The Banker Customer Relationship - Research Paper Example

THE BANKER CUSTOMER RELATIONSHIP INTRODUCTION The common law does not provide a comprehensive definition of the term banking. All the same, it is commonplace to accept the traits of banking activity, which had been ascertained by Denning MR in United Dominions Trust Ltd v Kirkwood.1 The characteristics identified by him were; first, the conduct of current accounts; the payment of cheques; and the collection of cheques for a customer. However, there are several other features of banking activity, and the aforementioned are not the sole aspects of this activity.2 In accordance with the Oxford English Dictionary, a bank constitutes an establishment that undertakes the custody of money deposited into the account of its customers. One of the essential duties performed by a bank, includes the payment of drafts and cheques drawn upon it. However, this definition is inadequate as it fails to establish the basic principles related to the working of a bank. In addition, the Bills of Exchange Act of 1882 defines a banker as a body of individuals who conduct the business of banking. This body can be incorporated or otherwise. Evidently, the exact meaning of the term bank is not furnished by this definition. At the same time, the nature of banking is not indicated. One scholar has defined a banker as an individual who in the ordinary course of his business, honours cheques drawn on him by entities from and for whom this banker receives money on current account.3 However, banks conduct numerous operations that are not limited to the honouring of cheques. Another scholar had defined a bank as a body that accepts deposit accounts, takes current accounts, issues and honours cheques, and collects cheques for its customers. Furthermore, the Hilton Young Commission of 1926, described a bank or banker as denoting an entity that included the term bank or banking in its title or description, and engaged in taking deposits of money that could be withdrawn by cheque, draft or order. Thus, these definitions describe the fundamental function of a bank as being the acceptance of deposits.4 Another term that is of great significance to practical banking, is the term customer. However, this term has not been defined accurately, and there is no universally accepted definition of this term. In one case, the presiding judge had described a customer as an individual who had some form of an account with a banker. One authority described this as follows, a customer had to be a person who engaged in some recognisable course of habit of dealing that could be classified as regular banking business. In other words, a person is a customer if the following conditions hold good.5 First, there should be some recognisable course or habit of dealing. In other words, the engagement with the bank should not be a solitary or isolated transaction. Second, the engagement or dealing with the bank should be classifiable as constituting regular banking business.6 Significantly, in Ladbroke v Todd, Bailhache J stated that the banker-customer relation is established the moment the first cheque is deposited into the customer’s account and is accepted for collection.7 With regard to the term customer, Bailhache J, stated that it denoted a relationship that was not determined by its duration. At the same time, a certain periodicity of conducting transactions was deemed to be necessary for rendering a person dealing with a bank, its customer. Thus, a person is the customer of a bank, when he has an account with the bank, and when his dealings with the bank are essentially in the nature of regular banking business.8 Banker Customer Relationship The common law has enjoined, from time immemorial that banks are legally obliged to ensure secrecy regarding the affairs of their customers. For instance, in Tournier v National Provincial and Union Bank of England,9 the appellate court ruled that an implied duty of secrecy was owed by banks towards their customers. Moreover, such duty was not restricted to the knowledge obtained by the bank, due to the contractual relationship with the customer.10 As such, this duty was deemed to extend to knowledge obtained by the bank, prior to the commencement of the relationship with the customer, as well as after the cessation of this relationship. Furthermore, this duty was also applicable to knowledge obtained regarding the customer that had been obtained from external sources, such as the information procured from a third party.11 In Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd,12 the Privy Council provided the ruling, with respect to a case that had been submitted for its decision by Hong Kong. In this case, an accounts clerk of the plaintiff customer had obtained payment for cheques on which he had forged the signature of the managing director. This company did not have an internal audit mechanism to detect such fraudulent activity. The Privy Council ruled that the customer did not owe a duty towards the bank to implement systems that would limit or prevent the presentation of forged cheques upon the bank.13 In the event of the customer claiming that his account had been wrongly debited, on account of occurrence of instances of forgery, the customer can seek a declaration to this effect, sue for breach of contract, or sue for negligence, regarding the conversion of a cheque belonging to the customer. Such cheque having been altered or drawn in a fraudulent manner. The amount of damages granted by the court, will usually be the amount of the cheque.14 In addition, the customer can sue in debt, as the customer owes a debt to the bank. This was clarified in National Bank of New Zealand Ltd v Walpole15 and Kepitagalla Rubber Estates Ltd v The National Bank of India Ltd.16 With respect to the banker-customer relationship, the bank enjoys a lien on the bills and cheques that come into its possession as a banker. This lien is with regard to the general balance of amounts due from the customer. As such, when a bank acquires lien over bills of exchange, the possession is as an agent for collection in the course of its dealings with the customer. 17 In addition, in BP Refinery (Westernport) Pty Ltd v Shire of Hastings,18 the Privy Council stipulated the conditions that had to be invariably satisfied for a term to be implied in a contract. In this regard, Lord Simon LJ, opined in this case, while pronouncing the majority decision of the Privy Council that albeit, it was not essential to conduct an exhaustive review of the authorities, regarding the implication of a contractual term, the conditions given below had to be fulfilled. First, the term had to be equitable and reasonable. Second, it should provide business efficacy to the contract. Third, it should be patently obvious. Fourth, it should be possible to express it clearly. Fifth, no express term of the contract should be invalidated by it.19 Additionally, in Equitable Life Assurance Society v Hyman the court raised the alternative query, whether the implied term was indispensable for realising the reasonable expectations of the parties to the contract.20 This recent decision has served to increase the uncertainty associated with determining the correct test for implying terms into contracts that mirror the intentions of the parties. 21 The Australian and Canadian laws, and to some extent, the UK law, recognise that a fiduciary nature is inherent in the relationship between a banker and those who avail themselves of the services provided by the former. In the past, the situation was not so, and the relationship between a banker and the entities dealing with the banker were deemed to be having nothing more than a debtor-creditor relationship.22 Moreover, with regard to mutual obligations, it was generally accepted that these were totally defined by the contractual terms existing between these parties. For instance, in N Joachimson v Swiss Bank Corporation, it was held that with respect to the usual relationship between a banker and its customer, the relationship was determined by the implied contract between them.23 Despite the fact that the customer had deposited funds with the banker, the property in such amounts was deemed to have been transferred, in its entirety. In fact, a formal relationship of trustee and cestui que, with respect to the money deposited with the bank, was not deemed to be in existence. 24 As such, this situation has continued, and the obligation of the banker is limited to accounting to the depositor, the value of what had been entrusted. Thus, the mutual obligations of the parties, from the instance of deposit of funds are articulated on the basis of a running account, and the relationship is described as being purely of a contractual nature.25 Confidentiality Confidentiality is central to the banker-customer relationship. As such, no legal system endeavours to deal with this issue in a comprehensive manner. With the exception of a few nations, such as Switzerland and Luxembourg, the majority of the nations do not ensure complete confidentiality. Moreover, the majority of the nations have enacted laws that require the financial institutions to reveal the details of certain individuals under certain circumstances. For example, the Banking and Financial Institutions Act of 1989,26 implements provisions that adhere to the common law and the UK’s statutory instruments. However, the presence of several conditions, under which confidential information regarding customers has to be disclosed by the banks, cast serious doubts upon the presence of confidentiality in the banking sector. The Islamic system had been totally unfamiliar with the Western model of banking. This has changed in the recent past. However, the development of Islamic banking in Malaysia and several other Muslim nations has served to emphasise the crucial significance of confidentiality of the banking sector.27 Moreover, in Taylor v Blacklow,28 the Court of Common Pleas pronounced a momentous decision pertaining to the confidentiality of the banker-customer relationship. In this case, the disclosure of the client’s confidential information by the client’s attorney resulted in considerable loss to the client. The latter had been engaged in the task of procuring a mortgage to a prospective lender.29 On account of the disclosure, the client’s attempts to raise money on the mortgage were significantly delayed. Moreover, the rate of interest on the mortgage increased substantially, which the client had to pay. The court held that the attorney had breached his professional duty of confidentiality towards the client. Although, the client had obviously breached a moral duty, the attorney owed him a professional duty of confidentiality.30 Customers’ Obligations The common law limits itself by enjoining merely two duties upon customers. One of these is the duty to exercise reasonable care at the time of drawing cheques, so that the bank is not misled or forgery is not facilitated. The other duty is to inform the bank, immediately upon coming to know about acts of forgery or misuse of the account. There had been several concerted attempts to extend the duties owed at common law by customers to their bank. Some of these were requiring customers to discover forgeries by perusing the bank statement of accounts, exercising care in preserving the cheque book, and conducting an organised business. However, these attempts were on the whole unsuccessful.31 Nevertheless, an obligation can be imposed upon customers under express contractual terms. However, in such cases, it is essential to bring these terms to the notice of the customers, in an explicit manner. Moreover, the Australian Securities and Investments Commission Act and the Electronic Funds Transfers Code of Conduct impose certain restrictions. For instance the former requires services to be rendered with due care, skill and reasonable fitness for purpose. Furthermore, the Electronic Funds Transfer Code restricts customer liability for unauthorised transactions. It obliges non-excludable conditions and terms to be made integral to the contract document.32 The case law involving customers’ obligations towards the banking system has been discussed in the sequel. The Macmillan and Greenwood duties were established with the decision of the court in c Stock Bank Ltd v Macmillan and Greenwood v Martins Bank Ltd, respectively. The former requires the customer to draw a cheque in a manner that does not facilitate forgery or fraud; the Greenwood duty, on the other hand, requires the customer to intimate the bank regarding an act of forgery or fraudulent drawing of a cheque on his account. Furthermore, such information has to be conveyed to the bank, as soon as the customer comes to know of it. This has been reiterated by the court, in United Asian Bank v Tai Soon Heng Construction Sdn Bhd33 and Syarikat Islamiyah v Bank Bumiputra Malaysia Bhd.34 In London Joint Stock Bank Ltd v Macmillan, it was held that a customer was duty bound towards the bank, to refrain from drawing cheques in a manner that would promote forgery or fraud.35 Furthermore, in Greenwood v Martins Bank Ltd, the court held that customers owed a duty to the bank to inform it of any act of forgery immediately upon coming to know of the same.36 In addition, banks had stated that this duty had wider application and possessed the features of an implied term in contracts, whereby customers had to take reasonable precautions to prevent the presentation of forged cheques, during the management of their business with the bank. Moreover, customers had a duty in tort, towards the bank, which required them to scrutinise the periodic statements of account provided to them by the bank and to inform the bank of any irregularities in them. In addition, in Commonwealth Trading Bank of Australia V Sydney Wide Stores, it was held that the contract between a banker and customer, imposed a duty upon the customer to take the usual and reasonable precautions, whilst drawing a cheque, so as to preclude fraudulent alteration of the cheque, which could cause loss to the banker.37 The tortious liability of professional service providers has been enhanced. In the past, the liability of a solicitor towards his client had been limited to the extent of the retainer charged by him from the latter. Subsequently, changes to the law have ensured that a solicitor could be held liable in tort, as well as in contract. As long as the necessary features for a cause of action are in place, a professional can be held liable in tort. This situation applies to professionals, such as accountants, architects, builders and surveyors.38 Moreover, the Bills of Exchange Act of 1949, at Section 60 deals with endorsements made in bills of exchange. A bill of exchange that is payable to order on demand and drawn on a banker, upon being paid by the latter in good faith and in the ordinary course of business, does not require the banker to demonstrate that the endorsement of the payee or any subsequent endorsement had been made by the person whose endorsement it purports to be. As such, even if the endorsement had been forged or made in an unauthorised manner, the banker will be deemed to have paid the bill of exchange in good faith and in the ordinary course of business. In Syarikat Islamiyah v Bank Bumiputra Malaysia Bhd, the court ruled that Section 60 of the Bills of Exchange Act 1949, provides protection to the banker who pays the bill of exchange, against unauthorised or forged endorsements. However, this section does not encompass the issue of signatures that have been forged or which are unauthorised. Such signatures are governed by the provisions of Section 24 of this Act.39 The conduct of a customer can prevent him from claiming that a payment had not been authorised. In this regard, the customer could have presented an explicit representation to the bank. On the other hand, the customer, with regard to forgeries or other fraudulent uses of his account, could have failed to inform the bank upon coming to know of such transactions in his account. As such, the customer should possess actual knowledge regarding fraud or forgery. The presence of constructive knowledge is insufficient.40 For example, in the Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd case, the subject matter related to cheque fraud. In this case, the Privy Council did not accept the notion that a customer owed the bank a wider duty to conduct his business in a manner that would significantly impede fraud. In addition, the Privy Council rejected the idea that the customer owed the bank a duty to scrutinise the bank statements related to his account, at an early stage and thus prevent any subsequent fraud.41 Moreover, none of the duties were to be included by implication into the contract between a banker and its customer, and as such did not arise in tort. Stating the opinion of the Privy Council, Scarman LJ declared that this situation could be rectified if the banks were to enhance the stringency of their business terms and conditions. One suggestion was the inclusion of verification clauses in the contract, which would oblige the customer to notify the bank, regarding wrong entries in the bank statement of account, within a previously stipulated period. 42 Failure to notify the bank would legally permit the bank to conclude that the transactions in the account were correct and genuine. Despite the large scale criticism directed at this decision, it has continued to prevail with respect to the law governing cheques. All the same, the obligations of customers engaging in online banking have changed significantly. Such transactions are governed by the Payment Services Regulations 2009,43 and require the customer to employ a card or electronic device for effecting funds transfers. 44 In such case, the onus rests upon the customer to adopt all reasonable measures to maintain his confidential bank information secret. A duty to draw cheques with circumspection was imposed upon customers, by the decision in London Joint Stock Bank Co v Macmillan. In this case, the clerk who was allotted the work of preparing cheques for his employers, made out cheques with significant blank spaces. Thereafter, he would obtain the signature of one of the firm’s partners and then inflate the cheque amount, by taking advantage of the gaps that he had deliberately left in the cheques. After encashing a large number of such cheques, this clerk absconded. The employers contended that the bank should not have paid these cheques.45 In their decision, their Lordships ruled that without any misgivings or reservations, customers were obliged to exercise reasonable care at the time of drawing cheques, so as to prevent their banker from being deceived. The Law Lords further stated that customers who drew cheques in a manner that facilitated fraud were guilty of a breach of duty. In addition, such customers would be held responsible for any loss undergone by the banker that was directly and naturally the outcome of such breach. The facts of the case had made it amply clear that the employer had failed to take the necessary precautions. This rendered the employer’s bank well within its rights to make payments against these cheques. 46 Moreover, it was practically impossible to detect any fraudulent alteration to the cheques. The ink was the same, the handwriting was that of the very same clerk, and the additions made by the clerk were in the same ink. Therefore, it could not be claimed that the bank was responsible. The said bank had acted in good faith without negligence. 47 The requirement that customers have to exercise reasonable care at the time of drawing cheques, tends to create considerable confusion and doubt. In Slingsby v District Bank [1932], the contention of the bank had been that the drawer of a cheque had failed to draw a line after the payee’s name. The presence of this empty space after the payee’s name had enabled fraud to be committed. This argument was not accepted by the Court of Appeal, as it was not the usual practice to append a line before and after the payee’s name, during that period. Hence, this was not a common precaution.48 The decision in Greenwood v Martin’s Bank established that customers were obliged to inform their bank about cheques, wherein their signature had been forged. Such information had to be provided as soon as it was discovered by the customer. In this case, the plaintiff had an account with the defendant bank. The passbook and chequebook pertaining to this account were with the plaintiff’s wife.49 Upon requiring money for some urgent exigency, the plaintiff asked his wife for a cheque leaf form the chequebook. To this she replied that she had exhausted all the cheques, in order to pay for her sister’s illness. As such, she had forged his signature and drawn the entire balance in the plaintiff’s account. The plaintiff’s wife convinced him that she would not commit any further forgeries and that this forgery should be kept concealed from the bank. Subsequently, the plaintiff came to know that his wife had drawn the moneys for some selfish and gross purpose and not for defraying the cost of her sister’s medical expenses. Upon being confronted with these facts, by the husband, the wife committed suicide.50 Thereafter, the plaintiff brought an action against the bank for the amounts that had been fraudulently withdrawn from his account. To this the bank claimed that the plaintiff had been under a duty to inform the bank about the fraudulent transactions in his account, as soon as he became aware of the same. 51 Such prompt intimation to the bank would have enabled it to sue the wife directly in tort. The principal contention of the bank was that the silence maintained by the plaintiff, till the time of her death, had prevented it from availing itself of the remedy of suing the wife. Their Lordships ruled that the failure on the part of the plaintiff to inform the bank, immediately after coming to know of the forgery committed by his wife, effectively deprived him of a remedy. 52 As declared in Kepitagalla Rubber Estates v National Bank of India Ltd, customers are not obliged to check the statement of account provided to them by their banker. This holds good, despite the fact that bank passbooks and statements enable customers to verify their accounts, and detect any fraudulent transaction in their accounts. The banker and customer are at liberty to come to a mutual understanding, whereby the customer consents to verify the entries in the bank statement or passbook and to inform any discrepancy in these to the banker. Moreover, this verification and reporting process has to be completed within some previously agreed upon time interval. When such an agreement between a bank and its customers is in place, then failure to inform the bank about incorrect entries in the bank account would connote that the customers regard these entries to reflect genuine transactions that are in their knowledge. 53 As such, courts will not impose a duty of care in tort that is contrary to the contractual terms. This extends to situations, wherein no implied term can be established to the same effect as the tortious duty proposed. With the rejection of the contentions raised by the banks in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd, with respect to liability in tort and contract, the Privy Council emphasised that the bank was solely responsible and liable for making payment against forged cheques. Consequently, an employer cannot be rendered liable for the acts of forging of cheques by employees or agents.54 All the same, the banks could rely upon the following contentions. First, the bank could be justified in relying upon the contributory negligence of the customer. This could serve to reduce its liability for the losses resulting from the fraud. Second, the customer constitutes the employer. Therefore, he should be held vicariously liable for the fraud committed by his agent or employee.55 CONCLUSION The common Law imposed only two obligations on customers, with respect to banking transactions. The first of these duties is that of exercising reasonable care while drawing cheques, so that the bank is not misled and forgery is dissuaded. The second of these duties is to inform the bank, as soon as the customer comes to know about the perpetration of forgery or misappropriation in his account. The momentous decisions in Stock Bank Ltd v Macmillan and Greenwood v Martins established the Macmillan and Greenwood duties, respectively. Many decisions followed these cases, which related to assessing the duties of customer. Accordingly customers were obliged to ensure that they did not facilitate fraud or forgery. In early cases, such as Slingsby v District Bank, it was held that customers were not obliged to take any exceptional precautions, at the time of drawing cheques. However, the ruling in London Joint Stock Bank Ltd v Macmillan implied a responsibility on the part of the customer to draw cheques diligently without giving any scope for fraud or forgery. Moreover, in the Greenwood v Martins Bank decision, it was established that the customer was under an obligation to inform the bank about any forgery, with respect to his cheques, immediately upon coming to know about it. As such, the common law developed and promoted the obligations of customer towards their banker, in order to promote fair and fraud free transactions. BIBLIOGRAPHY A Articles/Books/Reports Burrows, Andrew, English Private Law (Oxford University Press, 2013) Clifford, Gomez, Banking and Finance: Theory, Law and Practice (PHI Learning Pvt Ltd, 2011) Consumer Focus, Banking Services and the Consumer (RLE: Banking & Finance) (Routledge, 2012) Ellinger, EP, E Lomnicka and C Hare, Ellinger’s Modern Banking Law (Oxford University Press, 2011) Gillies, Peter, Business Law (Federation Press, 2004) Glover, John, ‘Banks and Fiduciary Relationships’ (1995) 7(1) Bond Law Review 50 Hajela TN, Money, Banking & International Trade (Ane Books Pvt Ltd, 2009) Hong Kong Institute of Bankers, Banking Law and Practice (John Wiley & Sons, 2012) IIBF, Legal and Regulatory Aspects of Banking (Macmillan, 2008) Jawahitha, Sarabdeen, ‘Banking Confidentiality: A Comparative Analysis of Malaysian Banking Statutes’ (2002) 17(3) Arab Law Quarterly 255 Oughton, David, ‘Expanding Tort Liability in English Law and Compulsory Insurance for Professional Risks’ (1989) 14(4) Geneva Papers on Risk and Insurance 331 Stokes, Robert, ‘The Genesis of Banking Confidentiality’ (2011) 32(3) Journal of Legal History 279 B Cases BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Commonwealth Trading Bank of Australia V Sydney Wide Stores (1981) 148 CLR 304 Equitable Life Assurance Society v Hyman [2002] 1 AC 408 Greenwood v Martins Bank Ltd (1933) AC 51 Kepitagalla Rubber Estates Ltd v The National Bank of India Ltd [1909] 2 KB 1010 Ladbroke v Todd (1914) 111 LT 43 London Joint Stock Bank Ltd v Macmillan (1918) AC 777 National Bank of New Zealand Ltd v Walpole [1975] 2 NZLR 7 N Joachimson v Swiss Bank Corporation [1921] 3 KB 110 Slingsby v District Bank [1932] 1 KB 544 Syarikat Islamiyah v Bank Bumiputra Malaysia Bhd [1988] 3 MLJ 218 Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] 1 AC 80 Taylor v Blacklow (1836) 3 Bing NC 235 Tournier v National Provincial and Union Bank of England [1924] 1 KB 461 United Asian Bank v Tai Soon Heng Construction Sdn Bhd [1993] 1 MLJ 182 United Dominions Trust Ltd v Kirkwood [1966] 1 All ER 968 C Legislation Banking and Financial Institutions Act 1989 (Malaysia) Bills of Exchange Act 1909 (Cth) Bills of Exchange Act 1949 (Malaysia) Bills of Exchange Act of 1882 (UK) Payment Services Regulations 2009 (UK) D Other Privy Council clarifies test for implying terms into contracts and other instruments (24 March 2009) < http://uk.practicallaw.com/1-385-3958?service=fs > Wentworth, Elisabeth, Essential Banking Law and Practice Read More