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Banker and customer relationship


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Banker and customer relationship

  1. 1. Banker Customer Relationship <ul><li>Definition of a Bank </li></ul><ul><li>The Financial Services and Markets Act 2000 establishes framework for Financial Services Authority to authorise banks but no definition </li></ul><ul><li>Common law definition in UDT v Kirkwood [1966] 2 QB 431 CA </li></ul><ul><li>The essential characteristics of a banking business are: </li></ul><ul><ul><li>a) collecting cheques for customers; </li></ul></ul><ul><ul><li>b) paying cheques drawn by customers; </li></ul></ul><ul><ul><li>c) keeping current accounts for customers. </li></ul></ul>
  2. 2. Banker Customer Relationship <ul><li>Definition of Customer </li></ul><ul><li>A person becomes a customer and a contract is created when an account is opened - Commissioner for Taxes v English, Scottish and Australian Bank [1920] AC 683 PC Woods v Matins Bank [1959] 1 QB 55. </li></ul><ul><li>If no contract bank may be liable for tort - Hedley Byrne v Heller & Partners Ltd [1964] AC 465 HL </li></ul><ul><ul><li>Contracts between banks and large corporations with roughly equal bargaining power </li></ul></ul><ul><ul><li>Contracts between banks and small and medium sized enterprises (SMEs) </li></ul></ul><ul><ul><li>Contracts between banks and consumer customers </li></ul></ul>
  3. 3. Banker Customer Relationship <ul><li>The Banking Codes </li></ul><ul><li>Review of Banking Services Law and Practice in 1987, which reported in 1989 – (the Jack Report) Cm 622 </li></ul><ul><li>White Paper entitled Banking Services Law and Practice in March 1990 - Cm 1026. </li></ul><ul><li>Banking Code 1991 British Bankers Association, the Building Societies Association and the Association for Payment Clearing - updated 2003 </li></ul><ul><li>Mortgage Code 1997 - updated 1998 </li></ul><ul><li>Business Banking Code 2002 - updated 2003 </li></ul>
  4. 4. Banker Customer Relationship <ul><li>The Data Protection Act 1998 </li></ul><ul><li>Data processing is only legitimate where one of the following applies: </li></ul><ul><li>where the individual consents </li></ul><ul><li>where it is necessary for the performance of a contract with the individual </li></ul><ul><li>where it is a required under a legal obligation </li></ul><ul><li>where it is necessary to protect the vital interests of the individual or to carry out public functions </li></ul><ul><li>where it is necessary to pursue the legitimate interest of the business unless prejudicial to the individual </li></ul>
  5. 5. Banker Customer Relationship <ul><li>The Data Protection Act 1998 </li></ul><ul><li>Individuals have a right to a description of and data concerning them, the purpose for which it is processed and of any potential recipients of the data </li></ul>
  6. 6. Banker Customer Relationship <ul><li>The Contract </li></ul><ul><li>When a customer pays money into his account </li></ul><ul><li>the bank = a debtor </li></ul><ul><li>customer = creditor. Foley v Hill (1848) 2 HL Cas 28 The money becomes the property of the bank; the bank has borrowed the money from the customer </li></ul><ul><li>Balmoral Super market Ltd v Bank of New Zealand [1974] 2 NZLR 155 money stolen at the counter still the property of the customer; </li></ul><ul><li>Chambers v Miller (1862) 13 CBNS 125 money drawn by a customer from overdrawn account belongs to the customer </li></ul>
  7. 7. Banker Customer Relationship <ul><li>Implied Terms </li></ul><ul><li>The bank will receive the customer’s deposits and collect cheques </li></ul><ul><li>The bank will comply with written orders (i.e. cheques) issued by its customers assuming there is sufficient credit tin the account; </li></ul><ul><li>The bank will repay the entire balance on the customers demand at the account holding branch during banking hours - Libyan Arab Foreign Bank v Bankers Trust [1989] AC 80 PC </li></ul><ul><li>The bank will give reasonable notice before closing a customer’s account if it is in credit </li></ul><ul><li>Joachimson v Swiss Bank Corporation [1921] 3 KB 110 CA </li></ul><ul><li>The bank must only act on its customer’s valid instructions and not on any forgery of those instructions Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank [1986] AC 80 PC </li></ul>
  8. 8. Banker Customer Relationship <ul><li>Implied Terms </li></ul><ul><li>A customer only has duties to: </li></ul><ul><li>To exercise reasonable care when drawing cheques to prevent forgery and alteration; and </li></ul><ul><li>To notify the bank if he actually knows of forgeries on his account, a customer who wilfully ignores the obvious is not considered to have actual knowledge London Joint Stock Bank v Macmillan and Arthur [1918] AC 777 HL and in Greenwoods v Martins Bank [1933] AC 51 HL </li></ul>
  9. 9. Banker Customer Relationship <ul><ul><li>Implied Terms </li></ul></ul><ul><ul><li>Liability cannot be excluded for certain matters under the Unfair Contract Terms Act 1977 </li></ul></ul><ul><ul><li>Unfair Terms in Сonsumer Contracts Regulations 1999 </li></ul></ul>
  10. 10. Banker Customer Relationship <ul><li>Express Terms </li></ul><ul><li>Must be made clear to the customer </li></ul><ul><li>e.g. Electronic Banking and Charges </li></ul>
  11. 11. Banker Customer Relationship <ul><li>Termination of the Contract </li></ul><ul><li>Termination by the Customer </li></ul><ul><li>Termination by the Bank Prosperity Ltd v Lloyds Bank (1923) 39 TLR 372. </li></ul><ul><li>Termination by Law </li></ul><ul><li>a) Death of the customer; </li></ul><ul><li>b) Mental incapacity of the customer </li></ul><ul><li>c) Bankruptcy or insolvency of bank or customer. </li></ul>
  12. 12. Banker Customer Relationship <ul><li>Duties of the Bank </li></ul><ul><li>Duty to collect cheques </li></ul><ul><li>Duty to honour cheques </li></ul><ul><li>Duty not to pay a cheque without authority </li></ul><ul><li>Duty to obey customer's countermands of cheques </li></ul><ul><li>Duty to tell customer of forgeries </li></ul><ul><li>Duty to inform customers of the state of the account </li></ul><ul><li>Duty to act on notice of death </li></ul>
  13. 13. Banker Customer Relationship <ul><li>Duty of care and skill </li></ul><ul><li>S.13 Supply of Goods and Services Act 1982 customer = &quot;consumer&quot; - implied term of the Act the bank will carry out its services for the customer with reasonable care and skill. </li></ul>
  14. 14. Banker Customer Relationship <ul><li>Duty of care and skill </li></ul><ul><li>The customer has a duty to take reasonable care to prevent forgery and alteration of cheques. </li></ul><ul><li>But if a cheque is altered without the customers authorisation the cheque is worthless - s64 Bills of Exchange Act 1882. Therefore the bank will be liable if the bank pay out on a cheque where the sum is altered or the name of the payee is changed or added to without the authorisation of the customer - Smith v Lloyds TSB Bank [2000] 2 All ER (Comm) 693 CA </li></ul>
  15. 15. Banker Customer Relationship <ul><li>Duty of care and skill </li></ul><ul><li>A bank pays or collects a cheque as an agent Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340 CA & [1992] 2 AC 548 HL </li></ul><ul><li>The test to be applied to determine whether a bank is in breach of its duty as agent is: if a reasonable banker would have had reasonable grounds for believing that the customer's account was being operated fraudulently by another - Barclays Bank v Quinceare Ltd [1992] 4 All ER 363. </li></ul>
  16. 16. Banker Customer Relationship <ul><li>Box v Midland Bank [1979] 2 Lloyds Rep 391 </li></ul><ul><li>Redmond v Allied Irish Banks [1987] 2 FTLR 264 </li></ul><ul><li>Verity and Spindler v Lloyds Bank (1995) CLC 1557 </li></ul><ul><li>Gold Coin Joailliers SA v United Bank of Kuwait [1907] 7 Bank LR 60 CA </li></ul><ul><li>Yorkshire Bank v Lloyds Bank </li></ul><ul><li>Williams v Natural Life Health Foods Ltd </li></ul><ul><li>Suriya and Douglas v Midland Bank </li></ul>
  17. 17. Banker Customer Relationship <ul><li>Bank as Trustee </li></ul><ul><li>A bank may be liable as constructive trustee if it either: </li></ul><ul><li>a) receives trust funds with actual or constructive notice that they are trust funds and that the transfer of the funds to the bank is a breach or trust, or </li></ul><ul><li>b) knowingly assists a trustee of the trust to dishonestly misapply trust funds. </li></ul><ul><li>&quot;Knowingly&quot; includes: actual knowledge, wilfully shutting one's eyes to the obvious, wilfully failing to make inquiries, knowledge of circumstances would indicate the facts to an honest and reasonable person or would put such person on inquiry. Belmont Finance Corporation v Williams Furniture Ltd (no.2) (1980) CA </li></ul>
  18. 18. Banker Customer Relationship <ul><li>Knowledge </li></ul><ul><li>There are several degrees of knowledge, classified by Gibson J in Baden v Societe Generale [1983] BCLC 325 : </li></ul><ul><li>1. actual knowledge; </li></ul><ul><li>2. wilfully shutting one's eyes to the obvious (turning a blind eye); </li></ul><ul><li>3. wilfully and recklessly failing to make such enquiries as an honest and reasonable person would make; </li></ul><ul><li>4. knowledge of circumstances which would indicate the facts to an honest and reasonable person; </li></ul><ul><li>5. knowledge of circumstances which would have put an honest and reasonable person on inquiry. </li></ul>
  19. 19. Banker Customer Relationship <ul><li>Re Montagu [1987] held that only knowledge types 1., 2. and 3. would incur liability since he did not believe mere careless was enough to make somebody a constructive trustee. He also warned against using comparisons with the doctrine of notice. </li></ul><ul><li>Vinelott J in Eagle Trust Plc v SBC Securities Ltd [1992] 4 All ER 488 submitted that 4. and 5. should not be applied in commercial transactions since they would require parties to be unduly suspicious. </li></ul>
  20. 20. Banker Customer Relationship <ul><li>Receipt </li></ul><ul><li>To be a constructive trustee the person receiving the trust property must have done so for his or her own use and benefit. If the bank used the money itself e.g. to pay off an overdraft then it was benefiting and so could be a constructive trustee but if the money was merely being held passively in the account it could not be a trustee. Agip (Africa) Ltd v Jackson [1989] 3 WLR 1367 </li></ul><ul><li>Trust Property </li></ul><ul><li>The stranger must have received trust property in breach of trust to be held to be a constructive trustee. </li></ul>
  21. 21. Banker Customer Relationship <ul><li>Dishonest </li></ul><ul><li>Where a stranger dishonestly assists in the breach of a trust then the stranger will be liable as a constructive trustee. </li></ul>
  22. 22. Banker Customer Relationship <ul><li>Four Requirements of Dishonest Assistance: </li></ul><ul><li>1. A fiduciary relationship is enough there does not have to be a formal trust. </li></ul><ul><li>2. Assistance is enough for there to be a constructive trustee There does not have to be a dishonest or fraudulent design involving the stranger and the trustee or fiduciary. Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 WLR 64 </li></ul><ul><li>3. There must be some act which promoted or advanced the unlawful object. Brinks Ltd v Abu‑Saleh (No 3) (1995) The Times October 23. </li></ul><ul><li>4. There must be some dishonest act. Lord Nichols in Royal Brunei Airlines Sdn Bhd v Tan </li></ul>
  23. 23. Banker Customer Relationship <ul><li>Duty of Confidentiality </li></ul><ul><li>A bank owes an implied duty to its customer not to divulge information about its customers to third parties. </li></ul><ul><li>There are 4 exceptions Tournier v National Provincial and Union Bank of England (1924) CA </li></ul>
  24. 24. Banker Customer Relationship <ul><li>Duty of Confidentiality . </li></ul><ul><li>1. Disclosure under Compulsion of Law </li></ul><ul><li>a) Court Order </li></ul><ul><li>Order to inspect entries in the Banker's books - S 7 Banker’s Books Evidence act 1879 </li></ul><ul><li>To assist police with their enquiries - S 9 Police and Criminal Evidence Act 1984 </li></ul><ul><li>Discovery orders for Mareva injunctions </li></ul><ul><li>Evidence for foreign trials – Evidence (Proceedings in Other Jurisdictions) Act 1975 </li></ul><ul><li>Writ or Subpoena compelling bank employee to give evidence </li></ul>
  25. 25. Banker Customer Relationship <ul><li>b) Request from an official </li></ul><ul><li>Inland Revenue – Taxes Management Act 1970 & Income and Corporation Taxes Act 1988 </li></ul><ul><li>Department of Trade and Industry – Companies Act 1985 </li></ul><ul><li>Director of the Serious Fraud Squad – Criminal Justice Act 1987 </li></ul>
  26. 26. Banker Customer Relationship <ul><li>c) Bank liable to prosecution is information not revealed </li></ul><ul><li>Money Laundering Provisions </li></ul><ul><li>S328 Proceeds of Crime Act 2002 - It is an offence for someone to enter into or become concerned in an arrangement which knows or suspects facilitates the acquisition, retention use or control of criminal property. Disclosure must be made to the National Criminal Intelligence Service (NCIS) </li></ul><ul><li>S 337 statutory protection given if </li></ul><ul><li>a) Information in the course of profession business or employment </li></ul><ul><li>b) The person knew, suspected or had reasonable grounds for knowing or suspecting that another person is engaged in money laundering </li></ul><ul><li>c) The disclosure is made as soon as practicable after the information comes to the discloser </li></ul>
  27. 27. Banker Customer Relationship <ul><li>d) Where the law compels the bank to disclose information and it is an offence not to do so </li></ul><ul><li>S330 Proceeds of Crime Act 2002 </li></ul><ul><li>It is an offence to fail to report a person's engagement in any kind of illegal money-laundering wen the information is acquired in the course of business if the defendant has knowledge or suspicion or reasonable grounds for knowledge or suspicion. </li></ul><ul><li>No offence is committed if the information is disclosed as soon as is reasonably practicable after the information came to the person's knowledge or there was a reasonable excuse for non-disclosure. It is also a defence for legal advisers if the information arose in privileged circumstances. </li></ul>
  28. 28. Banker Customer Relationship <ul><li>2. Duty to the Public to Disclose </li></ul><ul><li>Not a clear application – Libyan Arab Foreign Bank v Bankers Trust & Pharaon v BCCI </li></ul><ul><li>3. Disclosure in the Bank’s Interest </li></ul><ul><li>Bank dishonoured cheques of wife as insufficient funds in account and also concerned about gambling told Husband - held entitled to do so. Sunderland v Barclays Bank Ltd (1938). </li></ul><ul><li>4. Disclosure with the Customer’s Consent </li></ul><ul><li>It is now common for bank’s to request customers for permission to give a reference. </li></ul>
  29. 29. Banker Customer Relationship <ul><li>Rights of The Bank </li></ul><ul><li>Interest </li></ul><ul><li>Charges </li></ul><ul><li>Repayment on Demand </li></ul><ul><li>Limitation </li></ul><ul><li>Appropriation of Payment </li></ul><ul><li>Combination of Accounts </li></ul><ul><li>Equitable Right of Set Off </li></ul><ul><li>Set Off following Insolvency </li></ul>
  30. 30. Banker Customer Relationship <ul><li>Appropriation of Payment </li></ul><ul><li>Rule in Clayton's Case </li></ul><ul><li>The limitations on the rule are: </li></ul><ul><li>a) The rule only applies to running accounts; </li></ul><ul><li>b) The Rule in Hallett's Case (1880) applies where personal funds are in the same account with trust funds and it is deemed that the personal funds are withdrawn first. </li></ul>
  31. 31. Banker Customer Relationship <ul><li>Combination of Accounts </li></ul><ul><li>Where a customer has two accounts with same bank the bank has a common law right to combine them Garnett V Mc Kewan (1872) LR 8 Exch 10. </li></ul><ul><li>A bank's right to combine accounts is limited: </li></ul><ul><li>a) Where the debit balance is not yet due, Jeffrys v Agra Masterman’s Bank (1866) LR 2 Eq 674. </li></ul><ul><li>b) There is an implied agreement to keep accounts separately Bradford Old Office v Sutcliffe [1918] 2 KB 833 CA Halesown Presswork and Assemblies Ltd v Westminster Bank [1972] AC 785 HL </li></ul><ul><li>c) An express agreement not to combine accounts will negate the bank’s right to do so. </li></ul><ul><li>d) A trust fund cannot be combined with personal funds. </li></ul>
  32. 32. Banker Customer Relationship <ul><li>Equitable Right of Set Off </li></ul><ul><li>Bhogal v Punjab National Bank [1988] 2 All ER 296 CA and Uttamchandani v Central Bank of India [1989] NJLR 222 CA </li></ul>
  33. 33. Banker Customer Relationship <ul><li>Set Off following Insolvency </li></ul><ul><li>Where bank or the customer is insolvent </li></ul><ul><li>a) A statutory set off may be applied to accounts on insolvency under S.323 Insolvency Act 1986 (individuals) or the Insolvency Rules 1986 (companies). </li></ul><ul><li>b) The statutory set off is automatic and unexcludable </li></ul><ul><li>c) Any right to extend set off is void. </li></ul><ul><li>d) Debts become due and payable as soon as the customer or bank are insolvent and are subject to statutory set off. </li></ul><ul><li>e) Debits on a customers account after the bank had notice will not be subject to set off and credits on a customer’s account after the customer has had notice of the banks’ insolvency will not be subject to set off. </li></ul><ul><li>f) Where the customer has 3 or more accounts the statutory set off will combine all of them but note preferential accounts (wages) </li></ul>
  34. 34. Banker Customer Relationship <ul><li>Banker's Lien </li></ul><ul><li>A lien right to retain property belonging to another pending satisfaction of a debt owed by the owner of the property. </li></ul><ul><li>A pledge is security, which carries the right to retain the property until the debt is paid or if unpaid after a certain time, carries the right to sell the property to satisfy the debt. </li></ul>
  35. 35. Banker Customer Relationship <ul><li>A banker's lien is a special kind of lien that is the equivalent of the pledge in other words the bank may retain the property until the debt is paid however if it becomes apparent that the debt will not be paid then the property may be sold to satisfy the debt e.g. securities Brandao v Barnett (1846) 12 Cl & Fin 787 HL such as insurance policies Re Bowes , Earl of Strathmore v Vane (1886) 36 ChD 586 and shares Re United Service Co., Johnstone’s Claim (1870) 40LJ Ch 286. </li></ul>
  36. 36. Banker Customer Relationship <ul><li>The limitations on the Banker’s Lien are: </li></ul><ul><li>1. The bank does not have a lien on cheques paid into the bank for collection. The bank may have a lien on a cheque it collects for a customer who has an overdrawn account one of which is overdrawn but the payment is to an account in credit the bank may appropriate the cheque and pay it in to the overdrawn account. </li></ul><ul><li>2. The lien does not apply to securities kept in safe custody. </li></ul><ul><li>3. The lien does not apply to securities, which are held by the customer as a trustee </li></ul><ul><li>4. The lien does not arise if there is an agreement to the contrary between the bank and the customer. </li></ul>
  37. 37. Banker Customer Relationship <ul><li>Banker's Opinions </li></ul><ul><li>The Bank gives a reference ot another bank </li></ul><ul><li>Liability to the recipient of the reference </li></ul><ul><li>If the reference is unduly favourable the bank may then be liable in tort for negligent misstatement as in Hedley Byrne v Heller (1964). However the effectiveness of any exclusion clause in these cases will now have to be tested against the Unfair Contract Terms Act 1977. </li></ul><ul><li>Liability to the customer </li></ul><ul><li>If the reference is adverse the bank may be liable by reason of breach of the bank's duty of confidentiality or for libel </li></ul>
  38. 38. Banker Customer Relationship <ul><li>Safe Custody </li></ul><ul><li>Voluntary bailment. </li></ul><ul><li>This type of bailment is subdivided into </li></ul><ul><li>Gratuitous bailment for which the bailee does not receive any payment and </li></ul><ul><li>Bailment for reward for which the bailee is paid e.g. Bank </li></ul>