Banking Law lecture 4

Customer Relationship: Who is a customer?

(most customers will not know the duty the banks owe to them.)
-Banking law regards a specialist nature of contract law.
-Is this an area we need the law to be updated?
-Banks are required to act as gatekeepers to prevent fraud and to secure stability. (this area
of the law is an overlap with money laundering)

-Contract law is central to the banker/customer relationship, but the relationship is rarely
reduced to a single written contract.
-When you join a bank you have signed a contract with a bank. Having to read all the terms
of a bank account contract would cause many issues as the terms tend to be very long and
boring.
-The standard form is written contracts which form the basis of the relationship but are
supplemented by terms implied by common law, minimum standards of conduct (originally
set out in voluntary codes of practice) all add to the banking contract. There will be standard
terms but depending on the terms and the services that are offered there may also be
supplemental terms to the original contract. We enter these contracts without fully
understanding the nature of the contract.
-Voluntary Banking Codes regulate minimum standards of conduct for the retail and for
small businesses. It is very basic and very brief, it does not give any of the details you need.
However, they have this to prevent the threat of statutory intervention. This code basically
sets out the minimum standard of conduct.

Due Diligence Requirements:

- The term ‘customer’ is not defined by statute --neither Bills of Exchange Act 1882
nor the Cheques Act 1957 give any definition. Both these acts talk about rights given
to the customer, but they do not give a definition. (we don’t necessarily need to know
these acts but its useful to look at the rigid form of the banking system.)
- -But banks are under an obligation to carry out due diligence when opening an
account (this has become more significant as the law around anti-money laundering has grown,
and fears about the banking sector being used for illegal activity have grown.)
- Concerns with terrorist financing have given this requirement an added impetus (the
Basle Committee regards these as key requirements to enable banks to manage risk.)
- And so this means banks must retain certain information about their customer on
opening an account and throughout the life of the account, verify identity and take
up references.

- Opening a bank has become harder. There are so many checks going on in the background
to make sure you are the type of person the bank wants as a customer. On top of this due
diligence is needing to be carried on throughout your time as a customer at the bank. It may
query some transactions (specifically ones over £10,000) and it will ask the purpose of the
transaction because they are worried about money laundering.
- The nature of the banking business may result in transactions where the bank is unsure of
the customer’s identity. And so, the law has to provide an answer to ‘who is a customer,’ as
it is Important because certain rights belong to the customer.

-The concept of a customer is used in a wide sense to describe anyone who deals with a
bank in relation to a banking service.
-Those who have an account are easily recognised as customers because of the accounting
relationship established, but borrowers and those who use the bank for financial advice,
fund management, securities and derivatives dealings etc are customers too.
-Customers can be other banks, commercial customers, and private customers.

Why find out who is a customer?

o S.75(1) Bills of Exchange Act 1882 - regulates the right of the customer to
countermand the payment of cheques;
o S.75(2) deals with the termination of the banker-customer relationship on the death
of the customer;
o S.4 Cheques Act 1957 deals with liability of the collecting bank where it receives
payment of a cheque for a customer who subsequently does not have the rights of
the true owner over that instrument.

-the nature of the banker-customer relationship also imposes certain contractual obligations
between the bank and its customers, for example, the bank is under a duty to conform to
the customers mandate, the bank owes a duty of care to the customer, the bank owes duty
of confidentiality to the customer.

-additionally, certain remedies are available to the bank ONLY WHERE the customer
becomes overdrawn or fails to keep up with repayments. In these circumstances, the bank
customer commits a breach of the banking contract. The bank, in these circumstances, has
rights such as combining or consolidating accounts of the overdrawn customer.

The following cases look at who is a customer.

Barclays Bank Ltd v Okenarhe 1992
-Looks at who makes an offer and who accepts it.
-Balihache J suggested that an individual makes an offer to open an account, and its
acceptance by the bank (unless and until the bank accepts this offer there is no contract,)
will create a binding contract on the basis of the general law of contract;

but in;

Robinson v Midland Bank 1925

- person intending to become a bank customer must either open the account personally
with the relevant intention or instruct an agent to act for him (a company for example may ask
an agent to open an account for them.)

Going back to Barclays Bank 1992, it was declared that ‘the bank must maintain an account,
whether that is a current or deposit account, to effect the banker-customer relationship and
make the recipient of the banking services becomes a customer.’ (In other words an ongoing
credit relationship for a person to remain a customer.)

Great Western Railway Co v London and County Banking Co 1901

Facts-X habitually cashed cheques with defendant bank fraudulently obtained from his
employers. The bank handed over cash when cheques were brought in – instead of having
them paid into an account.
-Question whether the cheque had been collected by the bank for its customer.
Held- although bank had regularly cashed cheques at the collector’s request – X was not a
customer – as he did not maintain an account with the bank personally. And although their
was repetition in the transaction it was stated that the bank was merely performing a casual
service (in other words need a debit-credit relationship.)

Ladbroke & Co v Todd 1914

Facts- Rogue who stole a cheque/opened an account with the defendant bank under the
name of the payee. In an action for conversion by the drawer – bank relied on s. 82 of Bills
of Exchange Act 1882 - Arguing merely opening the account did not render the rogue a
customer and bank could not rely on s.82.
Held: Although the bank was making payment to a rogue, the rogue became a customer of
the bank when the bank agreed to open the account – the fact that he has not withdrawn
the proceeds of the cheque was irrelevant to the existence of the banker-customer
relationship.

Commissioners of Taxation v English, Scottish and Australian Banks LTD 1920

Facts- Cheque payable to the Commissioners of Taxation was stolen and paid by the thief to
the credit of an account opened by him with the defendant bank.
Issue that needed to be resolved was whether the rogue had become a customer of the
defendant bank by reason of the single transaction although related to the stolen cheque.
Held- Lord Dunedin delivering judgment observed that: ‘the word ‘customer’ signifies a
relationship in which duration is not of the essence. A person whose money has been
accepted by a bank on the footing that they undertake to honour cheques up to the amount
standing to his credit is ‘…a customer of the bank…irrespective of whether his connection is
of short or long standing.’

-it seemed to suggest that a customer is somebody who has the right to put money in and
take money out of the bank account.
-However, we have a question about whether someone who enters a shop for a mortgage,
but isn’t a member of the bank, becomes a customer.

Woods v Martins Bank Ltd 1959

-A person who merely agrees to open an account may be treated as a customer although
formalities to the opening of the account have not been completed
Facts- Pl given investment advice by defendant’s manager. Pl signed a letter instructing bank
to deal with funds previously held in a building society account. Agreed that any resulting
credit balances would be held for the account of the plaintiff.
Held Although an account was not opened until later on there was an intention that an
account would be opened, and for that reason, that banker-customer relationship came in
to existence from the date bank accepted instructions contained in the letter to manage the
credit balances although the account was not formally opened until later. -is this an attempt
by the courts to broaden the type of person who is a customer?

-Is the definition appropriate for modern banking relationships? (question to think about).

The banker and customer relationship: Terms of the contract

Banking Contract – based on standard contractual terms supplemented by more specific

terms relevant to banking contract – developed by the courts.

Courts are reluctant to impose additional duties and terms that are not sufficiently well-
known to customers. They have said if additional duties are to be implemented you need
statute to do that.

The Jack Committee Report on Banking Services Law and Practice (Cmnd 622):
• stressed the need for transparency and fairness.
• To be achieved through a voluntary code of good practice (now found in the
Standards for Lending principles – in order to protect customers from credit cards,
charge cards, and overdrafts).
• Rejected the need for a model contract.
• In July 2016 by the Standards for Lending Principles – intended to protect customers
regarding loans, credit cards, charge cards, overdrafts.

What is a mandate?
-Banks must act in accordance with the mandate.
-A mandate is instruction authorising banks to act in a certain way.
-It is an order to act in a certain way, or refrain from doing something. Banks must act in
accordance with the instruction, or it may be in breach of contract.
-If the bank acts outside the scope of the instruction - the bank’s action will not bind the
customer and the bank will be liable for any loss. (The bank has failed in its obligation if it does
this.)
-If the customer withdraws the mandate before the bank has acted on the instruction, the
bank must comply with that – thus bank must comply with the most recent instruction.
(hence an instruction to make a payment may be superseded by a counter mark.)
-if an instruction is not mandated then its not clear or appropriate. (For example saying you
can pay the recipient if you feel like it.) The mandate MUST instruct the bank to act in a
certain way (eg pay Harry £30 on the 1st April.)

-the courts are at the forefront in developing scope, nature and breadth of obligations owed
by banks to their customers. Duties owed by banks have been established in the following
cases;

Joachimson v Swiss Bank Corporation 1921

Atkin LJ stated that a banker-customer relationship = single contract but with several
obligations flowing from it. He continued to say that ‘the Bank undertakes to… ‘receive
money and to collect bills for its customer’s account’…’to repay any part of the amount
due’… and not to ‘cease to do business with the customer except upon reasonable notice.’
(this is important because if the bank just decides to close our account all kinds of payments
will be dishonored and that can have an adverse effect on the customer's reputation.)

Tournier v National Provincial and Union Bank of England 1924

-This case established that banks owe a duty of confidentiality.

Selangor United Rubber Estates Ltd v Cradock 1968

-Established banks owe a duty of care. They said that in this case the bank breached that
duty.

Barclays Bank Plc v Quincecare Ltd 1992

-A failure to conform to this obligation may render the bank liable in both contract and tort.

-There are two key features to the banker-customer relationship:

(i) Includes making/receiving payments as directed by the customer including an

obligation to act on countermand.
(ii) Required to act in accordance with payment instructions.

(i)the duty to conform to mandates includes this obligation to make payments as

instructed.
-If the instrument is properly given and the payment instruction is either within the credit
balance on the account, or within overdraft limit bank must act as expeditiously as possible.

Barclays Bank Plc v W.J.Simms and Cooke Ltd 1979

Bank made payment on cheque which customer had countermanded (issued an instruction
in the form of a cheque, but changed his mind and countermanded that instruction.) The
bank made a mistake and ignored that countermand.
Goff J said that the bank is required to:
- Honour the presentation of cheques (or these days other payment instructions);
- Provided there are sufficient funds; or (if there are no sufficient funds)
- Bank has agreed to provide overdraft facilities to meet the payment instruction.

If the credit or overdraft facility falls short of the amount of authorized payment the bank is
not obliged to make payment and may itself reject those payments (it is a choice for them,
they can extend a temporary overdraft or they can just decline it.) But banks may find
themselves liable for breach of contract where the dishonour amount to a breach of
contract. (basically, if they don’t follow a payment instruction they are in breach of a contract.) You
can sue in defamation in this area as well because if you are a business it may affect your business
repuatation.

Fleming v Bank of New Zealand 1900

Facts- Has an overdraft with the bank's permission.
HELD: bank was guilty of wrongful dishonour and thereby guilty of breach of contract -
when it dishonoured a cheque drawn by its customer who had overdrawn on the account
with the bank’s consent and who had paid into the credit of his account cash and cheques
specifically agreed to be used for the purposes of paying the cheque that was later
dishonoured by the bank.

Fleming illustrates that the bank's obligations to pay a cheque, or other instruments, in
accordance with the customer's mandate.

The bank will come under a general duty to conform to the customer’s mandate regardless
of the nature of the transaction, so long as the instruction is:
- Unambiguous (clear);
- reasonable; and
- the bank agreed to act on behalf of the customer. This is usually implied when you enter
into the bank contract (as Lord Atkin said earlier on!)

Erroneous overpayment is with the bank’s money! The bank is obliged to reimburse any
errors they made IMMEDIATELY! They do not get the benefit of waiting a few days as this is
a serious breach of contract.

Marzetti v Williams 1994

Facts- at 11:00 £40 was paid in (balance £190). At 15:00 the bank dishonoured a cheque,
properly drawn for, for £87. The amount of £40 had not been entered up on the ledger by
then. The cheque paid the following day when it was re-presented.
Held- bank entitled to a reasonable time to credit the funds to the customer's account and
the jury found the delay of four hours unreasonable.
(Reasonable time will depend on the case. Nowadays we would probably say an hour or two is
unreasonable)

(ii)obligation not to exceed the customer mandate

-Bank is under a negative duty not to exceed the customer’s mandate. (has to be exact
compliance)
-Question of exceeding the mandate can arise in various ways, e.g., agent ( e.g., company
director) operating an account for the customer (customer) uses the company’s bank
account in an unauthorized manner, or the mandate is forged.

-Classic example = forgery - no authority to make payment and cannot debit the customer’s
account. (Bills of Exchange Act 1882, s.24) but there are other examples. (forgery is always
acting without a mandate).

Liggett (Liverpool) Ltd v Barclays Bank Ltd 1928

Facts- 2 directors (A and B) had the authority to draw cheques. A is not happy with the
running of the business – insisted on signing all cheques. B drew a number of cheques and
bank honored them without A’s signature.
HELD: the bank exceeded its mandate. Instruction was that bank could only act to make
payment and thereby debit the customer’s account if both directors has signed the payment
mandate. Bank could only discharge its obligations if it made payment against properly
drawn cheques--two signatures were required in line with the company’s mandate.
Morison v London County and Westminster Bank 1914 (action can be brought for
negligence in situations similar to the above case.)
-The question of negligent liability may also arise regarding the bank’s obligation to act
within the customer’s mandate is one of fact.
-But Three issues will be relevant for determining negligence:
1. The question should be determined separately for each cheque or mandate;
2. Whether the transaction of paying any cheque/or other mandate is so out of the
ordinary that it ought to have aroused suspicion in the mind of the bank and caused
it to make inquiries. (this basically requires bankers to monitor a usual customer
transaction. They must have knowledge of ongoing activity regarding each bank
account. – in reality banks are just going to take the risk as they have millions of
accounts.)
3. The negligence must be the proximate cause of the loss.

Selangor United Rubber Estates Ltd v Craddock 1968

Facts- Bank provided financial assistance in relation to a takeover bid. Due to the
inexperience of its officer, bank failed to realize the company was financing the purchase of
its own shares contrary to the (then) Companies Act. Basically money was being used to buy
its own shares. This created an artificial demand, making it look like people wanted the
shares (this is a form of negligence).
-The question is how the reasonable banker would act
-Held: an agent who assists in bringing about the disposal of trust property in breach of trust
will be personally liable either if it knew or ought to have know about the breach.
Negligence standard = reasonable banker (objective).

Lipkin Gorman Ltd v Kapnale Ltd and Lloyds Bank 1972

If the breach of mandate is not obvious from the facts, then bank may not be treated to
have notice of the agent’s lack of authority.
Held- May LJ: ‘Having in mind the vast numbers of cheques which are presented every day
for payment… … Negligent liability will be imposed only when the circumstances are such
that any reasonable cashier would hesitate to pay a cheque at once and refer it to his or her
superior, and when any reasonable superior would hesitate to authorise payment without
enquiry, that a cheque should not be paid immediately upon presentation and such enquiry
made.’

Another example of mandate requires banks not to act in obligation to comply with a
countermand of payment instruction
-The mandate to pay may be superseded by a countermand directing the bank not to pay.
(basically, if the customer says STOP before the payment is made he has countermanded
the payment.)
-Countermand must be clear and unambiguous.
-Bank must have clear information about the original mandate being countermanded.
-In the case of cheques s.75(1) of the Bills of Exchange Act 1882 gives a statutory right to
countermand the payment of written instructions. But the question is to what extent does
the countermand exist nowadays. Payments are instantaneous so its harder to revoke.
This countermand doesn’t always exist.
Westminster Bank Ltd v Hilton 1926
Facts- Customer gave the wrong serial number for the cheque being countermanded.
HELD: when making a payment from the customer’s account the bank acts as the
customer’s agent, and where, therefore, the customer gives erroneous or ambiguous
instructions capable of several interpretations the bank is not liable if it adopts an
interpretation to the customer's instruction that is reasonable, although the
consequences were not intended by the customer.

Reade v Royal Bank of Scotland 1922

Facts- Customer gave an instruction to countermand cheque by telegram, setting out the
number of the cheque and name of the payee. He failed to indicate which of his two
accounts the cheque was drawn. Bank’s clerk made a note of the stop instruction against 1
account only, the cheque having been drawn against the other account, was paid.
HELD: countermand was effective and the bank not entitled to debit the customer’s
account.

Remfor Industries Ltd v Bank of Montreal 1978

CA HELD:
- If details set out in the countermand instruction are sufficient to identify the
cheque the bank comes under a duty to conform to the countermand and stop the
cheque, even if the notice is defective or inaccurate in respect of one detail.
- Where the cheque is not described with reasonable accuracy bank must, in case of
doubt, enquire whether the cheque presented is the one the customer seeks to
countermand. (Giordano v Royal Bank of Canada [1973] 3 OR 771)- it could be
argued that this is to much burden to put on the bank. But nowadays it’s easy to
contact the customer (email, phone call, text etc.)

The bank will usually need the countermand mandate to be authenticated.

-Whilst the bank may accept verbal countermand, it will usually ask for written
confirmation. (It could be argued this is just a means of protecting themselves.)
-If the bank doubts the customer’s identity or cannot verify identity it must refuse to act on
the instruction.

Morrell v Workers Savings & Loan Bank [2007] UKPC 3 Lord Mance recognized that a bank
may act on the oral instructions of the customer and be entitled to debit his account
accordingly.

Curtice v London City and Midland Bank ltd 1908

For the countermand to be effective it must come to the knowledge of the branch manager
where the customer’s account is maintained prior to payment being effected.
-Notice of countermand sent by telegram was placed in the bank’s letter box and missed
when the letter box was cleared so it did not come to the branch manager’s attention until
after the cheque was paid.
-Held that the doctrine of constructive notice would not apply to a countermand – notice of
actual countermand required.
(You need to look at the age of this case- in these days there is a central bank area that
organising everything. We don’t tend to go into our local branch to supersede payments. If
you have a query now you tend to call up, use webchat, use other means. This case hasn’t
been overruled but is it valid?)

London Provincial and South-Western Bank Ltd v Buzzard 1918

Countermand sent to another branch of the bank
Held: ineffective until came to the attention of the branch where the account was
maintained and cheque drawn Countermand will only be effective if it is given by the
customer or his agent and before payment is made and a reasonable time before the
cheque is paid in order to enable the bank to take appropriate action to act on the
countermand. Bank will not, however, accept the countermand of a cheque where payment
is guaranteed by a cheque card.

Jack Committee Report 1989

• Considerable uncertainty and confusion about the drawer’s rights to countermand.
• Recommended the right to countermand must be preserved, wherever possible -
banks should make available to customers an explanation of the rights and
obligations of the parties to transactions effected through the clearing systems,
including rights of countermand.
• Made the same recommendation for automated funds transfer systems.

The customer may be estopped from denying that the bank acts without a mandate, if it
becomes obvious the customer has known of the forgeries for some time – look at this
when we look at the duties of the customer to the bank (Greenwood v Martin’s Bank Ltd [1933]
AC 51).
-If the customer is aware of forgeries and does nothing then they may be estopped by the
bank. However, this duty only exists if they have knowledge that the account is being used
in an improper way.

Damages for Wrongful Dishonour of a cheque

Where bank acts in breach of its mandate/ either makes payment when it should not have
or fails to make a properly authorized payment, the customer will be entitled to sue the
bank for breach of contract.
-you used to have to show loss to get compensation unless a business of a business man. This was
because they may have had a knock on effect to their reputation. This has now changed.
• Unlikely that customer will suffer any special loss and claims are therefore likely to
be confined to damages for loss of the customer’s credit reputation.
• In law - now a presumption of damage and the customer need not plead any
particular loss.

Gibbons v Westminster Bank ltd 1939

Bank dishonored cheque drawn by the tenant in favour of the landlord.
HELD: In order for the plaintiff, the customer, to bring action against the bank they had to
plead and prove loss in order to recover substantial damages. Unlikely that the customer
will suffer any special loss under the rules of contract law and claims are, therefore,
confined to nominal damages.
Kpoharor v Woolwich Building Society 1996 (important case)
The customer was a self-employed exporter/importer (therefore a trader) The bank
wrongfully dishonoured a cheque to suppliers.
-There was a question as to whether the person was a trader or a business man. They said
that the Customer’s position analogous to a tradesman.
HELD, the distinction between tradesmen and the general consumer should no linger be
maintained. In the present social conditions, it should be presumed that the wrongful
dishonour of a cheque would cause damage to any customer’s reputation.

(it’s unclear whether this would still be valid. I think it would be more even more valid. Any
transaction now can affect a person’s credit score)
-No longer a line between individuals and businessman.

Defamation (another cause of action)

In cases of wrongful dishonour – the customer may also bring a claim for defamation – this
requires the making of an untrue statement that would lower the plaintiff in the estimation
of right-thinking members of society. (for example wrongful credit ratings.)
-For banks, the problem is whatever reason they give for dishonoring the cheque – eg.
insufficient funds.
-The claim is based on the fact the information is published to a 3rd party.

Baker v Australia and New Zealand Bank Ltd 1958

HELD: the words ‘present again’ were both legally capable were both legally capable of a
defamatory meaning and in fact did have the effect of conveying such a meaning.
-Present again is defamatory.

Pyke v Hibernian Bank Ltd 1995

Black J: reached a similar conclusion with regard to the words ‘refer to drawer’ when the
bank dishonoured a cheque.

Bumpitra- Commerce Bank Bhd v Top-A Plastic Sdn Bhd [2006] CLJ 460
Malaysian CA held placing the word ‘frozen account and ‘refer to drawer’ on the cheque
were capable of a highly defamatory meaning and tantamount to saying that the plaintiff
had gone into liquidation or been locked up.
-You are suggesting something is seriously wrong with the account.

Frost v London Joint Stock Bank 1906

Defendant bank returned a cheque with the words ‘reason not stated’ stamped on the
back.
Held: Action for defamation - court concluded that the plaintiff had failed to prove the
words would naturally be understood as conveying a defamatory meaning since the words
were equally capable of an innocent meaning. (action didn’t succeed)