Banking Law Assignment (GPR 306) November 16, 2012

BANK’S DUTIES AND CUSTOMER’S

DUTIES
A bank is a company which carries or purposes to carries or purposes to carry on banking business
in Kenya, licensed under the Banking Act, Cap. 488, subject to the laws of Kenya.

Nature of Banker Customer Relationship

The relationship between a bank and a customer is deemed to begin either when the bank opens an
account for someone (with the intention that the relationship be permanent) or as soon as the bank
agrees to provide any other service to the customer.

Bank’s Duties

Banks have specific duties that they owe to their customers, including:

 Duty of care as an agent: Customer gives the banker a mandate (account) to do certain acts
in regards to his account/permit any other person to do such an act, for example, Standing
Orders, Making remittances, e.t.c.
 Duty of care as a trustee: Banker is subject to constructive trust; he owes a duty of care to
the beneficiaries of a trust. However, it is not liable as a trustee unless it is appointed as such.

 Banker’s opinions: The bank is sometimes asked to give a reference about its customers. The
reference must be based upon the facts actually known to the banker at the time. The banker
is not obliged to make enquiries to ascertain new facts or other people's opinions.

Duty of care to the customer

Where a situation arises that the reference given by the bank is adverse and without
justification, the bank may be liable by reason of breach of the bank's duty of confidentiality
or for libel, or for negligence.

Duty of care to the recipient of the reference (3rd Party)

If the reference is unduly favourable the bank may then be liable in tort for negligent
misstatement as in Hedley Byrne v Heller (1964).

Duty of safe custody

This is a service established by banks where items are accepted for “safe keeping”; this is
incorporated into their contract with the customer. This arrangement is known as voluntary
bailment. This type of bailment is divided into two categories:

 Gratuitous bailment: here, the bailee does not receive any payment;

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 Bailment for reward: here, the bailee is paid.

Where the bank is a bailee of property it is treated as a bailment of reward irrespective of

whether payment is actually made for eth service as it is part of the contract between banker
and customer. As a result the bank has a duty to take proper care of the items deposited and
will be liable for breach of contract if it negligently allows them to be stolen or gives them to
the wrong person. If property is stolen while in the bank’s custody then it may be liable for
negligence or vicariously liable if the employee stole it in the course of his employment e.g. if
he or she was responsible for looking after the property.

If two or more bailors deposit property jointly then it should not be delivered except on the
authority of all bailors, as in Brandon v Scott (1857) 7 E&B 234. However, if one dies then
the personal representative of the deceased will have to step in so as to receive it. Also, if an
agreement is signed to say that the property may be released to either bailor, the bank may
still be liable if it delivers the property knowing that a breach of trust is being perpetrated.

Items deposited for safe custody are not subject to the banker lien.

Banker’s lien

A lien is a type of security, which carries the right to retain property belonging to another. A
lien has the power of sale; if one does not repay debts owed then the securities held will be
sold to cover the cost of whatever is owed, plus whatever the interest that may have accrued.
This however does not extend to items in safe custody.

In R vs. Turner (No. 2) (1971)1 WLR 901 Court of Appeal, the owner of a car who removed
the vehicle form the garage where it was being repaired without paying the bill and without
permission could be guilty of theft.

A pledge carries the right to retain the property until the debt is paid or if it becomes apparent
that such debt will not be paid, the creditor is allowed to sell the property to honour payment
of the debt.

Property that is subject to the lien includes securities such as insurance policies and shares
that are held as security are subject to the lien.

The limitations on the Banker’s Lien are:

1. The bank does not have a lien on cheques paid into the bank for collection. The
bank may have a lien on a cheque it collects for a customer who has an overdrawn
account. It also has a duty to collect the cheque and credit the proceeds to the
customer’s account. The lien and the duty complement each other, as the payment
will reduce the debt on the account. If the customer has several accounts one of which
is overdrawn but the payment is to an account in credit the bank may appropriate the
cheque and pay it in to the overdrawn account.

2. The lien does not apply to securities kept in safe custody.

3. The lien does not apply to securities, which are held by the customer as a trustee.
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4. The lien does not arise if there is an agreement to the contrary between the bank
and the customer.

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Banking Law Assignment (GPR 306) November 16, 2012

Duty to honour cheques:

The banker should not refuse to make payments that the customer has authorised to the limit
of his credit facility. The bank will be liable to the customer for defamation if it unjustifiably
refuses to make such payment when such funds are available. Damages are awardable for
wrongful dishonour of cheque by a bank.

Such was the case when in 2009, Hon. Justice Nicholas Ombija sued Kenya Commercial
Bank (KCB) for defamation when his card failed to make payments twice between the
months of March and April while at The Intercontinental Hotel as well as at Nakumatt Ukay.
He claimed that the two incidents caused him serious embarrassment and humiliation and the
bank subjected him to agony, distress, scandal and contempt. Hon. Lady Justice Joyce
Khaminwa ordered KCB to pay the judge Ksh. 2.5 million in damages.

A bank is only justified in refusing to make authorised payments where there are insufficient
funds available in the customer’s account; there is a defect in the document authorizing such
payment; or if there is a legal ban on such payments.

Duty not to pay without authority:

A bank should only make payments authorised by the customer (account holder) and should
make necessary confirmation when unauthorised payments come through. A bank that makes
any unauthorised payments without prior confirmation will be liable for negligence and will
be required to compensate the affected customer, as was the case in Lazarus Masayi Onjalla
vs. Kenya Commercial Bank Ltd. (Civil Appeal No. 259 of 2001).

Another relevant case would be that of Cr.1010/2011 Republic vs. Nickson Musalia Juma.
Here, the suspect (Nickson) had tried to withdraw money from Thomas Bradley Kamonji’s
account over the counter at Co-Operative Bank of Kenya, Parliament Road Branch, by trying
to mislead the teller that he had been sent to withdraw the amount of Ksh. 25,000/= by
Thomas Bradley Kamonji and producing an National ID Card and ATM card that he had
stolen from him. Upon suspecting foul play, the branch manager called Thomas to find out if
he had actually authorised that transaction, to which he replied in the negative.

Duty to obey the customer’s countermands:

A bank is required to comply when a customer issues written instructions to stop a cheque for
one reason or another. However, if instructions are given over the telephone, the bank will
only stop the cheque temporarily and if by the close of business that day no written notice has
been issued, then the bank has the right to proceed with making such payment.

Duty to tell customers of forgeries:

The bank has a duty to advise a customer of any forgery of their signature, so that payments
may not be made unauthorised.

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Duty to collect cheques:

The bank has a duty to collect cheques within reasonable time, by the close of business
preferably.

Duty to inform a customer of the state of his account:

This is done through sending of statements to the concerned customer; such statements should
reflect all the activity of the customer’s account accurately.

Nowadays, banks update their customers immediately when a transaction has taken place, via
a text messaging service. Such banks include Equatorial Commercial Bank, Standard
Chartered Bank, Barclays Bank as well as Commercial Bank of Africa.

Duty and skill of care:

The banker has a duty to take reasonable care to refrain from taking any steps which may
occasion damage to the true owner

Duty of confidentiality:

Tournier vs. National Provincial and Union Bank of England Ltd. (1924) 1 KB 461; (1923)
All ER Rep 550

Banks owe a duty to their customers not to divulge information to a third party, except where:

 The bank is required by law to disclose

 There is a public duty to disclose

 The interest of the bank requires disclosure

 The customer has given express or implied consent.

Duty to act on notice of death:

Death of a customer invokes both authority and duty to pay when the bank has notice of it.
All transactions on the account should be stopped and cheques should be returned marked
‘Drawer Deceased’. Records should be kept of all cheques presented but not paid and
solicitors acting for the personal representatives advised of the position of the account and
furnished with a list of any documents or securities held on behalf of the deceased. Noting of
grants of probate and letters of administration should be done alongside release of the funds
and securities to the personal representative(s)

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Banking Law Assignment (GPR 306) November 16, 2012

Customer’s Duties

Customer has no duty to check his bank statements:

In a certain case heard while we were on clinical attachment, (Cr.1010/2011 Republic vs. Nickson
Musalia Juma), the first prosecution witness, Bradley Thomas Kamonji, upon being asked if he used
to check his bank statements, declared that he would not check his bank statements regularly, but
would do so upon making a deposit.

In the case of Tai Hing Cotton Mill Ltd. vs. Liu Chang Hing Bank Ltd. (1985) 2 All ER 947, it was
held that:

 Even by express terms, bank statements are not conclusive evidence.

 The customer was not stopped by its own negligence from asserting that the bank acted
without authority.
 The bank has no duty to inspect bank statements.
 The customer has no duty to supervise employees so as to prevent forgeries.
 The customer only owes a duty to draw cheques with care and to inform the bank of known
forgeries.

In this case, the employee of the plaintiff company forged 300 cheques worth a total of 5.5 million
dollars, over a period of six years. The three banks that the plaintiff company held accounts with held
a policy those statements would be checked and confirmed as correct within a short period of time,
with any complaint being raised during that period.

Duty to exercise care when drawing cheques:

Cheques must be drawn in such a manner that fraud does not become encouraged and does not
consequently succeed in being carried out. A cheque should not be issued when it is not properly
completed (with the name of payee, date of payment, amount of payment- both in numbers and words
and finally the proper signature). Much as it is not a duty to take all possible precautions, necessary
preventive measures must be taken.

In London Joint Stock Bank Ltd. vs. Macmillan and Arthur (1918) AC 777 All ER Rep 30 HL, it was
held that an employer owed a duty to take usual precautions against alterations and had failed on that
duty. The bank had the right to debit the full 120 pounds to the account.

Here, a dishonest clerk took advantage of a carelessly written cheque and inflated the amount to the
sum of 120 pounds, which he presented to the bank (after his employer negligently signed for this
amount) and received the full payment.

Duty to tell the bank of known forgeries:

A customer has a duty to advise a bank of a forgery of his/her signature. If he does not do so, then
breach of mandate to pay only on authority.

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In Greenwood vs. Martins Bank Limited (1933) AC 51 (1932) All ER Rep 318 HL, it was held that
since the husband did not immediately advise the bank of the forgery that he had discovered, the
forged cheques were genuine and any denial that he did not sign them would not be accepted. The
bank could not claim any of the money due to the death of the wife of the plaintiff, and it thereby
went at a loss.

However, where a cheque is altered without the customer’s authorisation the cheque is worthless.
Therefore the bank will be liable if the bank pay out on a cheque where the sum is altered or the name
of the payee is changed or added to without the authorisation of the customer, as was the case in Smith
v Lloyds TSB Bank (2000) 2 All ER (Comm.) 693 CA.

In the case of a join account, where one holder of the account forges the signature of the other holder
on a cheque and adds his own, the innocent account holder can deny signing any such cheque and
therefore the bank will not have any right to pay out the amount. The bank owes each separate
account holder separate duty.

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