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BOTH STATE AND FEDERAL HIGH COURTS HAVE CONCURRENT JURISDICTION ON ISSUE OF BANKER/CUSTOMER RELATIONSHIP

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CASE TITLE: ECOBANK V. ANCHORAGE LEISURES LTD & ORS (2018) LPELR-45125(SC)

PRACTICE AREA: BANKING

HEADING: BOTH STATE AND FEDERAL HIGH COURTS HAVE CONCURRENT JURISDICTION ON ISSUE OF BANKER/CUSTOMER RELATIONSHIP

LEAD JUDGMENT: MARY UKAEGO PETER-ODILI, J.S.C.

SUMMARY OF JUDGMENT

INTRODUCTION:

This appeal borders on the Jurisdiction of the Federal High Court to try Banker-Customer relationship matters.

This is an appeal against the judgment of the Court of Appeal, Lagos Division, Coram: Sidi Dauda Bage, JCA (as he then was), Samuel Chukwudumebi Oseji and Abimbola O. Obaseki – Adejumo JJCA delivered on the 30th day of March, 2016 where the Court affirmed the ruling of the trial Court delivered on 11th day of November, 2015 per M. B. Idris J.

The Respondents’ grouse in presenting the suit in this appeal is that Appellant herein allegedly failed and/or neglected to adhere to an “in-principle” agreement reached between a certain Honeywell Group Limited (not a party in the suit of this appeal) and the appellant. The respondents herein were indebted to the appellant bank over sums in excess of N5.5 Billion following which Honeywell Group Limited proposed to the appellant bank that the latter grant to it concessions on the total indebtedness. Appellant indeed, gave the concession as sought by Honeywell Group Limited that out of the entire N5.5 Billion outstanding, the negotiating Honeywell Group Limited pay a concessionary sum of N3.5 Billion on terms and conditions mutually agreed at the meeting of 22nd July, 2013. Further agreed at the 22nd July, 2013 meeting was that the negotiating third party, Honeywell Group Limited pay an immediate sum of N500,000,000.00 whilst the remainder N3 Billion is paid in bullet point form and before the departure of the then visiting CBN examiners at the appellants bank, in August, 2013.

​In a letter dated 22nd July, 2013 the negotiating third party, Honeywell Group Limited proposed fresh terms so as to stagger the repayment of the N3 Billion balance contrary to the agreement earlier reached. 

In confirmation of the above and upon receipt of the fresh proposal, appellant herein immediately caused to be issued; a letter dated same 22nd July, 2013 rejecting the new proposal and demanding a reversion to the agreement of 22nd July, 2013. There is no record of Honeywell Group Limited’s immediately and/or prompt reaction to the above reproduced assertions. Also by a letter dated 6th September, 2013, it was again admitted by the negotiating third party that agreement reached at the meeting of 22nd July, 2013 and for good order’s sake was for a bullet payment of N3.5 Billion. 

By a letter dated 14th September, 2014, the appellant’s bank again informed the negotiating third party that the agreement of 22nd July, 2013 became extinct and frustrated in August, 2013 following the palpable breach as contained and proposed in the letter dated 22nd July, 2013. However, that based on its unending proposal that the N3.5 Billion be deemed as full and final settlement of the obligations, appellant’s management submitted the fresh proposal to its board of directors and having considered same, the board rejected the offer. 

Following the foregoing, the respondents herein approached the trial Court seeking certain reliefs. At the resumed hearing before the trial Court on the 11th day of December, 2015 appellant’s counsel, informed the learned trial Judge, Idris J of the contempt apparent on the Motion on Notice dated 5th November, 2015.

​Following parties’ arguments on the contempt apparent on the face of the respondents’ process, His Lordship, Idris J, ruled that he indeed, saw the subject Motion seeking for abridgment of time but disregarded same. Subsequent to this, the respondents withdrew the contemptuous Motion on Notice following which His Lordship, Idris J, again held as follows: 

“The application having been withdrawn this morning, it is hereby dismissed. Counsel should be warned to desist from filing applications that might make it appear as though they owned the Court. The Court belong (sic) to everyone, it belongs to no one. I award N5,000.00 cost in favour of the defendants against the plaintiffs. Matter is adjourned to 14/12/15 for hearing.”

The appellant aggrieved approached the Court of Appeal. The appellant filed 2 (two) Notices of Appeal before the Court of Appeal one challenging the ruling of the trial Court dismissing appellant’s notice of preliminary objection dated and filed on the 11th day of December, 2015. The second Notice of Appeal, dated same 11th December, 2015 was against the trial Court’s ruling in respect of respondents’ Motion on Notice dated 5th November, 2015 which was contemptuous of the trial Court and which the trial Court discountenanced while adjourning hearing on the contempt proceedings commenced by the respondents against the appellant bank. 

At the hearing of the appeal, appellant herein withdrew the Notice of Appeal against the trial Court’s ruling over respondents’ contemptuous Motion on Notice.

The Court of Appeal in its judgment affirmed the decision of the trial Court hence this appeal.

The Court determined the appeal on the Respondents’ issues as follows:

(i) Whether the Lower Court was right to have affirmed the decision of the trial Court to assume jurisdiction on the claim before it arising out of a banker-customer relationship.

(ii) Whether the Lower Court was correct in its resolution of the issue of cause of action, having considered the entire circumstances and facts of the case.

(iii) Did the decision of either of the two Lower Courts breach appellant’s right to fair hearing. 

DECISION/HELD:

In the final analysis, the Court held that the appeal lacked merit and it was accordingly dismissed. Consequently, the decision of the Court of Appeal and High Court was affirmed.

  • APPEAL – NATURE OF APPEAL – Nature of an appeal

“…That shown to be the angle put forward by the objector, there needs be cleared the point variously referred to by this Court that an appeal presumes or presupposes the existence of some decision appealed against where there is an absence of such a decision on a point it will be a waste of time for an appeal to lie against what the Lower Court had not reached and pronounced a decision upon. This is in consonance with the laid down practice of law that an appeal is a rehearing and for that to take place the appellate Court would reconsider the materials before the trial judge and would not hesitate to overrule his decision even on facts where after due regard and consideration it is manifest that the decision is wrong. See Babalola v. State (1989) 4 NWLR (Pt.115) 264 at 294 per Oputa JSC; Okhuarobo v. Aigbe (2002) 9 NWLR (Pt.711) 29 at 83 per Ayoola JSC.”

Per MARY UKAEGO PETER-ODILI ,J.S.C ( P. 14, paras. A-E )

  • JURISDICTION – JURISDICTION OF THE FEDERAL HIGH COURT –  Whether the Federal High Court has exclusive jurisdiction in cases of banker/customer relationship

“…To set the stage in this deliberation is to go into the constitutional provisions of Section 251 (1) (d) of the 1999 Constitution of the Federal Republic of Nigeria (as amended) CFRN for short and thus:- 251 (1) – Notwithstanding anything to the contrary in this Constitution and in addition to such other jurisdiction as may be conferred upon it by an Act of the National Assembly, the Federal High Court shall have and exercise jurisdiction to the exclusion of any other Court in civil cases and matters – (a)…; (b)…; (c)…’ (d) connected with or pertaining to banking, banks, other financial institutions, including any action between one bank and another, any action by or against the Central Bank of Nigeria arising from banking, foreign exchange, coinage, legal tender, bills of exchange, letters of credit, promissory notes and other fiscal measures: Provided that this paragraph shall not apply to any dispute between an individual customer and his bank in respect of transactions between the individual customer and the bank.” From the provisions of Section 251 (1) (d) CFRN, the Federal High Court is vested with exclusive jurisdiction in relation to issues pertaining to banks, banking and other financial institutions but when the dispute relates to banker/customer relationship, the jurisdiction is not exclusive and the said jurisdiction is concurrently shared with the Federal High Court and the State High Courts and that of the Federal capital Territory. The interpretation clearing the grey area on the confusion that would have otherwise arisen is seen in the case of NDIC v. Okem Ent. Ltd (2004) 10 NWLR (Pt.680) 107 at 221 where the Supreme Court stated thus:- “Section 251 (1) (d) does not confer exclusive jurisdiction in disputes arising between individual customer and the bank on the State High Court. All it did is to remove the exclusivity in dealing with those kinds of disputes from the Federal High Court; which means that the High Court of a State by virtue of Section 272 (1) of the 1999 Constitution also shares the jurisdiction with the Federal High Court.”

Per MARY UKAEGO PETER-ODILI ,J.S.C ( Pp. 21-23, paras. F-D )

  • BANKING LAW – BANKER-CUSTOMER RELATIONSHIP  –   Nature of a banker/customer relationship

“It is to be noted though the situation has become trite that it is the claim of a plaintiff that vests jurisdiction in a Court. See Adeyemi v Opeyori (1976) 9 – 10 SC 31. That is the basis on which the trial Court held thus:- “Whilst the defendant is not contesting the fact that it acquired all the rights and liabilities accruable to Oceanic Bank Plc, it then becomes lucid that the banker-customer relationship which existed between the plaintiffs and Oceanic Bank transposes to a relationship between the defendants (sic) and the defendant. See paragraph 9 of the statement of claim”‘ As a guide I shall cite the case of Bank of the North v. Yau (2001) 10 NWLR (Pt.721) 408 at 438 paras D – E, this Court per Ayoola JSC held thus:- “In the course of carrying on business of banking, a bank enters into several contractual relationships and performs various roles. It is important in an action between bank and customer to be clear which of the several contractual relationships forms or form the basis of the action. In this case, it is pertinent to note only four of these possible relationships, namely: (i) The relationship of creditor and debtor that arises in regard to the customer’s funds in the hands of the bank; (ii) The relationship of creditor and debtor that arises when the bank loans money to the customer or allows him to overdraw on this accounts; (iii) The relationship that arises from the role of the bank as a collecting bank of cheques drawn or other banks or branches of the same bank by a third person; and (iv) the possible role of the bank as a holder for value of a negotiable instrument.” (Underline mine for emphasis). The said meeting was also specifically referenced in relief 45 (a) of the statement of claim thus:- “A declaration that the plaintiffs (as customers), by the agreement reached at the meetings of July 22, 2013 and December 12, 2013 with the defendant (as banker to the plaintiffs) are not indebted to the defendant in any amount apart from the agreed sum of N3,500,000,000.00 (Three Billion, Five Hundred Million Naira) as full and final settlement/liquidation of their indebtedness.” Evidently clear from what has been showcased above is that what is available as the relationship between the parties is that of banker/customer, a situation of interaction emanating from a banking transaction where both parties assumed the role of creditor and debtor however the colouring presentation may seem to be. See Bank of the North v Yau (supra).”

Per MARY UKAEGO PETER-ODILI ,J.S.C ( Pp. 28-31, paras. F-A )

  • APPEAL – UNAPPEALED FINDING(S)/DECISION(S) –  Effect of unappealed finding(s)/decision(s) of court

“It follows that the objection raised by the appellant in the Court below would be headed for failure since that meeting of 22nd July, 2013 was held in the clear purview of the banker/customer relationship. The decision of the Court below in that regard being not appealed against has the matter settled for all time. I shall place reliance on the case of Akere v Governor of Oyo State (2012) 12 NWLR (Pt.1314) 240 at 278 wherein this Court held thus:- “In the circumstance, it is very clear and as settled in a long line of cases by this Court that a decision of a Court/tribunal not appealed against is deemed accepted and remains binding on the parties and all and sundry.” See also Kraus Thompson Organisation Ltd v Unical (2004) 9 NWLR (Pt.879) 631 at 653; A.G, Anambra State v A. G. Federation (2005) 9 NWLR (Pt.931) 572 at 615. The point has to be made that the learned counsel for the appellant’s submission cannot take the place of the pleadings before the Court nor the evidence proffered. Therefore the findings of the trial Court of Appeal that what was at stake was based on a banker/customer relationship and upon which the trial High Court was empowered to entertain not having been appealed against, learned counsel now bringing up the same issue at this address stage has in my humble view laboured in vain. See Obasuyi v Business Ventures Ltd (2000) 5 NWLR (Pt.558) 568 at 690; Akinbobola v Plisson Fisko (1991) 1 NWLR (Pt.167) 270 at 287. Indeed the Lower Court could only have decided the issue of cause of action on the same basis as the trial Court’s decision in reiteration that a reply address of counsel can neither be a re-argument nor an avenue to raise fresh not contained in the initial address or what was outside the pleadings of the plaintiff. Also to be brought in is the fact that the finding of the trial Court discountenancing the objection of the appellant on the cause of action as it relates to third party negotiations was not appealed in the court below and so remains binding and cannot be reopened at this stage either without a ground of appeal so holding it. See Akere v. Governor of Oyo State (supra) and A. G. Anambra State v A. G. Federation (supra); Agbakoba v INEC (2008) 18 NWLR (Pt.1119) 489; KT & Industries Plc v The Tug Boat M/V Japaul B. (2011) 9 NWLR (Pt.1251) 13 at 151 – 152. On the third issue on whether or not the right to fair hearing of the appellant was breached. The stance of the appellant on this question stems from a motion filed by the respondents on 5th November, 2015 and when it was called up for hearing on 11th December, 2015 which said motion was withdrawn and the appellant opposed the said withdrawal and the Court of trial allowed the withdrawal and dismissed the application and no appeal arose therefrom. The implication of there being no appeal in that regard is that the order of dismissal remained a final determination and end of all rights of a party arising from the dismissed process. I refer to Mohammed v. Abdulaziz (2009) All FWLR (Pt.465) 1684 at 1701.”

Per MARY UKAEGO PETER-ODILI ,J.S.C ( Pp. 31-33, paras. B-F )

  • COURT – JURISDICTION  –   What determines jurisdiction of Court to entertain a cause/matter

“The law is trite that it is the claim of the plaintiff which determines the jurisdiction of the Court to entertain the matter. See Jev v. Iyortyom (2014) 14 NWLR (Pt.1428) 575, Adetayo & Ors v. Ademola & Ors (2010) 3-5 SC. (Pt.1) 87, Salik v. Idris (2014) 15 NWLR (Pt.1429) 36, Adetona & Ors v. Igele General Enterprises Ltd (2011) 7 NWLR (Pt.1247) 535.”

Per JOHN INYANG OKORO ,J.S.C ( P. 36, paras. B-D )

  • JURISDICTION – JURISDICTION OF THE FEDERAL HIGH COURT  –   Whether the Federal High Court has exclusive jurisdiction in cases of banker/customer relationship

“A close perusal of the originating process before the trial Court clearly shows that the relationship between the appellant and the respondents is that of banker/customer relationship. There is nothing in the entire process to show a matter relating to simple contract. Section 251(1) of the Constitution of the Federal Republic of Nigeria vests exclusive jurisdiction on disputes between banks and other financial institutions but the Proviso thereto confers concurrent jurisdiction on the Federal and State High Courts in matters between an individual customer and his bank in respect of transactions between the individual customer and the bank. It is therefore erroneous to ague that the Federal High Court does not have jurisdiction in this matter between the Appellant and the Respondents. See Nigeria Deposit Insurance Corporation v. Okem Enterprises Ltd (2004) 10 NWLR (pt 880) 107, (2004) LPELR – 1999 (SC.), Merill Guaranty Saving & Loans Ltd & Anor v. Worldgate Building Society Ltd (2013) 1 NWLR (Pt.1336) 581; It must be noted that Section 251(1) (d) of the 1999 Constitution particularly the proviso thereof does not lose sight of the provision of Section 272(1) of the same constitution which provides that – “subject to the provisions of Section 251 and other provision of the Constitution the High Court of a State shall have jurisdiction to hear and determine any civil proceedings in which the existence or extent of a legal right, power, duty, liability, privilege, interest, obligation or claim is in issue.” I do not think this provision provides exclusive jurisdiction on the State High Court on issue of disputes between an individual customer and his bank. Both Courts have concurrent jurisdiction on issue of banker/customer relationship. Based on the above few words of mine and the elaborate reasons in the lead judgment, I agree that the Court below was right to uphold the jurisdiction of the Federal High Court to entertain this matter.” 

Per JOHN INYANG OKORO ,J.S.C ( Pp. 36-38, paras. D-A )

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U.C.C. - ARTICLE 4 - BANK DEPOSITS AND COLLECTIONS (2002)

Primary tabs.

  • PART 1. GENERAL PROVISIONS AND DEFINITIONS
  • § 4-101 . SHORT TITLE.
  • § 4-102 . APPLICABILITY.
  • § 4-103 . VARIATION BY AGREEMENT; MEASURE OF DAMAGES; ACTION CONSTITUTING ORDINARY CARE.
  • § 4-104 . DEFINITIONS AND INDEX OF DEFINITIONS.
  • § 4-105 . "BANK"; "DEPOSITARY BANK"; "PAYOR BANK"; "INTERMEDIARY BANK"; "COLLECTING BANK"; "PRESENTING BANK".
  • § 4-106 . PAYABLE THROUGH OR PAYABLE AT BANK; COLLECTING BANK.
  • § 4-107 . SEPARATE OFFICE OF BANK.
  • § 4-108 . TIME OF RECEIPT OF ITEMS.
  • § 4-109 . DELAYS.
  • § 4-110 . ELECTRONIC PRESENTMENT.
  • § 4-111 . STATUTE OF LIMITATIONS.
  • PART 2. COLLECTION OF ITEMS: DEPOSITARY AND COLLECTING BANKS
  • § 4-201 . STATUS OF COLLECTING BANK AS AGENT AND PROVISIONAL STATUS OF CREDITS; APPLICABILITY OF ARTICLE; ITEM INDORSED "PAY ANY BANK".
  • § 4-202 . RESPONSIBILITY FOR COLLECTION OR RETURN; WHEN ACTION TIMELY.
  • § 4-203 . EFFECT OF INSTRUCTIONS.
  • § 4-204 . METHODS OF SENDING AND PRESENTING; SENDING DIRECTLY TO PAYOR BANK.
  • § 4-205 . DEPOSITARY BANK HOLDER OF UNINDORSED ITEM.
  • § 4-206 . TRANSFER BETWEEN BANKS.
  • § 4-207 . TRANSFER WARRANTIES.
  • § 4-208 . PRESENTMENT WARRANTIES.
  • § 4-209 . ENCODING AND RETENTION WARRANTIES.
  • § 4-210 . SECURITY INTEREST OF COLLECTING BANK IN ITEMS, ACCOMPANYING DOCUMENTS AND PROCEEDS.
  • § 4-211 . WHEN BANK GIVES VALUE FOR PURPOSES OF HOLDER IN DUE COURSE.
  • § 4-212 . PRESENTMENT BY NOTICE OF ITEM NOT PAYABLE BY, THROUGH, OR AT BANK; LIABILITY OF DRAWER OR INDORSER.
  • § 4-213 . MEDIUM AND TIME OF SETTLEMENT BY BANK.
  • § 4-214 . RIGHT OF CHARGE-BACK OR REFUND; LIABILITY OF COLLECTING BANK; RETURN OF ITEM.
  • § 4-215 . FINAL PAYMENT OF ITEM BY PAYOR BANK; WHEN PROVISIONAL DEBITS AND CREDITS BECOME FINAL; WHEN CERTAIN CREDITS BECOME AVAILABLE FOR WITHDRAWAL.
  • § 4-216 . INSOLVENCY AND PREFERENCE.

PART 3. COLLECTION OF ITEMS: PAYOR BANKS.

  • § 4-301 . DEFERRED POSTING; RECOVERY OF PAYMENT BY RETURN OF ITEMS; TIME OF DISHONOR; RETURN OF ITEMS BY PAYOR BANK.
  • § 4-302 . PAYOR BANK'S RESPONSIBILITY FOR LATE RETURN OF ITEM.
  • § 4-303 . WHEN ITEMS SUBJECT TO NOTICE, STOP-PAYMENT ORDER, LEGAL PROCESS, OR SETOFF; ORDER IN WHICH ITEMS MAY BE CHARGED OR CERTIFIED.
  • PART 4. RELATIONSHIP BETWEEN PAYOR BANK AND ITS CUSTOMER
  • § 4-401 . WHEN BANK MAY CHARGE CUSTOMER'S ACCOUNT.
  • § 4-402 . BANK'S LIABILITY TO CUSTOMER FOR WRONGFUL DISHONOR; TIME OF DETERMINING INSUFFICIENCY OF ACCOUNT.
  • § 4-403 . CUSTOMER'S RIGHT TO STOP PAYMENT; BURDEN OF PROOF OF LOSS.
  • § 4-404 . BANK NOT OBLIGED TO PAY CHECK MORE THAN SIX MONTHS OLD.
  • § 4-405 . DEATH OR INCOMPETENCE OF CUSTOMER.
  • § 4-406 . CUSTOMER'S DUTY TO DISCOVER AND REPORT UNAUTHORIZED SIGNATURE OR ALTERATION.
  • § 4-407 . PAYOR BANK'S RIGHT TO SUBROGATION ON IMPROPER PAYMENT.

PART 5. COLLECTION OF DOCUMENTARY DRAFTS

  • § 4-501 . HANDLING OF DOCUMENTARY DRAFTS; DUTY TO SEND FOR PRESENTMENT AND TO NOTIFY CUSTOMER OF DISHONOR.
  • § 4-502 . PRESENTMENT OF "ON ARRIVAL" DRAFTS.
  • § 4-503 . RESPONSIBILITY OF PRESENTING BANK FOR DOCUMENTS AND GOODS; REPORT OF REASONS FOR DISHONOR; REFEREE IN CASE OF NEED.
  • § 4-504 . PRIVILEGE OF PRESENTING BANK TO DEAL WITH GOODS; SECURITY INTEREST FOR EXPENSES.
  • PART 3. COLLECTION OF ITEMS: PAYOR BANKS
  • PART 5. COLLECTION OF DOCUMENTATARY DRAFTS

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Mastering Banking pp 54–72 Cite as

The banker-customer relationship

  • D. P. Whiting  

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Part of the Macmillan Master Series book series (MMS)

When you have carefully studied this chapter you should be able to:

Define a bank

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Give brief accounts of the main effects of the Consumer Credit Act 1974, the Financial Services Act 1986, and the Banking Acts of 1979 and 1987

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Relationship between Banker and Customer

Introduction.

In India, the history of banking had started long before India got independence from the British in 1947. The first phase of the banking sector was initiated during 1786 with the establishment of India’s first bank “bank of Hindustan” (which collapsed in 1832) and ended in 1947. From there till now there have been major changes in the banking system and management over the years with the advancement in technology and considering the needs of people. In India, the banking sector forms the base of the economic development of the country. Trust helps in building a healthy relationship between a banker and a customer. Their relationship comes to existence once the banker agrees to open an account in the name of a customer.

Definition of Bank

The definition for banking is given by Section 5 (b) of the Banking Regulations Act 1949, “Banking means accepting, for lending or investment, of deposits of money from the public repayable on demand or otherwise and withdraws by cheque, draft, and order or otherwise”. To be precise a bank is a lawful institution that acts as deposit and lending. They promote people who have excess money (saver) to deposit and earn an interest rate and on the other hand, they promote loans for people who need money (borrower) at an interest rate. So, the bank functions as an intermediary between the saver and the borrower. Certain features of banking are:

1. A bank should conduct the major function of acceptance of deposits and lending.

2. They should collect the deposits from stakeholders.

3. They are bounded to repay the deposited amount at any time via any mode.

Definition of a Banker

It is stated under Section 3 of the Negotiable Instruments Act 1881 , that the term banker includes any person acting as a banker.  The banker is an individual who is a dealer of capital or a money dealer. Sir john Paget stated that “no person or body, corporate or otherwise, can be a banker who does not:

1. Take deposit accounts.

2. Take current account.

3. Collect, issue, and paycheques, crossed and uncrossed for his customers.

Duties of a Banker

The duties of a Banker are –

1. It is the responsibility of the banker not to disclose the personal information given by the customer.

2. A banker should follow the guidelines of the customer. If the banker isn’t provided with any guidelines they can follow the rules and regulations.

3. A banker is obliged to maintain all the details of transactions made by the customer.

4. The banker is obliged to honour the cheques of its customers up to the amount standing to the credit of the customer’s account. If the banker is wrongly refusing to honour the cheque, he or she is liable to pay the compensation to the customer.

5. A banker is responsible to withdraw and deposit funds with attention and accuracy.

6. A banker should gather financial information from new and existing clients to prepare their accounts, loans and determine their creditworthiness.

7. The banker is obliged to advise, assist, and guide the client to meet their financial goals.

Rights of a Banker

1. right of lien.

This is one of the rights that are enjoyed by the banker. Under this right, a banker can keep the goods or properties which are under the possession of the debtor until the loan is repaid by the same. The right of general lien is referred to under Section 171 of the Indian Contracts Act, 1872. A banker is only supposed to maintain the collateral but not allowed to sell it. But, the banker can sell the collateral after issuing a reasonable notice to the debtor who has defaulted.

2. Right of Set-off

Under this right, the banker has the right to merge two or more accounts of the customer under the same name in a bank and set off the debt balance in one account and the credit balance in other, provided the funds belong to the customer.

3. Right of Appropriation

This right is used when a customer who has taken many loans from the bank, deposits some money without any instructions. In such cases, the banker can use his right to appropriate the deposited amount to any loan, even to a time-barred- debit after informing the customer about the appropriation.

4. Right to charge interest and commission

Every bank in India has the right to charge interest on the loans they provided to their customers. The interests are charged monthly, quarterly, semi-annually or annually. Along with interests, the banks also have the right to levy commissions for the services they are rendering for their customers like SMS notification service, multi-city cheque service, retail banking etc.

5. Right to close the Account

After sending a written intimation to the customer, the banker has the right to close an account if it is found to be not operated properly.

Definition of a Customer

A customer is a person or a company who has an account in the bank.  And the activities anticipated by the customer should be valid and lawful. The term “customer” is not defined under any law.

Qualifications of a Customer under the guidelines of RBI:

1. A person or entity that maintains an account and/or has a business relationship with the bank.

2. Any person or entity connected with a financial transaction can pose significant reputation or other risks to the bank, say, wire transfer or issue of a high-value demand draft as a single transaction.

3. One on whose behalf the account is maintained.

4. Beneficiaries of transactions conducted by professional intermediaries, such as stockbrokers, chartered accountants, solicitors, etc. as permitted under the law.

Obligations of the Customer

1. The customer should read the most important terms and conditions of the bank.

2. They should ensure that they have repaid their dues on time.

3. Customers should provide authentic information in the records of the bank.

4. If the customer found any forgery in the cheque, they should inform the bank immediately.

5. The customer should inform the bank if they lost their cheque.

6. The customer should fill their cheque properly.

7. The customer should only present their negotiable instruments during business hours.

8. Customers should inform the bank in case of any disagreement in the bank statement.

Rights of the Customer

1. right to grievance redressal and compensation.

The customer has the right to a grievance redressal system if the bank fails to adhere to its basic norms. If the complaint isn’t resolved by the bank, the customer can go to the banking ombudsman.

2. Right to privacy

The bank is obliged to respect the privacy of the customer by keeping the personal information of the customer confidential. Bankers can only disclose such information in matters of law or with the permission of the customer.

3. Right to the suitability

Under this right, the banks should always sell the products by taking into consideration the needs of the customer.

4. Right of transparent, fair and honest dealing

The contract between the bank and the customer should be easily understood by the common man. The bank should make the customer aware of the major aspects like interest rates and risk involved etc. It is the responsibility of the bank not to hide anything from the customer before signing the agreement.

5. Right to fair treatment

The customers have the right to not be discriminated against based on caste, creed, gender, sex, religion, etc. by the bank. But, the bank can offer schemes which are designated for a particular set of people.

The relationship between the banker and the customer varies according to the type of customer and the service he/she demand. There are two main relationships between the banker and customer, they are:

1. General relationship: it consists of the possible services the banker provides to the customer.

2. Special relationship: it consists of duties and instructions to the banker.

General Relationship between Banker and Customer

The general relationship between a banker and customer is:

1. Debtor and Creditor relationship

When a customer fills and signs the account opening form he/she enters into a contract with the bank. And when the customer deposits money in their account, the customer becomes a creditor and the bank becomes a debtor. The bank can utilise the amount in the way they want. They aren’t bound to inform the creditor about the utilization and aren’t bound to give any security to the depositor. The banks are liable to give the amount back when the depositor demands.

Lending money by providing loans is one of the major aspects of banks. They provide loans by charging a particular amount of interest by utilizing the resources mobilized by them. In this case, the bank becomes a creditor and the customer becomes a debtor. But here, the bank requires security and documents for providing loans.

2. Trustee and Beneficiary relationship

Section 3 of the Indian Trust Act, 1882 describes trust as: “an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner’.

Here the relationship between the bank and the customer is based on trust. When the bank receives a valuable asset or document for security in exchange for the loan provided by the bank, the bank is considered to be a trustee and the customer is considered to be a beneficiary.

3. Principal and Agent

An agent is a person who acts as the one who is employed to do any act for another or to represent another in dealings with the third person. The person for whom the work is done or to whom it is represented is called the principal.

Bank carry payments to various authorities by collecting cheques, bills on the behalf of the customers. Here bank acts according to the guidelines of the customer and charges for the services rendered to them.

4. Lesser and Lessee

Section 105 of the Transfer of Property Act 1882 had defined the term lease as: “a lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specific occasions to the transferor by the transferee, who accepts the transfer on such terms”. The important term that comes under Section 105 is:

  • Lessor: the person who transfers the immovable property.
  • Lessee: the person to whom the property is transferred.
  • Premium: to obtain a lease of an immovable property a price called “premium” is paid.
  • Rent: the service or money that is rendered is known as rent.

5. Bailor and Bailee

A bailment is a contract where the customer provides a valuable asset or any specific good for a specific period of time to the banker. The customer who entrusts the asset to the banker is a bailer. And the banker to whom the asset is entrusted for a specific time is called a bailee. Bankers also charge a particular amount for bailment.

6. Advisor and Client

The banker acts as an advisor when a customer invests in securities. Here the customer is the client. The banker should be cautious while giving advice officially or unofficially.

Special Relationship between Banker and Customer

The special relationship that exists between banker and customer is:

1. The obligation of bankers to maintain records

The banker should maintain the records of transactions, deposits, loans and investments done by a customer. The records should be clear and genuine. Any irregularity in records might leads to legal trouble for the banker and customer.

2. The obligation of banker to maintain confidentiality

The bank is responsible to keep all the information and details of the customers safe and secure. Even though the information is confidential, the information can be disclosed to government officials in terms of any legal issues.

3. The obligation of the banker to honour checks

The banker is responsible to provide the cheque of the customer equivalent to the sum of money present in their account. The conditions that needed to be fulfilled while honoring the cheque of the customer under Section 31 of the Negotiable Instruments Act, 1881:

  • Proper design of the cheque.
  • The check should be properly presented.
  • The cheque should be collected only on banking hours.
  • The correctness of the cheque should be noticed.
  • Availability of sufficient funds of the customer.

Termination of Relationship between the Banker and the Customer

The relationship between the banker and the customer terminates on:

1. Liquidation of the company .

2. The death, lunacy or insolvency of the customer.

3. The completion of the term of contract or specific transaction.

4. Voluntary termination of the relationship by the customer by closing the account.

5. Closing of the account by the bank after the issue of notice.

As time evolves major changes occur in different sectors of society. One such sector which has got evolved with time is banking. The history of banking in India shows that with time and according to the necessities of people, major developments had occurred in the field of banking. And also due to the invasion of the internet, the opportunities for easy and convenient banking have got widened. As in the future, we can witness new changes each day in the banking sector for the betterment of the economic growth of the country.

1. https://m.rbi.org.in//scripts/bs_ViewMasDirections,aspx?id=10292

2. http://lawtimesjournal.in/customer-banker-relationship/

3. https://blog.ipleaders.in/relationship-between-banker-customer/amp/

4. https://indiankanoon.org

This article has been written by Nourien Nizar 1st Year B.com LLB student at Government Law College, Ernakulam

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Relationship between banker and customer

Relationship between Banker and Customer

The relationship between banker and customer is a legal relationship that starts after the formation of a contract . When a person opens a bank account in the bank and the banker gives his acceptance for the account, it binds the banker and customer in the contractual relationship. The person who holds a bank account in the bank and uses its services is called a bank customer . The contractual relationship between bank and customer creates more types of banker and customer relationships.

The bank and customer are two different terms that are related to the bank. The person doing the banking business is called a banker and the person who is connected with the bank, either depositing his money or taking a loan from the bank is called a bank customer. The relationship between banker and customer can be of various types because it totally depends upon the activities, products and services provided by the banker to the customer. Although the relationship is totally based on contact, trust is an important part of the relationship between bankers and customers.

Section 5 (b) of the Banking Regulations Act 1949 defines the bank as a financial institution . According to the section “The bank accepts, lending money or invest the money from the public repayable on demand or otherwise and withdraw through online, cheques, drafts or any other way.” It is a licensed institution to receive deposits of its costumer and make the loan.

The main work of the bank is depositing and lending money. The bank encourages people to save their money in bank accounts to earn some interest on the money. The bank uses this money to give loans to needy people with an interest rate. In simple words, the bank works as the intermediary between two people where one wants to save his money and the other needs money.  This process also helps the bank to gain some profit and improve the relationship between banker and customer. This process creates different rights and duties of bankers against the customer and rights and duties of customers against the bank which make the banker and customer relationship stronger.

What are Effective Laws?

So now, let us discuss all the legal relationships between banker and customer in detail.

Table of Contents

Relationship between banker and customer

The banker and customer relationship are based on trust. This relationship is divided into two important parts to understand clearly:

The general relationship between banker and customer

  • The special relationship between banker and customer

The services provided by a banker to its customer come under a general relationship between banker and customer. The general relationships between banker and customer are:

Relationship as Debtor and Creditor

The opening of a bank account in the bank of a banker by a person who has the capacity to contract is the basis of the debtor and creditor relationship between banker and customer. By filling out the form for opening a bank account bind the banker and customer in the written contract . The customer when deposits his money into his bank account, becomes a creditor because he is giving his money to the bank indirectly. The money deposited by the customer in the bank account becomes the bank’s property. The bank can use your money as it likes. By using your money, the bank becomes a debtor because he will take that money into his account to make further transactions with other bank customers. The bank is not liable to inform the customer about the utilization of his money.

This relationship gets opposite at the time when a bank customer takes a loan from the bank, the bank becomes the creditor and the customer becomes a debtor. It means the debtor and creditor relationship works both ways depending on the condition of the transfer of money. The bank usually takes the money of customers to use it to provide loans for other bank customers and it is the most important activity of a bank.

How to Resolve an Insolvent Company in India?

Almost in all types of bank accounts, the customer can withdraw his saved money into the bank account at any time because there are no restrictions imposed by the bank on the customer. Some bank accounts like fixed deposits etc. impose minor penalties if a person wants to withdraw his money before the expiration period.

Relationship as Trustee and Beneficiary

The bank performs the relationship as a trustee with his customer when the bank customer deposits his property or other assets. In this case, the bank holds the property of other documents of bank customers in exchange for the loan provided by the bank. The person who is depositing the property or other documents is known as the beneficiary.

It can be done in two conditions:

  • When a person deposits his important document in the bank locker.
  • The person took the loan and deposited his property document as security.

This relationship is based on trust. The document deposited in the bank is a secured document and the bank never share these document with any other person. Also, the ownership of the property will remain with the person, not the bank. In the situation of bank liquidation, the property secured in the bank by the beneficiary is not subject to distribution to the general creditors of the bank.

Relationship as principal and Agent

The bankers provide agent services to their customers. The agent is defined under section 182 of the Indian Contract Act as the agent is the person who is employed by a person by giving him the power of attorney to work or deal on his behalf. The banker pay taxes, electricity bills, insurance premium etc. at the command of the bank customer who acts as principal.  The bank usually charges for these services provided by the bank to its customers.

In the banking industry, the relationship between a banker and a customer can be considered as a principal-agent relationship. In this type of relationship, the customer (the principal) entrusts the bank or the banker (the agent) with their money and other financial assets, and the bank or the banker acts on the customer’s behalf to manage and invest those assets.

The customer, as the principal, is the party who has the ultimate control over their assets and makes the final decisions on how they should be managed. The bank or the banker, as the agent, is the party who is responsible for executing the customer’s instructions and managing their assets in accordance with the customer’s wishes.

The bank or the banker has a fiduciary duty to act in the best interests of the customer and to use reasonable care, skill, and diligence in managing the customer’s assets. This means that the bank or the banker must always act in the customer’s best interests, even if it is not in the best interests of the bank or the banker. The bank or the banker must not use their position of trust and confidence to gain any advantage over the customer or to benefit themselves at the customer’s expense.

This fiduciary duty is important because it helps to ensure that the customer’s assets are managed in a responsible and ethical manner. It also provides a level of protection for the customer, as they can trust that their assets will be managed in a way that is in their best interests.

One of the key responsibilities of the bank or the banker is to invest the customer’s assets in a way that will generate a reasonable return, while also balancing the risk of loss. This requires the bank or the banker to have a good understanding of the customer’s investment goals and risk tolerance and to make investment decisions accordingly. The bank or the banker should also be able to provide the customer with regular updates on the performance of their investments, as well as any changes that have been made to the investment portfolio.

Another important aspect of the principal-agent relationship between a banker and a customer is the concept of agency authority. This refers to the authority that the customer has given to the bank or the banker to act on their behalf. This authority can be expressed, where the customer has given the bank or the banker specific instructions on how their assets should be managed, or it can be implied, where the customer’s actions have indicated that they have given the bank or the banker permission to act on their behalf.

It’s also worth mentioning that this relationship is not a one-way street, there are certain responsibilities that the customer needs to fulfil as well, for instance keeping the bank updated about any important changes such as changes in the assets, liabilities, contact information, regular updation of their tax id number, e.t.c.

The relationship between a banker and a customer can be considered as a principal-agent relationship, in which the customer entrusts the bank or the banker with their money and other financial assets, and the bank or the banker acts on the customer’s behalf to manage and invest those assets. The bank or the banker has a fiduciary duty to act in the best interests of the customer and to use reasonable care, skill, and diligence in managing the customer’s assets. This relationship is built on trust and mutual understanding and both parties should fulfil their responsibilities effectively in order to make the best out of it.

Relationship as Lesser and Lessee

Section 105 of the Transfer of property act deals with the contract of lease . It is a transfer of a right to enjoy the immovable property for a certain time with consideration . This happens in the relationship between banker and customer when the bank provides a safe deposit locker to the customer of the bank to save his important property for a certain period of time. The bank changes its customer who is taking the benefit of the locker for a certain period of time.

The relationship between a banker and a customer can also be understood in terms of a lesser and lessee relationship. In this context, the customer is the lessee and the bank is the lesser.

In a lease agreement, the lessee (customer) is granted the use of an asset (such as a piece of property or equipment) by the lesser (the bank), usually in exchange for rent or a periodic payment. Similarly, when a customer opens an account with a bank, they are essentially leasing the use of the bank’s assets, such as its capital and liquidity, in order to access financial services such as borrowing, depositing, and investing.

In this analogy, the bank is the owner of assets that the customer can use and the customer is paying a fee to the bank to use these assets. Like any lease agreement, the terms of this “lease” are outlined in a contract, which defines the rights and responsibilities of both parties. This contract, known as a “banking agreement,” outlines the various services that the bank will provide to the customer, as well as the fees, interest rates, and other terms associated with those services.

An important aspect of this relationship is that customer trust the bank to handle their money and other assets responsibly, and to comply with applicable laws and regulations. Similarly, the bank is obligated to manage the customer’s assets in a safe and sound manner and to use reasonable care, skill and diligence to meet their customer’s needs.

In this analogy, the bank also has a duty to act in good faith and not to take advantage of their customers. They have to use their assets in a way that is beneficial for the customer and not just for themselves.

The lesser-lessee analogy also highlights the distinction between the assets of the bank and the assets of the customer. The customer’s assets are held in a separate account and are not commingled with the bank’s own assets. This is done to protect the customer’s assets in case of bank failure or other financial difficulties, and it also makes it easier to track and reconcile the customer’s transactions.

In this analogy, the bank also has an investment role and can suggest different investment options to their customer based on the customer’s financial goals and risk appetite. They can also provide various financial products and services such as savings accounts, loans, credit cards, insurance, etc.

Overall, the relationship between a banker and a customer can be understood in terms of a lesser and lessee relationship, where the customer leases the use of the bank’s assets in exchange for various financial services and access to credit. The bank, as the lesser, has a fiduciary duty to act in the best interests of the customer and to use reasonable care, skill, and diligence in managing the customer’s assets.

Relationship as Pledger and Pledgee

The banker performs the relationship of Pledger and Pledgee when the customer took the loan from the bank and deposits some security to the banker. The customer becomes a pledger and the bank is pledgee.  The security of the customer will remain in the custody of the bank until the person repays the money from the loan taken by him from the bank.

The relationship between a banker and a customer can also be understood as a pledgee and a pledger. In this context, a pledge is a legal agreement in which a borrower (the pledger) gives the lender (the pledgee) the right to take possession of and sell the specific property (the collateral) if the borrower defaults on the loan. This type of arrangement is commonly used in secured lending, where the borrower is required to provide collateral in order to secure the loan.

In a banking context, the customer may pledge assets such as real estate, vehicles, or stocks as collateral for a loan or line of credit. The bank, as the pledgee, holds the right to take possession of and sell the pledged assets in the event that the customer defaults on the loan. This allows the bank to recover its losses if the borrower is unable to repay the loan.

However, the bank’s rights as a pledgee are subject to certain restrictions. For example, it is not usually allowed to take possession of the pledged assets prior to default and can only sell the assets after default and after reasonable efforts have been made to give notice to the pledger and offer the assets for sale to the public or to specific third parties at a reasonable price. The bank also has a duty to exercise reasonable care in protecting and preserving the pledged assets.

Additionally, the pledged assets can be used as security for more than one debt, so one pledge of the assets may have multiple pledgees. In such a case, the pledgee with the highest priority in the pledge takes precedence over the other pledgees in the right to take possession and sell the assets in case of default of the pledger.

Relationship between Banker and Customer

In summary, the relationship between a banker and a customer can be viewed as a pledge and a pledger when collateral is involved. The pledgee (bank) holds the right to take possession of and sell pledged assets in the event of default while the pledger (customer) has the right to continue to use and enjoy the pledged assets until a default occurs. Both parties have rights and obligations that need to be adhered to maintain the pledge relationship.

Relationship as Bailor and Bailee

The banker can perform the relationship of bailor and bailee with its customer. There are many types of bailment under which the person delivers his goods to another party for a specific period of time and takes the goods back when the purpose of bailment has been done.

The relationship of bailor and bailee between banker and customer arises when the customer gives his security document of any other goods to the bank for a specific period of time for security. The customer is a bailor and the bank becomes bailee.

Relationship as Advisor and Client

The relationship between banker and customer can be as advisor and client in a case when the customer invests in securities. The bank gives advice to its customer for investing. For example, if you are planning to take any kind of loan, but are not sure which loan you should take. Here, the bank can advise you officially or unofficially to make the right decision. In that case, the banker will be your advisor and you will be his client.

Relationship as Mortgagor and Mortgagee

Section 58(a) of the Transfer of Property Act, of 1882 defines the mortgage as “A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced by way of loan, etc.”

When the banker provides the credit facility to his customer against the security of immovable property, the customer becomes a mortgagor and the bank is a mortgagee.

Relationship as Indemnity holder and Indemnifier

There are various types of indemnity given under the Indian Contract Act. Indemnity is one of the types of contract in which one person promises to save another party by paying his loss that occurred due to the person who is making the contract or by the act of any other person.

In the relationship between banker and customer, the banker acts as an indemnity holder if any wrong transaction is done while making the payment by the customer.

For example, if you make an online transaction with another person but the transaction fails and your money is deducted. The bank will repay the loss that occurred due to fault occurred in the transaction. However, it requires all the necessary written evidence to prove this in litigation .

Relationship as Hypothecator and Hypothecatee

The relationship between banker and customer converts into Hypothecator and Hypothecatee when the bank customer hypothecates some movable or immovable property or any other assets into the bank to take the loan from the bank. In this case, the bank customer is a hypothecator and the banker is Hypothecatee.

Special Relationship between Banker and Customer

The duties and instruction to the banker come under a special Relationship between Banker and Customer.

Maintain records

It is the duty of the banker to maintain every record of the transaction, loan and investment done by the bank customer. These records must be clear, genuine and authorized. The bank customer has the right to check his transaction details whenever he needs them. In a case where the transaction details are needed, the bank has the duty to provide the true details to its customer with the stamp and signature of the authorized person. Any mistake in the records can bring the bank into trouble.

Maintain confidentiality

A banker is responsible for the safety of the documents, records or any other property which is deposited by the bank customer in the bank. The information must remain confidential. However, there are some conditions when the banker can disclose these confidential documents saved in the bank account.

Obligation to honour cheques

The bank is responsible for accepting the Cheque of the customer that is equivalent to the amount present in the account. There are some necessary conditions which must be fulfilled by the Cheque. Lack of these conditions can lead to the dishonour of cheques . Some important conditions are:

  • Proper format of the Cheque
  • Correctly signed by the person
  • Properly presented in the bank
  • There must be an available balance in the bank account.

Termination of Relationship between the Banker and the Customer

The relationship between a banker and a customer can come to an end for a variety of reasons. Some of the most common reasons for the termination of this relationship include:

Liquidation of the company

The banker and customer relationship can be terminated at the time of:

  • Liquidation of bank
  • Winding up of a company .

Death or lunacy of a customer

If the bank customer dies and becomes a lunatic, the banker and customer relationship will terminate.

Completion of contract

It can be done if:

  • The loan taken by the bank customer is repaid
  • The bank guarantee has been completed

Closing the account after bank notice

It is the right of the banker that if he finds any illegal activity with the account or any other reasonable ground, the bank can close the account after giving proper notice to the customer.

Voluntary Closure of Account

Customers may choose to close their accounts with a bank for a variety of reasons, such as moving to a different area, dissatisfaction with the bank’s services, or finding a better deal elsewhere. Banks are typically obligated to close a customer’s account if requested to do so, but they may require the customer to provide proper identification and settle any outstanding debts or fees.

Involuntary Closure of Account

Banks may choose to close a customer’s account if they suspect fraud or illegal activity, if the customer has violated the terms of their account agreement, or if the customer has not maintained the minimum balance required by the bank. Banks may also close accounts that have been inactive for a certain period of time. Customers should be notified of the bank’s decision to close their account and given an explanation for the closure.

Termination by the Bank due to Risk Assessment

Banks may terminate customer relationships in case of higher risk assessment for a customer for instance when the customer is involved in money laundering activities, financing terrorism, other illegal activities, violation of anti-bribery laws, sanctions or other laws, regulations, rules and guidance. Also, if the customer’s information provided is inaccurate, false or incomplete, a relationship may be terminated.

Non-compliance with KYC or AML regulations

Banks are required to comply with various regulations related to the identification and verification of their customers, as well as to monitor their transactions for any suspicious activity. Failure to comply with these regulations may result in the termination of the customer’s account and possible legal consequences for the bank.

Bankruptcy or Insolvency of the Customer

If a customer declares bankruptcy or becomes insolvent, their accounts may be frozen and their assets may be used to pay off their debts. Banks may also be required to write off any outstanding loans or debts owed by the customer.

Merger or Acquisition of the Bank

If a bank is acquired by another bank, or if two banks merge, the accounts of the customers of the acquired or merged bank may be transferred to the acquiring or surviving bank. In such cases, customers may be given the option to close their accounts or to continue banking with the acquiring or surviving bank.

It’s worth noting that, termination of a customer relationship can be initiated by either party, the customer or the bank. The termination process should follow a formal process and adequate notice should be given to the other party. The bank should also have a protocol to handle the customer’s funds and assets after the termination of the relationship.

When a bank terminates a customer relationship, it may have an impact on the customer’s credit score, and it can also limit the customer’s access to banking services and financial products. Therefore, customers should be aware of the reasons why their accounts may be closed, and they should take steps to ensure that they are in compliance with all of the bank’s terms and conditions to avoid any potential problems.

From the bank’s perspective, the termination of customer relationships may lead to loss of revenue and reputation damage if not handled properly. Therefore, banks should ensure that they have a clear and transparent process for terminating customer relationships and that they follow all relevant laws and regulations related to customer identification, verification, and monitoring.

The relationship between a banker and a customer may come to an end for a variety of reasons, including voluntary or involuntary closure of the account, non-compliance with regulations, bankruptcy or insolvency of the customer

The relationship between a banker and a customer is a crucial one, as it involves the handling of important financial assets and the provision of financial services. The relationship can be understood as a principal-agent relationship, where the customer entrusts the bank or the banker with their money and other financial assets, and the bank or the banker acts on the customer’s behalf to manage and invest those assets. Additionally, when collateral is involved, it can be viewed as a pledgee-pledger relationship where the customer pledge assets to secure a loan or line of credit and the bank holds the right to take possession of and sell pledged assets in the event of default.

The customer-banker relationship is built on trust and mutual understanding, and both parties have certain rights and obligations that they must adhere to. Banks have a fiduciary duty to act in the best interests of the customer and to use reasonable care, skill, and diligence in managing the customer’s assets. Customers, on the other hand, have the right to access their accounts and financial information, to receive a fair and transparent service, and to be protected against fraud and other financial crimes.

However, the customer-banker relationship may come to an end for a variety of reasons. Customers may choose to close their accounts with a bank for a variety of reasons, such as moving to a different area, dissatisfaction with the bank’s services, or finding a better deal elsewhere. Banks, on the other hand, may choose to close a customer’s account if they suspect fraud or illegal activity, if the customer has violated the terms of their account agreement, or if the customer has not maintained the minimum balance required by the bank. Banks may also close accounts that have been inactive for a certain period of time. Additionally, termination of customer relationships may occur if the bank is acquired by another bank, if two banks merge, or if the customer declares bankruptcy or becomes insolvent.

It’s important that the process of termination of a customer relationship should follow a formal process, adequate notice should be given to the other party, the customer or the bank, and the bank should have a protocol to handle the customer’s funds and assets after the termination of the relationship.

In summary, the relationship between a banker and a customer is a vital one that is built on trust, mutual understanding and rights and obligations for both parties. It’s a dynamic relationship that may evolve or come to an end. The termination process should be handled with care, transparency and in accordance with the legal requirements, to minimize the negative impact on the customers, banks, and the economy as a whole.

Due to the invasion of the internet, we use our bank accounts to make hundreds of transactions every month. The Internet is making a special bond in the relationship between bankers and customers. Now, we can take the help of an E-contract to take a loan from the bank which is an easy way to get the loan even without going to the bank. It is the relationship of trust. We can see more changes in the bank sector as it is one of the major branches which is growing fast.

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customer relationship case law

Many law firms now integrate customer relationship management (CRM) software into their overall legal case management software suite. This technology plays a significant role in managing the growing complexity of client interactions and case information. 

As firms grow and the number of cases and the details involved expand, the need for robust  case management tools  like CRM becomes apparent. This article explores how CRM systems are used within the legal industry. By examining their application, we aim to provide insights into how these systems contribute to the effective handling of legal work and client relationships.

What Is Legal CRM Software?

Legal CRM software is a digital system that helps law firms manage, analyze, and improve their interactions and relationships with customers. For example, this software can store comprehensive client profiles, including contact details, case history, and personal preferences. Having a centralized database like this makes it easy for lawyers to access and update client information.

Beyond the more obvious use cases, CRM software can be greatly beneficial to a firm’s profitability. According to  data  from G2, 55% of CRM buyers see a return on investment (ROI) in six months or less. A further 24.5% see an ROI within seven to 12 months.

However, in the legal field, standard CRM solutions may fall short due to the nuanced requirements of legal professionals. For example, Salesforce is a popular CRM system that’s the industry leader in managing general customer relationships—but it lacks the specialized features that legal practices need. Law firms can experience challenges with Salesforce’s usability, including difficulties in configuring workflows and customizing processes without expert intervention. Ultimately, Salesforce wasn’t designed for law firms, and that becomes clear when legal professionals attempt to use its CRM features.

Why Do Law Firms Need a CRM?

CRM software is useful to law firms because it efficiently manages client relationships, tracks interactions, and streamlines client management processes. Some other benefits of CRM software include:

  • Client Retention in Competitive Markets : Nowadays, clients expect personalized attention and prompt responses. Without law firm intake software to track every interaction and preference, clients may feel neglected and look elsewhere for legal services. CRM software enables law firms to maintain detailed records of client communications and preferences, fostering a more tailored and satisfying client experience.
  • Lead Response in Time-Sensitive Scenarios : Another issue is slow response times on legal inquiries that can lead to lost opportunities. Clients typically rely on the firm that has the ability to address their needs promptly. The best CRM for small law firms and large ones will streamline lead management, ensuring swift response times and maximizing the chances of converting inquiries into clients.
  • Managing Complex Client Workflows : Law firms often deal with a complex array of client-specific tasks, including scheduling, communication tracking, and follow-ups. CRM software assists law firms in efficiently organizing and handling these client-centric activities. By centralizing client interaction records and preferences, the software simplifies the process of providing personalized and timely services. This organizational capability is crucial in maintaining a high standard of client care and ensuring that every client feels valued and well-served.
  • Balancing Client Services with Administrative Tasks : Lawyers frequently juggle client services with demanding administrative responsibilities. This balancing act can lead to extended work hours and  potential burnout . CRM software alleviates some of this strain by automating and organizing administrative tasks. This automation enables lawyers to focus more on their clients and less on time-consuming back-office duties, leading to better work-life balance and overall job satisfaction.

What Are the Features of a CRM in a Law Firm?

Law firm CRM software includes features tailored to enhance client engagement, optimize operational efficiency, and provide insightful analytics for strategic decision-making. Some of these features include:

  • Client portals  provide clients with direct access to their documents and status updates. These portals foster transparency and trust by offering clients a real-time view of their legal matters, ultimately improving their satisfaction with the firm.
  • Deadline and task automation  are other critical features of legal CRM. Modern legal CRMs incorporate calendar systems that automatically calculate deadlines, which is crucial for maintaining legal timelines. These systems help lawyers stay on top of filing deadlines and court dates, reducing the risk of missed obligations and even potential sanctions.
  • Automated workflows are invaluable for repetitive tasks like document generation, billing, and case updates. They minimize manual administrative work, allowing lawyers to focus more on strategic aspects of their practice.
  • Analytics and reporting  features allow firms to review client data and firm performance, aiding decision-making with helpful insights. Understanding client needs and firm efficiency through this analysis leads to better client relationships and operational procedures.

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The Bank-Customer Relationship in England: Unfair Terms and Good Faith

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In this research, I will analyse the bank-customer relationship in England and its correlation with the European legal system, studying various systemic parallels between UK legal norms and their European (and especially Italian) counterparts. In addition, the recent UK referendum on EU membership has brought a period of legal and political uncertainty. It is therefore difficult to predict which could be the consequences of this decision for consumers and how this decision will influence English courts in interpreting the principles introduced in England by the European Union. Therefore, any analysis will be conducted in order to contemplate the best solutions to adopt, especially in the development of principles which are not always recognised in the UK as doctrine, for instance good faith. The thesis goes forward in comparing the role of good faith in banking contracts in England to those provided by Italian banks to their customers. It will be explained that the gap between Italian and English legislation on this particular matter is in many ways one of legal form rather than substance, rather than one pertaining to the nature of common law and civil law, as one would expect of these two countries.

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Collection of Materials XXIII International Scientific Conference of Turiba University

Aleksejs Jelisejevs

When unilaterally closing a customer's account as part of a policy of so-called "de-risking", the customer's interests are not only ignored by the bank but their human rights, including respect for their private life and presumption of innocence, are also severely violated. De facto, de-risking stigmatises discarded consumers as being involved in criminal activity without a court conviction. The protection of the interests of such consumers is impeded by the formal application of legal rules and contractual terms, which ultimately contradicts public interests, including combating money laundering and preventing the financing of terrorism. To overcome this conflict, the research proposes a doctrinal approach according to which the bank's right to withdraw from a customer contract unilaterally should be limited by the systemic and teleological interpretation of regulating rules in combination with the general civil principle of good faith, which, by analogy with the original source of the problem, is called the "Good-Faith-Based Approach". This paper is its summary and presents general research conclusions.

customer relationship case law

ACTA PROSPERITATIS

This paper focuses on a scientific analysis of the genesis and historical development of the good faith principle as a doctrinal interpretation of the Latvian regulations' governing issues when closing a payment account against a consumer's will. Starting from the origin of bona fides in archaic Roman law and its rediscovery by Justinian's Corpus Juris Civilis, passing through its application in the western medieval ius commune and its continental renaissance in the early twentieth century, noting its limited place in the Code of Civil Laws of the Baltic Provinces and paying tribute to its triumph in Latvian Civil Law, this paper focuses on the evolution of attitudes towards this principle in modern legal science and case law. This comparative historical research shows that a clear definition of good faith could be found through a system-historical interpretation of the good faith rule. This should help identify the target essence of subjective rights and duties under each legal rule governing specific legal relationships. Therefore, when de-banking, in view of good faith, the target essence of a bank's right to withdraw from an account contract is to save justice by respecting the justified consumer's interest in retaining payment services.

Pierre de Gioia-Carabellese

Compound interest is a concept that, historically, has been tainted with an essentially mercantile flavour. It relates to the custom of banks in capitalising on the interest due by a client upon the expiry of a certain interval (the rest). Such practice, zealously vilified in some quarters whilst acclaimed as a prosperous enterprise in others, has been challenged more recently, at both judicial level and under statute, in the case of Italy. This contribution, in briefly recalling the origin of the concept of anatocism (the orthodox definition of compound interest) and, therefore, its Roman predecessor, the usurarum usurae and the futurarum usurarum usurarae (usurae), seeks to examine the state-of-the-art apparatus applicable to compound interest in the British common law. Such deliberations will thereupon give rise to what this paper aspires to describe as a peculiar development. In this respect, attention is drawn to the recent Consumer Rights Act 2015 and the manner in which the b...

Journal of Financial Services Marketing

Common Market Law Review

Marta Simoncini

International Review of Financial Consumers

Vincenzo Senatore, LLM

In Europe, general legislation requires protection of the economic interests of consumers. This includes, for instance, the consumer protection from financial services, misleading advertising and unfair contract terms. However, only after the global financial crisis, the European Union (EU) has become aware of the lack of transparency, poor handling of conflicts of interest, over-indebtedness, and low awareness of risks of the consumers in dealing with financial services. This paper aims to investigate the financial knowledge and overconfidence in Europe, and to provide an overview of consumer protection policy in EU. Here, it will be analyzed the EU regulatory framework, whose aim is to ensure the stability of the financial markets and to establish specific and common rules for banks and investments companies among the Member States. Furthermore, it deals with protections of financial consumers in the Italian legislation and within a European context. It concludes providing the Ita...

Pravovedenie

Jan Halberda

Given that continental civil law scholarship applies the concept of good faith in either a subjective (honesty in fact) or objective sense (good faith and fair dealing), the present article focuses on the latter one. The traditional view in England and Wales discards the recognition of a general principle of good faith and fair dealing in English law. English courts have adopted a piecemeal solutions approach (as shown by the judicial decisions issued in Interfoto Picture Library (1987) and Walford v. Miles (1992)). Meanwhile, the principle in question, along with the concept of the freedom of contract, is one of the most important principles of the continental civil law tradition (cf. art. 1104 of the French Civil Code, § 157, § 242 of the German Bürgerliches Gesetzbuch, art. 2 (1) of the Swiss Zivilgesetzbuch, art. 6:2 Burgerlijk Wetboek, art. 5 of the Polish Civil Code, art. 2 (1) Common European Sales Law, art. 1:201 Principles of European Contract Law, art. III1:103 Draft Common Frame of Reference). The current work analyzes recent English case law (in particular Yam Seng (2013)), which seems to acknowledge the principle of good faith and fair dealing while rejecting the traditional view mentioned above. The comparative approach — references to American, and Commonwealth law, as well as to that of particular European states — is taken into account. The author claims that hostility to the concept of good faith in an objective sense in English law is superficial. One may expect that in the near future courts in England and Wales will follow the path taken by courts in the United States (§ 205 of the Restatement (Second) of Contracts (1981)), Australia (Renard Constructions (1992)) and Canada (Bhasin v. Hrynew (2014)), and they will finally recognize good faith as an underlying principle.

benjamin geva

in European Business Law Review, 2023, pp. 1017-103718-

Pietro Sirena

Despite its apparent fragmentation, the Union's private law must be seen as a coherent legal system, which is constitutionally based on a mutual interplay between private liberties and market regulation and designed to achieve economic (and social) integration between the Member States. As banking law illustrates, fundamental principles and public policies tend to flow into individual rights and duties, particularly with regard to consumer protection. Since the Union's private law has to coexist with those of the Member States, it must draw on the best instances of national cultures, which, conversely, have to traverse a process of Europeanisation. Stefan Grundmann urged scholars to equip European private law with an apparatus of legal methodology capable of ensuring its coherent interpretation and supplementation and of vouching for its unity.

A Contemporary Anthology of Law

The twelfth essay Crucial Issues with Legal Protection of Consumers Human Rights when Banks unilaterally Close Accounts has been authored by Aleksejs Jelisejevs. The author points out that when a bank unilaterally closes a customer‘s account due to so-called ―de-risking‖, the customer‘s interests are not only ignored by the bank but their human rights, including respect for his private life and presumption of innocence, are also severely violated. De- risking stigmatised discarded consumers as being involved in criminal activity without a court conviction. As a result of the unfair account closure, both the consumer's social and psychological integrity can suffer. In order to overcome the above collision of interests, the author proposes a doctrinal assessment of consumer's interests that should limit the bank's right to unilaterally terminate the contract by the systemic and teleological interpretation of regulating rules in combination with the general civil principle of good faith. In view of the affirmative obligations of the member states under the European Convention on Human Rights, the author shows that the consumers' conflicting interests should take priority in legal protection until the consumer's involvement in money laundering and terrorist financing is established and proven.

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Termination of the Banker-Customer Relationship by Operation of Law

Open Access

customer relationship case law

N. Krishna Kumar

  • Associate Professor, Government Law College, Kerala, India

The determination of whether the banker-customer relationship is in existence at a particular point of time has important legal consequences for both parties to that contractual relationship. As duration is not of the essence of the relationship, even a single transaction can give rise to it. It is therefore important to determine the conditions under which the banker-customer relationship may be terminated. Termination of the banker-customer relationship by operation of law may occur in the following ways, viz, death of the customer, mental incapacity of customer, bankruptcy of the customer, winding up of a company customer, winding up of a bank and outbreak of war. Since a detail examination on this point is unnecessary as far as our topic is concerned, it is avoided from further discussion. for legal purposes, the receiving of deposits by a bank from the public is regarded as a borrowing by the bank. But as a debtor, the bank is not like other commercial debtors; he has certain privileges and is burdened with contractual, statutory and customary obligations. It is with reference to this peculiar legal relationship that the behaviour of the bank in any particular case is scrutinized and any deficiency in service is detected. In this Article, an attempt is made to concentrate on the major decisions relating to the legal remedies available to Banking customers and the endeavour of judiciary to conceptualise the relation between banker and customer.

Keywords: Agent, Alternative remedies, Bailee, Bailor, Banking customers, Banking ombudsman, Beneficiary, Compensation, Customer, Damages, Deficiency in service, Legal remedies, Principal, Trustee

Full Text PDF

  • Goyle L.C, Law of Banking and Bankers, 1995. Eastern Law House Private Ltd., Calcutta.
  • Gupta S.N, Banking Law in Theory and Practice, 4th Edn. Universal Law Publishing Co. Pvt. Ltd.,
  • Gupta S.N. op. cit. preface
  • Goyle L.C., op.cit. p.3
  • Section 3 of the N.I. Act
  • Halsbury’s Laws of England, 4th edn, Vol lll. London, Butterworths, 1973.p.31.
  • Hart H.L., The Law of Banking, 4th edn. p.1
  • Johnson’s Dictionary, 1755.
  • SMA Somasundaram Mudaliyar Vs. District Collector, AIR 1967 AP 126
  • Irinjalakuda Bank v. Paruthussery Panchayat (1970) 40 comp. Cases 767.
  • Goyle L.C., op.cit. p.5
  • Supporting the view expressed by Dr. Hart, the Kerala High Court in Central Bank of India Ltd., Bombay v. Gopinathan Nair and others (AIR. 1979 Kerala 74) observed: “so far as banking transactions are concerned, a customer is one whose money has been accepted on the understanding that the bank will honour transactions up to the amount standing to his credit, irrespective of his connections being of short or of long standing”.
  • Taxation Commissioners v. English, Scottish and Australian Bank Ltd (1920) A.C. 683
  • This appears to be the correct and acceptable exposition of law since the ‘Duration theory’ (requiring a course or habit of dealing with the bank) has now been discarded by Courts universally. A wider definition describing the customer as ‘any person having a dealing with a bank’ may be useful for many purposes, but the context of acceptance of deposits, it is obviously irrelevant.
  • Sec 138(7) (British) Financial Services Management Act. – about the meaning of customers.
  • (1959) QB 55 at. p. 63.
  • (1901) AC 414.
  • Dr. Hart defines a banker or bank as: “A person or company carrying on the business of receiving money and collecting drafts for customers subject to the obligation of honouring cheques drawn up on them from time to time by the customers to the extent of the amounts available on their current accounts.” Dr. Herbert. L. Hart. ‘The Law of Banking’, 4th Edn. p.1
  • Regarding the functions of a banker, Sheldon states: “ the principal business of a banker is to receive money from his customers on the understanding that he will refund all moneys received or collected, either on demand or at some definite date agreed upon between him and his customers”. C. B. Drover and R.W.B. Bosley (Ed). Sheldon’s Practice and Law of Banking. 10th Edn., London, Macdonald and Evans Ltd., 1972.p.162
  • Lord Chorley observes: “the receipt of money on loan and the obligation to repay it on demand against cheques seem to be the basic elements of the business. If a person carries on a business involving such borrowing and the issue of cheques, it is submitted that it is a banking business; if it does not, the business is not legally banking, even though he call himself a banker”. Lord Chorley. ‘Law of Banking’. 6th Edn. London. Sweet and Maxwell. 1974., p.31.
  • (1848) 2 H.L.C.28.
  • Hapgood (ed.). Paget’s Law of Banking. 10th edn., London. Butterworths. 1989.
  • (1966) 2 QB 431
  • Banking Regulation Act,1949. S.5(b).
  • Ibid, S.4(A).
  • Ibid, S.6(1).
  • AIR .1961. Cal.666.Relying on Bank of Commerce Ltd., v. Kunja Behari Kar. AIR 1944 F.C.2.
  • Ibid. in this connection, it may be noted that the E.C. approach to banking business is to consider the function of granting credits also, as an equally important and essential ingredients as deposits taking from the public. See. Art. I of both, the 1st and 2nd Banking Directives of the European Community. The Indian Parliament, however, followed the English approach.
  • C. Cooper v. Union of India. AIR 1970 SC.564
  • Robinson V Midland Bank Ltd. (1925) 41 TLR 402
  • Lord Davey in G.N. Railway V. London & County Bank (1901)
  • Sheldon’s Practice and Law of Banking 10th edn., London, Macdonald & Evans Ltd. 1972.p.162.
  • See Supra.n.21.
  • The Indian Contract Act,1872, s.148.
  • Halsbury’s Laws of India vol.30 (Banking and Finance).
  • For eg, when placed in a sealed bag or box.
  • The beginning of English banking may correctly be attributed to the London goldsmiths during the age of Queen Elizabeth I. They used to receive their customer’s valuables and funds for safe custody and issue receipts acknowledging the same. For sometimes, the deposits were made without interest and the transactions were simple bailments. Later on, the goldsmiths started lending these amounts and for that purpose they started giving interest to their customers instead of charging fees for safeguarding their money, thereby losing the character of bailment for the transactions. To have an historical perspective, see, W.S. Holdsworth.’ The Early History of Banking’, (1918) 34 Law Quarterly Review p. 11; Edward. L. Symons Jr. The Business of Banking in Historical perspective, 51, George Washington Law Review. p. 676; W.S. Holdsworth, ‘The Origins and Early History of Negotiable Instruments’, 31 Law Quarterly Review, p. 12;S.N. Gupta. ‘The Banking Law in Theory and Practice’, 3rd edn. vol. 1. New Delhi, Universal Law Publishing Co.,1999. pp.1-25.
  • Lord Chorley. Op.cit. p.19.
  • United Corporation Bank v. Hem Chandra Sarkar (1990) 3 SCC 389.
  • State of Bombay v. Memon Muhammed Haji Hasan (1967) 3 SCR 938.
  • Dhuli Chand v. Jawala Prasad and sons AIR 1934 All. 568.
  • National Bank of Lahore Ltd., v. Sohan Lal Saigal AIR 1962 Pun. 534
  • Balkrishnan R Dayma v. Bank of Jaipur Ltd., (1971) 41. Com. Cas.55 (Bom)
  • Bombay Steam Navigation Co. Ltd., v. Vasudev Babu Rao AIR 1928 Bom.5
  • Vijaya Bank v. United Corporation Bank AIR 1991 (Ker) 209.
  • Chellappan Pillai v. Canara Bank (1971) 71 Com. cas.584. Cochin Porttrust v. Associated Cotton Traders Ltd., AIR 1983, (Ker) 154Jagadish Chandra Trikha v. Punjab National Bank (2000) 100 Com. cas.839 (Del)
  • Dena Bank v. Glorphic James (1994) BC 240(Ker) DV.
  • The Indian Trust Act, 1882, SS.19 &20.
  • (1910) ILR 36 Mad 499 (FB)
  • AIR 1951 Mad 910
  • AIR 1962 SC 1003
  • AIR 1942 Cal 556
  • Imperial Bank of Canada V Mary Victoria Bagley (1936) 44 LW 128
  • AIR 1962(Ker) 210
  • (2008) 8 SCC 92
  • A breach of fiduciary duty can lead to an injunction, damages, or to the fiduciary having to account for any profits made in addition to the criminal sanctions for breach of trust.
  • Indian Contract Act 1872 Sec. 212.
  • Punjab National Bank Ltd., v. Dewan Chand AIR 1931 Lah. 302.Punjab National Bank Ltd., v. RBL Benarsi Das and Co. AIR 1960 Punj. 590Bank of India v. Official Liquidator AIR 1950 Bom.376.First National Bank Ltd., v. Industrial Oil Com. AIR 1962. Punj. 170First National Bank Ltd., v. Pioneer Commercial Bank. AIR 1951 Cal.34Indian Bank v. Aluminium Industries Ltd., (1990) CCV 69 Ker 427.Keshari Chand v. Shillong Banking Corporation Ltd., AIR 1965 SC. 1711.
  • AIR 1958 J&K25
  • Central Bank of India Ltd., v. Ram Sarup Khanna AIR 1956 Punj. 78.
  • See, The Indian Contract Act, 1872, SS.211-218.
  • Lord Chorley. op. cit. p.20.
  • Ross Cranston, ‘Principles of Banking Law’, Oxford, Clarendon Press, 1997.
  • Ibid, p.203.
  • 385 US 99 at p.101 (As quoted in Ross Cranston, Principles of Banking Law’, Oxford, Clarendon Press, 1997.p. 141)
  • (1921) 3 KB 110: Chorley and Smart, ‘Leading Cases in the Law of Banking’, 3rd edn.. London, Sweet & Maxwell, 1973.p.4.
  • Lord Chorley, op. cit., p.26
  • Lord Chorley, op.cit., p.24.
  • AIR 952 Cal. 193
  • (1956) 26 Com. Cases 81
  • AIR 1957 Mad 745
  • AIR 1978 Cal55
  • (1963) 2 SCR 297
  • Supra n.35.
  • Chartered Bank v Mohammed Hussain AIR 1952 Cal. 193
  • This principle has been consistently followed in later decisions in England and in India, making it a ‘well-established’ principle.
  • The Privy Council, in ‘State Aided Bank of Travancore Ltd v. Dhrit Ram’, [(1942) 12 comp. CAs. 80: M.S. Parthasarathy, ‘Banking Law-Leading Indian cases’, 2nd edn. Bombay, N.M. Tripathi, 1985, p.2] established the principle in relation to deposit accounts. In this connection it is to be noted that the principles will have application only in the absence of any contract to the contrary. Basically, the law which governs a contract depends upon the intention of the parties, express or implied. The question of implication arises only in the absence of express terms.
  • 1915(2) KB 576
  • AIR 1970 Goa 11
  • AIR 1970 All 108
  • (1873) 3 AC 325
  • 1954 AC 495
  • AIR 1955 SC 590
  • The India Limitation Act 1963. Art. 44.
  • For eg., a banker who wrongly judges the relationship to be at an end and fails to honour a customer’s cheques is exposed to the possibility of substantial damages and sometimes, even for defamation.
  • Commissioner of Taxation v. English, m Scottish and Australian Bank Ltd.,(1920) AC 683. See further, Central Bank of Idia Ltd. Bombay v. Gopinathan Nair and others, AIR 1979 Kerala74.

Journal of Banking and Insurance Law

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Customer-banker relationship

Customer-banker relationship

Customers and Bankers share a fiduciary relationship with one another and build an interconnection between the two on the basis of trust. The terms Customer and Banker have not been defined under any specific statute although, various legal philosophers have tried to define and give an understandable meaning to these terms.

According to H.L.A Hart, a Banker “is one who, in the ordinary course of his business, honours cheques drawn upon him by customers from and for whom he receives money on current accounts.” According to Sir John Paget’s view, “to constitute a customer there must be some recognizable course or habit of dealing in the nature of regular banking business.”

Similarly, the Cambridge dictionary defines the term Banker as “someone with an important position in a bank” and the term Customer as “a person who buys goods or a service”.

Inference can be made from the above definitions that as soon as a person enters a bank in order to avail its services, that person becomes the customer of the bank and the person from whom the services are availed by that customer in a bank can be termed as the banker.

Existence of a legal relationship

Since there is an involvement of transfer of funds between the parties, it is important to establish a relationship which covers in its ambit, legal provisions in order to safeguard the interest of both the parties. Flow of money in these cases are generally unidirectional i.e., the banker pays back the money to the customer which he/she deposited in the bank exception being in the cases of loans.

Inclusion of legal principles in this relationship is necessary not only to safeguard the rights of the parties but also to ensure that a well-established working model exists which can be followed by public at large without any discrepancies.

Legal provisions safeguarding the relationship

Year 1969 proved to be a founding pillar of the banking system in India when the procedure for nationalization of banks was initiated. Several legal frameworks were enunciated in India whose main purpose was to safeguard the rights of the bankers as well as customers. The SARFAESI ACT, 2002 was passed with an objective to provide security to the banking institutions and their assets.

Debt recovery tribunals (DRT) were set up under this act by the amendment of 2016.

The Reserve Bank of India, established in 1934 under the Reserve Bank of India Act, 1934 is the most important body which holds the responsibility of setting ground rules for the Banks and its officials to work in a specified manner.

The Securities Exchange Board of India (SEBI ) established in 1992 also put certain restrictions on the bankers and side by side, provide them with reasonable powers.

The Consumer Protection Act 1986 is one such Act which protects the rights of the Customers. Since a banker can be considered as a service provider, their relationship is covered under the consumer protection Act.

Rights and duties of a banker and customer

A banker enjoys many rights. From opening of a bank account to its closing procedure, everything is carried out by the bank officials. Some of the important rights are listed below:

1. A banker has the right to charge interests from the customers but the same must be in consonance with the guidelines of the government authorities.

2. Banks have the right to keep certain goods with them as a security against any loan provided to the customers. These securities can be in terms of both, movable as well as immovable property.

3. Bankers have the right to dishonour the cheques of the customers in certain circumstances although, it can be considered as more of an obligation rather than a right.

4. Right to set-off customer’s accounts in order to bring an equilibrium in debits and credits in the bank.

It must be noted that these rights should be exercised with great caution and care without violating the rights of a customer and maintain the element of trust between the two.

Duties of a banker includes:

1. Foremost duty of the bank is to assure safety to its customers and keep the funds safely. It is the paramount duty of the banker to handle cash and kind with utmost care and caution.

2. Day to day Transactions must be kept safe by the bankers and show the same to its customers.

3. Also, the banker cannot reject the request of the customers to honour cheques as well as provide them with their money at any time.

Customers of the bank are also vested by certain rights and duties which are listed below:

1. Customers have the right to take back their money from the banks whenever needed. The ban authorities cannot question upon such withdrawals unless illegal.

2. On the other hand, Customers owe a duty to pay back the loans if taken.

Roles of a banker

  • Banker as a Creditor

A banker plays the role of a creditor only when a loan has been taken by a customer and this position is continued by the bank till the loan is repaid.

  • Banker as a debtor

As soon as an account is opened in a bank by any customer, the banker acquires the position of a debtor because it is the holder of the funds which needs to be paid back along with interests.

  • Banker as Agents

A banker acts as an agent in cases where he acts as an intermediate for customers. For example, in case of payment of dues and collection of revenues.

  • Banker as Beneficiary

Whenever a banker acts as a debtor but on the instructions of the customer in order to perform certain tasks, the position of a beneficiary is acquired. For example: in case of holding money for shares and transactions of repayment.

Discontinuance of the relationship

A relationship tends to terminate whenever there is dissatisfaction between the parties involved or under special circumstances which are listed below.

1. If the customer is not satisfied by the services provided by the banker.

2. If there are chances of winding up of the bank and there is a risk involved in dealing with that bank.

3. If the rules and regulations of the bank are such that the customer is not able to abide by all of them.

4. In cases where the court/tribunal has, by an order or decree asked to terminate the relationship.

5. In case of Death, Unsoundness of the customer in due course of time.

6. If the customer is unable to repay the loans and becomes a proclaimed offender.

Landmark judgments

Various judgments have been laid down by the higher courts in order to establish a fiduciary relationship between the bankers and the customers.

  • In the case of Motigavri vs. NaranjiDwarkadas [1] , the Bombay High court held that the relationship between customer and a banker is that of a borrower and a lender.
  • Later, in the case of Canara Bank vs. Canara Sales Corporation and others [2] , a wider approach was taken into consideration and it was held that the relationship between a customer of a bank and a customer is that of a creditor and a debtor. A similar approach was shown by the Madras High Court in the case of Commissioner of Gift-Tax vs. K. M. Ziauddin [3] .
  • In a judgment of Surender S/O Laxman Nikose vs. Chief manager and authorised officer, state bank of India [4] , the Bombay High Court held that as soon as the relationship between the banker and the customer ends, all the rights and duties are waived off including banker’s lien.

It is very important to understand the relationship between a banker and a customer since it helps us to understand the foundation of the whole banking system and what all rights and duties vests with both the parties. It also helps us to gather the remedies available in case of breach of duties.

Government of India has also worked hard from time to time by introducing several legal statutes in order to safeguard this relationship and create an exceptional bond between the two.

Banks build a strong economical structure of a nation where customers work as a catalyst and enhance the building process. Courts and Tribunals have also emphasized on the importance of the relationship and therefore it must not be disregarded and both, the bankers as well as customers should interact comprehensively.  

Frequently Asked Questions

What is the role of rbi in maintaining the customer banking relationship.

RBI plays an important role in maintaining a sound customer banking relationship. It lays down rules and regulations for the banks which must be abided and spreads awareness among the general public. It can be considered as the head of all the banks in India.

Major roles of RBI include – securitization of banks, laying down policies, ensure fulfilment of rights of the customers etc.

What remedies are available with the customers in case of breach of their rights?

In case of breach of rights of the customers by the bankers, the government has laid down various rules and regulations in the form of statutes to safeguard the customer’s rights and penalties for the banks.

The Consumer Protection Act provides the customers of the bank appropriate remedies. The customers under this Act can be considered as the consumers of the services provided by the banks and in case, these services are not fulfilled, they can approach the court of law.

Edited by  Shikhar Shrivastava

Approved & Published –  Sakshi Raje  

[1] (1927) 29 BOMLR 423

[2] 1987 AIR 1603

[3] 1998 231 ITR 645 Mad

[4] 2013, Bombay High Court

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Characteristics and functions of central banks, reserve bank of india – origin, evolution, functioning, promissory note, popular posts, contract of bailment and pledge, what are the different classifications of law, actus non facit reum nisi mens sit rea – legal..., popular category.

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Depreciation allowable on Customer Relationship Rights as Goodwill

  • | Income Tax - Judiciary
  • Download PDF
  • 31 May 2019
  • 3,825 Views

Case Law Details

M/s. incap manufacturing service pvt. ltd. vs dcit (itat bangalore).

The sole disputed issue raised by the assessee in respect of granting of depreciation on Customer Relationship Rights which is in the nature of non-compete fee.

We found that the co-ordinate bench of the Tribunal based on the findings of the AO. has observed that the claim of the assessee is required to be considered by treating the said payment as goodwill. We found strength in the submissions of the learned AR on the claim of depreciation on Customer Relationship Rights supported with observations of the Co-ordinate bench and following the judicial discipline, we set aside the order of the CIT(A) and direct the AO to grant depreciation on Customer Relationship Rights treating the same as Goodwill and allow the grounds of appeal of the assessee.

FULL TEXT OF THE ITAT  JUDGEMENT

These are appeals filed by the assessee against different orders of the CIT(A) passed u/s 143(3) and 250 of the Income-tax Act,1961 [‘the Act’ for short]. Since issues are common in all these appeals, they were heard together and consolidated order is passed.

2. For the sake of convenience, we shall take up the appeal in ITA No.2214/Bang/2018. The assessee raised the following grounds of appeal:

“Ground No. 1: General Ground:

1. The order of the learned CIT(A) is based on incorrect interpretation of law and facts and therefore is erroneous and bad in law.

Ground No. 2: Disallowance of depreciation on Customer Relationship Rights (Non-compete fee)

The learned CIT(A) has erred in law and facts, in upholding the disallowance of depreciation on customer relationship rights of INR 12,654,563, which is in the nature of Goodwill and is therefore eligible for depreciation under Section 32(1)(ii) of the Act.

3. The learned CIT(A) has failed to appreciate the fact that the Assessing Officer (“AO”) himself characterized the customer relationship rights to be in the nature of goodwill and thus erred in not following the directions of the Hon’ble Tribunal.

4. The learned CIT(A) has erred in law and facts, in disregarding the directions of the Hon’ble Tribunal that allowability of depreciation on customer relationship rights is to be examined by considering the same as in the nature of Goodwill in line with the findings of the AO in the assessment order dated 7 December 2011.

5. The learned CIT(A) has erred in law in not appreciating that if customer relationship rights can otherwise be treated as Goodwill, the same would be entitled to depreciation in light of the decision of Hon’ble Supreme Court in CIT v Smifs Securities Ltd. (348 ITR 302).

6. The learned CIT(A) has erred in disregarding the various submissions of the Appellant that depreciation on customer relationship rights to be allowed by treating the same to be in the nature of Goodwill under the Act.

The Appellant craves leave to add, alter, vary, omit, substitute or amend any of the aforesaid grounds of appeal, at any time before, or at the time of hearing of the appeal, so as to enable the Hon’ble Tribunal to decide the appeals in accordance with the law. “

3. Brief facts of the case are that the assessee is a subsidiary of Incap OYJ (Incap Finland) and is engaged in the business of manufacturing of electrical equipment, sub-systems, inverter power products and power electronic products and filed the Return of income for the assessment year 2009-10 on 30/09/2009 declaring net loss of Rs.119,738,203/-. The case was selected for scrutiny and notices u/ss 143(2) and 142(1) of the Act were issued. The AO completed the assessment u/s 143(3) of the Act by order dated 07/12/2011 assessing the loss of Rs.107,083,640/-. In the assessment, the AO disallowed depreciation claim of Rs.1,26,54,563/- on customary relationship rights and held that depreciation on goodwill is not allowable.

4. On appeal, the CIT(A) accepted the action of the AO and dismissed the assessee’s appeal. On further appeal to the Tribunal, and further the assessee has raised additional ground of appeal with respect to depreciation of Rs.47,93,063/- on goodwill and it was raised for the first time before the ITAT and same was admitted. The Tribunal rejected the contention of the assessee for claim of depreciation on the Customary Relationship Rights and directed the AO to adjudicate the same in the light of the judgment of the Hon’ble Supreme Court in the case of CIT vs. Smifs Securities Ltd. (348 ITR 302) as the depreciation on goodwill is a legal issue and directed the AO to follow the decision in the case of Smifs Securities Ltd (supra) and remanded the matter to the file of the AO for deciding the issue.

5. Whereas the assessee has filed Misc. Petition (MP) against the order of ITAT in respect of certain errors and omissions and the Tribunal passed the order on 18/04/2017 allowing the MP and further directed the AO, on the issue of depreciation of goodwill, to consider the decision of Hon’ble Supreme Court in the case of Smifs Securities Ltd., (supra). Subsequently, the AO, based on the directions of the Tribunal, has passed the consequential order. The AO found that the assessee has disclosed customary relation rights as intangible asset and claimed depreciation of Rs.1,26,54,563/-. When the case was posted, the learned AR of the assessee appeared from time to time and submitted that details and mentioned that the depreciation should be allowed on goodwill based on Hon’ble Supreme Court’s decision in the case of Smifs Securities Ltd., (Supra) and similarly on customary relationship rights.

Whereas the AO relied on the decision of the Tribunal in the case of M/s.Sanyo BPL Pvt. Ltd., vs. Deputy Commissioner of Income-tax (75 taxmann.com  253)(Bang.-Trib) where it was decided that customer distribution networks does not result in intangible asset and the AO referred to the relevant portion of the decision in the order. In the assessment proceedings, the AO dealt on two issues, first claim of depreciation on goodwill relying on the Apex Court decision in the case of Smifs Securities Ltd., (supra) as per the directions of the Tribunal and the AO has worked out depreciation on goodwill Rs.47,93,063/-But in respect of the customary relationship Rights treated intangible assets by the assessee. The AO is of the opinion that the Tribunal has rejected the assessee’s claim by the order dated 18/04/2017. Therefore, sustained the disallowance made by the AO in the original assessment u/s 143(3) of the Act dated 07/12/2011 and finally the AO passed the order u/s 254 of the Act dated 22/12/2017 assessing loss of Rs.11,18,76,703/-.

6. Aggrieved by the order, the assessee has filed an appeal with the CIT(A). The CIT(A), dealt on the facts of the case and the findings of the AO and the decision of the Tribunal and finally dismissed the assessee’s appeal observing at 4.7 as under:

“4.7 Considering above the grounds of appeal 2 and 3 of the appellant deserve to be dismissed as no such direction was given by the ITAT to the AO to examine the issue of depreciation on the ‘customer relationship rights’ as the issue had already been adjudicated by the ITAT and same has rightly been followed by the AO while giving effect to the order of ITAT.”

7. Aggrieved by the CIT(A)order, the assessee has filed appeal with the Tribunal. The learned AR submitted that the AO has not considered the directions of the Tribunal and referred to Tribunal order and filed paper book with supporting evidence of financial statements and business transfer agreements of the assessee and relied on the order of the Tribunal. The learned AR further contended that this issue was considered for the first time before the Tribunal since the matter was restored to the file of the AO, prayed for allowing the appeal.

Contra, the learned DR relied on the order of the CIT(A) and submitted that there is no specific direction. Therefore, the AO was correct in grant of depreciation on goodwill and not on Customer Relationship Rights.

8. We heard the rival submissions and perused the material on record. The sole disputed issue raised by the assessee in respect of granting of depreciation on Customer Relationship Rights which is in the nature of non-compete fee. The learned AR’s contention that the Tribunal has directed the AO by order dated 18/4/2017 in MP with directions as under:

“5. Having considered the rival submissions as well as careful perusal of the record, we find that while deciding the issue in para 6 of the impugned order, the Tribunal has duly given the reference of the judgment of Hon’ble Supreme Court in the case of CIT vs. Smsifs Securities Ltd. Therefore, while setting aside the issue to the record of the AO on the additional ground of claim of depreciation on intangibles including goodwill, it was directed that the AO decide the same as per law which includes the decision of Hon’ble Supreme Court on this point. Accordingly, we may clarify that the AO while deciding the issue shall consider the judgment of Hon’ble Supreme Court in the case of CIT vs. Smsifs Securities Ltd.”

9. We found that in the earlier order of the Tribunal in ITA Nos.1469 to 1471/Bang/2014 for the assessment year 2009-10 to 2011-12 dated 9/3/2016 held as under at para.6 pages 7 to 11 of the order which reads as under:

“6. We have heard the rival submissions as well as considered the relevant material on record. The transaction of purchase of contract manufacturing service division of TVS Electronics Ltd. by the assessee vide BTA dt.31.5.2007 is slump sale as the consideration was agreed and paid in lump sum without assigning any value to specific assets. Therefore as per the agreement the consideration was paid lump sum without giving any details of payment for any specific assets. The business was purchased by the assessee and it .was transferred by the TVS Electronics as an on going business/division. However, in its books of accounts the assessee has valued the fixed asset and intangibles as per the valuation made by the consultants as under :

Thus it is clear that the excess amount paid by the assessee over and above the value assigned to the various assets had been assigned to two intangibles namely “customer relationship” and “goodwill”. The assessee did not claim any depreciation on the value of Rs.2.55 Crores assigned to the goodwill and therefore the same was not an issue before the authorities below. The assessee claimed depreciation in respect of the amount of Rs.6.74 Crores which was assigned to customer relationship (intangible). The assessee took a plea that this amount was paid as non-compete fees as the seller has expressed, agreed and undertook not to participate or engage in any jurisdiction as a owner or partner or as shareholder or in any capacity in the business of contract manufacturing services which was transferred to the assessee. Thus the learned Authorized Representative has referred to the Article 11 of BTA in support of his contention that the payment was made for non-compete fees. However, in the absence of any agreement between the parties for any consideration on account of non-compete fees as well as in the absence of any such value assigned to the non-compete fees in the books of accounts, we do not find any substance in the contention of the learned Authorized Representative that the said payment is made as non-compete fees. The assessee in its books of accounts has allocated sum to the intangible being customer relationship. Therefore, though the seller has agreed not to engage in any business for a period of three years or participate or engage as owner, partner shareholder, consultant, advisor or any other capacity solicit the employees of the CMS Business however in the absence of any intention of parties to pay consideration for such restrictive covenants in the agreement the payment in question cannot be regarded as non-compete fees. Therefore, the decision of the Hon’ble jurisdictional High Court in the case of Ingersoll Rand International India Ltd. (supra) will not help the case of the assessee. As regards the nature of payment in question, as treated by the assessee in the books of accounts being customer relationship, the issue is clearly decided against the assessee by the decision of the Hon’ble Delhi High Court in the case of Sharp Business System (supra). However, this can be looked from another angle because the Assessing Officer while denying the claim of depreciation has taken a view that the customer relationship rights are in the nature of goodwill as under :

“The submissions made by company are considered. The assessee has relied upon section 32(1)(ii) of the Income Tax Act, stating that the wordings äny other business or commercial rights of similar nature” gives scope to many such business or commercial rights including customer relationship rights which are as per assessee almost in nature of goodwill. Hence there is no dispute that customer relationship rights are in nature of goodwill.”

Therefore the claim of the assessee is required to be considered by treating the said payment as goodwill . The learned Authorised Representative of the assessee has relied upon the judgment of Hon’ble Supreme Court in the case of CIT Vs. Smsifs Securities Ltd. 348 ITR 302 and submitted that in view of the said judgment of the Hon’ble Supreme Court, goodwill eligible for depreciation as per the Section 31(1)(ii) of the Act. Since the assessee did not claim depreciation on goodwill in the return of income and even not made any claim before the CIT (Appeals). Therefore, the issue of allowing depreciation on goodwill has not been examined by the authorities below.”

We found that the co-ordinate bench of the Tribunal based on the findings of the AO, in the above paragraph of the decision, has observed that the claim of the assessee is required to be considered by treating the said payment as goodwill. We found strength in the submissions of the learned AR on the claim of depreciation on Customer Relationship Rights supported with observations of the Co-ordinate bench and following the judicial discipline, we set aside the order of the CIT(A) and direct the AO to grant depreciation on Customer Relationship Rights treating the same as ‘Goodwill” and allow the grounds of appeal of the assessee.

11. For the assessment years 2010-11 and 2011-12 similar grounds of appeal are raised. For the parity of reasons given by us while dealing with ITA No.2214/Bang/2018 for assessment year 2009-10, the grounds of appeal raised in the appeals for assessment years 2010-11 and 2011-12 in ITA Nos.2215 & 2216/Bang/2018 are allowed.

12. In the result, the assessee’s appeals for assessment years 2009-10, 2010-11 and 2011-12 are allowed.

Order pronounced in the open court on 30 th  April, 2019.

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