Relationship with Banker and Customer - Essay Example

THE BANKER CUSTOMER RELATIONSHIP [YOUR NAME] I INTRODUCTION The banker customer relationship produces important legal rights and duties. This is in addition to the commercial considerations involved in this relationship.1 In addition, the banker customer relationship has been defined as the undertaking by the former to collect bills and receive money for the account of the customer.2 These amounts are not held in trust for the customer. On the other hand, the bank borrows these proceeds and makes an undertaking to the customer to repay these amounts. Another important feature of this undertaking is that the bank promises to repay the amounts at the branch, wherein the account exists, and during the banking hours.3 Furthermore, the bank undertakes to repay any portion of the customer’s amounts with it, on the basis of a written order from the customer. Such orders have to be addressed to the bank. The customer is required to exercise reasonable care, while making written orders to the bank, in order to ensure that the bank is not deceived. As such, the customer should ensure that his acts do not facilitate forgery.4 This important definition of the banker customer relationship was provided in Joachimson v Swiss Bank Corporation, by Atkin LJ.5 Thus, the crux of the contract between the banker and the customer is the right of the bank to employ the customer’s deposits, with it, for its business purposes. In addition, this relationship is essentially based upon the understanding that the bank will repay to the customer, an amount that equals the deposited amount, with or without interest. Repayment of the deposited amounts can be made after a fixed period or on demand.6 This reasoning was employed by the House of Lords in Foley v Hill, wherein their Lordships ruled that fundamentally, the banker customer contract was a contract between a debtor and creditor.7 In Foley v Hill, the relationship between bankers and their customers was described as that of a debtor and creditor. The banker was held liable to repay the customer’s money, held by the banker for the customer. Such repayment had to be made either after a previously agreed upon date or whenever demanded by the customer. Significantly, the money deposited into the customer’s account with the bank, becomes the banker’s money, and the latter can use it without any reservations.8 Thus, the banker is not placed in the fiduciary position of a trustee, with regard to the customer, in the context of the amounts deposited in the customer’s account with him. II DEBTOR AND CREDITOR The contract between the banker and customer was that of a debtor and creditor. The obligations of these parties towards each other were deemed to be described, in their entirety, by the contractual terms. This debtor creditor relationship had been usually described as the banker customer relationship. Gradually, it was recognised that the customers of a bank, could be depositors, borrowers, or entities seeking commercial advice. In addition, customers could belong to one or more of these categories.9 The relationship between a banker and customer, can be described, from a very basic level of understanding, as that of borrowing and lending money. Over the years, there has been a tremendous evolvement in the ramifications of this relationship. With regard to forgery, the Court of Appeal of New South Wales provided the following clarification, in its ruling in National Australia Bank Ltd v Hokit Pty Ltd.10 This Court rejected the contention that the burden of forgery had to be borne by the customer. It declared that the principle requiring banks to bear the burden of forged cheques, could not be widened to make the customer liable for the presentation of forged cheques upon the bank. Therefore, the customer could not be made to bear a duty in tort or contract to undertake adequate precautions in the management of his accounts with the bank, to preclude the presentation of forged cheques.11 In addition, the banker customer relationship, occasionally envisages issues that are comparatively rare in the banking industry. For instance, in the Joachimson v Swiss Bank Corporation case, an account had been opened with the defendant bank by a partnership. This partnership was between English and German nationals. With the onset of the First World War, this account was frozen, as some of the partners were declared to be enemy aliens.12 Subsequently, after the cessation of the war, the English partner attempted to dissolve the partnership and close the account with the defendant bank. A formal demand for closure of the account and payment of the proceeds of the account had not been submitted to the bank, prior to the commencement of the proceedings by the English partner to wind up the partnership. The bank refused to close the account, and the Court of Appeal dismissed the action for repayment of the account proceeds, on the grounds that the action was premature. In the absence of a formal application for closure of the account, the bank was not constrained to repay the amount outstanding in the customer’s account to the customer.13 As such, the bank functions, in the capacity of an agent of the customer. Consequently, it has to necessarily comply with the mandate of the customer. At the same time, the customer is duty bound to provide his banker with clear instructions that do not leave any room for ambiguity. Moreover, the customer is duty bound to exercise reasonable care, at the time of drawing cheques, and to provide the bank with information that comes to his notice regarding any fraudulent activity in his account with the bank.14 In addition, to the basic duty of the bank to comply with the instructions of its customer, the carrying out of the payment instructions of the customer or other incidental banking services for him could generate other types of liability and duties for the bank. III PRINCIPAL AND AGENT Banks primarily function, as the agents of their customers. This leads to several legal complications. For instance, in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd,15 the ruling of the Court of Appeal made it abundantly clear that actual authority, implied or express, was not indispensable. As such the absence of such authority from the corporate agent was not fatal to the position of the bank. Moreover, the Court of Appeal ruled that the apparent authority of the agent could protect a person dealing with an unauthorised agent, provided that person could establish the following. First, that he had relied upon a representation from the purported principal of the agent, regarding the authority of the agent. Secondly, the person making such representation was genuinely authorised to make it. Third, the transaction was within the power of the agent or intra vires.16 The common law entertains considerable uncertainty regarding the extent of implied authority possessed by a corporate agent; and the correlation between the doctrines pertaining to apparent and implied authority. Consequently, the sagest course to be adopted by the banker is to be prudent, at the time of honouring the cheques drawn on the account of a corporate customer.17 In general, banks protect their position, whilst simultaneously carrying out their obligations towards their customers, by ascertaining that the persons drawing cheques in the account have been duly authorised. The acceptance of a cheque, prima facie, can be justified to some extent, when the cheque has been executed as per the requirements of the constitution of the company.18 However, the bank has to be alert for any significant changes in the pattern of drawing cheques. In Burnett v Westminster Bank Ltd,19 the basic query of what can change the fundamental banker customer relationship was addressed. The plaintiff had opened accounts in two of the branches of the defendant bank. One of these, had a computerised system for banking transactions, whilst the other had a manual system. This customer, altered the branch name on a cheque issued in the account held with the computerised branch to the name of the non-computerised branch. Thereafter, he informed the non-computerised branch that he had altered the branch name, and that he was issuing a stop-payment instruction, with respect to that cheque, to the bank. 20 This cheque was presented in clearing, and due to the computerised nature of the clearing transactions, it was presented to the computerised branch. The computerised scanning system had read the Magnetic Ink Character Recognition (MICR) code on the cheque, and directed it to the computerised branch, on the basis of the MICR code printed upon it. The computerised branch paid this cheque, without taking cognisance of the alteration in the name of the branch and the stop payment instructions issued by the drawer of the cheque.21 Subsequently, the customer claimed from the defendant bank for wrong payment of a cheque, against whose payment, he had issued stop-payment instructions to the bank. At court, the bank claimed that as per the express terms of its relationship with the customer, the latter was prohibited from using a cheque issued in a particular account with a specific branch, in some other branch or account. Furthermore, the bank claimed that these instructions had been incorporated in a letter posted to the customer by the bank. The customer denied any recollection of these instructions or of such a letter from the bank.22 The court held that the alteration in the branch name, mandated that the amount was to be paid at the non-computerised branch. In the absence of explicit authorisation from the customer, the bank was not empowered to debit his account at the other branch. Moreover, the customer had instructed the bank that it was not to honour the cheque. Consequently, the bank was held liable.23 IV BAILOR AND BAILEE The origin of banking has been traced to goldsmiths, who used to perform the task of depositories for the gold and other precious metals of their customers. This was intrinsically a bailor bailee relationship, with the goldsmiths being the bailees and the customers being the bailors. Over time there was an acceptance of deposits of money, which was evidently not a bailment. 24 Banks offer much more than bailment services. The amounts deposited by customers into their accounts with the bank are commingled with the other deposits of the bank. Thereafter, the bank utilises these funds for providing loans and advances, and other banking services. It is the usual practice for banks to pay some interest to customers for the amounts deposited with them. As such, it has been acknowledged that the property in the money of the customer is conveyed to the bank, subsequent to its deposit in the account with the bank.25 V CONCLUSION As such, the banker customer relationship generates several significant legal rights and duties. This is in addition to the commercial considerations. The fundamental correlation between a banker and customer is that of debtor and creditor. The bank has duties and rights, with regard to its customers; and the customer has, at the same time, obligations towards his bank. BIBLIOGRAPHY A Articles/Books/Reports Ellinger, EP, E Lomnicka and C Hare, Ellinger’s Modern Banking Law (Oxford University Press, 2011) Glover, John, ‘Banks and Fiduciary Relationships’ (1995) 7(1) Bond Law Review 50 Megrah, Maurice, ‘The Banker-Customer Contract’ (1966) 29(3) The Modern Law Review 315 Mugambwa, John, Harrison Amankwah and CEP (Val) Haynes, Commercial and Business Organizations Law in Papua New Guinea (Routledge, 2007) Ramlogan Rajendra, and Natalie Persadie, Commonwealth Caribbean Business Law (Routledge, 2012) B Cases Burnett v Westminster Bank Ltd [1965] 3 All ER 81 Joachimson v Swiss Bank Corporation [1921] 3 KB 110 Foley v Hill (1848) 2 HLC 28 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 National Australia Bank Ltd v Hokit Pty Ltd (1996) 39 NSWLR 377 C Other Chapter 7 Banker-Customer Relationship Contracts between customers and banks: Implied terms (2014) Thomson Reuters (Professional) Australia Limited Foley v. Hill & Others (May 2003) Read More