FINANCIAL TECHNIQUES AND CONTRACTS (2)

Lending activities

o Property loan
o Commercial loan
o Financial lease

Selected legal issues on lending activities

1. Nature of banker – customer relationship

 The banker – customer relationship is contractual in nature – stated in Foley v

Hills, Atkin LJ in Joachimson v Swiss Bank Corporation.
 All banking transactions are based on the law of contracts in general together
with the law on special contracts which govern specific transactions or
banking services such as standing order, funds, transfers or remittances,
banker’s drafts, letter of credit and foreign currency.
 The term of banker – customer contract are either express or implied; and
more often than not, the contract is governed by both expressed and implied
terms.

2. Debtor – creditor relationship

 The type of contractual relationship between banker and customer is mainly of

debtor and creditor. That is, as regards deposit accounts, the bank is the debtor
and the customer is the creditor. Whereas in a financial situation, the bank is
the creditor and the customer is the debtor.
 The debtor – creditor relationship was established by the House of Lords
decision in the case of Foley v Hill and Joachimson v Swiss Bank
Corporation.

3. Agent and principal relationship

 This kind of relationship happens where the customer gives the banker a
mandate to do certain acts in connection with his account or to permit any
other person to do such act.
 Bankers act as their customer’s agents when carrying out standing instructions
or orders, making remittances on their customer’s instructions and when
acting as an agent in collection of bills and other trade transactions. It also
happens when a banker collects the proceeds of cheques for his customer.
 Lord Atkinson in the case of Westminster Bank Ltd v Hilton held that as
regards to the drawing and payment of cheques, the relationship between
banker and customer is that of principal and agent.
4. Fiduciary relationship

 The bank has fiduciary duties, if the bank acts as advisor, or if the bank acts as
a trustee over trust funds.
 Some funds may be the subject of an express trust whilst some may be of a
constructive trust.
 Sometimes the court held that a banker owes a fiduciary duty towards its
customer.
 An example is where equity imposes a duty on a bank not to take undue
advantage over a customer - Woods v Martins Bank Ltd & Anor,
 One of the fiduciary duties applicable to ‘fiduciary’ relationships is the duty to
avoid conflict of interest.
 Sometimes, and especially with the diversification of banking businesses, the
bank may act as agent, in which case the question of conflict of interest and
other duties of agents (avoiding secret profits, and so on) may arise.

5. Constructive trustee and beneficiary relationship

 Although the relationship between banker and customer is primarily one of

debtor and creditor, a bank may be affected by rights which third parties have
over funds held by the customer in an account.
 Those third-party rights may be legal, where for example, an express legal
assignment of the funds is made.
 Alternatively, the customer may hold funds in trust for another. This type of
relationship arises when courts hold that the bank is liable as a constructive
trustee.
 When it is said that a bank is subject to a constructive trust, it means that the
bank’s actual or constructive notice of a breach of trust or of fiduciary duties
by another has, taken in conjunction with certain acts of the bank, caused the
bank to be considered as having become ‘involved’ in the breach, with the
result that the bank itself comes under a liability.
 Thus, if the banker knows that its customer holds money in trust, the banker
should not part with the money for any purpose which is inconsistent with the
trust, even on the instructions of the customer.
 Otherwise, the bank may be held by the court to be a party to the breach of
trust. Cases on point include Selangor United Rubber Estates v Craddock Co
Ltd Karak Rubber Co v Burden & Ors.

Banker’s rights

1. Right to commission or service charge

 A banker has the right to charge a customer commission or service charges for
keeping the customer’s account, remittances and for other banking services.
In practice, these charges and commission are generally standard and are fixed
by the Association of Bankers.

2. Right to interest

The interest charged by the banker is determined by express agreement

between the banker and the customer.
Sometimes, the interest is determined by an agreement implied from the usual
course of dealings between the banker and his customer.
For example, when a customer draws a cheque which takes his account into
overdraft and the banker allows this overdrawing, the banker’s normal interest
rate for unsecured advances may apply.

3. Right to set- off

Where a customer has an account, which is in credit but owes money to the
banker in respect of another account, the banker may have the right of set-off
or of combining accounts.
In other words, the banker may have the right to reduce his liability to repay
the customer by the amount which the customer owes him, or, to reduce the
amount which the customer owes to him by the credit balance in the
customer’s account.
The banker may exercise the right of set-off only when the money owed to
him is a sum certain, which is due, and where there is no agreement, express
or implied, to the contrary. As a general rule, a banker may only exercise the
right of set-off when all the relevant accounts are held ‘in the same right’.
Rahimah bte Abdullah v Bank Bumiputra Malaysia Bhd [1994] 1 MLJ 477,
High Court.

Banker’s duties

When dealing with customers and throughout the banker-customer

relationship, the banker is legally obliged to observe proper standards of
market conduct, avoid prohibited business conduct, conflicts of interest and
treat customers fairly and equitably.
Other legal obligations that dictate how a banker must act in relation to
customers are in respect of the prevention of money laundering and terrorist
financing and avoidance of contravention of tax laws and crimes.
1. Compliance with standard of market conduct

It is a legal requirement that banking business must be conducted fairly,

responsibly and professionally. Bankers are expected to embrace a strong
compliance culture and ensure that their businesses are being conducted
ethically and with integrity.

2. Duty to honour his customer’s cheques and not pay without valid authority

A banker has an implied duty to honour his customer’s cheques provided that:

o They are drawn in the proper form;

o the account on which they are drawn is in credit to an amount
sufficient to pay them, or arrangements have been made for an
overdraft facility and the agreed overdraft limit will not be exceeded;
o there is no legal cause (for example, service of a garnishee order)
which makes the credit balance or the agreed overdraft limit
unavailable;
o they are presented during banking hours (or within a reasonable time
thereafter).

If the banker wrongfully dishonours his customer’s cheques, the customer may
be able to sue him for damages in breach of contract. Where the customer is a
trader, he may be able to recover substantial damages for injury to his
commercial credit without having to prove any actual loss: Rolin v Steward.
If the customer is not a trader, he can recover substantial damages in breach of
contract only if he can prove actual loss: Gibbons v Westminster Bank.
Whether or not the customer is a trader, he or she may be able to recover
substantial damages without proving actual loss by bringing an action for libel
against a banker for wrongful dishonour of a cheque.
In an action for libel the customer must prove that the words used by the
banker when dishonouring the cheque tend to lower the customer ‘in the
estimation of right-thinking members of society generally’.

3. Duty of secrecy

The banker’s duty of secrecy in Malaysia is statutory.

This is in contrast with the position in England where, based on the principles
laid down in Tournier v National Provincial Bank, the banker is entitled to
disclose information about his customer’s affairs in only four circumstances:
(i) when disclosure is compelled by law; (ii) when the banker owes a duty of
 disclosure to the public; (iii) when disclosure is required in the interests of the
bank; and (iv) when the customer consents.

4. Duty to produce documents in court

A subpoena duces tecum is a court order compelling disclosure. There is a

duty to produce documents in court under subpoena.
Robertson v Canadian Imperial Bank of Commerce [1995] 1 All ER 824,
Privy Council

5. Code of conduct

To better enhance consumer protection, section 124 of the Financial Services

Act 2013 provides that certain business conduct are prohibited (as laid down
in Schedule 7 of the Financial Services Act 2013).
In addition, BNM issued the ‘Code of Conduct For Malaysia Wholesale
Financial Markets’ which applies to market participants in the wholesale
financial
markets, including banks, investment banks, Islamic banks, development
financial institutions, insurers, takaful operators, money-brokers, operators of
electronic trading or broking platform, corporations and investment
institutions. The full text of this Code may be downloaded from BNM’s
official website. The most relevant Part, Part C is as follows:

Prohibited conduct
The following conducts are prohibited under the Financial Services Act 2013
and Islamic Financial Services Act 2013: (1) market manipulation; (2)
misinformation and rumour; and (3) insider dealing;

I. Market manipulation

Section 141 of the FSA 2013 prohibit a person from:

 taking part in or carrying out a transaction that has or is likely

to have the effect of creating a rate which is an off-market rate
which results in an artificial rate for dealing in financial
instruments in the money market or foreign exchange market;
and
 creating or causing anything that creates a false or misleading
appearance of active dealing in financial instruments in the
money market or foreign exchange market.
 II. Misinformation and rumour

Section 141(1)(c) of the Financial Services Act 2013 prohibits a

person from making a statement or disseminating information that is
false or misleading in a material particular and is likely to induce
another person to deal in financial instruments or is likely to have the
effect of raising, lowering, maintaining or stabilising the market rate of
such financial instruments in the money market or foreign exchange
market and when the person makes the statement, or disseminates the
information:

 (1) the person does not exercise due care whether the statement
or information is true or false; or
 (2) the person knows, or ought reasonably to have known, the
statement or information is false or is materially misleading.
 Without limiting the generality of the scope of the Financial
Services Act 2013, the following amounts to making of
statement or dissemination of information which is false or
misleading in a material way and constitutes offences under
section 141(1) (c) of the Financial Services Act 2013:
 (a) start and spread rumours to move markets or to deceive
other market participants; and
 (b) discuss with any other person without care, unsubstantiated
information which is suspected to be false or materially
misleading and damaging to third parties.

III. Insider trading

Section 141(1)(d) of the Financial Services Act 2013 prohibits a

person from taking part in or carrying out a transaction based on
information that is not generally available to persons who regularly
deal in the money market or foreign exchange market that would, or
would tend to, have a material effect on the price or value of financial
instruments.

 (Without limiting the generality of the scope of the Financial

Services Act 2013, the following amounts to insider dealing
and constitutes offences under section 141(1)(d) of the
Financial Services Act 2013 :
 (1) profit or seek to profit from insider’s information with
intent or through negligence; and
 (2) provide any other person with such information to make a
profit for their institutions, clients or third parties with intent or
through negligence.
  Market participants, who possess insider’s information, must
not disclose such information, except where the disclosure is
required as a part of the course of employment, required by
laws or relevant supervisory authorities.

IV. Whistleblowing

Market participants may, pursuant to section 256 of the Financial

Services Act 2013, whistle blow to the Bank in good faith if they have
knowledge or information that a contravention of this policy document
has been committed or is about to be committed.

Customer’s rights
 The customers’ rights are generally three-fold, namely: (1) right to repayment;
(2) right to draw cheques; (3) right to interest.
 It is an implied term of the contract between the banker and his customer that
the banker promises to repay the customer ‘a sum equivalent to that paid into
his hands’.

Customer’s duties
 Customers have two main duties: (1) duty of taking reasonable care in drawing
cheques; (2) duty to disclose forgeries once he is aware of it.
 The customer has an implied duty ‘to exercise reasonable care in executing his
written orders so as not to mislead the bank or facilitate forgery’: Joachimson
v Swiss Bank Corporation; London Join Stock Bank v Macmillan and Arthur,
Lord Haldane in London Joint said that the customer contracts that ‘in drawing
his cheques he will draw them in such a form as will enable the banker to fulfil
his obligations and therefore in a form which is clear and free from
ambiguity’.
 In Greenwood v Martins Bank, it was held that the customer has an implied
duty to inform the bank if he discovers that cheques purporting to have been
signed by him have been forged.

Macmillan duty and the Greenwood duty

 United Asian Bank Bhd v Tai Soon Heng Construction Sdn Bhd [1993] 1 MLJ
182, Supreme Court
 Proven Development Sdn Bhd v Hongkong and Shanghai Banking Corp
[1998] 6 MLJ 150, High Court
 It is incumbent upon a customer to inform the bank of any irregularity in the
customer’s account as soon as he became aware of it. Failure to do so gives
 rise to estoppel. Proven Development Sdn Bhd v Hongkong and Shanghai
Banking Corp [1998] 6 MLJ 150, High Court

Interference to bank – customer relationship

 Sometimes deposit accounts may be affected by third parties.
 These interferences may be in the form of attachment, Mareva injunctions,
freezing orders, discovery and inspection orders and the banker’s
obligations under the Unclaimed Moneys Act 1965.

1. Attachment
 Lord Denning MR explained the nature of attachment proceedings under
English law in Choice Investments Ltd v Jeromnimon

2. Mareva Injuction

 Mareva injunction is an order of the court restraining a party to

proceedings from removing from the jurisdiction of the court or otherwise
dealing with assets located within the jurisdiction and, in more limited
circumstances, from dealing with assets outside the jurisdiction.
 The purpose of a Mareva injunction is to prevent judgments of the court
from being rendered ineffective whether by the removal of assets from the
jurisdiction or by dissipation within the jurisdiction. Once a banker
receives a Mareva injunction or any other freezing order, the banker has to
obey the order. If the banker pays away any monies in the deposit account
which is the subject of a Mareva injunction or freezing order, such
payment would constitute a contempt of court.
 Once a banker receives a Mareva injunction or any other freezing order,
 the banker has to obey the order. If the banker pays away any monies in
the deposit account which is the subject of a Mareva injunction or freezing
order, such payment would constitute a contempt of court.
 There are numerous cases involving Mareva injunctions such as Stone
Master Corp Bhd v Dato’ Koh Mui Tee & Ors, Toyota Tsusho v Foo Tseh
Wan & Ors

3. Discovery and inspection orders

  The banker may also be served with a discovery and inspection of
documents order which are meant to aid freezing orders such as the
Mareva injunction.
 By virtue of section 7 of the Banker’s Books (Evidence) Act 1949,136
any party to any civil or criminal proceedings or inquiries (which may
include arbitration) can apply for an order enabling him or her to
inspect and take copies of any entries in a banker’s book for any of the
purposes of such proceeding.
 A ‘banker’s book’ is defined to include any ledger, day book, cash
book, account book and any other book used in the ordinary business
of a bank.

4. Unclaimed money

 The Unclaimed Moneys Act 1965137 applies throughout Malaysia and

this Act relates to the payment of unclaimed moneys into the Federal
Consolidated Fund.
 This Act relates to banking as it is common for some bank accounts to
turn dormant or stagnant; particularly, savings accounts with small
credit balances.
 Section 8 of the Unclaimed Moneys Act 1965 defines ‘unclaimed
moneys’ as:
 (a) all sums of money which are legally payable to the owner and have
remained unpaid for a period of not less than one year after they have
become payable;
 (b) all sums of money to the credit of an account that has not been
operated in whatever manner by the owner for a period of not less than
seven years; and
 (c) all sums of money to the credit of a trade account which has
remained dormant for the period of not less than two years.
 Deposit accounts may sometimes fall within the definition above. By
virtue of section 10 of the Unclaimed Moneys Act 1965, the banker
holding such unclaimed moneys has to enter all unclaimed moneys in a
register. Once a year, the bank has to submit a copy of the register for
publication in the Government Gazette.
 Failure to comply may result in the bank being guilty of an offence.

Termination of banker – customer relationship

1. Termination by parties
 The banker-customer relationship may be terminated by the parties in any one
of the following ways: (1) by mutual agreement; (2) by unilateral act, as where
the customer or the banker gives notice to terminate.
If a customer maintains a current account which is in credit or if he maintains
deposit accounts, he may close the accounts by demanding repayment of the
balance due or standing in the accounts.
If the customer’s current account is overdrawn, he may close his account by
repaying the overdraft. A banker who wants to close his customer’s account
must give that customer reasonable notice.
The period of notice must be long enough to enable the customer, having
regard to all the surrounding circumstances, to make alternative arrangements.
Written notice to close the customer’s account must be given by the bank -
Cheng Kiat v Overseas Union Bank [1984] 2 MLJ 140, High Court.

2. Termination by operation of law

The banker-customer relationship may also be terminated by operation of law;

that is by notice of death, bankruptcy or winding up or mental incapacity.
Unless there is an agreement to the contrary, the mandate for the operation of
bank accounts may be revoked automatically by the death, bankruptcy or
mental incapacity of any of the parties.
The banker should therefore stop the account as soon as he has notice of any
one of these events.
A bank may be held to be negligent if it fails to freeze the joint account upon
actual notice of the death of the joint account holder.
The requirement to freeze the account is not based on official notification of
the death, but by actual knowledge of such death.
Application of the survivorship principle in event of notice of death of a joint
account holder – the bank may be held liable if it pays out negligently to the
survivor.
New Ace Digital Print Sdn Bhd & Anor v Public Bank Bhd [2018] 1 MLJ 769
(Court of Appeal)