Summary of the Cases

A case in which a bank was held to be under a duty of care to a customer was the 1959 case of
Woods v. Martins Bank Ltd. In that case, the defendant bank negligently advised the customer
to invest in the shares of a company on the basis that the company was financially sound and
that the investment was a wise one to make. In fact the company was in a poor financial
condition, and had a considerable overdraft with the bank which despite being continually
pressed by the bank to repay, it did not repay during the time when the bank was advising the
customer. The bank was held liable in damages for the negligent advice. In the course of giving
judgment, Mr. Justice Salmon said:

"In my Judgment, the limit of a banker's business cannot be laid down as a matter of Law. The
nature of such a business must in each case be a matter of fact and, accordingly cannot be
treated as if it were a matter of pure law". In considering what is and what is not within the
scope of the defendant bank's business I cannot do better than look at their publications.

Mr. Justice Salmon then went on to consider various booklets and advertisements published by
the defendants in whom there were various references to advice on financial matters being
available to customers and concluded:

I find that it was and is within the scope of the defendant bank's business to advise on all
financial matters and that, as they did advise [the plaintiff], they owed a duty to the plaintiff to
advise him with reasonable care and skill in each of the transactions to which I have referred
(Smailes, Woods v. Martins Bank ltd and another, [website]).

The Woods v. Martins Bank Ltd case demonstrated what has subsequently become clearer in
the more recent cases referred to below; that in assessing the existence and extent of any duty
of care, an English court will look first at the facts in relation to each case to ascertain whether
there was any express or implied assumption of responsibility by a bank or other financial
institution to advice, and second at whether that advice was reasonably relied on by the
plaintiff (Reinhart & Carmen, 2008: 214).

Debtor/Creditor Relationship
The relationship is not a principal/agent or trust/trustee relationship; it is a relationship based in
express contract.
Foley v Hill: The bank is allowed to co-mingle cash and use it for its own purposes - money in a
bank account is not subject to any trust arrangement. The money is repayable to a customer on
demand: unlike the general rule where a debtor must seek to repay the creditor, the debtor only
pays when the creditor demands it.
The bank can do what it likes with the money that the customer gives it. The customer is merely
a creditor of the bank: the bank owes it money, which may be repayable on demand or at call
(have to give notice). Theres no trust, so if the bank becomes insolvent the customer will lose all
or some of its money.

Foley v Hill 1848: Customer paid money into an account expecting to receive 3% interest per
year, but wasnt paid any for 6 years. He wanted them to give the profit they made on his money.
The account of profits was denied: he should have just sued to return the debt. Where money is
paid into the account, the bank can do what it likes. Its duty was to repay (when demanded) a
sum equivalent to that paid into his hands.

Generally the onus is on the debtor to seek out somebody you owe money to and repay them, but
the banks obligation is to repay when demanded. This also applies when the customers account
is overdrawn the customer waits for the bank to demand repayment rather than seek to pay
them the money.

Joachimson v Swiss Bank Corporation 1921: The bank has an obligation only to repay you at
the branch where the account is kept and during normal working hours.

The House of Lords, then the highest court in the land, had its say on the matter in Foley v Hill
and Others 1848, duly reported in the Clerks Reports, House of Lords 1847-66 (pages 28 and
36-7). In summary, the appellant in 1829 opened a bank account with the respondent bankers.
Two further deposits we added in 1830 and in 1831 interest was still added. In 1838 the
appellant brought proceedings against the respondent bankers seeking recovery of both the
principle and interest. The counsel cleverly tried to argue that it was the duty of the respondent
bankers to keep all the accounts up to date at all times and thus there was more to this
relationship than that of debtor and creditor.

The Lord Chancellor Cottenham said the following in judgement

Money, when paid into a bank, ceases altogether to be the money of the principal; it is
by then the money of the banker, who is bound to return an equivalent by paying a
similar sum to that deposited with him when he is asked for it. The money paid into a
bankers is money known by the principal to be placed there for the purpose of being
under the control of the banker; it is then the bankers money; he is known to deal with
it as his own; he makes what profit of it he can, which profit he retains to himself, paying
back only the principal, according to the custom of bankers in some places, or the
principal and a small rate of interest, according to the custom of bankers in other places.
The money placed in 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 principal if he puts it into jeopardy, if he engages in a
 hazardous speculation; he is not bound to keep it or deal with it as the property of his
principal; but he is, of course, answerable for the amount, because he has contracted,
having received that money, to repay to the principal, when demanded, a sum
equivalent to that paid into his hands.

That has been the subject of discussion in various cases, and that has been established
to be the relative situation of banker and customer. That being established to be the
relative situations of banker and customer, the banker is not an agent or factor, but he is
a debtor.

Thus the settled position of the law is that when you deposit, the bank becomes the owner of
the money deposited and you become a creditor to the bank.

Joachimson v Swiss Bank Corporation

Facts[edit]
Siegfried Joachimson, Jacob Joachimson and L.E. Marckx jointly operated a business in
Manchester as a partnership. L.E. Marckx was a naturalised British citizen, but the other two
partners were German nationals. The firm opened and operated a bank account with the Swiss
Bank Corporation.
On 1 August 1914 Siegfried Joachimson died. Under English partnership law at the time, [4] this
had the effect of dissolving the partnership. However three days later, on 4 August 1914, World
War I broke out, and Jacob Joachimson returned to Germany. The firm's account with the bank
was dormant for the duration of the war; the case report suggests that this might have been
because of legal prohibitions relating to property of enemy aliens.[5] After the war, the English
partner, L.E. Marckx, tried to wind up the affairs of the partnership, and sought repayment of
the 2,312 held in the bank account from the bank. The bank refused to repay the sums in the
account arguing that either (i) the firm had made no demand for repayment of the sums, and so
they were not due; or in the alternative (ii) that if the right to repayment arose upon the death
of Siegfried Joachimson, then it was now barred by the statute of limitation. [6]
The case report indicates that there was a great deal of procedural wrangling at first instance in
relation to whether the claim could be brought by an individual partner or had to be brought in
the name of the firm.

Decision[edit]
The Court of Appeal held unanimously that the claim was not statute barred. Until a customer
demanded repayment from the bank, the debt was not due and payable, and thus limitation
periods would not run. Bankes LJ held:[7]
 It seems to me impossible to imagine the relation between banker and customer, as it
exits today, without the stipulation that, if the customer seeks to withdraw his loan, he
must make application to the banker for it...

DUTY OF A CUSTOMER OWED TO THE BANK IN DRAWING A CHEQUE

This duty can be expressed in these terms

a Customer of a bank owes a duty of care in drawing a cheque to take reasonable and ordinary
precautions against forgery.

The leading authority for this proposition is the case of

London Joint Stock Bank Ltd v. Macmillan (1918) A.C. 777

The bare facts of this case are that a firm who were customers of a bank entrusted the duty of
filling out their cheques to a clerk whose integrity they had no reason to doubt. The clerk
presented to one of the partners for signature a cheque drawn in favour of the firm or bearer.
There was no sum on words written on the cheque in the space provided and there were the
figures 2 in the space intended for the figures. The partner signed the cheque. The clerk
subsequently tampered with the cheque by adding the words one hundred and twenty pounds
in the space that had been left. The clerk then presented that cheque for payment at the firms
bank and received a hundred and twenty pounds out of the firms account. The question was
whether the bank would then be liable to the firm for that loss that was perpetrated by their
own clerk.

The House of Lords held that the firm had been guilty of a breach of duty arising out of the
relation of a banker and customer to take care in the mode of drawing the cheque and that the
alteration of the cheque by the clerk was a direct result of that breach of duty. And accordingly
the bank was entitled to debit the customers account with the amount of that cheque.

Lord Finley summed up that duty at page 789 as follows:

the relationship between a banker and a customer is that of debtor and creditor with a super
added obligation on the part of the banker to honour the customers cheques if the account is in
credit. A cheque drawn by a customer is in points of law a mandate to the banker to pay the
amount according to the tenor of the cheque. It is beyond dispute that the customer is bound to
exercise reasonable care in drawing the cheque to prevent the banker being misled. If he draws
the cheque in a manner which facilitates fraud, he is guilty of a breach of duty as between
himself and the banker and he will be responsible to the banker for any loss sustained by the
banker as a natural and direct consequence of this breach of duty.

Sections 3 and 4 of the Cheques act s. 3 (2) that where a banker in good faith and without
negligence and in the ordinary course of business
(a) Receives payment for a customer of a prescribed instrument to which the customer has
no title or defective title

Protection is essentially being proffered to protect the bank

Section 24 of the Bills of Exchange Act which provides that where a signature on a bill is forged,
or placed thereon without the authority of the person whose signature it purports to be, the
forged or the authorised signature is wholly inoperative. In other words if the bank honours a
forged cheque and it subsequently turns out the cheque was forged, then the banker bears the
loss.

Does the duty of the customer extend to scrutinising bank statements and are the statements to
be deemed to be accurate unless challenged by the customer within a given period.

As a matter of practice the banks will expressly provide that that is the case, in the absence
however of an express agreement with the bank, is such a duty to be implied? If under the
written terms of the contract there is no agreement that statements will be binding after a
certain time has lapsed. This was the issue in the case of Tai Hing Cotton Mills Ltd v. Liu Chong
Hing Bank Ltd P.C 1985 2 947

Brief statement of facts

A company was a customer of a bank and maintained accounts with that bank. The bank
honoured cheques 300 of them totalling approximately 5.5 million Hong Kong dollars. The
cheques on the face of them appeared to have been drawn by the company and appeared to
bear the signature of the Managing Director of the Company who was one of the authorised
signatories and so the bank honoured these cheques. It later transpired that those cheques
were not infact the companys cheques, they were in fact forgeries and the forgeries had been
perpetrated by the companys own accounts clerk and the question was whether that loss
should fall on the company or on the bank.

The holding of the privy council was as follows: that in the absence of express agreement to
the contrary the duty of care owed by a customer to his bank in the operation of a current
account was limited to a duty to refrain from drawing a cheque in such manner as to facilitate
fraud or forgery and that a customer had a duty to inform the bank of any unauthorised
cheques purportedly drawn on the account as soon as the customer became aware of it. And on
the question whether there was an obligation on the part of the customer to screen statements
which is what the bank had advocated or argued, the court held, that the customer was not
under a duty to take reasonable precautions in the management of his business with the Bank
to prevent forged cheques being presented for payments nor was he under a duty to check his
periodic bank statements so as to enable him to notify the bank of any unauthorised debit items
because such wide a duty was not a necessary incident of the Banker/Customer relationship
since the business of Banking was not the business of the customer but the business of the bank
and forgery of cheques was a risk of the service which the bank offered.
It had been suggested in this case that there was a duty owed to the bank by the customer but
the Privy Council stated that the customer was under no duty to scrutinise statements to check
if they are erroneous.

WHEN CAN A CONDITION BE IMPLIED

Conditions that must be satisfied

A term will not be implied into a contract unless it satisfied the following conditions:

1. The term proposed to be implied must be reasonable and equitable.

2. It must be necessary to give business efficacy to the contract i.e. a term will not be
implied into a contract if the contract is effective without that implied term.
3. The term must be so obvious that it goes without saying as it were.
4. The term must be capable of clear expression;
5. It must not contradict any express term of the contract.

So if the customer has a term to be implied in the relationship, it must meet these 5 conditions.