its officials.

The forwarding letter accompanying the opinion should also clearly state

that the opinion is strictly for private use of the banker, without any risk

and responsibility on the part of the bank or any of its officials and thisopinion should not be passed on to any third party.


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Termination of Relationship

The banker-customer relationship is contractual in nature, it can beterminated by either party by serving a notice on the other. However, inpractice a customer may terminate his contract at any time, banker ifintends to terminate this relationship always serve a notice in view of theoperative nature of the account.

Why a customer would like to close his account, some of the plausiblereasons for closure of account by a customer are listed below?

i) Change in residence of the customer which makes banking at the existingbranch very inconvenient or costly.

ii) Customer may not be satisfied with the quality of service rendered bythe bank.

iii) Account may also be closed due to the death of the customer.On the other hand a banker would like to close the account of a customerdue to the following reasons :


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Termination of Relationship

i) Presentation by customer for payment of cheques without adequatebalance in the account.

ii) When the customers account has been unremunerative.

iii) A regular habit of approaching and presenting cheques after bankinghours.

The bankers give formal intimation to the customer that he wishes to closethe account after a specified period. He may also mention to the customerto withdraw all credit balance in his account and return the unused cheques.

Reasonable Notice :

The length of notice given to customer by a banker is of great signficance.

It depends largely on the character of the account and circumstances of thecase. A notice served to a salaried person may be for a few days, whereasfor a business account, it may vary from 15 days to a month or even moreaccording to the size of transactions in the respective account.


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CASE STUDYOPENING A NEW

ACCOUNTLadbroke v. Todd (1914)

The plaintiffs, a firm of bookmakers, posted a crossed chequein respect of winnings to one of their clients, from whose letter

box it was stolen. The thief opened a bank account in the nameof Jobson, with the defendant (a banker), paying in for thecredit of the account the stolen cheque, which was cleared forhim the same day. The bank told him that no withdrawal couldbe made until the cheque was cleared, but no reference were

taken or enquiries made by the bank as to his standing orrespectability.


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CASE STUDYOPENING A NEW

ACCOUNT

It was held that the relation of banker and customer begins

with the first transaction, and the banker is protected under the

Negotiable Instrument act (if crossed of course) sent for

collection, even if the customer had, upto that time, drawn no

money.

In this case, however, although the bank acted in good faith,

there was negligence in not making enquiries usual on opening

of an account; the protection of available under NegotiableInstrument Act was lost, and the judgment was given against

the bank.


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CASE STUDY

JOINT ACCOUNT

JOINT ACCOUNTHUSBAND AND WIFE

(MARSHALL V. CRUTWELL)

A bank account was opened in the names of M and hiswife, the plaintiff. The account was opened by transfer of

the balance on account of M, who was in failing health and

who, therefore, wished to hand over to his wife the making

of payments in respect of household and other expenses.

On the death of M, the wife claimed to be entitled to the

balance of account.


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CASE STUDY

JOINT ACCOUNT

It was held that although the deceased had stated, to the

recollection of the Bank Manager, that the balance of the

account would belong to the survivor of himself and hiswife, the transfer of the account into the joint names was

not intended to be a provision for the wifes benefit. It was

merely a mode of conveniently managing the affairs of the

deceased, and the wife was not entitled to the balance ofthe account.


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JOINT ACCOUNTSERVICE OF

GARNISHEE ORDERHusband and wife - Account in wifes name Service ofGarnishee order:

T, a recently discharged bankrupt, opened a bank account inthe name of his wife. The account was to be used for domesticpurposes and was only to be drawn upon with the husbandsconsent.T paid into the account, which had been overdrawn, moneybelonging to himself amounting to GBP 555, so that there wasa credit balance on the account when judgment was obtainedagainst the wife by H. Ltd. in respect of indebtedness for

goods, principally clothing. A garnishee order was served onthe bank in respect of the account, and the question waswhether, in fact, the account was attached by the order.


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JOINT ACCOUNTSERVICE OF

GARNISHEE ORDER

It was held that although the account was in the name of the

wife, the arrangement was merely a mode of conveniently

managing the husbands affairs, and there was a resulting trustin favour of husband.

It had been held that a bank could not be garnisheed if it could

be shown that no part of the money in the account was the

judgment debtors own. Hence, the wifes account was not

attached and the garnishee order would be discharged.


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BATTS COMBE QUARRY CO. V. BARCLAYS BANK (1931)

The plaintiff company put an enquiry through their bankers, Lloyds Bank,

to the defendant bank, as to the financial standing of T. & Co. A favourable

reply was given by the defendants and the plaintiffs opened a credit

account in favour of T. & Co., supplying them with goods in reliance upon

the reply to their enquiry.

The debt was not paid, and in an action against Barclays Bank, the

plaintiffs alleged that the bank had been negligent in reply to the enquiry,

as at the time, they knew T. & Co. to be in difficulties and were in fact,

pressing them for reduction of their overdraft, which was not fully secured.

They also alleged that the bank, in breach of duty, failed to exercise

reasonable care and skill in replying to the enquiry.


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Held : The defendant were not liable. There was no evidence

of negligence, and no duty was owed by them to the plaintiffs.


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GuaranteeBanks duty as to disclosure :

The plaintiff, C, guaranteed the bank account of a married

woman. At the time he signed the guarantee, the account was

already overdrawn, the womans husband was undischarged

bankrupt, to whom she had given authority to draw on theaccount, while payment had been stopped, in a number of

cases, of cheques drawn on the account.

The surety claimed to have the guarantee set aside on the

ground that the bank had not disclosed to him of any thesefacts.


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Held : There was no need for disclosure to be made voluntarilyof any matters which might naturally be expected to take placebetween the parties concerned. The bank was, therefore, not

bound to disclose any of the facts mentioned, and the actionwould be dismissed.

A guarantee is not a contract and therefore a banker is notbound to disclose all material facts to the guarantor. Thebanker, when taking a guarantee, or in subsequent dealings

with the guarantor, need not volunteer information, but if hebelieves that the guarantor is under a misapprehension as toany circumstances, it is his duty to correct themisapprehension.


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CASE STUDYIn Balmoral Supermarket Ltd. v. Bank of New Zealand the

plaintiffs employee entered the defendant banks premisesintending to deposit some cash and cheques. The cash wasemptied out of a bag on to the counter midway between theemployee and the teller. The teller took a small bundle ofnotes from the counter and proceeded to count them.

After these notes had been counted and put on one side,robbers entered the bank and took the uncounted cashfrom the counter. The plaintiff brought an action againstthe bank claiming the amount of the cash taken by therobbers and alleging that the possession of and property inthe cash on the counter had passed to the bank. This claim

failed. The Supreme Court of New Zealand held that, untilthe money to be deposited had been checked and the bankhad signified its acceptance thereof, the money had notbeen deposited and the bank had not become the debtor ofthe customer in respect of money.

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Banker Customer i

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