Corene Procope UOL 2018

Commercial Law Practice Question

BANKING AND FINANCE

What are the defining characteristics of a ‘bank’ at common law, what is the nature of the
relationship that these institutions have with their customers?

To aid the discussion of the nature of the relationship between a bank and customer, both parties
role must be clarified and defined.

What is a bank? This is certainly not an easy question to answer as there is no fixed definition in
common law or in statute. Wadsley and Penn, 2000 opined that “it is notoriously difficult to answer
given that the traditional bank with many local branches with customers face to face seems odd and
out of date”. As such one will think that given the stringent statute and regulations in place to monitor
banking activities that there should be certainty as to its definition rather than adding to the
complexity of banking business. It is of no surprise that the common law, with its premise governed
on certainty, sought to define a bank in United Dominions Trust v Kirkwood. This case concerned
whether a finance house was bona fide carrying on the business of banking. Lord Denning as such
listed features of a bank to regard as good evidence of its status; “accepting deposits, the handling of
cheques and having a reputation among commercial people as a bank”. This definition coming before
a time of electronic payments and payment cards which has replaced the use of cheques evidencing
an ever evolving banking structure, especially in today’s FinTech environment; the Kirkwood features
nonetheless remain core banking. Re Roes Legal Charge noted that it was the activities being carried
out which determined whether or not the institution was a bank. However Hsiao, 2010 pointed out
that the credit union which satisfies two elements in the Kirkwood case to have banking status is
excluded from the Banking Act 2009; which defines a bank as an institutions permitted under the
Financial Services and markets Act 2000 to carry out regulated activities.

The characteristics laid out in the Kirkwood case, are not achievable without customers. It is therefore
essential to outline who is a customer? As with a bank it is difficult to define. Wadsley and Penn
advocated that the concepts are interdependent and one cannot be completely understood without
reference to the other. No statutory definition though Cranston in Principles of Banking Law 2002,
considered for the provision of statute that anyone who opens an account, be it rogue or angel, is a
customer for the purpose of statutory protection. In Common law Ladbroke v Todd states that a
customer is anyone who has an account with a bank. It is not material if they have only made one
transaction (Taxation Commissioners v English, Scottish & Australian Bank) or that level of activity is
low (Woods v Martins). While this definition of a customer holds true, due to expanding nature of the
banking activities, a customer need not have an account for there to be a duty owed to them or for
them to receive a service from a bank. The court found in Mutual Life v Evatt, that the bank owed a
fiduciary duty to a non-customer who sought investment advice. In today’s Banking Sector, some
banks even state in their annual reports that every individual is a customer as they refer to prospective
customers. So it raises the question, if a customer for X bank uses their payment card in the ATM of Y
bank does that mean that they are also a customer of Y bank? Or perhaps the relationship is with X
and Y bank; X being the customer of Y on behalf of their customer.
Corene Procope UOL 2018

The bank customer relationship can go as basic to acting as a depository for the customer’s money to
more transacting with advanced financial instruments such as derivatives and securities. From the
point of engagement, that is once the money has been placed into the account the relationship is a
contractual one of debtor and creditor (Foley v Hill). This relationship thus opens duties owed to the
customer by the bank.

The judgement in Joachimson summarized the relationship as a limited one based on the contractual
arrangement of debtor and creditor, stating that the duty of the bank is to repay any part of the
amount due against the demand of the customer. Thus under a duty to comply with the customers
mandate (Sierra Leone Telecommunications v Barclays Bank). Another duty under common law, is that
of reasonable care and skill (s. 13 Supply of Goods and Services Act) in addition to being liable in tort
for failure to reach that standard (Henderson v Merret) though a very low standard as it will be
unreasonable to expect a bank to make enquiries in all cases given the volume of activity it engages
in (Karak v Cradock). In Lipkin Gorman, a solicitor was drawing cheques on the partnership account to
fund his gambling habit, the court held that it was unreasonable of the bank to suspect wrongdoing.
This case decided in 1989, the same decision may not be held today, as banks have compliance
measures and policies in place to detect strange activities on a client account for purpose of Anti-
Money Laundering (AML) safeguards.

Given the nature of the bank’s activities as laid down in Kirkwood, it will be strange to also implore a
fiduciary relationship on the operation of taking deposits and making payments. Earlier, the fiduciary
relationship mentioned was for investment advice, which can be deemed a special relationship given
that the activity is one of the expanded activities that banks provide. As such, this duty will be owed
when the bank acts as financial advisor (Wood v Martins), as trustee, agent or a longstanding bank-
customer relationship (Lloyds Bank v Bundy).

In a commercial context, businesses expect and rely on the relationship with their banks in order to
give effect to their transactions, for instance the drawee in a bill of exchange is usually a bank.
Whether for purpose of the relationship be for payments, creating a charge on their goods or to fund
their operations by way of loans. The importance of the bank-customer relationship is instrumental
to the commercial world especially given the magnitude of international transactions involved and
coming from the 2009 Financial Crisis.