This week on The Answers Blog we explore an issuing bank’s duty to the customer, and the things you need to think about as you transact with your bank as a Startup/SME in the ordinary course of business.
- Nature of banker-customer relationship.
It is settled knowledge that a person (or a legal entity) becomes a customer of a bank when the person opens an account with the bank. The relationship is purely a contractual one, although in some instances it can be described as a fiduciary one. The essence of the contract between the banker and the customer is the bank’s right to use the money deposited for its own purposes and its undertaking to repay an amount equal to that paid in, with or without interest, either on demand or at a fixed time. Transactions with banks in Kenya are regulated under the Banking Act, Cap 488 Laws of Kenya, The Cheques Act, Cap 35 Laws of Kenya and The Bills of Exchange Act, Cap 27 Laws of Kenya and the Central Bank of Kenya Act.
2. Banker’s duty to the customer.
According to Mark Hapgood QC, Paget’s Law of Banking, 13th Edition, at pp149-152, the duties of care owed by a bank to its customer include:
- the duty to protect the customer from the fraud of agents such as directors and partners in issuing cheques and other payment orders;
- duty not to act negligently; and
- duty of care in giving financial and investment advice and in explaining the effect of financing or security documents.
Usually, paragraph (a) above arises in the context of execution of payment instructions while the subsequent two paragraphs arise in the giving of advice, perfection and realisation of securities.
Courts the world over have generally given judgments in favour of aggrieved customers with respect to wrongful dishonour of payment instructions. For example, in the case of Houghton Enterprises & Another v National Bank of Kenya Limited HCCC 226 of 1992 (unreported), the court held that the aggrieved customer was entitled to nominal damages for wrongful dishonour of a cheque. Similarly, in the case of Gibbons v Westminister Bank, Limited [1939] 3 ALL ER 577 KBD the court held that the plaintiff was entitled to nominal damages in respect of wrongful dishonour of a cheque by her bank. Also, in the case of Davidson v Barclays Bank Limited [1940]1 ALL ER 316 the court found the bank liable for wrongfully dishonouring a cheque claiming insufficient funds when sufficient money was in the account. In the last instance, damages were also awarded for libel and the resultant injury and inconvenience occasioned to the customer.
3. Securities/Collateral
Usually, a licensed bank or financial institution issues facilities to a person against a security or collateral to secure the advanced amounts. It is imperative that you take your time to understand the terms against which the collateral is given and any applicable exit or discharge provisions.
How Legal Answers Consulting can assist:
LAC can support businesses by advising on the legal implications and obligations attaching to Financing/Loan Agreements between your business and your potential financier in your particular circumstances. We can also review the Term Sheets, Facility Agreements and other Commercial Agreements for you or your business to help you make informed business decisions. We are happy to advise you on the required legal due diligence processes as well. Please do not hesitate to reach out by e-mail to us or to your usual contact at Legal Answers Consulting for any further questions you may have.