ID#: 1100028 Course: Banking and Finance Law Lecturer: Ms. O.

Lyn Submission Date: March 9, 2013

A bank is said to owe a certain incidental duty to its customers, such as a common law and equitable duty of care, a duty of confidentiality and sometimes fiduciary duty similar to those owed by a trustee. In an effort to discuss this statement it is prudent to have an understanding of what a bank is and what qualifies a person to become a customer of a bank. With reference to S 2(1) of the Banking Act of Jamaica 2002, A bank is any company licensed under this Act to carry on banking business. In the said section the Act explains what is meant by banking business. It says that it is the business of receiving from the public, on current account or deposit account, money which is repayable on demand by cheque or order and which may be invested by way of advances to customers or otherwise; and such other business of a like nature as the Minister may, by order, prescribe1 It should be noted however that the meaning of banking business is subject to change from time to time and in the case of Woods v Martins Bank Ltd and Another Salmon J held that giving advice on financial matters constituted banking business inter alia. He also purports that the limits of banking business must be laid down as a matter of fact as oppose to a matter of law2. While the definition of a bank can be found in statute and case law, it is important to note that legislations are silent as to the definition of a customer. Therefore, currently, there is no statutory definition of a customer and as a result, one has to look to case law and academic texts for a definition. Sir John Paget, in an attempt to define a customer says that there must be some recognisable course or habit of dealings in the nature of regular banking businessit is difficult to reconcile the idea of a single transaction with that of a customer.3 It was found that the criteria to be met in order for one to be considered a customer is rather complex, and it varies from case to case. In one case particularly, Mathew v William Brown and Co Ltd ,it was held that merely opening a bank account was insufficient to be regarded as a customer of a bank, and as a results the initial transaction in opening an account did not set up the relation of banker customer as there has to be some measure of continuity4. This is known as
1 2

The Banking Act of Jamaica 1992 (Amended 2004) [1959]1 Q.B 55 3 Rajesh, R and Sivagnanasithi T(2009) Banking Theory Law and Practice Tata Mc Graw- Hill Publishing Ltd pg 114 4 (1894) 10 T.L.R 386, D.C.; 1 L.D.B. 200

ID#: 1100028 Course: Banking and Finance Law Lecturer: Ms. O. Lyn Submission Date: March 9, 2013

The Duration Theory. This theory was however set aside by Bailaches J. dicta in Ladbroke and Company v Todd, where it was purported that a person becomes a customer of a bank when he goes to the bank with money or a cheque and asks to have an account open in his name and the bank agrees to do so5. Lord Dunedin observed that a customer signifies a relationship where duration is not of much essence. According to one academic text particularly, Management of Banking and Financial Services, Typically, any person or entity transacting with a bank through a deposit or borrowing account is considered to be a customer. The author of the said text also said that in modern banking the vital determinant of whether a person or entity is a customer of a bank depends on the dealings that person or entity has with a particular bank. He went on to say that such dealings should be in the nature of banking business, therefore those persons or entities that does not deal with the bank in terms of its core banking functions such as accepting deposits or lending or investing the deposits but avails from other services of the bank, is not considered to be a customer of the bank6. According to Dr. Hart, a customer is one who has an account with a banker or for whom a banker habitually undertakes to act as such. Thus to constitute a customer, one may have an account with the bank, a single transaction may constitute a customer and the dealing between the bank and the customer must be of a banking nature. It is also important to note that a customer does not have to be a person, as firms, joint stock companies, Government departments or a separate legal entity may also be customers of a bank.

Relationship between Bankers and Customers

The relationship between a banker and customer in most cases, is one of a debtor creditor relationship, as seen in the case of Foley v Hill7. The positions of the parties will depend upon, whether the bank has lent money or has accepted deposits. It is important to note that the banker is not a mere depository or trustee as a depository receives a sealed packet and undertakes to return it unopened. This is not to say that banks do not do this, but when they do,it is as a
5 6

(1914)19 Com. Cas. 256. nd Padmalatha S. and Paul J (2010) Management of Banking and Financial Services 2 Edt. 7 (1848) 2 H.L. Cas. 28

ID#: 1100028 Course: Banking and Finance Law Lecturer: Ms. O. Lyn Submission Date: March 9, 2013

secondary function. Similary,the Banker becomes the bailee and the customer becomes the bailor when the customer deposits valuables, bonds or other documents with the banks. Since the banker now becomes the custodian for the customers assets he is liable for any damages suffered by its customers due to its negligence. The banker or bank therefore owes a certain incidental duty to its customers, such as a common law and equitable duty of care, a duty of confidentiality and sometimes a fiduciary duty similar to those owed by a trustee.

A duty of Confidentiality or secrecy

The duty of confidentia1lity of the banker to its customers is the core of customer-banker relationship. The leading case in this area is Tournier v National Provincial and Union Bank of England. In this case, the bank had released information related to the plaintiff's debt to the bank to his employers, and this subsequently led to his dismissal. Prior to the case of this case, the duty of confidentiality was a moral duty. However in this case, the appellate court held that beside the moral duty is the legal duty created by the contractual relationship between the banker and the customer8. The duty of secrecy or confidentiality is said to be rooted both in criminal and common law. As it relates to the criminal law aspects, jurisdictions such Switzerland has based the banks duty of confidentiality on criminal law. Thus, a breach of Article 47 of the Swiss Banking Act of 1934 could lead to an imprisonment or fine. The law of Switzerland as it relates to the confidentiality of the relationship between bankers and customers can be said to have been designed to protect legitimate activity from illicit investigation. The jurisdictions that have adopted this type of legislation often argue that what they do is distinguish between legitimate activities and illegitimate activities where individuals or businesses seek to escape from capital gains tax, exchange-control or financial laws. Such jurisdictions deny that countries with strong bank confidentiality rules also attract drug traffickers, money launderers, and other criminals, who exploit banking confidentiality to avoid the creation of an 'audit trail' which investigators can track.

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ID#: 1100028 Course: Banking and Finance Law Lecturer: Ms. O. Lyn Submission Date: March 9, 2013

In contrast, there are also jurisdictions which establishes the duty of care that a bank owes to its customer at common law. What this means is that the banks duty of confidentiality is implied in the contractual relationship that exists between itself and its customers. The rationale behind the duty of confidentiality in the bank-customer relationship is to protect the principal guardian from groundless attempts by intruders to enquire about his affairs and the fact that the customer would not be comfortable discussing his financial affairs with the bank if he knows the bank could be forced to its customers information. It is said that the bank which fails to ensure that the information relating to the customers finances is kept secret would eventually acquire a bad reputation and would therefore lose the publics trust. It is of significant importance that the bank adheres to the confidential nature of the relationship between itself and its customers as failing to do so can place the customer at risk from competitors. In that information pertaining to businesses has an intrinsic market value increases where confidential information is concerned. Recently, economic factors have been given great attention with respect to policy considerations and in certain circumstances, the duty of secrecy has been treated as having less importance than the country's interests9. In addition to this the duty of confidentiality is important especially now in the internet age where bankers hold a considerable amount of the customers personal information on their databases. Third parties therefore now, can hack into banks computer databases, especially if customers makes use of the internet banking. There is thus, a real risk of third parties obtaining personal information10. Notwithstanding, that the bank owes a duty of confidentiality to its customers, it is important to take into consideration the exceptions to these rules. One such exception is where there exists an obligation by law in a legal proceeding for the bank to divulge information about its customers account as was seen in the case of Bucknell v. Bucknell11 and Eckman v. Midland Bank Ltd12.

9 10

Ellinger E.P.,Lomnicka Eva and Hooley Richard. Ellingers Modern Banking Law ( Fourth Edition, Oxford University Press 2006) 186
11 12

ID#: 1100028 Course: Banking and Finance Law Lecturer: Ms. O. Lyn Submission Date: March 9, 2013

These two cases shows that there are instances in which judges will require a full disclosure of the customers account in an effort to establish the truth. In addition to this, in the event where the court summons a bank to give information about its customers account, the bank cannot refuse a courts order on the grounds of privilege. If the bank refuses to respond to such an order, then it will be held to be in contempt of court13. The courts however has to be very thorough when granting such orders and this right must be exercised very carefully. In that the court having a mere suspicion of the customer is not sufficient for it to grant an order. Adding to this, it is not a requirement for the bank to obtain the customers permission to disclose information when it is requested by the court as is illustrated in the case of Bankers Trust Co v Shapira14. Another exception to the rule of the obligation of confidentiality that a bank owes to its customer is where disclosure of the customers information is a matter of public interest. This exception emerged from the case of Blundell v Stephens.15 It should be noted however, that public interest here is not necessarily what the public is interested in, but it arises where it is in the best interest of the public to disclose certain information for example in the case of a fraud being commited.16

13 14

Cranston Ross, Principles of Banking Law (Second Edition, Oxford University Press 2002) 76 [1980] 3 ALL ER 353 15 [1920] AC 956
16

W. Goosen, A. Pampallis, Amelia Van Der Merwe, L. Mdlul Banking In The New Millennium (Juta and Co 1999)194

ID#: 1100028 Course: Banking and Finance Law Lecturer: Ms. O. Lyn Submission Date: March 9, 2013