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LECTURE 5: BANKER-CUSTOMER RELATIONSHIP

LECTURE OUTLINE;

- Definition of a bank and a customer

- Classification of the relationships
i. Debtor-creditor & creditor-debtor relationship
ii. Bailee-bailor relationship
iii. Agent-principal
iv. Lessor-lessee
v. Trust-beneficiary
vi. Mortgagor and mortgagee

- Discuss the Duties and rights of each party & Disclosure of information
- Termination of the banker-customer relationship

INTRODUCTION;

What is a bank?

Recap of the definition in the first lecture.

Who Is A Customer?

 There is no standard definition of a bank customer and therefore it is necessary to rely on

case law in order to establish whether or not a person is a customer.
In Great Western Railway v. London and County Banking Co. (1901), it was stated that
a customer must have a current or deposit account or some similar relationship.
However not all 'customers' of banks deposit money and may, for instance, deposit
valuables other than money, yet the banks regard such people as customers.
 In Woods v. Martins Bank Ltd and Another (1959) it was considered that Woods became
a customer when he made an investment in a company on the advice of the manager,
even though his account was not opened for some weeks thereafter. The length of
time during which there have been dealings with a person does not appear to affect the
situation, for in Ladbroke and Co. v. Todd (1914) and Commissioners of Taxation v.
English, Scottish and Australian Bank Ltd (1920), it was established that a continuous
dealing relationship was not essential to a definition of a customer and that the
relationship began immediately an account was opened and funds paid into it.
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 Thus a bank customer is anyone conducting banking business like depositing money
(Great Western Railway Co -v-London and County Bank Co Ltd), getting a loan, seeking
financial advice (Woods -v- Martins Bank) or investing in securities.
 A bank customer can be an individual, group of individuals, a company, an institution, a
trust, government organisation, or another bank.
Basic Contractual Relationship
The banker-customer relationship has been largely left to implied contract, the terms of
which have been developed by judicial decisions over the years (i.e. by case law).
The term 'implied contract' means that there is no written agreement between the bank
and its customer, and their relationship is simply based on what has happened between
banks and their customers in the past and the decisions that the courts have made
when the banks have been sued for failure to fulfil their implied obligations.

The banker-customer relationship begins when the customer opens an account at the
bank. The relationship between a banker and a customer depends on the type of
transaction, and it varies as per transaction. Thus the relationship is based on contract, and
on certain implied terms and conditions.

CLASSFICATION OF THE BANKER-CUSTOMER RELATONSHIP

1) DEBTOR-CREDITOR RELATIONSHIP;
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 bank’s property
and bank has a right to use the money as it likes.

This relationship is reversed when the customer borrows money (loan, advance,
overdraft) from the bank. Customer who borrows money from bank owns money to
the bank. In this case the banker is the creditor and the customer is the debtor.
Borrower executes documents and offer security to the bank before utilizing the credit
facility.
[when the account is in Credit Bank is DEBTOR Customer is CREDITOR, when the
account is Overdrawn Bank is CREDITOR Customer is DEBTOR]
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2) THE BAILEE-BAILOR RELATIONSHIP;

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. When banks
take charge of deed boxes, parcels of deeds, stocks and shares and
other securities on behalf of their customers they are bailees.

If an item left in safe custody is delivered to the wrong person, the banker could be sued
for conversion, which is an unauthorised act that deprives another person of his property.
When property is deposited with a bank for safe custody the bailor (the customer) retains
ownership of it, and the bank cannot claim a lien on it (a right to retain possession of
another's property until the owner pays a debt), except to the extent of any unpaid fees in
respect of the bailment itself. This means that if the customer has a loan or overdraft
which is unsecured or inadequately secured, the bank cannot claim possession of property
on safe custody as security for the debt.

Banks prefer boxes to be locked and packages to be sealed before they are lodged for
safekeeping and the bank's receipt usually states that the contents are unknown. These
precautions may lessen the bank's liability for loss or damage.

3) AGENT-PRINCIPAL RELATIONSHIP;
“An agent” is 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 a person
who is represented is called “the Principal”.
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Thus an agent is a person, who acts for and on behalf of the principal. This relationship
arises when the bank acts on behalf of the customer- collects cheques on behalf of the
customer, bill payment (electricity or water), credit and payments, insurance premium
payments, when the bank remits funds abroad or buys stocks and shares for the customer
etc. The bank becomes the agent who collects payments from the customer and pays to
the service provider and the customer is known as the Principal.

There are times when these roles are reversed - as, for instance, when the bank holds a
letter of pledge over goods which the customer is importing, and the bank allows the
customer access to those goods against a trust receipt. In the trust receipt the customer
undertakes to act on behalf of the bank when handling the goods and to pay the proceeds
from selling the goods over to the bank.

4) LESSOR (BANK)-LESSEE (CUSTOMER) RELATIONSHIP;

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 banking
hours and charge rentals.
The 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.

5) TRUST-BENEFICIARY
This is formed when the customer creates a trust and appoints the bank as a trustee.
A trustee holds property for the beneficiary, and the profit earned from this property
belongs to the beneficiary. If the customer deposits securities or valuables with the banker
for safe custody, banker becomes a trustee of his customer. The customer is the
beneficiary so the ownership remains with the customer.
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6) MORTGAGOR AND MORTGAGEE

When a customer mortgages his house to his bank he is the mortgagor and the bank is the
mortgagee. A mortgage can take the form of a full legal charge over the property or
simply an equitable charge. The former involves registering a signed legal document with
the Land Registry (unless it is unregistered land), whereas the latter simply involves
depositing the land certificate or deeds with the bank together with the bank's form of
equitable mortgage which is signed by the mortgagor. The property that is mortgaged
need not be land and, for example, a charge taken over stocks and shares is in fact a
mortgage. (to be discussed further when we look at lending)

RIGHTS AND DUTIES OF THE BANKER

a. Receive money, and collect cheques and other instruments for a customer and use
these funds as he thinks fit provided that he satisfies the liquidity requirements of the
Bank of Zambia.
b. Repayment of whole or part of money upon customers’ written authority or against
his use of a plastic service card.
c. Honour customers’ cheques subject to conditions like sufficient funds & no legal
prohibition to payment.
d. Maintain secrecy of customers’ confidential information (Accounts & Affairs).
Secrecy in the banker-customer relationship is very important. The bank needs to
assure its customer that their account information will be kept a secret and will not be
disclosed even when the relationship has ended.
However, there are circumstances requiring the bank to disclose information about
the customer. These are;
 Under the law
 Under implied or express consent of the customer; the bank can authorize the
bank to disclose information for instance when the customer wants a potential
guarantor or business alliance to know its financial status.
 Common courtesy among banks-in the event that other banks make an enquiry
about a customer, the customer’s bank can disclose. E.g. during acceptance of
bills of exchange.
 Disclosing of information is in the banks interest-the bank will disclose
information if it has to protect its own interest.
 Disclosing in the interest of the nation-the bank can be asked to disclose
information in the interest of a nation and the public as a whole. The bank will
disclose information when they suspect that the customer has been
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undertaking some illegal translations or are in doubt about the customer’s

earnings.
 In the course of criminal or civil proceedings
 Garnishee order served on banks by court order
 Customer’s credit reference for bona fide commercial transactions
e. Reasonable notice before closing customer/s account.
f. Exercise reasonable competence and care in carrying out the customer's instructions;
but this also means that the banker has the right to expect the customer to exercise
reasonable care in drawing his cheques
g. Keep accurate records and provide his customer with statements of account
h. Follow the usual banking practice

DUTIES OF CUSTOMER
 Exercise reasonable care in drawing cheques so as not to mislead the bank or to facilitate
forgery.
 To inform the bank immediately upon discovery of forgery of his cheques.

RIGHTS OF THE BANKER

- Rights to commission/ service Surcharges.
- Rights to interest on advances and reasonable commission for other services, and to be
reimbursed for any expenses incurred in acting on the customer's behalf
- To have repayment on demand of any overdrawn balance
- Rights to set-off
- To have a lien over any of the customer's property lodged with the bank other than on
safe custody, and this includes cheques and other bills of exchange deposited for
collection

RIGHTS OF THE CUSTOMER

- Rights to repayment.
- Rights to draw cheques
- Rights to interest
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TERMINATION OF THE BANKER-CUSTOMER:

The relationship between a bank and a customer ceases on:
(a) The death, insolvency, mental incapacity of the customer.
(b) The customer closing the account i.e. voluntary termination
(c) Liquidation of the company
(d) The closing of the account by the bank after giving due notice.
(e) The completion of the contract or the specific transaction.

WORKSHEET 2:
Answer the following questions in your note books;
1. Which court case was particularly helpful in providing a definition of a bank? What
definition did it give?
2. How does the Banking Act 2000, as amended by the 2017 Act, define a bank?
3. Can anyone be a director of a bank, or are there special conditions laid down?
4. Why is the definition of a customer so important in connection with the protection
available to a banker?
5. What is meant by an implied contract?
6. When a bank looks after a deed box on behalf of a customer is it bailor or bailee?
7. Distinguish a bailee for reward from gratuitous bailee?
8. How does the consumer protection Act apply to bank customers?
9. Are Zambian banks obliged to uphold the code of banking practice? What are its key
provisions?