MAKERERE UNIVERSITY

SCHOOL OF LAW
LAW 3113
BANKING AND NEGOTIABLE INSTRUMENTS

DUTIES OF A BANKER

GROUP FOUR
Afternoon Class
DUTIES OF THE BANKER1

Foundation of a banker’s duty of care

Hedley Bryne & Co Ltd v Heller & Partners Ltd (1964) AC 465 (HL)

Principle: Test of banker’s duty of care

Brief facts:

A bank inquired by telephone of the respondent merchant banks concerning the financial
position of a customer for whom the respondent were bankers. The bank said they wanted
to know in confidence and without responsibility on the part of the respondents the
respectability and standing of E Ltd and if it would be good for an advertising contract as
well as whether they are trustworthy financially. The respondent replied that E Ltd was
respectably constituted and considered good for its normal business engagements. Relying
on this, the appellant gave advertising contracts to E Ltd which later went into liquidation
causing financial loss to the appellants.

Held:

Although in the instant case, but for the respondents’ disclaimer the circumstances might
have given rise to a duty of care on their part, yet their disclaimer of responsibility for their
replies on the occasion of the first inquiry to exclude the assumption by them of a duty of
care with the consequence that they were not liable in negligence.

In the absence of special circumstances requiring particular search and consideration on the
part of a bank giving to another bank a reference concerning a customer’s credit worthiness
there is no legal duty on the replying bank beyond that of giving an honest answer.

If in the ordinary course of business/professional affairs a person seeks information or advice

from another, who is not under contractual or fiduciary duty/obligation to give the
information or advice, in circumstances in which a reasonable man so asked would know
that he was being trusted, or that his skill or judgement was being relied on and the person
asked chooses to give information/advice without clearly so qualifying his answer or to show
that he does not accept responsibility, then the person replying accepts a legal duty to ensure
such care as the circumstances require in making his reply and for failure to exercise that
care an action for negligence will lie if damage results.

1
By Ainerugaba Joseph Bill
The paying banker: The Banker’s obligations

1. A paying banker is bound to pay cheques drawn on it by its customer in legal form
provided there are in the bank at the time sufficient funds standing to the credit of the
customer and available for the purposes or provided the cheques are within the limits
of an agreed overdraft.

A banker acts as an agent of its customer when it honours cheques drawn on his or her
account and therefore has a duty to exercise care and skill when dealing with his/her affairs.

The exact extent of this duty has not been clearly decided by the courts but;

The banker is obliged to pay its customer’s cheques if there are sufficient available funds on
the customer’s account. At the same time, it is to exercise care and skill which means that
the bank may in certain circumstances, justifiably refuse to honour his or her customer’s
mandate. According to Lipkin Gorman (a firm) v Karpnale Ltd and another (1989) F.L.R.
137 or [1991] 2 AC 548 or [1992] 4 All ER 331/409/512 a reasonable banker would be
justified in refusing to honour his or her customer’s mandate if there was a serious or real
possibility that its customer is being defrauded. Otherwise, a reasonable banker would be in
breach of duty if it continued to pay cheques without inquiry.

Queen’s Bench Division:

Alliot, J:

“When (as in this case) the alleged constructive trustee is a bank, the court’s approach must
reflect the established contractual duties of a bank. In this context counsel for the bank made
five propositions to me as follows. (1) The bank is entitled to treat the customer’s mandate at
its face value save in extreme cases. (2) The bank is not obliged to question any transaction
which is in accordance with the mandate, unless a reasonable banker would have grounds
for believing that the authorised signatories are misusing their authority for the purpose of
defrauding their principal or otherwise defeating his true intention. (3) It follows that if a
bank does not have reasonable grounds for believing that there is fraud it must pay. (4) Mere
suspicion or unease do not constitute reasonable grounds and are not enough to justify a
bank in failing to act in accordance with a mandate. (5) A bank is not required to act as an
amateur detective.

Those propositions were well supported by authority which it is unnecessary for me to cite,
and I accept them. Counsel for the bank also conceded that if the bank had reasonable
grounds for believing that Cass was operating the clients’ account in fraud of the solicitors,
then it is accepted that it is the duty of the defendants not to honour cheques drawn by Cass
even when drawn within the mandate. Again, I approach that concession on the basis that
reasonable grounds must be construed in the light of the three types of knowledge I have
restricted myself to considering.”

“On the other hand, the bank through their branch manager had constructive knowledge of
C’s misuse of trust funds from the time the manager discussed with C the bank’s concern
that gambling cheques were being presented to the bank and told C that he did not accept
that C’s gambling was controlled outlay, since from then on the branch manager would have
had reasonable grounds for believing that C was probably operating the firm’s clients’
account fraudulently and had acted with want of probity in either ignoring the obvious source
of C’s funds for gambling or in wilfully and recklessly failing to make such inquiries as an
honest and reasonable man would have made. Accordingly the plaintiffs were entitled to
succeed in their claim against the bank but, having regard to the plaintiffs’ contributory
negligence, which could be taken into account when considering contractual breach, the
bank was only liable in respect of losses from the firm’s clients’ account up to the time the
partners in the firm discovered C’s dishonesty in respect of the office account since that
should have put them on notice of the possibility that C was also defrauding the clients’
account.”

Court of Appeal:

“As regards the claim against the bank of breach of contract generally (Nicholls LJ
concurring), the primary duty of a paying banker of a current account in credit was to honour
its customer’s instructions for payment of cheques in accordance with the customer’s
mandate but if a reasonable banker would have had reasonable grounds for believing that
the account was being operated dishonestly a bank which continued to pay cheques without
inquiry would be negligent and liable for breach of contract. On the facts, there was nothing
in the way that C and the firm’s cashier had operated the clients’ account which would have
caused a reasonable banker to believe that there was possibly something wrong in the way
the account was being operated. Furthermore, the branch manager would have been in
breach of the bank’s duty of confidentiality to C as a personal customer if he had informed
the firm of his knowledge of C’s gambling. Accordingly, the solicitors’ claim against the bank
for breach of contract generally failed and therefore the bank’s appeal would be allowed.”
In Babalola v Union Bank of Nigeria Ltd 1980 (1) ALR Comm. 201, the court held that
the defendant bank was justified in refusing to honour the cheques, pending further
investigations, where there was obvious disparity between the signatures on the cheques and
the specimen signature.

On the other hand, a customer has a duty to give clear and unambiguous instructions to the
bank and this includes a duty to ensure that his or her signature is upon orders to the bank
is similar to the specimen signature held by the bank. Even if the disparity is not obvious the
banker will be justified in its action if it is an honest doubt as to the authenticity of the of
the signature. If there is no basis whatsoever such doubt the bank will be liable breach of
contract. If a bank pays upon a forged or unauthorized payment it will not be protected.

2. The bank will also be justified in refusing to pay if the cheque is stale or out of date. A
cheque must be presented for payment when it is due or within a reasonable time
thereafter.
3. The Bill of Exchange Act (Cap. 68) under section 74 (Revocation of a banker’s
authority) provides that the duty and authority of a banker to pay a cheque drawn on
it by its customer are determined by (a) countermand2 of payment and (b) notice of the
customer’s death. In these situations, the bank will be justified to refuse payment.

The bank may also refuse payment if the customer becomes mentally ill or if the state of the
customer’s mind is such that he/she does not know what he/she is doing and loses his
contractual capacity. The banker has to have knowledge and if the banker has no knowledge
and reason to no suspect then the mandate is operative.

4. A paying banker must recognize the person from whom or for whose account he/she
has received the money in account as the proper person to draw on it. Therefore, it
cannot set up a chain of a third person against that of customer.

Duty of care and skill (Cont’d)3

The duties owed by the banker to the customer to customer largely relate to carrying out the
customers payment instructions dealing with securities.

2
Revoke or cancel (as order)
3
By Ainemujuni Caroline
 The customer gives bank authority to operate the account in accordance with his
instructions that is customers New south wales v Laing4 where the bank had agreed to grant
the customer an overdraft and the amount of the cheque does not exceed the prescribed.

The duty of care skill and care owed by the bank in carrying out customers operations it
should be reasonable as stated in Barcalys V Quincecare5.If a banker executes an order
knowing or suspecting it dishonestly of failing to inquire is liable for breach of duty. Like wise
in Mind land Bank V Reckitt6 House of Lords affirmed court of appeals decision that the
bank accepting and receiving payment of cheque to a wrong party not their customer implied
negligence on part of the bank,Lord Atkin buttressed the argument that the banker never in
fact asked for or saw the terms of the document

In Marfani & Company Ltd V Mindland7 and Bank Ltd Nield J laid out principles of
standard care of bankers to their customers. He stated that standard of care required of
bankers is that it can be derived from the ordinary practice of careful bankers. That standard
of care does not require bankers to subject the customer’s account to microscopic
examination. He further explains relying on Ladbroke & co.V Todd Bailhache duty of care
implies protecting the person whose name appears on cheque as being payee lastly it is very
clearly recognized that the onus is upon the banker acted without negligence as illustrated
by Lord Wright in Loys Bank ltd V 8Savory E.B

DUTY OF SECRECY/CONFIDENTIALITY;9
The banker customer relationship has elements of agency and as a general rule an agent
owes a duty of loyalty and confidentiality of his principle. S. 40 (3) Bank of Uganda Aet Cap
51 a banker shall not publish or disclose any information regarding the affairs of a financial
institution or a customer of a financial institution... unless customer consents.
Parry Jones v. Law Society [1965] Diplock stated that the duty of secrecy extended even to
a banker and customer and subject to the contract
Tournier v. National Provincial and Union Bank of England (1924] | KB the plaintif was
unable to meet the payment demands made by the branch manager. On one occasion the
branch manager noticed a cheque drawn to the plaintiffs order by another custodian. The

4
[1954]AC 135
5
[1992]4 ALL ER 363
6
[1933]A.C 1
7
(1968)1WLR 958

8
1933A.C 201
9
By Naluswa J Lawrence
manager then rang the plaintiffs employees to ascertain the plaintiffs private address but in
the course of the conversation he disclosed the plaintiffs account being overdrawn. The
plaintiff's contract was not renewed because of this by the employers.
Court of Appeal held the bank guilty of a breach of a duty of secrecy and awarded damages
against it. it was clucidated, the bank's duty remains even after the account has been closed.
In this case, it was highlighted that the duty of nondisclosure is a legal one arising out of
contract, highlighted the fact that the duty is not absolute but qualified, hence providing
exceptions thereto.

Exceptions to the duty of secrecy.

a)
Where disclosure is under compulsion of law.
A bank cannot refuse to answer questions concerning its relationship with a customer on the
ground of privilege.
S. 6 Evidence )Banker's Book) Act Cap 7 - on application of any part of a legal proceeding
court may order that such party may be at liberty to inspect, take copies of any entries in the
banker's book for any of the purpose of such proceedings. The bank is served with 3 days
notice to comply with courts directive.
This application is similar to an application for a search warrant as the courts are guided by
ecisions from inspecting and discovering documents.
Bankers trust Co v. Shapira (1980) two rogues obtained money by presenting to plaintiff
bark cheques purportedly drawn on it by a bank in Saudi Arabia. Court of Appeal held that
the order would be granted where plaintiff sought to trace funds of which evidence showed
they had been fraudulently deprived.
Foley v Hill it was held that a customers bank account has been described as a chose in
action or incorporeal right as contrasted with corporeal or tangible things.
Income Tax Act Cap 340 S. 131 (1) allows the commissioner general or any authorized in
writing to access any premise, place, book, record, computer. They may make a copy or seize
the record for evidence in determining liability.
Leadership Code Act Cap 167 the Inspector of Goverment can authorize anyone under its
control to inspect a bank account or any safe deposit book in an account.
Prevention of Corruption Act Cap 121 S. 13 (1)if DPP is satisfied that there are reasonable
grounds to suspect corruption may authorize any police officer above rank of Assistant
perintendent to investigate any bank account. And failure to disclose is a punishable offence.
S.14 provides that any court may place restrictions on the operation of any bank account of
an accused.
Companies Act, Sections 165 - 175 states a duty to officers and apocaf the campaay whose
affairs ante being investigated to produce to the inspector all books of accounts.
S. 176 a company's banker is not required to disclose affairs to any other.
Standard Bank of West Africa v AG of Namibia(1927) a police officer wished to inspect
books of the banker and the account of a certain customer in hope of coming upon un offence
but without knowledge what this evidence would help, he laid the information before a
magistrate und the magistrate issued a warrant for the documents Bank instituted
proceedings aguinst being, subject for a search warrant for reasonable grounds of evalence.
It was held, search warrant should issue against a bank only if the bank suspected of having
communicated the offence itself or of harbouring evidence directly connected with a crime
and should not issue in any case where an inspection order might be made under the
Bankers Books Act and it is not enough for applicant to merely hope for evidence along the
search- must have a very good reason, hence it was wrong.
A court order in the form of gamishee proceedings.. here money held by a bankersto the
credit of a customer who is a judgement debtor may be attached to satisfy the judgement
debtor. The bank is called upon to show why customers money should not be attached. Here
it has to disclose its customer's affairs. Civil Procedure Rules 0. 20

b) Where there is a duty to the public to disclose.

Described in the Tournier case as where a higher duty than the private duty is involved. E.g.
where danger to the state or public doty may supersede the duty of the agent to his principal.
Libyan Arab Foreign v Bank Bankers Trust Co (1988) the defendant bank invoked the
exception in relation to disclosure made by it to, and at the request of the federal reserve
Bank in New York of payment instructions which the defendant had received from the
plaintiff. The court viewed the th exception as applicable.

C)Where the interest of the bank requires disclosure for example where a customer brings a
suit against the banker. The banker can reveal the customers affairs as part of defence. Or
where the bank sues to recover an amount lent to the customer. In Sunderland v Barclays
Bank Led (1238) the bank dishonoured cheques drawn on it by a married woman, because
the account had insufficient credit balance, and the cheques where drawn in respect of
gambling debts. When the husband interceded he was told by the branch manager, most of
the cheques were drawn in favour of bookmarkers. The court dismissed the wife's action for
breach of duty of secrecy as the disclosure was required in the bank's own interest. The wife
had given implied consent of the disclosure of the facts to her husband.
d) Where disclosure is made by the express or implied consent of the customer. The consent
may be implied or express, or general in the sense that the bank can disclose the general
state of the account or special to mean the bank is entitled to supply only such information
as is sanctioned by the custom.
Usually it is in the giving of bank references. This is a well -established practice which
authorises banks to provide such information. Customers will therefore be regarded as
having consented to the giving of such information except if they have specifically indicated
that they refuse to allow their banks to reply such inquiries.
Answering inquiries from other banks and acting on behalf of the customer is within the
scope of banking business and the practice may be regarded as implicity authorized by most
customers of the banks.
Parsona v Barclays Co Ltd (1910) 2 it was held that answering inquiries is very wholesome
and useful habit by which one banker arrives in confidence and answers honestly to another
answers being given ant the request and with this knowledge of the first banking customer.

N.B.
Submissions not submitted by time of compiling shall be discussed independently by the
discussants.