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.