COMMERCIAL LAW

BBB 2313

LECTURE 7: BANKER-CUSTOMER RELATIONSHIP

 TOPIC OUTLINE
• Creation of Banker-Customer Relationship
• Constructive Trust
• Legal Issues and Consequences
• Termination of Bank and Customer Relationship
• Dispute Resolution, Payment System
• Electronic Banking, Confidentiality and Data Protection
 CREATION OF BANKER-CUSTOMER
RELATIONSHIP
• Carrying on a business of receiving money and collecting drafts for
customers
• Subject to the obligation of honouring cheques drawn by
customer
• Contractual relation begins when customer ask the banker to
open account through deposit
• Agency Relationship
• Can be express or implied
• Bound to carry out direction of the principal
An agent usual act within their authority which includes:
• An agent’s act are binding on the principal if they are done within the agent’s
authority
• Agent’s authority may be actual or apparent where it can be expressly given by
the principal (oral or writing) or implied
• Apparent authority is not expressly given by the principal but which the law
regards the agent as possessing it although the principal did not give
consent to exercise such authority
• Secret of private restriction on the authority of the agent do not affect a third
party who does not know of such restrictions
• Also acted in good faith in relying on the agent’s apparent
 CONSTRUCTIVE TRUST
• A trust is a mechanism in which one person can transfer ownership of certain properties during his or her life
or after death
• Trust is subject to the provisions an instructions in the trust document
• Some trust are formed based on the conduct of the parties and their intentions as opposed to the official
wording of a trust document
• Created to remedy (or make up for) a situation where there is "unjust enrichment“
• A constructive trust is an justifiable remedy resembling a trust (implied trust) imposed by a court
• To benefit a party that has been wrongfully deprived of its rights due to
• Either a person obtaining or holding a legal property right which they should not possess due to unjust
interference
• One Person Must Unjustly Benefit From Another Person's Act
• For example, someone has possession of property (money, real estate, or other assets) that they should not
have because they obtained it unfairly through fraud or breach of a fiduciary duty
• Occurs due to some wrong doing, where the wrong doer has acquired legal tittle to some
property and cannot in good principles be allowed to benefit from it
• Imposed by the court on grounds of conscience
• For example, if the defendant steals RM100,000 from the plaintiff and uses that money to
buy a house, the court can trace the house back to the plaintiff's money and deem the
house to be held in trust for the plaintiff
• The defendant must then convey title to the house to the plaintiff, even if rising property
values had appreciated the value of the house to RM120,000 by the time the transaction
occurred. If the value of the house had instead depreciated to RM80,000, the plaintiff
could demand a remedy at law (money damages equal to the amount stolen) instead of an
equitable remedy
 Hussey v Palmer (1972) – Court of Appeal
• Mrs Hussey was an elderly woman. Her daughter and son-in-law (Mrs & Mr Palmer) invited her to move in with them.
• Mrs Hussey sold her house and paid £607 to have an extension built on the property of Mr & Mrs Palmer which was to be her
bedroom.
• After a few months the relationship between the mother and daughter broke down and Mrs Hussey decided to move out.
•She then made a claim against Mr Palmer asserting a beneficial interest in the property based on a resulting trust
Held: Mrs Hussey was entitled to a share in the beneficial interest in proportion to the £607 contributed

Chase Manhattan Bank NA v Israel-British Bank (London) Ltd (1981)

• Chase Manhattan was instructed to pay $2m to the Israel-British Bank, but it paid the sum twice by mistake. The Israel-British
Bank went insolvent, after Yehoshua Ben-Zion, the managing director, was convicted of embezzling £20 million ($39.4 million)
from the bank. Chase Manhattan wished to claim its money back, without waiting in the insolvency queue. The Israel-British
bank had known about the mistake before it finally went into liquidation.
• Held that Chase Manhattan could recover the full sum, because the money was held on trust from the moment it was
received

Wambo Coal Pty Ltd v Ariff (2007)

• The liquidator was held personally liable for payments made by mistake to the company in liquidation. The money was paid in
error by Wambo to the company, when no money was in fact owing.
• Before Wambo discovered the error and demanded reimbursement, the company liquidator (Ariff) used the monies to pay
disbursements, even though he was aware that Wambo did not owe any money to the company.
• The fact that the recipient company was insolvent did not affect the remedy available to the payee (Wambo).
• Wambo was able to seek payment from the liquidator personally, as the liquidator had sufficient knowledge that the monies
were paid by mistake and that the company had no right to keep the monies which were being held by the company on
constructive trust.
LEGAL ISSUES AND CONSEQUENCES
• A banker's duty of secrecy in Malaysia is statutory as it is clearly provided under the Financial Services Act
2013 ("FSA")
• Section 133(1) of the FSA stipulates that no person who has access to any document or information
relating to the affairs or account of any customer of a financial institution, including the financial institution
or any person who is or has been a director, officer or agent of the financial institution, shall disclose to
another person any document or information relating to affairs or account of any customer of the financial
institution
• According to section 133(1) which is read together with section 133(3) of the FSA, the duty
of confidentiality encompasses a person who is not just a bank officer but even a third party
• Section 133(3) of the FSA states that a person who has any information or document which to his
knowledge has been disclosed in contravention of section 133(1) of the FSA is prohibited from disclosing
the same to any other person
• The duty of secrecy continues even after the termination of the banker and customer relationship
In the event that a banker breaches his duty of secrecy, the customer may be entitled to
claim for damages:
• If he has suffered losses
• When a customer successfully sues a banker for breach of duty of secrecy, the amount
of damages which he is entitled to recover depends
• On whether he is able to establish the actual extent of the damages he had suffered as
a result of the disclosure
• Under section 133 (4) of the FSA, any person who is found guilty of breaching his duty
of secrecy to a customer, shall be liable to imprisonment for a term not exceeding 5
years or to a fine not exceeding RM10 million or both
• This imposes a criminal penalty
• Section 16 of the Central Bank of Malaysia 1958, it prohibits all its officers from
disclosing any information relating to the affairs of bank and its customers to third
party
• However, under certain circumstances, there are qualifications which entitle the Bank
to divulge and disclose the information:
1. If directed by the court order or compulsion by law
2. If consent is given by the customer either impliedly or expressly
3. Disclosure for public interest
4.To protect the Bank's interest where the Bank initiates action to recover monies owed
by the customer and the notice of demand and pleading tendered to the court contain
the details of the debt
5. When the practices and usages among bankers permits exchange of information
 Tournier v National Provincial and Union Bank of England [1924]
• A landmark legal case in the United Kingdom
• It established the conditions under which banks owed confidentiality to their
clients, allowing four circumstances wherein banks were not required to guard
privacy: where compelled by (1) law, (2) public duty, (3) the interest of the bank, or
(4) where the client had consented, even implicitly, to disclosure
• In this case the bank disclosed to its customer's employer the fact that one of the
customer's unpaid cheques was drawn in favour of a bookmaker's account.
• As a result, the customer's employer did not renew his contract with the
customer.
• The Court of Appeal held that confidentiality was an implied term in the customer's
contract and that any breach could give rise to liability in damages if loss results
• A customer has the right to sue his banker for damages for breach of contract
where the banker discloses information relating to the customer in circumstances
out side specific permitted parameters
• A banker’s duty of confidentiality was reaffirmed by the High Court in Walsh v
National Irish Bank Limited (2008)
• Court held that it is an implied term of any contract between a banker and its
customer that the banker will not divulge to third parties, without the
customer’s express or implied consent, the state of the customer’s account or
the amount of his or her balance, the securities offered and held, the extent
and frequency of transactions or any information acquired by the bank during
or by reason of its relationship with the customer
• In so deciding the court noted that this principle of law had been recognised
by the Supreme Court[ and followed the authority of the English Court of
Appeal’s decision in Tournier v National Provincial and Union Bank of England
Ltd (1924)
• Thus, in Ireland, confidentiality is an implied term in a contract between a
banker and its customer
 TERMINATION OF BANK AND CUSTOMER
RELATIONSHIP
• Section 154 to 163 of the Contracts Act 1950 deal with the manner
in which an agent’s authority may be terminated
Agency may be terminated in one of the following ways:
1) Termination by Agreement
• Authority of an agent maybe terminated by act of the parties, by mutual
agreement or mutual consent or revocation by the principal
• When both parties desire and agree that the agency shall be terminated,
the agency is terminated by agreement
• In this method of termination, if the agency evidenced by a contract, then
any provision regarding the termination of the agency by agreement should
be observed by the party wishing to terminate the agency
• Any time frame concerning the length of notice should be kept and if there is
none, then the termination party should consider giving a ‘reasonable’
length to notice to the other party
• The agency relationship is a fiduciary one and so the courts are reluctant to
keep parties together, therefore both agent and principal can agree that the
agency come to an end
2) Termination by Revocation
• The principal may revoke the authority of his agent before it has been exercised by the agent so as
to bind the principal
However, the revocation of agent’s authority is subject to the following conditions:
1.If the agent has exercised his authority partly, the principal may revoke the agency for future acts
only
2.If the agency is created for a fixed term and if there is some sufficient cause, the principal may revoke
it before the expiry of the said term
3. If the agency is created for a fixed period or continuous, the principal must give a reasonable notice
of
revocation of agency to the agent
4.If the agent has some interest in the subject-matter, the agency can be revoked only when there is an
express contract permitting the termination
• Example: P appointed A, as his agent to purchase certain goods. Any time before he purchases the
3) Termination by Renunciation
• When agent surrender the authority and by doing so ends the mandate
given to him as agent
• Agent can terminate by giving reasonable notice to principal
• Otherwise, agent will be liable to principal for damages for any loss
caused by the premature termination of the agency
4) Termination by Performance
• Contract of agency end when the agent has performed the contract
• When agency is created for a single specific transaction and is
completed – Section 154, Contract Act 1950
DISPUTE RESOLUTION AND PAYMENT
SYSTEM
• Most bank transactions are properly made following the instructions of the
account holder - and are completed successfully
• However, sometimes things can go wrong
• Often because the consumer disputes having made or authorized the
transaction
• Central Bank of Malaysia Act 1958 (CBA) provide for the promotion
of
reliable and efficient operation of national payment and settlement
systems
• Financial Services (Financial Ombudsman Scheme)
Regulations 2015
Consumers can refer eligible disputes involving any of the following FOS for
resolution in:
• Licensed banks and Islamic banks;
• Licensed insurers and takaful operators;
• Prescribed development financial institutions;
• Approved designated payment instrument issuers and designated Islamic
payment instrument issuers;
• Approved insurance and takaful brokers; and
• Approved financial advisers and Islamic financial advisers
 ELECTRONIC BANKING, CONFIDENTIALITY AND
DATA PROTECTION
• Banking institutions licensed under the Banking and Financial Institutions Act 1989 and the
Islamic Banking Act 1983 are allowed to offer Internet banking services in Malaysia
• Consumer Protection Act 1999 does not apply to any trade transactions by electronic
means (Revised 2009)
• Bank Negara provides minimum guidelines on consumer protection in Internet banking
• A need to be a specific legislation protecting online consumers
• The bank's duty of legal obligation to maintain the customer's information securely
• Confidentiality is implied therefore from the very beginning of the banker-
customer relationship
• Confidentiality covers all customers' information about themselves and their accounts obtained
A bank's duty of confidentiality is not absolute, and is subject to four exceptions:
1. Disclosure by compulsion of law;
2. Disclosure under duty to the public interest;
3. Disclosure under the bank's own interest and
4. Disclosure under the customer's approval
• Personal Data Protection Act 2010 (“PDP Act”) has recently been enacted due to the
increasing need to curb the unauthorised use of personal data in Malaysia
• To safeguard personal data by requiring the data user to comply with certain
obligations and conferring certain rights to the data subject in relation to his personal
data
• Does not permit a data user to transfer any personal data to a place outside Malaysia
unless to such a place specified by the Minister and published in the Gazette
 Durant v Financial Services Authority (2003)
• Is a judicial decision of the English Court of Appeal in relation to the provisions of the Data Protection Act 1998
• Mr Durant had been a customer of Barclays Bank. There was proceedings between Mr Durant and the bank in
1993, which he lost.
• Subsequently, he has sought disclosure of various records in connection with the dispute giving rise to that
litigation, records which, the Court of Appeal recorded "he believes may assist him to re-open his claims
against it and/or to secure an investigation of its conduct".
• The FSA investigated his complaint against the Bank, eventually closing that investigation in March 2001,
without informing Mr Durant of its outcome, pursuant to its obligation of confidentiality under sections 82 to
85 of the Banking Act 1987.
• In October 2000, Mr Durant complained about that refusal to the FSA's Complaints Commissioner, who
adjudicated upon and dismissed that complaint.
• FSA had disclosed much of the information sought but refused to disclose some as it did not “relate to”
Durant
• Durant argues that, as he was the source of the material. All of the information generated by the FSA in
response to his complaint was his personal data
• FSA argues that the phrase “elate to” had to be construed more narrowly, so that the information had to refer
to or concern, Durant
• Court of Appeal rejected Durant’s argument
• The Court recognized that information about an individual would be his personal data if it was about his/her
 EXERCISES
1) Elaborate the concept of constructive trust.
2)Ali just finish his first week orientation upon joining Bank ABC in Malaysia. Based on his
understanding from the orientation, a banker's duty of secrecy in Malaysia is statutory as it is
clearly provided under the Financial Services Act 2013. He then ask you as the trainer of the
orientation, if the customer may be entitled to claim for damages in the event that banker
breached the duty of secrecy. You are required to enlighten Ali on this matter.
3)Both Abu, the principal and Siti, the agent had mutually agreed to terminate their agency
principal relationship. Identify and elaborate they type of termination they had entered.
4)Explain the notion of banking confidentiality and determine the four exception of bank's
duty of confidentiality.
END