Banking Law and Practice Hand out No 3 class 29/9/21 Page 1/8

BS (Hons.) BAF Year IV, Sem.VII (Sep22 – Feb23), Session 2022-2023

Mid term exam expected 1st Nov 22 Course hand outs (1 to 8)

You are never fully dressed until you wear a smile.

Banker Customer Relationship

What Is a Banker:
"Banker means a person transacting the business of accepting, for the purpose of lending
or investment, of deposits of money from public, repayable on demand or otherwise and
withdrawable by cheque, draft, order or otherwise and includes any Post Office Saving
Bank"
(Section 3(b) Negotiable Instruments Act (Amendment) 1962)

Banker has been defined in almost the same terms in section 5(b) of Banking Companies
Ordinance 1962.
YOU ARE THE
In simple words we can say a banker is one who PILOT OF YOUR
LIFE PLANE.
(1) Takes deposits of money from the people,
(2) Repays these deposits to the people according to agreed terms and conditions
including on demand, and
(3) Lends or invests these deposits in ventures for return or profit.

(Research the difference between lending and investment)

Who Is a Customer?
The term customer has not so far been defined in any banking law, however, some
eminent writers on banking and jurists have tried to define it. In earlier times Sir John Paget
had said: "To constitute a person being called a “customer” there must be some
recognisable course or habit of dealing in the nature of regular banking business". The
most important point, according to Sir John Paget, was the sufficiently long "duration" of
relationship between the banker and a customer, but it was ruled off by the judgement of
Mr. Justice Bailhache in the case of Ladbroke v/s Todd (1914) who observed: -
"the relationship of banker and customer begins as soon as the first cash
deposit is accepted or a cheque is paid in and accepted for collection and
not merely when it is paid".

This was confirmed by Privy Council (a higher court in UK) in the case of Commissioner of
Taxation v/s English, Scottish, and Australian Bank (1920). "The word 'Customer' signifies a
relationship in which duration is not of the essence. A person whose money has been
accepted on the footing that the bank undertakes to honour cheques up to the amount to
his credit is, in the view of their Lordship, a customer of the bank in the sense of statute*
irrespective of whether his connection is, of long or short standing".
(*What is a statute? Look up in a Dictionary or on the Internet.) law

To restate the concept; the word 'Customer' generally denotes a relationship resulting
from habit or continued dealings. We know that a person cannot be regarded as a
customer of a shop unless he makes a practice or habit of purchasing articles from that
 Banking Law and Practice Hand out No 3 class 29/9/21 Page 2/8
BS (Hons.) BAF Year IV, Sem.VII (Sep22 – Feb23), Session 2022-2023
Mid term exam expected 1st Nov 22 Course hand outs (1 to 8)

shop. An isolated transaction is not sufficient to suggest that the purchaser is a customer.
However, for a bank customer, this habit of dealings is not essential. A person becomes
customer as soon as he opens an account with the bank.
only opening of account is needed
On the other hand, if a person comes to bank for encashment of cheques daily, which
means he is a regular visitor of bank, but these frequent visits, will not entitle him to
become a customer of bank. Only the opening of an account establishes the relationship
of ‘banker and customer’.
customer
In the light of what has been said above and banking practice we can say that any
person having an account in a bank is a customer, whatever the nature of his account.
Whether or not he operates his account regularly and whether his, account is of long or
short duration, the account holder is a customer.

Who Can Be A Customer: The relationship of banker and customer is a contractual

one, therefore, any person who has the legal capacity to enter into a contract, can be a
customer.
He / She must, therefore, be a person who: minor can be customer
(i) has attained the age of majority, (in Pakistan it is 18 years.)
(ii) is of sound mind;
(When he opens an account, he should be capable of understanding it and
making a rational judgment as to its effect on his interests)
(iii) is not disqualified from contracting by any law to which he is subject. (should not
claim or be a proclaimed offender, should not be undischarged bankrupt and should not
announce be alien enemy) (Who is an undischarged bankrupt or an alien enemy?)

However, there is one exception to this law and that is a minor can be a customer
according to the banking practice. Such accounts are opened only to broaden the
banking facilities. These accounts are operated by their guardians for the benefit of the
minor under Courts Wards Act. A minor, however, cannot operate an account.
(By law the property of a minor can be used for the benefit of the minor only. A loan
against the property of a minor should only be given after great care.)

What Is The Nature Of Banker Customer Relationship: As stated earlier, bank relationship is
a contractual one and for every valid contract there must be an ‘offer’ and its
‘acceptance’. Similarly, there is an offer and its acceptance in such cases. The depositor
offers his/her money and banker accepts or the banker offers to accept deposits and
customer in acceptance of this offer, deposits his money.
contractual
agreement
Types of Banker Customer Relationships
i) General Relationship:
The general relationship of banker customer is that of DEBTOR and CREDITOR; which of
these two, entirely depends on the ‘current’ state of account. When the customer borrows
from the bank, he is debtor (and the bank creditor) and when customer builds up balance
in the account, he / she is a creditor (and the bank is a debtor).
This relationship of debtor and creditor was for the first time recognised in 1848 in the case
of Foley v/s Hill by the court of law. A customer brought an action against a banker to
account for money received, claiming that the relationship was ‘equitable’, akin to that of
Banking Law and Practice Hand out No 3 class 29/9/21 Page 3/8
BS (Hons.) BAF Year IV, Sem.VII (Sep22 – Feb23), Session 2022-2023
Mid term exam expected 1st Nov 22 Course hand outs (1 to 8)

Principal and Agent and that he was entitled on that basis to know, what had happened
to his money and what profit had been derived from it. The court decided that the
relationship is that of debtor and creditor and not that of Principal and Agent. The decision
enabled the banker to use the money according to their own discretion. When customer
deposits money in his account, he has a right to withdraw it, but he cannot enquire about
its utilization. banker and customer are not analogous to principle and agent

ii) Bailer and Bailee.

When the banks provide safe custody or locker facilities to customers for their
valuables, the relationship becomes that of bailer and bailee under Contract Act,
1872. It is an old relationship of banker and customer which started from the days
of earlier bankers, i.e., goldsmiths. The goldsmiths used to keep the belongings and
valuables of public for safe custody with themselves. Later on, they started lending
a part of that deposit which was nothing but a breach of contract of bailment.
Section 148 of the Contract Act, 1872, defines bailment as
“A bailment is delivery of goods by one person to another for some purpose, upon a
contract”. gratuitous baile vs bailee for reward

A distinction should be made between a ‘gratuitous’ bailee and ‘bailee for reward’. A
gratuitous (meaning: done without any compensation or reward) bailee is required to “take the
same care of the customers property as a reasonably prudent and careful man may fairly
be expected to take of his own property of the like description”. A bailee for reward must
take greater care and make use of the most effective appliances available for the
safekeeping of the valuables appropriate for the nature of goods entrusted to his care.

The extent and character of bank’s obligations as a bailee will vary with the different forms
of items deposited. When shares and securities are lodged with instructions to handle
them, the banker must have notice of the particulars of the articles bailed, but when
articles are put in a sealed box or packet or kept in a safe deposit locker the banker is not
supposed to have any notice of the contents. In the latter case, the banker’s obligation is
to return the box or packet with seals intact or allow the customer to operate his locker
which should be unhampered and inaccessible to the banker independently.

The receipt granted by the banker for safe custody of articles is not a negotiable
instrument or transferable document. In case the bailer of a deposited article is unable to
call at the bank to take back the articles when required to be withdrawn, the banker
should take care to ensure that the person deputed for the purpose is duly authorized by
the bailer, otherwise the banker will be liable for the loss to the customer (bailer).

(iv) Agent and Principal:

When a banker performs agency services for his customer, he becomes an agent
of his customer. These services may include like:
i) Purchase and sale of shares and securities;
ii) Collection of cheques and other negotiable instruments, etc.
iii) Payment of premium to insurance companies or subscription and fees to
clubs and associations under customers standing instructions.
iv) What are standing instructions?
payment in regular intervals due
automated same instructions
 Banking Law and Practice Hand out No 3 class 29/9/21 Page 4/8
BS (Hons.) BAF Year IV, Sem.VII (Sep22 – Feb23), Session 2022-2023
Mid term exam expected 1st Nov 22 Course hand outs (1 to 8)

In performing these services, the relationship of an Agent and Principal is implied.

No formal execution of a Power of Attorney in favour of the bank is necessary.

Collection of cheques and other negotiable instruments. Banker collects cheques

and other negotiable instruments on his customers behalf from banks and financial
responsi institutions on which these are drawn. He thus acts as agent of the customer.
bility as Banker as agent has certain responsibilities which he must discharge meticulously.
agent Banker is expected to keep his customer advised of the fate of the instruments
under collection. The customers’ account can be debited with the usual
commission or collection charges as per banks’ rules and practice. As this service
is not rendered free of charge, the banker is liable for any inordinate and
avoidable delays in the collection or in advising the fate of the instrument to the
customer.

(v) Pledger and Pledgee /Mortgagor and Mortgagee: When a customer

pledges his movable property like goods and documents (e.g., gold, carpets and
Govt savings certificates) and passes on physical possession thereof to the banker
as security for an advance, he becomes the pledger and the bank becomes the
pledgee. Similarly, when advance to the customer is made against mortgage of
immovable property like land or building, the relationship becomes that of
mortgagor and mortgagee, the customer being the mortgagor and the bank
mortgagee. In terms of the deed of pledge executed by the customer at the time
of taking the advance the banker has express authority to dispose of the movable
property held in pledge after giving due notice.

However, in the case of mortgage on immovable property, under Pakistan Law, the
immovable property can be sold only on the orders of a competent court of law.

President Musharraf had brought the law in line with the World and given authority
to bankers to sell mortgaged property of borrower after serving three notices to the
defaulters but in Nawaz Sharif era the Parliament changed the law and now, again
the mortgaged property cannot be sold without court orders. Imran Khan govt.
Has moved a bill in the Parliament to bring the law in agreement with the
international practice but it is still not heard.

How Banking Relationship Is Established:

The opening of an account establishes the relationship. An account may be opened
either by cash deposit or by tender of negotiable instrument for credit to the account.
According to the banking practice in Pakistan, accounts are generally opened with cash
deposits. If party is well-known a cheque or any other negotiable instrument may also be
accepted in lieu of cash.

How Does The Relationship Subsist: This relationship starts with the knowledge about
the customer and gradually builds up over a period of time. This relationship continues so
long as it is carried out according to the terms of contract embodied in the rules of the
bank.
{Subsist = to exist; to be valid}
Banking Law and Practice Hand out No 3 class 29/9/21 Page 5/8
BS (Hons.) BAF Year IV, Sem.VII (Sep22 – Feb23), Session 2022-2023
Mid term exam expected 1st Nov 22 Course hand outs (1 to 8)

How And By Whom The Relationship Can be Terminated: This relationship can be
terminated by any of the following:-
1) By Customer: According to terms of the deposits, if it is payable on
i) demand by withdrawing whole balance and closing the account,
unprofitable
ii) Fixed maturity - the payment of the balance at such maturity.

2) By Bank: The bank may close the account when it becomes unremunerative or
tedious or tiresome or for any other reason, risky to maintain (Obstinacy of
Customer) or when bank exercises the right of set-off. Bank should close the
account after proper notice to the customer, otherwise it may drag the bank into
litigation. Customers permission is not necessary for closing the account, a prior
notice must be given.
IT IS IN YOUR POWER
3) By Operation Of Law: TO FLY YOUR PLANE,
When the customer HIGH OR LOW.
i) dies or DECIDE WHAT YOU
ii) becomes insane or WANT TO BECOME.
iii) becomes bankrupt or FIND OUT WHAT YOU
iv) the bank itself becomes bankrupt or
NEED TO DO AND
iv) any other contractual incapacitation of the
WORK FOR IT.
parties.

Rights And Duties Of Bankers:

Banker has the following rights /duties towards its customers

Rights of Bankers:
1) Payments and receipts must be in business hours:
2) Right to refuse payment of:
i) Stale cheque (dated more than 6 months before presentation)
ii) Post-dated cheque (date which has not yet arrived on the date of
presentation)
iii) Undated cheques, or
v) Any other irregularity in the cheque such as difference in amount written in
words and figures or signature differs, cutting not authorized, etc.
3) Right to debit the account which was previously credited by clearing item which is
returned unpaid.
4) Right to have reasonable time for posting.
5) Right to utilize the customer's funds according to its own will.
6) Right to charge for services rendered.

7) Right Of Lien: Lien is a right of a Bank to retain the “property” belonging to a customer
until the debt due from the customer is paid. Suppose a customer has not repaid a loan
on time or has not paid bank’s charges, etc. The bank receives a dividend warrant from a
company for credit to this customer’s account. The bank will have a lien on the proceeds
of the dividend warrant till such time as the customer clears the banks dues. Items under
Banking Law and Practice Hand out No 3 class 29/9/21 Page 6/8
BS (Hons.) BAF Year IV, Sem.VII (Sep22 – Feb23), Session 2022-2023
Mid term exam expected 1st Nov 22 Course hand outs (1 to 8)

lien to the bank can be sold/appropriated by the bank only after the bank gives due
‘notice’ to the customer.

8) Right Of Set Off: Set-off means adjusting ‘ debit balance’ against ‘credit balance’ in
other accounts of the same customer. Set-off is a statutory right of bankers. It consists of
the right of the bank to fully or partially merge the credit balance of a customer account
with a claim that the bank has against the customer. The banker has this right of set off
when:
i Account is in the same name and right,
ii There is no contract to the contrary.
The bank can execute the set off only after giving due notice to the customer.

Duties Of Banker:
1) Obligation to pay/honour the cheques:
i. when there is credit balance or
ii. when there are other arrangements like overdraft facilities.
iii. To pay cheques drawn by the customer on the branch of the bank where the
account is kept, or under special arrangement at agreed places like online
payments made possible by technological advancements.

2) To provide a statement containing a copy of his account with the banker at regular
intervals;

3) To pay profit/return to the customers on their balances as per agreed rates.

4) To collect the proceeds of cheques and other instruments deposited for credit to
the account; Collection of cheques and other negotiable instruments - Banker collects
cheques and other negotiable instruments on his customer’s behalf from banks and
financial institutions on which these are drawn. The banker thus acts as agent of the
customer. Banker as agent has certain responsibilities which he must discharge
meticulously. Banker is expected to keep his customer advised of the fate of the
instruments under collection. The customer’s account can be debited with the usual
commission or collection charges as per bank’s rules and practice. As this service is not
rendered free of charge the banker is liable for any inordinate and avoidable delays in
the collection or in advising fate of the instrument to the customer.

5) To give reasonable notice to the customer before closing the account or

determining the relationship. (In law the word ‘determining’ means ending, closing.)

6) To Maintain Secrecy Of Customer's Account: It is the most important legal

duty of banker not to disclose the state of customer's account to any unauthorised
person. The banker cannot disclose the state of an individual account even to the
wife or husband of account holder. This duty does not end with the closing of
account but it continues even after that. A prudent banker must, therefore, exercise
greatest care to observe this duty of secrecy. Any inadvertent disclosure made
during the busy time may have serious consequences.
Banking Law and Practice Hand out No 3 class 29/9/21 Page 7/8
BS (Hons.) BAF Year IV, Sem.VII (Sep22 – Feb23), Session 2022-2023
Mid term exam expected 1st Nov 22 Course hand outs (1 to 8)

However, banker can disclose the state of account on proper and

reasonable occasions which are: - WASTING TIME IN
1. Under Compulsion of Law, GUP SHUP, SURFING
2. In The National Interest, AIMLESSLY:
3. As Common Courtesy to Other Banks, YOU ARE PLANNING
4. In Banks Interest, TO SUBSIST AT A
5. On Expressed or Implied Consent of Customer. LOW LEVEL.

Rights and Duties of a Customer Towards the Banker

RIGHTS of Customer:
The customer has the following universally accepted rights:

(1) to draw cheques against his credit balance or in the absence of credit balance if
there are arrangements for granting accommodation made with the banker beforehand,
to this effect.

(2) to receive a Pass Book or a statement containing a copy of his account with the
banker. In case he finds any over-crediting or over-debiting in his account he has a right
to get it corrected;

(3) to sue the bank for the costs, loss and damages when his cheque is wrongfully
dishonored;

(4) to sue when the banker has not maintained the secrecy of his account.

(5) to claim for and receive the profit / return on his deposits as promised by the bank.

DUTIES of Customer:
The customer has the following duties towards his banker:

(1) That the customer must present the cheques for payment and collection
within the business hours of his banker. (Negotiable Instruments Act)

(2) That the customer should see that the cheque and other instruments are
presented for payment within a reasonable time from the date of their Issue.
(Negotiable Instruments Act)

(3) Customer should keep his cheque book under lock and key so that no
unauthorized person gets access to it. If a customer fails in this duty, he is to be
held responsible for his negligence in leaving his cheques unprotected.

(4) Customer should draw the cheques very carefully and in such a way
that there is no room left for any fraudulent alterations and additions.

Examples of what a customer could do to ensure that cheques are issued in

a manner which does not facilitate alteration: -
Banking Law and Practice Hand out No 3 class 29/9/21 Page 8/8
BS (Hons.) BAF Year IV, Sem.VII (Sep22 – Feb23), Session 2022-2023
Mid term exam expected 1st Nov 22 Course hand outs (1 to 8)

• Not leaving any spaces in the beginning or between words/figures when

writing the amount of the cheque in words/figures.
• When inserting the figures in the amount box, customer should use a slanting
line to separate the “Rupees” and “Paisas”.

In the court case, London Joint Stock Bank vs. Macmillan and Arthur -(l918-A.C 77)
Lord Findlay said: "A cheque drawn by a customer, is in point of law a mandate to
the banker to pay the amount according to the tenor of the cheque. It is beyond
dispute that the customer is bound to exercise reasonable care in drawing the
cheque to prevent the bank from being misled. If he draws a cheque in a manner
which facilitates fraud, he is guilty of a breach of duty to himself and the banker
and he will be responsible to the banker for any loss sustained by the banker as a
natural and direct consequence of this breach of duty."
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