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 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  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
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.