Commercial Law: Bank/Customer Relationship

Lord Denning in UDT v Kirkwood 1966 outlined 4 characterisitcs:

 1. Accept £ from and collect cheques for customers and place in credit

2. Honour cheques drawn by customers when presented for payment and debit customers a/c.  3. Keep current a/c's or similar for which debits and credits entered

4. Reputation (stability, soundness and probity)(Harman LJ dissented with this: 'not enough')

- UDT v Kirkwood: regarded bank by London big 5, Diplock more cautious but dangerous if big 5 incorrect, said met first 3 requirements, Denning=all 4, Harman said none - policy argument!!    

- Common law assists with lack of concrete defintion: Becomes customer when a/c opened: Taxation Commissoners v English, Scottish & Australian Bank: cheque written & stolen and thief entered bank as fake person and opened a/c in fake name to pay stolen cheque in and took £ out. Comm brought claim against bank in conversion but Q was whether thief had become customer of bank by 1 transaction. Is 1 transaction enough? Lord Duene held yes! customer when a/c first opened 'customer signifies a relation when duration is not of the essence'. 

- Bank a/c not essential to be a customer: Woods v Martins Bank (Justice Salmon): young man w/no business experience inherited £,wrote to bank manager asking for financial advisor. Woods invested £5k into bank managers advised company,said 'wise investment', CL opened bank a/c,invested more £+loaned £3k. Company=large overdraft,manager pressured to reduce. Cl lost all £+claimed negligence. When advice first given, no a/c, but Justice Salmon=when bank received instructions = relationship formed despite no bank a/c. Bank owed duty to advice w/reasonable care and skill. Financial advise may suffice. Confirmed in Warren Metals v Colonial (NZ) 'account w/bank or relationship that bank/customer exists even though no bank a/c'. 

- Authority: is a necessity. Stoney Stanton Supplies v Midland Bank (Lord Denning): fraudulently opened a/c=no breach of duty as relation of bank/customer didn't exist.No meeting of minds.

1. To honour customers mandate (9 exceptions)

2. To obey the customers countermand: (2 requirements)

3. Duty of care (implied term - contract and tort)

4. Duty of confidentiality (4 exceptions)

- Sierra Leone Telecommunications Co v Barclays Bank whereby Cresswell J affirmed that it is a ‘basic obligation owed by a bank to its customer that the bank will honour on presentation a cheque drawn by the customer on the bank’.

Exceptions:

1. Insufficient funds and no overdraft  2. Out of date (6 months)

3. Ambiguity in instructions: London Joint Stock Bank Ltd v Macmillian(Lord Haldane)= mandate must be in the ‘form which does not leave room for misgiving’. 

4. Bank has reasonable grounds to believe mandate not authorised: Lipkin Gorman v Karpnale Ltd (May and Parker LJ) Respectable man partner in CL solicitor firm with gambling addication and withdrawing funds from client a/c £200k, bank aware of addiction but allowed to withdraw 63 cheques. Bank not liable as only exceptional circumstances to refuse to honour mandate for 'commercial wisdom' and bank no reason to believe a possibility and no breach of duty. LJ May: 'First test = 'any reasonable cashier would hesistate to pay a cheque at once and refer it to superior and when any reasonable superior would hesistate to auth payment w/out inquiry. Parker LJ second test: 'if a reasonable and honest banker knew of the relevant facts would consider a serious or real poss (not probability) that customer may be being defrauded'. 

5. Contains proceeds of crime: section 328(2) of the Proceeds of Crime Act 2002. If bank knows or believes then not liable if auth'd disclosure made: Squirrel v National Westminster Bank (mere suspicion = fine).  

6. 3rd party debt order: part 72 Civil Procedure Rules 1998 (interim/final orders) 

7. Freezing order: section 37 of the Senior Courts Act 1981

8. Winding up of company: s. 127 Insolvency Act 1986

9. Bankruptcy: s.278 (a) and 284(1) Insolvency Act 1986

10. Bank a/c closed: can refuse. 

Section 75 Bills of Exchange Act 1882: 2 REQUIREMENTS:

1st Requirement: countermand must be clear and unambigious: HoL's Westminster Bank v Hilton (ambigious instructions with ref to incorrect cheque so dismissed claim)

2nd Requirement: countermand must be brought to actual notice of bank: Curtice v London City and Midland Bank Ltd (customer changed mind after 5pm and called the bank asking for a countermand of the original cheque. The telegraph was delivered and placed in a letterbox as it was after hours and the box was not checked and the telegram not brought to notice until 2 days later and therefore the cheque was presented and paid. The bank did not have actual notice and therefore there was not a successful countermand.)

Remedies/defences availed to bank who pays £ in error as overlooked a countermand:

1. Money had and received: Barclays Banks v WJ Simms      2. Tracing in equity

3. Payments made for the benefit of the customer (B Liggett v Barclays Bank). 

Duty of care: CONTRACT (implied)

- Must exercise reasonable care and skill in their capacity as a banker

- Barclays Bank v Quincecare (Steyn J) (whether bank when exercising order given by the chairman of corporate customer has been put on inquiry that the chairman was acting for his own benefit ‘reasonable grounds for believing that the order is an attempt to misappropriate the funds of the company’.

- Lipkin Gorman v Karnape (May LJ) “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 inquiry, that a cheque should not be paid immediately on presentation.” Parker LJ: “the question must be whether, if a reasonable and honest banker knew of the relevant facts, he would have considered that there was a real or serious possibility, albeit not a probability that its customer might be being defrauded”.

- Verjee v CIB Bank (J Hart): when signature not a/c holder i.e. director of corporate a/c: being put on inquiry much more likely. 

Duty of Care: TORT

Voluntary assumption of responsibility: Hedley Byrne v Heller (bank gave negligent ref about customer to 3^rd party. 3^rd party incurred substantial losses and HoL’s held that there was no contractual relationship but a duty in tort where there is a voluntary assumption of responsibility). 

Reliance, foreseeability, proximity, fair and just and reasonable: Caparo (Lord Bridge) (audited accounts relied upon to invest+£ often lost when reliance on a/c's, however held that the advisor must have known certain things about person i.e. identity+thus there was a lack of proximity because the information was available to all of the general public+therefore no proximity). 

- RBS v Bannerman (audited accounts, investor suffers lost but this case was different to Caparo because there was a close relationship and they knew of the reliance of the accounts and the proximate element was sufficiently made out) and Riyad Bank v Ahli United Bank (investors cannot exclude liability as are advisers and the liability is v. strong)

- Lloyds Bank v Cobb (Scott LJ) (General: bank not under a duty to warn a customer about the risks of transaction) confirmed in Williams & Glyn Bank v Barnes BUT...Verity v Spindler v Lloyds Bank (Taylor J) (buying house and used banks' advisory service on commercial wisdom so liable). 

Legal duty arising from the bank/customer relationship 

- Tournier v National Provincial and Union Bank of England (Atkin LJ & Bankes LJ) (customers a/c was heavily overdrawn and a cheque was drawn down on Tournier but paid into a 3^rd party account not his own and when the bank noticed this, called his employer to advise that he was indebted to the bank and a bookmaker and Tournier’s employer failed to renew his contract and he lost his job. Tournier claimed slander and implied term that the bank wouldn’t disclose the state of his bank account and breach of confidentiality and the CoA agreed and awarded damages Atkin LJ: The duty ‘extends beyond the period when the account is closed or ceases to be an active account’ and ‘there must be strict observance of that confidence’.  Bankes LJ in the same case asserted that ‘the duty is legal arising out of a contract but not absolute and is qualified'... 

4 exceptions.....

The exceptions/qualifications to the duty of confidentiality: (as outlined by Bankes LJ)

1. Compulsion: Disclosure compulsory by law - Police & Criminal Evidence Act 1984, Insolvency Act 1986, Proceeds of Crime Act 2002 and Terrorism Act 2000. Norwich Pharmacal Co v Customs & Excise Commissioners 1974 (Norwich Powers of the court i.e. give full info and indentify the wrongdoer if mixed up with acts of others) and Bankers Trust Co v Shapira 1980 (fraud and the bank ordered disclosure of confidential information to assist a victim to trace his funds and the court stated that it is a strong thing to disclose the state of a customers account and the documents relating to it but the order was granted with severe implications). Road into common law duty of confidentiality and thus erodes confidentiality?

2. Duty to public (rare): duty to the public to disclose - Permits rather than compels: the balance of confidentiality vs. public interest: Price Waterhouse v BCCI Holdings (J Millet) (disclosure of confidential information requiring clients of BCCI for purposes of the Bingham Inquiry to investigate statutory footing. No statutory power to disclose and PWH applied to the court to see if required and the court held that the disclosure was permitted where Justice Millet held that the duty of confidentiality may be outweighed by a higher public interest). The Jack Committee recommended abolition but government refused. This doesn't erode confidentiality. 

The exceptions/qualifications to the duty of confidentiality: (as outlined by Bankes LJ)

3. Interests of bank: interests of the bank require disclosure - Sutherland v Barclays Bank 1938 (cheque dishonoured by bank as insufficient funds and as cheques for gambling. Convo with bank with husband and customer when the husband interrupted and the bank disclosed that the cheques were made out of bookmakers and insufficient funds. The court dismissed the wife’s claim for damages as the disclosure was justified so that the bank could protect its own reputation. However, bank could have just disclosed ‘insufficient funds’ rather than ‘gambling’ which in academic commentary is argued as going a step too far & this decision is very criticised. Cranston Principles of Banking Law 2002: ‘should never ever be a qualification based on the interests of the bank, only a higher public duty’. The decision allows the banks to abuse the duty of confidentiality immensely and this severely erodes the common law duty of confidentiality. This qualification should be interpreted very narrowly, which isnt the case in Sutherland.

4. Express/implied by customer: Turner v RBS (‘if the practice is to bind the customer, it must be notorious’ and the CoA held that it was not sufficiently notorious practice to become an implied term and the customer must give express consent) and the Lending Code 2009. Qualification is narrow and the duty of confidentiality is not eroded. 

Other sources of duty of confidentiality:

1. The Jack Report: Banking Services Law and Practice (83 recommendations: examined Tournier 3rd exception of interests of bank. Recommended damages for breach of confidentiality should include compensation for distress, embarrassment or inconvenience, regardless of whether financial loss could be proved.No such legislation was introduced. The government did not accept that there had been a massive erosion of the duty. The government has since enacted extensive additional legislation which further undermines the obligation of confidentiality, creating a new suspicion based reporting regime. The government will argue that the further inroads are justified in the fight against terrorism, drug trafficking and other serious crime.

2. Data Protection Act 1998

3. The Lending Code 2009

4. Human Rights Act 1998 (Art 8 ECHR) (Douglas v Hello! 2005)

1. 'Confidentiality diminishing’ 1995: Howard Johnson ‘generally accepted that duty is being defined in scope as new draconian methods are introduced’.

2. Joan Wadsley: 1990: ‘Bank confidentiality: a much reduced duty’: ‘customers would be well advised to keep your money under your mattress’ =shows the extent the duty has been undermined. Case note on Barclays v Taylor (D suspected of fraud,police obtained orders to disclose various docs/a/c's, bank complied w/out notifying D, unsuccessfully tried to set order aside as lack of notification+breach of confid, court=no implied obligation to give notice, contrary to Jack Committee recommendations that Tournier should be interpreted restrictively). Tournier in 1924 v. few exceptions where disclosure permitted,now many more inroads. Case indicates the increasing concern about erosion of a once sturdy common law concept. 

3. Roy Goode: 1989: The banker's duty of confidentiality: No discussion of what types of financial institutions are bound by duty of confidentiality=even thornier q's. Does it include shops/stores that customers hold a/c with?Warmly welcomes Jack Reforms that law should clarify and erosion of breach of confid be halted: tournier should be codified, duty to public should be abolished, ground of protection4bank should be confined to disclosure of court, do not enlarge exceptions to duty of confid w/out taking full a/c of consequences. More literature devoted to exceptions than scope of duty itself yet remain many uncertainties. 

4. Griffiths & Robert-Tissor 'Neates Bank Confidentiality: 2006: 'ultimately, public interest may well result in bank confidentiality being no longer the rule, but the exception'. 

1. Duty not to draw cheques to facilitate fraud or forgery: London Joint Stock Bank Ltd v Macmillian (Lord Finlay) 1918 (entrusted a clerk to write cheques for them and presented a cheque to the directors. Clerk added figures and the clerk presented for payment and obtained the money, just a blank cheque with the numbers in the box – bank entitled to debit the account for the forged amount and company were in a breach of their duty to take care when drawing cheques. Customer breached duty and bank were entitled to debit for the full forged amount).‘the customer is ordered to exercise reasonable care and will be responsible to banker as a natural consequence of this breach of duty’.

- S.64 Bills of Exchange Act: gen position: where cheque materially altered w/out consent of all parties liable,bill=voided+bank has no right to debit account+cheque is worthless.

2. Duty to inform bank of forgery as soon as customer has actual notice: Greenwood v Martins Bank 1933. (Wife was forging cheques and she withdrew the money, the husband was aware but the wife persuaded him not to inform the bank and the husband kept quiet for 8 months. When the husband did reveal to his wife what he was going to do, he went to the bank but changed his mind but the wife committed suicide and the husband brought a claim for £. HoL’s held that there was a duty to reveal as soon as he had notice so that the bank could take reasonable steps and 8 months meant that the husband was estopped & not entitled to claim the withdrawn funds.)

3. Wider duty? Tai Hing Cotton Mill  (Lord Scarman) (forged cheques by accounts clerk  - as soon as company aware they notified the bank and the bank claimed that the customer has a wider duty i.e. to check monthly bank statements but the Privy Council rejected the banks argument and reiterated the only 2 duties in existence in law – very criticised but defended notoriously as bank in a better position to absorb losses and a wider duty should not be imposed. Also delivered a potentially stunning blow to the future merging of contract and tort into a law of obligations. 

- James Cairns 'Banks and Obligations': Lord Scarman's perception of banking is founded on misunderstanding of tradit common law approach2respective obligations of bank/cust, which emphasized their mutuality. To hold customers to the duties expounded at the beginning of this century=deny the mutuality principle= the classical analysis of bank/cust relationship is and should be rooted. If courts treat banks as insurers=no incentive for customer to adapt+utilize reasonable accounting procedures to reduce forgery by dishonest employees. Encouraging customers to take reasonable care isnt an unreasonable policy for the law to advocate.

- Kepitigalla Rubber v National Bank of India Ltd (Bray J): "the number of cases where bankers sustain losses of this kind are infinitesimal in comparison with the large business they do, and the profits of banking are sufficient to compensate them for this very small risk. To the individual customer the loss would often be very serious; to the banker it is negligible.”

5.  "A bank is bound to act according to the mandate given by its customer." Discuss.

6. 'Banking confidentiality is an important part of one's private life and as such warrants protection. It is lamentable that this fact has been diluted in recent years by the erosion of the common law duty of confidentiality' (Robert Stokes,2007). Discuss.