Narni Pty Ltd - Bank Law - Essay Example

Narni Pty Ltd sues National Australia Ltd Bank for damages in connection with the loss of income potential of the business conducted by Narni at the Carrum Nursing Home because of the act of the bank in dishonoring the checks drawn on Narni No. 2 check account maintained at Elwood Branch. Due to the breach of arrangement committed by the bank, the Carrum Nursing Home was sold after being subjected to possession by appointed agent. The refusal of the Bank to honor the cheque without giving adequate notice to Narni is a breach of their arrangement. The agent in possession of the said Nursing Home sold it and the proceeds were applied to reduction of the credit debt and no surplus accrued to benefit the other creditors and Narni. After the sale, no profit or income was derived by Narni. 2. Narni which runs the Carrum Nursing Home applied for overdraft facility with National Australia Bank. Pending formal approval of the application with limit of $65, 000.00, the Bank nevertheless honored the cheques drawn by Narni even though there were no funds to meet them since the account was regularly in debit. The bank refused to extend the overdraft facility to $100, 000.00 but supported Narni by honoring the cheques drawn despite lack of funds. The Court found that the "Bank and Narni conducted their business and arranged their affairs, from February 1989, on the basis that the approved overdraft of $65,000 was at best a nominal limit and that the Bank would tolerate surges well in excess of that limit in each monthly cycle. The bank operated and permitted the account to operate in a very flexible way so that the monthly surges far exceeded any such limit". The court also found that "Narni relied upon this attitude on the part of the Bank in the operation of its business, as the Bank officers knew". It was deduced from the facts that the Bank itself also enjoyed a benefit from this arrangement from the receipt of interest and other fees and by the retention of a satisfied customer. The Court found that it was a "term of this arrangement between the Bank and Narni that the Bank would not refuse to honour cheques drawn by it on the ground that the balance of the account exceeded the approved overdraft limit of $65,000." The correctly held that it was an implied term of the arrangement that the Bank could not terminate or vary it without giving the customer reasonable notice so as to allow time for it to arrange its affairs to comply. Furthermore, they must have regard to the fact that cheques, which had been previously drawn and delivered may have to be honoured under the pre?existing arrangement in place at the time they were drawn and delivered. The implication of such a term is an incident of the arrangement between the Bank and its customer because the Bank knew that Narni was dependent upon it. As aptly held by the court, " there was no warning of dishonor from the bank and this act was relied upon by Narni and giving rise to overdraft extension. Narni was dependent for its cash flow upon the accommodation of the bank in excess of the agreed limit given by the Bank." In the case of Joachimson v Swiss Bank Corporation [1921] 3 KB 110 CA, it was held that the following are considered implied terms: a). The bank will receive the customer’s deposits and collect his or her cheques; b). The bank will comply with written orders (i.e. cheques) issued by its customers assuming there is sufficient credit tin the account; c). The bank will repay the entire balance on the customers demand at the account holding branch during banking hours -as was also held in Libyan Arab Foreign Bank v Bankers Trust [1989] AC 80 PC for the application for the terms in relation to UK banks; d). The bank will give reasonable notice before closing a customer’s account if it is in credit; e). the customer will take reasonable care when writing cheques (Topic 1, n.d.). Implied terms are extra terms read into contracts by the courts in order to give effect to statutory requirements and common law presumptions (Robinson, 2009). Implied terms can be divided into the following categories: Terms implied by the courts as a matter of law and Terms implied by the courts as a matter of fact. The following are terms implied by Court as a matter of fact: 1). as a result of a course of past dealings between the parties; 2). as a result of custom or trade usage; and 3). to give business efficacy to the contract (Topic 6, n.d.). Terms may be implied by the courts as a matter of fact as a result of a course of past dealings, if a). the terms of the collateral contract must not be inconsistent with the terms of the main the term claimed to have been used in past dealings is clearly identifiable. This is most easily done by reference to previous contractual documents; b). the previous dealings were sufficiently frequent and consistent, given the circumstances of the case, to constitute a regular course of dealing; c).the present dealing fits into that course of dealing to the extent that it can reasonably be said that the same terms should be included; d). and there is no conflict between the implied term and the express terms (Topic 6, n.d.). In the case of Narni, it is an implied term that the bank will give reasonable notice to Narni before dishonoring or refusing to honor the cheques. As reasonably pointed out by the Court "that by honouring cheques at a time when the account was well in excess of $100,000 the Bank impliedly extended the overdraft facility to “a limit of at least $100,000” and further agreed not to dishonour a cheque drawn “within the limit” without first giving adequate notice as correctly pointed out by the Court. The court held that it is " well established that the contract between a banker and customer obliges the Bank to pay cheques only when there are available funds in the account to support the payment. Funds may be available in this sense where there is an agreement between the parties to permit the customer to overdraw to a specified limit and there are sufficient funds to meet the cheque without exceeding that limit." This relationship is confirmed in the terms of the transaction entered into by Narni and the Bank as reflected in the Authority to Transact Banking Business signed by the directors of Narni on 6 November 1987 when the account was opened. To understand what is the existing relationship between the Bank and Narni, it is noteworthy to establish the meaning of bank and customer. To define the bank, it must first important to determine what is banking. There are three essential characteristic of banking business as held in the case of United Dominion Trust Ltd vs. Kirkwood (1966) 2 QB 431 CA, which are: 1) Collecting Cheques for Customers, 2) paying cheques drawn by their customer and 3). Keeping current accounts for their customer. These three must concur in order for an institution be considered a Bank ( One, n.d.). A person is considered customer of the bank at the moment he opened an account therein and a contract was thereby created between them. Basic legal relationship between banker and customer is contractual relationship. This relationship is established from the time of opening an account in a bank. This relationship is at the root of all other legal relationships that exist between the banker and customer (Banker-Customer, n.d.). The nature of the relationship between Narni and the Bank is one of creditor and debtor. The bank is the lender and Narni is the borrower in the case of loan and overdraft. Where a credit representing a benefits payment is received for the credit of an overdrawn account it will immediately reduce/repay the amount overdrawn. That reflects the debtor – creditor relationship that exists between banker and customer (Supplementary, n.d.). In the given case, Narni is the debtor and the bank is the creditor. The Bank allowed Narni to incur overdraft beyond the ceiling without formal approval from the former. This practice and dealings of the bank with its debtor is binding on the former. Hence, the bank cannot simply put to stop this course of dealing without giving adequate notice to Narni. 3. The Bank was held by the court to be in estoppel , which is " a bar which precludes someone from denying the truth of a fact, which has been determined in an official proceeding or by an authoritative body. An estopple arises when someone has done some act, which the policy of the law will not permit her to deny " (Estoppel, n.d.). In certain situations, the law refuses to allow a person to deny facts when another person has relied on and acted in accordance with the facts on the basis of the first person's behavior (Ibid). In the case of Narni, it raises and alleged the claim of promissory estoppel, which is a legal doctrine used in American law as well as other legal systems, although other legal systems may call it by a different name. Promissory estoppel allows a party to recover on a promise even though that promise was made without consideration (What, n.d.). Essentially it prevents, or estops, a person from arguing that his or her promise should not be upheld. It also requires that reliance on the promise was reasonable, and that the person trying to enforce the promise actually relied on the promise to his or her detriment. The precise legal requirements for promissory estoppel may vary between jurisdictions (Ibid). Anent the claim of estoppel by Narni, the Court did not pursue the same because the cause of action raised by Narni is one for promissory estoppel, which is not allowed by law. Promissory estoppel is used where, although there may not otherwise be a enforceable contract, because one party has relied on the promise of the other, it would be unfair not to enforce the agreement (Wick, n.d). And in the given case, there was an agreement between the Bank and Narni where the latter sets up "a promise wanting consideration." The claim will not lie since there was an agreement to pay interest on the money lent which is considered sufficient consideration and bars the claim for promissory estoppel. It refers to the promise wrongly or falsely made by a person to another person, depending on which, the other person relied on the promise and suffered an economic loss. The sufferer can enforce such false promise in court and judge would believe the statement made by the promisor as promise and order for the payment for the value of work of the sufferer. Of course it would depend on the actual element present such as , false statement of promise, promissor's inability to deny that such statement was made by him/her, enforcement and establishment of the facts (Promissory Estoppel, n.d.). It is a doctrine, which prevents a party from breaking a promise that was not supported by any consideration and the other party believed in the promise and had suffered a significant loss. A party who acts in reliance upon an oral contract sometimes finds that the other party to the contract refuses counter-performance for the reason that the oral contract is unenforceable under the Statute of Frauds. The doctrine of promissory estoppel may then be pled to overcome such a defense (Luepke, 2002). To plead promissory estoppel the following elements must be complied with: 1) a promise, 2). Foreseeable reliance upon the promise; 3) Actual reliance upon the promise; and 4) I Injustice absent enforcement of the promise (Ibid). Each element must be proven "by clear and convincing evidence. Oral promise must be "definitely made in contractual sense (Ibid). Word Count: 2000 Reference List Estoppel, nd. Available at Lectic Law Library Website. Retrieved from: http://www.lectlaw.com/def/e040.htm, [Date Accessed: May 13, 2011] Zoe Kirk-Robinson. Nov 5, 2009. What are Implied Terms in Contracts? An Explanation of Clauses Read Into Contracts in English Law. Available at Law Crime and Justice by Suite 101 Website. Retrieved from: http://www.suite101.com/content/what-are-implied-terms-in-contracts-a166192, [May 14, 2011]. E. Marshall Wick , Promissory Estoppel. Available at E. Marshall Wick Website. Retrieved from: http://homepage.gallaudet.edu/marshall.wick/bus447/promissory_estoppel.html. [Date Accessed: May 15, 2011]. What is promissory estoppel? (n.d.) Available at Wisegeek Website. Retrieved from: http://www.wisegeek.com/what-is-promissory-estoppel.htm. [Date Accessed: May 12, 2011]. Supplementary Submission from the Committee of Scottish Clearing Banks. (n.d.) Retrieved from: http://www.scottish.parliament.uk/business/committees/enterprise/inquiries/bdb/bdb-ScottishClearingBanks.pdf. [Date Accessed: May 14, 2011]. Banker-Customer Relationship. (n.d.). Available at Free Books Online Website. Retrieved from: http://free-books-online.org/banking-2/banking-laws-and-practices/banker-customer-relationship-2/. [Date Accessed: May 15, 2011]. Topic 1 BANKER - CUSTOMER RELATIONSHIP. Retrieved from: http://nli.northampton.ac.uk/mmb/lawacc/jrm/FS-1-Banker-&-Customer-Relationship-Law-2015.htm. {Date Accessed: May 15, 2011]. Topic 6. Implied Terms of the Contract. (n.d.). Retrieved from: http://www.acsis.com.au/Publications/RiskMange/Chapters/BusinessPractise/Topic_6.pdf. [Accessed: May 13, 2011]. Promissory Estoppel, (n.d.). Available at Legal Explanations Website. Retrieved from:http://www.legal-explanations.com/definitions/promissory-estoppel.htm. [Date Accessed: May 15, 2011]. One: Banker-Customer Relationship. (n.d.). Retrived from: http://www.banking-law.co.uk/gr_fs_ch1.pdf. [Date Accessed: May 17, 2011]. Luepke, Henry F. III Promissory Estoppel and the Statute of Frauds in Missouri, JOURNAL OF THE MISSOURI BAR. Volume 58 - No. 3 - May-June 2002. Available at The Missouri Bar Website. Retrieved from: http://www.mobar.org/9f9753bb-ae48-4a83-885c-473b89565bfd.aspx. [Date Accessed: May 17, 2011]. Read More