MSE- WEBSITE such a negative forum on charges

[jdes26]

just been browsing through the mse forums regarding bank charges- and there so called experts are saying " dont bother even trying to claim

Whats all that about???????????????????

[rebel11]

Same attitude as the England Football Team:D, maybe Capello runs the site:eek:

[jdes26]

well im looking for dirt on lloyds as i bloody hate them!!!!!!!!!!!!!

www.lloydsbankinggroup.com/media/pdfs/.../2006_LTSB_Form_20F.pdf

[jdes26]

TOPIC 1 - BANKER - CUSTOMER RELATIONSHIP

Definition of a Bank

Importance of the definition:

(i) Certain rights and obligations attach to bank's in particular;

(ii) A bank is entitled to a statutory protection when paying and collecting cheques.

The Financial Services and Markets Act 2000 establishes a framework whereby the Financial Services Authority authorises institutions to refer to themselves as banks. Under the Act the definition of a bank is simply an institution authorised under the Act.

Therefore to assess what constitutes a bank, especially for the protection of the Bills of Exchange Act 1882 and the Cheques Act 1957 it is necessary to look at the common law definition in UDT v Kirkwood [1966] 2 QB 431 CA

The essential characteristics of a banking business are:

a) collecting cheques for customers;

b) paying cheques drawn by customers;

c) keeping current accounts for customers.

However under the Banking Act 1987 a business can only use the name "bank" if it has paid up capital and undistributed reserves of more than £5 million.

Definition of Customer

A person becomes a customer when an account is opened and at the same time a contract is formed as held in Commissioner for Taxes v English, Scottish and Australian Bank [1920] AC 683 PC.

Equally well a person can only become a customer of the bank when a contract has been formed with the bank. This includes investment advice as well as opening an account. The contract is formed as soon as the bank accepts the customer's instructions Woods v Matins Bank [1959] 1 QB 55. However a bank can be liable in tort for negligent advice where a person is not a customer – Hedley Byrne v Heller & Partners Ltd [1964] AC 465 HL

The contract of the banker customer relationship can be categorised as follows:

• Contracts between banks and large corporations with roughly equal bargaining power
  
• Contracts between banks and small and medium sized enterprises (SMEs)
  
• Contracts between banks and consumer customers
  

The principal reason from the bank's point of view for determining when a person becomes a customer is for the protection afforded in collecting a cheque under S.4 Cheques Act 1957. A bank is only protected from liability under the section if it collects a cheque for a customer not just of the bank but also of the particular branch - LLoyds Bank Ltd v E.B. Savory [1932] 2 KB 122 CA & [1933] AC 201 HL.

The Banking Code

The banker customer relationship firs came under scrutiny in the Review of Banking Services Law and Practice in 1987, which reported in 1989 – (the Jack Report) Cm 622 This was followed by a White Paper entitled Banking Services Law and Practice in March 1990 - Cm 1026. Few recommendations were implemented, these mostly related to electronic banking, bank cards and the account payee printed crossing on cheques. However in December 1991 following a recommendation in the Review the British Bankers Association, the Building Societies Association and the Association for Payment Clearing Services adopted a voluntary code of Practice now referred to as the Banking Code. In 1997 a Mortgage Code of Practice was published. In March 2002 a Business Banking Code was published which seeks to protect the interests of unincorporated business customers (e.g. partnerships) and small company customers (those with a turnover of less than £1 million per annum) customers. The latest editions of the Banking Code and Business Banking Code http://www.bankingcode.org.uk are March 2003 and of the Mortgage Code at http://www.fsa.gov.uk is April 1998.

The Codes are not legally binding as such although they may be considered to part of the implied terms of the contract. In any event if they are not complied with then the courts are more likely to find in favour of the customer. It requires the banks to establish a written complaints handling procedure. A copy of the procedure must be given to a customer on request or within 5 days of a complaint being made. The bank must issue a holding (or final) response within 4 weeks and a final response within 8 weeks. The complainant can then take the matter to the Financial Ombudsman Service (FOS) http://www.financial-ombudsman.org.uk within 6 months of the receipt of the Bank’s final response and within 6 years of the event, giving rise of the complaint or within 3 years of when the complainant ought to have become aware of the relevant facts. The Financial Services and Markets Act 2000 established the FOS, which has compulsory jurisdiction over institutions that are acting in the capacity of authorised persons performing regulated activities under the Act e.g. banks. It hears complaints form bank customers and non-customers who are guarantors of loans, payees of cheques backed by cheque guarantee cards recipients of banker’s references etc…

The FOS will determine a complaint by reference to what it considers fair and reasonable in all the circumstances of the case and taking account of the law, regulator’s guidance Codes and good practice. It may make an award of up to £100,000 based upon the complainant’s financial loss, pain and suffering or damage due to loss of reputation or distress or inconvenience. It may also require disclosure of documents and require the bank to take such action as the FOS consider just and appropriate.

The complainant can choose whether or not to accept the determination. If the complainant accepts, the determination becomes final and is binding on both parties there is no appeal except by judicial review by either party, which is an appeal to a the High Court on a point of law - R v Financial Services Ombudsman [2003] 1 All ER (Comm) 65. An award may be enforced through the courts if the Bank fails to comply.

The FOS cannot make an award against a complainant although it may dismiss a case if it considers the complainant has suffered no loss or the claim is frivolous or vexatious or that eh bank has already made an offer that is fair and reasonable.

If the complainant does not accept the determination of the FOS then he or she may commence an action in the courts.

The Data Protection Act

As banks are computerised which means that they hold details or data about their customers on computer they must comply with the Data Protection Act 1998.

Data processing is only legitimate where one of the following applies

1. where the individual consents
   
2. where it is necessary for the performance of a contract with the individual
   
3. where it is a required under a legal obligation
   
4. where it is necessary to protect the vital interests of the individual or to carry out public functions
   
5. where it is necessary to pursue the legitimate interest of the business unless prejudicial to the individual
   

Individuals have a right to a description of and data concerning them, the purpose for which it is processed and of any potential recipients of the data

The Contract

The relationship is essentially one of contract. In Foley v Hill (1848) 2 HL Cas 28 HL it was held that when a customer pays money into his account the bank becomes a debtor to the customer who is the creditor. Therefore the money becomes the property of the bank; the bank has borrowed the money from the customer – Balmoral Super market Ltd v Bank of New Zealand [1974] 2 NZLR 155 money stolen at the counter as a customer was about to pay it in was still the property of the customer; Chambers v Miller (1862) 13 CBNS 125 money drawn by a customer from an account with insufficient funds belongs to the customer as soon as it was handed over and the bank had no right to forcibly take it back.

Implied Terms

As the money becomes the banks property the bank is free to do what it like with the money and is not bound to account to the customer for what is does with the money. The customer only has the right to be repaid the money owed on demand – the bank is not obliged to seek out its creditors, contrary to he general rule.

If the bank fails to repay the customer and becomes insolvent then the customer is an unsecured creditor. Under s 323 Insolvency ct the customer may obtain a set off i.e. it the bank owes money on one account and the customer owes money on another then the customer may set off the debt on one account against the credit in the other.

Due to the customers vulnerability most countries offer a protection scheme. In the UK the Financial services Compensation Scheme will refund 100% of a deposit up to £2,000 and up to 90% of the next £33,000 i.e. £31,700 maximum. Deposits in the same bank are aggregated. The Scheme also pays out to investors and insurance policy holders. Investors receive 100% of £30,000 and 90% of £20,000 i.e. £48,000 maximum. Insurance policy holders receive 100% of the first £2,000 and 90% of the balance on an unlimited amount. (100% if the insurance was statutorily required e.g. motor or employer insurance)

In Joachimson v Swiss Bank Corporation [1921] 3 KB 110 CA the following were held to be implied terms:

• The bank will receive the customer’s deposits and collect his or her cheques;
  
• The bank will comply with written orders (i.e. cheques) issued by its customers assuming there is sufficient credit tin the account;
  
• The bank will repay the entire balance on the customers demand at the account holding branch during banking hours - Libyan Arab Foreign Bank v Bankers Trust [1989] AC 80 PC for the application for the terms in relation to UK banks
  
• The bank will give reasonable notice before closing a customer’s account if it is in credit
  
• The customer will take reasonable care when writing cheques.
  

It was also held that although a bank may offer a variety of different services to a customer the relationship is contained in one contract. There is not a contract for each service.

In Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank [1986] AC 80 PC an implied term was held to be:

• The bank must only act on its customer’s valid instructions and not on any forgery of those instructions
  

Whereas it was held in London Joint Stock Bank v Macmillan and Arthur [1918] AC 777 HL and in Greenwoods v Martins Bank [1933] AC 51 HL that a customer only has duties to:

• To exercise reasonable care when drawing cheques to prevent forgery and alteration; and
  
• To notify the bank if he actually knows of forgeries on his account, a customer who wilfully ignores the obvious is not considered to have actual knowledge
  

Implied terms may generally be altered or excluded by an express agreement however this is limited by some statutes:

• Liability cannot be excluded for death or personal injury resulting from negligence - Unfair Contract Terms Act 1977 s 2(1)
  
• Liability for any other loss resulting from negligence can only be excluded if it is reasonable to do so - Unfair Contract Terms Act 1977 s 2(2). Whether or not it is reasonable will depend on the bargaining power between the parties- Unfair Contract Terms Act 1977 schedule 2.
  
• When dealing with a consumer customer a bank cannot exclude or restrict liability for a breach of contract nor is it be able to render a performance substantially different from that which was expected of it Unfair Contract Terms Act 1977 s 3(1)
  
• When dealing with a business customer on its standard written terms of business a bank cannot exclude or restrict liability for a breach of contract nor is it be able to render a performance substantially different from that which was expected of it - Unfair Contract Terms Act 1977 s 3
  
• In contracts which are into individually negotiated any term which, contrary to the requirement of good faith, causes a significant imbalance in the parties’ rights and obligations to the consumer’s detriment is not binding on the consumer. – Unfair Terms in Сonsumer Contracts Regulations 1999. This does not apply to the main subject matter of he contract or to the adequacy of the price. It appears for this that the interest rate of a loan cannot be challenged under this provision. In Director General of Fair Trading v First National Bank [2002] 1 AC 481 HL a term in a consumer loan agreement that made the borrower liable for interest up to any beyond the time of a court judgement was held not to be concerned wit the adequacy of the price as it was unlikely to affect the price. In the event the clause was found to be fair.
  
• The bank must carry out its service to the customer with due care and skill - Supply of Goods and Services Act 1982 s13. Any attempt to exclude this will be subject to the Unfair Contract terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999
  

The Banking Code requires contracts between banks and personal (consumer) and small business customers to be fair.

Express terms

Over the years the banking relationship has become established and it is not thought necessary to have an express contract and the agreement relies upon implied terms. Although there is nothing to prevent an express contract being made between the bank and its customer, which can take precedence over the implied ones, nevertheless it has been held that any express terms must be made clear to the customer - Tai HingCotton Mill v Liu Chong Hing Bank [1986] AC 80 PC.

Notwithstanding that usually terms are implied there are occasions where express terms regulate specific aspects of the banking service and customers are given special notice of these terms. The provision of the Banking Codes now require that certain matters are made clear to customers in writing which in effect means that banks are including express terms e.g. tariffs of charges for banking services.

Banks obtain a signed mandate from customers, which often set out a number of basic terms. On signing the customer is bound by the terms of the mandate whether or not he or she has read and understood them - L'Estrange v Graucob [1934]. However the terms of such mandate may not be effective if there is any misrepresentation and any ambiguities will be construed strictly and against the bank. Also any exclusion of the bank's liability will be seen in the light of the Unfair Contract Terms Act 1977.

In relation to electronic banking there may be an express provision that the bank will not be liable where the customer allows an unauthorized person to get access to the PIN number or password.

The bank will usually have express terms to deal with Internet banking and for banking with large companies.

However the express provisions must come within the Banking Code both in the way the are presented and in their content e.g. in relation to consumer-activated cards the Code states that the customer is only liable for a maximum of £50 unless the bank can show that the customer did not take reasonable care or acted fraudulently.

Large corporate customers will normally make separate contracts with banks and are usually considered to be on an equal contractual footing to banks.

Termination of the Contract

Termination by the Customer

The customer may demand repayment of the credit balance on the account at any time. Merely because there is a nil balance in an account does not necessarily mean the customer has closed the account and confirmation must b sought. Normally the bank should close the account on request from the customer although the contract will not be at an end until any overdrawn sums are repaid. Although the contract may be terminated the relationship of banker customer remains indefinitely due to the banker’s duty of confidentiality.

Termination by the Bank

A bank may only close an account after giving reasonable notice and making provision for outstanding cheques. One month has been held to be insufficient where the customer’s dealings were particularly complex – Prosperity Ltd v Lloyds Bank (1923) 39 TLR 372. However the Banking Code states that in normal circumstances at least 30 days notice should be given.

Termination by Law

The following will terminate the contract in law:

a) Death of the customer;

b) Mental incapacity of the customer

c) Bankruptcy or insolvency of bank or customer.

 

Duties of the Bank

There are a number of duties of banks. Some relate to the basic business of banking such as:

Duty to collect cheques

Duty to honour cheques

Duty not to pay a cheque without authority

Duty to obey customer's countermands of cheques

Duty to tell customer of forgeries

Duty to inform customers of the state of the account

Duty to act on notice of death

However the duties of care and skill and of confidentiality require particular consideration.

Duty of care and skill

S.13 Supply of Goods and Services Act 1982 qualifies the customer as a "consumer" and so entitles him or her to the benefit of an unexcludable implied term of the Act the bank will carry out its services for the customer with reasonable care and skill.

The customer has a duty to take reasonable care to prevent forgery and alteration of cheques. However if a cheque is altered without the customers authorisation the cheque is worthless - s64 Bills of Exchange Act 1882. Therefore the bank will be liable if the bank pay out on a cheque where the sum is altered or the name of the payee is changed or added to without the authorisation of the customer - Smith v Lloyds TSB Bank [2000] 2 All ER (Comm) 693 CA

When a bank pays or collects a cheque it does so as agent for its customer and as such it owes a duty of care. It was held in Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340 CA & [1992] 2 AC 548 HL that a bank may be liable as agent for a customer if it pays a cheque, which is drawn in accordance with the mandate from the customer even if it is free from alteration if the bank knew or should have been aware of fraud or dishonesty.

The test to be applied to determine whether a bank is in breach of its duty as agent is: if a reasonable banker would have had reasonable grounds for believing that the customer's account was being operated fraudulently by another.

This test was applied in Barclays Bank v Quinceare Ltd [1992] 4 All ER 363 where a loan was granted to a customer for the purchase of a number of chemist shops. Unichem guaranteed the loan. The monies were transferred to the solicitor acting for the customer who, on the instructions of the customer transferred them to an account in the USA from where it was never recovered or repaid. The bank sued Unichem on the guarantee. It was held that the bank were not liable as ther had been no suspicions circumstances to alert the bank to fraudulent behaviour.

Other issues concerning the Bank's liability:

Box v Midland Bank [1979] 2 Lloyds Rep 391 - A customer asked for a loan to finance an export contract and was told erroneously that permission would be a formality. The customer arranged the contract but was refused the loan. The bank was liable for negligent misstatement under Hedley Byrne v Heller

Redmond v Allied Irish Banks [1987] 2 FTLR 264 - A customer paid in endorsed cheques marked not negotiable for a third party to his bank. The customer received payment for the cheques, which he handed to the third party who absconded. Later the cheques were dishonoured because they were obtained by fraud and the customer did not obtain good title to them due to the not negotiable crossing. There was not duty on the bank to warn the customer of the risks of accepting not negotiable cheques that had been endorsed.

Verity and Spindler v Lloyds Bank (1995) CLC 1557 - A mortgage on a property was obtained based upon the advice by the bank that the purchase was prudent. The priority was sold at a loss and the bank was held liable for negligent advice. The bank had offered financial advice, the project was of a business nature, the customers were financially naïve, the property had been inspected by the adviser and said to be good.

Gold Coin Joailliers SA v United Bank of Kuwait [1907] 7 Bank LR 60 CA - A rogue impersonated A, a wealthy customer, and instructed the bank to give a reference to X. On receiving the reference X released watches to the rogue on payment of cheque drawn on A's account. The cheque was dishonoured as a forgery. No duty of care was owed by the bank X. Both were victims - X lost.

Yorkshire Bank v Lloyds Bank [1999] a All ER (Comm) 153 - A cheque drawn on bank A was stolen from bank B. The payee's name was changed and the cheque was paid into bank C from which the thief obtained payment. Following Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830 HL neither B nor C were liable therefore A had to stand the loss. The customer could not be debited as the cheque was worthless due to the forgery.

Suriya and Douglas v Midland Bank [1999] 1 All ER (Comm) 612 CA it was held that he bank has no obligation to inform the customer of the availability of new accounts which may give a better interest rate that the customer's existing account.

Bank as Trustee

It has been established in Belmont Finance Corporation v Williams Furniture Ltd (no.2) (1980) CA that a bank may be liable as constructive trustee if it either:

a) receives trust funds with actual or constructive notice that they are trust funds and that the transfer of the funds to the bank is a breach or trust, or

b) knowingly assists a trustee of the trust to dishonestly misapply trust funds. "Knowingly" includes: actual knowledge, wilfully shutting one's eyes to the obvious, wilfully failing to make inquiries, knowledge of circumstances would indicate the facts to an honest and reasonable person or would put such person on inquiry.

Knowledge

It is important to know what knowledge is required for a stranger to incur liability. Agip (Africa) Ltd v Jackson [1989] 3 WLR 1367. In Re Montagu [1987] Ch 264 it was held that a stranger will not be liable where he or she had knowledge of facts which he or she genuinely forgot at the relevant time or receipt.

There are several degrees of knowledge, which have been classified by Gibson J in Baden v Societe Generale [1983] BCLC 325 as being of 5 types:

1. actual knowledge;

2. wilfully shutting one's eyes to the obvious (turning a blind eye);

3. wilfully and recklessly failing to make such enquiries as an honest and reasonable person would make;

4. knowledge of circumstances which would indicate the facts to an honest and reasonable person;

5. knowledge of circumstances which would have put an honest and reasonable person on inquiry.

The types of knowledge may be grouped as follows:

- 1., 2. and 3. may be described as wrong-doing;

- 4 and 5 might be described as being assumed knowledge and might be innocent if careless;

- 3., 4 and 5. contain the phrase honest and reasonable person which indicates that a person would have to have been acting in good faith to be able to claim that his or her knowledge did not come within these categories.

It was believed that to have knowledge of a breach of trust that came within any of these 5 categories would mean that the stranger receiving the trust property would be liable as a constructive trustee. However Megarry VC in Re Montagu [1987] held that only knowledge types 1., 2. and 3. would incur liability since he did not believe mere careless was enough to make somebody a constructive trustee. He also warned against using comparisons with the doctrine of notice.

In addition Vinelott J in Eagle Trust Plc v SBC Securities Ltd [1992] 4 All ER 488 submitted that 4. and 5. should not be applied in commercial transactions since they would require parties to be unduly suspicious.

In Polly Peck International Plc v Nadir (No 2) [1992] 4 All ER 769 Scott LJ took the view that the categories were not rigid and that they demonstrated possible degrees of knowledge and that the key question was should the stranger have been suspicious.

In Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340 CA & [1992] 2 AC 548 HL it was held that the bank may be a constructive trustee if it allows an authorised withdrawal but in the knowledge that the funds were to be misapplied.

Receipt

In Agip (Africa) Ltd v Jackson [1989] 3 WLR 1367 Millet J held that to be a constructive trustee the person receiving the trust property must have done so for his or her own use and benefit. The question arose as to whether a bank would be a constructive trustee of money in one of its accounts, which a trustee had placed there in breach of trust. Millet J held that if the bank used the money itself e.g. to pay off an overdraft then it was benefiting and so could be a constructive trustee but if the money was merely being held passively in the account it could not be a trustee.

Trust Property

The stranger must have received trust property in breach of trust to be held to be a constructive trustee.

Dishonest

Where a stranger dishonestly assists in the breach of a trust then the stranger will be liable as a constructive trustee.

Before Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 WLR 64 it was believed that before a stranger could be held liable as a constructive trustee, the actual trustee or fiduciary had to be a party to a dishonest or fraudulent design and not just a breach of trust which might be innocent. The stranger would only be dishonest if the trustee was dishonest.

Since Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 WLR 64 it is enough to show that there has merely been a breach of trust and that the stranger dishonestly assisted in that breach even if the trustee was quite innocent. Lord Nicholls in the case referred to the hypothetical example of a dishonest solicitor who might advise a trustee to misapply funds.

Before the case it was believed that the solicitor would not be liable because the trustee was not fraudulent. However since the case the solicitor as the stranger would be liable as a constructive trustee as he has dishonestly assisted even though the trustee might escape liability by not being fraudulent or dishonest.

Hoffman LJ in Polly Peck International Plc v Nadir and Others (No 2) [1992] 4 All ER 769 distinguished between knowing receipt and dishonest assistance as follows:

"Although both knowing assistance and knowing receipt give rise to the equitable remedy of accountability as a constructive trustee, the two causes of action are very different.

Liability for knowing assistance is based upon wrongful conduct namely knowing participation in a fraudulent breach of trust or fiduciary duty. Its common law analogy is conspiracy to defraud.

Liability for knowing receipt is restitutionary, based upon the beneficial receipt of money or property known to belong in equity to somebody else. The equitable remedy depends upon the existence of a trust or fiduciary duty but the breach of trust or duty need not have been fraudulent. The nearest common law analogy is money had and received."

Four Requirements of Dishonest Assistance:

1. It is enough for there to a be a fiduciary relationship there does not have to be a formal trust.

2. Since the Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 WLR 64 a stranger can be liable as a constructive trustee when he or she has assisted in a breach when the breach is innocent. There does not have to be a dishonest or fraudulent design involving the stranger and the trustee or fiduciary.

3. The stranger must have assisted in the breach of trust and done some act which promoted or advanced the unlawful object. In Brinks Ltd v Abu-Saleh (No 3) (1995) The Times October 23 it was claimed that, following a robbery, bullion was being held by certain persons as constructive trustees. It was alleged that Mrs E was an accessory to the removal of the bullion to Switzerland as she accompanied her husband who was carrying the bullion and that therefore she was liable as a constructive trustee as having dishonestly assisted in the breach of trust. It was held she merely accompanied him and did not assist.

4. It must be shown that the stranger acted dishonestly in order to be liable as a constructive trustee. Lord Nichols in Royal Brunei Airlines Sdn Bhd v Tan suggested that it was an objective test but with subjective considerations such as experience and intelligence of the stranger and the reasons for acting as he or she did.

"Quistclose Trusts

In Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 HL If a bank receives funds from an individual which it knows are to be held separately for the customer for a specific purpose then the bank holds those funds for the individual as a constructive trustee and if the funds are not used for the specified purpose they are to be held for the benefit of the individual. Note the analysis of Quistclose in Twinsectra v Yardely [2002] 2 AC 164 HL where it was acknowledged that a bank may lend for a specific purpose however this alone does not create a trust. The key issue is whether the funds were intended to be at the free disposal of the borrower or whether they were only to be used for a specific purpose. It was stated that the Quistclose trust was really just a resulting (returning) trust. The money was lent for a specific purpose on the understanding that if that purpose were not carried out then the money would return (result) to the lender.

Duty of Confidentiality.

A bank owes an implied duty to its customer not to divulge information about its customers to third parties.

However Tournier v National Provincial and Union Bank of England (1924) CA set out four exceptions:

1. Disclosure under Compulsion of Law

a) Court Order

Order to inspect entries in the Banker's books - S 7 Banker’s Books Evidence act 1879

To assist police with their enquiries - S 9 Police and Criminal Evidence Act 1984

Discovery orders for Mareva injunctions

Evidence for foreign trials – Evidence (Proceedings in Other Jurisdictions) Act 1975

Writ or Subpoena compelling bank employee to give evidence

b) Request from an official

Inland Revenue – Taxes Management Act 1970 & Income and Corporation Taxes Act 1988

Department of Trade and Industry – Companies Act 1985

Director of the Serious Fraud Squad – Criminal Justice Act 1987

c) Bank liable to prosecution is information not revealed

Money Laundering Provisions

S328 Proceeds of Crime Act 2002 - It is an offence for someone to enter into or become concerned in an arrangement which knows or suspects facilitates the acquisition, retention use or control of criminal property. Disclosure must be made to the National Criminal Intelligence Service (NCIS)

S 337 statutory protection given if

a) Information came to the person making the disclosure in the course of his profession business or employment

b) The information caused the to know, or suspect or gives reasonable grounds for knowing or suspecting that another person is engaged in money laundering

c) The disclosure is made as soon as practicable after the information comes to the discloser

d) Where the law compels the bank to disclose information and it is an offence not to do so

S330 Proceeds of Crime Act 2002

It is an offence to fail to report a person's engagement in any kind of illegal money-laundering wen the information is acquired in the course of business if the defendant has knowledge or suspicion or reasonable grounds for knowledge or suspicion.

No offence is committed if the information is disclosed as soon as is reasonably practicable after the information came to the person's knowledge or there was a reasonable excuse for non-disclosure. It is also a defence for legal advisers if the information arose in privileged circumstances.

2. Duty to the Public to Disclose

Not a clear application – Libyan Arab Foreign Bank v Bankers Trust & Pharaon v BCCI

3. Disclosure in the Bank’s Interest

This exception was successfully claimed in Sunderland v Barclays Bank Ltd (1938). The bank dishonoured cheques of customer because there were insufficient funds in her account and because the bank were also concerned about the customer's gambling. The bank told husband and claimed that it was in its interest to do so. It was held the bank was entitled to do so.

4. Disclosure with the Customer’s Consent

It is now common for bank’s to request customers for permission to give a reference.

Rights of The Bank

Interest

Where a customer has an overdrawn account the right of the lending bank to interest on the debt may be expressed or may be implied from the customer's acquiescence in the debiting of interest.

The bank will compound interest on a longstanding debt i.e. it will add the interest to the capital at intervals so that interest is charged on unpaid interest. The right to compound is also implied form the customer's acquiescence and survives the demand of the bank for payment and the closing of an overdrawn account.

The Banking Codes oblige the banks to publish their interest rates n the on their Web site and helpline and customers affected by the changes must be notified within 30 days of the alteration.

Savings account customers must be informed of the interest rates and also details of the provisions relating to superseded accounts. The Codes have extensive requirements for interest rates.

Charges

Charges tend to be an express term of the contract. The Codes require customers to be given details of charges for the day to day running of accounts including the charge for an unauthorised overdraft, exceeding an overdraft limit and loan repayment arrears. Where a tariff has been provided this will form an express term of the contract. The code requires that where charges are made available on the bank’s web site and helpline. Customers should be advised of any charges for services that do not relate to day-to-day running before the services are provided. 14 days notice should be given of any charges to be deducted in respect of standard account services on savings and current accounts.

Details of charges in relation to using automated teller machines (ATM) must be given when the card is issued. The ATM must inform the card user in adance of the transaction what charge will be made and by whom.

S.15 Supply of Goods and Services Act 1982 establishes an implied term in the absence of an express term that the bank may make reasonable charges for its services.

Repayment on Demand

Where a bank permits a customer to borrow by overdrawing his or her current account the bank is entitled to require payment on demand Titford Property Co v Cannon Street Acceptances Ltd (1975)

Where however the bank has expressed the facility is available for a specific period then the bank will not be able to demand repayment before this period has expired Williams & Glyn's Bank v Barnes [1981] Com LR 205

If there are conflicting statements in the facility letter then the right to repayment on demand is paramount – Lampert v Lloyds Bank [1994] 1 All ER (Comm) 161 CA

Limitation

The Limitation Act 1980 provides that a cause of action in contract becomes statute barred after 6 years. Therefore following the demand by the bank for repayment of an overdraft the bank have 6 years within which to sue.

Appropriation of Payment

Appropriation of payments may arise in two situations:

1. Where a customer has two or more accounts with the same bank and he or she pays money in the money will be appropriated to one of the accounts.

2. Where a customer has one account and he or she pays money into it as well as drawing cheques upon it appropriation will settle the issue of which payment in relates to which payment out.

Generally it is the balance on the combined accounts or the final balance of a single account that matters and so usually appropriation is not an issue.

However there are some occasions when a customer may have several overdrawn accounts and the bank may prefer to keep a lower overdraft on one than another. E.g. if a customer has a wages account then under insolvency law if this is overdrawn when the customer goes into liquidation or is declared bankrupt then the liquidator or trustee in bankruptcy is obliged to settle this account from the realisation of the assets in preference to other accounts. Therefore the bank will prefer to reduce the overdraft on other accounts rather than the wages account as that account will be the first debt to be settled on insolvency.

With a single account when a customer pays money in he or she has the first right to appropriate money paid in. This means that the customer of an overdrawn account may prevent the bank from using a payment in to reduce the overdraft by appropriating the payment by a payment out.

If the customer does not appropriate the bank may make an appropriation. If the bank does not appropriate then if it needs to be decided which payment in relates to which payment out the Rule in Clayton's Case applies which states that the first payment in relates to the first payment out. Note Devaynes v Noble,Clayton's Case (1816) & Deeley v Lloyd's Bank Ltd (1912) HL.

The limitations on the rule are:

a) The rule only applies to running accounts;

b) The Rule in Hallett's Case (1880) applies where personal funds are in the same account with trust funds and it is deemed that the personal funds are withdrawn first.

Combination of Accounts

Where a customer has two different accounts with same bank the bank has a common law right to combine them without giving notice to the customer. This is so even if the accounts are with different branches – Garnett V Mc Kewan (1872) LR 8 Exch 10.

If there are more than two accounts the bank is free to combine any accounts of its choice and to leave others intact.

However a customer has no right to instantly combine accounts.

A bank's right to combine accounts is limited:

a) Where the debit balance is not yet due, e.g. the due date for a loan has not yet passed – Jeffrys v Agra Masterman’s Bank (1866) LR 2 Eq 674.

b) Where the debit balance of a loan account is due there is no right to combine an account instantly as there is an implied agreement to keep accounts separately (Bradford Old Office v Sutcliffe [1918] 2 KB 833 CA) and a customer in these circumstances is entitled to notice before his or her cheques are dishonoured. However this does noto apply to an already frozen overdrawn account – Halesown Presswork and Assemblies Ltd v Westminster Bank [1972] AC 785 HL

c) An express agreement not to combine accounts will negate the bank’s right to do so.

d) If an account is held that contains trust funds this cannot be combined with an account with personal funds.

Equitable Right of Set Off

In Bhogal v Punjab National Bank [1988] 2 All ER 296 CA and Uttamchandani v Central Bank of India [1989] NJLR 222 CA the banks held two accounts, one in the name of X which is in credit and one in the name of Y which is overdrawn eh bank believed both the accounts were nominee accounts operated by Z. The banks set off the balance of one account against the other and refused to honour X’s cheques. The bank was unsuccessful because:

• The bank has a duty to pay all cheques properly drawn by its customer within a reasonable time. Therefore In order to be in a position to dishonour the cheques drawn by X it should have obtained a mandate expressly permitting X’s account to be used as security for Y’s account.
  
• An equitable set off is only permitted if there is indisputable evidence that the accounts were nominee accounts and that they were both operated by Z.
  

Set Off following Insolvency

If either the bank or the customer is insolvent then the following principles apply:

a) A statutory set off may be applied to accounts on insolvency under S.323 Insolvency Act 1986 (individuals) or the Insolvency Rules 1986 (companies).

b) The statutory set off is automatic and unexcludable therefore any agreement not to set off or combine is void.

c) Any right to extend set off is void.

d) Debts, which were not yet due and payable, become due and payable as soon as the customer or bank are insolvent and are therefore subject to statutory set off.

e) Debits on a customers account after the bank had notice of insolvency of the customer will not b subject to set off and credits on a customer’s account after the customer has had notice of the banks’ insolvency will not be subject to set off.

f) Where the customer has 3 or more accounts the statutory set off will combine all of them but note preferential accounts (wages accounts)

g) Part VII of the Companies Act 1989 sets up an insolvency regime for when a recognised investment exchange (Stock Exchange) becomes insolvent.

Banker's Lien

A lien is a type of security, which carries the right to retain property belonging to another pending satisfaction of a debt owed by the owner of the property. The goods remain the property of the owner but the creditor has the right to retain them until the debt is paid. In R v Turner the owner of a car who removed the vehicle form the garage where it was being repaired without paying the bill and without permission could be guilty of theft. The lien does not carry the right to sell the goods to satisfy the debt (see pledge). However a the Torts (Interference with Goods) Act 1977 enables a person to sell goods in his or her custody and use the funds to satisfy any monies owed provided a specified procedure is followed.

A pledge is a different type of security, which carries the right to retain the property until the debt is paid or if unpaid after a certain time, carries the right to sell the property to satisfy the debt.

A banker's lien is a special kind of lien that is the equivalent of the pledge in other words the bank may retain the property until the debt is paid however if it becomes apparent that the debt will not be paid then the property may be sold to satisfy the debt.

Property that is subject to the lien includes securities Brandao v Barnett (1846) 12 Cl & Fin 787 HL such as insurance policies Re Bowes , Earl of Strathmore v Vane (1886) 36 ChD 586 and shares Re United Service Co., Johnstone’s Claim (1870) 40LJ Ch 286 that are held as security are subject to the lien.

The limitations on the Banker’s Lien are:

1. The bank does not have a lien on cheques paid into the bank for collection. The bank may have a lien on a cheque it collects for a customer who has an overdrawn account. It also has a duty to collect the cheque and credit the proceeds to the customer’s account. The lien and the duty complement each other, as the payment will reduce the debt on the account. If the customer has several accounts one of which is overdrawn but the payment is to an account in credit the bank may appropriate the cheque and pay it in to the overdrawn account.

2. The lien does not apply to securities kept in safe custody.

3. The lien does not apply to securities, which are held by the customer as a trustee

4. The lien does not arise if there is an agreement to the contrary between the bank and the customer.

Banker's Opinions

The bank is sometimes asked to give a reference about its customers. The reference must be based upon the facts actually known to the banker at the time. The banker is not obliged to make enquiries to ascertain new facts or other people's opinions.

Liability to the recipient of the reference

If the reference is unduly favourable the bank may then be liable in tort for negligent misstatement as in Hedley Byrne v Heller (1964). However the effectiveness of any exclusion clause in these cases will now have to be tested against the Unfair Contract Terms Act 1977.

Liability to the customer

If the reference is adverse the bank may be liable by reason of breach of the bank's duty of confidentiality or for libel

Safe Custody

Bank's have an established service of accepting items for safe custody incorporated into their contract with the customer. This arrangement is known as:

Voluntary bailment.

This type of bailment is subdivided into

Gratuitous bailment for which the bailee does not receive any payment and

Bailment for reward for which the bailee is paid

Where the bank is a bailee of property it is treated as a bailment of reward irrespective of whether payment is actually made for eth service as it is part of the contract between banker and customer. As a result the bank has a duty to take proper care of the items deposited and will be liable for breach of contract if it negligently allows them to be stolen or gives them to the wrong person. It is possible for a bank to exclude liability for negligence – Coldman v Hill [1919] 1 KB 443 but the exclusion must be reasonable under the Unfair Contract Terms Act 1977.

If two or more bailors deposit property jointly then it should not be delivered except on the authority of all bailors – Brandon v Scott (1857) 7 E&B 234. If one dies then the personal representative of the deceased will have to give a receipt – Hollins v Fowler (1875) LR 7, HL 757. If a mandate is signed to say that the property may be released to either bailor the bank may still be liable if it delivers the property knowing that a breach of trust is being perpetrated.

If there is doubt as to the bailor then the bank is entitled to retain the property for a reasonable time in order to clear the doubt.

If property is stolen while in the bank’s custody then it may be liable for negligence (see above on exclusion) or vicariously liable if the employee stole it in the course of his employment e.g. if he or she was responsible for looking after the property.

Items deposited for safe custody are not subject to the banker lien.

[jdes26]

TOPIC 1 - BANKER - CUSTOMER RELATIONSHIP

Definition of a Bank

Importance of the definition:

(i) Certain rights and obligations attach to bank's in particular;

(ii) A bank is entitled to a statutory protection when paying and collecting cheques.

The Financial Services and Markets Act 2000 establishes a framework whereby the Financial Services Authority authorises institutions to refer to themselves as banks. Under the Act the definition of a bank is simply an institution authorised under the Act.

Therefore to assess what constitutes a bank, especially for the protection of the Bills of Exchange Act 1882 and the Cheques Act 1957 it is necessary to look at the common law definition in UDT v Kirkwood [1966] 2 QB 431 CA

The essential characteristics of a banking business are:

a) collecting cheques for customers;

b) paying cheques drawn by customers;

c) keeping current accounts for customers.

However under the Banking Act 1987 a business can only use the name "bank" if it has paid up capital and undistributed reserves of more than £5 million.

Definition of Customer

A person becomes a customer when an account is opened and at the same time a contract is formed as held in Commissioner for Taxes v English, Scottish and Australian Bank [1920] AC 683 PC.

Equally well a person can only become a customer of the bank when a contract has been formed with the bank. This includes investment advice as well as opening an account. The contract is formed as soon as the bank accepts the customer's instructions Woods v Matins Bank [1959] 1 QB 55. However a bank can be liable in tort for negligent advice where a person is not a customer – Hedley Byrne v Heller & Partners Ltd [1964] AC 465 HL

 

The contract of the banker customer relationship can be categorised as follows:

• 
  
  • Contracts between banks and large corporations with roughly equal bargaining power
    
  • Contracts between banks and small and medium sized enterprises (SMEs)
    
  • Contracts between banks and consumer customers
    

The principal reason from the bank's point of view for determining when a person becomes a customer is for the protection afforded in collecting a cheque under S.4 Cheques Act 1957. A bank is only protected from liability under the section if it collects a cheque for a customer not just of the bank but also of the particular branch - LLoyds Bank Ltd v E.B. Savory [1932] 2 KB 122 CA & [1933] AC 201 HL.

The Banking Code

The banker customer relationship firs came under scrutiny in the Review of Banking Services Law and Practice in 1987, which reported in 1989 – (the Jack Report) Cm 622 This was followed by a White Paper entitled Banking Services Law and Practice in March 1990 - Cm 1026. Few recommendations were implemented, these mostly related to electronic banking, bank cards and the account payee printed crossing on cheques. However in December 1991 following a recommendation in the Review the British Bankers Association, the Building Societies Association and the Association for Payment Clearing Services adopted a voluntary code of Practice now referred to as the Banking Code. In 1997 a Mortgage Code of Practice was published. In March 2002 a Business Banking Code was published which seeks to protect the interests of unincorporated business customers (e.g. partnerships) and small company customers (those with a turnover of less than £1 million per annum) customers. The latest editions of the Banking Code and Business Banking Code http://www.bankingcode.org.uk are March 2003 and of the Mortgage Code at http://www.fsa.gov.uk is April 1998.

The Codes are not legally binding as such although they may be considered to part of the implied terms of the contract. In any event if they are not complied with then the courts are more likely to find in favour of the customer. It requires the banks to establish a written complaints handling procedure. A copy of the procedure must be given to a customer on request or within 5 days of a complaint being made. The bank must issue a holding (or final) response within 4 weeks and a final response within 8 weeks. The complainant can then take the matter to the Financial Ombudsman Service (FOS) http://www.financial-ombudsman.org.uk within 6 months of the receipt of the Bank’s final response and within 6 years of the event, giving rise of the complaint or within 3 years of when the complainant ought to have become aware of the relevant facts. The Financial Services and Markets Act 2000 established the FOS, which has compulsory jurisdiction over institutions that are acting in the capacity of authorised persons performing regulated activities under the Act e.g. banks. It hears complaints form bank customers and non-customers who are guarantors of loans, payees of cheques backed by cheque guarantee cards recipients of banker’s references etc…

The FOS will determine a complaint by reference to what it considers fair and reasonable in all the circumstances of the case and taking account of the law, regulator’s guidance Codes and good practice. It may make an award of up to £100,000 based upon the complainant’s financial loss, pain and suffering or damage due to loss of reputation or distress or inconvenience. It may also require disclosure of documents and require the bank to take such action as the FOS consider just and appropriate.

The complainant can choose whether or not to accept the determination. If the complainant accepts, the determination becomes final and is binding on both parties there is no appeal except by judicial review by either party, which is an appeal to a the High Court on a point of law - R v Financial Services Ombudsman [2003] 1 All ER (Comm) 65. An award may be enforced through the courts if the Bank fails to comply.

The FOS cannot make an award against a complainant although it may dismiss a case if it considers the complainant has suffered no loss or the claim is frivolous or vexatious or that eh bank has already made an offer that is fair and reasonable.

If the complainant does not accept the determination of the FOS then he or she may commence an action in the courts.

The Data Protection Act

As banks are computerised which means that they hold details or data about their customers on computer they must comply with the Data Protection Act 1998.

 

Data processing is only legitimate where one of the following applies

1. where the individual consents
   
2. where it is necessary for the performance of a contract with the individual
   
3. where it is a required under a legal obligation
   
4. where it is necessary to protect the vital interests of the individual or to carry out public functions
   
5. where it is necessary to pursue the legitimate interest of the business unless prejudicial to the individual
   

Individuals have a right to a description of and data concerning them, the purpose for which it is processed and of any potential recipients of the data

The Contract

The relationship is essentially one of contract. In Foley v Hill (1848) 2 HL Cas 28 HL it was held that when a customer pays money into his account the bank becomes a debtor to the customer who is the creditor. Therefore the money becomes the property of the bank; the bank has borrowed the money from the customer – Balmoral Super market Ltd v Bank of New Zealand [1974] 2 NZLR 155 money stolen at the counter as a customer was about to pay it in was still the property of the customer; Chambers v Miller (1862) 13 CBNS 125 money drawn by a customer from an account with insufficient funds belongs to the customer as soon as it was handed over and the bank had no right to forcibly take it back.

Implied Terms

As the money becomes the banks property the bank is free to do what it like with the money and is not bound to account to the customer for what is does with the money. The customer only has the right to be repaid the money owed on demand – the bank is not obliged to seek out its creditors, contrary to he general rule.

If the bank fails to repay the customer and becomes insolvent then the customer is an unsecured creditor. Under s 323 Insolvency ct the customer may obtain a set off i.e. it the bank owes money on one account and the customer owes money on another then the customer may set off the debt on one account against the credit in the other.

Due to the customers vulnerability most countries offer a protection scheme. In the UK the Financial services Compensation Scheme will refund 100% of a deposit up to £2,000 and up to 90% of the next £33,000 i.e. £31,700 maximum. Deposits in the same bank are aggregated. The Scheme also pays out to investors and insurance policy holders. Investors receive 100% of £30,000 and 90% of £20,000 i.e. £48,000 maximum. Insurance policy holders receive 100% of the first £2,000 and 90% of the balance on an unlimited amount. (100% if the insurance was statutorily required e.g. motor or employer insurance)

 

In Joachimson v Swiss Bank Corporation [1921] 3 KB 110 CA the following were held to be implied terms:

• 
  
  • The bank will receive the customer’s deposits and collect his or her cheques;
    
  • The bank will comply with written orders (i.e. cheques) issued by its customers assuming there is sufficient credit tin the account;
    
  • The bank will repay the entire balance on the customers demand at the account holding branch during banking hours - Libyan Arab Foreign Bank v Bankers Trust [1989] AC 80 PC for the application for the terms in relation to UK banks
    
  • The bank will give reasonable notice before closing a customer’s account if it is in credit
    
  • The customer will take reasonable care when writing cheques.
    

It was also held that although a bank may offer a variety of different services to a customer the relationship is contained in one contract. There is not a contract for each service.

 

In Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank [1986] AC 80 PC an implied term was held to be:

• 
  
  • The bank must only act on its customer’s valid instructions and not on any forgery of those instructions
    

Whereas it was held in London Joint Stock Bank v Macmillan and Arthur [1918] AC 777 HL and in Greenwoods v Martins Bank [1933] AC 51 HL that a customer only has duties to:

• 
  
  • To exercise reasonable care when drawing cheques to prevent forgery and alteration; and
    
  • To notify the bank if he actually knows of forgeries on his account, a customer who wilfully ignores the obvious is not considered to have actual knowledge
    

Implied terms may generally be altered or excluded by an express agreement however this is limited by some statutes:

• 
  
  • Liability cannot be excluded for death or personal injury resulting from negligence - Unfair Contract Terms Act 1977 s 2(1)
    
  • Liability for any other loss resulting from negligence can only be excluded if it is reasonable to do so - Unfair Contract Terms Act 1977 s 2(2). Whether or not it is reasonable will depend on the bargaining power between the parties- Unfair Contract Terms Act 1977 schedule 2.
    
  • When dealing with a consumer customer a bank cannot exclude or restrict liability for a breach of contract nor is it be able to render a performance substantially different from that which was expected of it Unfair Contract Terms Act 1977 s 3(1)
    
  • When dealing with a business customer on its standard written terms of business a bank cannot exclude or restrict liability for a breach of contract nor is it be able to render a performance substantially different from that which was expected of it - Unfair Contract Terms Act 1977 s 3
    
  • In contracts which are into individually negotiated any term which, contrary to the requirement of good faith, causes a significant imbalance in the parties’ rights and obligations to the consumer’s de
    

• 
  
  • triment is not binding on the consumer. – Unfair Terms in Сonsumer Contracts Regulations 1999. This does not apply to the main subject matter of he contract or to the adequacy of the price. It appears for this that the interest rate of a loan cannot be challenged under this provision. In Director General of Fair Trading v First National Bank [2002] 1 AC 481 HL a term in a consumer loan agreement that made the borrower liable for interest up to any beyond the time of a court judgement was held not to be concerned wit the adequacy of the price as it was unlikely to affect the price. In the event the clause was found to be fair.
    
  • The bank must carry out its service to the customer with due care and skill - Supply of Goods and Services Act 1982 s13. Any attempt to exclude this will be subject to the Unfair Contract terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999
    

The Banking Code requires contracts between banks and personal (consumer) and small business customers to be fair.

Express terms

Over the years the banking relationship has become established and it is not thought necessary to have an express contract and the agreement relies upon implied terms. Although there is nothing to prevent an express contract being made between the bank and its customer, which can take precedence over the implied ones, nevertheless it has been held that any express terms must be made clear to the customer - Tai HingCotton Mill v Liu Chong Hing Bank [1986] AC 80 PC.

Notwithstanding that usually terms are implied there are occasions where express terms regulate specific aspects of the banking service and customers are given special notice of these terms. The provision of the Banking Codes now require that certain matters are made clear to customers in writing which in effect means that banks are including express terms e.g. tariffs of charges for banking services.

Banks obtain a signed mandate from customers, which often set out a number of basic terms. On signing the customer is bound by the terms of the mandate whether or not he or she has read and understood them - L'Estrange v Graucob [1934]. However the terms of such mandate may not be effective if there is any misrepresentation and any ambiguities will be construed strictly and against the bank. Also any exclusion of the bank's liability will be seen in the light of the Unfair Contract Terms Act 1977.

In relation to electronic banking there may be an express provision that the bank will not be liable where the customer allows an unauthorized person to get access to the PIN number or password.

The bank will usually have express terms to deal with Internet banking and for banking with large companies.

However the express provisions must come within the Banking Code both in the way the are presented and in their content e.g. in relation to consumer-activated cards the Code states that the customer is only liable for a maximum of £50 unless the bank can show that the customer did not take reasonable care or acted fraudulently.

Large corporate customers will normally make separate contracts with banks and are usually considered to be on an equal contractual footing to banks.

Termination of the Contract

Termination by the Customer

The customer may demand repayment of the credit balance on the account at any time. Merely because there is a nil balance in an account does not necessarily mean the customer has closed the account and confirmation must b sought. Normally the bank should close the account on request from the customer although the contract will not be at an end until any overdrawn sums are repaid. Although the contract may be terminated the relationship of banker customer remains indefinitely due to the banker’s duty of confidentiality.

Termination by the Bank

A bank may only close an account after giving reasonable notice and making provision for outstanding cheques. One month has been held to be insufficient where the customer’s dealings were particularly complex – Prosperity Ltd v Lloyds Bank (1923) 39 TLR 372. However the Banking Code states that in normal circumstances at least 30 days notice should be given.

Termination by Law

The following will terminate the contract in law:

a) Death of the customer;

b) Mental incapacity of the customer

c) Bankruptcy or insolvency of bank or customer.

 

Duties of the Bank

There are a number of duties of banks. Some relate to the basic business of banking such as:

Duty to collect cheques

Duty to honour cheques

Duty not to pay a cheque without authority

Duty to obey customer's countermands of cheques

Duty to tell customer of forgeries

Duty to inform customers of the state of the account

Duty to act on notice of death

However the duties of care and skill and of confidentiality require particular consideration.

Duty of care and skill

S.13 Supply of Goods and Services Act 1982 qualifies the customer as a "consumer" and so entitles him or her to the benefit of an unexcludable implied term of the Act the bank will carry out its services for the customer with reasonable care and skill.

The customer has a duty to take reasonable care to prevent forgery and alteration of cheques. However if a cheque is altered without the customers authorisation the cheque is worthless - s64 Bills of Exchange Act 1882. Therefore the bank will be liable if the bank pay out on a cheque where the sum is altered or the name of the payee is changed or added to without the authorisation of the customer - Smith v Lloyds TSB Bank [2000] 2 All ER (Comm) 693 CA

When a bank pays or collects a cheque it does so as agent for its customer and as such it owes a duty of care. It was held in Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340 CA & [1992] 2 AC 548 HL that a bank may be liable as agent for a customer if it pays a cheque, which is drawn in accordance with the mandate from the customer even if it is free from alteration if the bank knew or should have been aware of fraud or dishonesty.

The test to be applied to determine whether a bank is in breach of its duty as agent is: if a reasonable banker would have had reasonable grounds for believing that the customer's account was being operated fraudulently by another.

This test was applied in Barclays Bank v Quinceare Ltd [1992] 4 All ER 363 where a loan was granted to a customer for the purchase of a number of chemist shops. Unichem guaranteed the loan. The monies were transferred to the solicitor acting for the customer who, on the instructions of the customer transferred them to an account in the USA from where it was never recovered or repaid. The bank sued Unichem on the guarantee. It was held that the bank were not liable as ther had been no suspicions circumstances to alert the bank to fraudulent behaviour.

Other issues concerning the Bank's liability:

Box v Midland Bank [1979] 2 Lloyds Rep 391 - A customer asked for a loan to finance an export contract and was told erroneously that permission would be a formality. The customer arranged the contract but was refused the loan. The bank was liable for negligent misstatement under Hedley Byrne v Heller

Redmond v Allied Irish Banks [1987] 2 FTLR 264 - A customer paid in endorsed cheques marked not negotiable for a third party to his bank. The customer received payment for the cheques, which he handed to the third party who absconded. Later the cheques were dishonoured because they were obtained by fraud and the customer did not obtain good title to them due to the not negotiable crossing. There was not duty on the bank to warn the customer of the risks of accepting not negotiable cheques that had been endorsed.

Verity and Spindler v Lloyds Bank (1995) CLC 1557 - A mortgage on a property was obtained based upon the advice by the bank that the purchase was prudent. The priority was sold at a loss and the bank was held liable for negligent advice. The bank had offered financial advice, the project was of a business nature, the customers were financially naïve, the property had been inspected by the adviser and said to be good.

Gold Coin Joailliers SA v United Bank of Kuwait [1907] 7 Bank LR 60 CA - A rogue impersonated A, a wealthy customer, and instructed the bank to give a reference to X. On receiving the reference X released watches to the rogue on payment of cheque drawn on A's account. The cheque was dishonoured as a forgery. No duty of care was owed by the bank X. Both were victims - X lost.

Yorkshire Bank v Lloyds Bank [1999] a All ER (Comm) 153 - A cheque drawn on bank A was stolen from bank B. The payee's name was changed and the cheque was paid into bank C from which the thief obtained payment. Following Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830 HL neither B nor C were liable therefore A had to stand the loss. The customer could not be debited as the cheque was worthless due to the forgery.

Suriya and Douglas v Midland Bank [1999] 1 All ER (Comm) 612 CA it was held that he bank has no obligation to inform the customer of the availability of new accounts which may give a better interest rate that the customer's existing account.

Bank as Trustee

It has been established in Belmont Finance Corporation v Williams Furniture Ltd (no.2) (1980) CA that a bank may be liable as constructive trustee if it either:

a) receives trust funds with actual or constructive notice that they are trust funds and that the transfer of the funds to the bank is a breach or trust, or

b) knowingly assists a trustee of the trust to dishonestly misapply trust funds. "Knowingly" includes: actual knowledge, wilfully shutting one's eyes to the obvious, wilfully failing to make inquiries, knowledge of circumstances would indicate the facts to an honest and reasonable person or would put such person on inquiry.

Knowledge

It is important to know what knowledge is required for a stranger to incur liability. Agip (Africa) Ltd v Jackson [1989] 3 WLR 1367. In Re Montagu [1987] Ch 264 it was held that a stranger will not be liable where he or she had knowledge of facts which he or she genuinely forgot at the relevant time or receipt.

There are several degrees of knowledge, which have been classified by Gibson J in Baden v Societe Generale [1983] BCLC 325 as being of 5 types:

1. actual knowledge;

2. wilfully shutting one's eyes to the obvious (turning a blind eye);

3. wilfully and recklessly failing to make such enquiries as an honest and reasonable person would make;

4. knowledge of circumstances which would indicate the facts to an honest and reasonable person;

5. knowledge of circumstances which would have put an honest and reasonable person on inquiry.

The types of knowledge may be grouped as follows:

- 1., 2. and 3. may be described as wrong-doing;

- 4 and 5 might be described as being assumed knowledge and might be innocent if careless;

- 3., 4 and 5. contain the phrase honest and reasonable person which indicates that a person would have to have been acting in good faith to be able to claim that his or her knowledge did not come within these categories.

It was believed that to have knowledge of a breach of trust that came within any of these 5 categories would mean that the stranger receiving the trust property would be liable as a constructive trustee. However Megarry VC in Re Montagu [1987] held that only knowledge types 1., 2. and 3. would incur liability since he did not believe mere careless was enough to make somebody a constructive trustee. He also warned against using comparisons with the doctrine of notice.

In addition Vinelott J in Eagle Trust Plc v SBC Securities Ltd [1992] 4 All ER 488 submitted that 4. and 5. should not be applied in commercial transactions since they would require parties to be unduly suspicious.

In Polly Peck International Plc v Nadir (No 2) [1992] 4 All ER 769 Scott LJ took the view that the categories were not rigid and that they demonstrated possible degrees of knowledge and that the key question was should the stranger have been suspicious.

In Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340 CA & [1992] 2 AC 548 HL it was held that the bank may be a constructive trustee if it allows an authorised withdrawal but in the knowledge that the funds were to be misapplied.

Receipt

In Agip (Africa) Ltd v Jackson [1989] 3 WLR 1367 Millet J held that to be a constructive trustee the person receiving the trust property must have done so for his or her own use and benefit. The question arose as to whether a bank would be a constructive trustee of money in one of its accounts, which a trustee had placed there in breach of trust. Millet J held that if the bank used the money itself e.g. to pay off an overdraft then it was benefiting and so could be a constructive trustee but if the money was merely being held passively in the account it could not be a trustee.

Trust Property

The stranger must have received trust property in breach of trust to be held to be a constructive trustee.

Dishonest

Where a stranger dishonestly assists in the breach of a trust then the stranger will be liable as a constructive trustee.

Before Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 WLR 64 it was believed that before a stranger could be held liable as a constructive trustee, the actual trustee or fiduciary had to be a party to a dishonest or fraudulent design and not just a breach of trust which might be innocent. The stranger would only be dishonest if the trustee was dishonest.

Since Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 WLR 64 it is enough to show that there has merely been a breach of trust and that the stranger dishonestly assisted in that breach even if the trustee was quite innocent. Lord Nicholls in the case referred to the hypothetical example of a dishonest solicitor who might advise a trustee to misapply funds.

Before the case it was believed that the solicitor would not be liable because the trustee was not fraudulent. However since the case the solicitor as the stranger would be liable as a constructive trustee as he has dishonestly assisted even though the trustee might escape liability by not being fraudulent or dishonest.

Hoffman LJ in Polly Peck International Plc v Nadir and Others (No 2) [1992] 4 All ER 769 distinguished between knowing receipt and dishonest assistance as follows:

"Although both knowing assistance and knowing receipt give rise to the equitable remedy of accountability as a constructive trustee, the two causes of action are very different.

Liability for knowing assistance is based upon wrongful conduct namely knowing participation in a fraudulent breach of trust or fiduciary duty. Its common law analogy is conspiracy to defraud.

Liability for knowing receipt is restitutionary, based upon the beneficial receipt of money or property known to belong in equity to somebody else. The equitable remedy depends upon the existence of a trust or fiduciary duty but the breach of trust or duty need not have been fraudulent. The nearest common law analogy is money had and received."

Four Requirements of Dishonest Assistance:

1. It is enough for there to a be a fiduciary relationship there does not have to be a formal trust.

2. Since the Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 WLR 64 a stranger can be liable as a constructive trustee when he or she has assisted in a breach when the breach is innocent. There does not have to be a dishonest or fraudulent design involving the stranger and the trustee or fiduciary.

3. The stranger must have assisted in the breach of trust and done some act which promoted or advanced the unlawful object. In Brinks Ltd v Abu-Saleh (No 3) (1995) The Times October 23 it was claimed that, following a robbery, bullion was being held by certain persons as constructive trustees. It was alleged that Mrs E was an accessory to the removal of the bullion to Switzerland as she accompanied her husband who was carrying the bullion and that therefore she was liable as a constructive trustee as having dishonestly assisted in the breach of trust. It was held she merely accompanied him and did not assist.

4. It must be shown that the stranger acted dishonestly in order to be liable as a constructive trustee. Lord Nichols in Royal Brunei Airlines Sdn Bhd v Tan suggested that it was an objective test but with subjective considerations such as experience and intelligence of the stranger and the reasons for acting as he or she did.

"Quistclose Trusts

In Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 HL If a bank receives funds from an individual which it knows are to be held separately for the customer for a specific purpose then the bank holds those funds for the individual as a constructive trustee and if the funds are not used for the specified purpose they are to be held for the benefit of the individual. Note the analysis of Quistclose in Twinsectra v Yardely [2002] 2 AC 164 HL where it was acknowledged that a bank may lend for a specific purpose however this alone does not create a trust. The key issue is whether the funds were intended to be at the free disposal of the borrower or whether they were only to be used for a specific purpose. It was stated that the Quistclose trust was really just a resulting (returning) trust. The money was lent for a specific purpose on the understanding that if that purpose were not carried out then the money would return (result) to the lender.

Duty of Confidentiality.

A bank owes an implied duty to its customer not to divulge information about its customers to third parties.

However Tournier v National Provincial and Union Bank of England (1924) CA set out four exceptions:

1. Disclosure under Compulsion of Law

a) Court Order

Order to inspect entries in the Banker's books - S 7 Banker’s Books Evidence act 1879

To assist police with their enquiries - S 9 Police and Criminal Evidence Act 1984

Discovery orders for Mareva injunctions

Evidence for foreign trials – Evidence (Proceedings in Other Jurisdictions) Act 1975

Writ or Subpoena compelling bank employee to give evidence

b) Request from an official

Inland Revenue – Taxes Management Act 1970 & Income and Corporation Taxes Act 1988

Department of Trade and Industry – Companies Act 1985

Director of the Serious Fraud Squad – Criminal Justice Act 1987

c) Bank liable to prosecution is information not revealed

Money Laundering Provisions

S328 Proceeds of Crime Act 2002 - It is an offence for someone to enter into or become concerned in an arrangement which knows or suspects facilitates the acquisition, retention use or control of criminal property. Disclosure must be made to the National Criminal Intelligence Service (NCIS)

S 337 statutory protection given if

a) Information came to the person making the disclosure in the course of his profession business or employment

b) The information caused the to know, or suspect or gives reasonable grounds for knowing or suspecting that another person is engaged in money laundering

c) The disclosure is made as soon as practicable after the information comes to the discloser

d) Where the law compels the bank to disclose information and it is an offence not to do so

S330 Proceeds of Crime Act 2002

It is an offence to fail to report a person's engagement in any kind of illegal money-laundering wen the information is acquired in the course of business if the defendant has knowledge or suspicion or reasonable grounds for knowledge or suspicion.

No offence is committed if the information is disclosed as soon as is reasonably practicable after the information came to the person's knowledge or there was a reasonable excuse for non-disclosure. It is also a defence for legal advisers if the information arose in privileged circumstances.

2. Duty to the Public to Disclose

Not a clear application – Libyan Arab Foreign Bank v Bankers Trust & Pharaon v BCCI

3. Disclosure in the Bank’s Interest

This exception was successfully claimed in Sunderland v Barclays Bank Ltd (1938). The bank dishonoured cheques of customer because there were insufficient funds in her account and because the bank were also concerned about the customer's gambling. The bank told husband and claimed that it was in its interest to do so. It was held the bank was entitled to do so.

4. Disclosure with the Customer’s Consent

It is now common for bank’s to request customers for permission to give a reference.

Rights of The Bank

Interest

Where a customer has an overdrawn account the right of the lending bank to interest on the debt may be expressed or may be implied from the customer's acquiescence in the debiting of interest.

The bank will compound interest on a longstanding debt i.e. it will add the interest to the capital at intervals so that interest is charged on unpaid interest. The right to compound is also implied form the customer's acquiescence and survives the demand of the bank for payment and the closing of an overdrawn account.

The Banking Codes oblige the banks to publish their interest rates n the on their Web site and helpline and customers affected by the changes must be notified within 30 days of the alteration.

Savings account customers must be informed of the interest rates and also details of the provisions relating to superseded accounts. The Codes have extensive requirements for interest rates.

Charges

Charges tend to be an express term of the contract. The Codes require customers to be given details of charges for the day to day running of accounts including the charge for an unauthorised overdraft, exceeding an overdraft limit and loan repayment arrears. Where a tariff has been provided this will form an express term of the contract. The code requires that where charges are made available on the bank’s web site and helpline. Customers should be advised of any charges for services that do not relate to day-to-day running before the services are provided. 14 days notice should be given of any charges to be deducted in respect of standard account services on savings and current accounts.

Details of charges in relation to using automated teller machines (ATM) must be given when the card is issued. The ATM must inform the card user in adance of the transaction what charge will be made and by whom.

S.15 Supply of Goods and Services Act 1982 establishes an implied term in the absence of an express term that the bank may make reasonable charges for its services.

Repayment on Demand

Where a bank permits a customer to borrow by overdrawing his or her current account the bank is entitled to require payment on demand Titford Property Co v Cannon Street Acceptances Ltd (1975)

Where however the bank has expressed the facility is available for a specific period then the bank will not be able to demand repayment before this period has expired Williams & Glyn's Bank v Barnes [1981] Com LR 205

If there are conflicting statements in the facility letter then the right to repayment on demand is paramount – Lampert v Lloyds Bank [1994] 1 All ER (Comm) 161 CA

Limitation

The Limitation Act 1980 provides that a cause of action in contract becomes statute barred after 6 years. Therefore following the demand by the bank for repayment of an overdraft the bank have 6 years within which to sue.

Appropriation of Payment

Appropriation of payments may arise in two situations:

1. Where a customer has two or more accounts with the same bank and he or she pays money in the money will be appropriated to one of the accounts.

2. Where a customer has one account and he or she pays money into it as well as drawing cheques upon it appropriation will settle the issue of which payment in relates to which payment out.

Generally it is the balance on the combined accounts or the final balance of a single account that matters and so usually appropriation is not an issue.

However there are some occasions when a customer may have several overdrawn accounts and the bank may prefer to keep a lower overdraft on one than another. E.g. if a customer has a wages account then under insolvency law if this is overdrawn when the customer goes into liquidation or is declared bankrupt then the liquidator or trustee in bankruptcy is obliged to settle this account from the realisation of the assets in preference to other accounts. Therefore the bank will prefer to reduce the overdraft on other accounts rather than the wages account as that account will be the first debt to be settled on insolvency.

With a single account when a customer pays money in he or she has the first right to appropriate money paid in. This means that the customer of an overdrawn account may prevent the bank from using a payment in to reduce the overdraft by appropriating the payment by a payment out.

If the customer does not appropriate the bank may make an appropriation. If the bank does not appropriate then if it needs to be decided which payment in relates to which payment out the Rule in Clayton's Case applies which states that the first payment in relates to the first payment out. Note Devaynes v Noble,Clayton's Case (1816) & Deeley v Lloyd's Bank Ltd (1912) HL.

The limitations on the rule are:

a) The rule only applies to running accounts;

b) The Rule in Hallett's Case (1880) applies where personal funds are in the same account with trust funds and it is deemed that the personal funds are withdrawn first.

Combination of Accounts

Where a customer has two different accounts with same bank the bank has a common law right to combine them without giving notice to the customer. This is so even if the accounts are with different branches – Garnett V Mc Kewan (1872) LR 8 Exch 10.

If there are more than two accounts the bank is free to combine any accounts of its choice and to leave others intact.

However a customer has no right to instantly combine accounts.

A bank's right to combine accounts is limited:

a) Where the debit balance is not yet due, e.g. the due date for a loan has not yet passed – Jeffrys v Agra Masterman’s Bank (1866) LR 2 Eq 674.

b) Where the debit balance of a loan account is due there is no right to combine an account instantly as there is an implied agreement to keep accounts separately (Bradford Old Office v Sutcliffe [1918] 2 KB 833 CA) and a customer in these circumstances is entitled to notice before his or her cheques are dishonoured. However this does noto apply to an already frozen overdrawn account – Halesown Presswork and Assemblies Ltd v Westminster Bank [1972] AC 785 HL

c) An express agreement not to combine accounts will negate the bank’s right to do so.

d) If an account is held that contains trust funds this cannot be combined with an account with personal funds.

Equitable Right of Set Off

 

In Bhogal v Punjab National Bank [1988] 2 All ER 296 CA and Uttamchandani v Central Bank of India [1989] NJLR 222 CA the banks held two accounts, one in the name of X which is in credit and one in the name of Y which is overdrawn eh bank believed both the accounts were nominee accounts operated by Z. The banks set off the balance of one account against the other and refused to honour X’s cheques. The bank was unsuccessful because:

• 
  
  • The bank has a duty to pay all cheques properly drawn by its customer within a reasonable time. Therefore In order to be in a position to dishonour the cheques drawn by X it should have obtained a mandate expressly permitting X’s account to be used as security for Y’s account.
    
  • An equitable set off is only permitted if there is indisputable evidence that the accounts were nominee accounts and that they were both operated by Z.
    

Set Off following Insolvency

If either the bank or the customer is insolvent then the following principles apply:

a) A statutory set off may be applied to accounts on insolvency under S.323 Insolvency Act 1986 (individuals) or the Insolvency Rules 1986 (companies).

b) The statutory set off is automatic and unexcludable therefore any agreement not to set off or combine is void.

c) Any right to extend set off is void.

d) Debts, which were not yet due and payable, become due and payable as soon as the customer or bank are insolvent and are therefore subject to statutory set off.

e) Debits on a customers account after the bank had notice of insolvency of the customer will not b subject to set off and credits on a customer’s account after the customer has had notice of the banks’ insolvency will not be subject to set off.

f) Where the customer has 3 or more accounts the statutory set off will combine all of them but note preferential accounts (wages accounts)

g) Part VII of the Companies Act 1989 sets up an insolvency regime for when a recognised investment exchange (Stock Exchange) becomes insolvent.

Banker's Lien

A lien is a type of security, which carries the right to retain property belonging to another pending satisfaction of a debt owed by the owner of the property. The goods remain the property of the owner but the creditor has the right to retain them until the debt is paid. In R v Turner the owner of a car who removed the vehicle form the garage where it was being repaired without paying the bill and without permission could be guilty of theft. The lien does not carry the right to sell the goods to satisfy the debt (see pledge). However a the Torts (Interference with Goods) Act 1977 enables a person to sell goods in his or her custody and use the funds to satisfy any monies owed provided a specified procedure is followed.

A pledge is a different type of security, which carries the right to retain the property until the debt is paid or if unpaid after a certain time, carries the right to sell the property to satisfy the debt.

A banker's lien is a special kind of lien that is the equivalent of the pledge in other words the bank may retain the property until the debt is paid however if it becomes apparent that the debt will not be paid then the property may be sold to satisfy the debt.

Property that is subject to the lien includes securities Brandao v Barnett (1846) 12 Cl & Fin 787 HL such as insurance policies Re Bowes , Earl of Strathmore v Vane (1886) 36 ChD 586 and shares Re United Service Co., Johnstone’s Claim (1870) 40LJ Ch 286 that are held as security are subject to the lien.

The limitations on the Banker’s Lien are:

1. The bank does not have a lien on cheques paid into the bank for collection. The bank may have a lien on a cheque it collects for a customer who has an overdrawn account. It also has a duty to collect the cheque and credit the proceeds to the customer’s account. The lien and the duty complement each other, as the payment will reduce the debt on the account. If the customer has several accounts one of which is overdrawn but the payment is to an account in credit the bank may appropriate the cheque and pay it in to the overdrawn account.

2. The lien does not apply to securities kept in safe custody.

3. The lien does not apply to securities, which are held by the customer as a trustee

4. The lien does not arise if there is an agreement to the contrary between the bank and the customer.

Banker's Opinions

The bank is sometimes asked to give a reference about its customers. The reference must be based upon the facts actually known to the banker at the time. The banker is not obliged to make enquiries to ascertain new facts or other people's opinions.

Liability to the recipient of the reference

If the reference is unduly favourable the bank may then be liable in tort for negligent misstatement as in Hedley Byrne v Heller (1964). However the effectiveness of any exclusion clause in these cases will now have to be tested against the Unfair Contract Terms Act 1977.

Liability to the customer

If the reference is adverse the bank may be liable by reason of breach of the bank's duty of confidentiality or for libel

Safe Custody

Bank's have an established service of accepting items for safe custody incorporated into their contract with the customer. This arrangement is known as:

Voluntary bailment.

This type of bailment is subdivided into

Gratuitous bailment for which the bailee does not receive any payment and

Bailment for reward for which the bailee is paid

Where the bank is a bailee of property it is treated as a bailment of reward irrespective of whether payment is actually made for eth service as it is part of the contract between banker and customer. As a result the bank has a duty to take proper care of the items deposited and will be liable for breach of contract if it negligently allows them to be stolen or gives them to the wrong person. It is possible for a bank to exclude liability for negligence – Coldman v Hill [1919] 1 KB 443 but the exclusion must be reasonable under the Unfair Contract Terms Act 1977.

If two or more bailors deposit property jointly then it should not be delivered except on the authority of all bailors – Brandon v Scott (1857) 7 E&B 234. If one dies then the personal representative of the deceased will have to give a receipt – Hollins v Fowler (1875) LR 7, HL 757. If a mandate is signed to say that the property may be released to either bailor the bank may still be liable if it delivers the property knowing that a breach of trust is being perpetrated.

If there is doubt as to the bailor then the bank is entitled to retain the property for a reasonable time in order to clear the doubt.

If property is stolen while in the bank’s custody then it may be liable for negligence (see above on exclusion) or vicariously liable if the employee stole it in the course of his employment e.g. if he or she was responsible for looking after the property.

Items deposited for safe custody are not subject to the banker lien.

[landy_alert]

well im looking for dirt on lloyds as i bloody hate them!!!!!!!!!!!!!

www.lloydsbankinggroup.com/media/pdfs/.../2006_LTSB_Form_20F.pdf

 

Hi jdes:)

 

Just dropping by to offer my support 'cos you know I hate them with a vengeance too

 

Landy x

[jdes26]

I'm gona get those dirty beggars