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The Banker Customer Relationship
According to J.W. Gilbert, a banker is a dealer in capital, or more specifically, a dealer in money. He is an intermediate party between the borrower and the lender, and he borrows from one party and lends to another. On the other hand, according to Dr. Herbert L. Hart, banker carries the definition of a person carrying on a business of receiving money and collecting drafts for customers. At the same time, this person is subject to the obligation of honouring cheques drawn upon him from time to time by the customers to the extent of the amounts available on their current accounts.
Generally, there are many duties of a banker in a banker-customer relationship. Firstly, it is the duty of banker to honor the cheques issued by customers. Also, duty of secrecy is another key obligation of banker to the customers in a banker-customer relationship due to its confidentiality of this agreement. A banker should not reveal the secrecy of his customers account. The banker takes care of the property deposited by the customer with or without charge as it is the duty of the banker to look after the property.
According the Malaysian Banking Law, the banker abides by the standing order of the customers in making payment on behalf of customer such as insurance premium. When dealing in foreign exchange, it is the duty of banker to follow the exchange control regulation ad instructions issued by the authority. Other duties of banker include receiving money for customer’s account, to render a statement of account and to abide any mandate a customer gives.
However, in this section, our discussion will focus only on three duties of banker which are the duty to honor the cheque, the duty to safeguard trust property and duty of confidentiality to customer. Examples of court cases will be elaborated also in order to support of justification on the duties as discussed.
(a)Duty to honor cheque
As “banking" means accepting deposits which can be withdrew by cheque, draft, order or otherwise, the banker is duty bounded to honor cheques issued by the customers from their accounts, provided there is sufficient balance in the account and the balance is properly applicable for payment of the cheque.
There are a few conditions when the banker is entitled to enforce his duty to honor the cheques issued by the account holder. When the cheque has been properly drawn and is in order in all respects including the date, amount in words and clearly expressed figures. In order words, the cheque issued is neither stale, post dated nor mutilated. Also, the signature of accountholder must to tallies with the specimen recorded with the bank. Other criteria that are needed to be fulfilled before a banker can be summarized as follows:
Sufficient balance in the customer account and the balance is applicable for payment using cheque.
The cheque issued is presented for payment on working days and during the business hours of the particular branch of the bank where the customer registered with.
Endorsements on the cheque issued are correct, proper and regular.
Payment of the cheque is not countermanded by the drawer.
Duty of banker to honor cheques can cease in the existence of certain conditions. In other words, the banker’s authority to honor cheques is revoked in the case that specific conditions are fulfilled. Firstly, if the customer countermands the payment before the cheque is cashed. in this situation, banker receives the stop payment instructions from the account holder and it is his responsibility to ends the duty to pay cheque. Other conditions include the recipient of notice about the death ot lunatic of the drawer at the time of drawing or the customer is declared bankruptcy before the cheque is paid. When the customer is claimed to be bankrupt, the drawer of the cheque become insolvent and the banker is unable to cash the cheque from the account of customer. Another situation that makes the duty to honor cheque ceases is a garnishee order attaching the balance in the account or an income-tax attachment order received by the banker.
Besides the revocation of the duty to honor cheque, a banker can refuse to honor the cheques provided there insufficient balance in the account of customer to make payment of the cheque. Also, if the cheque issued does not tally with the account on which it was issued, banker can refuse to conduct his duty. If the cheque issued is not in the correct order, for instance it happens to be post dated, stale, payment countermanded or even the difference of amount in words and figures, then the banker can refuse to honor the cheque of customer. One last situation that enable bankers to revoke its duty is that the balance held in account of customer are earmarked for other specific purposes and the remaining balance after fulfilling the other purposes is insufficient for banker to honor the cheque.
Court Case: Tina Motors v. ANZ Banking Group
In this case, Mr and Mrs I own a used car business together named Tina Motors Pty Ltd. The cheque account of this business entity is with ANZ Bank and the manager was Hardy. In this banker-customer relationship, only Mrs I as the customer could sign and issue a cheque from this account. Mrs. I’s brother in law, Mr Stella worked in Tina Motors Pty Ltd together with Mr and Mrs I. Under one incident, Mr Stella forged Mrs I’s signature on cash cheques and he was paid on cheque by ANZ Bank.
After seven months, his unethical act was subsequently found out. Tina Motors responses by issuing a court sue towards ANZ Banking Group for not obligating its duty as a banker to honor the cheque only when it is properly noted and signed. The judge of this case, Crockett J analyzed the background, facts and evidence of this case and voiced out his opinion. In usual similar cases like the current case would succeed because an authorized signatory from Mrs I did not sign the cheque issued.
However, in this case, evidence showed that Mr Hardy as the representative banker from ANZ Bank had twice been doubtful on the authenticity of signature and he acted accordingly by seeking confirmation from Mr I on the issuance of the cheque. Upon his act, he has been reassured by Mr I that the cheque was authorized by Mrs I and can be paid. Mr I put on inquiry and chose not to examine the situation deeper after being asked by Mr Hardy. Mr Hardy’s efforts to seek for confirmation from Mr I twice on the particular cheque when he found doubts on it has proved his continuing responsible to act with reasonable care to ensure proper working of account of the plaintiff.
Hence, the court judged that the defendant is to be claimed no guilty and that he had obliged to his duty to honor cheque of plaintiff, although the cheque was later found out to be forged on its signature.
(b)Duty to safeguard trust property
The duty to safeguarding the trust or customer property is fundamental to the notion of trusteeship and to the operation of trusts. In a banker-customer relationship, one of the roles of banker is to act as the trustee for customers. A bank is a place for customers to keep their properties especially cash in order to secure the safety of the properties, hence it is the responsibility of bank to ensure the security of these properties. Consequently, it is obviously comprehend that the trustees aka bankers are responsible for ensuring that they can minimize the harm that might goes to any property which they hold on trust. To that extent, of course, this duty will be dependent on the nature of the property, so as to prevent the property from becoming broken, run-down or reduce in its worth.
Also, there is another further dimension to this duty to safeguard trust property as banker as the trustee, which is the obligation to consider the best interests of the beneficiaries or customers and always consider the best alternative way of maximizing the utility or the value of the property the hold on trust, as applicable. For instance, if the property that a customer kept in the bank is investment capital, then it is the obligation of trustee to consider and select the most profitable investments to be invested, of course commensurate with the type of trust in question and in accordance with reasonable level of risk. In other words, the banker acting as the trustee has active duties to safeguard the trust property so that it remains suitable for the trust’s objectives and may not simply to watch over the property and preserve it from decay. For instance, if the trust property is comprised of cash which is to be invested for the benefits of the customers/beneficiaries, then the trustee or bankers will be required to consider the method or sources of investment in which the money of the trustee should be spent on. On the other hand, if the property were land and buildings which were rented out to tenants with the objective of customers to secure an income stream from those rents, then the trustees have the duty to manage these long term asset in a proper way in order to collect rents continuously or trustees may choose to take any other necessary steps to enforce the trust’s rights generally over these properties or to insure the land and building accordingly to any insurance contracts.
Court case: Cowan v Scargill and ors
In this case, the defendants refused to allow any funds of the claimant to be invested abroad. The claimant held that it is the obligation of the defendant as the trustee to exercise their duty in the best interests of the present and future beneficiaries of the trust, which is the customers in this case, by holding the scales impartially between different classes or levels of customers. This duty to safeguard the trust property of their beneficiaries is overriding any other matters. Yes, it is true that the defendant is obliged to obey the law, but subject to that, trustees must put the interests of their beneficiaries beyond others. When the purpose of the trust is to provide financial benefits to the beneficiaries, the objectives of the customers that the trustees or bankers need to achieve is to make the best investment to maximize the financial interests of plaintiff. If trustees for social or ethical reasons fail to make a wise investment decision which is able to give the best benefits to the beneficiary, then they would be subject to criticism. In making the best decision based on the interest of plaintiff the beneficiary, defendant as the trustee has to forgo all personal interests or views. Under a trust, if investment of any types would be more beneficial to the customers than other investments, banker must not cease from doing it by the reasons that they hold.
Hence, it is held by the court that the trustee (defendant)’s refusal to approve investment plan with regards to the choices of investments and diversification of investment was in violation of his duty to do the best that he can afford to safeguard the trust properties of plaintiff, including his duty to ensure that the property remain suitable for the trust’s objective, which in the current case is the maximize monetary returns. Defendant has an overriding obligation to the plaintiff to take advantage of a full range of investments.
(c) Banker’s duty of confidentiality to customer (Secrecy Duty)
When opening an account with the bank, there will a contract between customers and their banks. This made a contractual duty for the banker which implied that there has an agreement that banker will keep their customer’s information confidential. This confidentiality is not only applied to account transactions, it also includes all the information that the bank has about the customer.
From the “Banking and Financial Institution Act 1989" (BAFIA), it show that a bank is also under a legal obligation which is not make any unauthorized disclosure. It’s stated in BAFIA part XIII: Information and Secrecy. Section 97(1) states clearly that no director or officers of the bank, any external bureau or agent of the bank and any person who have the information of customer, for example: accountants, lawyers, police and liquidators can disclose any information or document relating to the customer.
Court Case: Tournier v National Provincial and Union Bank of England
This case was a legal case in United Kingdom. In this case, the National Provincial and Union Bank of England had disclosed one of the customer’s unpaid cheques to its customer’s employer. This cheque was drawn in favour of a bookmaker’s account. This made the employer refuse to renew his contact with the customer. The Court of Appeal held that confidentiality was an implied term in term in customer’s contract and any breach can make a liability if loss results.
However, subsequently from the case about, there are four principles that stated the condition where the bank can disclose the information. It’s named as Tournier Principles. These principles are:
where the bank is compelled by law to disclose the information
if the bank has public duty to disclose the information
if the bank’s own interests require disclosure; and
where the customer has agreed to the information being disclosed.
Banking and Finance Institutions Act 1989 (BAFIA 1989) does not provide any definition about customer.However we can summarise it as a customer of bank is one who has an account with that bank with the condition where the relationship is not one which duration is the essence. This definition is summarized from some cases , for example: Ladbroke v. Todd 111LJ 43.
In the case Ladbroke v. Todd, the bank opened an account for a thief who, as first transaction handed to the bank for collection a cheque which he has stolen. The court need to decide whether the thief was a customer of the bank or not. It was contended that as the banker-relationship could only be established over a period of time, so the thief is not considered as a customer. Finally the court held that a person need not have a series of dealings with the bank before he get the status of a customer. The costumer status will be given at the moment the bank received money or cheque abd agreed to open an account in the bank.
Duties of customer
To exercise reasonable care in drawing cheque (the Macmillan duty)
In absence of express agreement to contrary, customer’s duty is limited to duty to refrain from drafting a cheque in such a manner as to facilitate fraud or forgery. Customer’s duty is to take care to prevent fraudulent alterations of cheques which might cause loss to banker, thus the customers have to exercise due care in drawing cheques to prevent any fraud from happening.
Court Case: Grindlays Bank International (Z) Limited v Nahar Investments Limited
The banker (Grindlays Bank International (Z) Limited) is the respondent who was sued by Nahar Investmens Limited. The respondent’s employee, Daya overdrew money from respondent's account with the appellant. Daya withdraw a sum of total K5,ooo for her own used and she has committed fraud by taking all this money for her own used. Bank of Zambia.
The respondents suit the appellant for recovering the sum of K50,000 plus interest. The result approve the overdraft since the company belong to non-Zambians and the exchange control regulation required such approval. By the way, the High Court found that the appellant had been negligent in allowing a fraudulent employee of the respondent to overdraw on the latter's account resulting in a loss which must be borne by the appellant.
Court Case: Bintai Kindenko Pte Ltd V Sanwa Bank Ltd & Anor
However, that is a case which the banker have to responsible to the customer even though the customer is negligence of the customer. In the case of Bintai Kindenko Pte Ltd V Sanwa Bank Ltd & Anor, the repellant claimed that the withdraw of $ 126,260 actually is in favour of X. The actual amount the repellant intended to draw in the cheque is the amount of $260. The cheque actually is altered by third party, X. X then take the cheque paid the second respondent bank the amount of $ 126,260. The first respondent paid the second respondent bank the full amount stated in the cheque with debiting the repellent’s account. The repellent claimed that the first respondent for debiting his own account without his authorization. Furthermore, the repellent also claimed second respondent for conversion of $126,260, alternatively for payment of the same money had and received. The repellent claimed for the cost and interest from the first and second respondents.
A customer is responsible to exercise reasonable care and take reasonable precaution against fraud in drawing cheque. Whether he has done this is a question of fact taking into account the course of dealings between the customer and the bank. On the evidence, the repellent had exercised reasonable care and taken reasonable precaution in drawing up the cheque, and had not acted in breach of his duty to its banker, the first defendants. It was therefore not estopped from claiming against the first defendants. The second defendants were liable to the repellent in conversion for the full amount of the cheque for disposing of the cheque even though the cheque had been materially altered. The second defendants were not entitled to rely on s 85 of the Act as the section does not apply to a materially altered cheque which is null and void. Repellent’s claim is allowed and the sum of $ 126,260 plus interest wrongly debited against them thereon calculated to date of judgment and costs. As both defendants are liable for the same loss and both are equally to blame in that they failed to detect the alterations, liability between them are equally apportioned.
To disclose forgery ( the Greenwood duty)
Customer has to disclose to the bank any forgery immediately upon his discovery of such forgery (the Greenwood duty) to enable the bank to take a adequate precautions against future loss. A customer owes no wider duty of care to the bank in the overall management and operation of the bank account.
Court Case: Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd
The company has a current account in the bank and approximately 33 cheques were withdrawn from the bank with the total amount of HK$ 5.5 million. The money drawn is bear with the signature of Mr. Chen the managing director of the company who was authorized signatories to its cheques. The cheques are debited to the company current’s account but indeed the cheques were not drawn by the company. The signatures were not signed by Mr. Chen they were forged by an account clerk, Leung Wing Ling. It is the customer’s duty to disclose the forgery to the banker so it can enable banker to take adequate precautions to against future loss. Leung Wing Ling opened an account which name similar to real suppliers’ name and persuade Mr. Chen to sign cheques in their favour by producing to him forged documents as evidence of transactions with these fictitious.
Equity & trusts (book)
By Alastair Hudson