DR.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY, LUCKNOW
2016-17

Banking Law
Final Draft
On
Banker Customer relationship- Rights and Duties
Submitted for the project work undertaken in the partial
fulfillment of B.A.L.L.B (Hons.) 5 years integrated course of Dr.
Ram Manohar Lohiya NLU, Lucknow.
SUBMITTED TO: SUBMITTED BY:
Dr. APARNA SINGH
SHALINI DWIVEDI
(ASST.PROFESSOR)
ROLL NO:-121
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DR.RMLNLU
5th SEMESTER

ACKNOWLEDGEMENT
I take this opportunity to express my profound gratitude and deep regards to my Assistant
Professor Dr. Aparna Singh on her exemplary guidance, monitoring and constant
encouragement to give shape to this project. The blessing, help and guidance given by her time
to time shall carry me a long way in the journey of life on which I am about to embark.

I also take this opportunity to express a deep sense of gratitude to my respected seniors who
share their cordial support, valuable information and guidance, which helped me in completing
this task through various stages.

Lastly, I thank the almighty, my parents, brother, sisters and friends for their constant
encouragement without which this assignment would not have been possible.

Shalini

Table of Contents:1. Introduction..................................................................................................................................4

2. Definition of Banker and customer.............................................................................................4
3. Banker duties to his Customer.....................................................................................................6
4. Duties of Customer......................................................................................................................8
5. Rights of Banker and Customer...................................................................................................8
6. Relationship between Banker and Customer.............................................................................11
7. Termination of contract between Banker and Customer...........................................................15
8. Conclusion.................................................................................................................................16
9. Bibliography..............................................................................................................................17

Introduction
The business of banking is pivotal for the economy of any country. Today, banks are perceived
as indispensable institutions not only by the business community, but also by ordinary public.
The concept of multi-functional banks in the globalized economy, providing various types of
services, has radically changed the historical scope of banking business. Owing to this varied
scope of banking business, their relationship of the bank and the customer too has undergone
rational changes.
The various services provided by banks impose number of important duties on themselves. Due
to the extensive and varied nature of modern banking business, proper regulation over the duties
of the banks has become vital.
The purpose of this project is to examine the bank-customer relationship in the light of banks
duties owed to their customers, and the scope of challenging the conduct of banks by the
customers in the event of breach of those duties.

Definition of Banker and Customer

Banker:According to Section 3 of the Negotiable Instruments Act the term banker includes any person
acting as a banker.
According to Halsburys Laws of England a banker as "an individual, partnership or corporation
whose sole predominating business is banking, that is the receipt of money on current account or
deposit account and the payment of cheques drawn by and the collection of cheques paid in by
the customer."
A banker is one who in the ordinary course of his business, honors cheques drawn upon him by
persons from and for whom he receives money on their account. No person or body corporate
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can be a banker who does not (1) take deposit accounts and current accounts, (2) issue and pay
cheques and (3) collect cheques crossed and uncrossed for its customers. One claiming to be a
banker must acknowledge himself to be one, and the public must accept him as such; his main
business must be that of banking from which normally he should be able to earn his livelihood.
Customer
A customer is a person who has some kind of account, such as deposit or current with a bank and
from this it follows that any person may become a customer by opening a deposit or current
account or having some similar relation with a bank." To constitute a customer, there must be
some identifiable course or habit of dealing in the nature of regular banking business. It is
difficult to settle the idea of a single transaction with that of a customer. A customer is a person;
he should have some kind of an account with the bank. The initial transaction in opening an
account will not create the relation of a banker and customer. According to the duration theory
the relation of a banker and customer begins as soon as the first cheque is paid in and accepted
for collection.
In simple words a customer can be any person for whom the bank agrees to conduct an account.
Legal Requirements to be qualified as Customer:

Customer should be a major

Customer be of sound mind

He should not be debarred under any law

There must be an offer and acceptance of the proposal.

Things to be noted:

A single transaction can constitute a customer

Every customer should have an account

There should be some frequency in transactions

All the dealing must be of banking nature

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The customer can be a person, a company, a society or a legal entity.

BANKERS DUTIES TO HIS CUSTOMER

1. Duty to obey Customers mandate
The banker must observe the customers mandate as to the right person or the number of persons
that are authorized to sign cheques drawn on the customers account and their right signatures.
So a banker cannot pay out of a customers account a cheque which is not signed by the
customer or his authorized agent. If the mandate is that a cheque is to be signed by two
signatories, the banker cannot pay on one signature.
A banker has no right to debit a customers account if he pays on a cheque on which the
customers signature1 has been forged, because the payment is made without the customers
mandate.
Payments out of a customers account must be done in accordance with the customers direction.
So payment made because of a forged endorsement of a cheque cannot be debited by the banker
against the customers account.
However, a bank will not be liable where the banker was misled by the fault of the customer in
failing to draw his cheque properly.2
2. Duty to honour Customers Cheque
A banker must honour his customers cheque to the extent that the account is in credit or to the
extent of an agreed overdraft. If a banker misleads a customer into thinking that he has sufficient
credit to meet a cheque the banker must honour the cheque.3
3. Duty to take reasonable care
1 Ligget (Liverpool) Ltd V Barclays Banks [1972} All E.R.Rep451,[1928] 1 K.B, 48
2 London Joint Stock Bank Ltd v. Macmillian & Arthur[ 1918-19] All E.R.Rep30[1918]A.C.77
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Banker has a duty to act with reasonable care and skill so as to ensure that money is not
improperly withdrawn from his customers account.4
4. Duty to observe secrecy
Banker has a duty to observe secrecy in respect of his customers financial affairs. Exceptions
(a) Where disclosure is under compulsion of law e.g. by court order;
(b) Where disclosure is expressly or impliedly authorized by the customer e.g. where he
authorizes a reference to his bank;
(c) Where the interest of the bank requires disclosure e.g. where the bank is suing on an overdraft
(d) Where vital national interest requires disclosure.5
5. Duty to collect cheques paid in
Banker has a duty to collect moneys due on cheques paid in by his customer. He is then a
collecting bank for that purpose, and is entitled to statutory protections given to collecting banks.
6. Duty to ensure payment to the right person
Banker owes a duty to the true owner of a cheque to make payment to him and to no one else. If
the cheque is crossed, it must be paid to him through his collecting bank, if not crossed; payment
must be to him direct or to his order. Breach of this duty renders the paying bank liable for
conversion of the cheque.
The cheque must be presented by the payee or by someone duly authorized by him to do so e.g.
by an endorsement at the back.

3 Holland v. Manchester v. Liverpool District Bank Co [1909] 25 T.L.R. 386;Hot v Markham [1922]All
E.R. Rep 134; [1923]1K.B 504
4 Selabgor United Rubber Estate Ltd v Cradock (No.3) [1968] 2 All E.R. 1073; Belmont Finance
Corporation v Williams Furniture Ltd (No.2 ) [1980] 1 All E.R.393
5 Tounier v National Province & Union Bank of England [1924] 1 KB.461, [1923] All E.R. 550
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7. Duty to respect third partys rights over customers account

If a third party has a superior claim to moneys in a customers account e.g. under a tracing claim,
or under a garnishee order, the payment banker must respect that claim, except in so far as he has
given value for that sum by letting the customer take an overdraft.

DUTIES OF THE CUSTOMER

The customer owes some onerous but very few duties to his banker, the most important being
that he must take proper care of the cheque book issued to him by his banker. But he is not liable
to the banker for mere carelessness in keeping his cheque book if this enables a third party to
obtain a cheque leaf and forge his signature. The locus classicus of judicial attitude is found in
Bank of Ireland v Evans Charities Trustees 6. In that case, the defendants had allowed their
seal to remain in the possession of their secretary who by that event misappropriated certain
consoles.
However, the customer is liable where the loss suffered by the banker is a direct result of the
customers negligence. He is also liable where his negligent conduct amounts to estoppels
against him or otherwise to a ratification of the negligent conduct of a third party. In such
instances, the customer is liable if the carelessness relates to the drawing of the cheque or
otherwise the issuing of his mandate. Thus it is a settled law that the customer owes his banker a
duty to draw his cheque carefully or not to issue his mandate in a careless manner.
Three distinct obligations flow from this singular implied undertaking by the customer, namely:
(a) That the customer should not draw his mandate in a manner that would facilitate fraud by
third parties.
(b) That the customer should always draw his mandate in a clear and unmistakable or
unambiguous terms; and
(c) That the customer should inform his banker promptly whenever he discovers that his cheque
or mandate has been or is being forged.

6 [1855] 2hlc 389

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Rights of Banker and Customer

Rights of the banker
The right of setoff- is nothing but combine the two or more accounts of a customer of the
customer. If the customer have two or more account and incase of absence of agreement the
banker can exercise has right of set off.
(a) The two or more accounts must be in the name of same customer.
(b) There must be same capacity.
(c) There must be same bank, though different branches.
(d) One account should show debit balance and other should show a credit balance.
(e) The debt must be manual.
(f) The amount of debit should be certain one.
Thus set off is adjustment of debit balance with that of credit balance.
Right to close an account-: There should be no confusion between closing the account and
stopping operation of the account. The contractual relationship between banker and customer is
terminated by closing the account. There is no opportunity for the customer to operate the
account once again. On the other hand, stopping operation of an account refers to the suspension
of the operation of an account for the time being, at the advent of certain events. It is purely
suspension of the relationship between a banker and a customer and the customer can operate the
account, after such events come to a close.
The circumstances for closure of account are:

Customers intension to close the account.

(i) The customer can close the account in any of the following condition.
(ii) If he does not agree to the terms of the banker such as rate of interest, bank charges etc.

(iii) If the customer does not enjoy such facilities as are offered by some other banks e.g. free
transfer of money up to Rs 10000.
(iv) When the confidence of the person is shaken

Bankers intention to close the account.

(i) The banker can close the account of the customer when he finds.
(ii) The account is not remunerative.
(iii) When the customer is not a desirable one.

Customers death-as soon as the bank gets notice of the death of the customer, he should
immediately stop the operations of the account. It is because death puts an end to the

contract.
Customers insanity-the banker should stop the operation of his account .the banker

should apply for the official copy of Lunacy Order.

Customers insolvency-when the banker comes to know that the customer is insolvent
than the bank will close the account of the customer.

Right to appropriate payments -: The banker has the right to appropriate the money deposited
by a customer to any one of the loan account due by him. The appropriation arises when the
customer has more than one account one showing the debit balance and the other with a credit
balance. The customer is given the first option to decide the account to which the amount should
be credited. If the customer fails to indicate his choice then the banker has every legal right to
credit the amount in any one account of that customer.

Rights of a customer:

A customer who has deposited money can draw check on his account up to the extent of

his credit balance or according to overdrawing limit sanctioned by the bank.

A customer has the right to receive statement of accounts from the bank.
A customer has the right to sue the bank for compensation of a wrongful dishonor of his

check.
A customer has a right to sue and demand compensation if the bank fails to maintain the
secrecy of his account.
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Relationship between banker and customer

The relationship between banker and customer is of utmost importance. Now we can define the
nature of relationship that exists between a banker and customer. According to John Paget,
The relation of a banker and a customer is primarily that of debtor and creditor the respective
position been determined by the existing state of the account.

General Relationship:
1. Debtor-Creditor: When a 'customer' opens an account with a bank, he fills in and signs the
account opening form. By signing the form he enters into an agreement/contract with the bank.
When customer deposits money in his account the bank becomes a debtor of the customer and
customer a creditor. The money so deposited by customer becomes banks property and bank has
a right to use the money as it likes. The bank is not bound to inform the depositor the manner of
utilization of funds deposited by him. Bank does not give any security to the depositor i.e. debtor.
The bank has borrowed money and it is only when the depositor demands, banker pays. Banks
position is quite different from normal debtors.
Banker does not pay money on its own, as banker is not required to repay the debt
voluntarily. The demand is to be made at the branch where the account exists and in a proper
manner and during working days and working hours.
The debtor has to follow the terms and conditions of bank said to have been mentioned in
the account opening form. {Though the terms and conditions are not mentioned in the account
opening form, but the account opening form contains a declaration that the terms and conditions
have been read and understood or has been explained. In fact the terms and conditions are

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mentioned in the passbook, which is issued to the customer only after the account has been
opened.}
In the past while opening account some of the banks had the practice of giving a printed
handbill containing the terms and conditions of account along with the account open form. This
practice has since been discontinued. For convenience and information of prospective customers
a few banks have uploaded the account opening form, terms and conditions for opening account,
rate charge in respect of various services provided by the bank etc., on their web site.
While issuing Demand Draft, Mail / Telegraphic Transfer, bank becomes a debtor as it
owns money to the payee/ beneficiary.
2. CreditorDebtor: Lending money is the most important activities of a bank. The resources
mobilized by banks are utilized for lending operations. Customer who borrows money from bank
owns money to the bank. In the case of any loan/advances account, the banker is the creditor and
the customer is the debtor. The relationship in the first case when person deposits money with the
bank reverses when he borrows money from the bank. Borrower executes documents and offer
security to the bank before utilizing the credit facility.
In addition to opening of a deposit/loan account banks provide variety of services, which
makes the relationship more wide and complex. Depending upon the type of services rendered
and the nature of transaction, the banker acts as a bailee, trustee, principal, agent, lessor,
custodian etc.

Special Relationship:
1. Bank as a Trustee: As per Sec. 3 of Indian Trust Act, 1882 A "trust" is an obligation
annexed to the ownership of property, and arising out of a confidence reposed in and accepted by
the owner, or declared and accepted by him, for the benefit of another, or of another and the
owner. Thus trustee is the holder of property on behalf of a beneficiary.
As per Sec. 15 of the Indian Trust Act, 1882 A trustee is bound to deal with the trustproperty as carefully as a man of ordinary prudence would deal with such property if it were his
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own; and, in the absence of a contract to the contrary, a trustee so dealing is not responsible for
the loss, destruction or deterioration of the trust-property. A trustee has the right to
reimbursement of expenses (Sec.32 of Indian Trust Act.).
In case of trust banker customer relationship is a special contract. When a person entrusts
valuable items with another person with an intention that such items would be returned on
demand to the keeper the relationship becomes of a trustee and trustier. Customers keep certain
valuables or securities with the bank for safekeeping or deposit certain money for a specific
purpose (Escrow accounts) the banker in such cases acts as a trustee. Banks charge fee for
safekeeping valuables
2. Bailee Bailor: Sec.148 of Indian Contract Act, 1872, defines "Bailment" "bailor" and
"bailee". A "bailment" is the delivery of goods by one person to another for some purpose, upon
a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed
of according to the directions of the person delivering them.
The person delivering the goods is called the "bailor". The person to whom they are delivered is
called, the "bailee".
Banks secure their advances by obtaining tangible securities. In some cases physical
possession of securities goods (Pledge), valuables, bonds etc., are taken. While taking physical
possession of securities the bank becomes bailee and the customer bailor. Banks also keeps
articles, valuables, securities etc., of its customers in Safe Custody and acts as a Bailee. As a
bailee the bank is required to take care of the goods bailed.
3. Lessor and Lessee: Sec.105 of Transfer of property Act 1882 defines lease, Lessor, lessee,
premium and rent. As per the section A lease of immovable property is a transfer of a right to
enjoy such property, made for a certain time, express or implied, or in perpetuity, in
consideration of a price paid or promised, or of money, a share of crops, service or any other
thing of value, to be rendered periodically or on specified occasions to the transferor by the
transferee, who accepts the transfer on such terms.
Definition of Lessor, lessee, premium and rent:
(1)The transferor is called the lessor,
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(2)The transferee is called the lessee,

(3)The price is called the premium, and
(4)The money, share, service or other thing to be so rendered is called the rent.
Providing safe deposit lockers is as an ancillary service provided by banks to customers. While
providing Safe Deposit Vault/locker facility to their customers bank enters into an agreement
with the customer. The agreement is known as Memorandum of letting and attracts stamp duty.
The relationship between the bank and the customer is that of lessor and lessee. Banks lease
(hire lockers to their customers) their immovable property to the customer and give them the
right to enjoy such property during the specified period i.e. during the office/ banking hours and
charge rentals. Bank has the right to break-open the locker in case the locker holder defaults in
payment of rent. Banks do not assume any liability or responsibility in case of any damage to the
contents kept in the locker. Banks do not insure the contents kept in the lockers by customers.
4. Agent and Principal: Sec.182 of The Indian Contract Act, 1872 defines an agent as a
person employed to do any act for another or to represent another in dealings with third persons.
The person for whom such act is done or who is so represented is called the Principal.
Thus an agent is a person, who acts for and on behalf of the principal and under the
latters express or implied authority and the acts done within such authority are binding on his
principal and, the principal is liable to the party for the acts of the agent.
Banks collect cheques, bills, and makes payment to various authorities viz., rent,
telephone bills, insurance premium etc., on behalf of customers. . Banks also abides by the
standing instructions given by its customers. In all such cases bank acts as an agent of its
customer, and charges for these services. As per Indian contract Act agent is entitled to charges.
No charges are levied in collection of local cheques through clearing house. Charges are levied
in only when the cheque is returned in the clearinghouse.
5. As a Custodian: A custodian is a person who acts as a caretaker of something. Banks take
legal responsibility for a customers securities. While opening an account bank becomes a
custodian.
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6. As a Guarantor: Banks give guarantee on behalf of their customers and enter in to their
shoes. Guarantee is a contingent contract. As per sec 31, of Indian contract Act guarantee is a
contingent contract ". Contingent contract is a contract to do or not to do something, if some
event, collateral to such contract, does or does not happen.
It would thus be observed that banker customer relationship is transactional relationship.

Termination of contract between a customer and banker

The following are the circumstances under which the relationship between the two is terminated.
Termination of relationship by a customer
A customer due to change of place, may like to close the account with the bank.

If the customer is not satisfied with the working of the bank, he may then close his

account the bank.

The account is also closed on the death of a customer. The outstanding balance is paid to
the nominee of the customer.

Termination of relationship by a banker

If a customer keeps a very small amount in his account which may be deemed un-

remunerative by banker.
If customer does not responded to notice served on him by the banker and he

continuously ignore them, then banker can close his account

In case of the death of the customer the banker will close his account.
In case the customer goes mad insane, the relationship of customer and banker

automatically terminates and the banker will close his account.

When banker receives the notice about insolvency of the customer, all his duties comes to
an end and the will close the account of the customer transferring any balance in it to the

official assignee or liquidator.

When bank receives a garnishee orders his relationship to the customer comes to an end.

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Assignment of accounts means that customer directs the bank to pay all his balance to
any other party. When the banker executes such an instructions, the account is closed and
relationship comes to an end.

Conclusion
Law and business are inextricably intertwined. Thus, when businesses and their scope change,
the law should also rationally develop to cope up with the new challenges posed by the said
changes.
The business of banking has undergone a radical transformation from its inception throughout
the years. Banks exert wide influence over not only their customers, but also the overall
economy. In the light of this, the banking law has developed various means to regulate the affairs
of banking business.
The duties of a bank towards its customer, mainly emanates from the bank-customer
relationship. Though this relationship is contractual, common law and statute law have stepped
into the relationship in order to safeguard the interests of the customer. Since, banks are powerful
financial institutions, their accountability is vital for the economy as well as the society.
When compared with the vast number of legal developments both by way of legislation and
judicial activism in developed countries, such as the United Kingdom, Australia and Canada, Sri
Lanka still remains far behind. In the countries mentioned above, consumer protection laws have
proved to be an effective method of challenging the conduct of banks. However, there is great
potential for Sri Lanka to reap the benefits of the developments that have taken place in the
aforementioned jurisdictions, since English common law principles which apply in the said
jurisdictions are dominantly applicable in Sri Lanka when it comes to Banking law.

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Bibliography
Books:

Tannan, M.L, Banking Law and Practice. Wadhwa & Company, Nagpur
Gupta R. Banking Law and Practice in 3 Vols. Modern Law Publications.

Sites:

http://www.ligiagolosoiu.ro
https://ignoubcom.wordpress.com

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