" DUTIES OP A BANKER TOWARDS HIS CUSTOMERS "

tor

Shamsul Ba.hr in bin Baharuddin

Submitted in partial fulfillment of the requirement

for the Diploma. In Law at the MARA Institute Of
Technology,

ACKNOWLEDGEMENTS.

The writer would like to express his gratitute to

Enche Da.rbi for his guidance in the preparation
of this paper.
Grateful acknowledgement is also made to" Puan
Zuraidah for typing out the paper to meet the dateline.

- iii PREFACE.
When a person opens an account with a hank, seldom it is
realised that a contract has been entered into between him
and the bank. The normal steps to be taken to open an account
are simple and short. In fact all that is required to be done
by the prospective customer, at least in the case of a. deposit
account, is just to put his signature or thunb-print on the
specimen signature card. The rest of the work will be done
by the bank.
However,out of this apparently simple act will come into
existence a. debtor-creditor contractual relationship which,
in its turn, establishes the duties of both parties i.

the

bank and the customer).

This paper attemts to discuss the duties which a banker
owes to his customer. However, the duties discussed in this
paper are by no mean exhaustive. They are duties which can be
said to be the more important ones which have often become
the subjects of litigation in the courts.
The first two chapters of this paper seek to explain the

meaning of bank, banker and banking business and the qualificatior.

for a. person to become a bank's customer. The discussion on the
subject is felt necessary since it is out of the contract between
the banker and the customer that the duties arise.
The third chapter discusses the nature of the Banker-Customer
relationship. Here the paper seeks to determine the relationship
by explaining the possible areas of the relationship based on

iv -

the usual customs and usages of bankers as recognized by the

Courts.
The final

Chapter discusses the important duties owed by a

banker to his customers. The duties discussed are firstly the

duty to repay on demand. Here both the positive and negative
aspects of the banker's duty to honour its customers payment
orders are discussed. The positive aspect being that the bank
must honour the order if it is in the proper form and the
negative aspect is that it must not make payment out of its
customer account without confirming to the instructions or
mandate which the customer has given. The negative aspect leads
to the discussion-, regarding cheques which relates to the effect
of forgeries, alterations and specific types of crossings.
For completeness the duties and position of the bank as a
collecting banker will also be discussed.
The next duty that will be discussed is the duty of the banker
to obey the Customer's Countermand orders. Reliance will be made
on decided cases in the discussion of this area.
The final duty that will be discussed is the banker's duty
of secrecy. The governing provision on this area, is S.36(2) of the
Banking Act 1973(Act No.102). Therefore the effect of this section
will be examined as well as the special legislations which provide
for inroads into banking secrecy.
In writing this paper the writer tries to rely chiefly on the
decisions of the local Courts. Only in the absence of local cases
will reliance beraa.deon English cases.

CONTENTS
Preface

iii

Table of Cases

Table of Statutes

viii

Chapter I
Bank, Banker and Banking

Chapter II
Who is a Customer?
Chapter III

6
...

. .

The nature of.Banker-Customer relationship

13

Chapter IV
1. Duty to.repay on demand

19

a. Forgery of the Customer's signature

25

b. Alterations on the cheque

c. Crossed cheques

28
.

...

...

30

(i).'Not Negotiable' crossing

. . . .

31

(ii). 'Account Payee' crossing

. . . .

32

2. The collecting banker

3. Duty to obey customers' countermand order.

34
.

36

4. Duty to render accounts

38

5. Duty as to secrecy

40

6. Banking secrecy and special legislations .

43

Conclusion

48

Appendix

51

Bibliography

53

TABLE OF CASES.
British and North Eastern Bank v. Zalzstein

/T9277 2 K.B. 92

38

Brov/n v. Westminster Bank Ltd. / T 9 6 4 7 2 Lloyd's

Rep. 187

26

Carr v. Carr / " " 1 8 1 1 7 1 Mer 541

15

Chatterton v. London & County Bank '(?1891) The Times,

Jan. 21

. 4 0

Commissioners of Taxation v. English, Scottish and

Australian Bank Ltd. / T 9 2 0 7 A.C. 683

7,

Davidson v. Barclays Bank Ltd. / T 9 4 0 7 1 All E.R. 316

Devayness v. Nohle $1816) 1 Mer. 529 .

Dodwell & Co. v. John / T 9 1 8 7 A.C. 5 6 3 .

10

. 24
.

15
. 2 7

E.A. Barhour Limited v. The Ho Hong Bank Limited

(1929) S.S.L.R. 116

36

Far Eastern Bank Ltd. Bee Hong Finance Ltd.

/T971.7 2 M.L.J. 6

33

Fleming v. Bank of New Zealand / " 1 9 0 0 7 A.C. 577.

Foley v. Hill (1848) 2 H.L. Cas 28
Gibbons v. Westminster Bank Ltd. / T 9 3 9 7 2 K.B. 882

22

16,

17

24

Great Western Railway Co. v. London & County

Banking Co. Ltd / T 9 0 1 / A . C 414

Greenwood v. Martins Bank /T933.7 A.C. 51

Hadley v. Baxendale ( 1 8 5 4 ) 9 Exch 341

.
.

. 2 5

. 2 4

Holland v. Manchester and Liverpool District

Banking Co. Ltd. ( 1 9 0 9 ) 25 T.L.R. 386

38

House Property Co. of London v. London County and

Westminster Bank ( 1 9 1 5 ) 84 L.J.K.B. 1846

32

- vi TABLE OF CASES.
Jayson v. Midland Bank /~1968_7 1 Lloyd's Rep. 409 . . .

24

Joachimson v. Swiss Banking Corporation (1921) 3

K.B. 110 .

14 17 21, 22

Kepitagalla Rubber Estates ltd. v. National Bank

of India Ltd. /~1909_7 2 K.B. 1010

39, 40

Ladbroke & Co. v. Todd ( 1 9 1 3 - 1 4 ) 30 T.L.R. 433 . . .

London Joint Stock Bank Limited v. Macmillan

/~1918_7 A.C. 777

29

Matthews v. Williams, Brown & Co. (1894) 63 1.J.Q.B.494

Mc Eroy v. Belfast Banking Co. Ltd. (1935) A.C. 24 .

. . 6'

.11

Oriental Bank of Malaya v. Rubber Industry

(Replanting) Board /~1957_7 M.L.J. 153

10

R v. Kinghorn /~1908_7 2 K.B. 949

Robinson v. Midland Bank Ltd. (1925) 41 T.L.R. 402 .

44
.

.11

Shields Estate, Re / " 1 9 0 1 _ 7 I.L.R. 172

Sims v. Bond /~1833_7 5 B & Ad. 389

16

Sinclair v. Brougham (1914) A.C. 398

14

Tournier v. National Provincial & Union Bank

of England /~1924_7 1 K.B. 461 .

40, 42

United Dominions Trust Ltd. v. Kirkwood (1966)

All E.R. 986

United Overseas Bank v. Jiwani /~1977_7 1 All E.R. 733 . . 39

Universal Guarantee Pty Ltd. v. National Bank
of Australasia Ltd. /~1965__7 2 All E.R. 98
Westminster Bank Ltd. v. Hilton (1926) 43 T.L.R. 124 .

39
.

36

Williams and Others v. Summerfield /~1972_7 2 Q.B. 512 . . 44

Wilson v. United Counties Bank ltd. (1920) A.C. 102 .
Woods v. Martins Bank J 1 9 5 9 ) 1 Q.B. 55

. . 23
6, 8

- vn;-TABLE OF STATUTES.
Banker's Book (Evidence) Act 1949 (Revised 1971)

s 7 ( 1 )

43

Banking Act 1973 (Act 102)

S. 36

1, 41, 43

S 3 (^)

3, 4

S 2

4, 5

Bills of Exchange Act 1949 (Revised 1978) (Malaysian)

S. 24

. 25

S. 64(2)

. 28

S. 73

. 20

S. 75

. 36

S. 80

. 30

S. 81

. 31

S. 85

6, 35

Bills of Exchange Act 1882 (English)

3 82

. 32

. 43

Civil law Act 1956

S# 5

Income Tax Act (Revised 1971)

S. 79

. 45

Internal Security Act ( Revised 1972)

S. 76

. 45

Kidnapping Act 1961 (Act 41)

S 7

. 46

- viii TABLE OF STATUTES.

Prevention of Corruption Act (1971) (Act 57)

CHAPTER I
Bank, Banker and Banking.
In England, the definition of a "bank'^or "banker" has
caused considerable confusion as Parliament has never defined
those terms. In Malaysia, although the terms are defined in
the Banking Act, 1973

confusion however arises over what

the authorities concern.

it to mean since in Malaysia,

whether a body is a. bank or not, depends on whether or not

it has been granted a banking licence from the Minister.
Sheldon stated that it may either be unprofitable or
undesirable to try to answer the question "What is a bank?"
apart from the particular context in which it is asked. This
is because different criteria may be found to apply in different
cases-and indeed in some contexts, a person may be a bank
p

simply because some authorithy says he is .

In Malaysia, the words 'banker' and 'bank' are used

quite

loosely. Quite often employees of banks are described as

'bankers'.
Hart has described a bank and a banker as "a person or
company carrying on the business of receiving moneys, and
collecting drafts for customers subject to the obligation
of honouring cheques drawn upon them from time to time by the
customer to the extent of the amounts available on their
5

current accounts."
In Halsbury's laws of England, the term receives a similar
but much wider meaning. A banker is defined as "an individual,
partnership or corporation, whose sole or predominating business

- 2 -

is "banking, that is, the receipt of money on current or deposit

account and the payment of cheques drawn "by and the collection
of cheques paid in by a customer." Here the Court must
ascertain, without prejudice to other businesses of the
company, person or corporation, which is its predominating
or primary business. If it is banking business, then the
company or person must be a bank. In other words, if the
banking business is subsidiary to another major business or
other businesses carried on by the same concern, that
concern is not a banker.
4
The leading case supporting this view is Re Sheilds Estate .
Here, one laberto, carried on several classes of business,
stock-broking, a.gency and money broking, including some
banking business. The Court held that banking was not his chief
business but was only ancillary to it and,therefore, he was
not a banker.
Yet another definition of a bank is given by Paget.
In his view,"no one and nobody, corporate or otherwise can
be a. banker who does not conduct current accounts, pay cheques
5
drawn on himself and collect cheques for his customers."
In United Dominions Trust v. Kirkwood^ where the question
was whether a certain finance house was carrying on banking
business or not, the handling of cheques as a requisite
function of a bank

was stressed by lord Denning, who said:

"Money is now paid and received by cheques to such an extent

that no person can be considered a banker unless he handles
cheques as freely as cash".

- 3 -

Thus the traditional view that no one may he considered

a hanker unless he pays cheques drawn on himself was
re-affirmed.
In Malaysia, the term'Bank' is defined in the Banking Act
Q
of 1973 as "any person who carries on hanking business."
Further it is provided in S.3(1) of the same Act that:
"Banking business shall not be transacted in the Federation
except by a. corporation which is in the possession of c
licence in writing from the Minister authorizing it to
do so."

Thus a bank in this country must be a corporation carrying

on banking business and holding a licence from the Minister.
Unlike the practice in Malaysia, in England, there are
private bankers. They are private persons who keep banks
and engage in the business of banking by receiving money on
deposit with or without interest, by buying and selling bills
of exchange, promissory notes, bonds or stock, or other
securities, and by lending money without being incorporated.
The next question to be asked is "What is 'banking business'?"
In this regard the banking Act 1973 provides that banking
business means:

"The business of receiving money on current or deposit

account, paying and collecting cheques drawn by or paid in
by customers and making advances to customers and includes
such other business as the Central Bank with the approval Q
of the Minister may prescribe for the purpose of this Act."
The section thus tells the function which a person has to
perform in order that he may be said to be trading as a b a n k

e r #

- 4 -

However, if the status of a hanker is to be taken solely in

this

context then those persons or organizations who

undertake directly or indirectly, wholly or partially

some of these activities should qualify as a banker.
Finance companies for instance receive monies on deposit
accounts and make loans and advances to their customers.
In the same vein, moneylenders perform a. parallel function
of borrowing from one source to lend to another and on a.
broader scale too, there exist co-operative societies
inviting subscriptions and deposits from their members
only to lend to others. Can these bodies be then considered
as banks?.
It is therefore necessary

to draw a line to distinguish

institutions which come under the regulations of the Banking

Act 1973 a.nd those others which fall outside it;
Under Section 3(1) of the Banking Act 1973, it is.stipulated
that "banking business shall not be transacted in the Federation
except by a corporation which is in the possession of a licence
in writing from the Minister authorizing it to do so.
Thus it can be concluded tha.t the distinction between a bank
and other bodies carrying out seemingly similar functions (and
thus does not come under the Banking Act regulations) lies in
the fact that banks possess a licence authorizing it to carry
the bussiness underlined in S.2.
Under the circumstances therefore in order for a concern to
become a banker it has to perform not only the basic functions

- 5 -

underlined by section 2(1) but also it must be in possession

of a licence from the Minister of Finance authorizing it
to perform such functions specifically as a banker and the
licence is only

granted to a. corporate body.

It should be noted that Section 9 of the Banking Act 1973

prevents any person or body of persons, other than a bank
(apparently within the meaning of the Act) to use the word
"bank" or any of its derivatives, or any other word indicating
it transacts banking business except with the consent in
writing of the Minister.

CHAPTER I

1.

Act 102 of 1973.

2.

Sheldon, Sheldon's Practice and Law of Banking,

1972, 10th Ed., p. 159.

3.

Hart, H.L, The Law of Banking, 1931, 4th Ed.,

Vol. 1, p. 1.

4.

Z~1901.J I.L.R. 172.

5.

Paget, Paget's Law of Banking, 1972, 8th Ed., p. 4.

6.

( 1966 ) 1 All E.R

7.

ibid at p. 975.

8.

S.2, Banking Act 1973 (Act No. 102 of 1973)

9.

ibid.

968.

- 6 -

CHAPTER II
Who is a customer?
It is important to know whether or not a. person is a customs?
of a hank. And if he is indeed a customer, it is also relevant
to know at what point of the dealing does he become one. This
is important because the rights and obligations of each party
flow from the relationship. The importance can be explained
further by the fact that the Malaysian Bills of Exchange Act
1949 (Revised 1978) protects a. bank collecting money on behalf
1
of a person only if that person is a 'customer'.
The question of who may be called a. banker's customer is
not answered by any specified definition of the word in any
of the key legislations governing

banking business in this

country. Resort has therefore to be made to decided cases in

order-to appreciate the legal interpretation of what constitute
a customer.
The cases deciding this issue have adopted differing views.
2
In one English case, Woods v. Martins Bank ,
held that a person who had not yet

the Court even

opened an account could

become a customer of a bank.

In yet another early English case of Mathews v. Williams,
3

Brown and Co. . which concerned a stolen cheque discounted by

a banker it was held that the thief was not a "customer" of the
bank. Justice Cave's dictum on this point was as follows:
"The word 'customer' involves use and habit. There was

- 7 -

nothing of the kind here, and this man who presented the
cheque cuuld not he described as a. customer. He was a stranger
of whom the hank who paid him knew nothing. They did not
even know his name or his place of abode. They knew nothing
about him. It is absurd to speak of his being a 'customer'
of the bank. He was an absolute stranger to them. One
transaction - the one in question j
does not make a man a 'customer'."

The view to the effect that the word

"customer" involves

something of use and habit was not however accepted in the

later case of Great Western Railway Co. v. London and County
5

Banking C o . L t d w h e r e a bank had cashed cheques for about

twenty years for a man who had no account with the bank.
Both the trial judge and the Court of Appeal held that he was
a customer, but the House of Lords took the opposite view.
Lord Davey in his judgment

stated:

"It is true there is no definition of customer in the Act,

but it is aC-wll-known expression^^and I think that there must
be some sort of account, either a. deposit or a current account
or some similar relation, to make a. man a. customer of a. banker.
On the facts proved in this case I do not think the respondents
undertook any duty towards Huggins. They took the cheque he
offered in payment of sum to be placed to the credit of their
customers and gave him. the change, or in some cases (though
it is not proved)they may have bought his cheque possibly for
their own convenience in remitting to the head office. But this
will rot in my opinion, prove that Huggins was a customer, or
that they undertook to collect the cheque on his behalf so as
to bring them within the protection of section 82."

In the Privy Council case of Commissioners of Taxation v.

7
English, Scottish & Australian Bank Limited

it was stipulated

that "continuos dealing" was not of the essence, and that a

"customer" relationship bega.n immediately when an account was
opened and cheques paid in for collection.

- 8 -

Lord Dunedin delivering the judgment of their Lordships

stated:

"T-hedbr Lordships are of opinion that the word "customer"

signifies a relationship in which duration is not of the
essence. A person whose money has been accepted by a bank
on the footing that they undertake to honour cheques up to
the amount standing to his credit is, in the view of their
Lordships, a. customer of the bank in the sense of the statute,
irrespective of whether his connection is of short or long
standing. The contrast is not between an habitue and a newcomer,
but between a person for whom the bank performs a casual
service, such as, for instance, cashing a cheque for a. person
introduced by one of their customers, and a person who has an
account of his own at the bank."

In Ladbroke & Co. v. Todd

it was held that the moment a

person tendered cash to a. banker on the latters

undertaking

to repay such cash on demand, that person became a customer

of the bank.
Bailhache J. stated that:

"There must be a time when he began to be a customer. His

Lordship thought a person became a customer of a bank when
he went to the bank with money or a cheque and asked to have
an account opened in his name andUhe basalt accepted the money
or cheque and was prepared to open an account in the name of
that person. He thought the person became a customer then, and
after that he was entitled "to be called a customer of the bank.
He did not think it was necessary that the person should have
drawn any money or even that he should be in a position to
draw money. He thought such person became a customer the moment
the bank rgceived the money or cheque and agreed to open an
account."

As mentioned earlier, in the case of Woods v. Martins Bank

it

'-.'cs

decided that even a person who has not opened an account

could became a customer. However, that case should be read in

the context of the special circumstances of the case.

- 9 -

In Wood's case, a man who had been introduced to a hank

manager was given certain advice by the manager about
investing money. The manager then dictated a letter address
to the bank for this man to sign instructing the bank to
deal in a specified way with the proceeds of repayment of
an investment with a building society.
The letter authorised the bank to apply the greater part of
the proceeds in making the investment which the manager had
advised, and the balance was to be retained by the bank to
the order of the person signing the letter. It was held by
Salmon J., that the relationship of banker and customer
existed as from the date when the bank accepted the instructions
contained in the letter even though an account was not opened
v?ntil about three weeks later.

Salmon J.: "In my view the defendant bank accepted the

instructions contained in this letter as the plaintiff's
bankers, and tt^any rate from that date the relationship
of banker and-customer existed between them. It is true
that the express advice was in the first place given before
t h e 9 t h May, but it was implicity repeated on that day. On
June 1 , 1 9 5 0 , the defendant bank opened a current account for
the plaintiff and it is conceded that from this date the
relationship of banker and customer existed between them.
The next point taken by the defendants'.'is ..that the
plaintiff was not a customer of the defendant bank at the date
of the first transaction in May,1950, in that no current account
had then been opened by the plaintiff and that, therefore, they
owed vthe plaintiff no duty of any kind, at any rate in respect
of this transaction of May,1950. I have already stated that,
in my judgment, the plaintiff was a customer of the defendant
bank on May 9 , 1 9 5 0 . Nevertheless, even if he did not become
a customer until later, the defendants would still, in my
judgment, have been under a duty to exercise ordinary care
and skill in advising him in relation to the 5 , 0 0 0 / transaction."

From the above cases it can be concluded that the general

view is that a person qualifies as a 'customer' only after he

- 10 -

has opened an account with the hank.,. However, Holden is of the

opinion that it is possible that the general rule should be
qualifies to the extent that a person who is about to open
12
an may sometimes be regarded as a, customer.
A local case which deals with the question of whether a
person could be termed a. customer is the case of Oriental
1

Bank of Malaya v. Rubber Industry (Replanting) Board. 5here

it was held that the term 'customer' represents a relationship
in which duration is not of the essence (following the
decision in Commissioners of Taxation v. English, Scottish
1A
and Australian Bank)

and that the moment a person has his

monies accepted by a. bank on the understanding that he may draw

cheques up to': the amount standing in his account with the
banker, that person is regarded as the latter*s customer
notwithstanding the fact that such person's relationship with
the banker has only just begun and it is not of a. long standing
duration. This appeal case concerned a, misappropriated cheque
paid in by customer to open

an ; account

with the defendant -

appellent bank. The proceeds of the cheque were subsequently

withdraw by the customer and the drawers brought ah action
against the bank. One of the points at issue was whether the
person could be termed a 'customer' with only

an initial

transaction of the account.

Finally, if an account is opened in a. person's name by another
who either impersonates him, or represents himself as having
authorithy to open the account when he does not, there is no
contract or other legal relationship between the bank and the
person in whose name the account stands, and he is therefore not

- 11 -

a customer. In other words a person does not become a

customer of a bank unless he opens an account with it
himself, or at least authorises another person to do so.
This point became significant in the case of RoMnson v.
15
Midland Bank Ltd

where an account was opened in the

plaintiff's name with the defendant bank, by a conspirator

in a blackmail plot who- paid in a cheque obtained from
;

the blackmail victim in return for a promise not to reveal

his indiscretions with the plaintiff's wife. It was held
by the Court of Appeal that since the conspirator acted
without the plaintiff's authority^and used the plaintiff's
name- fictitiously merely in order to carry out the conspiracy,
there was no contract between the plaintiff and the defendant
bank, and he could not therefore claim the proceeds of the cheque
after it had been collected. Similarly, it was held by a majority
of the House of Lords in Mc Eroy v. Belfast Banking Co. L t d ^
that when a father directed his bank to transfer a deposit
account in his name into the joint &ames of himself and his
son, the son did not thereby become a customer because he
had not opened the account

himself and neither did he ask

the father to open the account for him. Therefore he did

not enter into any contractual relationship with the bank.
The legal definitions of a bank and the business of
banking, as shown above, concentrate on the traditional
elements of commercial banking as its essential and
indispensable ingredients and it is not therefore surprising
to find that legal definition of a customer of a bank depends
on these same elements. A customer of a bank can be concluded

- 12 -

as a person who has applied to it to open a current or deposit

account in his name and whose application has been accepted
by the bank. It is not necessary that the account

should

have been opened for a minimum length of time, or that it

should have been operated by the customer making a certain
minimum number of payments into

it or drawings against it.

CHAPTER II
1.

S.85 Bills of Exchange Act 1949 (Revised 1978)

2.

( 1959 ) 1 Q.B. 55.

3.

( 1894 ) 63 L.J.Q.B. 494.

4.

ihid at p. 498.

5.

"1901 J; A.C. 414.

6.

ihid at p. 420.

7.

L 1920 J,

A.C. 683.

8. ihid at p. 687.
9.

( 1913 - 14 ) 30 T.L.R. 433.

10. ihid at p. 434.

11. Supra.
12. Holden, J. Milnes, The Law and Practice of Banking,
1970, 2nd Ed., p. 26.
13.

C 1957 J

MLJ 153.

14. Supra.
15. ( 1925 ) , 41 TLR 402.

16. f~ 1935J A.C. 24.

CHAPTER III
THE NATURE OF BANKER-CUSTOMER RELATIONSHIP.
In legal theory, the relationship is contractual in
nature. But a remarkable feature of the contract is that its
terms are not usually embodied in any written agreement
executed by the parties. In practice

the most important

procedure when opening a current or deposit account is

1

the signing of a 'specimen signature card . There is for

example no formal agreement which provides that a banker
must maintain strict secrecy concerning his customers'
accounts.
v Status of Relationship.
The exact status of the relationship between a banker
and a customer must next be examined because it is that
status which entitles the pa,rties to certain rights and
imposes on them certain obligations.
a) Is it a, bailor-bailee relationship?
Occasionally a piece of valuable may be lodged with a
bank.for safe keeping. Here the legal status of the bank
is that of a bailee because the valuable remains the property
of the bank is obliged to return it in due course.

However, when money is the subject of the bailment, the

position changes. Money is currency and as such has legal
characteristics which do not belong to things in possession.
When bank notes are paid over as currency,

so far as the payer

is concerned, they cease ipso facto to be the subject of specif