Typically
the commencement of the relationship in practice is documented in the
sense that the Bank will impose standard terms and conditions on the
customer on which that relationship is to be based. To the extent that
there are express stipulations in that contractual relationship then the
question of whether or not one of the parties to that relationship is
in breach of the express terms is a matter of interpretation of the
express terms of the contract. When talking of implied duties we are not
concerned with where those duties have expressly been stipulated under
the contract. It is also necessary to say that if an express term
exists, then the question of implying terms does not arise.
If
for instance the contract says that the bank is at liberty to close an
account after the stipulated time, the question of whether or not the
bank has given a reasonable notice does not arise as long as the parties
have contracted and agree to the number of days. We can only talk of
implied terms where there are no stipulations.
The Kenya Banking Code which seeks to set the standards of banking practice became effective on 1st
October 2001 by the Kenya association of bankers. It is modelled to a
very large extent on the UK Good Banking Code of Practice. To an extent
this code sets out standards which the Kenya Bankers Association
considers to be standards of good banking practice.
The question is whether these standards form part and parcel of the Banker Customer Relationship?
In
its introduction, the code states that it is a voluntary code and that
it sets standards of good banking practice for banks choosing to
participate in the code i.e. it is voluntary and the banks have an
option of whether to use it or not to use it.
For
instance one of the standards imposed is the requirement for banks to
give information to their customers about their accounts, operations
etc, this is required by the code of practice of the Kenya Association
of Bankers.
Another
feature of the code is with regard to the question of changes in
interest rates. While one might expect that it would be good practice
for banks to inform their customers of changes in interest rates, the
code suggests that there is no obligation for the banks to do so.
Another
undertaking is that the written terms and conditions that govern the
relationship will be fair and will set out the customers’ rights and
responsibilities in clear and clean language.
They
also impose an obligation under the code that a customer’s account will
not be closed without notice to the customer unless there are
exceptional circumstances which might prevent the giving of notice. The
exceptional circumstance would be like if an account has been used to
perpetrate fraud etc.
There is the question of statements – the obligation on the part of the bank to give regular account statements.
The
code stipulates that it is recommended that the customer should check
those statements on a regular basis and if a wrong entry is noted then
the customer is required to inform the bank. If the express terms and
conditions of the contract so provide, then the customer will be bound
by the express terms and conditions and cannot raise a claim against the
bank.
Obligation
on the part of the customer in the code is to the effect that the
customer must himself exercise care in writing cheques and also in the
storing of cheque books, the ATM cards the pin numbers etc so that
should a loss arise and is attributed to the customer’s failure in
either filling out the cheques or handling of ATM cards or Pin Numbers
then the Bank will be protected.
There
is also the obligation requiring the Banker to keep the affairs of the
Customer confidential and there are exceptions to the rule where the law
permits disclosure, where the customer has authorised disclosure and
where public duty or interest demands that there be disclosure and when
it is in the banks own interest to disclose.
Ordinarily the banks will stipulate their terms and conditions and the customers are bound by these.
What are the implied duties
It
is not possible to exhaustively list the duties owed by the Banker and
the Customer to each other. No case is like the other and in each case
the court will be concerned with the particular facts and the particular
circumstances of the case before it and in addressing the question
whether in a particular case a Banker or a customer is in breach of an
implied term, or whether a term should be implied, the court will be
guided by the usual principles in law of proximity, reasonableness and
justice and to a very large extent, those principles themselves or the
application of those principles will be guided by the customs and usages
of Bankers.
Case
law gives a guidance about situations where a duty of care will or will
not be found to exist. For example, case law has established that a
Banker owes a duty of care in giving financial investment advice. For
instance in the case of Woods v. Martins Bank the court held that
on the facts of that case it was within the scope of the banks business
to advise on financial matters and that in doing so, the bank owed a
duty of care to the Plaintiff to advise him with reasonable care and
skill. The bank in this case was seeking to avoid liability to the
Plaintiff on the grounds that it was not part of bankers business to
advise on financial matters. The court found and made the statement
that what is to be defined as bankers business is not a matter to be
laid down by the courts as a matter of law. What constitutes banking
business is a matter to be decided on the facts before the court.
Statement by Samuel J. “in my judgment the limits of a bankers business cannot be laid down as a matter of law …”
This
case is important for immediate purpose in terms of establishing that a
bank that gives financial advise assumes responsibility of reasonable
care and should the customer suffer as a result of negligent advise then
the bank will be held responsible.
At
Page 71 Salmon J. says “I find that it was and is within the scope of
the Defendant Bank’s business to advise on all financial matters and
that as they did advise him they owed a duty to the Plaintiff to advise
him with reasonable care and skill in each of the transactions.”
This principle is covered in the case of Hedley Byrne & Co. Ltd v. Heller (1961) All E.R.
Another
example where the courts have recognised the existence of a duty of
care is the duty of a paying banker to protect its customer from fraud
i.e. agent, directors, etc and with that duty is the duty on the part of
the bank to meet and comply with the customers’ mandate. It is an
implied term of the contract between the banker and the customer that
the bank will observe reasonable skill and care in and about executing
the customers’ orders and the leading authority is the case of
Barclays Bank Plc v. Quince care & Another (1992) Vol. 4 All E.R. 363
A
bank agreed to lend £400,000 to a company formed to purchase four
chemists shops. The bank imposed a condition that that company i.e. the
borrower, be formed for that purpose. The Chairman of the new company
caused a sum of £340,000 to be drawn out and to be misapplied for
dishonest purposes and almost the entire sum was lost. As part of the
terms of the facility or on the basis of which the bank agreed to lend
£400,000, was that it required a guarantee from a company called
Unichem.
The
bank sued both the company as the principal debtor and the guarantor
and the defences raised there involved the central question or issue
whether the bank acted in breach of its duty to the principal debtor.
The principal debtor contended that the bank acted in breach of the
implied duty of care in the Banker Customer relationship because
according to the company (the customer) the circumstances under which
the £340,000 were transferred raised questions in their submissions in
the mind of a reasonable banker as to whether that transaction was in
fact authorised by the customer. The customer also contended that those
circumstances surrounding the transfer of the funds should
The
bank has no business asking for proof at this stage. But anyway Mr.
Nderitu obliged and produced a payment voucher from the Customs &
Excise, for money paid under the Export Compensation Scheme. The bank
noticed from the payment voucher what it considered significant
discrepancies on the payment voucher not on the cheque namely the amount
shown in words in the payment voucher does not tally with the amount
shown in figures and this raises eyebrows at the bank. Mr. Nderitu was
in fact allowed to use some of the funds in the Intercom account and he
drew some of the money and transferred 15 Million shillings to the
account of Swiftair Kenya Ltd in the same Bank. Meanwhile the bank
commenced a series of enquiries. The first enquiry was to Kenya
Commercial Bank upon which the cheque was drawn and KCB confirmed that
the cheque was good and hence they made the payment. The enquiry does
not end there as the bank calls the department of customs and excise and
speak to the first signatory of the cheque who assured them of the
legitimacy of the cheque. They called the 2nd signatory who
also assured them that the cheque was legitimate. The suspicion did
not end there and they spoke to a Police Officer in the Fraud section of
the Central Bank of Kenya. Mr. Nderitu was ultimately arrested and
charged with a criminal offence of obtaining money by false pretences
and all his accounts were frozen. He was finally acquitted after a very
long battle.
Mr. Nderitu brought an action against the bank on the following
1. Breach
of the bank’s duty to his company by disclosing his account affairs to
other parties; bank violated its duty of confidentiality.
Visram
J. found the bank guilty of violating its duty of confidentiality. He
discussed the law at great length and analysis the bankers duty of
confidentiality and the duties of a collecting bank and to an extent the
duties of a paying bank in as far as the cheque is concerned. He also
discussed the principle and cites Joachimson with approval and concludes
that “that a banker in these circumstances is not to inquire for what
purpose the customer opened the account, he is not to inquire what the
moneys are that are paid into the account and he is not to inquire for
what purpose moneys are drawn out of the account. He also pegs the
responsibility of the bank to what would be considered good banking
practice. I accordingly enter judgment on liability in favour of the
plaintiff.
X Attorney General v. A Banks [1983] 2 All ER 464
Two
corporate customers of London Branch of an American bank applied for an
injunction to restrict the bank from producing documents relating to
their accounts pursuant to a subpoena issued by a grand jury and upheld
by the United States District Court for the Southern District of New
York. The court granted the interlocutory injunction to restrain
disclosure. The issue having arisen on an interlocutory application, it
was dealt with in strict conformity with American cynamid principles.
The
court has power to order discovery of documents which would normally be
subject to the obligation of confidentiality owed by a bank to its
customer. Thus in the case of
Bankers Trust Co. v. Shapira
The
Plaintiff bank claimed that it had been fraudulently deprived of US$1
Million by two men, who then placed the money on deposit at the Hatton
Garden branch of the Discount Bank (Overseas) Ltd. The Plaintiff bank
brought an action against the two men and against the Discount Bank.
The defendant bank was duly served with the proceedings, but it was
impossible to serve the individual defendants, both of whom were said to
be on the continent, one of them being in jail in Switzerland during a
fraud investigation by the Swiss police. The plaintiff bank claimed as
against the defendant bank an order for discovery of the documents
relating to these sums of money. In his judgment in the court of
appeal, Lord Denning said that the Discount Bank had got mixed up with
the wrongful acts of the two men. The bank was under a duty to assist
the plaintiff bank by giving them full information and disclosing the
position of the wrongdoers. Though banks had a confidential
relationship with their customers, it did not apply to conceal the fraud
and iniquity of wrongdoers. In the result, the Court of Appeal made an
order for discovery (i.e. disclosure) of the relevant documents.
Libyan Arab Foreign Bank v. Bankers Trust
A relationship between bank and customer is contained in one contract which may encompass a variety of matters.
L
had Eurodollar deposits amounting to over $300 million with the bank.
There were two accounts, one was held in New York and one at a London
branch. The bank refused to repay the deposit on L’s demand as a US
Presidential order had sought to freeze the accounts. It became
important to decide whether the contract was subject to English or to
New York Law. it was held that there was one contract between the
parties, although the New York account was subject to New York law and
the London account was subject to English Law. it was also decided
that, in the absence of any express provision, L was entitled to demand
the balance held on the London account in cash. This was despite the
evidence that it would involve seven plane journeys from New York to
bring over the necessary dollar bills.
The rationale of the exception of the Public duty is that there exists a higher duty than the private duty owed to the customer.
Status
Enquiries (Bankers References) & the Responsibilities that the
Banks assume in answering status enquiries or in giving Bankers
References
The
bank runs the risk that the person to whom the information is given
there is exposure to the bank and the bank has to ensure that they give
correct information. The person to whom the information is being given,
there is also exposure there since more information than authorised may
be given.
The
second danger is that inaccurate information may be given with the
result that one loses the deal that the information was required to aid.
The
problem arises from the standpoint or from the perspective of the
Customer about whom the information is given and secondly from the
perspective of the person to whom information is given. The legal
question is whether the giving of information by the bank would give
rise to a ground for liability.
If
the information is false the cause of action is defamation,
misrepresentation, negligence, all these claims could arise. If you
exceed the authority, again you may be in breach of contract and the
relief in all these cases will be damages.
The
more problematic area is with regard to the liability the bank may
incur with respect to the person who is the recipient of the
information. Here exposure to a claim of negligence could arise for
misrepresentation.
The 3 ingredients for sustaining a course of action in negligence are
1. Existence of a duty of care;
2. Breach of that duty;
3. Loss resulting from the breach of that duty.
The
law imposes a duty on the part of the bank when giving information
regarding the credit of a customer to exercise care and the leading
authority for this proposition is the case of
Hedley Byrne & co. v. Heller & Partners
Bare
facts are that the Plaintiffs who were advertising agents booked space
and time on behalf of a customer under a contract making them liable.
The Plaintiffs made an inquiry through their bankers and the enquiry was
with regard to the financial status of the defendant. As a result of
the answers they got in response to their enquiry, they incurred
liabilities which ended in loss. The trial judge held that the answer
given in response to the inquiry was negligent but that the defendant’s
duty did not go beyond being honest in giving a reply. The appeal court
upheld that finding on the basis that there was no duty of care in the
absence of a contractual fiduciary or other special relationship and
that in the circumstances of the case, no special relationship existed
between the Plaintiffs and the Defendants.
The matter went to the House of Lords which considered the matter and stated as follows:
Lord
Morris “If someone who was not a customer of a bank made a formal
approach to the bank with a definite request that the bank would give
him deliberate advice as to certain financial matters of a nature with
which the bank ordinarily dealt, the bank would be under no obligation
to accede to the request. If however, they undertook, though
gratuitously to give deliberate advice, they would be under a duty to
exercise reasonable care in giving it. They would be liable if they
were negligent although there being no consideration no enforceable
relationship was created. It should now be regarded as settled that if
someone possessed of a special skill undertakes to apply that skill for
the assistance of another who relies upon such skill, a duty of care
will arise.”
The
relationship that gives rise to a duty of care is not stemming from
contract or the existence of fiduciary responsibility but purely from
proximity.
Woods v. Martins Bank – financial advice to a customer
TAKING SECURITY
The
issues are if one takes the example of a property registered in the
names of Mr. and Mrs. X have raised a red flag in the eyes of the banker
or the circumstances were such that the bank should have been put on
inquiry or a duty to inquire arose on the part of the bank whether that
transfer was in fact authorised by the customer. It was contended for
the customer that in failing to make such inquiry the bank was
negligent.
The
court held that the relationship between a banker and a customer
regarding the drawing and payment of the customers’ cheques against the
money of the customers in the bankers hands was that of a principal and
agent and that as an agent the bank owed fiduciary duties to the
customer and prima facie was also bound to exercise reasonable care and
skill in carrying out the instructions of its principal. Accordingly it
was an implied term of the contract between the bank and the customer
that the bank would observe reasonable skill and care in and about
executing the customers orders but generally that duty was subordinate
to the bank’s other conflicting contractual duties such as its prima
facie duty when it received a valid order to execute the order promptly
on the pain of incurring liability for consequential loss to the
customer.
The
court in this case is saying that on one hand the bank is under an
obligation to honour cheques that on the face of them appear proper but
on the other hand they have an obligation to protect their customers
from loss.
It
goes on to say that if the bank executed the order knowing it to be
dishonestly given or shut its eyes to the obvious facts of dishonesty or
acted recklessly, in failing to make such inquiries as an honest and
reasonable man would make the bank would plainly be liable.
The
obligation of the bank is that it must not act recklessly and if
circumstances demands that it inquires it should inquire and should not
knowingly facilitate fraud. It is a balancing act.