The banker customer relationship is a contractual relationship.

A contract is a voluntary,
deliberate, and legally binding agreement between two or more competent parties.
Contracts are usually written but may be spoken or implied. A contractual relationship
is evidenced by an offer, acceptance of the offer, and a valid (legal and valuable)
consideration. Each party to a contract acquires rights and duties relative to the rights
and duties of the other parties. A contract creates for each party a duty to do something
(e.g., to provide goods at a certain price according to a specified schedule) or a duty not
to do something (e.g., to divulge an employer's trade secrets or financial status to third
parties).A banker customer relationship is no exception it also yield right and
obligations for both parties.

Bankers lien: In the creditor and debtor relationship between the banker and
the customer, the banker is the creditor and the customer is the debtor. This
relationship arises when an amount remains due by the customer (debtor) to the banker
(creditor). The banker can exercise his right of general lien by retaining the properties of
the customer till all the dues are paid by the customer. In the absence of any agreement
to the contrary, the banker can retain any goods and securities for general balance of
accounts. However, the banker cannot exercise this right over the goods or securities
which he has received in the capacity of agent or trustee of the customer.

Rights of Automatic set- off: The right of set-off is a right to adjust the
accounts between two parties- creditor and the debtor. On the basis of right of set- off,
the banker can adjust the credit balance in the customers account against the amount
due to the banker i.e. any debit balance in the customers account. When a customer
maintains two accounts in the same capacity, the right of set- off enables the banker to
combine the two accounts and adjust the amount due from the customer. The banker
can exercise this right if there is no agreement to the contrary between them. In
exercising this right, the banker must serve a notice to the customer.
A banker has the automatic right of set-off in the following circumstances
(a) On death, insanity or insolvency of the customer.
(b) On the insolvency of partner of a firm or on the winding up of a company.

(c) On receipt of a Garnishee Order. The banker on receipt of a garnishee order can
exercise the right of set-off and surrender only the surplus to the judgement creditor
(d) On receiving notice of assignment of a customer's credit balance and
(e) On receiving notice of second mortgage over the security charged to the bank.
Although the banker has the statutory right of set-off, yet by way of caution he obtains
from the customer a letter of set-off duly signed in the presence of a witness to protect
the banker from any possible future objection to the exercise of his right of set-off.

Right of appropriation: When a debtor (customer) makes payment to a creditor

(banker), the debtor can instruct the creditor to adjust the amount for discharge of a
particular debt. If the debtor does not give any instruction to the creditor regarding the
adjustment, the creditor has the right to appropriate the amount against any debt. The
creditor must inform the debtor regarding such appropriation.

Right to Charge Interest and Commission: A banker has an implied right

on the customer to charges for various services rendered to them. Such charges are
known as bank charges/commission. These are required to be reasonable.

Rights under Garnishee Order: Generally a banker has the obligation to

honour the cheques of his customer. But in case a garnishee order is issued by the court,
the banker cannot make any payment from the account of the customer. The obligation
of the banker to honour the cheques stand suspended in that case.
Let us see how a garnishee order can affect the relationship between the banker and the
customer. Suppose Mr. A is the customer of SBI. He has taken a loan from his friend Mr.
B. But Mr. A fails to repay the loan to Mr. B and as a result Mr. B files a case against Mr.
A. Now Mr. B requests the court to issue an order on the bank of Mr. A directing the
banker (SBI) not to make any payment from the available balance in the account of Mr.
A. If the court issues such an order, it is known as Garnishee Order. Here, Mr. A
(debtor) is known as judgement debtor, Mr. B (creditor) is known as judgement
creditor and the SBI is known as garnishee.

The garnishee order is issued in two phases. First, order nisi is issued directing the
garnishee (banker) not to make any payment from the account of the garnishee debtor.
The garnishee is asked to give his reply in the court whether the funds in the account of
the garnishee debtor can be appropriated towards the payment of the particular debt in
question. If the garnishee has no objection then in the second phase the court issues the
order absolute i.e. the garnishee order, to make the payment to garnishee creditor to
satisfy the debt from the account of the judgement debtor. Then the bankers obligation
to the customer (garnishee debtor) is discharged to that extent.

There are a number of duties of banks. Some relate to the basic business of banking such
as:
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
However the duties of care and skill and of confidentiality require particular
consideration.

Banker's Right of Automatic Set-Off: A banker has th automatic right of set-off in the
following circumstances
(a) On death, insanity or insolvency of the customer
(b) On the insolvency of partner of a firm or on the winding up of a company.
(c) On receipt of a Garnishee Order. The banker on receipt of a garnishee order can
exercise the right of set-off and surrender only the surplus to the judgement creditor
(d) On receiving notice of assignment of a customer's credit balance and
(e) On receiving notice of second mortgage over the security charged to the bank.

Although the banker has the statutory right of set-off, yet by way of caution he
obtains from the customer a letter of set-off duly signed in the presence of a
witness to protect the banker from any possible future objection to the exercise of
his right of set-off.
05. Right to Charge Interest and Commission: A banker has an implied right on the
customer to charges for various services rendered to them. Such charges are known
as bank charges/commission. These are required to be reasonable.

Banker customer relationship,is just a special contract where a person entrusts valuable items
with another person with an intention that such items shall be retrieved on demand from the
keeper by the person who so entrust.
Thus the banker is the one who is entrustd with the above mentioned valuable items,whie the
person who entrust the items with a view to retrieving it on demand is called the customer.
The relationship is thus based on contract.It is based on certain terms and conditons.For
instance,the customer has the right to collect his deposit on demand personally or by proxy.The
banker too is under obligation to pay, so long the proxy is duly auhorised by the customer
It has a semblance of creditor /debtor relationship.Thus the customer is the creditor who has the
right of demand on the money from the banker.As long as the banker is keeping the customer
items,the banker is indebted to the customer.
The elationship is also fiducial.The terms and conditons governing the relationship should not be
leaked to a third party,particularly by the banker.Also the items kept should not be released to a
third party without due authorisation by the customer.

Banker-Customer Relationship

The relationship between banker and customer is mainly that of a debtor and creditor. However, they also share other
relationships.
Some of the important relationships they share are depicted below.

The banker-customer relationship is that of a:

1.

Debtor and Creditor,

2.

Pledger and Pledgee,

3.

Licensor and Licensee,

4.

Bailor and Bailee,

5.

Hypothecator and Hypothecatee,

6.

Trustee and Beneficiary,

7.

Agent and Principal,

8.

Advisor and Client, and

9.

Other miscellaneous relationships.

Discussed below are important banker-customer relationships.

1. Relationship of Debtor and Creditor

When a customer opens an account with a bank and if the account has a credit balance, then the relationship is that
of debtor (banker / bank) and creditor (customer).
In case of savings / fixed deposit / current account (with credit balance), the banker is the debtor, and the customer is
the creditor. This is because the banker owes money to the customer. The customer has the right to demand back his
money whenever he wants it from the banker, and the banker must repay the balance to the customer.
In case of loan / advance accounts, banker is the creditor, and the customer is the debtor because the customer
owes money to the banker. The banker can demand the repayment of loan / advance on the due date, and the
customer has to repay the debt.
A customer remains a creditor until there is credit balance in his account with the banker. A customer (creditor) does
not get any charge over the assets of the banker (debtor). The customer's status is that of an unsecured creditor of
the banker.
The debtor-creditor relationship of banker and customer differs from other commercial debts in the following ways:
1.

The creditor (the customer) must demand payment. On his own, the debtor (banker) will not repay the debt.
However, in case of fixed deposits, the bank must inform a customer about maturity.

2.

The creditor must demand the payment at the right time and place. The depositor or creditor must demand
the payment at the branch of the bank, where he has opened the account. However, today, some banks allow
payment at all their branches and ATM centres. The depositor must demand the payment at the right time (during

the working hours) and on the date of maturity in the case of fixed deposits. Today, banks also allow pre-mature
withdrawals.
3.

The creditor must make the demand for payment in a proper manner. The demand must be in form of
cheques; withdrawal slips, or pay order. Now-a-days, banks allow e-banking, ATM, mobile-banking, etc.

2. Relationship of Pledger and Pledgee

The relationship between customer and banker can be that of Pledger and Pledgee. This happens when customer
pledges (promises) certain assets or security with the bank in order to get a loan. In this case, the customer becomes
the Pledger, and the bank becomes the Pledgee. Under this agreement, the assets or security will remain with the
bank until a customer repays the loan.

3. Relationship of Licensor and Licensee

The relationship between banker and customer can be that of a Licensor and Licensee. This happens when the
banker gives a sale deposit locker to the customer. So, the banker will become the Licensor, and the customer will
become the Licensee.

4. Relationship of Bailor and Bailee

The relationship between banker and customer can be that of Bailor and Bailee.
1.

Bailment is a contract for delivering goods by one party to another to be held in trust for a specific period
and returned when the purpose is ended.

2.

Bailor is the party that delivers property to another.

3.

Bailee is the party to whom the property is delivered.

So, when a customer gives a sealed box to the bank for safe keeping, the customer became the bailor, and the bank
became the bailee.

5. Relationship of Hypothecator and Hypothecatee

The relationship between customer and banker can be that of Hypothecator and Hypotheatee. This happens when
the customer hypothecates (pledges) certain movable or non-movable property or assets with the banker in order to
get a loan. In this case, the customer became the Hypothecator, and the Banker became the Hypothecatee.

6. Relationship of Trustee and Beneficiary

A trustee holds property for the beneficiary, and the profit earned from this property belongs to the beneficiary. If the
customer deposits securities or valuables with the banker for safe custody, banker becomes a trustee of his
customer. The customer is the beneficiary so the ownership remains with the customer.

7. Relationship of Agent and Principal

The banker acts as an agent of the customer (principal) by providing the following agency services:
o

Buying and selling securities on his behalf,

Collection of cheques, dividends, bills or promissory notes on his behalf, and

Acting as a trustee, attorney, executor, correspondent or representative of a customer.

Banker as an agent performs many other functions such as payment of insurance premium, electricity and gas bills,
handling tax problems, etc.

8. Relationship of Advisor and Client

When a customer invests in securities, the banker acts as an advisor. The advice can be given officially or unofficially.
While giving advice the banker has to take maximum care and caution. Here, the banker is an Advisor, and the
customer is a Client.

9. Other Relationships

Other miscellaneous banker-customer relationships are as follows:

o

Obligation to honour cheques : As long as there is sufficient balance in the account of the customer, the
banker must honour all his cheques. The cheques must be complete and in proper order. They must be presented
within six months from the date of issue. However, the banker can refuse to honour the cheques only in certain
cases.

Secrecy of customer's account : When a customer opens an account in a bank, the banker must not give
information about the customer's account to others.

Banker's right to claim incidental charges : A banker has a right to charge a commission, interest or other
charges for the various services given by him to the customer. For e.g. an overdraft facility.

Law of limitation on bank deposits : Under the law of limitation, generally, a customer gives up the right to
recover the amount due at a banker if he has not operated his account since last 10 years.
So, these were some important banker-customer relationships.

Read more: http://www.businessdictionary.com/definition/contract.html#ixzz2O3pEHoRh

A party's failure to honour a contract allows the other party or parties to bring an action for DAMAGES in a
court of law, though ARBITRATION may also be pursued in an effort to keep the matter confidential. In
order to be valid, a contract must be entered into both willingly and freely. A contract that violates this
principle, including one made with a legal minor or a person deemed mentally incompetent, may be
declared unenforceable. A contract also must have a lawful objective
Type of charge that gives a bank automatic claim over a borrower's property or assets that come in bank's possession in
the normal course of its business. Bankers' lien is both a possessory lien and special lien: the bank has the right to seize
and sell the defaulting borrower's property in its possession, after giving a reasonable notice but without going through the
foreclosure procedure. Enforcement of a banker's lien, however, may depend on the type of the property and the reason it
was handed over to (or came in possession of) the bank. Bills of exchange, credit cash-balances, negotiable securities
(such as cleared checks and drafts), and promissory notes, may be claimed under this lien. But it is not applicable where

the borrower's property was handed over to the bank for a specific purpose, such as for safe custody (as in the bank's safe
deposit boxes) or for sale through a department of the
Read more: http://www.businessdictionary.com/definition/banker-s-lien.html#ixzz2NF3lnRDq

01. Banker's Lien: A banker has the right of general lien in respect of the dues to
him by the customer. Lien is the right to retain property belonging to another until a
debt due from the latter is paid. In other words, it is the right of the creditor to
retain the goods and securities in his possession, belonging to the debtor, until his
debt due is paid. Lien, however, does not give right to sell unless such right is
expressly conferred by statue or by custom or usage. The right of lien may ba (a)
particular or (b) General.
02. Right of Appropriation: In case of several debts outstanding by the
debtor(customer) to the bank, question arises as to which of the debts is to be
discharged when payment is made by the debtor and the amount is not sufficient to
discharge all the debts.
03. Banker's Right of Set-Off: A banker has the right to set-off. This right entitles him
to adjust a debt balance in some account of a customer against any credit balance
in his other account(s). Accounts of a customer can be combined/set-off subject to
the following conditions, namely (a) If the different accounts are held by the same
parties in the same right, debit balance in his own account can not be adjusted with
the credit balance of trust account in his own name (b) The debt must have become
actually due. The right can not be exercised against further or contingent debt and
(c) There is no express or implied agreement to the contrary.
04. Banker's Right of Automatic Set-Off: A banker has th automatic right of set-off in
the following circumstances
(a) On death, insanity or insolvency of the customer
(b) On the insolvency of partner of a firm or on the winding up of a company.
(c) On receipt of a Garnishee Order. The banker on receipt of a garnishee order can
exercise the right of set-off and surrender only the surplus to the judgement creditor
(d) On receiving notice of assignment of a customer's credit balance and
(e) On receiving notice of second mortgage over the security charged to the bank.
Although the banker has the statutory right of set-off, yet by way of caution he
obtains from the customer a letter of set-off duly signed in the presence of a
witness to protect the banker from any possible futur objection to the exercise of his
ritht of set-off.
05. Right to Charge Interest and Commission: A banker has an implied right on the
customer to charges for various services rendered to them. Such charges are known
as bank charges/commission. These are required to be reasonable.

TOPIC 1 - BANKER - CUSTOMER RELATIONSHIP

Definition of a Bank
Importance of the definition:
(i) Certain rights and obligations attach to bank's in particular;
(ii) A bank is entitled to a statutory protection when paying and collecting cheques.
The Financial Services and Markets Act 2000 establishes a framework whereby the
Financial Services Authority authorises institutions to refer to themselves as banks.
Under the Act the definition of a bank is simply an institution authorised under the Act.
Therefore to assess what constitutes a bank, especially for the protection of the Bills of
Exchange Act 1882 and the Cheques Act 1957 it is necessary to look at the 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.
However under the Banking Act 1987 a business can only use the name "bank" if it has
paid up capital and undistributed reserves of more than 5 million.
Definition of Customer
A person becomes a customer when an account is opened and at the same time a
contract is formed as held in Commissioner for Taxes v English, Scottish and
Australian Bank [1920] AC 683 PC.

Equally well a person can only become a customer of the bank when a contract has been
formed with the bank. This includes investment advice as well as opening an account.
The contract is formed as soon as the bank accepts the customer's instructions Woods v
Matins Bank [1959] 1 QB 55. However a bank can be liable in tort for negligent advice
where a person is not a customer Hedley Byrne v Heller & Partners Ltd [1964] AC
465 HL
The contract of the banker customer relationship can be categorised as follows:
o Contracts between banks and large corporations with roughly equal
bargaining power
o Contracts between banks and small and medium sized enterprises (SMEs)
o Contracts between banks and consumer customers
The principal reason from the bank's point of view for determining when a person
becomes a customer is for the protection afforded in collecting a cheque under S.4
Cheques Act 1957. A bank is only protected from liability under the section if it collects a
cheque for a customer not just of the bank but also of the particular branch - LLoyds
Bank Ltd v E.B. Savory [1932] 2 KB 122 CA & [1933] AC 201 HL.
The Banking Code
The banker customer relationship firs came under scrutiny in the Review of Banking
Services Law and Practice in 1987, which reported in 1989 (the Jack Report) Cm 622
This was followed by a White Paper entitled Banking Services Law and Practice in
March 1990 - Cm 1026. Few recommendations were implemented, these mostly related
to electronic banking, bank cards and the account payee printed crossing on cheques.
However in December 1991 following a recommendation in the Review the British
Bankers Association, the Building Societies Association and the Association for Payment
Clearing Services adopted a voluntary code of Practice now referred to as the Banking
Code. In 1997 a Mortgage Code of Practice was published. In March 2002 a Business
Banking Code was published which seeks to protect the interests of unincorporated
business customers (e.g. partnerships) and small company customers (those with a
turnover of less than 1 million per annum) customers. The latest editions of the
Banking Code and Business Banking Code http://www.bankingcode.org.uk are March
2003 and of the Mortgage Code at http://www.fsa.gov.uk is April 1998.
The Codes are not legally binding as such although they may be considered to part of the
implied terms of the contract. In any event if they are not complied with then the courts
are more likely to find in favour of the customer. It requires the banks to establish a
written complaints handling procedure. A copy of the procedure must be given to a
customer on request or within 5 days of a complaint being made. The bank must issue a
holding (or final) response within 4 weeks and a final response within 8 weeks. The
complainant can then take the matter to the Financial Ombudsman Service (FOS)
http://www.financial-ombudsman.org.uk within 6 months of the receipt of the Banks

final response and within 6 years of the event, giving rise of the complaint or within 3
years of when the complainant ought to have become aware of the relevant facts. The
Financial Services and Markets Act 2000 established the FOS, which has compulsory
jurisdiction over institutions that are acting in the capacity of authorised persons
performing regulated activities under the Act e.g. banks. It hears complaints form bank
customers and non-customers who are guarantors of loans, payees of cheques backed by
cheque guarantee cards recipients of bankers references etc
The FOS will determine a complaint by reference to what it considers fair and
reasonable in all the circumstances of the case and taking account of the law, regulators
guidance Codes and good practice. It may make an award of up to 100,000 based upon
the complainants financial loss, pain and suffering or damage due to loss of reputation
or distress or inconvenience. It may also require disclosure of documents and require
the bank to take such action as the FOS consider just and appropriate.
The complainant can choose whether or not to accept the determination. If the
complainant accepts, the determination becomes final and is binding on both parties
there is no appeal except by judicial review by either party, which is an appeal to a the
High Court on a point of law - R v Financial Services Ombudsman [2003] 1 All ER
(Comm) 65. An award may be enforced through the courts if the Bank fails to comply.
The FOS cannot make an award against a complainant although it may dismiss a case if
it considers the complainant has suffered no loss or the claim is frivolous or vexatious or
that eh bank has already made an offer that is fair and reasonable.
If the complainant does not accept the determination of the FOS then he or she may
commence an action in the courts.
The Data Protection Act
As banks are computerised which means that they hold details or data about their
customers on computer they must comply with the Data Protection Act 1998.
Data processing is only legitimate where one of the following applies
a. where the individual consents
b. where it is necessary for the performance of a contract with the individual
c. where it is a required under a legal obligation
d. where it is necessary to protect the vital interests of the individual or to carry out
public functions
e. where it is necessary to pursue the legitimate interest of the business unless
prejudicial to the individual

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
The relationship is essentially one of contract. In Foley v Hill (1848) 2 HL Cas 28 HL it
was held that when a customer pays money into his account the bank becomes a debtor
to the customer who is the creditor. Therefore 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 as a
customer was about to pay it in was still the property of the customer; Chambers v
Miller (1862) 13 CBNS 125 money drawn by a customer from an account with
insufficient funds belongs to the customer as soon as it was handed over and the bank
had no right to forcibly take it back.
Implied Terms
As the money becomes the banks property the bank is free to do what it like with the
money and is not bound to account to the customer for what is does with the money.
The customer only has the right to be repaid the money owed on demand the bank is
not obliged to seek out its creditors, contrary to he general rule.
If the bank fails to repay the customer and becomes insolvent then the customer is an
unsecured creditor. Under s 323 Insolvency ct the customer may obtain a set off i.e. it
the bank owes money on one account and the customer owes money on another then the
customer may set off the debt on one account against the credit in the other.
Due to the customers vulnerability most countries offer a protection scheme. In the UK
the Financial services Compensation Scheme will refund 100% of a deposit up to 2,000
and up to 90% of the next 33,000 i.e. 31,700 maximum. Deposits in the same bank
are aggregated. The Scheme also pays out to investors and insurance policy holders.
Investors receive 100% of 30,000 and 90% of 20,000 i.e. 48,000 maximum.
Insurance policy holders receive 100% of the first 2,000 and 90% of the balance on an
unlimited amount. (100% if the insurance was statutorily required e.g. motor or
employer insurance)
In Joachimson v Swiss Bank Corporation [1921] 3 KB 110 CA the following were held to
be implied terms:
o The bank will receive the customers deposits and collect his or her
cheques;
o The bank will comply with written orders (i.e. cheques) issued by its
customers assuming there is sufficient credit tin the account;
o 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 for the application for the terms in
relation to UK banks
o The bank will give reasonable notice before closing a customers account if
it is in credit
o The customer will take reasonable care when writing cheques.
It was also held that although a bank may offer a variety of different services to a
customer the relationship is contained in one contract. There is not a contract for each
service.
In Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank [1986] AC 80 PC an implied term
was held to be:
o The bank must only act on its customers valid instructions and not on any
forgery of those instructions
Whereas it was held in London Joint Stock Bank v Macmillan and Arthur [1918] AC 777
HL and in Greenwoods v Martins Bank [1933] AC 51 HL that a customer only has
duties to:
o To exercise reasonable care when drawing cheques to prevent forgery and
alteration; and
o 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
Implied terms may generally be altered or excluded by an express agreement however
this is limited by some statutes:
o Liability cannot be excluded for death or personal injury resulting from
negligence - Unfair Contract Terms Act 1977 s 2(1)
o Liability for any other loss resulting from negligence can only be excluded
if it is reasonable to do so - Unfair Contract Terms Act 1977 s 2(2).
Whether or not it is reasonable will depend on the bargaining power
between the parties- Unfair Contract Terms Act 1977 schedule 2.
o When dealing with a consumer customer a bank cannot exclude or restrict
liability for a breach of contract nor is it be able to render a performance
substantially different from that which was expected of it Unfair Contract
Terms Act 1977 s 3(1)

o When dealing with a business customer on its standard written terms of

business a bank cannot exclude or restrict liability for a breach of contract
nor is it be able to render a performance substantially different from that
which was expected of it - Unfair Contract Terms Act 1977 s 3
o In contracts which are into individually negotiated any term which,
contrary to the requirement of good faith, causes a significant imbalance
in the parties rights and obligations to the consumers detriment is not
binding on the consumer. Unfair Terms in onsumer Contracts
Regulations 1999. This does not apply to the main subject matter of he
contract or to the adequacy of the price. It appears for this that the interest
rate of a loan cannot be challenged under this provision. In Director
General of Fair Trading v First National Bank [2002] 1 AC 481 HL a term
in a consumer loan agreement that made the borrower liable for interest
up to any beyond the time of a court judgement was held not to be
concerned wit the adequacy of the price as it was unlikely to affect the
price. In the event the clause was found to be fair.
o The bank must carry out its service to the customer with due care and skill
- Supply of Goods and Services Act 1982 s13. Any attempt to exclude this
will be subject to the Unfair Contract terms Act 1977 and the Unfair Terms
in Consumer Contracts Regulations 1999
The Banking Code requires contracts between banks and personal (consumer) and small
business customers to be fair.
Express terms
Over the years the banking relationship has become established and it is not thought
necessary to have an express contract and the agreement relies upon implied terms.
Although there is nothing to prevent an express contract being made between the bank
and its customer, which can take precedence over the implied ones, nevertheless it has
been held that any express terms must be made clear to the customer - Tai Hing Cotton
Mill v Liu Chong Hing Bank [1986] AC 80 PC.
Notwithstanding that usually terms are implied there are occasions where express terms
regulate specific aspects of the banking service and customers are given special notice of
these terms. The provision of the Banking Codes now require that certain matters are
made clear to customers in writing which in effect means that banks are including
express terms e.g. tariffs of charges for banking services.
Banks obtain a signed mandate from customers, which often set out a number of basic
terms. On signing the customer is bound by the terms of the mandate whether or not he
or she has read and understood them - L'Estrange v Graucob [1934]. However the
terms of such mandate may not be effective if there is any misrepresentation and any
ambiguities will be construed strictly and against the bank. Also any exclusion of the
bank's liability will be seen in the light of the Unfair Contract Terms Act 1977.

In relation to electronic banking there may be an express provision that the bank will
not be liable where the customer allows an unauthorized person to get access to the PIN
number or password.
The bank will usually have express terms to deal with Internet banking and for banking
with large companies.
However the express provisions must come within the Banking Code both in the way the
are presented and in their content e.g. in relation to consumer-activated cards the Code
states that the customer is only liable for a maximum of 50 unless the bank can show
that the customer did not take reasonable care or acted fraudulently.
Large corporate customers will normally make separate contracts with banks and are
usually considered to be on an equal contractual footing to banks.
Termination of the Contract
Termination by the Customer
The customer may demand repayment of the credit balance on the account at any time.
Merely because there is a nil balance in an account does not necessarily mean the
customer has closed the account and confirmation must b sought. Normally the bank
should close the account on request from the customer although the contract will not be
at an end until any overdrawn sums are repaid. Although the contract may be
terminated the relationship of banker customer remains indefinitely due to the bankers
duty of confidentiality.
Termination by the Bank
A bank may only close an account after giving reasonable notice and making provision
for outstanding cheques. One month has been held to be insufficient where the
customers dealings were particularly complex Prosperity Ltd v Lloyds Bank (1923)
39 TLR 372. However the Banking Code states that in normal circumstances at least 30
days notice should be given.
Termination by Law
The following will terminate the contract in law:
a) Death of the customer;
b) Mental incapacity of the customer
c) Bankruptcy or insolvency of bank or customer.
Duties of the Bank

There are a number of duties of banks. Some relate to the basic business of banking such
as:
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
However the duties of care and skill and of confidentiality require particular
consideration.
Duty of care and skill
S.13 Supply of Goods and Services Act 1982 qualifies the customer as a "consumer" and
so entitles him or her to the benefit of an unexcludable 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. However 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
When a bank pays or collects a cheque it does so as agent for its customer and as such it
owes a duty of care. It was held in Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340
CA & [1992] 2 AC 548 HL that a bank may be liable as agent for a customer if it pays a
cheque, which is drawn in accordance with the mandate from the customer even if it is
free from alteration if the bank knew or should have been aware of fraud or dishonesty.
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.
This test was applied in Barclays Bank v Quinceare Ltd [1992] 4 All ER 363 where a
loan was granted to a customer for the purchase of a number of chemist shops. Unichem
guaranteed the loan. The monies were transferred to the solicitor acting for the
customer who, on the instructions of the customer transferred them to an account in the

USA from where it was never recovered or repaid. The bank sued Unichem on the
guarantee. It was held that the bank were not liable as ther had been no suspicions
circumstances to alert the bank to fraudulent behaviour.
Other issues concerning the Bank's liability:
Box v Midland Bank [1979] 2 Lloyds Rep 391 - A customer asked for a loan to finance an
export contract and was told erroneously that permission would be a formality. The
customer arranged the contract but was refused the loan. The bank was liable for
negligent misstatement under Hedley Byrne v Heller
Redmond v Allied Irish Banks [1987] 2 FTLR 264 - A customer paid in endorsed
cheques marked not negotiable for a third party to his bank. The customer received
payment for the cheques, which he handed to the third party who absconded. Later the
cheques were dishonoured because they were obtained by fraud and the customer did
not obtain good title to them due to the not negotiable crossing. There was not duty on
the bank to warn the customer of the risks of accepting not negotiable cheques that had
been endorsed.
Verity and Spindler v Lloyds Bank (1995) CLC 1557 - A mortgage on a property was
obtained based upon the advice by the bank that the purchase was prudent. The priority
was sold at a loss and the bank was held liable for negligent advice. The bank had
offered financial advice, the project was of a business nature, the customers were
financially nave, the property had been inspected by the adviser and said to be good.
Gold Coin Joailliers SA v United Bank of Kuwait [1907] 7 Bank LR 60 CA - A rogue
impersonated A, a wealthy customer, and instructed the bank to give a reference to X.
On receiving the reference X released watches to the rogue on payment of cheque drawn
on A's account. The cheque was dishonoured as a forgery. No duty of care was owed by
the bank X. Both were victims - X lost.
Yorkshire Bank v Lloyds Bank [1999] a All ER (Comm) 153 - A cheque drawn on bank A
was stolen from bank B. The payee's name was changed and the cheque was paid into
bank C from which the thief obtained payment. Following Williams v Natural Life
Health Foods Ltd [1998] 1 WLR 830 HL neither B nor C were liable therefore A had to
stand the loss. The customer could not be debited as the cheque was worthless due to
the forgery.
Suriya and Douglas v Midland Bank [1999] 1 All ER (Comm) 612 CA it was held that he
bank has no obligation to inform the customer of the availability of new accounts which
may give a better interest rate that the customer's existing account.
Bank as Trustee
It has been established in Belmont Finance Corporation v Williams Furniture Ltd
(no.2) (1980) CA that 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.
Knowledge
It is important to know what knowledge is required for a stranger to incur liability. Agip
(Africa) Ltd v Jackson [1989] 3 WLR 1367. In Re Montagu [1987] Ch 264 it was held
that a stranger will not be liable where he or she had knowledge of facts which he or she
genuinely forgot at the relevant time or receipt.
There are several degrees of knowledge, which have been classified by Gibson J in
Baden v Societe Generale [1983] BCLC 325 as being of 5 types:
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.
The types of knowledge may be grouped as follows:
- 1., 2. and 3. may be described as wrong-doing;
- 4 and 5 might be described as being assumed knowledge and might be innocent if
careless;
- 3., 4 and 5. contain the phrase honest and reasonable person which indicates that a
person would have to have been acting in good faith to be able to claim that his or her
knowledge did not come within these categories.
It was believed that to have knowledge of a breach of trust that came within any of these
5 categories would mean that the stranger receiving the trust property would be liable as
a constructive trustee. However Megarry VC in 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.
In addition 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.
In Polly Peck International Plc v Nadir (No 2) [1992] 4 All ER 769 Scott LJ took the
view that the categories were not rigid and that they demonstrated possible degrees of
knowledge and that the key question was should the stranger have been suspicious.
In Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340 CA & [1992] 2 AC 548 HL it was
held that the bank may be a constructive trustee if it allows an authorised withdrawal
but in the knowledge that the funds were to be misapplied.
Receipt
In Agip (Africa) Ltd v Jackson [1989] 3 WLR 1367 Millet J held that to be a constructive
trustee the person receiving the trust property must have done so for his or her own use
and benefit. The question arose as to whether a bank would be a constructive trustee of
money in one of its accounts, which a trustee had placed there in breach of trust. Millet J
held that 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.
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.
Before Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 WLR 64 it was believed that
before a stranger could be held liable as a constructive trustee, the actual trustee or
fiduciary had to be a party to a dishonest or fraudulent design and not just a breach of
trust which might be innocent. The stranger would only be dishonest if the trustee was
dishonest.
Since Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 WLR 64 it is enough to show that
there has merely been a breach of trust and that the stranger dishonestly assisted in that
breach even if the trustee was quite innocent. Lord Nicholls in the case referred to the
hypothetical example of a dishonest solicitor who might advise a trustee to misapply
funds.

Before the case it was believed that the solicitor would not be liable because the trustee
was not fraudulent. However since the case the solicitor as the stranger would be liable
as a constructive trustee as he has dishonestly assisted even though the trustee might
escape liability by not being fraudulent or dishonest.
Hoffman LJ in Polly Peck International Plc v Nadir and Others (No 2) [1992] 4 All ER
769 distinguished between knowing receipt and dishonest assistance as follows:
"Although both knowing assistance and knowing receipt give rise to the equitable
remedy of accountability as a constructive trustee, the two causes of action are very
different.
Liability for knowing assistance is based upon wrongful conduct namely knowing
participation in a fraudulent breach of trust or fiduciary duty. Its common law analogy is
conspiracy to defraud.
Liability for knowing receipt is restitutionary, based upon the beneficial receipt of
money or property known to belong in equity to somebody else. The equitable remedy
depends upon the existence of a trust or fiduciary duty but the breach of trust or duty
need not have been fraudulent. The nearest common law analogy is money had and
received."
Four Requirements of Dishonest Assistance:
1. It is enough for there to a be a fiduciary relationship there does not have to be a
formal trust.
2. Since the Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 WLR 64 a stranger can be
liable as a constructive trustee when he or she has assisted in a breach when the breach
is innocent. There does not have to be a dishonest or fraudulent design involving the
stranger and the trustee or fiduciary.
3. The stranger must have assisted in the breach of trust and done some act which
promoted or advanced the unlawful object. In Brinks Ltd v Abu-Saleh (No 3) (1995) The
Times October 23 it was claimed that, following a robbery, bullion was being held by
certain persons as constructive trustees. It was alleged that Mrs E was an accessory to
the removal of the bullion to Switzerland as she accompanied her husband who was
carrying the bullion and that therefore she was liable as a constructive trustee as having
dishonestly assisted in the breach of trust. It was held she merely accompanied him and
did not assist.
4. It must be shown that the stranger acted dishonestly in order to be liable as a
constructive trustee. Lord Nichols in Royal Brunei Airlines Sdn Bhd v Tan suggested
that it was an objective test but with subjective considerations such as experience and
intelligence of the stranger and the reasons for acting as he or she did.
"Quistclose Trusts

In Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 HL If a bank receives
funds from an individual which it knows are to be held separately for the customer for a
specific purpose then the bank holds those funds for the individual as a constructive
trustee and if the funds are not used for the specified purpose they are to be held for the
benefit of the individual. Note the analysis of Quistclose in Twinsectra v Yardely [2002]
2 AC 164 HL where it was acknowledged that a bank may lend for a specific purpose
however this alone does not create a trust. The key issue is whether the funds were
intended to be at the free disposal of the borrower or whether they were only to be used
for a specific purpose. It was stated that the Quistclose trust was really just a resulting
(returning) trust. The money was lent for a specific purpose on the understanding that if
that purpose were not carried out then the money would return (result) to the lender.
Duty of Confidentiality.
A bank owes an implied duty to its customer not to divulge information about its
customers to third parties.
However Tournier v National Provincial and Union Bank of England (1924) CA set out
four exceptions:
1. Disclosure under Compulsion of Law
a) Court Order
Order to inspect entries in the Banker's books - S 7 Bankers 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 came to the person making the disclosure in the course of his profession
business or employment
b) The information caused the to know, or suspect or gives 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 moneylaundering 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 Banks Interest
This exception was successfully claimed in Sunderland v Barclays Bank Ltd (1938). The
bank dishonoured cheques of customer because there were insufficient funds in her
account and because the bank were also concerned about the customer's gambling. The
bank told husband and claimed that it was in its interest to do so. It was held the bank
was entitled to do so.
4. Disclosure with the Customers Consent
It is now common for banks to request customers for permission to give a reference.

Rights of The Bank

Interest
Where a customer has an overdrawn account the right of the lending bank to interest on
the debt may be expressed or may be implied from the customer's acquiescence in the
debiting of interest.
The bank will compound interest on a longstanding debt i.e. it will add the interest to
the capital at intervals so that interest is charged on unpaid interest. The right to
compound is also implied form the customer's acquiescence and survives the demand of
the bank for payment and the closing of an overdrawn account.
The Banking Codes oblige the banks to publish their interest rates n the on their Web
site and helpline and customers affected by the changes must be notified within 30 days
of the alteration.
Savings account customers must be informed of the interest rates and also details of the
provisions relating to superseded accounts. The Codes have extensive requirements for
interest rates.
Charges
Charges tend to be an express term of the contract. The Codes require customers to be
given details of charges for the day to day running of accounts including the charge for
an unauthorised overdraft, exceeding an overdraft limit and loan repayment arrears.
Where a tariff has been provided this will form an express term of the contract. The code
requires that where charges are made available on the banks web site and helpline.
Customers should be advised of any charges for services that do not relate to day-to-day
running before the services are provided. 14 days notice should be given of any charges
to be deducted in respect of standard account services on savings and current accounts.
Details of charges in relation to using automated teller machines (ATM) must be given
when the card is issued. The ATM must inform the card user in adance of the
transaction what charge will be made and by whom.
S.15 Supply of Goods and Services Act 1982 establishes an implied term in the absence
of an express term that the bank may make reasonable charges for its services.
Repayment on Demand
Where a bank permits a customer to borrow by overdrawing his or her current account
the bank is entitled to require payment on demand Titford Property Co v Cannon Street
Acceptances Ltd (1975)

Where however the bank has expressed the facility is available for a specific period then
the bank will not be able to demand repayment before this period has expired Williams
& Glyn's Bank v Barnes [1981] Com LR 205
If there are conflicting statements in the facility letter then the right to repayment on
demand is paramount Lampert v Lloyds Bank [1994] 1 All ER (Comm) 161 CA
Limitation
The Limitation Act 1980 provides that a cause of action in contract becomes statute
barred after 6 years. Therefore following the demand by the bank for repayment of an
overdraft the bank have 6 years within which to sue.
Appropriation of Payment
Appropriation of payments may arise in two situations:
1. Where a customer has two or more accounts with the same bank and he
or she pays money in the money will be appropriated to one of the
accounts.
2. Where a customer has one account and he or she pays money into it as
well as drawing cheques upon it appropriation will settle the issue of which
payment in relates to which payment out.
Generally it is the balance on the combined accounts or the final balance of a single
account that matters and so usually appropriation is not an issue.
However there are some occasions when a customer may have several overdrawn
accounts and the bank may prefer to keep a lower overdraft on one than another. E.g. if
a customer has a wages account then under insolvency law if this is overdrawn when the
customer goes into liquidation or is declared bankrupt then the liquidator or trustee in
bankruptcy is obliged to settle this account from the realisation of the assets in
preference to other accounts. Therefore the bank will prefer to reduce the overdraft on
other accounts rather than the wages account as that account will be the first debt to be
settled on insolvency.
With a single account when a customer pays money in he or she has the first right to
appropriate money paid in. This means that the customer of an overdrawn account may
prevent the bank from using a payment in to reduce the overdraft by appropriating the
payment by a payment out.
If the customer does not appropriate the bank may make an appropriation. If the bank
does not appropriate then if it needs to be decided which payment in relates to which
payment out the Rule in Clayton's Case applies which states that the first payment in
relates to the first payment out. Note Devaynes v Noble, Clayton's Case (1816) & Deeley
v Lloyd's Bank Ltd (1912) HL.

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 different accounts with same bank the bank has a common
law right to combine them without giving notice to the customer. This is so even if the
accounts are with different branches Garnett V Mc Kewan (1872) LR 8 Exch 10.
If there are more than two accounts the bank is free to combine any accounts of its
choice and to leave others intact.
However a customer has no right to instantly combine accounts.
A bank's right to combine accounts is limited:
a) Where the debit balance is not yet due, e.g. the due date for a loan has
not yet passed Jeffrys v Agra Mastermans Bank (1866) LR 2 Eq 674.
b) Where the debit balance of a loan account is due there is no right to
combine an account instantly as there is an implied agreement to keep
accounts separately (Bradford Old Office v Sutcliffe [1918] 2 KB 833 CA)
and a customer in these circumstances is entitled to notice before his or
her cheques are dishonoured. However this does noto apply to an already
frozen overdrawn account Halesown Presswork and Assemblies Ltd v
Westminster Bank [1972] AC 785 HL
c) An express agreement not to combine accounts will negate the banks
right to do so.
d) If an account is held that contains trust funds this cannot be combined
with an account with personal funds.
Equitable Right of Set Off
In Bhogal v Punjab National Bank [1988] 2 All ER 296 CA and Uttamchandani v
Central Bank of India [1989] NJLR 222 CA the banks held two accounts, one in the
name of X which is in credit and one in the name of Y which is overdrawn eh bank
believed both the accounts were nominee accounts operated by Z. The banks set off the
balance of one account against the other and refused to honour Xs cheques. The bank
was unsuccessful because:

o The bank has a duty to pay all cheques properly drawn by its customer
within a reasonable time. Therefore In order to be in a position to
dishonour the cheques drawn by X it should have obtained a mandate
expressly permitting Xs account to be used as security for Ys account.
o An equitable set off is only permitted if there is indisputable evidence that
the accounts were nominee accounts and that they were both operated by
Z.
Set Off following Insolvency
If either the bank or the customer is insolvent then the following principles apply:
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 therefore any
agreement not to set off or combine is void.
c) Any right to extend set off is void.
d) Debts, which were not yet due and payable, become due and payable as
soon as the customer or bank are insolvent and are therefore subject to
statutory set off.
e) Debits on a customers account after the bank had notice of insolvency of
the customer will not b subject to set off and credits on a customers
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 will
combine all of them but note preferential accounts (wages accounts)
g) Part VII of the Companies Act 1989 sets up an insolvency regime for
when a recognised investment exchange (Stock Exchange) becomes
insolvent.
Banker's Lien
A lien is a type of security, which carries the right to retain property belonging to
another pending satisfaction of a debt owed by the owner of the property. The goods
remain the property of the owner but the creditor has the right to retain them until the
debt is paid. In R v Turner 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. The lien does not carry the right to sell the goods to satisfy the debt (see
pledge). However a the Torts (Interference with Goods) Act 1977 enables a person to sell

goods in his or her custody and use the funds to satisfy any monies owed provided a
specified procedure is followed.
A pledge is a different type of 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.
Property that is subject to the lien includes 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., Johnstones Claim (1870) 40LJ Ch 286 that
are held as security are subject to the lien.
The limitations on the Bankers 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 customers 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
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 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.
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
Bank's have an established service of accepting items for safe custody incorporated into
their contract with the customer. This arrangement is known as:
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
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. It is possible for a bank to exclude liability for
negligence Coldman v Hill [1919] 1 KB 443 but the exclusion must be reasonable
under the Unfair Contract Terms Act 1977.
If two or more bailors deposit property jointly then it should not be delivered except on
the authority of all bailors Brandon v Scott (1857) 7 E&B 234. If one dies then the
personal representative of the deceased will have to give a receipt Hollins v Fowler
(1875) LR 7, HL 757. If a mandate 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.
If there is doubt as to the bailor then the bank is entitled to retain the property for a
reasonable time in order to clear the doubt.
If property is stolen while in the banks custody then it may be liable for negligence (see
above on exclusion) 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.
Items deposited for safe custody are not subject to the banker lien