BANKERS AND

CUSTOMERS
UNIT 4
MEANING OF CUSTOMER

• Customer-
• Sir John Paget’ to constitute customer a person should satisfy following conditions
1. Account with the banker at the time of drawing
• Great western railway co. vs London and country banking co ltd. (1894)
2. Recognizable course or habit of dealing between the banker and the customer
• Mathews vs William Brown &Co (1894)
3. Dealings in the nature of regular banking business
Commissioner of Taxation vs English Scottish and Australian Bank ( 1920)
MEANING OF CUSTOMER

• Dr. Hart “ A customer is one who has an account with a banker or for whom a banker
habitually undertakes to act as such.

• According to his definition, duration of dealing with the bank is not important
MEANING OF CUSTOMER

• Common Law:
• Ladbroke vs Todd (1914)
• Commissioner of Taxation vs English Scottish and Australian Bank (1920)
• Central Bank of India vs Gopinathan Nair 1970 Ker
• Savoury & Co vs Lloyd Ltd. (1932)- single transaction
• Stony Stanton Supplies v Midland Bank Ltd. (1966)- existence of an account not leading
to a banker customer relation
MEANING OF CUSTOMER

• Statutory Instruments

• Sec 131 of NI Act, 1881- non liability of a banker receiving payment of cheques
• When a banker receives payment of a crossed cheque in good faith and without
negligence for a customer, he bank does not incur any liabilities to the true owner of the
cheque by reason of having received such payment

• Opening of no frill account- customer of a bank

MEANING OF CUSTOMER

• Customer- only for the branch in which the account is maintained and not the bank
• Operations- any branch
• Grievances – Parent branch

• KYC Guidelines of RBI

• Customer is defined
MEANING OF BANKER

• Banker:
• Hart
• Halsbury’s Laws of England
• Sir John Paget

• Money lenders and bankers

MEANING OF BANKER

• Statutory Instruments :
• Banking Regulations Act, 1949- defines banking but not banker
• Sec 5 (b) - banking means 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

• Sec 3 of Negotiable Instruments Act- Banker includes any person acting as banker and
any post office savings bank.
MEANING OF BANKER

• Sec 2 – Bills of Exchange Act 1882-

• Banker includes a body of persons, whether incorporated or not who carryon the
business of banking

• Accepting deposits from the public

• For depositing or borrowing money there has to be an account relationship with the
bank
NATURE OF BANKER AND CUSTOMER RELATION

• Relation between a banker and a customer depends on the type of transaction, contract
and statutory obligations

• The relationship is categorized as

• General Relationship – Sec 5 (b)- accepting deposits for the purpose of lending
• Special Relationship – Sec 6 Banking Regulations Act, 1949
GENERAL RELATIONSHIP

• Debtor- Creditor
• Customer depositing money- creditor
• Bank receiving deposits repayable on demand – debtor

• Foley v Hill (1848)

• Joachimson v Swiss Banking Corporation (1921)
• Joachimson v Swiss Banking Co.

A customer does not have a right of action against its bank for repayment of sums until the
customer makes a demand (and accordingly, that time does not run for the purposes of limitation
periods until such a demand is made
GENERAL RELATIONSHIP

• Creditor – Debtor

• Customers having loan/advance account- overdraft

GENERAL RELATIONSHIP

• Banker is not a depository

• Banker is not a trustee

• Banker is not an agent

 SPECIAL RELATIONS

• Principal and Agent

• Velji Lakhamsey & Co vs Banaji (1955) Bom

• Trustee and beneficiary

• Barclays Bank vs Quistclose Investment (1968) UKHL
• New Bank of India vs Pearey Lal 1961 SC

• Bailor and bailee- United Commercial Bank vs Hem Chandra Sarkar 1990 SC
FEATURES OF BANKER CUSTOMER RELATIONS

• Obligations

1. To honour Cheques- Sec 31 of NI Act

2. To maintain secrecy
3. To follow instructions given by the customer- Sec 131of NI Act
4. To maintain proper accounts
5. To give notice before closing of account
OBLIGATION TO HONOUR CHEQUES

• Fleming v Bank of New Zealand (1900)

• Conditions for honouring cheques
1. Sufficient Balance – Overdrafts ( IOB vs Naran Prasad (1980) Guj
2. Presentation within reasonable time and during working hours- Sec 65 NI Act
3. Presentation at the bank branch maintaining the account- Delhi Cloth & General Mills Co
vs Harnam Singh (1950)
4. Signatures
5. Proper form and correct amount- Sec 18 NI Act
OBLIGATION TO HONOUR CHEQUES

6. Mutilated cheques
7. Reasonable time for collection of amount
8. Cheques of Partnership firms and Company account
9. Cheques of trust account
10. Material Alterations-
Meaning of material alterations and protection to the payment bank
Sec 87, 88, 89 of NI Act
MATERIAL ALTERATIONS

• Liability for forged cheques

• Brahma Shum Shere Jung Bahadur vs Chartered Bank of India 1956 Cal

• Bank of Maharashtra vs Automotive Engineering Co. 1993 SC-

• Sec 10, 31 and 89 of NI Act
• Meaning of payment in due course
 CONSEQUENCES OF BREACH

• Nominal damages – non-trading customer

• Gibbons vs Westminster Bank 1939

• Substantial damages- Trading customer

• Sterling v Barclays bank
• Canara bank vs I V Rajagopal 1974- exception

• Assessing of Damages- Davidson vs Barclays Bank 1940

BANKERS DUTY OF CONFIDENTIALITY

• Banker is under an obligation not to disclose his customers financial position and nature
as well as details of his account to anybody as this may affect his reputation, credit
worthiness and business

• Tournier v National Provincial and Union Bank of England Ltd (1924)

Plaintiff lost his job due to a disclosure made by the bank to his employer
Filed a suit for breach of duty of confidentiality and compensation for the job lost
 TOURNIER’S CASE OBSERVATIONS:

• The duty of non-disclosure is a legal one arising out of contract

• Such a duty is not absolute but qualified by
i. Compulsion of law
ii. Duty to the public to disclose
iii. Interest of the bank requires disclosure
iv. Disclosure with the express or implied consent of the customer
TURNER VS ROYAL BANK OF SCOTLAND (1999)
COURT OF APPEAL
• A bank could not depend on banking practice to justify the assumption of its customer's
implied approval for the use of private details in providing other banks with references.

• The theory that the bank could pass on its customer's confidential information on the
grounds that the bank has its customer's implied consent was rejected
SCOPE OF THE DUTY

a) Duty continues even after the account is closed

a) Obligation extends to information obtained from other sources than the customer’s
actual account

a) Such information obtained while dealing with or in connection with the customer’s
account
b) Duty extends to all the account holders of a joint account
OBLIGATION IN INDIA

• Sec 44 (1) of SBI Act- obligation as to fidelity and secrecy

• Sec 13 of Nationalization Act 1970 – obligation as to fidelity and secrecy

• Shankarlal v SBI 1987 Cal HC

EXCEPTIONS TO THIS OBLIGATION

A. Compulsion of Law
1. IT ACT- sec 131, 133 and 285- Income tax authorities carrying out assessment
2. Banker’s Books Evidence Act, 1891- Sec 4
3. RBI Act- Sec 45 B
4. Banking Regulations Act- Sec 26
5. Companies Act, 2013- Sec 206-229- Investigation into the affairs of a company by CG
6. [Link]- sec 91, 94, 100, 122
EXCEPTIONS TO THIS OBLIGATION

7. FEMA- Sec 37- ED investigations

8. Garnishee Order- disclose the nature of the account held
EXCEPTIONS TO THIS OBLIGATION

B. Public interest
• For political purpose in contravention to the law
• Account of unlawful association
• Account of enemy of State
EXCEPTIONS TO THIS OBLIGATION

C. In the interest of the Bank

• To recover dues from a customer who has appointed a guarantor

D. Disclosure under a banker’s enquiry

E. Disclosure under express or implied consent of the customer

PRECAUTIONS

1. Avoid negligence while disclosure

2. Bare facts
3. Not to give false or misleading information
4. Information to be given in strict confidence and without any future liability
5. Exact balance in the account not to be disclosed to the holder of a cheque
6. Information to be supplied to fellow banker where possible
7. Improper cheques not to be processed
CONSEQUENCES OF BREACH

1. Customer may sue the banker

1. Liable to third party for false information

OBLIGATION TO FOLLOW CUSTOMER’S
INSTRUCTIONS

• Sec 131 NI Act

• Pre-requisites

• Liability of collecting bank

• Brahma Sham Sher Jung Bahadur Rana vs Chartered Bank of India

RIGHTS OF BANKER

1. Right of General Lien

1. Right of set-off/ Combining of accounts

1. Right of Appropriation – Clayton’s Rule

1. Right to claim incidental charges

1. Right to close the Account

RIGHT OF GENERAL LIEN

• Lien- a right of a creditor in possession of goods, securities or

any other assets belonging to the debtor to retain them until
debt is repaid, provided there is no other contract (express or
implied) to the contrary.
 KINDS OF LIEN

• Specific or particular lien- to retain for a particular debt only.

• Sec 170 ICA, 1872

• General Lien-
• Sec 171 of ICA- General Lien of Bankers, Factors, wharfingers,
attorneys and policy brokers
 NATURE OF BANKER’S LIEN

• Brando v Barnet 1864

• According to sec 171 of Indian Contract Act,
1. Bankers can exercise general lien for a general balance of account
2. The goods or securities should be given to the banker as a bailee
3. Lien extends only to those goods that are bailed
• Sec 148 Indian Contract Act - bailment
CONDITIONS FOR EXERCISING LIEN

1. No agreement inconsistent with the right

2. Property comes in his capacity as a banker
3. Possession must be lawfully obtained in his capacity as a
banker
4. Property should not be entrusted for any specific purpose
 FEATURES OF BANKER’S LIEN

1. Goods and securities entrusted in his capacity as a banker

2. Goods and securities standing in the name of the borrower
3. Lien to apply in the absence of express contract to contrary
• Krishna Kishore Kar vs United Commercial Bank 1982 Cal
4. Securities remaining in the possession of the banker after previous loan has
been repaid
• Syndicate Bank vs Vijay Kumar 1992 SC
 PROVISIONS FOR EXERCISING LIEN

5. General Lien can be enforced, if mutual demands exist between banker and
customer
• Jai Kishan Das vs Central Bank of India 1960 Punj
6. Separate agreement to exercise lien is not required
7. Lien extends to all documents under which money will or may be payable
to the customer
8. Banker can retain security even in the case of time-barred debts
NO LIEN IN FOLLOWING CASES

1. Safe custody deposits

• Sir John Paget
• “ A banker’s lien only attaches to such securities as a banker
ordinarily deals with for his customer other than for safe
custody, where there is no question or contemplation of
indebtedness on the part of the customer.”
 NO LIEN IN FOLLOWING CASES

2. Documents entrusted for a specific purpose

3. On articles left by mistake or negligence as it amounts to unlawful
possession
4. Deposits
5. Stolen bonds
6. No lien for trust accounts- where customer deposits as a trustee
7. No lien on title deeds of immovable property
8. No lien till due date and on deposits of partners for debt of the firm
BANKER’S RIGHT TO SET OFF

• Set-off
• When a customer keeps two or more accounts at the bank, some of
which are overdrawn and some in credit, the bank has a right to
combine such two or more accounts and pay the resultant balance, if
any, upon a demand being made by the customer
• Halesowen Presswork vs Westminster Bank 1970
SET-OFF IN RESPECT OF DEBT

• The right of set-off can be exercised only in respect of debts

• When securities are held by the banker, the right to lien is

exercised
ESSENTIALS FOR EXERCISING SET-OFF

1. Account in the same name and right

2. The right is exercised for debts due and not contingent debts
3. Certainty in the debt
4. No agreement to the contrary
5. Right to set-off precedes garnishee order
6. Notice to be given to the customer before exercising set-off
SET-OFF WITHOUT NOTICE

1. Death, mental incapacity, insolvency of customer

2. Insolvency of firm or liquidation of a company
3. Garnishee order
4. Second Mortgage over security charged to the bank
RIGHT FOR APPROPRIATION OF PAYMENT

• Appropriation – where a customer pays in money for a stated purpose the banker is obliged to
apply such payment only for such stated purpose

• Indian Contract Act, 1872

• Sec 59- Appropriation by debtor
• Sec 60- Appropriation by creditor
• Sec 61- appropriation by law
• M/s Kharavela Industries vs Orissa State Finance Corporation and others 1985
Orissa
APPROPRIATION BY LAW

• In case, the customer has single running or current account and

he deposits and withdraw the money frequently, the order in
which the credit entry will set-off the debt entry is the
chronological order

• The first item on the debt side to be discharged or reduced by

the first item on the credit side
CLAYTON’S RULE

• The Rule in Clayton’s Case is:

1. Where the account goes into debit, the first item on the debit side is
cancelled by the first item on the credit side i.e appropriation takes
place in the order of time

1. Where the account goes into credit, the first item on the credit side is
extinguished by the first item on the debit side and so on.
CLAYTON’S CASE

• Devaynes v Noble 1816

• Fact:
• Partnership firm running business of banking
• Nathaniel Clayton- represented creditors of the bank
• One of the partners died and Clayton wanted to claim the amount due from the estate
of the deceased partner (Devaynes)
 CLAIMS

1. Amount at the time of partners death was same as the amount existing at
the time of insolvency of the firm
2. Money was withdrawn only from the money deposited after the partner’s
death
3. Firm was solvent at the time of the death of the partner
• Court rejected all the claims
RULING

• Deceased partners estate is not liable at the time of insolvency

CONDITIONS FOR APPLICATION

1. The account must be continuous and running

2. No agreement contrary to this rule should be existing

between the debtor and creditor
EXCEPTION TO THE RULE

1. When the amount is paid not to the current account but as

part of separate transactions

1. Halletts estate rule

Knatchbull v Hallett 1880- case for mixing of trust money
with personal money
 APPLICATION OF THE RULE TO BANKING
TRANSACTIONS
• Death or Insolvency of a Partner or Joint Account Holder- for
the debts created before his death

• Guarantee agreement

• Notice of Second Charge

 AUTHENTICATION BY PASS-BOOK

• Paget “proper function of a passbook is to constitute a conclusive and

unquestionable record of the transaction between a banker and the customer
and it should be recognized as such”

• Devaynes v Noble
• Canara Bank vs Canara Sales Corporation 1987 Com Cases SC
 FINALITY OF PASSBOOK ENTRIES

• Where the passbook credits more than the authorized amount due to
mistake/negligence, can the entries be reversed?

• United Overseas Bank vs Jiwani 1977 ALL ER

• Three conditions to satisfy
• Misrepresentation
• Misled to enter third party transactions
• Inequitable to repay
UNREMUNERATIVE ACCOUNTS

• Right to claim incidental charges

• In India, a nominal charge is levied due to less usage of cheques

and to encourage opening of current account by business
entities
 LAW OF LIMITATION

• Joachimson vs Swiss Bank

• Sec 22 Limitation Act, 1963
• Limitation starts from the date of such demand being made
• Demand in case of Fixed Deposits- when receipt is presented
• Sec 26 Banking Regulations Act, 1949- accounts inoperative for10 years
• For Fixed Deposits, 10 years calculated from the due date of the Fixed
Deposit
TERMINATION OF THE ACCOUNT

• Right to close the account

1. Voluntary termination
2. Death of the customs
3. Bankruptcy
4. Liquidation of the company
5. Insanity of the customer