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ANALYSIS OF BANK CUSTOMER RELATIONSHIP: AS AGENCY RELATIONSHIP

INTRODUCTION
In order to understand the relationship between a banker and customer, it is necessary to
comprehend the legal meaning of these two terms. The term "banker'' until the passing of the
Indian Companies Amendment Act of 1936, had no statutory definition in India, and the legal
decisions on its interpretations, were by no means harmonious. The term "customer" has never
been defined in any statute and the Indian Judicial decisions on this point have not also been very
helpful. Tannan in his Banking Law and Practice in India 1, has well pointed out that much time,
ink and paper have been consumed in an effort to define what exactly constitutes banking. Even
the best authorities have found it rather a hard nut to crack, mostly on account of the multifarious
functions and services, e.g., dealings in stocks and shares, etc., which modern banks perform, in
addition to or in conjunction with what is distinctive and characteristic banking business.
Dr. H.L. Hart in his Law of Banking, 2 says :
"A banker is one who in the ordinary course of his business, honours cheques drawn upon by
him by persons from and for whom he receives money on current accounts."
This definition is based upon the dicta given in a number of decisions, beginning with Foley v.
Hill3, Joachimson v. Swiss Bank Corporation4, etc. According to this definition, the essential
function to enable a person, firm, or institution, to be regarded as a banker or a bank, is that of
receiving current deposits against which cheques may be drawn. (For an analysis of Foley and
Hill, Joachimson etc., bearing on the relationship of Banker and customer see pages 1 to 16 of
Lord Chorley and Smarts' Leading Cases in 5 (Law of Banking, 1953 (Pitman and Sons) Ltd .
1 . 7th Edn. at page 25.
2 Vol. I, 4th Edn. 1931, page 1
3 (1948) 2 HLC 28 (D)
4 (1921) 3 KB 110 (E)
5 Law of Banking, 1953 (Pitman and Sons) Ltd.
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This definition is reinforced by Sir John Paget in his Law of Banking, 6,who reviewing the
Birkbeck Building Society v. Birkbeck, 7writes :
'"It is a fair deduction that no person or body corporate or otherwise, can be a banker who does
not (1) take deposit accounts, (2) take current accounts, (3) issue and pay cheques and (4) collect
cheques crossed and uncrossed, for his customers."
Sir John further adds that one claiming to be a banker must profess himself to be one, and the
public must accept him as such; his main business must be that of banking, from which generally
he should be able to earn his living. This definition is fairly exhaustive, although it makes no
mention of many Other important functions of the present day banker, which may be put under
two heads (1) agency services, comprising the collection of bills, promissory notes, coupons,
dividends, payment of subscriptions and insurance premiums, and acting as a trustee, attorney or
executor of his customers, and (2) general utility services, e.g., issue of credit instruments, the
transaction of foreign exchange business, the safeguarding of valuables and documents against
fire, theft, etc. There seems to be no doubt that according to English law, a person claiming to be
treated as a banker, should perform the functions as given by Sir John.
American Jurisprudence defines "bank" as follows in Section 2: ''Strictly speaking, the term
"bank' implies a place for the deposit of money. In its more enlarged sense a bank may be
defined as an institution, generally incorporated, authorised to receive deposits of money; to lend
money and issue promissory notes, usually known by the name of 'bank notes'; or to perform
some one or more of these functions. A bank has also been defined as a place of business where
credits are opened by the deposit or collection of money or currency, subject to be paid or to be
remitted upon draft, check, or order; or where money is advanced or loaned on stocks, bonds, or
bullion, and bills of exchange; or where promissory notes are received for discount or for sale.
Accordingly, banks, in the commercial sense, are of "three kinds :

6 5th Edn. page 5


7 (1913) 29 TLR 218 (F)
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(i) of deposit (ii) of discount and (iii) of circulation."Dunn v. State, 8 Auten v. V.S. National
Bank9, Oulton v. German Savings Society, 10.

OVERVIEW OF BANK CUSTOMER RELATIONSHIP


Corpus Juris11 ,tersely defines the nature and characteristics of a bank as follows (Sec. 1):
"While the term "bank' has received a number of definitions differing considerably in language,
but all expressing of course the same fundamental ideas, and the sense in which it is intended to
be used is largely determined by its connection with other language, perhaps the most concise
and at the same time complete definition to be found in the books is that a bank is "an association
or corporation whose business it is to receive money on deposit, cash cheques or drafts, discount
commercial paper, make loans, and issue promissory notes payable to bearer called 'bank notes'.
The term is also used to designate the buildings apartment, or office where such business is
transacted.' A bank is usually, but not necessarily, an incorporated institution; and while it has
been said that a bank is an institution of a quasi public character, it is nevertheless true that,
where, as is usually the case, the stock is owned by individuals, a bank is a private corporation."
Turning to the definition of 'customer' there is yet no statutory definition of 'customer' either in
England or in India. H.P. Sheldon in his "The Practice and Law of Banking" at page 75 states:
that it would seem that any person keeping an account current or deposit is entitled to the
description of "customer" and that it would appear from the judicial decisions that if a banker
renders to a person advices incidental to, but not peculiar to, the business of banking, he does not
8 . 13 GA A 314: 79 SE 170 (G);
9 1889) 174 US 125 (H);
10 (1873) 84 US 109: 21 Law Ed. 618 (I).
11 page 473
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thereby constitute that person a customer; Great Western Rly. Ltd., v. London and County
Banking12 .
The primary functions of commercial banks may be summarized as borrowing and lending of
money. Besides these two main functions, a commercial bank also undertakes a variety of other
activities. These activities involve services offered by banks to help the customers (account
holders). Such activities include collection of cheques, dividend, warrants, etc. on behalf of
customers as well as effecting transfer of funds, remittances by mail and telegram. In order to
attract customers and make banking services effective, banks always make efforts to diversify
their activities. Such diversification takes place by way of new service activities and schemes.
These services offered by banks are generally known as agency services. These are also termed
as nonbanking, general utility, and miscellaneous services. Banker customer relationship, is just a
special contract where a person entrusts valuable items with another person with an intention that
such items shall be retrieved on demand from the keeper by the person who so entrust. Thus the
banker is the one who is entrusted with the above mentioned valuable items, while the person
who entrust the items with a view to retrieving it on demand is called the customer. The
relationship is thus based on contract. It is based on certain terms and conditions. For instance,
the customer has the right to collect his deposit on demand personally or by proxy. The banker
too is under obligation to pay, so long the proxy is duly authorised by the customer. It has a
semblance of creditor /debtor relationship. Thus the customer is the creditor who has the right of
demand on the money from the banker. As long as the banker is keeping the customer items, the
banker is indebted to the customer. The relationship is also fiduciary. The terms and conditions
governing the relationship should not be leaked to a third party, particularly by the banker. Also
the items kept should not be released to a third party without due authorisation by the customer.
Banker customer relationship, is just a special contract where a person entrusts valuable items
with another person with an intention that such items shall be retrieved on demand from the
keeper by the person who so entrust.
Thus the banker is the one who is entrusted with the above mentioned valuable items, while the
person who entrust the items with a view to retrieving it on demand is called the customer. The
relationship is thus based on contract. It is based on certain terms and conditions. For instance,
12 1901 AC 414 (J).
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the customer has the right to collect his deposit on demand personally or by proxy. The banker
too is under obligation to pay, so long the proxy is duly authorized by the customer It has a
semblance of creditor /debtor relationship. Thus the customer is the creditor who has the right of
demand on the money from the banker. As long as the banker is keeping the customer items, the
banker is indebted to the customer. The relationship is also fiduciary The terms and conditions
governing the relationship should not be leaked to a third party,particularly by the banker.Also
the items kept should not be released to a third party without due authorization by the customer.
The relationship between a customer and a bank is that of a Principal and Agent. The bank
acts as an agent on behalf of the customer as principal. When any bank acts as an agent, the
services rendered by it are known as agency services. Under agency services, the bank
undertakes payment of subscriptions, premium on insurance, collection of cheques, dividends,
etc. It acts as a trustee, executor or administrator and an agent for buying and selling shares,
stocks, debentures on behalf of the customer. General utility services refer to those non-bank
services which are in the interest of general public, i.e. the society at large. Such services are
called non-banking services because they are not directly concerned with the main banking
activities. These services include issue of travellers cheques, credit cards, drafts, circular notes,
gift cheques and safe custody of valuables, like negotiable securities, jewellery, documents of
title to goods, etc. The range of services offered differs from bank to bank, depending mainly on
the size and type of bank, but the acceptance of deposits from the public and lending operations
form the main stay of the banking business.

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PRINCIPAL AND AGENT RELATIONSHIP


In certain situations, the banker serves as agent of the customer (principal) some of these
situations are enumerated below:

Collection of cheques on behalf of the customer


Collection of dividends and bills of exchange
Acting as attorney, executor or representative of a customer
Buying and selling securities on his behalf.

Those who wish to subscribe to shares and debentures floated by companies can do so through
designated banks. Also, banks may be authorised to buy and sell shares, debentures and
government securities to the advantage of investors. Banks may and do undertake payment of
subscription to clubs, insurance premium, income tax and sales tax, etc. These services save time
and effort of people.
According to Skeleton another service being rendered by a banker to his customer is to collect his
customers cheque and other credit instruments. In these transactions, the relationship between
the two parties is that of principal and agentthe banker acting as his customers agent. This is
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because in the course of business incidental to banking, a banker undertakes to perform many
services for the customer such as:
Buying and selling securities on his behalf; collection of cheques, dividends, bills or promissory
notes on his behalf; acting as a trustee, attorney, executor, correspondent or a representative of a
customer.
In the performance of all these functions, the banker acts as an agent of the customer.
In general terms, Agency refers to the relationship which exists between two persons, the
Principal and the Agent in which the Agent has to perform different duties/ functions as per
instructions of the principal and also enters into contract with the third party / parties on behalf of
the principal. The relationship of agency plays an important role in business and commercial
dealings. This relationship is legal created by virtue of agreement between Principal and Agent

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DEFINITION OF AGENT AND PRINCIPAL: Sec 182

Agent is a person employed to do any act for another or to represent another in dealing with a
third persons. The person for whom such act is done, or who is so represented, is called the
Principal.
Explanation
The legal relation between a merchant in one country and a commission agent in other is that of
principal and agent, and not seller and buyer, though this is consistent with the agent and
principal, when the agent consigns the goods to the principal, being in a relation like that of
seller and buyer for some purposes. A merchant, therefore, in this country who orders goods
through a firm of commission agents in Europe cannot hold the firm liable as if they were
vendors for failure to deliver the goods. And the result is the same if the goods are ordered
through a branch in this country of a firm of commission agents in another country. For the same
reason, where a commission agent buys goods for a merchant at a price smaller than the limit
specified in the indent, he cannot charge any price higher than that actually paid by him. .
An agent may have, and often has, in fact, a large discretion, but he is bound in law to follow the
principals instructions provided they do not involve anything lawful. To this extent an agent may
be considered its a superior kind of servant; and a servant who is entrusted with any dealing
with third persons on his masters behalf is to that extent an agent. But a servant may be wholly
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without authority to do anything as an agent, and agency, in the case of partners, even an
extensive agency, may exist without any contract of hiring and service.
Agency may be created in the following ways:

By consent

By operation of law

By estoppels

By ratification

Agency by Consent:
Consent may be express or implied.
Express Agency:
Such agency is created by words either spoken or written. In business transactions, this
relationship is usually established through writing an agreement
Implied Agency:
An authority is referred to as implied when it is inferred from the conduct of the parties or
circumstances of the case.
Definitions of express and implied authority as contained in section 187 of the Act is given
below:
An authority is said to be express when it is given by words spoken or written. An authority is
said to be implied when it is to be inferred from the circumstances of the case; and things spoken
or written, or the ordinary course of dealing, may be accounted for circumstances of the case.

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RIGHTS AND DUTIES OF AGENT AND PRINCIPAL


RIGHTS OF THE AGENT:
These are discussed in the following paragraphs:
When agents remuneration becomes due-Sec 219:
In the absence of any special contract, payment for the performance of any act is not due to the
agent until the completion of such act; but an agent may detain moneys received by him on
account of goods sold, although the whole of the goods consigned to him for sale may not have
been sold, or although the sale may not be actually complete.
Agent to be indemnified against consequences of lawful acts (sec
222)
The employer of an agent is bound to indemnify him against the consequences of all lawful acts
done by such agent in exercise of the authority conferred upon him.
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Agent to be indemnified against consequences of acts done in good faith (sec 223)
Where one person employees another to do an act and the agent does the act in good faith, the
employer is liable to indemnify the agent against the consequences of that act, though it cause an
injury to the rights of third persons.
Compensation to agent for injury caused by principals neglect (sec
225)
The principal must make compensation to his agent in respect of injury caused to such agent by
the principals neglect or want of skill.
Enforcement and consequences of agents contracts (sec 226)
Contracts entered into through an agent, and obligations arising from acts done by an agent, may
be enforced in the same manner, and will have the same legal consequences as if the contracts
had been entered into and the acts done by the principal in person.
Principals liability with regard to agreements caused by
misrepresentation or fraud by agent: Sec 238
Misrepresentation made, or frauds committed, by agents acting in the course of their business for
their principals, have the same effect on agreements made by such agents as if such
misrepresentations or frauds had been made or committed by the principals; but
misrepresentations made, or frauds committed, by agents, in matters which do not fall within
their authority, do not affect their principals.
DUTIES OF THE AGENT:
Duties of agent are contained in sec 211 to 218 of the Contract Act. Some of the important duties
are given below:

To follow principals instructions

To show required skill and diligence


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Agent to render proper accounts

Agent to pass on any benefits derived by him

Agents duty in conducting principals business. (sec 211)


An agent is bound to conduct the business of his principal according to the directions given by
the principal, or, in the absence of any such directions, according to the custom which prevails in
doing business of the same kind at the place where the agent conducts such business. When the
agent acts otherwise, if any loss be sustained, he must make it good to his principal, and, if any
profit accrues, he must account for it.
Illustrations
(a) A, an agent engaged in carrying on for B, a business, in which it is the custom to invest from
time to time, at interest, the moneys which may be in hand, omits to make such investments. A
must make good to B the interest usually obtained by such investments. (b) B, a broker, in whose
business it is not the custom to sell on credit, sells goods of A, on credit to C, whose credit at the
time was very high. C before payment becomes insolvent. B must make good the loss to A.
(c) An agent, instructed to warehouse goods at a particular place, warehouse a portion of them at
another place, where they are destroyed, without negligence. He is liable to the principal for the
value of the goods destroyed. (d) An agent, instructed to insure goods, neglects to do so. He is
liable to the principal for their value in the event of their being lost. (e) A broker, entrusted with
goods for sale, sells them by auction at an inadequate price, not having made an estimate of the
value in accordance with the custom of the particular trade. He must make good the loss. (f) An
auctioneer, contrary to the usual custom, takes a bill of exchange in payment of the price of
goods sold. He is liable to the principal for the amount of the bill in the event of its being
dishonored. (g) An agent, bound by his contract to keep proper books of account, omits to
scrutinize, examine or check the accounts of his subordinates whom he implicity trusts. Taking
advantage of this, the subordinates commit gross frauds on him and his employers. The frauds

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and defalcations being due to the agents failure to perform his duty he is liable to make good the
loss thereby caused.
Skill and diligence required from agent (sec 212)
An agent is bound to conduct the business of the agency with as much skill as is generally
possessed by persons engaged in similar business, unless the principal has notice of his want of
skill. The agent is always bound to act with reasonable diligence, and to use such skill as he
possesses; and to make compensation to his principal in respect of the direct consequence of his
own neglect, want of skill or misconduct, but not in respect of loss or damage which are
indirectly or remotely caused by such neglect, want of skill or misconduct.
Illustrations
(a) A, a merchant in Islamabad, has an agent, B, in London to whom a sum of money is paid on
As account, with orders to remit. B retains the money for a considerable time. A, in consequence
of not receiving the money, becomes insolvent. B is liable for the money and interest from the
day on which it ought to have been paid, according to the usual rate, and for any further direct
lossas e.g., by variation of rate of exchangebut not further. (b) A, an agent for the sale of
goods, having authority to sell on credit, sells to B on credit, without making the proper and
usual inquiries as to the solvency of B. B, at the time of such sale, is insolvent. A must make
compensation to his principal in respect of any loss thereby sustained. (c) A, an insurance broker,
employed by B to effect an insurance on a ship, omits to see that the usual clauses are inserted in
the policy. The ship is afterwards lost. In consequence of the omission of the clauses nothing can
be recovered from the underwriters. A is bound to make good the loss to B.) A, a merchant in
England, directs B, his agent at Karachi who accepts the agency, to send him 100 bales of cotton
by a certain ship. B, having it in his power to send the cotton, omits to do so. The ship arrives
safely in England. Soon after her arrival, the price of cotton rises. B is bound to make good to A,
the profit which he might have made by the 100 bales of cotton at the time the ship arrived, but
not any profit he might have made by the subsequent rise.
Agents accounts (section 213)
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An agent is bound to render proper accounts to his principal on demand.


Agents duty to communicate with principal (section 214)
It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating
with his principal, and in seeking to obtain his instructions. Agent is under a duty to consult
principal in a difficult situation so as to save repudiation of his action by principal.
Right of principal when agent deals, on his own account, in business
of agency without principals consent.( sec 215)
If an agent deals on his own account in the business of the agency, without first obtaining the
consent of his principal and acquainting him with all material circumstances which have come to
his own knowledge on the subject, the principal may repudiate the transaction, if the case shows
either that any material fact has been dishonestly concealed from him by the agent, or that the
dealings of the agent have been disadvantageous to him.
Principals right to benefit gained by agent dealing on his own
account in business of agency (sec 216)
If an agent, without the knowledge of his principal, deals in the business of the agency on his
own account instead of on account of his principal, the principal is entitled to claim from the
agent any benefit which may have resulted to him from the transaction.
Agents right of retaining out of sums received on principals
account.( sec 217)
An agent may retain, out of any sums received on account of the principal in the business of the
agency, all moneys due to himself in respect of advances made or expenses properly incurred by
him in conducting such business, and also such remuneration as may be payable to him for
acting as agent.
Agents duty to pay sums received for principal (sec 218)
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Subject to such deductions, the agent is bound to pay to his principal all sums received on his
account.
SCOPE AND DUTIES OF PRINCIPAL:

Duties of the principal are enumerated below:

Payment of remuneration to the agent

Not to prevent his agent from performing the duties/ acts assigned to him under the
contract and for which remuneration is payable.

Any legitimate expenses which have been incurred by the agent in the course of
performance of his duties are to be indemnified by the principal.

CONCLUSION

"While the term "bank' has received a number of definitions differing considerably in language,
but all expressing of course the same fundamental ideas, and the sense in which it is intended to
be used is largely determined by its connection with other language, perhaps the most concise
and at the same time complete definition to be found in the books is that a bank is "an association
or corporation whose business it is to receive money on deposit, cash cheques or drafts, discount
commercial paper, make loans, and issue promissory notes payable to bearer called 'bank notes'.
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The term is also used to designate the buildings apartment, or office where such business is.
transacted.' A bank is usually, but not necessarily, an incorporated institution; and while it has
been said that a bank is an institution of a quasi public character, it is nevertheless true that,
where, as is usually the case, the stock is owned by individuals, a bank is a private corporation."
The primary functions of commercial banks may be summarized as borrowing and lending of
money. Besides these two main functions, a commercial bank also undertakes a variety of other
activities. These activities involve services offered by banks to help the customers (account
holders). Such activities include collection of cheques, dividend, warrants, etc. on behalf of
customers as well as effecting transfer of funds, remittances by mail and telegram. In order to
attract customers and make banking services effective, banks always make efforts to diversify
their activities. Such diversification takes place by way of new service activities and schemes.
These services offered by banks are generally known as agency services. The relationship
between a customer and a bank is that of a Principal and Agent. The bank acts as an agent on
behalf of the customer as principal. When any bank acts as an agent, the services rendered by it
are known as agency services. Under agency services, the bank undertakes payment of
subscriptions, premium on insurance, collection of cheques, dividends, etc. It acts as a trustee,
executor or administrator and an agent for buying and selling shares, stocks, debentures on
behalf of the customer. General utility services refer to those non-bank services which are in the
interest of general public, i.e. the society at large. Such services are called non-banking services
because they are not directly concerned with the main banking activities.

BIBLIOGRAPHY

BOOKS
1. Dr. S. R. Myneni. Law of Banking, Asia Law House: Hyderabad.
2. Tannan M, 2001, Banking Law and Practice in India, India Law House: New Delhi.
3. Tandon P, 1989, Banking Century: A Short History of Banking in India, Viking: New
Delhi.
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WEBSITES REFFERED

http://kalyan-city.blogspot.com/2012/04/banker-customer-relationshipexplained.html
http://hanumant.com/Banking%20law%20-%20Meenakshi%20Natesan.html
http://www.indg.in/financialliteracy/financial_quiz/relationship_between_banker_and_customer.pdf
http://www.indiankanoon.org/doc/5446/
http://www.rbi.org.in/scripts/AboutUsDisplay.aspx?pg=UrbanBankDept.htm

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