the legal environment unit5

THE UGANDA INSTITUTE

OF BANKING &

FINANCIAL SERVICES

UIBFS

ISO 9001:2008 CERTIFIED

Introduction to law

Contract law and Banking

Banking and its relationship with legislation

MODULE COVERAGE

1

Banker-Customer Contract

Negotiable Instruments


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Definitions – Banker / CustomerWe start our study of the banker – customer contract by defining the key terms

‘banker’ and ‘customer’. You may, at first, consider this to be unnecessary – afterall everyone who has reached primary school level knows what a bank is, and abanker is generally thought to be someone who works in a bank!. Consequently, acustomer is someone who uses services of a bank.

We are talking about a ‘contract’ and from our knowledge acquired in previous studyunits, we have continuously hinted at the application of the law or the legalimplications of behavior exhibited in the performance of a contact.

It is important to know that the banker’s relationship with his customers’ gives rise tolegal rights and duties apart from any commercial considerations. This simplymeans our approach in defining these key terms of the contract should keepreference to the existing regulations. Remember, unit 4 covered the legislationdirectly affecting the banking.

Who is a banker?Having learnt what contract law is in the unit2, we should easily conclude that the

relationship between a banker and his customer is basically contractual. Thereforewith ease of imagination, we should expect this relationship to be regulated by thegeneral rules of contract; and, most likely, banking practice. This is very trueespecially when we check the legislation at hand.

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From the Financial Institutions Act, the word ‘bank’ means any company licensed tocarry on the financial institution business as its principal business. For ourpurposes, in addition to loans, current accounts, etc; let us say that whatever wesee banks doing tantamount to ‘financial institutions’ legally acceptable business.

On the other hand, the Bills of Exchange Act provides that the term ‘banker’…..”includes any persons who carry on the business of banking”. Now, whatshould we take to be the business of banking?

Without going into the details, and as explained in our discussions of interpretation ofstatutes in unit 1, Courts of law identified three activities as definitivecharacteristics of bankers:

o accepting money from, and collecting cheques for customers and place them totheir credit;

o honouring cheques and orders drawn on them by their customers when presentedfor payment and debit the accounts accordingly; and

o keeping current accounts or something of that nature, in their books in which thecredits and debits are entered.

o In addition the court stressed that this definition was not static and would alwaysdepend on current practice. Having satisfied ourselves with who a banker is, then…

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Who is a customer?You and me have, no doubt, encountered persons call someone, rather literally –

customer. As far as available legislation is concerned, there is no definition offered.But basing on contract law, decided court cases (historical, anyway!) show that a

customer of a bank is a person who has entered into a contract with the bank forthe opening of an account in his /her name. Surely, even from the legal definitionof the ‘banker’ above, banks do more than the mere opening of current accounts.But there is no modern authority on this (legal) definition.

We conclude by stating that, ‘in the more practical sense, a customer is anyone whomakes a contact for any of a bank’s services, e.g. business advice, sale of USdollars, etc. even though they may not have an account with the bank.

The Banker-Customer RelationshipAt this point of our studies, we can confidently state that the relationship between the

banks and their customers is contractual, primarily that of the debtor (the bank)and creditor (customer) with these roles reversed where the customer has aliability (is indebted) with the bank, say has a loan he is servicing (repaying).

In either case, whether bank or customer as the case may be, is obliged to seek outtheir creditor (lender) to make repayment. No doubt in practice, banks do not tryto persuade customers to withdraw their balances but wait for the customer todemand repayment from the bank..

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Since the relationship is contractual, general rules of contract law apply. You may needto refer back to unit 2 where we discussed the basic principles of contract law andsaw how they apply in a banking context.

• We should however point out that the most astonishing fact about the banker-customer is its ‘informality’, if we may use the term, and the case of implied andnot express terms as the basis of the contract.

• Opening of the bank account is usually done without a written agreement but byoral discussion, completion of administrative forms, and sometimes, introductoryletters from areas of residence or employment.

• We cannot tell how many customers are aware of (or are made aware of) therights and duties which are implied in the contract.

• As mentioned in Unit 1, the rights and duties of bankers and customers haveevolved from custom and practice, as amended by various court decisions andstatutes.

• The duties and rights are generally implied but whenever a customer completebank form for any particular product or service, then the implied rights and dutiesturn into express written contacts.

• There is a variety of forms signed by customers during the various banking facilitiesthat they undertake for example mandates (signed when opening an account),charge forms (when giving securities for credit), payment instructions, etc.

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The above not withstanding:• In all agreements (contracts), an implied term is included which requires the bank

to carry out its services to the customer with reasonable care and skill.• In contracts between the Bank and customer, there is a requirement that Bank’s

written terms and conditions will be fair and in good faith.• When it deals with the customer on its written standard terms of business, it

cannot exclude or restrict its liability for breach of contract, nor can it claim to beable to render a performance substantially different from that which wasreasonably expected of it.

• The nature of the banker – customer relationship gives rise to consequentialbankers’ rights and duties. These are essential to understand particularly for thosenew to banking operations.

• We have seen that the issue of an account is a key factor for someone to qualify asa (bank) customer. Therefore before we look at the rights and duties of a banker,lets us familiarize ourselves with the creation and operation of a bank account.

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Opening and Operating an AccountBefore opening an account, a bank must be satisfied as to the character and standing

of the applicant and know their employer’s name and nature of employment. Thisinformation can be obtained by either:

• By a personal introduction from an existing customer or another branch or bank;or

• By taking references from the applicants employers and/or local leaders from one’splace of residence. The authenticity of the reference should be checked.

• Banks must obtain satisfactory references if they stand to be protected by the lawand to avoid unsatisfactory accounts. Two of the opening formalities are obtainingof specimen signatures of the parties to the account; and a mandate covering alloperations on the account.

Bankers’ Legal Rights and DutiesArising from the banker-customer contract are a number of legal rights and duties.

Basing on the arguments above, almost all are implied and not express terms ofthe ever engrossing contract. It is not in the practice of banks to try to makeimplied terms explicitly express. Indeed even the courts are known to respectestablished practice – the code of banking. These rights and duties are outlinedbelow. A detailed analysis of them is beyond the scope of this course but can beaccessed in the ‘law relating to banking’ course.

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RightsA banker has the following rights.• To charge his customer reasonable commission for services rendered to him, and

to charge interest on loans made to him• To repayment on demand from his customer of any overdrawn balance which has

been permitted on a current account• To be indemnified by his customer for expenses and liabilities incurred while acting

for them• To exercise a ‘lien’ (is a right to retain possession of the property of another in lieu

of payment due from that person) over any of the customer’s securities that are in its possession other than those for safe keeping (custody), for any money owing to it

• To dispose of its customer’s money as he pleases provided it honours its customers’ valid cheques.

• To combine or set-off accounts of the customer. This arises where the customer has more than one account with the bank - the bank is entitled to settle a debt on one account by transferring funds from another of the customer’s accounts

• To expect his customer to exercise due care in drawing cheques. The customer is under a duty to inform his bank of any known forgeries on the account.

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DutiesA banker has the following duties.• To abide by any express mandate from his customer (a mandate is signed by the

customer when opening the account. It shows the terms to be followed andobserved by the bank in honouring instructions from the customer)

• To honour its customer’s cheques (this duty is subject to a number of provisoswhich are observed when paying cheques in the normal course of business; forexample availability of sufficient funds on account)

• Not to disclose information about its customer’s affairs unless qualified• To render statements of account to its customer periodically or upon request• To collect cheques and other normal banking instruments for its customer and to

credit the proceeds to the customer’s account• To exercise proper care and skill in carrying out any business it has agreed to

transact for its customer• To give reasonable notice before closing a credit accountAs already mentioned, for purposes of this course, it is enough to remember these

rights and duties. Their detailed discussion entails much branch banking practiceand real life situations.

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It would be abnormal to imagine that the banker-customer contract can never die out.Just like the commercial contracts generally seen in business circles, the banker-customer contract can also come to an end, for more or less, the same reasonscovered under contact law. We end this unit by looking at termination of thebanker-customer contract.

Termination of the of banker customer contractThe banker-customer contract may be terminated. However, the banker -customer

relationship may survive indefinitely because of the bank’s duty of confidentiality(secrecy).

The banker customer contract can be terminated in the following ways:Termination by the Customer - The customer may demand full repayment of the

credit balance on the account at any time, but a nil balance on an account doesnot necessarily mean the customer has closed the account. Confirmation thatterminating the contract is the intention of withdrawing all the funds must besought.

The customer with an overdrawn account may not terminate the banker-customercontract without repaying the debt.

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Termination by the bankA bank may only close an account after

giving reasonable notice and makingprovision for outstanding cheques.

Operation of LawThe following will terminate the contract

in law: Death of the customer;Mental incapacity of the customer;Bankruptcy or insolvency of bank orcustomer.

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END

12

the legal environment unit5

Business

banker customer contract

business of banking

term banker

banking practice

financial institution

key terms banker

financial institutions

word bank