The legal environment unit5 copy

THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Introduction to law
Contract law and Banking
Banking and its relationship with legislation
MODULE COVERAGE
1
Banker-Customer Contract
Negotiable Instruments

OF BANKING &
FINANCIAL SERVICES
UIBFS
Definitions – Banker / Customer
We start our study of the banker – customer contract by defining the key terms
‘banker’ and ‘customer’. You may, at first, consider this to be unnecessary – after
all everyone who has reached primary school level knows what a bank is, and a
banker is generally thought to be someone who works in a bank!. Consequently, a
customer is someone who uses services of a bank.
We are talking about a ‘contract’ and from our knowledge acquired in previous study
units, we have continuously hinted at the application of the law or the legal
implications of behavior exhibited in the performance of a contact.
It is important to know that the banker’s relationship with his customers’ gives rise to
legal rights and duties apart from any commercial considerations. This simply
means our approach in defining these key terms of the contract should keep
reference to the existing regulations. Remember, unit 4 covered the legislation
directly affecting the banking.
Who is a banker?
Having learnt what contract law is in the unit2, we should easily conclude that the
relationship between a banker and his customer is basically contractual. Therefore
with ease of imagination, we should expect this relationship to be regulated by the
general rules of contract; and, most likely, banking practice. This is very true
especially when we check the legislation at hand.
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OF BANKING &
FINANCIAL SERVICES
UIBFS
From the Financial Institutions Act, the word ‘bank’ means any company licensed to
carry on the financial institution business as its principal business. For our
purposes, in addition to loans, current accounts, etc; let us say that whatever we
see banks doing tantamount to ‘financial institutions’ legally acceptable business.
On the other hand, the Bills of Exchange Act provides that the term ‘banker’
…..”includes any persons who carry on the business of banking”. Now, what
should we take to be the business of banking?
Without going into the details, and as explained in our discussions of interpretation of
statutes in unit 1, Courts of law identified three activities as definitive
characteristics of bankers:
o accepting money from, and collecting cheques for customers and place them to
their credit;
o honouring cheques and orders drawn on them by their customers when presented
for payment and debit the accounts accordingly; and
o keeping current accounts or something of that nature, in their books in which the
credits and debits are entered.
o In addition the court stressed that this definition was not static and would always
depend on current practice. Having satisfied ourselves with who a banker is, then
…
3

OF BANKING &
FINANCIAL SERVICES
UIBFS
Who is a customer?
You and me have, no doubt, encountered persons call someone, rather literally –
customer. As far as available legislation is concerned, there is no definition offered.
But basing on contract law, decided court cases (historical, anyway!) show that a
customer of a bank is a person who has entered into a contract with the bank for
the opening of an account in his /her name. Surely, even from the legal definition
of the ‘banker’ above, banks do more than the mere opening of current accounts.
But there is no modern authority on this (legal) definition.
We conclude by stating that, ‘in the more practical sense, a customer is anyone who
makes a contact for any of a bank’s services, e.g. business advice, sale of US
dollars, etc. even though they may not have an account with the bank.
The Banker-Customer Relationship
At this point of our studies, we can confidently state that the relationship between the
banks and their customers is contractual, primarily that of the debtor (the bank)
and creditor (customer) with these roles reversed where the customer has a
liability (is indebted) with the bank, say has a loan he is servicing (repaying).
In either case, whether bank or customer as the case may be, is obliged to seek out
their creditor (lender) to make repayment. No doubt in practice, banks do not try
to persuade customers to withdraw their balances but wait for the customer to
demand repayment from the bank..
4

OF BANKING &
FINANCIAL SERVICES
UIBFS
Since the relationship is contractual, general rules of contract law apply. You may need
to refer back to unit 2 where we discussed the basic principles of contract law and
saw how they apply in a banking context.
• We should however point out that the most astonishing fact about the banker-
customer is its ‘informality’, if we may use the term, and the case of implied and
not express terms as the basis of the contract.
• Opening of the bank account is usually done without a written agreement but by
oral discussion, completion of administrative forms, and sometimes, introductory
letters from areas of residence or employment.
• We cannot tell how many customers are aware of (or are made aware of) the
rights and duties which are implied in the contract.
• As mentioned in Unit 1, the rights and duties of bankers and customers have
evolved from custom and practice, as amended by various court decisions and
statutes.
• The duties and rights are generally implied but whenever a customer complete
bank form for any particular product or service, then the implied rights and duties
turn into express written contacts.
• There is a variety of forms signed by customers during the various banking facilities
that they undertake for example mandates (signed when opening an account),
charge forms (when giving securities for credit), payment instructions, etc.
5

OF BANKING &
FINANCIAL SERVICES
UIBFS
The above not withstanding:
• In all agreements (contracts), an implied term is included which requires the bank
to carry out its services to the customer with reasonable care and skill.
• In contracts between the Bank and customer, there is a requirement that Bank’s
written terms and conditions will be fair and in good faith.
• When it deals with the customer on its written standard terms of business, it
cannot exclude or restrict its liability for breach of contract, nor can it claim to be
able to render a performance substantially different from that which was
reasonably expected of it.
• The nature of the banker – customer relationship gives rise to consequential
bankers’ rights and duties. These are essential to understand particularly for those
new to banking operations.
• We have seen that the issue of an account is a key factor for someone to qualify as
a (bank) customer. Therefore before we look at the rights and duties of a banker,
lets us familiarize ourselves with the creation and operation of a bank account.
6

OF BANKING &
FINANCIAL SERVICES
UIBFS
Opening and Operating an Account
Before opening an account, a bank must be satisfied as to the character and standing
of the applicant and know their employer’s name and nature of employment. This
information can be obtained by either:
• By a personal introduction from an existing customer or another branch or bank;
or
• By taking references from the applicants employers and/or local leaders from one’s
place of residence. The authenticity of the reference should be checked.
• Banks must obtain satisfactory references if they stand to be protected by the law
and to avoid unsatisfactory accounts. Two of the opening formalities are obtaining
of specimen signatures of the parties to the account; and a mandate covering all
operations on the account.
Bankers’ Legal Rights and Duties
Arising from the banker-customer contract are a number of legal rights and duties.
Basing on the arguments above, almost all are implied and not express terms of
the ever engrossing contract. It is not in the practice of banks to try to make
implied terms explicitly express. Indeed even the courts are known to respect
established practice – the code of banking. These rights and duties are outlined
below. A detailed analysis of them is beyond the scope of this course but can be
accessed in the ‘law relating to banking’ course.
7

OF BANKING &
FINANCIAL SERVICES
UIBFS
Rights
A banker has the following rights.
• To charge his customer reasonable commission for services rendered to him, and
to charge interest on loans made to him
• To repayment on demand from his customer of any overdrawn balance which has
been permitted on a current account
• To be indemnified by his customer for expenses and liabilities incurred while acting
for them
• To exercise a ‘lien’ (is a right to retain possession of the property of another in lieu
of payment due from that person) over any of the customer’s securities that are in
its possession other than those for safe keeping (custody), for any money owing to
it
• To dispose of its customer’s money as he pleases provided it honours its
customers’ valid cheques.
• To combine or set-off accounts of the customer. This arises where the customer
has more than one account with the bank - the bank is entitled to settle a debt on
one account by transferring funds from another of the customer’s accounts
• To expect his customer to exercise due care in drawing cheques. The customer is
under a duty to inform his bank of any known forgeries on the account.
8

OF BANKING &
FINANCIAL SERVICES
UIBFS
Duties
A banker has the following duties.
• To abide by any express mandate from his customer (a mandate is signed by the
customer when opening the account. It shows the terms to be followed and
observed by the bank in honouring instructions from the customer)
• To honour its customer’s cheques (this duty is subject to a number of provisos
which are observed when paying cheques in the normal course of business; for
example availability of sufficient funds on account)
• Not to disclose information about its customer’s affairs unless qualified
• To render statements of account to its customer periodically or upon request
• To collect cheques and other normal banking instruments for its customer and to
credit the proceeds to the customer’s account
• To exercise proper care and skill in carrying out any business it has agreed to
transact for its customer
• To give reasonable notice before closing a credit account
As already mentioned, for purposes of this course, it is enough to remember these
rights and duties. Their detailed discussion entails much branch banking practice
and real life situations.
9

OF BANKING &
FINANCIAL SERVICES
UIBFS
It would be abnormal to imagine that the banker-customer contract can never die out.
Just like the commercial contracts generally seen in business circles, the banker-
customer contract can also come to an end, for more or less, the same reasons
covered under contact law. We end this unit by looking at termination of the
banker-customer contract.
Termination of the of banker customer contract
The banker-customer contract may be terminated. However, the banker -customer
relationship may survive indefinitely because of the bank’s duty of confidentiality
(secrecy).
The banker customer contract can be terminated in the following ways:
Termination by the Customer - The customer may demand full repayment of the
credit balance on the account at any time, but a nil balance on an account does
not necessarily mean the customer has closed the account. Confirmation that
terminating the contract is the intention of withdrawing all the funds must be
sought.
The customer with an overdrawn account may not terminate the banker-customer
contract without repaying the debt.
10

OF BANKING &
FINANCIAL SERVICES
UIBFS
Termination by the bank
A bank may only close an account after
giving reasonable notice and making
provision for outstanding cheques.
Operation of Law
The following will terminate the contract
in law: Death of the customer;
Mental incapacity of the customer;
Bankruptcy or insolvency of bank or
customer.
11

OF BANKING &
FINANCIAL SERVICES
UIBFS
END
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The legal environment unit5 copy

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