BANKER – CUSTOMER RELATION

BANKER

Halsbury law of England “ A banker is an individual, partnership, or corporation, whose sale or predominating business is banking, that is , the receipt of money on current or deposit account and the payment of cheques drawn by and the collection of cheques paid in by a customer”

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the view Sir John Paget pointed out 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 or uncrossed for his customers.  Dr. Herbert L.Hart “ A banker is one who in the ordinary course of his business, honours cheques drawn upon him by persons from and for whom he receives money on current accounts”

H.CUSTOMER  Dr. a customer is a person with whom the banker has some regular and formalized banking business  The nature of transaction should be of that of banking and he shoule be regular. .L Hart “ A customer is one who has an account with a banker or for whom a banker habituality undertakes to act as such”  In simple words.

This theory emphasis on the continuity of transaction and a single transaction is not sufficient There should be a habit of dealing  .e..Sir John Paget  According to this theory the following 2 condn has to be satisfied: between him and the bank The transaction should be of the nature of regular banking business i. frequency of transaction should be there.Old View – DURATION THEORY .

.MORDERN VIEW – REJECTION OF DURATION THEORY  The   theory was over ruled by Mr. it was pointed out that the relation bw the customer and the banker commences immediately when the account is opened and a paticular duration for the same Is not an essence. Justice Bailhache in the Judgment : Ladbroke v.1914 In the present case. Todd.

 The Banker – customer relation are of different kind and it depends upon the nature of transaction and the function carried out by the bank. .

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the banker becomes the debtor to the customer. who then becomes the creditor. Debtor – Creditor The Primary relation between that of the banker and customer is that of debtor and creditor.  Shanti Prasad Jain v.  The moment an account is opened in the bank.  .1963 was held that the banker and customer relation in respect of money deposited in the account of the customer with the bank is that of the debtor – creditor. Director of enforcement. foreign Exchange .1.

Hill. the relation between the banker and the customer is that of the debtor and creditor.  This relation is reversed as long as the account is overdrawn. the respective positions being determined by the existing state of account. And also in case where loan is drawn from the bank.  The banker is a creditor as long as there is credit in the account of the customer.  . 1848 Sir John Paget said that. In Foley v. It is not just money kept in the safe custody rather it is money due from the banker.

 For this reason the banker is know as PRIVILEGED DEBTOR .PRIVILEGED DEBTOR Ø The Banker is in a better position than the commercial debtors as the relation between the banker and customer is of such a nature.

It must be in writing. 2. the bank does not approach the bank but the customer approaches the bank with the money and thereby the relation is created. Unlike in the ordinary case where the debtor approaches the creditor. The debt is struck by limitation only from the date it is demanded.1. the debtor is not due to make the repayment until the creditor demands the refund. .1921 : Express demand of repayment of money is essential. Unlike the commercial debts. This is due to the special relation of the banker customer. Swiss Banking Corporation. As held in Joachinson v.

In the matter court hels that. In case of oridinary commercial debt. They made a demand for repayment at the London branch without making a request at Berlin bank. the debtor can make the repayment to the creditor at any place and at any time. and it is only payable from that particular branch and nowhere else. 1915 – The plaintiff had an account at “Berlin Branch” of D Bank. it can be made only in the particular branch where the party has the account .3. Dresdne Bank . they sued the London bank.  . And on refusal. which had its head office in Germany.  Clare & Co v. But in case of bank debts. the debt due by the banker to the customer is from the Berlin Bank. and a branch in London.

 THE SITUATION HAS CHANGED WITH THE INTRODUCTION OF ATMs.HC .  . V. 1970 All. Cheques etc. IT CAN BE REPAYED ANYWHERE. Unless there is an express agreement to the contrary there is an implied agreement for the bank to make the repayment to the customer only at the bank concern and the respective branch and no where else. Punjab National Bank Ltd. Indo-Allied Industries Ltd.But the customer may make special arrangements with the bank to make the payment at anyother branch. eg thru DD.

 .4. it can be made at any time of the day. In case of ordinary debt.customer. only if it presented during the banking hours. the timings for claiming the repayment is not specified. but in case of the banker.1954 : The bank is only duty bound to honor a cheque . it can be reclaimed during the business hours as laid down statutorily.  Arrab Bank v. Barclays Bank .

this law is not applicable. which points out that . the date is calculated from the date of demand and not the date of deposit. banks makes immediate repayment and for that matter . drafts. orders or otherwise. 6. after the expiry of 3 yrs becomes a bad debt from the date the money is paid. But this is not applicable in case of banking as. S.5. In case of bank practically. In case of commercial debt. Cheques. But in case bankers debt.22 of limitation Act. a debt.  . the debt can be withdrawn through orally asking or through acknowledgement. it has to be done through.

8.The ordinary debtor can close the debt at any time. In ordinary case .  . there maybe failure on part of the debtor to repay the amount. but a banker cannot do that with out getting the prior approval of the creditor. they make the payment immediately. but in case of banks.7.

SECONDARY RELATIONS .

or who is so represented.182 of the contract act defines Agent as “An ‘agent’ is a person employed to do any act for another or to represent another in dealing with third persons.2. is called the ‘Principal’. The person for whom such act is done.  Agency in broad sense includes every relation where one person represents another by his authority. PRINCIPAL .AGENT The banker also acts as an agent for its customer.  .  S.

bills of exchange. promissory note etc. the banker acts as the agent for the customer in no. correspondent or a representative for the customer. On behalf off. This is one important relation the banker and customer has.Payment of insurance premia. In the course of business. dividend warrants.Buying and selling securities on behalf of the customer 2. 5.Acting as trustee. of services. executor. They include : 1. 4. 3. . telephone bills etc. attorney.Collection of cheques.

212. S.211. The profits are to be accounted for.  In case of agency the rules laid down in the Indian contract act applies. While dealing with these. to carry on with the due deligence.  The law of agency applies in the present relation. the banks is to conduct the business with the due deligence of person engaged in similar business. etc . where the bank is to carry on the business as directed by the principal (customer) and in the manner prescribed. such as S.

who was acting as an agent. Kashwap Industries.  . Bharat bank Ltd. The D bank delayed the transaction and thereby caused loss to the P. V. SC held that D bank was liable to make the payment for the loss as he was to act in due deligence as an agent. It was held that the amount was held by the bank on behalf of ‘A’ and they were holding it merely as an agent.Tranvancore National & Quilon Bank. within 10 days. 1958 The Plaintiff sold certain goods to third party and sent the documents to collect the D bank. Case 1940 : Where ‘A’ remitted certain amount with the bank as a telegraphic transfer to a company in Bombay.

 The bank receives the money with the trust and coinfidence and there is an implied requirment not to alienate the money otherwise than with the permission with of the customer. . FIDUCIARY RELATION  The fiduciary relation is of different types.3. It is a relationship of trust and confidence.

Pioneer Commercial Bank. . 1951. when a bill are send to the bank for collection and the bank is directed to issue a draft. And the bank fails to issue the same. In First National Bank Ltd v. the customer has the right to claim it on the basis of trust.

3 of Trustee Act.BENEFICIARY S.1882 defines “Trustee” as “ one to whom property is entrusted to be administered for the benefit of another”  Beneficiary is one who is beneficially entitled to or interested in property. that is.4. And not to take improper adv. entitled to it for his/her own benefit and merely as trustee or executor holding ot for others. They are entrusted to the benefit of the property held by the trustee. TRUST. Over the property   .  The trustee is to take care of the property with due deligence and as his own.

V.creditor. Pearey Lal. banker holds the property as the debtor. but in case it is given for a specified purpose or for a specified period of time. In ordinary course of business.1962 There general presumption that arises of the relation between banker and customer is that of the debtor.Such relation arises on the banker under certain circumstance.  New Bank of India Ltd. he holds as a trustee.  . THIS IS DETERMINED ON THE BASIS OF THE SPECIFIED INSTRUCTION GIVEN BY THE CUSTOMER TO THE BANKER. such as in case to keep in safe custody.

Bailee .5.Bailor The “Bailee” is the party of whom the personal property is delivered under a contract of bailment. be returned or otherwise disposed of according to the directions of the persons delivering them”  .148 of the Indian Contract Act deals with Bailment which states as “ A bailment is the delivery of goods by one person to another for some purpose. “Bailor” is the party who bails or delivers goods to another under the contract of bailment. upon a contract that they shall.  S. when the purpose is accomplished.

e. In exceptional case.  This is the only circumstance when the banker acts as a bailee. where the bank is not permitted to take advantage of the items as they are obliged to return the identical goods. the banker acts as the Bailee. .. in case of safe custody of gold or documents. but the customer pays the rent for the locker. i. They do not pay the interest.

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1989 where there is an agreement exempting the bailee from the liability in case of not rendering reasonable care. Central Bank of India v.151. ia a valid agreement and is a valid exemption . Grains & Gunny Agencies.152 exempts the liability in respect of loss.DUTIES 1. if the required care has been taken. Under s. but under S. he is required to exercise reasonable care and duty over the property. destruction or deterioration of the goods bailed. DUTY TO TAKE REASONABLE CARE : When a banker accepts an item for safe custody.

Otherwise.   . the bailment maybe terminated as per S.154 for the damages. as bailee is not to make use of the goods other than for the particular purpose for which it has been deposited for.2.153 of the contract Act and liable to compensate as under S. DUTY NOT TO MAKE UNAUTHORISED USE OF GOODS BAILED :  The banker.

DUTY NOT TO MIX BAILOR’s GOODS WITH HIS OWN GOODS :  The Bailee may mix the goods with the consent of the Bailor and their will have the right over the goods with respect to the respective proportion as under S.155. with out consent. If the goods are severable . S. the bailee has to sever it bearing the expense. or pay the compensation (s.  If mixed.157)   .156 is attracted.3.

As soon as the purpose has been fulfilled the goods are to be returned with out fail.   .161 deals with this.  4.160 and S. DUTY TO RETURN THE GOODS ON THE FULFILMENT OF THE PURPOSE :  S.

RIGHT TO RECOVER COMPENSATION FROM THE BAILOR: S.158. RIGHT TO RECOVERY NECESSARY EXPENSES INCURRED ON BAILMENT: S.RIGHTS 1. in case of any loss incurred while dealing with goods. the bailor shall pay the bailee the expenses incurred on the goods on the course. bailor is liable to pay the compensation . 2.164 .

RIGHT OF LIEU OVER BAILED GOODS:  The banker has the right to retain the goods bailed until certain conditions are fulfilled   4.3. RIGHT TO SUE AGAINST WRONGDOER:  the banker has the right to sue against the wrongdoer  .

the Banker will not be aware about the content of the locker and cannot be held liable against the loss.6.  The liability is same as that of a lease deed.Lessee  When a property is kept in the custody of the banker. In case of safe custody. there arises the relation of the lessor and lessee . . Lessor . This is in case of safe custody.

Bank of Maharastra. 1962 and later in Atul Meher v. but arises the relation of the lessee and lessor and the liability of the banker is only to the extend of negligence. Court held that there is no relation of bailment in case of safe custody. and banker was liable for the loss. But this position changed by National Bank of Lahore v. Sohan Lal. Earlier position with respect to the lessee – lessor relation was that of bailee – bailor. .2002 .

SAFE CUSTODY OF CUSTOMER’S VALUABLES .

. Banker has to enter the particulars of item deposited into the register with specifications. 4. 5. In case of using the locker. a register has to be maintained with respect to that. The customer may withdraw the articles by surrendring the receipts with the bank. And entries of date. To maintain a book to issue receipts to the customer relating to safe custody deposits 2.Banker’s Responsibility 1. time of entering etc have to be maintained. A specimen signature to be obtained 3.

Liability of Banker with safe custody
1. Liable for any loss of any security deposited with him. 2. Liable for unauthorized conversion. 3. Liable for retaining the goods if he has no lien right over the goods. 4. Liable for the fraud committed by the employer.

7. Pawnee- Pawnor
 A pawn

is defined as a bailment or delivery of goods by a debtor or his creditor, to be kept till the debt is discharged.  This is for the security of the money borrowed.  Pawnee is a person with whom a pledge for payment of money is deposited; Pawnor is one who make the deposit. Pawn is the “thing” deposited.

Mortgagor is the person who extends the property.8.Mortgagor  The transfer of interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced.  . Mortgagee is the person to whom it is extended. Mortgagee.

 State Trading Corporation of India Ltd v.8. 1994 . BANK AS GUARANTOR  Bank guarantors gives guarantee to its customer by issuing the “letter of Credit”  This is mostly used in International trade and transaction  They guarantee to make the necessary repayment on the failure or default on the part of the other party. Jainson Clothing Corp.

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- GENERAL OBLIGATIONS .

He accepts a deposit with the obligation to repay the same on demand. S.1. entrusts the bank with the duty and on failure.31 of the NI Act. he is liable to compensate the loss  . Honour of Cheques  The banker is under the statutory duty to honour the cheque.

. And once an agreement has been formed . Indian Overseas Bank. This maybe availed through the express or implied agreement.Condition to Honour the Cheque 1. banker may permit overdraft. In case there is no sufficient fund with the customer. Sufficient Balance : Which means there must be sufficient fund as submitted in the cheque. If not with the customer atleast with the banker. It is sufficient to have implied from the conduct of the parties. Naran Prasad Govindlal Patel. 1980 : it is not necessary to have an express or written agreement for overdraft. Madras v. Ahmedabad . it can be unilaterally terminated by the bank alone 2.

It is to be given with 6 Months. The Banker is not honour undated cheque. V. The cheque is to be presented with the working hrs of the bank and on the working day. In Keptigalla Rubber Estates Ltd. that is with the banker.  . National Bank Of India Ltd. the banker has to immediately stop the payment and intimate the same to the customer or else the banker will be held liable for his neglection. The cheque is to presented within a reasonable time period from the date on the cheque. The Cheque is to carry the signature of the customer and it should tally with the specimen signature.. 4. This is a mandatory principle but it is not a mandatory for the customer to write the cheque himself. 3. 1909 : In case the signature on the cheque is believed to be forged.2.

And this should be duly verified as required under S. 11. It should be in the proper form and comply with the requirements of the law. The amount should be correct in word and in figure. 6.  . sign to be verified to see if it is signed by the authorised person and so with the seal. Mutilated cheques : it should be good in appearance and shouldn’t be torned affecting any printed word on the cheque. In case of any correction or other . The banker will permit the payment only it is for the proper application of the fund 9. 7. the cheque or transaction is to be stopped. In case of reliable information that the customer is death. insolvency.5. 8. The cheque is not to be honoured in case of legal bar 10. it should be dulu signed. In case of cheque of partnership or company.18 NI Act.

BANKER’S RIGHTS .

. Banker’s right to General Lien  Lien : Halsbury defines “Lien” as “A right in man to retain that which is in possession belonging to another.  Lien does not require a particular agreement in written or oral. until certain demands of the person in possession are satisfied”  The bankers right to retain the securities till the repayment unless there is an agreement to the contrary.1.

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Barnet.  There are four vital condition to be satisfied to exercise the general right to lien of the banker. 1864 Bankers most undoubtedly has the general right to lien over the property in the possession of the holder unless there is an express agreement to the contrary. S. .171 ICA confers general right to lien on the Banker. As held in Brando v.

goods etc.  . The property shouldn’t be entrusted for a particular purpose. The property must come into the hands of the banker in the capacity as the banker 3.1. Eg : Bill of exchange. bearer bonds. The possession must be one lawfully obtained as the capacity of the banker 4. There must not be an agreement to the contrary 2.

No Lien on securities. where the properties were refused to be taken as securities.Exceptions : 1. bill of exchange or other documents which are entrusted for particular or specific purpose [ Greenhalgh v. In Lucas v.1924] 3. Union Bank of Manchester. Banker cannot exercise right to lien on properties which were left behind by mistake or negligently. General lien cannot be exercised on safe custody deposits. . Court held that the banker cannot exercise right to lien over these properties. Dorrien. as he acts as a bailee and not in the capacity as banker 2. but the customer mistakedly left it behind.

6. The banker cannot exercise the right to lien on the title deeds of Immovable property.4. where the trustee is liable for his personal loan 7. No lien on the trust accounts.Banker cannot exercise right to lien on the deposit account of a customer with respect to loan advanced. There is no lien until the due date of the loan arises as there is no debt till the amount is due. 5.   .

it can be adjusted accordingly. . In case the customer keeps 2 or more accounts.  This right is also available to the banker.2. Banker’s right to set -off  This is the legal right by which the debtor is entitled to take into account the debt owing to him by a creditor while paying a debt due from him to the creditor. and few are overdrawn and other has credit.

Amount must be certain 4.Requirements for Set-off 1. Banker may exercise his right to discretion 6. The right of set-off can be exercised in respect of debts due and not future or contigient debts 3. The right is before the garnishee order is made effective 7. It is exercisable in the absence of any agreement to the contrary 5.  . A formal notice to the customer has to be given showing the bankers interest to set-off. The accounts must be in the same name and in the same right 2.

On the death. On the receiving notice of a second mortgage over security charged to the bank. On the receipt of a garnishee order d. On the insolvency of a firm or on liquidation of a company c. mental incapacity or insolvency of customer. b. Cases where automatic right to set-off is exercised : a. .

3. the banker is bound to follow the same.This is when the customer owes two or more debts to the banker and the sum paid is not sufficient. . the banker may appropriate after informing the customer. Right to appropriation or RULE IN CLAYTON’S CASE: . In English law it is known as the “Rule in CLAYTON’S CASE” and under the Indian Law. But once te amount is not appropriated. But once specified directions are given by the customer. it is dealt under Ss.This is the right of the banker to appropriate the sum paid by the customer to any of the loans due. . 59 to 61 of the Indian Contract Act.

Indian Law S.59 : Right to appropriate by the debtor s.60 : Right to appropriate by the creditor S.  .61 : Appropriation by law where neither party appropriates.

Appropriation takes place in chronological order.1816 which held as: Appropriation take place in the order of time : the first item on the debit side gets cancelled by the first item on the credit side.CLAYTON’s RULE  CLAYTON’s rule is the rule laid down in Devaynes v. . Noble .

the firm went into insolvency and the partners were paupers. This had 5 Partners. Dwans. Noble. who was a chief partner died during the course of business . Devaynes. The surviving partners continued the business in the old name of the firm despite the written notice from Devaynes’s Son and from the trustees. Craft and Barwook.FACTS:  There was a partnership firm running the banking business. It was argued on behalf of the living partners that the deceased’s estate must be made . It was that the name was continued to use without their consent. After abt a yr.Devaynes.

 . And also it was said that the amount in the account before the death of the deceased was same as the amount after his death and for this the rep. are to be made liable. unless there is an appropriation by the creditor or the debtor. And since the firm was of unlimited liability . it carried on to the legal representative of the deceased. As the old debts at the time of deceased was paid off by the subsequent payments of the firm. But the arguments were rejected and court held that. Therfore the estate of deceased is not liable.as the firm was solvent when he (Devaynes) died. the general presumption is that sum first paid was first drawn out and first item on the debt side is reduced by the first item on the credit side.

No agreement to the contrary. 1912 This is rule of evidence and rule of law. Conditions to apply the rule: The account still be running.1858. . Deelay v. Lumley. This doesn’t apply in case the account is broken and a separate account has been started. Lloyds’ Bank Ltd.    This principle was applied in Croft v.

 Eg. While taking DDs. . Transaction through different banks etc. service charges and such other.Banker’s right to claim incidental Charges:  The banker may claim incidental charges such as processing fee.4.

1980 .. This was held in the following cases:  Syndicate Bank v. but this is the special privilege given to the banks.5.1991  Bank of India v. M/S West Bengal Cement Ltd. Banker’s Right to Charge Compound Interest  This is generally prohibitied. Rao Saheb Krishna Rao Desai.

4. Avoid drawing cheques when there is no sufficient fund in the account as it is a criminal offence . The customer has to inform the banker immediately if he finds out that another person has been accessing his account or forged his signature. 5. The customer has the duty to repay the overdrawings made in the bank. The banker has to be given the reasonable service charges and other bank charge’s by the customer 3. 2. To render due deligence while using the cheques and making such entries.CUSTOMERS DUTIES 1.

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4. He loses his confidence in the bank or bank loses the reputation etc.Termination by Customer 1. He cannot get the facilities from the banker 3. If the customer is not satisfied with the services of the banker or vexed with the behaviour of the bank officials 2. He doesn’t agree with the terms of the bank. he may give it in writing    . or such other .

Customer’s insanity 3. Death of the customer 2.By Banker – By Operation of Law 1. Customer assigns his account to another person 6. Customer’s insolvency 4. Order of the court 5. . Customer of enemy country. Winding up of the company or closing of the partnership firm 7.

XXI. bank is the third person and he is directed to freeze the accounts of the customer.  This is the same case with the bank.46 – The Judgment Debtor’s debtor.  He is directed by the court at the instance of the judgment creditor to make the payment to him and not to the debtor.BANKERs and GARNISHEE ORDER  Garnishee – O. . R. where .

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 Where the garnishee order doesn’t apply.eg in case of joint acc.. And in case of limited – specified amount.. Garnishee order is effective to the amt in the account at the time of making the order. . if the banker knows the amt is held by the customer as trustee etc. . In case of oridinary the whole bal is attacked.

a relation arises with the banker and the customer.  It maybe of any kind and depends on the nature function the banker carries out… . the moment an account is opened in the bank. There fore it can be inferred that.