The relationship between banker and customer

The essential relationship between a banker and its customer is contractual, not fiduciary (Foley v Hill (1848) 2 HL Cas. 28; Hart v Sangster [1957] 1 Ch. 329 at 337; Encyclopaedia of Banking Law, para. C(471))

Obligations are owed on both sides of the contractual arrangement, the fundamental obligations of the bank being to honour its customer’s instructions and to repay on demand monies deposited in an account.

There is not normally an implied term in the contract between bank and customer obliging the bank to provide overdraft facilities or other finances to his customer (Suriya & Douglas v Midland Bank [1999] 1 All E.R. 612), nor is there an implied obligation upon the bank to inform its customers of the introduction of more advantageous forms of account (Barclays Bank v Green Unreported May 17, 1996 CA) or to give a period of notice to the customer before withholding further finances (Socomex v Banque Bruxelles Lambert SA [1996] 1 Lloyd’s Rep. 156). Equally, there is in general no duty upon the bank to advise its customer that particular borrowing is or may be imprudent (Williams & Glyn’s Bank Ltd v Barnes (1980) 10 Legal Decisions Affecting Bankers 200; [1981] Com. L.R. 205; Frost v James Finlay Bank, RG Cozens [2001] Lloyd’s Rep. Bank. 302, 310-311).

There is, however, an implied obligation upon the bank to keep its customer’s affairs confidential. (Tournier v National and Union Bank of England [1924] 1 K.B. 461, United Pan-Europe Communications NV v Deutsche Bank AG [2000] 2 B.C.L.C. 461; Cristofi v Barclays Bank Plc [2001] 1 W.L.R. 937; see Warne & Elliott, Banking Litigation, 2nd edn (2005), Ch. 8; Nete & Godfrey, Bank Confidentiality, 5th edn (2011)).

A bank notified of a freezing order does not owe a duty in tort to the party that has obtained the order to take care to prevent the dissipation of money in the frozen account (Customs & Excise Commissioners v Barclays Bank Plc [2006] 3 W.L.R.1). The bank may be exposed to claims by a third party victims of its customer’s conduct, for example, where a collecting bank has received monies transferred in breach of trust and applied those monies to repay an overdrawn account (See Agip (Africa) Ltd v Jackson [1990] Ch. 265 (Millet J.); affirmed [1991] Ch. 547). In addition, there is a burgeoning statutory regime imposing potential civil or criminal liability upon the bank in certain situations aimed at preventing criminal activities such as money laundering (Financial Services and Markets ct 2000; Drug Trafficking Act 1994; Money Laundering Regulations 2003; Proceeds of Crime Act 2002) and terrorism (Terrorism Acts 2000 and 2006) which requires banks to establish and maintain strict identification, record keeps and internal reporting procedures.

Until 2009, the conduct of banking business was subject to a system of self-regulation in the form of the Banking Codes. These were voluntary codes of practice to which all high street banks and building societies, as well as many other financial organisations, subscribed. However, on November 1, 2009, the Financial Services Authority introduced detailed external regulation of the conduct of business of banks in the form of the rules set out in the Banking Code of Business Sourcebook section of the FSA Handbook. Banks are also now subject to the Payment Services Regulations 2009 and the Lending Code.

Accounts in credit

A bank account is a statement of the extent of indebtedness as between the bank and its customer. Where an account is in credit, the bank is indebted to the customer; where the account is overdrawn, the customer is indebted to the bank. Moneys deposited by the customer with his bank may be appropriated by the bank for its own use, the deposit merely creates a chose in action, so that the bank is liable to repay the debt owed to the customer in accordance with the agreement between the parties (Joachimson v Swiss Bank Corp [1921] 3 K.B. 110). However, in the absence of agreement to the contrary, the customer’s cause of action against the bank is not completed until demand is made, at which point time begins to run for the purposes of the Limitation Act 1980 (For an example of the relevance of the rule in Joachimson in the limitation context see National Bank of Commerce v National Westminster Bank [1990] 2 Lloyd’s Rep. 514, applying Limpgrange Ltd v BCCS SA [1986] F.L.R. 36. See also Deutsche Morgan Grenfell Group Plc v Inland Revenue Commissioners [2006] 3 W.L.R. 781). Unless the demand, properly construed, also amounts to a termination of the banker-customer contract, it does not bring that contract to an end, with the result that the customer is entitled (in the absence of an express or implied contractual limitation) to make a further demand so that time will begin to run from the later demand (Bank of Baroda v Mahomed [1999] Lloyd’s Rep. Bank. 14).

Overdrawn accounts

When a customer has an overdraw account he owes a debt to the bank in the sum of the debit balance. The basic contractual rule is that the time when payment is due to be made by the customer is a question of construction of the contractual terms. Overdraft facilities will commonly be repayable on demand by their express terms. However, in the absence of express agreement, the general rule is that an overdraft is repayable on demand unless the lender impliedly agrees to the contrary (Williams and Glyn’s Bank Ltd v Barnes (1980) 10 Legal Decisions Affecting Bankers 200; [1981] Com. L.R. 205). Where the facility letter states that the facility is repayable on demand, but also provides that the bank’s present intention is to make the facility available until a specified future date, the bank nevertheless retains the right to call in the facility at will at any time (Lloyds Bank v Lampert [1999] 1 All E.R. (Comm) 161). No duty of care is owed to the customer or an interested third party when a bank exercises its rights of withdrawal of overdraft facilities at will (Chapman v Barclays Bank [1997] 6 Bank L.R. 315). In Lloyd’s Bank Plc v Voller, ([2000] 2 All E.R. (Comm) 978; [2001] Lloyd’s Rep. Bank 67; applied in Emerald Meats (London) Ltd v AIB Group (UK) Plc [2002] EWCA Civ 460) the Court of Appeal held that where a current account is opened by a customer with no express agreement as to what the overdraft facility should be, then, where a customer draws a cheque which causes the account to become overdrawn, the customer implied requests the bank to grant the customer an overdraft upon its usual terms as to interest rates and charges.

Account charges

Banks customarily levy charges to some of their account holders. It was contended in Office of Fair Trading v Abbey National Plc ([2010] 1 A.C. 696) that the OFT should be entitled to investigate whether standard bank charges arising out of unauthorised overdrafts were unfair within the meaning of reg.5(1) of the Unfair Terms in Consumer Contracts Regulations 1999. The Supreme Court held that since such bank charges constituted part of the price or remuneration for the banking services supplied as a whole, they did not fall to be assessed under reg.5(1) since they fell within the exception in reg.6(2) of the Regulations.

The bank’s right of set off

A bank has the right to combine two or more accounts held by its customer without notice, and to set one off against the other in the absence of agreement to the contrary (Halesowen, Presswork and Assemblies Ltd v Westminster Bank Ltd [1971] 1 Q.B. 1 at 34 (reversed on different grounds: [1972] A.C. 785)). The accounts need not be at the same branch (Garnett v McKewan (1872L.R. 8 Ex.10). The right of set off provides a defence, for example, to a claim of wrongful dishonour of a cheque, since a bank may legitimately refuse to honour a cheque if the overall balance of the customer’s accounts is insufficient to satisfy the cheque. The bank is not required to notify the customer of its intention to exercise the right of set off, and the right is not limited to current or other similar accounts (Halesowen, Presswork and Assemblies Ltd v Westminster Bank Ltd [1971] 1 Q.B. 1 at 9). However, set off is excluded where, for example, one account is a current account repayable on demand and the other is a term loan account not repayable on demand (Bradford Old Bank Ltd v Sutcliffe [1918] 2 K.B. 833). Nor is there a right of set-off where the accounts are not held in the same right, such as where one of the accounts is a trust account. (Re Gross Ex p. Kingston (1871) 6 Ch. App. 632).

Unauthorised payments

Breach of mandate

Where a customer gives instructions for the transfer of monies (whether by drawing a cheque or otherwise) it is necessary to distinguish between the paying bank (which honours the payment instruction) and the collecting bank (which receives the payment and credits its customer’s account). Sometimes the collecting bank and the paying bank may be one and the same, for example where the payee of a cheque maintains his account at the same bank as the drawer (See generally Encyclopedia of Banking Law, para. D(202)).

The primary duty of the paying bank is to honour its customer’s instructions and make the payment in accordance with the mandate (Joachimson v Swiss Bank Corporation [1921] 3 K.B. 110). The payment instruction can take a number of forms, including a cheque, an order to pay by direct debit, a standing order, or (increasingly) an electronic funds transfer instruction (See generally, Paget’s Law of Banking, 13th edn (2007), Ch. 17) (e.g. transfers effected by online banking, or withdrawals via an ATM). In all such cases, however, the fundamental principle is the same: where a bank makes a payment in the absence of authority from its customer, it has no right indemnity against its customer, and hence no entitlement to debit the customer’s account with the amount of the payment (Paget’s Law of Banking, 13th edn (2007), para. 19.2).

However, a bank is only obliged to honour a cheque or other payment order if there are sufficient funds in the customer’s account to meet the cheque or order, or if the bank has agreed to provide the customer with overdraft facilities to meet the cheque or order. In drawing a cheque or otherwise requesting a payment against inadequate funds, a customer impliedly requests the bank to grant an overdraft (or an increased overdraft facility, as the case may be). The bank then has an option whether or not to accede to that request and hence honour the cheque or payment order (Verjee v CICB Bank and Trust Co (Channel Islands) Ltd [2001] Lloyd’s Rep. Bank. 279 at 282). If the bank elects to honour the cheque, bringing the account into overdraft, it does so (in the absence of an agreement to the contrary) upon its standard terms as to interest and charges (Lloyds Bank Plc v Voller [2000] 2 All E.R. (Comm) 978; [2001] Lloyd’s Rep Bank. 67).

Where the payment instructions received by the bank are ambiguous, the bank must at least adopt a reasonable interpretation of its instructions, although the prudent course is for the bank to seek clarification from its customer (European Asian Bank AG v Punjab & Sind Bank (No. 2) [1983] 1 W.L.R. 642 at 656; Patel v Standard Chartered Bank [2001] Lloyd’s Rep. Bank 229 at 234; cf, Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep. 147 at 153 (approved by the Court of Appeal in Credit Agricole Indosuez v Muslim Commercial Bank Ltd [2001] 1 Lloyd’s Rep. 275)). If it fails to do so, the bank may find that it has acted in the absence of, or contrary, to its instructions (as properly interpreted), and hence face a claim for breach of mandate (See generally, Brindle & Cox, Law of Banking Payments, 3rd edn (Sweet & Maxwell, 2004), paras 3-070, 3-080).

A sum standing to the credit of a joint account is a debt owed by the bank to the account holders jointly. Where the mandate in respect of the joint account requires that the paying bank will only make payments out of the account on the joint signatures of both of the account holders, there is a separate agreement between the bank and each of the account holders that the bank will not honour drawings unless both account holders have signed them. In an action for breach of mandate where the bank has wrongfully honoured an instruction by a single account holder it is not necessary to join all the account holders as parties to the proceedings (Caitlin v Cyprus Finance Corp (London) Ltd [1983] Q.B. 759). The innocent joint account holder must be able to establish that the funds wrongfully transferred out of the account were his property. Where such facts cannot be provide, the innocent holder is entitled only to recover a moiety of the amounts paid out (Twibell v London Suburban Bank [1869] W.N. 127; see also Arden v Bank of New South Wales [1956] V.L.R. 569). Where a bank is found liable in these circumstances it may be able to claim contribution from the recipient of the funds wrongfully paid out for moneys had and received and/or for breach of warranty of authority.