THE COPPERBELT UNIVERSITY DIRECTORATE OF DISTANCE EDUCATION AND OPEN LEARNING PO.

BOX KITWE
NAME: TIMOTHY NSHIMBI P.O BOX 20515 KITWE

STUDENT NO.:09175202

PROGRAME: BBA3 COURSE: BUSINESS LAW 190 LECTURER: DR. KAMANGA ASSIGNMENT :FIVE

DUE DATE:27 October 2012

Introduction: Banks, and the services they provide, play a fundamentally important role in modern society. The practice of opening an account with a bank and depositing money with the bank, in the developed world, has profound implications not only for those directly involved in the transaction that is the depositor and the bank, but also for society generally. In this essay I will examine the circumstances in which the relationship between the bank and its customers ceases to be that of simply debtor and creditor, so that the bank comes under duty to look after its customers interests in preference to its own. I will also look at some reasons why such a duty arises.

However, today the range of banking services is more extensive, and indeed is expanding all the time, so it must be expected that other relationships will arise besides that of debtor and creditor. For instance, the relationship of principal and agent is present when the customer instructs his bank to buy or sell stocks on his behalf, and when items are held in safe-custody the relationship is that of bailer and bailee. Where the banks executorships service takes on the administration of a deceaseds estate the relationship is that of trustee and beneficiary. Duties akin to a trusteeship might also happen when a branch comes into possession of funds or property that belongs to a third party, as when the bank has sold property in mortgage, and has a surplus to pass to the subsequent mortgagee. Obviously the relationship with the customer in that situation is that of a mortgagor with a mortgagee. However, if the security had been given by a third party then another state of affairs would exist between the lender and his surety. There, duties and obligations would arise irrespective of the banker-customer relationship with the borrowing customer. The nature of the relationship depends upon the type of services rendered by the banker, which has two aspects: one is legal and another is behavioral. It is worth mentioning that the behavioral relationship is important from the view point of humanity, particularly for the customers who do not maintain account with the banker but buys, miscellaneous services like Demand Drafts, Mail Transfer of money or payment of electric bill, gas bill, opening and renewal of licenses of Television, and Radio. For example, a bankers good manners, courtesy, kindness, sympathy, and cooperation in helping to solve a customers problem, undoubtedly makes a good impression on the customer. The roads to progress and prosperity can easily be made through friendly behavior with the customers. If the bankers wish to develop their organizational image, they have to offer better services and cooperation, coupled with courteous service to gain a competitive edge. BANKERS AND CUSTOMERS Section 3(b) of the Negotiable Instruments Act-1881 defines a banker as a person transacting the business of accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by check, draft, order or otherwise, and includes any Post Office Savings Bank.

There is no statutory definition of a customer and one must turn to case law if any legal guidance is required as to what features need to be present to constitute a person being considered a customer of a bank. The Negotiable Instruments Act has not clearly defined a Customer, but it appears from Section-131 of the Act that constituents of the Bank who maintain some type of account(s) with him duly introduced for the purpose of having a certain amount of deposits therein withdrawable by checks or by any other means, are customers. More recently, however, where a bank gave investment advice to a person who was not in an account at the time, the court held that nevertheless the bank had incurred responsibilities to him, as to a customer (Woods vs. Martins Bank Ltd. 1959). It may be said, therefore, that a person becomes a customer as soon as a business relationship is established. It is not necessary for the account to have been open for a long period of time, or for the business to be conducted over a regular period. In fact, two conditions seem to be important for becoming a customer of a bank. These are as follows: (i) There has to have been some habit of dealing between him and the banker with or without opening an account; and (ii) The transactions so made ought to be in the nature of regular banking business.

A bank can even be a customer itself, where it has an account with another bank. Rendering Improved Customer Service: Better customer services can ensure better relationship between a banker and a customer. Logically, customers can claim some services as debtors, creditors, buyers and as fellow men in general.

I will now consider when banks may and will be held to be subject to fiduciary obligations. Aspreviously mentioned the normal relationship of debtor and creditor will not give rise in and of itself to fiduciary obligations. Nigel Clayton identified four situations in which a banker may become afiduciary in relation to its customer: where it receives or transfers funds of its customer; where itgives advice to its customer where it is in a position of conflict of duty and interest; where thebanker is in a special relationship with its customer or has confidential information about itscustomer, and is in a position of conflict of duty and interest; where a bank makes a mistakenpayment to another. Finally, equitable remedies and claims for equitable remedies are nottime barred by the statue of limitations in the way that common law damages are. Banks thereforeshould be careful not to expose themselves to such powerful remedies.The law of banking has therefore evolved with the practice of banking and financial serviceprovision. Originally the relationship of banker customer was merely that of debtor creditor andthere was no need to impose further obligations but with the introduction for financial advice,insurance advice, stock broking and underwriting banks now provide a far greater variety of servicesto their customers and the law has been forced to adapt to this alteration in the market place. Now,as John Breslin has said, it is obvious

that fiduciary duties play a central role, and potentially afundamental role, in the relationship between the bank as financial service provider and its customer

However, because of the far reaching implications of the banker customer relationship, it is also important to look at this topic by taking a preliminary look at the banker customer relationship in its legal, economic and commercial contexts. Legal context Probably the most concise, and somewhat simplistic, definition of the legal banker customer relationship was provided by the US Supreme Court in Bank of Marin v England: The relationship of bank and depositor is that of debtor and creditor, founded upon contract. Precisely when this relationship arises was the question at hand in Ladbroke v Todd Where Bailhache J was of the opinion that a person becomes a customer of a bank when they go to the bank with money or a cheque and ask to have an account opened in their name, and the bank accepts the money of cheque and agrees to open the account. White has said that a customer can be defined more generally as any person who has a contractual relationship with a bank under which the bank provides financial services to the person. This broader definition reflects the expansion in the range of services offered by banks to the public that has taken place since earlier cases such as Ladbroke v Todd. Some, but not all, of the legal incidents of the banker-customer relationship apply to such people. The legal incidents which attach to the banker-customer relationship are based on mercantile expectations and banking practice. However, several commentators have warned against oversimplification Of the bankercustomer relationship by characterizing it as a debtor-creditor relationship pure and simple. According to Cranston, the debtor creditor characterisation was only part of the story and in certain circumstances the relationship can take other forms, often resulting in the bank being placed under certain fiduciary duties. Even within the debtor-creditor relationship, it is clear that the debt in question is unique as far as the legal incidents attached to it are concerned. Counsel for the successful defendants in Joachimson v Swiss Bank Corporation explained the uniqueness of this particular form of debt. They said that all the incidents of an ordinary transaction of loan do not exist. For instance, the bank is not obliged to seek out the customer and pay him the amount. The debt is only payable at the bank during banking hours. Further, a demand is necessary before the bank can be sued. If this were not so the customer could sue the bank the moment the money was paid into the bank. In the ordinary case of money lent no demand is necessary before bringing an action against the debtor.

The above passage reflects the fact that, while the duties owed by a bank to its customers must be viewed in the legal context of the debtor-creditor relationship between the bank and the customer, the precise legal form of this relationship is itself determined to an extent by the duties which the courts place, or do not place, on the bank in respect of its debt to the customer. Economic context Banks perform a vital role in the economy as financial intermediaries, connecting lenders with borrowers by using the money deposited by customers to finance economic activity. Makinen highlights the positive impact of this process on the economy: Most economically advanced societies achieved that status in large part because their financial institutions grew in size, diversity, and sophistication. The relevance of this to the current analysis is that the economic role and performance of banks is connected to the legal treatment of the banker-customer relationship. The refusal of the courts to impose any duties on banks in relation to how deposited money is invested or spent, due primarily to the absence of a fiduciary relationship between the parties, has left banks relatively free to invest and spend deposited money as they see fit. This has allowed banks to finance a large amount of economic activity without any real oversight by the courts or by the customers who provide money to the bank. Commercial context Banks perform a wider variety of functions than merely accepting deposits from and providing repayments to customers. The outer perimeters of a banks commercial functions differ from case to case and may change over time, and it has been held that determination of these perimeters is a question of fact, not of law. The collection of cheques and the provision of loans and mortgages, for example, are functions which have long been associated with commercial banks. More recently, however, there has been a trend across the common law world towards further expansion and diversification of the range of services offered by banks. For example, Bank of Ireland, established in 1783, began to expand its range of services in the latter half of the 20th century and is now considered a financial conglomerate for the purposes of the Financial Conglomerates Directive Analysis of the banks duties The duty to obey the customers instructions Flowing from the banks obligation to repay its debt to the customer are the duties to honour the customers instructions to make payments to third parties and the collateral duty to obey the customers desire to countermand such instructions. A customer will often order his bank to make payment to a third party as consideration for goods or services provided to the customer. Methods of payment, such as cheques, which involve payment moving from the bank to a third party and a subsequent reduction of the banks debt to its customer are often a more convenient alternative to cash payment and therefore have become very important in commercial practice, and cheques in particular have become such an

important part of the banks commercial functions that many have come to see the collection and payment of cheques as an essential characteristic of the business of banking. The banks duty of care The banks duty of care to its customers is notable for the variety of ways in which it may arise in the course of dealings between banker and customer. The duty can arise in both contract and tort, and is grounded in both common law and statute. The effect of this is that a plaintiff may be able to choose whether to sue in contract or in tort, depending on which is most advantageous to him. The expansion of the range of services offered by commercial banks to their customers has increased banks exposure to this duty. A statutory duty of care is implied into every contract for the supply of a service where the supplier is acting in the course of a business and, in the words of Lord Pearce, if persons holding themselves out in a calling or situation or profession take on a task within that calling or situation or profession, they have a duty of skill and care. Thus, as banks extend the range of services they offer to customers and seek to build one stop financial conglomerates, it is imperative that they understand the extra duties of due care and diligence which attend, for example, investment advice and insurance business. One point of interest is that the banks duty of care to its customers relates only to customerside transactions and dealings, and not to how the bank invests money deposited with it. This was made clear in Foley v Hill when Lord Cottenham LC said of a banker in possession of money deposited by a customer, he is not answerable to the principal if he puts it in jeopardy, if he engages in a hazardous speculation. It could be argued that this position fails to recognise the interest of a customer in ensuring the continued vitality of his bank. The collapse of a bank has enormous and disastrous repercussions for its customers, as well as for the economy. In order to protect the customers interest in the banker-customer relationship, as well as the relationship itself, the law may need to intervene to limit the potential for bank failures to impact negatively on customers. In recent years, reckless lending and other unwise investment decisions have damaged the financial health of banks and other financial institutions, sometimes resulting in the inability of the bank to repay its debt to its customers. The problem is compounded when the deposit bank is part of a larger financial conglomerate, because many commentators believe that commercial banks which are part of such conglomerates face increased risks due to the riskier nature of investment banking and insurance business. It is submitted, therefore, that both customers and society generally would benefit greatly from the placement of banks under an enforceable legal duty to take greater care when investing deposited money. It might seem tempting, in light of this analysis of the terms implied into the banker-customer contract, to insert this duty of care into the contract and allow a customer to enforce the term in court if necessary. However, this approach would be irreconcilable with the historical development of the law in this area, and it would also be difficult to enforce in practice

due to the problems of formulating an adequate standard of care and deciding what constitutes an unwise or negligent investment.

The duty of confidence The law has long recognised and sought to protect the customers right to confidentiality in the context of the banker-customer relationship. Some commentators have acknowledged that there is a conflict between the secrecy which is guaranteed to customer-banker relationships and the social virtue of openness and that, as a result, bank confidentiality has been given a bad press.

However, the customers right to confidentiality has also been strongly defended as furthering the interests of business, consumers and regulators alike. The leading authority in this area is Tournier v National Provincial and Union Bank of England where the court confirmed that there was a duty of secrecy implied into the banking contract and expressed that duty in broad terms. Atkin LJ held that the bankers obligation of confidentiality covered all the transactions that go through the account, and to the securities, if any, given in respect of the account and also information obtained from other sources than the customer's actual account, if the occasion upon which the information was obtained arose out of the banking relations of the bank and its customers.

Where the interests of the bank require disclosure. There are many conceivable instances where a bank may need to disclose information about a customer in order to properly conduct its own business, or enforce its rights in court. This head of justification protects disclosure in such circumstances. The example given in Tournier is of a bank disclosing details of an overdraft on the face of a writ claiming payment of the overdraft, but the exception has been extended to cover situations where disclosure is required to protect the banks commercial reputation. In Christofi v Barclays Bank Chadwick LJ held, obiter, that a bank had a certain amount of discretion as to what was in its own interests. There might be differences of opinion as to whether or not it is in the banks interests to disclose information in a given situation, and the court in this case was prepared to allow the bank to decide this question itself. While this was a sensible conclusion, it is submitted that it would not be wise to interpret this principle too broadly. The law must require some standard of confidentiality to be observed by banks in order to properly protect customers. Where the disclosure is made by the express or implied consent of the customer. It was said inTournier that a customer may expressly or impliedly consent to the disclosure of confidential information to third parties. However, subsequent experience has shown that, particularly where the customer is a personal customer, implied consent may be insufficient. In Turner v Royal Bank of Scotland plc, the Court of Appeal rejected the claim by the defendant bank that a customers consent to disclosure could be implied from a prevailing practice amongst banks to disclose customer information in response to status enquiries from other

banks. Sir Richard Scott VC held that there was no evidence that such a practice was notorious among members of the public and also that any banking practice which deprived a customer of his right to confidentiality must be known and assented to by the customer.

Bibliography 1.Austin Buckley, Insurance Law (2nd ed, Round Hall, 2006). 2. Ross Cranston, Principles of Banking Law (Oxford University Press, 1997). 3. Ross Cranston, European Banking Law (2nd ed, LLP, 1999). 4. Mary Donnelly, The Law of Banks and Credit Institutions (Round Hall Sweet & Maxwell, 2000). 5. Mark Hapgood, Pagets Law of Banking (13th ed, Butterworths, 2006). 6. William Johnston, Banking and Security Law in Ireland (Butterworths, 1998). 7. Gail Makinen, Money, Banking and Economic Activity (Academic Press, 1981). 8. James Maycock, Financial Conglomerates: A New Phenomenon (Gower Publishing, 1986). 9. Paul Anthony McDermott, Contract Law (Butterworths, 2001). 10. Harry McVea, Financial Conglomerates and the Chinese Wall (Oxford University Press, 1993). 11. Fidelma White, Commercial Law (Thomson Round Hall, 2002).