| UNIT 2 |
| FINA 2006: |
| Law for Banking & Finance |
| Contract |
| A contract is a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty – Second Restatement; A contract is a “deliberate engagement between competent parties, upon a legal consideration, to do or to abstain from doing some act.” Brett L.J. in Wilson v Bury. A bank or other financial service provider has a contract (one or more than one) with each of its customers – Joachimson v Swiss Bank Corporation |
| Essential Elements of a Contract |
| Offer & Acceptance; Valuable Consideration Intention to create legal relations Capacity (competent parties) Consent Legality |
| Essential Elements of a Contract |
| Agreement (offer & acceptance)– an agreement is formed when one party accepts the exact offer of the other party to a contract. There must be a meeting of the minds. A valid offer is made when the terms of the offer are definite and grounded in legality. Consideration – the price the offeror and the offeree will be paying to enter the contract. It is provided by both parties to a contract when they promise to give or do something in return for entering into legal relations with each other. |
| Essential Elements of a Contract |
| Intention to create legal relations – the parties must intend that their actions be legally enforceable, as distinct from purely domestic agreements. A bank’s contract with its customers are commercial contracts that are presumed by the courts to be legally binding Capacity (Competent parties) – both parties to the contract must have the ability in law to enter into legal relations. This excludes minors and the mentally incompetent because the law presumes that they do not have the full power to contractually bind themselves. Note position as relates to aliens, patients, drunken persons, corporations, minors |
| Essential Elements of a Contract |
| Minors: Valid – contract for necessaries; educational contracts; Voidable – contracts that involve a continuing interest in property may be entered into by the minor; marriage settlement; partnership agreement; purchase of shares Void – contracts for repayment of money lent; goods supplied other than necessaries; |
| Essential Elements of a Contract |
| Consent – both parties must have arrived at an agreement of their own volition and without any pressure or undue influence being brought to bear on them Legality – the agreement must not be tainted by illegality |
| Enforcement of Contract |
| Enforcement of contracts is affected by the following: Form (writing) Certainty of terms; Genuineness of contract – no undue influence Legality of object Capacity |
| Conditions & Warranties |
| A condition is a term that is important for the sustenance of the contract. It goes to the root of the contract. A warranty is a term of the contract which is of less importance, the breach of which would not entitle the party to treat the contract as being discharged, but the party may claim damages |
| Misrepresentation |
| A misrepresentation is an inaccurate or untrue statement made in the course of negotiation by one party to the contract to another to induce the other party to enter into agreement Types: Fraudulent –statement made with the knowledge that it is untrue or careless as to whether it is true or false. Party is entitled to rescission Negligent – statement made in the belief that it is true but without reasonable grounds for that belief. Party is entitled to damages Innocent – statement made in the belief that it is true with reasonable grounds for that belief |
| Mistake & Undue Influence |
| Mistake – Where the contract does not accurately record the intention of the parties, an aggrieved party, usually the customer, may initiate action against the offending party. The latter may use mistake as a defence to such action. Undue Influence – influence by which a person is induced to act otherwise than by their own free will or without adequate attention to the consequences. If a person proves that he or she entered into a contract because of actual undue influence, that person is entitled to have the contract set aside. A person may also prove undue influence by establishing a relationship of trust and confidence and that the party in a stronger bargaining position may have taken advantage of the relationship by influencing or inducing the weaker party to enter the transaction. |
| Key Definitions |
| A bank is any financial institution whose operations include the acceptance of deposits subject to the transfer by the depositor by cheque A financial institution is any person doing banking business which is the business of receiving funds through: The acceptance of monetary deposits which are repayable on demand or after notice or any similar operation; The sale or placement of bonds, certificates, notes or other securities and the use of such funds, either in whole or in part, for loans or investment for the risk of the customer; and includes any other activity recognised by the Central Bank as banking practice and which a financial institution may additionally be authorised to do |
| Key Definitions |
| A customer is someone who has an account with a bank or who is in such a relationship with the bank that the relationship of banker and customer exists; even though at this stage he, she or it has no account with the bank. A “customer” is therefore a person who has a contractual relationship with the “bank” or other “financial service provider”. |
| Three essential features of Banker/customer relationship |
| Bankers must a) accept money from and collect cheques for their customers and place them in their credit; b) honour cheques or orders drawn on them by their customers when presented for payment and they debit their customers accordingly c)keep running accounts in their books in which the credits and debits are entered. |
| Essential Features of the Banker-Customer Relationship |
| Relationship of Agent & Principal; The Banker is not a trustee for the customer Debtor creditor relationship – The receipt of money on deposit account constitutes the banker a debtor to the depositor but not a trustee to the depositor. As the account is a continuing one no new contractual relationship is established by the bank and its customer |
| Bank’s Duties to the Customer |
| Paying bank i) to honour a customer’s cheques or orders; ii) to pay only on the authorisation of a customer; iii) to obey a customer’s countermands; iv) to tell customers of forgiveness. Collecting bank i) to collect cheques All banks and financial service providers i) to retain customer’s confidence (duty of secrecy); ii) to inform customer’s of the state of his or her accounts; iii) to exercise skill and care in the operation of a customer’s account; iv) to observe confidentiality in dealing with the customers and third parties. |
| Customer’s Duties to the Bank |
| The customer’s duties to the bank include the following: a) to exercise care in drawing cheques; b) to tell the bank or financial service provider of known forgeries. |
Joachimson v Swiss Bank Corporation
| (COA – 1919) |
| Firm applied to Court to recover sums standing to its credit in a current account held with the Defendant Bank as money lent to Defendant bank or alternatively as monies received by the Bank for the use of the firm. Judge at first instance ruled in favour of firm, stating that debt owed by a bank to its customer was in the position as a debt owed by any other debtor and so it could be sued for without any previous demand. On appeal, by the Bank, the Court of Appeal ruled in the Bank’s favour stating that because no previous demand had been made no cause of action arose. |
| Key Points from Case |
| The relation of banker and customer is that of borrower (debtor) and lender (creditor). The Banker is debtor to his customer and not trustee; There is a contract made between the bank and its customer |
| Key Points from Case |
| There are added implied obligations arising out of the contract between bank and customer: The Bank must honour the customer’s cheques; The customer contracts reciprocally that in drawing his cheques on the banker he will draw them in such a form as will enable the banker to fulfil his obligation, and therefore in a form that is clear and free from ambiguity; the banker “is of course answerable for the amount” namely, the money placed in his custody-“because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands it is a term of the contract that the bank will not cease to do business with the customer except upon reasonable notice bank is not liable to pay the customer the full amount of his balance until he demands payment from the bank |
| Key Points from Case |
| As a result of the peculiarities, the Bank is not in the same position of a traditional debtor who has to seek out his creditor to repay him. The proceeds received by the bank from the customer are not to be held in trust for the customer but the bank borrows the proceeds and undertakes to repay them. |
Tournier v National Provincial and Union
| Bank of England – 1924 COA |
| Facts: The Claimant held an account with the Defendant Bank, that account became overdrawn. A cheque was made in the Claimant’s favour by his employer. However, the Claimant did not cash the cheque but made it payable to third party and that cheque was drawn on another bank. When the cheque was presented by that other bank to the Defendant for payment, the Defendant subsequently made inquiries of that Bank as to who the cheque was paid to. The Defendant was informed that it was paid to a bookmaker. On discovering this, the Defendant called the Claimant’s employer and informed them that the Claimant owed the Bank money and despite various promises made by the Claimant to give the matter his attention and many letters sent to him by the Bank requesting payment, he had failed to pay the debt. Instead the Claimant was now mixed-up with bookmakers. The employer subsequently refused to renew the claimant’s contract of employment. The Claimant sued for slander and breach of contract. The jury held found the Defendant not liable after trial. The claimant appealed, seeking a retrial on the basis that the judge in his summing up had misdirected the jury. The appeal was allowed on the basis that the judge had failed to give proper directions to the duty. |
| Key Points |
| There is no absolute contract that the banker shall not under any circumstances disclose the state of a customer’s account to another person. One of the implied terms of the contract is that the bank enter into a qualified obligation with their customer to abstain from disclosing information as to his affairs without his consent. It is a legal duty which arises out of contract. It is not possible to exhaustively define the duty The qualifications can be classified under four heads: (a) Where disclosure is under compulsion by law; (b) where there is a duty to the public to disclose; (c) where the interests of the bank require disclosure; (d) where the disclosure is made by the express or implied consent of the customer The duty extends beyond the closure of the customer’s account. |
| Key Points |
| The confidence is not confined to the actual state of the customer’s account. It extends to information derived from the account itself. It extends at least to all the transactions that go through the account, and to the securities, if any, given in respect of the account. The obligation extends to information obtained from other sources than the customer’s actual account, if the occasion upon which the information was obtained arose out of the banking relations of the bank and its customers. It is an obligation not to disclose without the customer’s consent. It is an implied term, and may, therefore, be varied by express agreement. In any case the consent may be express or implied, and to the extent to which it is given the bank will be justified in acting. |
| Law of Agency |
| In the English case of Bristol and West Building Society v Mothew, [1996] 4 ALL ER 698 at p 711-712, Mitchell C J was of the view that “A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single indeed loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith, he must not make a profit out of his trust, he must not place himself in a position where his duty and his interest may conflict, he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not an exhaustive list, but it is sufficient to indicate the nature of the fiduciary obligations. They are the defining characteristic of the fiduciary.” This statement not only encapsulates the obligations arising from the contractual relationship between a bank and its customer but also identifies the relationship of agent and principal that also exits between the parties. |
| Agency |
| Agency refers to the relationship between three parties: the agent, his or her principal and a third party. An agent acts on behalf of another person who is referred to as the principal in entering into an agreement or contract with a third party. |
| Agency |
| There are at least three circumstances under which the principle of agency would apply to a financial service provider, in particular, to a banker: a) The bank is not required to disclose the state of the customers account except under compulsion of law: uniform Banking Act, ECCB member territories section 31 (exceptions under the Financial Intelligence Acts, Money Laundering Regulations and Exchange of Information Acts). See Douglas v Pindling (1996) 48 WIR 1. Disclosure required in the public interest even without the consent of the customer. b) The banker is employed to pay sums of money on behalf of the customer and in this regard, may be deemed to be acting as an agent of the customer although the relationship between banker and customer is primarily that between debtor and creditor. c) Where the customer has obtained an advance or loan from a bank and provided the security for the advance or loan the bank would have a general lien over the securities belonging to the customer until the debt owed by the customer to the bank is settled. |
| Agency |
| An agency may be created in any one of the following ways: a) Orally b) Impliedly c) Expressly or in writing d) By deed e) Ratification f) Estoppel |
| Duties of Agent |
| DUTIES OF AGENT 1) To exercise reasonable care. 2) Not to delegate its authority. 3) To avoid conflict of interest. 4) Not to take a secret profit or bribe. 5) To keep the principal’s affairs secret. |
| Agency |
| RIGHTS OF AGENTS 1) Clear mandate. 2) Right to indemnification from the principal. 3) Right of remuneration: Woo v Universal Properties Investment Ltd (1987) 41 WIR 1; Fazal v Annamanthadoo (1991) 48 WIR 150. 4) Right of lien. |
| Agency |
| Duties of Principal: The primary duty of the principal to his, her, its agent is to pay any agreed remuneration or commission: Rhodes v Forwood (1986). The principal is also required to indemnify the agent against liabilities properly incurred in the discharge of his duties: Christoforides v Terry (1924). |