Fs topic-1-law-3015

Banker Customer Relationship
Definition of a Bank
• The Financial Services and Markets Act 2000 establishes
framework for Financial Services Authority to authorise banks
but no definition
• Common law definition in UDT v Kirkwood [1966] 2 QB 431
CA
• The essential characteristics of a banking business are:
– a) collecting cheques for customers;
– b) paying cheques drawn by customers;
– c) keeping current accounts for customers.

Definition of Customer
• A person becomes a customer and a contract is created when an
account is opened - Commissioner for Taxes v English, Scottish
and Australian Bank [1920] AC 683 PC Woods v Matins Bank
[1959] 1 QB 55.
• If no contract bank may be liable for tort - Hedley Byrne v Heller
& Partners Ltd [1964] AC 465 HL
– Contracts between banks and large corporations with roughly
equal bargaining power
– Contracts between banks and small and medium sized
enterprises (SMEs)
– Contracts between banks and consumer customers

The Banking Codes
• Review of Banking Services Law and Practice in 1987, which
reported in 1989 – (the Jack Report) Cm 622
• White Paper entitled Banking Services Law and Practice in
March 1990 - Cm 1026.
• Banking Code 1991 British Bankers Association, the Building
Societies Association and the Association for Payment Clearing
- updated 2003
• Mortgage Code 1997 - updated 1998
• Business Banking Code 2002 - updated 2003

The Data Protection Act 1998
Data processing is only legitimate where one of the following
applies:
• where the individual consents
• where it is necessary for the performance of a contract with
the individual
• where it is a required under a legal obligation
• where it is necessary to protect the vital interests of the
individual or to carry out public functions
• where it is necessary to pursue the legitimate interest of the
business unless prejudicial to the individual

The Data Protection Act 1998
• Individuals have a right to a description of and data concerning
them, the purpose for which it is processed and of any potential
recipients of the data

The Contract
• When a customer pays money into his account
• the bank = a debtor
• customer = creditor. Foley v Hill (1848) 2 HL Cas 28 The money
becomes the property of the bank; the bank has borrowed the
money from the customer
• Balmoral Super market Ltd v Bank of New Zealand [1974] 2
NZLR 155 money stolen at the counter still the property of the
customer;
• Chambers v Miller (1862) 13 CBNS 125 money drawn by a
customer from overdrawn account belongs to the customer

Implied Terms
• The bank will receive the customer’s deposits and collect cheques
• The bank will comply with written orders (i.e. cheques) issued
by its customers assuming there is sufficient credit tin the
account;
• The bank will repay the entire balance on the customers demand
at the account holding branch during banking hours - Libyan Arab
Foreign Bank v Bankers Trust [1989] AC 80 PC
• The bank will give reasonable notice before closing a customer’s
account if it is in credit
Joachimson v Swiss Bank Corporation [1921] 3 KB 110 CA
• The bank must only act on its customer’s valid instructions and
not on any forgery of those instructions Tai Hing Cotton Mill Ltd
v Liu Chong Hing Bank [1986] AC 80 PC

Implied Terms
A customer only has duties to:
• To exercise reasonable care when drawing cheques to
prevent forgery and alteration; and
• To notify the bank if he actually knows of forgeries on his
account, a customer who wilfully ignores the obvious is
not considered to have actual knowledge London Joint
Stock Bank v Macmillan and Arthur [1918] AC 777 HL
and in Greenwoods v Martins Bank [1933] AC 51 HL

Implied Terms
– Liability cannot be excluded for certain matters under
the Unfair Contract Terms Act 1977
– Unfair Terms in Сonsumer Contracts Regulations 1999

Express Terms
• Must be made clear to the customer
• e.g. Electronic Banking and Charges

Termination of the Contract
• Termination by the Customer
• Termination by the Bank Prosperity Ltd v Lloyds Bank
(1923) 39 TLR 372.
• Termination by Law
a) Death of the customer;
b) Mental incapacity of the customer
c) Bankruptcy or insolvency of bank or customer.

Duties of the Bank
• Duty to collect cheques
• Duty to honour cheques
• Duty not to pay a cheque without authority
• Duty to obey customer's countermands of cheques
• Duty to tell customer of forgeries
• Duty to inform customers of the state of the account
• Duty to act on notice of death

Duty of care and skill
• S.13 Supply of Goods and Services Act 1982 customer =
"consumer" - implied term of the Act the bank will carry out its
services for the customer with reasonable care and skill.

• The customer has a duty to take reasonable care to prevent
forgery and alteration of cheques.
• But if a cheque is altered without the customers
authorisation the cheque is worthless - s64 Bills of
Exchange Act 1882. 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 - Smith v Lloyds TSB Bank
[2000] 2 All ER (Comm) 693 CA

• A bank pays or collects a cheque as an agent Lipkin
Gorman v Karpnale Ltd [1989] 1 WLR 1340 CA & [1992]
2 AC 548 HL
• The test to be applied to determine whether a bank is in
breach of its duty as agent is: if a reasonable banker would
have had reasonable grounds for believing that the
customer's account was being operated fraudulently by
another - Barclays Bank v Quinceare Ltd [1992] 4 All ER
363.

• Box v Midland Bank [1979] 2 Lloyds Rep 391
• Redmond v Allied Irish Banks [1987] 2 FTLR 264
• Verity and Spindler v Lloyds Bank (1995) CLC 1557
• Gold Coin Joailliers SA v United Bank of Kuwait [1907] 7
Bank LR 60 CA
• Yorkshire Bank v Lloyds Bank
• Williams v Natural Life Health Foods Ltd
• Suriya and Douglas v Midland Bank

Bank as Trustee
A bank may be liable as constructive trustee if it either:
a) receives trust funds with actual or constructive notice that
they are trust funds and that the transfer of the funds to the
bank is a breach or trust, or
b) knowingly assists a trustee of the trust to dishonestly
misapply trust funds.
"Knowingly" includes: actual knowledge, wilfully shutting
one's eyes to the obvious, wilfully failing to make
inquiries, knowledge of circumstances would indicate the
facts to an honest and reasonable person or would put such
person on inquiry. Belmont Finance Corporation v
Williams Furniture Ltd (no.2) (1980) CA

Knowledge
• There are several degrees of knowledge, classified by
Gibson J in Baden v Societe Generale [1983] BCLC 325 :
• 1. actual knowledge;
• 2. wilfully shutting one's eyes to the obvious (turning a
blind eye);
• 3. wilfully and recklessly failing to make such enquiries as
an honest and reasonable person would make;
• 4. knowledge of circumstances which would indicate the
facts to an honest and reasonable person;
• 5. knowledge of circumstances which would have put an
honest and reasonable person on inquiry.

• Re Montagu [1987] held that only knowledge types 1., 2.
and 3. would incur liability since he did not believe mere
careless was enough to make somebody a constructive
trustee. He also warned against using comparisons with the
doctrine of notice.
• Vinelott J in Eagle Trust Plc v SBC Securities Ltd [1992] 4
All ER 488 submitted that 4. and 5. should not be applied
in commercial transactions since they would require
parties to be unduly suspicious.

Receipt
• To be a constructive trustee the person receiving the trust
property must have done so for his or her own use and
benefit. If the bank used the money itself e.g. to pay off an
overdraft then it was benefiting and so could be a
constructive trustee but if the money was merely being
held passively in the account it could not be a trustee. Agip
(Africa) Ltd v Jackson [1989] 3 WLR 1367
Trust Property
• The stranger must have received trust property in breach of
trust to be held to be a constructive trustee.

Dishonest
Where a stranger dishonestly assists in the breach of a trust
then the stranger will be liable as a constructive trustee.

Four Requirements of Dishonest Assistance:
1. A fiduciary relationship is enough there does not have to
be a formal trust.
2. Assistance is enough for there to be a constructive trustee
There does not have to be a dishonest or fraudulent design
involving the stranger and the trustee or fiduciary. Royal
Brunei Airlines Sdn Bhd v Tan [1995] 3 WLR 64
3. There must be some act which promoted or advanced the
unlawful object. Brinks Ltd v Abu Saleh‑ (No 3) (1995) The
Times October 23.
4. There must be some dishonest act. Lord Nichols in Royal
Brunei Airlines Sdn Bhd v Tan

Duty of Confidentiality
• A bank owes an implied duty to its customer not to divulge
information about its customers to third parties.
• There are 4 exceptions Tournier v National Provincial
and Union Bank of England (1924) CA

Duty of Confidentiality.
1. Disclosure under Compulsion of Law
a) Court Order
• Order to inspect entries in the Banker's books - S 7 Banker’s
Books Evidence act 1879
• To assist police with their enquiries - S 9 Police and Criminal
Evidence Act 1984
• Discovery orders for Mareva injunctions
• Evidence for foreign trials – Evidence (Proceedings in Other
Jurisdictions) Act 1975
• Writ or Subpoena compelling bank employee to give evidence

b) Request from an official
• Inland Revenue – Taxes Management Act 1970 & Income
and Corporation Taxes Act 1988
• Department of Trade and Industry – Companies Act 1985
• Director of the Serious Fraud Squad – Criminal Justice Act
1987

c) Bank liable to prosecution is information not revealed
Money Laundering Provisions
S328 Proceeds of Crime Act 2002 - It is an offence for someone to
enter into or become concerned in an arrangement which knows
or suspects facilitates the acquisition, retention use or control of
criminal property. Disclosure must be made to the National
Criminal Intelligence Service (NCIS)
S 337 statutory protection given if
a) Information in the course of profession business or employment
b) The person knew, suspected or had reasonable grounds for
knowing or suspecting that another person is engaged in money
laundering
c) The disclosure is made as soon as practicable after the
information comes to the discloser

d) Where the law compels the bank to disclose information
and it is an offence not to do so
• S330 Proceeds of Crime Act 2002
• It is an offence to fail to report a person's engagement in any
kind of illegal money-laundering wen the information is
acquired in the course of business if the defendant has
knowledge or suspicion or reasonable grounds for knowledge
or suspicion.
• No offence is committed if the information is disclosed as
soon as is reasonably practicable after the information came
to the person's knowledge or there was a reasonable excuse
for non-disclosure. It is also a defence for legal advisers if the
information arose in privileged circumstances.

2. Duty to the Public to Disclose
Not a clear application – Libyan Arab Foreign Bank v
Bankers Trust & Pharaon v BCCI
3. Disclosure in the Bank’s Interest
Bank dishonoured cheques of wife as insufficient funds in
account and also concerned about gambling told Husband -
held entitled to do so. Sunderland v Barclays Bank Ltd
(1938).
4. Disclosure with the Customer’s Consent
It is now common for bank’s to request customers for
permission to give a reference.

Rights of The Bank
Interest
Charges
Repayment on Demand
Limitation
Appropriation of Payment
Combination of Accounts
Equitable Right of Set Off
Set Off following Insolvency

Appropriation of Payment
• Rule in Clayton's Case
The limitations on the rule are:
a) The rule only applies to running accounts;
b) The Rule in Hallett's Case (1880) applies where personal
funds are in the same account with trust funds and it is
deemed that the personal funds are withdrawn first.

Combination of Accounts
• Where a customer has two accounts with same bank the bank
has a common law right to combine them Garnett V Mc Kewan
(1872) LR 8 Exch 10.
• A bank's right to combine accounts is limited:
• a) Where the debit balance is not yet due, Jeffrys v Agra
Masterman’s Bank (1866) LR 2 Eq 674.
• b) There is an implied agreement to keep accounts separately
Bradford Old Office v Sutcliffe [1918] 2 KB 833 CA Halesown
Presswork and Assemblies Ltd v Westminster Bank [1972] AC
785 HL
c) An express agreement not to combine accounts will negate the
bank’s right to do so.
d) A trust fund cannot be combined with personal funds.

Equitable Right of Set Off
• Bhogal v Punjab National Bank [1988] 2 All ER 296 CA
and Uttamchandani v Central Bank of India [1989] NJLR
222 CA

Set Off following Insolvency
Where bank or the customer is insolvent
a) A statutory set off may be applied to accounts on insolvency
under S.323 Insolvency Act 1986 (individuals) or the Insolvency
Rules 1986 (companies).
b) The statutory set off is automatic and unexcludable
c) Any right to extend set off is void.
d) Debts become due and payable as soon as the customer or bank
are insolvent and are subject to statutory set off.
e) Debits on a customers account after the bank had notice will not
be subject to set off and credits on a customer’s account after the
customer has had notice of the banks’ insolvency will not be
subject to set off.
f) Where the customer has 3 or more accounts the statutory set off

Banker's Lien
• A lien right to retain property belonging to another
pending satisfaction of a debt owed by the owner of the
property.
• A pledge is security, which carries the right to retain the
property until the debt is paid or if unpaid after a certain
time, carries the right to sell the property to satisfy the
debt.

• A banker's lien is a special kind of lien that is the
equivalent of the pledge in other words the bank may
retain the property until the debt is paid however if it
becomes apparent that the debt will not be paid then the
property may be sold to satisfy the debt e.g. securities
Brandao v Barnett (1846) 12 Cl & Fin 787 HL such as
insurance policies Re Bowes , Earl of Strathmore v Vane
(1886) 36 ChD 586 and shares Re United Service Co.,
Johnstone’s Claim (1870) 40LJ Ch 286.

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 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
4. The lien does not arise if there is an agreement to the contrary
between the bank and the customer.

Banker's Opinions
• The Bank gives a reference ot another bank
• Liability to the recipient of the reference
• If the reference is unduly favourable the bank may then be
liable in tort for negligent misstatement as in Hedley Byrne
v Heller (1964). However the effectiveness of any
exclusion clause in these cases will now have to be tested
against the Unfair Contract Terms Act 1977.
• Liability to the customer
• If the reference is adverse the bank may be liable by
reason of breach of the bank's duty of confidentiality or for
libel

Safe Custody
• Voluntary bailment.
• This type of bailment is subdivided into
• Gratuitous bailment for which the bailee does not receive
any payment and
• Bailment for reward for which the bailee is paid e.g.
Bank

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