BNK601: Banking Law

Semester 1
TUTORIAL 6

1. Define the business of banking and support it with relevant statute law and case law.
The business of banking is defined under the Fiji Banking Act (1995) section 2 meaning (a)
the business of :  accepting deposits of money from the public or members thereof, 
withdrawal or payable upon demand or after a fixed period or after notice,  or any similar
operation through the frequent sales or placement of bonds, certificates, notes or other
securities,  and the use of such funds, either in whole or part, for loans or investments for
the account and at the risk of the person doing such business’.
2. Briefly explain the definition of a Customer and support it with relevant case law.
Customer is not specified in any statute law, but judges often rely on past case laws to give
the legal definition of customer which would consequently established a legal relationship
with the banker.

3. State two general relationships of a banker and customer.

i.Debtor-creditor relationship.
ii. Creditor-Debtor relationship
iii. Bailee-Bailor relationship
iv. Lesser-Lessee relationship
v. Agent-Principal relationship

4. State two special relationships of a banker and customer.

i. Legal Obligation or Duties of a Banker

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ii. Legal Rights of a Banker
iii. Legal Rights of a customer

5. Harvey Milton operates an upholstery recovering business as a sole trader. He completed a job
at a convention centre and billed the owners, Axel Wade Entertainment, for the $20 000 fee. They
made out a cheque in a hurry to H.Milton , without crossing out the remainder of the space for the
name. By coincidence, a person who operated a company named HM Milton Pty Ltd walked into
Axel Wade Entertainment and was given Harvey’s cheque by mistake. He added P/L to the H
Milton on the cheque and deposited in his company bank account. Since Harvey had not received
payment, he took action against Axel Wade Entertainment, who in turn took action against their
bank for breach of duty in paying out on an altered cheque.
i. Has the bank breached its duty of care to its customer, Axel Wade Entertainment?

ii. Has Axel Wade Entainment contributed to any negligence committed by the bank?

iii. What would be the likely outcomes of the court decisions?

6. Foley v Hill 1848: Customer paid money into an account expecting to receive 3% interest per
year, but wasn’t paid any for 6 years. He wanted them to give the profit they made on his money.
The account of profits was denied: he should have just sued to return the debt. Where money is
paid into the account, the bank can do what it likes. Its duty was to repay (when demanded) a sum
equivalent to that paid into his hands.
i. Briefly explain the banks obligation in the case above.
Banker receives the deposit and is bound to return an equivalent by paying a similar sum to
that deposited with him when he is asked for it. He is known to deal as its own make profit
out of it and retains it. Pay back only the principal or principal and small rate of interest.
He is not answerable to its principal if he engages in hazardous speculation, he is only
answerable to the amount as stated in the contract.
ii. Identify the general relationship of the banker‐customer being established in the above case.
Accepting a deposit from a customer, a banker acted as an agent or trustee for that customer
and thus subject to fiduciary obligations in its dealing with the customer.

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iii. Will the customer be successful if he sues the bank?
Banking Act (1995) section 2 than the clause doesn’t state that the banker has to appropriate
any profit to the customer. Therefore the bank will not be liable if there is a court case against
them.
7. Claytons Rule of Appropriation:
The account below shows an overdraft account of $5000 as on 1st January, and a further amount
was paid on 6th February. At the same time four remittances of $2000, $1000, $1500 and $3500
have been made on different dates during the year.

Customer Account

Date Particulars $ Date Particulars $

1/1 Balance 5000 25/2 Cash 2000
6/2 Cash 2000 6/06 Cash 1000
1/07 Cash 1500
15/08 Cash 3500

i. Discuss the banker’s right of appropriation and right of combination.

Right of Combination: banker has the right to set‐off or debit balance in one account against
a credit balance in another account, combining two accounts to clear out the debt of the
customer.
Right of Appropriation: Bankers right to appropriate funds to customers overdraft account.
ii. Calculate how the bank will appropriate the debt of the customer to recover the overdrawn
account. Apply the Clayton’s rule of First In First Out.

Customer is liable for:

First three deposits($2000+$1000+1500)and $500 from the last deposit to clear
out(discharge) the first debt of $5000.
Second debt of $2000 will be cleared out(discharged) from the last deposit of
$3500.

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Questions 5 Solution
Using the IRAC method the answers could be answered as follows:
A recommended way to approach a legal problem is the IRAC method – Issue, Rule,
Application, Conclusion.
5) Issue:
First identify the key legal points or issue – Banker‐Customer special relationships.
i. Has the bank breached its duty of care to Alex Wade Entertainment?
ii. Has Alex Wade breached its duty to draw a cheque carefully?
Rules:
i. Banker – A bank has a duty to avoid paying cheques that have been forged or materially altered.
A bank has a duty to act in good faith and without negligence when receiving a cheque. Good faith
basically means that the banker has to act honestly and fairly towards the customer, without
negligence which simply means the banker is being careful when receiving the cheque.eg: examine
the face of the cheque if there is any alteration or forgery. Statute Law: Fiji’s Bills of exchange
Act (1978) Section 2 stipulates that (1) ‘where a banker in good faith and without negligence (b)
having credited a customer's account with the amount of any such instrument, receives payment
thereof for himself, and the customer has no title or a defective title to, the instrument the banker
shall not incur any liability to the true owner of the instrument by reason only of having received
payment thereof. Case Law: Tina Motors v. ANZ Banking Group. The banker Mr Hardy as the
representative banker from ANZ Bank had twice been doubtful on the authenticity of signature
and he acted accordingly by seeking confirmation from Mr I on the issuance of the cheque. (He
acted without negligence)
One defence available is that the bank acted in good faith and without negligence.
ii. A customer has a duty to draw a cheque carefully so that it is not easily forged or altered. A
major precedent(previous decision of another court) is the Commonwealth Trading Bank v
Sydney Wide Stores Case. The bank wrongly paid a cheque made out to’cash’ after it was
converted to read ‘cash’. Although the bank had breached its duty by paying out on an altered
cheque, the customer had also breached its duty and was liable for contributory negligence. The
question is whether filling out a cheque correctly and leaving some white space at the end is a
breach of a customer’s duty. Could Alex Wade have reasonably expected there would be a
company known as Harvey Milton P/L?

Application

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i. The bank will have a reasonably strong argument that it acted honestly and without negligence
and that its error in missing the addition of P/L was the equivalent of missing a crossing or an
irregular endorsement. The question is whether a teller should reasonably be expected to have
noticed the addition of two letters.
ii. It is doubtful that Alex Wade breached its duty to draw the cheque carefully. However, Alex
Wade Entertainment appears to have been negligent in not checking the identity of the person to
whom it paid the cheque for $20,000 and should compensate Harvey Milton.

Conclusion;
The most likely outcome in this case is that Harvey Milton should gain compensation from Alex
Wade entertainment. In turn, Alex Wade may be able to prove its paying bank was liable for
paying out an altered cheque. However, Alex Wade is probably not liable for contributory
negligence in regard to the way it drew the cheque.

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