BANKER CUSTOMER

RELATIONSHIP

BANKER & CUSTOMER RELATIONSHIP

The moment a bank account is opened either by an individual, a firm or a limited company, the entity becomes the customer of the bank. To study and get ourselves familiarized with legal and other implications of this relationship are extremely important to avoid future complications and discharge of our responsibilities as an effective and successful banker.

BANKER & CUSTOMER RELATIONSHIP

The Bills of Exchange Act 1882 (UK) defines Bank as under: A banker includes any body or person, whether incorporated or not, who carry on the business of banking. Sec. 5(b) of Banking Companies Ordinance 1962 define banking as under: Accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw-able by cheque, draft, order or otherwise.
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BANKER & CUSTOMER RELATIONSHIP

No statue has defined the term customer. A leading banking case in which we find an important clue about who is a customer was that of Matthew v. William Browns & Company (1894), where the court decided that the stranger who stole the cheque, had no title to it. As such, a thief was not a customer. This decision gives an implied qualification that a course of dealing or a habit of calling at the bank by the person from time to time for banking service is essential for banker customer relationship. However, in subsequent decisions the court did not recognize a regular course of dealings for the establishment of this relationship.
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BANKER & CUSTOMER RELATIONSHIP

The SBP Prudential Regulations defines an Account holder in the following words : An Account holder means a person who has opened any account with a bank or is a holder of deposit/deposit certificate or any instrument representing deposit/placing of money with a bank/DFI or has borrowed money from the bank/DFI.

BANKER & CUSTOMER RELATIONSHIP

Conclusion : The Banker customer relationship does not commence unless both the parties intend to enter to it. Accordingly there must be some sort of account, either a deposit or a current account or some similar relationship, to make a man a customer of a banker. If a person has no account with a bank and is not about to open an account, the fact that a bank renders some casual service for him will not make him a customer.

BANKER & CUSTOMER RELATIONSHIP

Debtor and Creditor Relationship:

When a banker accepts deposit from the customer the immediate relationship established between them is that of debtor and creditor. This legal principle received the approval of the House of Lords in Foley v. Hill and Others. Extracts from the judgment are as under: Money, when paid into a bank, ceases altogether to be the money of the principal; it is 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. He is guilty of no breach of trust in employing it; he is not
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BANKER & CUSTOMER RELATIONSHIP

answerable to the principal; if he put 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; he is, of course, answerable for the amount, he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hand.

BANKER & CUSTOMER RELATIONSHIP

Duration is not an element in the relationship between a customer and the banker : In the English case of Ladbroke and Todd, 1914 Justice Bailhache held 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 opened in his name, and the bank accepts the money or cheque and is prepared to open an account in the name of that person; after that he is entitled to be called a customer of the bank. The person becomes a customer the moment the bank receives the money or cheque and agrees to open an account. Therefore, neither the number of transactions nor the period during which business has been conducted between the parties determine whether or not a person is a customer.
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BANKER & CUSTOMER RELATIONSHIP

Another leading case which further reemphasized this principle is of Great Western Railway Co. London and County Banking Co. Ltd., where a rate collector habitually encashed cheques for about twenty years at the counter of the defendant bank who had no account with the Bank. Both the trial judge and the Court of Appeal held that he was a customer, but the House of Lords took the opposite view. The Judicial Committee of the Privy Council summed up the position as follows: Their Lordships are of the opinion that the word customer signifies a relationship in which duration is not of the essence. A person whose money has been accepted by a bank on the footing that they undertake to honour

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BANKER & CUSTOMER RELATIONSHIP

cheques up to the amount standing to his credit is, in the view of their Lordships, a customer of the bank.irrespective of whether the connection is of short or long standing. Thus a person becomes a customer of the bank : a) when he opens an account with it; b) it is immaterial that the account is overdrawn; c) it is irrelevant whether the account is of the current type or some other type such as saving or deposit account.

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BANKER & CUSTOMER RELATIONSHIP

In Stoney Stanton Supplies (Coventry) Ltd. V. Midland Bank Ltd., in which A forged Bs signature and opened an account in B name without Bs authority. Subsequently it came into the knowledge of the B that A has fraudulently opened an account in his name and claimed that the said account belonged to him and he is entitled to operate upon the account. Bank refused to accept Bs contention. What should have been the decision of the court.

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BANKER & CUSTOMER RELATIONSHIP

The court held that no relationship came into existence between the Banker and B. The bank had no relationship of contract with B and did not owe him a duty of care. Simply opening of an account in Bs name does not establish a relationship of banker and customer between the parties.

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BANKER & CUSTOMER RELATIONSHIP

The relationship between the banker and customer in legal terms is purely contractual in nature, the parties thereto must be capable to enter into the contract as per conditions laid down under section 11 of the Contract Act 1872. This relationship can be established with the following : i) The applicant must be a major i.e. he must have attained the age of 18 years at the time of opening of account. A minor is not competent to contract and therefore bankers do not oblige them to open an account with them. However, to encourage savings and assist in handling legitimate banking transactions, a joint account of minor is allowed to be opened along with his guardian.
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BANKER & CUSTOMER RELATIONSHIP

ii) He should be a person of sound mind. Sec. 12 of he Contract Act lays down that a a person is said to be of sound mind for purpose of making a contract if at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interest. iii) He should not have been debarred from entering into any contract under any law, like undischarged bankrupt, proclaimed offender, and alien enemy.

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BANKER & CUSTOMER RELATIONSHIP

OTHER RELATIONSHIPS : 1. BAILOR AND BAILEE : The original bankers i.e. goldsmith, were providing to their clients safe custody facilities. However, with the passage of time it has become a secondary business. When the Banker provides such facilities to his customers, the relationship becomes that of a bailor and bailee. Duties of Bailee: 1. To take care of goods bailed. The question of degree of care is of particular importance in case of bailment. The bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed. (Sec.151) 2. (Sec. 152) The bailee, in the absence of any special contract is not responsible for the loss destruction or deterioration of the things bailed, if he has taken the amount of care of it described in Sect. 151.

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BANKER & CUSTOMER RELATIONSHIP

3. To return the goods. It is the duty of the bailee to return or deliver the goods, without demand, on the expiry of the time fixed or when the purpose is accomplished. If he does not return or deliver as directed by the bailor, or tender the goods at the proper time, he becomes liable for any loss, destruction of the goods even without negligence during the period it is detained. 4. As regards the return of goods bailed by two or more joint owners, the bailee may return the goods to any one without the consent of the bailors, provided that there is no contract that delivery must be given to all.
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BANKER & CUSTOMER RELATIONSHIP

PRINCIPAL AND AGENT : The relationship between a banker and his customers is ordinarily that of debtor and creditor, but he is an agent of customer when he buys or sells securities, collects cheques, dividend warrants, or promissory notes on behalf of his customer. Who may be an agent : Since a contract made by an agent is in law the contract of principal, it is immaterial whether or not the agent has legal capacity to make a contract for himself. The agent is only a connecting link and is not personally bound by his acts performed on behalf of his principal. The law requires the principal and third party to be competent to contract.
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BANKER & CUSTOMER RELATIONSHIP

PAWNER/PAWNEE, MORTGAGOR AND MORTGAGEE : A pledge is a contract of bailment, whereby one person transfers possession of some article to another to secure the payment of debt or the performance of promise. A pledge is a security device based upon a bailment. When a customer pledges goods and documents with the Bank as security for an advance, he becomes the Pawner and the Banker becomes the Pawnee. A pledge is something between a simple lien and mortgage. In the case of a lien there is no transfer of interest. In case of mortgage the transfer of interest in the property mortgaged passes to the mortgagee. He has an absolute interest in the property subject to a right of redemption by the mortgagor on payment of debt.

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BANKER & CUSTOMER RELATIONSHIP

Mortgage : A mortgage is the transfer of interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to pecuniary liability. Banks many time extend finance facility against mortgage of immovable property of the borrowers/guarantor. The person who is offering the security is called mortgagor and the bank in whose favour the property is mortgaged is called mortgagee. The banker can exercise his right to sell the property in case of customers default. Most popular mortgages among bankers are simple mortgage and mortgage by deposit of title deeds or equitable mortgage.
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BANKER & CUSTOMER RELATIONSHIP

Terms of contract between banker and customer : 1.The banker must receive cash and collect the proceeds of such items as cheques, postal orders, money orders and bills of exchange for his customers account. When executing such instructions of his clients, he frequently acts as an agent for his customer. Similar other responsibilities discharged as an agent includes, purchase and sale of stocks and shares, remittance of funds on standing instructions etc. 2. The money so received become at once the property of the banker, and he is thereupon indebted to his customer for an equivalent sum; hence the banker does not hold the money as his customers agent or trustee. Accordingly, the customer has no right to ask how the funds placed by him in his account have been used nor can claim the same cash deposited by him originally. He has only the right to claim the equivalent amount of cash and his right will be recognized when he demands it through submission of cheque.

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BANKER & CUSTOMER RELATIONSHIP

3. Although the banker becomes indebted to his customer, the ordinary rule that debtor must seek out his creditor does not apply, the bankers duty is to repay the money or any part of it upon demand being made by the customer. The duration laid under the law of limitation to pursue his claim through legal means against the bank in case of default will commence with effect from the date a demand is made by the customer. 4. The banker must pay cheques drawn on him by his customer in legal form on presentation, during banking hours subject to availability of sufficient funds to his credit or the cheques are within the limits of an agreed overdraft and there are no legal bars to payment.

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BANKER & CUSTOMER RELATIONSHIP

5. The banker has the right to charge his customer a reasonable sum for services rendered. 6. If a customer maintains two or more accounts with his banker (a) it is usually an implied term of the contract between banker and customer that the banker will keep the accounts separate and (b) if the customer makes a payment to the credit, he has the right to appropriate the funds to whichever account he chooses. 7. The banker does not owe a duty to his customer, who is seeking to borrow money from him, to advise the customer as to the wisdom of borrowing the money for the specified purpose.

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BANKER & CUSTOMER RELATIONSHIP

8. The banker must not disclose to third person without the consent of the customer, express or implied, either the state of customers account or any of his transactions. 9. A banker is under an obligation to supply to its customers a copy of the statement of account, either prepared manually or through computer system. 10. The customer must exercise reasonable care in drawing his cheques so as not to mislead his banker or to facilitate forgery.
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BANKER & CUSTOMER RELATIONSHIP

11. If the customer discovers that the cheques purporting to have been signed by him have been forged, he must inform his banker, and like wise the banker becomes aware that forged cheques are being presented for payment, he must inform his customer. 12. The relationship between banker and customer may be terminated by mutual consent or unilaterally, by either party. 13. Finally, there are certain events which affect, the relationship between banker and customer like death, mental incapacity or bankruptcy, the service of court order etc.
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BANKERS DUTY OF SECRECY

An important obligation of a banker is to keep his customers affairs secret. The leading case which established the basic principles of banks duty of secrecy was that of Tournier v. National Provincial and Union Bank of England. The plaintiff was a customer of the defendant bank. In April 1922, his account was overdrawn by an amount of about Pound 10 and he signed a document agreeing to pay off this amount by weekly installments of one pound. The plaintiff wrote on the document the name and address of a certain company whose employment he was about to enter as a traveler on a three month contract. When the agreement to repay was not observed, the acting manager of the branch telephoned the company in order to find out the plaintiffs private address, and he spoke to two of the companys directors. The plaintiff alleged that in those conversation the acting manager had disclosed that his account was overdrawn and that promises for repayment were not being
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BANKERS DUTY OF SECRECY

carried out and expressed the opinion the plaintiff was betting heavily, the bank having traced a cheque or cheques passing from the plaintiff to a bookmaker. The acting managers version of the telephone conversation did not differ subsequently from that of the plaintiff. As a result of those conversation, the company refused to renew the plaintiffs employment when the three months had expired. The plaintiff brought an action against the bank for damages for slander and for breach of an implied term of the contract between him and the bank that the bank would not disclose to third persons the state of his account or any transaction relating to it. The undernoted points were considered during trial and decided in the final verdict of this case : i) To what information does the obligation of secrecy extend. It clearly goes beyond the state of the account, i.e. whether there is debit or credit

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BANKERS DUTY OF SECRECY

balance. It goes to all the transactions that go through the account and to the securities, if any given in respect of the account . It extend even beyond that and also include information from other sources than the customers actual account. ii) Whether the duty is absolute or whether there are any occasion when a bank is justified in making disclosure concerning customers affair. The Lordship held that it is not absolute but qualified. On principle, he held that the qualifications can be classified under four heads namely : a) Where disclosure is under compulsion of law; b) where there is duty to the public disclosure; c) where the interest of the bank require disclosure; d) where the disclosure is made by the express or implied consent of the customer.
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BANKERS DUTY OF SECRECY

The Banks (Nationalization) Act, 1974, has also made it obligatory for every Pakistani banker to maintain secrecy about the affairs of the customers account. Sec. 12(1) of the act lays down that the banks will observe secrecy and shall not divulge any information relating to the affairs of its constituents except in circumstances in which it is, in accordance with the law or practice and usage customary among bankers, necessary or appropriate for a bank to divulge such information. Legally recognized instances when disclosure is appropriate are discussed below : i) Under Compulsion of Law : A banker is often served by an order by a competent court of law to furnish information about his customers account. For example Sec. 165 of Pakistan Criminal Procedure Code authorizes the investigating officer to search record of the bank for any
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BANKERS DUTY OF SECRECY

information relating to certain offences, provided prior permission has been obtained from a Session Judge. Similarly, with the prior approval of the Income Tax Commissioner, an Income Tax Officer may inspect the books of the banker or call for information required by him in accordance with Sec. 144 of the Income Tax Act. Sec. 6 of the Bankers Evidence Act of 1891, permits the banker to produce certified copies of the relevant parts of the entries from the ordinary books of the banker; and the court will be pleased to accept the evidence so produced. 2. Duty to public disclosure : Sometime the bank is morally bound to disclose the state of customers account, when it came to his knowledge that the activities of his customers account are against public/national interest. However, in such instances the banker must make himself sure
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BANKERS DUTY OF SECRECY

that he has sufficient evidence to support the disclosure. In the Interest of the Bank : The bank may also be disclosing the customers state of account when it is required in connection to safeguard his own interest e.g. suit filed for recovery of banks dues. In such an instance the bank will be filing copies of statement of accounts and other documents in support of his claim. It is also possible that some times the banker my have to disclose the nature of account in order to defend against the charges brought against him. Express or Implied consent of customer : Such disclosure are made in the interest of the customer under his express or implied consent. For example information furnished to auditors for compilation of final accounts or queries received from business circles about the customers account in connection with business contracts and ventures.

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BANKERS DUTY OF SECRECY

It is an established practice among bankers that they provide confidential opinion on their customers to fellow bankers when requested to do so. It is, however, not a breach of professional responsibility because it is a established practice on a reciprocal ground. A banker should be extra careful when furnishing information about his customer and should confine such opinions to casual expressions like fair, good, satisfactoryetc. The information should be carefully worded and provided on a plain paper not bearing signature of any of its officials. The forwarding letter accompanying the opinion should also clearly state that the opinion is strictly for private use of the banker, without any risk and responsibility on the part of the bank or any of its officials and this opinion should not be passed on to any third party.

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Termination of Relationship
The banker-customer relationship is contractual in nature, it can be terminated by either party by serving a notice on the other. However, in practice a customer may terminate his contract at any time, banker if intends to terminate this relationship always serve a notice in view of the operative nature of the account. Why a customer would like to close his account, some of the plausible reasons for closure of account by a customer are listed below? i) Change in residence of the customer which makes banking at the existing branch very inconvenient or costly. ii) Customer may not be satisfied with the quality of service rendered by the bank. iii) Account may also be closed due to the death of the customer. On the other hand a banker would like to close the account of a customer due to the following reasons :

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Termination of Relationship
i) Presentation by customer for payment of cheques without adequate balance in the account. ii) When the customers account has been unremunerative. iii) A regular habit of approaching and presenting cheques after banking hours. The bankers give formal intimation to the customer that he wishes to close the account after a specified period. He may also mention to the customer to withdraw all credit balance in his account and return the unused cheques. Reasonable Notice : The length of notice given to customer by a banker is of great signficance. It depends largely on the character of the account and circumstances of the case. A notice served to a salaried person may be for a few days, whereas for a business account, it may vary from 15 days to a month or even more according to the size of transactions in the respective account.
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CASE STUDY OPENING A NEW ACCOUNT

Ladbroke v. Todd (1914) The plaintiffs, a firm of bookmakers, posted a crossed cheque in respect of winnings to one of their clients, from whose letter box it was stolen. The thief opened a bank account in the name of Jobson, with the defendant (a banker), paying in for the credit of the account the stolen cheque, which was cleared for him the same day. The bank told him that no withdrawal could be made until the cheque was cleared, but no reference were taken or enquiries made by the bank as to his standing or respectability.

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CASE STUDY OPENING A NEW ACCOUNT

It was held that the relation of banker and customer begins with the first transaction, and the banker is protected under the Negotiable Instrument act (if crossed of course) sent for collection, even if the customer had, upto that time, drawn no money. In this case, however, although the bank acted in good faith, there was negligence in not making enquiries usual on opening of an account; the protection of available under Negotiable Instrument Act was lost, and the judgment was given against the bank.
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CASE STUDY JOINT ACCOUNT

JOINT ACCOUNT HUSBAND AND WIFE (MARSHALL V. CRUTWELL) A bank account was opened in the names of M and his wife, the plaintiff. The account was opened by transfer of the balance on account of M, who was in failing health and who, therefore, wished to hand over to his wife the making of payments in respect of household and other expenses. On the death of M, the wife claimed to be entitled to the balance of account.

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CASE STUDY JOINT ACCOUNT

It was held that although the deceased had stated, to the recollection of the Bank Manager, that the balance of the account would belong to the survivor of himself and his wife, the transfer of the account into the joint names was not intended to be a provision for the wifes benefit. It was merely a mode of conveniently managing the affairs of the deceased, and the wife was not entitled to the balance of the account.

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JOINT ACCOUNT SERVICE OF GARNISHEE ORDER

Husband and wife - Account in wifes name Service of Garnishee order: T, a recently discharged bankrupt, opened a bank account in the name of his wife. The account was to be used for domestic purposes and was only to be drawn upon with the husbands consent. T paid into the account, which had been overdrawn, money belonging to himself amounting to GBP 555, so that there was a credit balance on the account when judgment was obtained against the wife by H. Ltd. in respect of indebtedness for goods, principally clothing. A garnishee order was served on the bank in respect of the account, and the question was whether, in fact, the account was attached by the order.
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JOINT ACCOUNT SERVICE OF GARNISHEE ORDER

It was held that although the account was in the name of the wife, the arrangement was merely a mode of conveniently managing the husbands affairs, and there was a resulting trust in favour of husband. It had been held that a bank could not be garnisheed if it could be shown that no part of the money in the account was the judgment debtors own. Hence, the wifes account was not attached and the garnishee order would be discharged.

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BANKERS DUTY OF SECRECY

BATTS COMBE QUARRY CO. V. BARCLAYS BANK (1931) The plaintiff company put an enquiry through their bankers, Lloyds Bank, to the defendant bank, as to the financial standing of T. & Co. A favourable reply was given by the defendants and the plaintiffs opened a credit account in favour of T. & Co., supplying them with goods in reliance upon the reply to their enquiry. The debt was not paid, and in an action against Barclays Bank, the plaintiffs alleged that the bank had been negligent in reply to the enquiry, as at the time, they knew T. & Co. to be in difficulties and were in fact, pressing them for reduction of their overdraft, which was not fully secured. They also alleged that the bank, in breach of duty, failed to exercise reasonable care and skill in replying to the enquiry.

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BANKERS DUTY OF SECRECY

Held : The defendant were not liable. There was no evidence of negligence, and no duty was owed by them to the plaintiffs.

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BANKERS DUTY OF SECRECY

Guarantee Banks duty as to disclosure : The plaintiff, C, guaranteed the bank account of a married woman. At the time he signed the guarantee, the account was already overdrawn, the womans husband was undischarged bankrupt, to whom she had given authority to draw on the account, while payment had been stopped, in a number of cases, of cheques drawn on the account. The surety claimed to have the guarantee set aside on the ground that the bank had not disclosed to him of any these facts.

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BANKERS DUTY OF SECRECY

Held : There was no need for disclosure to be made voluntarily of any matters which might naturally be expected to take place between the parties concerned. The bank was, therefore, not bound to disclose any of the facts mentioned, and the action would be dismissed. A guarantee is not a contract and therefore a banker is not bound to disclose all material facts to the guarantor. The banker, when taking a guarantee, or in subsequent dealings with the guarantor, need not volunteer information, but if he believes that the guarantor is under a misapprehension as to any circumstances, it is his duty to correct the misapprehension.
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CASE STUDY
In Balmoral Supermarket Ltd. v. Bank of New Zealand the plaintiffs employee entered the defendant banks premises intending to deposit some cash and cheques. The cash was emptied out of a bag on to the counter midway between the employee and the teller. The teller took a small bundle of notes from the counter and proceeded to count them. After these notes had been counted and put on one side, robbers entered the bank and took the uncounted cash from the counter. The plaintiff brought an action against the bank claiming the amount of the cash taken by the robbers and alleging that the possession of and property in the cash on the counter had passed to the bank. This claim failed. The Supreme Court of New Zealand held that, until the money to be deposited had been checked and the bank had signified its acceptance thereof, the money had not been deposited and the bank had not become the debtor of the customer in respect of money.
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