This duty can be expressed in these terms
“a Customer of a bank owes a duty of care in drawing a cheque to take reasonable and ordinary precautions against forgery.”
The leading authority for this proposition is the case of
London Joint Stock Bank Ltd v. Macmillan (1918) A.C. 777
The bare facts of this case are that a firm who were customers of a bank entrusted the duty of filling out their cheques to a clerk whose integrity they had no reason to doubt. The clerk presented to one of the partners for signature a cheque drawn in favour of the firm or bearer. There was no sum on words written on the cheque in the space provided and there were the figures 2 in the space intended for the figures. The partner signed the cheque. The clerk subsequently tampered with the cheque by adding the words one hundred and twenty pounds in the space that had been left. The clerk then presented that cheque for payment at the firm’s bank and received a hundred and twenty pounds out of the firm’s account. The question was whether the bank would then be liable to the firm for that loss that was perpetrated by their own clerk.
The House of Lords held that the firm had been guilty of a breach of duty arising out of the relation of a banker and customer to take care in the mode of drawing the cheque and that the alteration of the cheque by the clerk was a direct result of that breach of duty. And accordingly the bank was entitled to debit the customer’s account with the amount of that cheque.
Lord Finley summed up that duty at page 789 as follows:
“the relationship between a banker and a customer is that of debtor and creditor with a super added obligation on the part of the banker to honour the customers cheques if the account is in credit. A cheque drawn by a customer is in points of law a mandate to the banker to pay the amount according to the tenor of the cheque. It is beyond dispute that the customer is bound to exercise reasonable care in drawing the cheque to prevent the banker being misled. If he draws the cheque in a manner which facilitates fraud, he is guilty of a breach of duty as between himself and the banker and he will be responsible to the banker for any loss sustained by the banker as a natural and direct consequence of this breach of duty.”
Sections 3 and 4 of the Cheques act s. 3 (2) that where a banker in good faith and without negligence and in the ordinary course of business
(a) Receives payment for a customer of a prescribed instrument to which the customer has no title or defective title
Protection is essentially being proffered to protect the bank
Section 24 of the Bills of Exchange Act which provides that where a signature on a bill is forged, or placed thereon without the authority of the person whose signature it purports to be, the forged or the authorised signature is wholly inoperative. In other words if the bank honours a forged cheque and it subsequently turns out the cheque was forged, then the banker bears the loss.
Does the duty of the customer extend to scrutinising bank statements and are the statements to be deemed to be accurate unless challenged by the customer within a given period.
As a matter of practice the banks will expressly provide that that is the case, in the absence however of an express agreement with the bank, is such a duty to be implied? If under the written terms of the contract there is no agreement that statements will be binding after a certain time has lapsed. This was the issue in the case of Tai Hing Cotton Mills Ltd v. Liu Chong Hing Bank Ltd P.C 1985 2 947
Brief statement of facts
A company was a customer of a bank and maintained accounts with that bank. The bank honoured cheques 300 of them totalling approximately 5.5 million Hong Kong dollars. The cheques on the face of them appeared to have been drawn by the company and appeared to bear the signature of the Managing Director of the Company who was one of the authorised signatories and so the bank honoured these cheques. It later transpired that those cheques were not infact the company’s cheques, they were in fact forgeries and the forgeries had been perpetrated by the company’s own accounts clerk and the question was whether that loss should fall on the company or on the bank.
The holding of the privy council was as follows: “that in the absence of express agreement to the contrary the duty of care owed by a customer to his bank in the operation of a current account was limited to a duty to refrain from drawing a cheque in such manner as to facilitate fraud or forgery and that a customer had a duty to inform the bank of any unauthorised cheques purportedly drawn on the account as soon as the customer became aware of it. And on the question whether there was an obligation on the part of the customer to screen statements which is what the bank had advocated or argued, the court held, that the customer was not under a duty to take reasonable precautions in the management of his business with the Bank to prevent forged cheques being presented for payments nor was he under a duty to check his periodic bank statements so as to enable him to notify the bank of any unauthorised debit items because such wide a duty was not a necessary incident of the Banker/Customer relationship since the business of Banking was not the business of the customer but the business of the bank and forgery of cheques was a risk of the service which the bank offered.
It had been suggested in this case that there was a duty owed to the bank by the customer but the Privy Council stated that the customer was under no duty to scrutinise statements to check if they are erroneous.
WHEN CAN A CONDITION BE IMPLIED
Conditions that must be satisfied
A term will not be implied into a contract unless it satisfied the following conditions:
1. The term proposed to be implied must be reasonable and equitable.
2. It must be necessary to give business efficacy to the contract i.e. a term will not be implied into a contract if the contract is effective without that implied term.
3. The term must be so obvious that it goes without saying as it were.
4. The term must be capable of clear expression;
5. It must not contradict any express term of the contract.
So if the customer has a term to be implied in the relationship, it must meet these 5 conditions.