Law of banking

1. Briefly explain the reason why Narni Pty Ltd sued the National Australia Bank Limited.

Narni Pty Ltd was a company that managed a private nursing home called "the Carrum Nursing Home". Narni opened the bank account with National Australia Bank to purchase and manage the nursing home which was supplied by loan funds from the vendor and some from Visa Credit Corporation Pty Ltd. They received their other loan of $50,000 which was from selling agent, Eccles Realty Pty Ltd and another $75,000 from their friends whom borrowed from a Visa Credit and mortgage received from their home.

Narni Pty Ltd sued the National Australia Bank Limited because they dishonoured a number of cheques that were drawn on the Narni No.2 cheque account. The bank wrongfully dishonoured cheques which led to the consequence of the company that "debenture securities were called upon an agent for the mortgagee in possession was appointed on 22 June 1989" (Byrne, J). This occurred because the bank continued to dishonour cheques when the amount was beyond the approved limited of $65, 000. This indicates that the bank breached the agreed arrangement between Bank and Narni that the Bank would not refuse to honour cheques if it exceeded the overdraft limit of $65,000 which caused Narni account to be in debit balance.

Mr Kealy, the Bank manager of Elwood branch was aware that the cheques drawn were of exceeding the approved limit of $65,000, which was later agreed to extend to a limit of at least $100 000 and Mr Kealy also did not approve of an overdraft facility until June 1988. However, the dishonoured cheques drawn were from the period of September 1988 and June 1989 which still had the limit of $65,000.

The bank also did not give appropriate "warnings" to their customer, Narni. It is stated in the case that Mr Kealy gave warnings that he would dishonour the cheques unless Mrs McCarthy were to put the account in order, however this was prior to 31 March 1989. Mrs McCarthy did not receive warnings from the bank from the period from June 1989 and October 1998 when the cheques were continued to the dishonoured without Mrs McCarthy's notice. This is a breach of the bank as regards to a banker and customer relationship. It is required for the bank to give appropriate warning to a customer, such as through a formal letter or of writing, however none of this procedure was taken, except for a conversation with ambiguous confirmation which was unclear for evidence of a warning to the customer.

Not only did the breach cause the bank account to be substantially overdrawn, it also caused a huge loss of income and had impact on their future profits and business of the Carrum Nursing Home.

2. The court found that the Bank had breached an implied term of the arrangement it had with Narni with respect to the overdraft facility. What was this term and why did the Court regard it as significant for Narni? In your answer include discussion about the nature of the banker-customer relationship and what implied terms have been identified as included in that relationship.

An overdraft facility is "a credit arrangement with a bank, allowing a person or company with an account to use borrowed money up to an agreed limit when nothing is left in the account" (View point Bank 2011) In this case regarding Narni and the Bank,  Narni had requested for an overdraft facility for renovations for their nursing home, however Mr Kealy, the branch manager of the bank did not approve of it until at a later period, which resulted in overdrawing of cheques which caused the account to be in debit balance.

There was an overdraft facility arrangement with Narni that an overdraft facility was not approved until at least June 1988. The court found that the term that the Bank had breached with regards to the overdraft facility was the fact that the Bank had agreed to provide an overdraft facility of unlimited amount for renovation purposes for Narni and the Bank also agreed not to dishonour cheques drawn to the agreed limit of the overdraft facility. However, the bank breached this agreement because it continued to dishonour cheques after the agreement.

Narni and Mr Kealy were of customer-banker relationship since the time Narni had opened an account at the branch and both parties from the opening of the account, were both intended to enter into this customer-banker relationship. This was shown through evidence that Narni relied the responsibility of her payments to the Bank, and Mr Kealy also said that he will support the account. The nature of the banker-customer relationship include a general relationship between the two parties which is of an implied contract and consists of common rights and duties founded on the practice of bankers. The relationship between the customer and banker may also be subject to special arrangements which are usually shown in writing. 

"The implied term is a legal conclusion that it is necessary to supplement the express terms of the contract" (Tyree) This means that both parties must have agreement to the term by an mutual evidential contract.  An example of a case was in Rouse v Bradford Banking Co Ltd [1894] AC 586; and Parras Holdings Pty Ltd v Commonwealth Bank of Australia [1988] FCA 682. In these cases, the banks had breached to provide reasonable notice to the customer in regards to a "repayment on demand" as the banks had thought it was a facility that can be terminated without notifying the customer. It must be required from the bank to give reasonable notice about the termination and that the bank may not refuse to honour cheques if they are outstanding at the time of the notice given to the customer. This relates to the Narni case as the bank continued to dishonour cheques when the balance was outstanding without giving notice to the customer and only gave "light warnings" without any warnings on paper.

The courts also found that there was a document in the Bank that records of "an Excess Report, dated 14 April 1989 which is, for the most part, in Mr Kealy's writing. It records that existing overdraft facilities were $65,000 at a time when the account was then overdrawn $106, 712 and the cycle for April was only half run. " paragraph 32 (Bryne J) There was also a term evident in the document which stated an extension was approved without Mrs McCarthy's consent. The report started that the "manager was to report with the file on 24 April if the excess was not then fully cleared and, in any event, the account after 24 April was to be controlled within the approved limit of $65,000." paragraph 32 (Bryne J). This was significant to Narni as the  bank had  breached the bank and customer relationship without notifying Narni about the temporary extension of the overdraft. 

It is a requirement of the bank to give evidential warning to their customer. In the case of Weaver & Craigie, The Law relating to Banker and Customer in Australia (2nd ed. 1990) [7, 150]  was cited that if there was not a formal approval by the Bank, the bank is to be bound of dealings when a customer has been permitted to sustain casual overdrafts regularly within a certain limit.

This case puts the law of "Paget's Law of  Banking (1996) at p.157 in reference which states "A banker is obliged to let his customer overdraw only if he has agreed to do so  or such agreement can be inferred from a course of business; borrowing and lending are a matter of contract, express or implied" This statement caused difficulty because of relations to the term of an "overdraft" which is "repayable on demand", therefore if there was a situation of outstanding cheques being drawn as if it was believed a facility exists, even when the limit of the overdraft has been reached.

When there is an establishment of a banker-customer relationship, which is usually from the opening of an account, it is obligatory that both parties are aware of the rights and duties that are imposed. These rights and obligations are imposed by an implied contract between the parties. The duties of the Banker include Duty to Repay, Duty to honour cheques (mandate of the customer), Duty to question a valid mandate and Duty of Secrecy/Confidentiality. In the Narni case, the Bank had breached the duty to honour cheques which has the obligation to honour customer's cheques to the extent of the credit balance in the account or up to arrange overdraft limit. This was breached because the bank had overdrawn the account and also continued to dishonour cheques ever after an overdraft agreement.

It had an enormous impact for Narni because their account was overdrawn on 12 September 1988 and by the end of the month it had achieved a debit of $117 562. Debit balances were permitted at that time when there was in fact, no approval of an overdraft as Mr Kealy supposely had refused Mrs McCarthy's requests to allow an overdraft facility of $100 000. Mr Kealy considered the situation that way because the cheques continued to be honoured notwithstanding that the account was already significantly overdrawn.

3. In paragraphs 47 & 48, the court dealt with the issue of estoppel. What is estoppel and what did Narni claim amounted to estoppel in this case?

Definition of Estoppel is stated by John Bouvier as "A preclusion, in law, which prevents a man from alleging or denying a fact, in consequence o his own previous act, allegation or denial of a contrary tenor. Steph. Pl. 239. Lord Coke says, "an estoppel is, when a man is concluded by his own act or acceptance, to say the truth." Co. Litt. 352, a.""

Use of "estoppel" was in the Greenwood case in which the term used "where it was said that silence could raise an estoppel when there is an obligation on the party to speak." (Tyree) In the Greenwood case, the husband failed to notify about known forgeries by his wife. This act estopped the customer from denying the legality of the signature. An estoppel occurs if only there is a duty to disclose to the bank about any breach of the duties. In the Greenwood case, the husband was estopped from denying about being aware of the forgeries due to the situation with his wife as she said it was for her sister, which was discovered later to be false.

However, estoppel can only occurs when there is an implied term of the banker-customer contract such as of that in the Narni case. In this case, to reference of the Estoppel Claim "the Bank was precluded from dishonouring the cheques because the Bank was estopped from denying that it would not dishonour cheques drawn on the account within the limit of  "at least $100,000" without first giving notice: statement of claim para 26H-26K." (Byrne, J) The overdraft extension claim in this case,  was the estoppel claim because Narni had relied upon the conduct of the Bank to meet the cheques at a time when the bank was not overdrawn to $100,000 DR.

The claim was said to fail for want of an underlying cause of action as Narni was seeking to use the doctrine of promissory estoppel as a cause of action which was not tolerable by law. In relation to this case, judge Bryne said it is not necessary for the principle of promissory estoppel because the estoppel claim was settled in the overdraft extension claim.