Law Relating To Banker and Customer

ByGroup No 5

Meaning and Definition of Banker and

Customer:

Meaning of Banker

• The term banking is defined as “accepting for the purpose, of lending or investments of deposit of money from the public, repayable on demand or otherwise, and withdrawable by cheque,draft, order or otherwise”.

Definition of Banker • Sec.5(c) defines the term ‘Banking’ has

“accepting, for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise , and withdrawable by cheque, draft, order or otherwise.”

• The Negotiable Instruments Act defines a ‘Banker’ as including any person acting as a banker.

• The Banking Regulation Act, 1949 defines a ‘Banking Company’ as “a company which transacts a business of banking”.

Meaning of customer

• The term customer of banking is not defined by law. Ordinarily, a person who has an account in a bank is considered to be customer of the bank.

Definition of Customer:

• The term ‘customer’ is also not defined in any of the statutes. A Person becomes a customer of a bank when the latter agrees to open an account of the former.

Law relating to bank and customer

Law relating to banker and customer

The Law regulating the relations between bankers and their customers and between the bankers and the outside world

The Law regulating the organizational aspect of banking

Legal relationship between Banker and Customer

A Relationship between a banker and his customer is essentially contractual. It is fundamentally a relationship of a debtor (the banker) and a creditor (customer)

with the modification that the banker is only liable to repay the customer and the customer demands payment. This happens when the banker lends money to the customer. The relationship between a banker and his customers also partakes many aspects of the relationship of agent and principal.

Special features Special features with regard to with regard to

Rights & Rights & Obligations of Obligations of

BankerBanker

Obligation to honor chequesObligation to honor cheques

A banker having sufficient funds of A banker having sufficient funds of the customer, properly applicable to the customer, properly applicable to the payment of cheques, is duty the payment of cheques, is duty bound to honor his customer’s bound to honor his customer’s cheques. If he refuses to honor these cheques. If he refuses to honor these cheques, he is liable to the customer cheques, he is liable to the customer in damages.in damages.

Obligation to keep a proper Obligation to keep a proper record of transactionsrecord of transactions

The banker must keep a proper and The banker must keep a proper and accurate record of all the accurate record of all the transactions of the customer.transactions of the customer.

Obligation to abide by the Obligation to abide by the instructions given by the customerinstructions given by the customer

The banker must abide by any express The banker must abide by any express instructions of the customer provided instructions of the customer provided these are within the scope of the these are within the scope of the relationship between the banker and the relationship between the banker and the customer. The relationship is subject to the customer. The relationship is subject to the terms of the contract between the bankers terms of the contract between the bankers and the customers and the rules laid down and the customers and the rules laid down in the Negotiable Instruments Act.in the Negotiable Instruments Act.

General lien of bankerGeneral lien of banker

According to Sec 171 of the Indian According to Sec 171 of the Indian Contract Act, 1872, the banker may, Contract Act, 1872, the banker may, in the absence of a contract to the in the absence of a contract to the contrary, retain, as a security for a contrary, retain, as a security for a general balance of account, any general balance of account, any goods and securities bailed to him.goods and securities bailed to him.

Obligation not to disclose the Obligation not to disclose the state of his customer’s account state of his customer’s account or affairsor affairs

The banker must take utmost care The banker must take utmost care not to disclose the state of account not to disclose the state of account of his customer’s affairs as this may of his customer’s affairs as this may result in considerable harm to the result in considerable harm to the credit and business of the customer. credit and business of the customer. If he fails in this duty, he is liable in If he fails in this duty, he is liable in his damages.his damages.

Incidental charges and interestIncidental charges and interest

The Banker has the right to claim The Banker has the right to claim from the customer incidental charges from the customer incidental charges and interest on money lent to the and interest on money lent to the customer as per the rules and customer as per the rules and regulations communicated to him at regulations communicated to him at the time when the account is the time when the account is opened.opened.

Right to set-offRight to set-off Where the banker has two accounts Where the banker has two accounts

of the customer, one showing a of the customer, one showing a credit balance and the other a debit credit balance and the other a debit balance, the banker has the right to balance, the banker has the right to combine the two accounts and set combine the two accounts and set off the balance of against the other. off the balance of against the other. But to exercise such a right, the But to exercise such a right, the debit and credit balances of two debit and credit balances of two accounts must be due by and to the accounts must be due by and to the customer in the same right.customer in the same right.

Bankers Obligation to Maintain Bankers Obligation to Maintain Secrecy of Customers AccountsSecrecy of Customers Accounts

A Banker is expected to maintain secrecy of his customer’s account. The banker

should not disclose his customer’s financial position and the nature and the

details of his account. This secrecy should be maintained even after the

account is closed and even after death of the customer.

It extends to all transactions that go through the account.

If a customer suffers any loss on account of the unwanted disclosure of his

account, the banker will be compelled to compensate for the loss suffered by his

customer.

Disclosure of AccountsDisclosure of Accounts

Disclosure under the compulsion of law

• Under sec.4 of the Bankers Book Evidence Act, 1891, a banker may be asked to produce a certified copy of his customer’s account in his ledger.

• Under sec.45B of Reserve Bank of India Act, the Reserve Bank is empowered to collect credit information from banking companies relating to their customers.

• Under sec .36 of the Gift Tax Act, 1947, the gift tax Officer can examine a banker on oath and compel him to produce the books of accounts.

• When a Garnishee order nisi is received, the banker must disclose the nature of the account of a customer to the court.

Disclosure in the interest of Disclosure in the interest of the publicthe public

• Disclosure of the account where money is kept for extreme political purpose.

• Disclosure of the account of an unlawful association.

• Disclosure of the account of a revolutionary body to avert danger to the state.

• Disclosure of the account of an enemy in the times of war.

Disclosure of the Accounts of customer

DISCLOSURE OF THE INTEREST OF THE BANK

When his own position is at stake, a banker may be compelled to ignore his oath of secrecy. Any prudent banker will safeguard his position before fulfilling his obligations.

Disclosure of the account of the customer who has failed to repay the loan to the guarantor.

Disclosure to fellow banker

DISCLOSURE UNDER THE EXPRESS OR IMPLIED CONSENT OF CUSTOMER

A banker is justified in disclosing the state of his customer’s account to a third party, when there is an express and implied consent of the customer for such disclosure

Sunderland Vs. Barclays Bank

A cheque for a small amount drawn by Mrs. Sunderland on Barclays bank in favour of a

dress maker was dishonoured. Mrs. Sunderland telephoned to the banker at the instance of her husband to know the reason for the dishonour of her cheque. During the

course of her conversations with the banker, her husband took the phone from

her and expressed to the banker his dissatisfaction at the banker’s

action. The banker then disclosed to the husband the position of Mrs. Sunderland’s account and her habit of issuing cheques in favor of book makers. Mrs. Sunderland then sued the banker for violating the obligation of secrecy. But it was held by the court that her giving phone to her husband, to talk with banker indicated her implied consent to the disclosure of the state of her account to her husband. Besides, there were supposed to be no secrets between a husband and wife.

Precautions to be taken by a banker in answering an enquiryHe should not be negligent in

giving informationThe information should be given

confidentially & HonestlyThe banker should depend only on

facts as disclosed by the customer’s account, and not on rumours

Contd…….

He should not make any statement which may make him liable for fraudulent representation

Whenever possible, he should get the express consent of the customer before giving the information.

To be on the safer side, it is advisable for the banker to specify in his reply that he does not undertake any responsibility for the information provided by him.

>> 0 >> 1 >> 2 >> 3 >> 4 >>

Banker’s obligation to honour his customer’s cheques.

Nature of banker’s obligation to honour cheques

>> 0 >> 1 >> 2 >> 3 >> 4 >>

Banker’s obligation to honour his customer’s cheques

When a current account is opened by a banker in the name of a customer, there is an obligation on the banker to honour the customer’s cheques as long as there are sufficient funds available in the customer’s account for meeting the cheques. In other words of Jones, “The banker’s primary contract is to repay the moneys received for his customer’s account usually by honouring his cheques.”

>> 0 >> 1 >> 2 >> 3 >> 4 >>

Nature of banker’s obligation to honour cheques

1. The current deposits accepted by a banker from a customer are the debts due from the banker to the customer. These debts are repayable by the banker to the customer on demand as per the contract entered into between them. So, whenever the customer demands the repayment of his deposits by issuing cheques, there is a contractual obligation on the banker to honour his customer’s cheques and repay his deposits.

>> 0 >> 1 >> 2 >> 3 >> 4 >>

2. The obligation of the banker to honour the cheques of his customer is also provided by statue. section 31 of the Indian Negotiable Instruments Act of 1881 provides, the drawee of a cheques having sufficient funds of the drawer in his hands, properly applicable to the payment of such cheques, must pay the cheques when duly required to do so, and in default of such payment, must compensate the drawer for any loss or damage caused by such a default.”

Banker’s obligation to honour cheques

Banker’s obligation to honour cheques is subject to certain conditions:

• Sufficient funds must be available

• Funds must be properly applicable to the payment of the cheques

• Banker must be duly required to pay the cheques

• There must be no legal bar preventing the payment of the cheque

Banker’s obligation to honour his customer’s Banker’s obligation to honour his customer’s cheques extends even to cheques drawn cheques extends even to cheques drawn against overdraft.against overdraft.

Banker’s obligation to honour cheques does Banker’s obligation to honour cheques does not apply to domiciled bills of exchange.not apply to domiciled bills of exchange.

Dishonour of customer’s cheques.Dishonour of customer’s cheques.

Banker’s obligation to honour his Banker’s obligation to honour his customer’s cheques extends even to customer’s cheques extends even to cheques drawn against overdraft:cheques drawn against overdraft:

The obligation of a banker to honour The obligation of a banker to honour his customer’s cheques applies not only to his customer’s cheques applies not only to cheques drawn against the customer’s cheques drawn against the customer’s credit balance for deposits, but also to credit balance for deposits, but also to cheques drawn against the amount of cheques drawn against the amount of overdraft agreed upon.overdraft agreed upon.

Banker’s obligation to honour Banker’s obligation to honour cheques does not apply to domiciled cheques does not apply to domiciled bills of exchange:bills of exchange:

The obligation of a banker to honour The obligation of a banker to honour the cheques of his customer does not the cheques of his customer does not apply to domiciled bills of exchange.apply to domiciled bills of exchange.

Dishonour of customer’s chequesDishonour of customer’s cheques::

Though a banker is obliged to honour Though a banker is obliged to honour his customer’s cheques, he can dishonour his customer’s cheques, he can dishonour the cheques issued by the customer under the cheques issued by the customer under certain circumstances, such as insufficiency certain circumstances, such as insufficiency of funds in the customer’s account, of funds in the customer’s account, irregularity in the cheques, presentation of irregularity in the cheques, presentation of after it becomes stale, presentation of a after it becomes stale, presentation of a post-dated cheque before its due date, post-dated cheque before its due date, attachment of the funds in the customer’s attachment of the funds in the customer’s account by a garnishee order, etc. account by a garnishee order, etc.

WHEN MAY A BANKER DISHONOUR A CUSTOMERS CHEQUE?

Where the banker does not have sufficient funds to the credit of the customer.

Where the funds to the credit of the customer are not applicable to the payment of the cheque.

Where the cheque is ambiguous or of doubtful legality.

Where the cheque is mutilated (torn so as to make it imperfect).INTENTIONAL MUTILATION OR ACCIDENTAL MUTILATION

WHEN MAY A BANKER DISHONOUR A CUSTOMERS CHEQUE?

Where the cheque is irregular or materially altered.

Where the cheque is not duly presented.

Where the customer’s signature does not agree with his specimen signatures.

Where the cheque is post-dated.

A customer gave a cheque on may 10th to airtel amounted Rs.1000 and airtel withdrew it 0n 5th,another cheque forwarded by customer dated 6th to electricity board amounted Rs.800.if this cheque is not able to be honoured by the banker due to deficiency of fund the banker is liable to bear the damages.

If banker honours a cheque before prescibed date,the customer has the right to question it and he can demand the damages.

Where the cheque has become stale (i.e., has not been presented for payment for six months from the date of its issue).

Where the cheque is presented at a branch other than the one where the customer has the account.

Where an account is in joint name of a few persons, but they have not all signed the cheque.

Where the banker has a claim for a set-off on the funds of the customer and the cheque is for an amount in excess of the balance above the claim.

WHEN MUST A BANKER DISHONOUR A

CUSTOMER’S CHEQUE?

When must a banker dishonour a customer’s cheque?

• A banker must dishonour a customer’s cheque in the following cases:

• When the customer becomes insolvent or an order of adjudication has been made against him.

• When the customer countermands payment (i.e., orders the banker not to honour a cheque).

• When the banker receives notice of the customer’s death. But if he pays a cheque before he receives notice, the payment is valid.

• When the banker receives notice of customer’s insanity.

Contd…• When a garnishee or other legal order attaching or

otherwise dealing with money in banker’s hands is received by the banker.

• When the customer gives notice to the banker to close the account.

• When the customer gives notice of assignment of the credit balance of his account.

• When the banker suspects, or has reason to believe, that the title of the person presenting the cheque is defective.

• When the holder gives a notice of loss of a cheque to the banker. The banker, may, however, insist that he holder should obtain a countermand from the drawer.

Consequences of wrongful Consequences of wrongful dishonour of chequesdishonour of cheques

Consequences of dishonour of the Consequences of dishonour of the chequescheques

However, under the following circumstances, the payment of a cheque must be refused:

1.Countermanding2.Upon the receipt of notice of death of a

customer3.Upon the receipt of notice of insolvency4.Upon the receipt of notice of insanity

CountermandingCountermanding

Countermanding is the instruction given by the customer of a bank requesting the bank not to honour a particular cheque issued by him. When such an order is received, the banker must refuse to pay the cheque.

Countermanding, in order to be Countermanding, in order to be really effectivereally effective

• must be in writing• The written mandate should contain all the

details of the cheque, viz., date, number of the cheque, name of the payee and the amount.

• The mandate must be signed by the customer. In the case of a company, any director can stop payment of a cheque.

• So also, any partner or any one of the joint account holders can stop the payment of a cheque.

• In Westminster Bank vs. Hilton, the customer had instructed his banker not to pay his cheque No.117283 instead of 117285. The cheque No.117285, therefore, was paid. It was held that the banker was not liable

• If a customer informs by telephone or telegram regarding the stopping payment of a cheque, the banker should diplomatically delay the payment, till written instructions are received.

• If the situation is very critical, he can return the cheque by giving a suitable answer like ‘payment countermanded by telegram and postponed pending confirmation.’

• The drawer alone has the right to countermand the payment of a cheque.

• In case a cheque is lost by a holder, he should stop payment of that cheque only through its drawer.

• It is so because; a banker is always answerable only to the drawer, in the case of dishonour of a cheque.

• If a cheque is covered by a ‘cheque card,’ then, that cheque can not be countermanded.

• A cheque card is a document issued by a bank which enables the holder to encash cheques, upto a stated maximum, at any branch of the issuing bank.

• Since it contains an undertaking by the issuing bank to pay it, it is readily acceptable to all parties particularly to third parties. Hence, it can not be countermanded.

If a banker, by mistake, honours a If a banker, by mistake, honours a countermanded cheque:countermanded cheque:

• The payment does not amount to payment in due course,

• He will have to answer for having disobeyed his customer’s mandate,

• He has no right to debit his customer’s account with the amount of the countermanded cheque,

• He may have to dishonour the customer’s subsequent cheques for want of funds in the account.

WHAT BANKER CAN DOWHAT BANKER CAN DO

• countermanding instructions, once received must be kept as a constant record. A ‘stopped payment’ register may be maintained for ready reference.

• It is advisable that a slip, giving the details of the cheque to be countermanded, is pasted on the customer’s account.

• Alternatively, a red ink mark may be made against the customer’s account, so that, the clerk concerned with posting of cheques may be careful.

• When a banker dishonours a countermanded cheque, it would be advisable to give answers like ‘orders not to play’ rather than “payment stopped” because the latter can be interpreted in any way.

2.Upon the receipt of notice of death of a customer

3.Upon the receipt of notice of insolvency

4.Upon the receipt of notice of insanity

5. Upon the receipt of notice of Garnishee Order

6. Upon the receipt of notice of assignment

7. When a breach of trust is intended

8. Defective title

9. Other Grounds - A conditional one-Drawn on an ordinary piece of paper -A stale one -A post-dated one

-Mutilated

-Drawn on another branch where the account is not kept

-Presented during non-banking hours -If the words and figures differ -If there is no sufficient funds -If the signature of the customer is forged

-If a crossed cheque is presented at the counter