Banker – Customer Relationship

Bank of Chettinad v
Commissioner of Income Tax
Colombo[1948] AC 378
The terms “banking” and “bank” may
bear different shades of meaning at
different periods of history, their meaning
may not be uniform in countries due to
different habits of life and degrees of
civilization.
Banker – Customer Relationship

 Definition of Banker
-traditional activities -receiving deposit,
honoring cheques & granting loans.
-modern day – issue credit & charge cards,
share financing, custodian & trust
business.
-now quite difficult to define the banker
or bank to cover all their diverse and
varied activities & functions.
a) textbook (Halsbury’s Laws of England)
-an individual, partnership or corporation,
whose sole business is banking i.e. the
receipt of money on current or deposit account
& the payment of cheques paid in by a customer.
 b) judicial interpretation
i- accept money from & collect cheques for, their
customers & place them in their credit.
ii- honour cheques or orders drawn on them by their
customers when presented for payment & debit their
customers accordingly.
iii- keep current account in their books in which the
credits and debits are entered.
(United Dominions Trust Ltd v Kirkwood [1966] 2 QBD 431)
by Lord Denning.
 c) statutory definition
FSA – does not define bank
Bill of Exchange Act 1949 – defines
banker as including a body of
persons whether incorporated or not
who carry on the banking business
CONT…
s121 FSA-
 ’Financial consumer’ means any person
who uses, has used or may be intending to
use any financial service or product.
 ‘financial service provider’ means an
authorized person or a registered person
but excludes approved money broker.
CASES
 the relationship of banker and customer does
not come into existence unless both parties
intend to enter into it
- Robinson v Midland Bank Ltd (1925) 41 TLR
402
 a person may be a customer even though his
only connection with the bank at the time in
question was payment into an account
opened for the purpose of a single cheque
for collection.
- Ladbroke & Co. v Todd (1914) 30 TLR 433

 a person is not a customer if the bank

performs a casual service for him i.e. cash a
cheque for a person who has no account at
the bank.
-Barclays Bank Ltd v Okenarhe [1966] 2
Lloyds Rep
 If a contract exists, a person may be a customer from
the time a bank accepts instructions to collect monies
from a third party, to pay part to a fourth party and to
retain the balance to the customer’s order although no
account is formally opened.
- Woods v. Martins Bank Ltd [1958] 3 All ER 166

 In the Privy Council case of Commissioners of Taxation

v.English, Scottish & Australian Bank Limited [1920]
AC 683 - it was stipulated that "continuous dealing" was
not of the essence, and that a "customer" relationship
began immediately when an account was opened and
cheque paid in as collection.
 A thief who opens account with a
stolen cheque is also considered as a
customer.
- Oriental Bank of Malaya v. Rubber
Industry [1957] MLJ 153

 A bank can be a customer to another

bank
- Importers Co. Ltd v. Westminster
Bank Ltd [1927] 2 K. B. 297
Nature of the relationship

(A) Debtor – creditor relationship

‘the relationship which arose between
a banker and a customer was
essentially one of debtor and
creditor. The money deposited by a
customer did not constitute trust
money and a banker was entitled to
use the money for his own purposes’.
 Foley v. Hill (1848) 2 HL Cas 28
Money in the custody of a banker is to all intents
and purposes the money of the banker, to do
with it as he pleases, he is guilty of no breach of
trust in employing it, he is not answerable to
the customer if he puts in jeopardy, if he
engages in a hazardous speculation, he is not
bound to keep it or deal with it as the property
of his customer, BUT
He is of course answerable for the amount b’coz
he has contracted, having received that money
to repay to the customer when demanded, a
sum equivalent to that paid into his hands.
 Joachimson v. Swiss Bank Corp [1921] 3
KB 110
- it is an implied term of the contract that the
banker is not liable to repay the customer until
demand is made.
- the relationship btw the banker and his
customer is a debtor-creditor relationship as
regards any money deposited by the customer
with the bank and as regards any money lent by
the customer to the bank.
(B) Agent and principal relationship
- this happens where the customer
gives the banker a mandate to do certain
acts in connection with his account or to
permit any person to do such an act.
- banker acts as a customers’ agent when
carrying out standing instructions,
making remittance on customer’s
instruction and collecting bill and other
trade transactions.
- Westminster Bank Ltd v Hilton (1926)
43 TLR 124 as regards the drawing and
payment of cheques, the relationship btw
banker and customer is that of principle and
agent.
(C) Fiduciary relationship
- one of the fiduciary duties applicable to
fiduciary relationship is the duty to avoid
conflict of interest.
- equity also imposes a duty on a bank not to
take undue advantage over a customer.
- Woods v Martins Bank Ltd & Another
- A bank granted a large o/draft to a certain
company. The bank advised Woods to invest in
that company.
Held: there was a breach of fiduciary r/ship
since it would benefit the bank if that company
could repay the loan with the money invested by
Woods.
(D) Constructive trustee & beneficiary r/ship
- if the banker knows that its customer holds
money in trust, the banker should not part with
the money for any purpose which is inconsistent
with the trust even on the instructions of the
customer.
- otherwise the bank may be held by the court
to be a party to the breach of trust.
- Selangor United Rubber Estates v Cradock
& Karak Rubber Co. Ltd v. Burden & ors
- if a paying banker knowingly assisted an agent
to carry out a dishonest and fraudulent scheme
to defraud his principal, the paying banker
would be burdened with the liability of a
constructive trustee.
Selangor United Rubber Estates v Cradock
& Karak Rubber Co. Ltd v. Burden & ors
[1968] 2 All ER 1073
Facts: New directors has taken over mgmt from
previous directors of KRCL. Bank has help to
released the compny’s money. KRCL used the
money to buy it’s own shares which is against
s. 67 of Companies Act and later is dissolved.
New directors and bank are sued.
Court: Bank is wrong in helping the directors to
deceit. As a trustee, bank is wrong to released
the money when it has knowledge that the
directors has dishonest intention and
fraudulent scheme.
- Barnes v. Andy (1874) 9 Ch App 244
- laid down the elements which must be
proven before a banker is held liable as a
constructive trustee
i- the bank offered assistance
ii- the bank had actual or constructive
knowledge
iii- there was dishonest and fraudulent
design or intention
(E) Bailee – safe custody & safe deposit box
customer.
- s101 Contract Act 1950 – A bailment is the
delivery of goods by one person to another for
some purpose, upon a contract that they shall,
when the purpose is accomplished, be written or
otherwise disposed of according to the
directions of the person delivering them. The
person delivering the goods is called the bailor.
The person to whom they are delivered is called
the bailee.
Banker’s Duties
 to receive money (deposit) and to collect
cheques for his customer’s account.
 to honour his customer’s cheque and not to
pay without a valid authority.
 duty of secrecy concerning the
customers’affairs and in particular the
customers’ account.
 duty with regard to garnishee orders (once a
banker has been served a garnishee order,
the banker has to freeze the account
immediately.
CONT…

 A garnishee order is a high court

order requiring the banker to freeze
the money in customer account in
order to pay the debt owed by the
customer (judgment debtor) to his
judgment creditor.
 Customer’s Duties
 duty of taking reasonable care in drawing
cheque (Macmillan duty)
- Joachimson v Swiss Bank Corp. [1921] 3
KB 110
- the customer has an implied duty to
exercise reasonable care in executing his
written orders so as not to mislead the bank
or facilitate forgery.
- London Joint Stock Bank Ltd v Macmillan &
Arthur (1918) [1918] AC 777
- Lord Haldane: the customer contracts that in
drawing his cheques he will draw them in such a form
as will enable the banker to fulfill his obligations &
therefore in a form which is clear and free from
ambiguity.
Cases:
 Ka Wah Bank Ltd. V. Tjang Moy Lian (1993) 3 SLR
951
 Bintai Kindenko Pte Ltd. V. Sanwa Bank& Anor
(1994) 3 SLR 951
BINTAI KINDENKO PTE LTD V SANWA BANK
LTD & ANOR[1994] 3 SLR 459

 Plaintiff issued a cheque for $ 260 in favour of

GDS and drawn on the first defendant bank. The
cheque was altered by a third party in favour
of X for $ 126,260. X subsequently paid the
cheque into her account with the second
defendant bank. The first defendants then paid
the second defendants the full amount and
debited the plaintiffs’ account with it. The
plaintiffs brought this action against the first
defendants for a declaration that the debit was
without authority and of no effect, alternatively
for payment of $ 126,260.
 Held, allowing the plaintiffs’ claims
against both defendants:
A customer owes a duty to his banker to
exercise reasonable care and take
reasonable precaution against fraud in
drawing a cheque. On the evidence, the
plaintiffs had exercised reasonable care
and taken reasonable precaution in
drawing up the cheque, and had not acted
in breach of its duty to its banker, the first
defendants. It was therefore not estopped
from claiming against the first defendants.
 duty to disclose forgeries once he is aware
of it (Greenwood duty)
- Greenwood v Martins Bank (1933)
AC 51
- the customer has an implied duty
to inform the bank if he discovers
that the cheques purporting to have
been signed by him have been forged
 Duty to examine passbooks and bank
statements
- Tai Hing Cotton Mill v. Liu Chong Hing Bank
Ltd. (1986) AC 80
- Held: Banks might need protection as their
business expanded and the relationship with
their customer also must change. Bank relied
on the current a/c rules which required the
customers to check their monthly statements
to enable them to notify the bank of any item
that might have not been authorized by
them. On failure to notify the bank within
specified period, the statement will be deem
to be approved or confirmed.
Banker’s Rights
a) Right to commission or service charge
b) Right to repayment of loan
c) Right to interest/profit
d) Right to set-off – right of a bank as a lender
to self-help of the moneys deposited with it
against the borrower.
 Right to set-off means banks have right to
transfer cash from a customer account to pay off
his or her debts with the banks.
 e.g: credit card and loans
CONT…

e) Right of lien – right of a person to

retain possession of goods owned by
another until the possessor’s claims
against the owner has been satisfied.

f) Right to recover under mistake of fact

- Bank can recover money pay out under
mistake of fact provided there is no
undue delay or the question of estoppel
does not arise.
CONT…

g) Over-crediting and over-debiting

- Over-crediting – Bank can recover
the money back provided no delay
and estoppel.
- Over-debiting – Bank has to pay the
money back to customer except for
the case of forgery of cheques.
Customer’s rights

 Right to draw cheques

 Right to interest/profit
TERMINATION OF BANKER CUSTOMER RELATIONSHIP

a) Unilaterally – Customer or the bank decides

to close the account.
Ng Cheng Kiat v Overseas Union Bank
- written notice to close the customer’s
accountmust be given by the bank and it must
be reasonable.
b) Garnishee order – order by Court to freeze
the customer account.
c) Death of customer
CONT…
d) Bankruptcy of customer –
Bankruptcy Act – once a person is
adjudicated a bankrupt, his property
vests in the Official Assignee.
 Official Assignee means is an officer in
the court who distributes a bankrupt's
assets to the creditors.
e) Unsound mind of customer
Effects of termination
 The banker customer relationship comes to an
end.
 However, the bank still need to comply with
duty of confidentiality.
i.e. a banker owes a duty to keep information
concerning the affairs of a customer confidential,
despite their r/ship has come to an end.
Tournier v. National Provincial & Union Bank of
England (1924) 1KB 461