Bank/Customer Relationship
There are no statutory provisions in this area.
Liabilities of the bank to the customer
The bank must obey the terms of the bank mandate. This is a document setting out what the bank will do for its customers in relation to the account. If they do not obey the terms, they have breached the contract and are liable.
The bank has fiduciary duties to its customers (trust, loyalty and confidence). In our jurisdiction, there is generally no fiduciary relationship between bank and customer. In the absence of these duties, the bank can put its own profit-making interests above the customers'. The English courts have not entirely ruled out these obligations: there are limited circumstances where a fiduciary relationship will exist where, for example, one customer grants the bank some security (like a car or a house) in respect of another customer's bank borrowings (Lloyds Bank v Bundy 1975: aged father, who was commercially naive, agreed to give the bank a charge over his home for his son's debt. The father was persuaded to grant a charge over the house without being advised to get legal aid. The bank strongly benefitted from this guarantee. The Court of Appeal set the guarantee aside because there was a long-standing and elderly customer who had relied on the bank's advice in executing the guarantee and charge. He had clearly placed trust and confidence in the bank. National Westminster Bank v Morgan 1985: This case was distinguished on its facts.)
A fiduciary relationship is also said to exist where the bank is acting as the customer's advisor and can reasonably be taken to have undertaken to put the customer's interests above its own (Woods v Martins Bank 1959: the manager had undertaken to act as the customer's advisor. It wasn't set in writing but the evidence suggested that this relationship was implicitly established. There were bank leaflets in the bank emphasising their expertise in giving business advice. The bank advised Woods to invest in shares in a company that owed the bank a lot of money without revealing that this would reduce the company's overdraft with the bank. He lost his money. The court said there was a fiduciary relationship and it had been broken.)
All the bank has to do to escape liability for breach of fiduciary duties is to include a contractual term excluding/modifying any fiduciary obligations that arise (Kelly v Cooper 1993: it is acceptable to include a contractual term excluding liability for the breach of any fiduciary obligation.)
The bank may not be able to enforce security (guarantee of a home for a debt) where undue influence exists. A successful line of argument is that there was a relationship of undue influence of the person guaranteeing security to the bank and the person who has borrowed the money from the bank (National Westminster Bank v Morgan 1985: the wife was visited in her home by a banker and signed a charge on the house, which would protect the husband's company and in turn benefit her. The bank enforced its security. The courts allowed this because there had to be some victimisation and that the transaction was wrongful because it gave an unfair disadvantage to the provider of security. There was no evidence so the bank could enforce security but it provided this principle.)
When looking at whether undue influence exists, the bank must have actual notice that the undue influence exists. If they don't have actual notice, they are presumed to have notice where there is a non-commercial relationship and the transaction itself has no benefit to the person providing security. In these circumstances, there is a legal burden on the bank to prove that all reasonable steps to ensure that legal advice was given to that person. The bank will normally be able to rely on that person's solicitor confirming that advice has been given. The bank can assume that the solicitor has not been negligent. Etridge: There has been an increase in negligence actions by those people against their legal advisors. There is no general duty on banks to advise customers about the legal effects and consequences of giving security for another's debt.
There is a duty to take reasonable care under contract and tort (Supply of Goods and Services Act 1982 s 13; UCTA 1977 (applies to clauses which exclude liability but in reality will rarely assist commercial entities as they have equal bargaining power)). The standard of care is contested (Selangor United Rubber Estates Ltd v Cradock (No. 3) 1968: objective standard; Lipkin Gorman v Karpnale & Co 1989: the bank repeatedly allowed a junior partner of a firm to cash cheques. The bank was held to not be negligent because they were given such a high volume of business through the business each day; didn't need to examine each cheque or question why the partner kept cashing them: low standard of care.) There is a higher standard where the bank has assumed advisory duties (JP Morgan Chase Bank v Springwell Navigation Corporation.) The law doesn't give good protection to customers in a way it should: it gives a level of protection that allows banks to grow.
Commissioners of Taxation v English, Scottish and Australian Bank Ltd 1920: Opening an account with a bank makes you a customer, but you are only a customer if you have a bank account. You will not be a customer purely from exchanging money or cashing cheques (casual services): Great Western Railway v London and County Banking Co Ltd 1901.
The customer becomes a customer when the bank agrees to open the account (Woods v Martins Bank Ltd 1959).
There must be a genuine meeting of minds between the bank and a customer to establish the relationship (Stoney Stanton Supplies (Coventry) Ltd v Midland Bank Ltd 1966) – if someone fraudulently enters you into a relationship with the bank, there’s no actual relationship between you and the bank. There can be implicit consent, for example where a grandparent opens an account in the name of a child without the consent of a parent/guardian; or a director opens an account in the name of the company.
The bank/customer relationship is not a bailment. The bank is not a trustee of the money: if it was it would have to account for profits, return the exact money deposited, keep the money entirely separate from others’ money, and the customer would be protected in the event of insolvency of the bank. Instead, it’s a debtor (person/entity who owes money)/creditor (person/entity who is owed money) relationship based in contract. The customer gives money to the bank and then the bank owes you that money with interest if agreed.
Liabilities of the bank to the customer
The bank must obey the terms of the bank mandate. This is a document setting out what the bank will do for its customers in relation to the account. If they do not obey the terms, they have breached the contract and are liable.
The bank has fiduciary duties to its customers (trust, loyalty and confidence). In our jurisdiction, there is generally no fiduciary relationship between bank and customer. In the absence of these duties, the bank can put its own profit-making interests above the customers'. The English courts have not entirely ruled out these obligations: there are limited circumstances where a fiduciary relationship will exist where, for example, one customer grants the bank some security (like a car or a house) in respect of another customer's bank borrowings (Lloyds Bank v Bundy 1975: aged father, who was commercially naive, agreed to give the bank a charge over his home for his son's debt. The father was persuaded to grant a charge over the house without being advised to get legal aid. The bank strongly benefitted from this guarantee. The Court of Appeal set the guarantee aside because there was a long-standing and elderly customer who had relied on the bank's advice in executing the guarantee and charge. He had clearly placed trust and confidence in the bank. National Westminster Bank v Morgan 1985: This case was distinguished on its facts.)
A fiduciary relationship is also said to exist where the bank is acting as the customer's advisor and can reasonably be taken to have undertaken to put the customer's interests above its own (Woods v Martins Bank 1959: the manager had undertaken to act as the customer's advisor. It wasn't set in writing but the evidence suggested that this relationship was implicitly established. There were bank leaflets in the bank emphasising their expertise in giving business advice. The bank advised Woods to invest in shares in a company that owed the bank a lot of money without revealing that this would reduce the company's overdraft with the bank. He lost his money. The court said there was a fiduciary relationship and it had been broken.)
All the bank has to do to escape liability for breach of fiduciary duties is to include a contractual term excluding/modifying any fiduciary obligations that arise (Kelly v Cooper 1993: it is acceptable to include a contractual term excluding liability for the breach of any fiduciary obligation.)
The bank may not be able to enforce security (guarantee of a home for a debt) where undue influence exists. A successful line of argument is that there was a relationship of undue influence of the person guaranteeing security to the bank and the person who has borrowed the money from the bank (National Westminster Bank v Morgan 1985: the wife was visited in her home by a banker and signed a charge on the house, which would protect the husband's company and in turn benefit her. The bank enforced its security. The courts allowed this because there had to be some victimisation and that the transaction was wrongful because it gave an unfair disadvantage to the provider of security. There was no evidence so the bank could enforce security but it provided this principle.)
When looking at whether undue influence exists, the bank must have actual notice that the undue influence exists. If they don't have actual notice, they are presumed to have notice where there is a non-commercial relationship and the transaction itself has no benefit to the person providing security. In these circumstances, there is a legal burden on the bank to prove that all reasonable steps to ensure that legal advice was given to that person. The bank will normally be able to rely on that person's solicitor confirming that advice has been given. The bank can assume that the solicitor has not been negligent. Etridge: There has been an increase in negligence actions by those people against their legal advisors. There is no general duty on banks to advise customers about the legal effects and consequences of giving security for another's debt.
There is a duty to take reasonable care under contract and tort (Supply of Goods and Services Act 1982 s 13; UCTA 1977 (applies to clauses which exclude liability but in reality will rarely assist commercial entities as they have equal bargaining power)). The standard of care is contested (Selangor United Rubber Estates Ltd v Cradock (No. 3) 1968: objective standard; Lipkin Gorman v Karpnale & Co 1989: the bank repeatedly allowed a junior partner of a firm to cash cheques. The bank was held to not be negligent because they were given such a high volume of business through the business each day; didn't need to examine each cheque or question why the partner kept cashing them: low standard of care.) There is a higher standard where the bank has assumed advisory duties (JP Morgan Chase Bank v Springwell Navigation Corporation.) The law doesn't give good protection to customers in a way it should: it gives a level of protection that allows banks to grow.
Commissioners of Taxation v English, Scottish and Australian Bank Ltd 1920: Opening an account with a bank makes you a customer, but you are only a customer if you have a bank account. You will not be a customer purely from exchanging money or cashing cheques (casual services): Great Western Railway v London and County Banking Co Ltd 1901.
The customer becomes a customer when the bank agrees to open the account (Woods v Martins Bank Ltd 1959).
There must be a genuine meeting of minds between the bank and a customer to establish the relationship (Stoney Stanton Supplies (Coventry) Ltd v Midland Bank Ltd 1966) – if someone fraudulently enters you into a relationship with the bank, there’s no actual relationship between you and the bank. There can be implicit consent, for example where a grandparent opens an account in the name of a child without the consent of a parent/guardian; or a director opens an account in the name of the company.
The bank/customer relationship is not a bailment. The bank is not a trustee of the money: if it was it would have to account for profits, return the exact money deposited, keep the money entirely separate from others’ money, and the customer would be protected in the event of insolvency of the bank. Instead, it’s a debtor (person/entity who owes money)/creditor (person/entity who is owed money) relationship based in contract. The customer gives money to the bank and then the bank owes you that money with interest if agreed.