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No tears for banks

Commercial banks in Barbados get away with highway robbery every day, holding customers at ransom seemingly with impunity while the Central Bank speaks calming words of “moral suasion”.

Believe it or not, the bank is not doing the public a favour by providing services, the relationship between a bank and its customer is actually based on the law of contract and one that is very profitable for the bank. The money deposited does not sit somewhere in a bank vault waiting for the customer to come and make a withdrawal. The bank uses that money to make a profit, for example by issuing loans and mortgages etcetera to other customers and collecting interest on the payments.

I am constantly amazed at the level of awe with which members of the public treat the bank and the level of fear of asking questions and ruffling feathers when you can simply take your money at any time and leave. So here is a basic summary of banking law which will hopefully help persons to ask the right questions and make the appropriate demands.

It is implied in every contract for banking services that the bank will (1) honour its customer’s instructions; (2) repay on demand funds deposited on the customer’s account; (3) exercise the care and skill of the ordinary banker in carrying out any instructions received from the customer; and (4) maintain the confidentiality of the customer’s business and financial information.

There is no duty to provide funds to the customer over and above what is in the actual account and where funds are so provided the account is said to be in overdraft. Overdraft facilities can generally be withdrawn at will by the bank as was discovered in Chapman v Barclays Bank [1997] 6 Bank L.R. 315.

Further, the court in Lloyds Bank v Voller [2001] Lloyds Rep. 67 (Banking) stated that where there is no express overdraft agreement and the customer issues a cheque for an amount in excess of the funds in the account there will be an implied request for the grant of overdraft facilities. It is then solely in the discretion of the bank to honour the request for funds. In other words, refrain from writing cheques when you know you have no money because you are then at the mercy of the bank.

In the event that the customer has more than one account, the bank (unless the contrary is agreed) is entitled to combine the funds in these accounts without having to seek permission from the account holder and use the overall balance to satisfy a cheque or other demand for payment. The type of account (for example chequing or saving) is irrelevant except where one of the accounts is a trust account (that is the funds are held on behalf of others).

As stated, the bank is required to carry out the customer’s instructions but cannot act without authority. At common law, where funds are paid without the customer’s authority such as the satisfaction of a forged cheque or with an unauthorised signatory, the bank is liable to the customer for the funds which were paid without authority.

The common law position is backed up by section 24 of the Bills of Exchange Act, Cap. 304 which states that “where a signature on a bill is forged or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorised signature is wholly inoperative”. In other words, it is void and of no effect.

The bank does not have any right to debit the account and where debited, the funds must be repaid to the customer. I wouldn’t bother feeling sorry for the bank either because I am sure they have insurance for situations such as these and they’ve probably got that amount and more out of the account holder in arbitrary and oppressive fees over the lifetime of the account.

Part and parcel of the duty of the bank to exercise care and skill in dealing with the customer’s account is being alert to situations where fraudulent activity may occur. In Lipkin Gorman v Karpnale Ltd. [1989] 1 W.L.R. 1340, the court outlined the standard of care as whether “a reasonable and honest banker knew of the relevant facts he would have considered that there was a serious or real possibility albeit not amounting to a probability that his customer might be defrauded”.

There is no duty on the customer to report fraud to the bank even if any ordinary reasonable person should have become aware of the fraudulent activity. The money has been entrusted to the bank’s care and it is for them to be vigilant.

To be continued.

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