BANKER-CUSTOMER RELATIONSHIP

CH 22
Debtor and Creditor Relationship
When customer deposits money in a bank the relationship of debtor and creditor is established, in
this case; Banker is Debtor & Customer is Creditor

In a court of law, you will have to show a promissory note whereby, the debtor has undertaken or
promised that this debtor owes this money to you.

 According to H P Sheldon in his publication ‘practice and law of banking’, this

relationship has been expressed as under:
“The banker when he receives money from a customer does not hold the money in the fiduciary
capacity. To say that the money is deposited with a banker is likely to cause misapprehension.
What really happens is that the money is not deposited with, but lent to the banker, and all that
the banker engages to do is to discharge the debt by paying over an equal amount when called
upon”

It says there is no fiduciary relationship i.e. it is not a relationship of trust. Here it does not mean
that the amount deposited is being kept in trust if is said then misapprehension is created that is
wrongly is being said. In reality you are giving debt to the bank and bank is responsible to repay
it.
 According to American Jurisprudence the said relationship is discussed as under:

Sec. 444: "It is a fundamental rule of banking law that in the case of a general deposit of money
in a bank, the moment the money is deposited it becomes the property of a bank, and the bank
and the depositor assume the legal relation of debtor and creditor. The legal effect of the
transaction is that of a loan to the bank upon the promise and obligation, usually implied by law,
to pay or repay the amount deposited usually upon demand; there is nothing of a trust or
fiduciary nature of a bailment in the transaction or relationship or in the nature of any right to
specific money deposited….”

In banking law when you deposit money in the bank the money is no longer yours rather it
becomes the property of the bank and the bank(debtor) can use it as it wants but the legal
relationship which is established is that of debtor and creditor. Right of creditor is that when the
creditor demands the amount debtor has to return it i.e. the legal relationship which is
established.
The legal effect of this is that it not explicit (written) but it implied due to the nature of the
transaction that when money is deposited in the bank then it is practice of the bank that on
demand it will be paid.

Creditor and Debtor Relationship:

When a bank grants loan or other credit facilities to the customer, relationship is reversed, that
is now Customer is Debtor & Banker is Creditor.

In such cases it is not the money of the customer in the hands of the banker but it is the money of
the bank in the hands of the customer but in all such cases when a customer's account is over
drawn, the customer does not cease to be a customer.

It says there is no fiduciary relationship i.e. it is not a relationship of trust. Here it does not mean
that the amount deposited is being kept in trust if is said then misapprehension is created that is
wrongly is being said. Now the bank which has collected the money from the people is the
creditor and now bank has the funds which it is giving to you.

Principal & Agent Relation

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

Collection of cheques to bank on behalf of the customer so now bank is acting as an agent for the
customer who is the principal. The legal relationship of agent and principal signifies that you
have the rights and obligations which are vested in the agent and principal and you can agitate
and get redressal of your rights and you will have to fulfil your obligations.

Agency may be created in the following ways:

 By estoppel
 By ratification

 Agency by estoppel (implied appointment)

Agency by estoppel arises when A (principal/ customer) makes a representation to a third party,
whether by words or conduct, that B (Banker) is his agent, and subsequently that third party
deals with B as A's agent in reliance on such representation. A will not be permitted (is estopped)
to deny the existence of the agency if to do so would cause damage (usually financial loss) to
that third party.

 Agency by ratification
Agency by ratification arises when a person (the principal) ratifies (that is, approves and adopts)
an act which has already been done in his name and on his behalf by another person (the agent)
who in fact, had no actual authority (whether express or implied) to act on his (the principal's)
behalf when the act was done. Example: A, without authority, buys goods for B. Afterwards B
sells them to C on his own account; B's conduct implies a ratification of the purchase made for
him by A.

 Duties of the Agent:

Duties of the agent are contained in sec 211-218 of the Contract Act. Some of the important
duties are given below:
-To follow principal’s instructions
-To show required skill and diligence
-Agent to render proper accounts
-Agent to pass on any benefits derived by him

-To show required skill and diligence:

Given below is an example of this:
Agent’s duty in conducting principal’s 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.

 Rights of the Agent:

-When agent’s 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.

Whenever an agent spends sums of money to fulfill the principal's request or to pay for necessary
expenses incurred in the reasonable performance of his or her duties, the principal has the duty to
compensate the agent.

-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.
As per the terms of the agency agreement, the principal has a duty to compensate, or indemnify,
the agent for liabilities arising from the agent's lawful and authorized acts on the principal's
behalf.
- Agent's lien on principal's property (sec 221)
In the absence of any contract to the contrary, an agent is entitled to retain goods, papers and
other property, whether moveable or immoveable, of the principal received by him, until the
amount due to himself for commission, disbursements and services in respect of the same has
been paid or accounted for to him.

Lien is the right to retain property belonging to another until the debt due from the latter has been
paid.