Bankers Legal Duties - Essay Example

Heading: Bankers’ Legal Duties Your name: Course name: Professors’ name: Date Introduction With the rising competitions among business firms, banking institutions are also striving to gain a wider market share than those of their competitors. However, success of such institutions can be achieved effectively if they adhere to the legal regulations that governing banking operations. This is implies that banks and bankers have legal responsibilities that are instrumental in guiding their operations. Bankers and customers have an existing contractual relationship. This paper explores some of the most significant legal duties of bankers in the maintenance of their clients’ current accounts. Secondly, by use of various cases, the paper illuminates on generally cited responsibilities of bankers. 1. Legal responsibilities of bankers Just like in any other contract, a banker and a customer have various duties and responsibilities that govern their relationship (White, 2010, pp. 14-17). Each party in the relationship has rights and duties owed to the other one in order to maintain their relationship. Legally, some responsibilities are put in place for the bankers in the appropriate maintenance of the customers’ current accounts. According to Iacovino (2006, pp.188-200), one of them is the duty of care and skill, which implies that the law requires that bankers exercise a lot of care and skill in the maintenance of their clients’ current accounts. This means that the bankers handling clients’ accounts should be careful and skillful in order to avoid any possible errors that might create huge losses to their customers. Bankers’ duty of care and skill are vital in handling documents like cheques and any other financial transaction that pertains to the clients’ accounts (Iacovino, 2006, pp.188-200). In the presentation of cheques to the paying bankers and in the collection of payment, the bankers involved must exercise considerable amount of care and diligence. On the other hand, a paying banker is required by law to carry out adequate inquiries on the whether there are suspicions of individuals that might be targeting their clients’ accounts. This is because some individuals have bad intentions against customers’ accounts. Therefore, bankers have legal responsibility of care and skill since they act as customers’ agents in the making and collection of payments. Secondly, Leong (2007, pp. 189-200) says that bankers are legally charged with the duty of secrecy. This implies that they are charged with the responsibility of keeping the clients’ information confidential. Some of this information regards the status of the clients’ accounts; their financial status, their businesses, and their personal information. On opening an account with a bank, a banker has a contractual duty, under common law, never to disclose any client’s information to any of the third parties. Besides, statutes bar bankers from disclosing any information about their clients (Leong, 2007, pp. 189-200). This obligation also extends to any information received concerning the client, and every transaction and securities associated to the customers’ accounts. Moreover, the information regarding the closure of the clients’ current accounts should strictly be kept confidential. For instance, in the case concerning Tournier v National Provincial Bank, the Court of Appeal agreed that the duty of confidentiality is contractual in nature, and was to be implied from customer-banker relationship. Nevertheless, their Lordship had different views on the scope of the duty. Both Atkin and Bankes L.JJ maintained that the duty is unlimited to the information obtained solely from a client’s account, but could extend to other information received from sources other than the client’s own account, provided that the information is derived in the course of the banker-client contractual relationship (Iacovino, 2006, pp.188-200). Nevertheless, Scrutton LJ confined the duty’s scope to the information obtained from the client’s real account. Regarding the duration of the duty, the Court held that it occurs only when customer-banker relationship has been created, and continues even after the termination of the relationship. On the other hand, Scrutton L.J. maintained that this duty must be terminated the moment customer-banker relationship ceases to exist (Leong, 2007, pp. 189-200). Generally, the court held that the clients’ accounts must always be kept secret whether the relationship exists or ceases to exist. However, there are situations that call for compulsory disclosure of the clients, information by the banker. These exceptions are outlined as follows: Compulsory by law This implies that bankers can be forced by law into the disclosure of their customers’ accounts in the course of legal proceedings. Impliedly, there is an obligation to comply with the law order as per the Bankers’ Books Evidence Act (BBEA) in a civil proceeding. On the other hand, criminal proceedings may call for orders for investigation according to various statutes, such as, Kidnapping Act and Anti-Corruption Act (White, 2010, pp. 14-17). Court orders might include writs of sequestration, witness summons, and garnishee order. This is exception is further illustrated in the case of Maurice Robertson v Canadian Imperial Bank of Commerce. Here, the disclosure of confidentiality was permitted because the bank was forced to release a bank statement regarding its client according to a subpoena. Therefore, duty of confidentiality can be exempted by legal compulsion; and thus, courts should exercise their cautiously in ordering the bank to make any disclosure. Bank’s interest Another exception to this duty is when the bank’s interests are at stake. Disclosure is allowed whenever there is a court hearing between customers and their bankers. For example, if a client takes a legal action against a bank for monies owed, a duty of confidentiality is denied. In the case of Sunderland v Barclays Bank Limited, the court ruled that the bank’s interests called for the disclosure of the information because it would have been irrational for the bank to carry on with the supply of overdraft facilities to the complainant for her participation in the gamble. Additionally, there was a justification of the bank’s disclosure to plaintiff’s husband due to a private attack on the reputation of the bank. Implied or express consent of client Duty of secrecy does not apply if a client permits the disclosure of the information either impliedly or expressly. In the Sunderland v Barclays Bank Limited, the court maintained that the client’s consent to disclose information may be implied from the customer’s conduct because the plaintiff did not deny the manager’s explanation to the husband. In terms of express consent, bankers are clearly justified for disclosure of information, unlike in the implied consent that has been largely criticized. 2. Generally cited bankers’ legal duties There are a number of generally cited legal obligations of a banker. Firstly, White (2010, pp. 14-17) says that bankers are required to protect their clients from any kind of fraud. This implies that they are charged with the responsibility of conducting adequate examination and verification of documents pertaining transactions done on the clients’ accounts. By doing this, bankers are exercising their duties of care, which failure amounts to a breach of contract, and can be sued for negligence. This is duty is vital in the avoidance of fraud and libel on the clients’ accounts. Strict compliance and verification of documents imply that the presenter should act as per the terms and conditions of the legal principles. For instance, in the case of JH Rayner and Company Ltd. v Hambros Bank Ltd., (1943) CA1 K.B.37, a company based in Denmark asked the bank (defendant) to open a credit line to the JH Rayner (plaintiff) “against invoice full set straight clean bills of lading for Coromandel groundnuts”. The plaintiff brought an invoice with three bills lading that described “machine-shelled groundnut kernels…originating from British India.” the margin comprised of the words, “ O.T.C.C.R.S. Aarhus.” As a result, the bank refused to pay in that the invoice never matched the credit line. Nevertheless, the plaintiff argued that the terms used bore the same meanings, and that it is understood by everyone in the trade. It was held that the bank did not have to honor the invoice and the bill of lading because they bore different words from the ones in the credit letter. It was agreed that the bank can only ask for indemnity if it honors documents that comply with the credit letter, and places itself at risk in accepting anything else. Besides, the bank did not participate in the groundnut business, and cannot have knowledge on the business terms. Another bankers’ obligation to the clients is that it should exercise a duty of care in provision of advice on investments and security documentation (Langbein, 2005, pp. 20-25). Nevertheless, bankers are not liable to the duty of care of clients’ third parties, and that it is not obliged to advise on issues under review. Moreover, Maynard (2002, pp. 20-26) notes that a banker has, but not always, a fiduciary duty. The contractual duty of a banker to the client is not a fiduciary one, and the banker-client relationship unaccepted. Commonly, a bank is allowed to value its interests more than the clients’, unlike lawyers or trustees, and is not obliged to give advice. Such cases in which a bank has exercised a fiduciary duty are very rare (Maynard, 2002, pp. 20-26). Nonetheless, when this happens, the case of Commonwealth Bank of Australia v Smith shows that it is treated as a special case. Here, borrowers were accustomed and inexperienced over a long time to depend on the bank manager’s pieces of advice. The bank manager provided a piece of advice when consulted on the viability of the business they suggested purchasing while saying that it is a ‘good buy’. The manager’s also advised against seeking further advice from other sources. The context of the happenings was in a small town. Additionally, Maynard (2002, pp. 20-26) notes that a banker is obliged to provide the customer with habitual account statements and any other information that concerns the client’s current account. This includes how check payments operate, and the operation of a direct debit. In case the client contains a passbook, the banker is not obliged to provide the aforementioned statements to the customer. Besides, Donovan (2005, pp. 162-180) asserts that the banker is obliged to issue notifications of the alteration of terms and conditions of handling the clients’ accounts. The notifications should be issued for a period of 30 days, but if the changes are beneficial to the clients, then they should be carried out as soon as possible without any notice to the customer (White, 2010, pp. 14-17). According to the Banking Code, notice should be 30 days; nonetheless, the common law requires that such a notice should be reasonable. Conclusion Evidently, the relationship existing between a bank and client is contractual. As a result, there are legal obligations and rights that each party has. In this case, some of the banker’s responsibilities to the customer include: duty of care and skill; duty of secrecy or confidentiality; duty of protection against libel, fraud and forgery; duty to issue sufficient and reasonable notices in case of changes; and sometimes, duty to fiduciary. Duty of secrecy can, sometimes, be exempted when a bank is compelled by law, when banks’ interests are at stake, and when a customer impliedly or expressively gives consent to disclosure of his or her information. References Donovan, J. (2005). Lender liability. London, UK: Sweet & Maxwell. pp. 162-180. Iacovino, L. (2006). Recordkeeping, ethics and law regulatory models, participant relationships and rights and responsibilities in the online world. Dordrecht, the Netherlands: Springer. pp. 188-200. Langbein, J.H. (2005). Questioning the Trust Law Duty of Loyalty: Sole Interest or Best Interest? Yale Law Journal, 114(3), 20-25. http://www.questia.com/PM.qst?a=o&d=5016592167 Leong, A. (2007). The disruption of international organized crime: an analysis of legal and non- legal strategies. Aldershot, Hants, England Burlington, VT: Ashgate. pp. 189-200. Maynard, T.H. (2002). Spinning in a Hot IPO: Breach of Fiduciary Duty or Business as Usual? William and Mary Law Review, 43(2), 20- 26. http://www.questia.com/PM.qst?a=o&d=5000767885 White, L.H. (2010).The Rule of Law or the Rule of Central Bankers? The Cato Journal, 30(5), 14-17. http://www.questia.com/PM.qst?a=o&d=5049385341 Commonwealth Bank of Australia v Smith (1991) 102 ALR 453 JH Rayner and Company Ltd. v Hambros Bank Ltd. (1943) CA1 K.B.37 Maurice Robertson v Canadian Imperial Bank of Commerce [1994] 1 WLR 1493 Sunderland v Barclays Bank Limited, (1938) 5 L.D.A.B 163 Tournier v National Provincial Bank [1924] 1 KB 461 Read More