Relationship Between A Banker And Customer: That Of A Creditor/Debtor

A banker, in addition to his primary functions, renders a number of services to his customers. After the account in the bank is opened and the relationship of a banker and customer is established, the bank not only undertakes to collect the cheques which are deposited, in the account but also makes the payment on behalf of the customer, whenever there is a mandate from the customer. On many occasions, when the customer gives bills for collection to his bank and the said bank passes the bills for collection to another bank and the amount of the bills is reduced as a result of debiting the customer’s account with collection charges as a result of an agreement between two banks, the bank is always acting on behalf of the customer. There are too many other occasions relating to so many matters which arise during the mutual dealings between the banker and the customer and at each time, a question arises as to what is the relationship between a banker and a customer.

It has now been well settled that the first and foremost relationship between the customer and the bank is the relationship of a Creditor and Debtor. For this point, it would be interesting to refer to the views of Sir John Paget who stated that the respective position of a banker and a creditor while sharing a relationship of a creditor and debtor is determined by their existing state of the account. The money is a debt due by the banker instead of him keeping it away in a safe room. The money deposited with the banker becomes his property and at his disposal.

In this research paper, the relationship of a banker and a customer as that of a creditor and debtor will be looked into and various case laws regarding the same shall be discussed.

Relationship between banker and customer : That of creditor/debtor or agent/principal

In the case of Official Liquidator, Hanuman Bank Ltd. V. K.P.T. Nadar and other [1] it was stated that when moneys are deposited in a bank, the ownership of the money passes to the bank and the right of the bank over the moneys lodged with it cannot be a lien at all. It was said that:

“The mere fact that a banker invites deposites, and is prepared to pay interest on them, is proof enough of his intention to make use of it as he likes, and earn interest therefrom, so as not only to enable him to pay interest to his depostior, but also to earn profits for himself. But even if the banker pays no interest on the money deposited, he is his customer’s debtor and not a bailee, because he undertakes to repay on demand a sum, equivalent to the amount deposited with him and the customer has no right whatsoever to claim the identical coins or notes deposited by him with his banker. The latter can pay the amount in any kind of legal tender." [2] 

In Velji Lakhamsey & Co. V. Dr. Banaji, [3] , the Bombay High Court has again stated that the relation between banker and customer is that of a debtor and a creditor and any amount due by the banker to the customer in that relationship cannot be claimed by the customer from the bank as a preferential creditor, if the bank is wound up. But a customer may given certain specific direction to the bank and constitute the bank his agent. If the bank acts as an agent and not as a debtor, then the agency brings about a fiduciary relationship which lasts until the agency is terminated. Therefore, if the bank was given a direction by the customer that a payment has to be made to a third party, then till that amount is paid pursuant to the directions of the customer, the agency would continue and the bank would hold the amount not as a debtor of the customer but in the capacity of a trustee. [4] 

Special reference has to be made to the case of Foley v. Hill [5] where the question whether the relationship between a banker and a customer was that of a creditor and debtor or whether it was that of a principal and agent. Lord Cottenham L.C. said:

“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. The money paid into the banker’s 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 banker’s money; he is known to deal with it as his own; he makes what profit 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 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 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 was contracted, having received that money, to repay to the principal, when demanded, sum equivalent to that into his hands." [6] 

A Debt by a bank vs. An Ordinary Commercial Debt

There is a difference between the bank-customer relationship and the ordinary commercial debtor-creditor relationship. The debt de from a banker to his customer differs from ordinary commercial debts in one important respect, which is that the general rule by which a request by the creditor for payments is unnecessary does not apply.

This point was further elaborated in the case of Joachimson vs. Swiss Banking Corporation [7] where it was held that in case of a debt due from a bank, an express demand for repayment by the customer is necessary. In this case, the creation of an indivisible contract was described by the judge as follows:

“The bank undertakes to receive money and to collect bills for its customer’s account. The proceeds so received are not to be held in trust for the customer, but the bank borrows the proceeds and undertakes to repay them. The promise to repay is to repay at the branch of the bank where the account is kept, and during banking hours. It includes a promise to repay any part of the amount due against the written order of the customer addressed to the bank at the branch, and as such written orders may be outstanding in the ordinary course of business from two or three days, it is a term of the contract that the bank will not cease to do business with the customer except upon reasonable notice. The customer on his part undertakes to exercise reasonable notice. The customer on his part undertakes to exercise reasonable care in executing his written orders so as to mislead the bank or to facilitate forgery. I think it is necessary term of such a contract that the bank is not liable to pay the customer the full amount of his balance until he demands payment from the bank at the branch at which the current account is kept." [8] 

As mentioned above, the relationship between a banker and a customer is that of a creditor and a debtor, but it is different from the relationship of an ordinary creditor and debtor in the following respect:

The creditor(customer) must demand payment from debtor(banker) – The customer(creditor), in a banker customer relationship, must demand payment from the banker(debtor), whereas in the case of an ordinary commercial debt, the debtor must pay the amount on the specified date as per the terms of the contract. This difference is because the banker is not an ordinary debtor, he accepts the deposits with an additional obligation to honour his customer’s cheques. If he returns the deposited amount on his own accord by closing the account, some of the cheques issued by the depositor might be dishonoured and his reputation might be adversely affected. Moreover, according to the statutory definition of banking, the deposits are repayable on demand or otherwise. The depositor makes the deposit for his convenience, apart from his motive to earn an income (except current account). Demand by the creditor is, therefore, essential for the refund of the deposited money. Thus the deposit made by a customer with his banker differs substantially from an ordinary debt. [9] 

The creditor (customer) must demand payment at the proper place and time – A proper place means the office or branch of a bank in which the customer has an account. A bank which has various branches spread out across cities and countries is basically considered to be one entity. But the depositor, when he opens an account, enters into a relationship with the branch where he opens his account. His demand for the repayment of the deposit must be made at the same branch of the bank concerned otherwise the banker is not bound to honour his commitment. However, special arrangements can be made with the banker for the repayments to be made at some other branch. For example, in case of travellers cheques, bank drafts etc.

The demand for the repayment by the customer should also be made during banking hours and on a working day of the bank. [10] 

The Allahabad High Court in the case of Indo Allied Industries Ltd. Vs. National Bank Ltd. [11] Observed that since the express contract to the contrary was absent, there was an implied contract with a customer who opened an account with a branch of a banking concern, which carried with it the duty of the bank to pay the customer only at the branch where the account was kept, subject to instructions to transfer the amount elsewhere. [12] 

The creditor (customer) must demand from the debtor (banker) in a proper manner - The customer can demand payment from the bank only in the manner prescribed by the rules of a bank or in accordance with usage. The statutory definition of a bank itself shows that deposits are withdrawable by cheques, drafts, orders or otherwise. [13] It means that the demand for the refund of money deposited must be made through a cheque or an order as per the common usage amongst the bankers. In other words, the demand should not be made verbally or through a telephonic message or in any such manner. [14]