ANALYSIS OF BANK CUSTOMER RELATIONSHIP: AS AGENCY RELATIONSHIP

ANALYSIS OF BANK CUSTOMER RELATIONSHIP: AS AGENCY RELATIONSHIP

INTRODUCTIONIn order to understand the relationship between a banker and customer, it is necessary to comprehend the legal meaning of these two terms. The term "banker'' until the passing of the Indian Companies Amendment Act of 1936, had no statutory definition in India, and the legal decisions on its interpretations, were by no means harmonious. The term "customer" has never been defined in any statute and the Indian Judicial decisions on this point have not also been very helpful. Tannan in his Banking Law and Practice in India[footnoteRef:1], has well pointed out that much time, ink and paper have been consumed in an effort to define what exactly constitutes banking. Even the best authorities have found it rather a hard nut to crack, mostly on account of the multifarious functions and services, e.g., dealings in stocks and shares, etc., which modern banks perform, in addition to or in conjunction with what is distinctive and characteristic banking business. [1: . 7th Edn. at page 25.]

Dr. H.L. Hart in his Law of Banking, [footnoteRef:2] says : [2: Vol. I, 4th Edn. 1931, page 1]

"A banker is one who in the ordinary course of his business, honours cheques drawn upon by him by persons from and for whom he receives money on current accounts."This definition is based upon the dicta given in a number of decisions, beginning with Foley v. Hill[footnoteRef:3], Joachimson v. Swiss Bank Corporation[footnoteRef:4], etc. According to this definition, the essential function to enable a person, firm, or institution, to be regarded as a banker or a bank, is that of receiving current deposits against which cheques may be drawn. (For an analysis of Foley and Hill, Joachimson etc., bearing on the relationship of Banker and customer see pages 1 to 16 of Lord Chorley and Smarts' Leading Cases in[footnoteRef:5] (Law of Banking, 1953 (Pitman and Sons) Ltd. This definition is reinforced by Sir John Paget in his Law of Banking,[footnoteRef:6],who reviewing the Birkbeck Building Society v. Birkbeck, [footnoteRef:7]writes : [3: (1948) 2 HLC 28 (D)] [4: (1921) 3 KB 110 (E)] [5: Law of Banking, 1953 (Pitman and Sons) Ltd.] [6: 5th Edn. page 5] [7: (1913) 29 TLR 218 (F)]

'"It is a fair deduction that no person or body corporate or otherwise, can be a banker who does not (1) take deposit accounts, (2) take current accounts, (3) issue and pay cheques and (4) collect cheques crossed and uncrossed, for his customers."Sir John further adds that one claiming to be a banker must profess himself to be one, and the public must accept him as such; his main business must be that of banking, from which generally he should be able to earn his living. This definition is fairly exhaustive, although it makes no mention of many Other important functions of the present day banker, which may be put under two heads (1) agency services, comprising the collection of bills, promissory notes, coupons, dividends, payment of subscriptions and insurance premiums, and acting as a trustee, attorney or executor of his customers, and (2) general utility services, e.g., issue of credit instruments, the transaction of foreign exchange business, the safeguarding of valuables and documents against fire, theft, etc. There seems to be no doubt that according to English law, a person claiming to be treated as a banker, should perform the functions as given by Sir John.American Jurisprudence defines "bank" as follows in Section 2: ''Strictly speaking, the term "bank' implies a place for the deposit of money. In its more enlarged sense a bank may be defined as an institution, generally incorporated, authorised to receive deposits of money; to lend money and issue promissory notes, usually known by the name of 'bank notes'; or to perform some one or more of these functions. A bank has also been defined as a place of business where credits are opened by the deposit or collection of money or currency, subject to be paid or to be remitted upon draft, check, or order; or where money is advanced or loaned on stocks, bonds, or bullion, and bills of exchange; or where promissory notes are received for discount or for sale. Accordingly, banks, in the commercial sense, are of "three kinds :(i) of deposit (ii) of discount and (iii) of circulation."Dunn v. State,[footnoteRef:8] Auten v. V.S. National Bank[footnoteRef:9], Oulton v. German Savings Society, [footnoteRef:10]. [8: . 13 GA A 314: 79 SE 170 (G);] [9: 1889) 174 US 125 (H);] [10: (1873) 84 US 109: 21 Law Ed. 618 (I).]

OVERVIEW OF BANK CUSTOMER RELATIONSHIPCorpus Juris[footnoteRef:11] ,tersely defines the nature and characteristics of a bank as follows (Sec. 1): [11: page 473]

"While the term "bank' has received a number of definitions differing considerably in language, but all expressing of course the same fundamental ideas, and the sense in which it is intended to be used is largely determined by its connection with other language, perhaps the most concise and at the same time complete definition to be found in the books is that a bank is "an association or corporation whose business it is to receive money on deposit, cash cheques or drafts, discount commercial paper, make loans, and issue promissory notes payable to bearer called 'bank notes'.The term is also used to designate the buildings apartment, or office where such business is transacted.' A bank is usually, but not necessarily, an incorporated institution; and while it has been said that a bank is an institution of a quasi public character, it is nevertheless true that, where, as is usually the case, the stock is owned by individuals, a bank is a private corporation." Turning to the definition of 'customer' there is yet no statutory definition of 'customer' either in England or in India. H.P. Sheldon in his "The Practice and Law of Banking" at page 75 states: that it would seem that any person keeping an account current or deposit is entitled to the description of "customer" and that it would appear from the judicial decisions that if a banker renders to a person advices incidental to, but not peculiar to, the business of banking, he does not thereby constitute that person a customer; Great Western Rly. Ltd., v. London and County Banking[footnoteRef:12] . [12: 1901 AC 414 (J).]

The primary functions of commercial banks may be summarized as borrowing and lending of money. Besides these two main functions, a commercial bank also undertakes a variety of other activities. These activities involve services offered by banks to help the customers (account holders). Such activities include collection of cheques, dividend, warrants, etc. on behalf of customers as well as effecting transfer of funds, remittances by mail and telegram. In order to attract customers and make banking services effective, banks always make efforts to diversify their activities. Such diversification takes place by way of new service activities and schemes. These services offered by banks are generally known as agency services. These are also termed as nonbanking, general utility, and miscellaneous services. Banker customer relationship, is just a special contract where a person entrusts valuable items with another person with an intention that such items shall be retrieved on demand from the keeper by the person who so entrust. Thus the banker is the one who is entrusted with the above mentioned valuable items, while the person who entrust the items with a view to retrieving it on demand is called the customer. The relationship is thus based on contract. It is based on certain terms and conditions. For instance, the customer has the right to collect his deposit on demand personally or by proxy. The banker too is under obligation to pay, so long the proxy is duly authorised by the customer. It has a semblance of creditor /debtor relationship. Thus the customer is the creditor who has the right of demand on the money from the banker. As long as the banker is keeping the customer items, the banker is indebted to the customer. The relationship is also fiduciary. The terms and conditions governing the relationship should not be leaked to a third party, particularly by the banker. Also the items kept should not be released to a third party without due authorisation by the customer. Banker customer relationship, is just a special contract where a person entrusts valuable items with another person with an intention that such items shall be retrieved on demand from the keeper by the person who so entrust. Thus the banker is the one who is entrusted with the above mentioned valuable items, while the person who entrust the items with a view to retrieving it on demand is called the customer. The relationship is thus based on contract. It is based on certain terms and conditions. For instance, the customer has the right to collect his deposit on demand personally or by proxy. The banker too is under obligation to pay, so long the proxy is duly authorized by the customer It has a semblance of creditor /debtor relationship. Thus the customer is the creditor who has the right of demand on the money from the banker. As long as the banker is keeping the customer items, the banker is indebted to the customer. The relationship is also fiduciary The terms and conditions governing the relationship should not be leaked to a third party,particularly by the banker.Also the items kept should not be released to a third party without due authorization by the customer.The relationship between a customer and a bank is that of a Principal and Agent. The bank acts as an agent on behalf of the customer as principal. When any bank acts as an agent, the services rendered by it are known as agency services. Under agency services, the bank undertakes payment of subscriptions, premium on insurance, collection of cheques, dividends, etc. It acts as a trustee, executor or administrator and an agent for buying and selling shares, stocks, debentures on behalf of the customer. General utility services refer to those non-bank services which are in the interest of general public, i.e. the society at large. Such services are called non-banking services because they are not directly concerned with the main banking activities. These services include issue of travellers cheques, credit cards, drafts, circular notes, gift cheques and safe custody of valuables, like negotiable securities, jewellery, documents of title to goods, etc. The range of services offered differs from bank to bank, depending mainly on the size and type of bank, but the acceptance of deposits from the public and lending operations form the main stay of the banking business.

PRINCIPAL AND AGENT RELATIONSHIPIn certain situations, the banker serves as agent of the customer (principal) some of these situations are enumerated below: Collection of cheques on behalf of the customer Collection of dividends and bills of exchange Acting as attorney, executor or representative of a customer Buying and selling securities on his behalf.

Those who wish to subscribe to shares and debentures floated by companies can do so through designated banks. Also, banks may be authorised to buy and sell shares, debentures and government securities to the advantage of investors. Banks may and do undertake payment of subscription to clubs, insurance premium, income tax and sales tax, etc. These services save time and effort of people.According to Skeleton another service being rendered by a banker to his customer is to collect his customers cheque and other credit instruments. In these transactions, the relationship between the two parties is that of principal and agentthe banker acting as his customers agent. This is because in the course of business incidental to banking, a banker undertakes to perform many services for the customer such as:Buying and selling securities on his behalf; collection of cheques, dividends, bills or promissory notes on his behalf; acting as a trustee, attorney, executor, correspondent or a representative of a customer.In the performance of all these functions, the banker acts as an agent of the customer.In general terms, Agency refers to the relationship which exists between two persons, the Principal and the Agent in which the Agent has to perform different duties/ functions as per instructions of the principal and also enters into contract with the third party / parties on behalf of the principal. The relationship of agency plays an important role in business and commercial dealings. This relationship is legal created by virtue of agreement between Principal and Agent

DEFINITION OF AGENT AND PRINCIPAL: Sec 182

Agent is a person employed to do any act for another or to represent another in dealing with a third persons. The person for whom such act is done, or who is so represented, is called the Principal. Explanation The legal relation between a merchant in one country and a commission agent in other is that of principal and agent, and not seller and buyer, though this is consistent with the agent and principal, when the agent consigns the goods to the principal, being in a relation like that of seller and buyer for some purposes. A merchant, therefore, in this country who orders goods through a firm of commission agents in Europe cannot hold the firm liable as if they were vendors for failure to deliver the goods. And the result is the same if the goods are ordered through a branch in this country of a firm of commission agents in another country. For the same reason, where a commission agent buys goods for a merchant at a price smaller than the limit specified in the indent, he cannot charge any price higher than that actually paid by him. .An agent may have, and often has, in fact, a large discretion, but he is bound in law to follow the principals instructions provided they do not involve anything lawful. To this extent an agent may be considered its a superior kind of servant; and a servant who is entrusted with any dealing with third persons on his masters behalf is to that extent an agent. But a servant may be wholly without authority to do anything as an agent, and agency, in the case of partners, even an extensive agency, may exist without any contract of hiring and service.Agency may be created in the following ways: By consent By operation of law By estoppels By ratification Agency by Consent:Consent may be express or implied.Express Agency:Such agency is created by words either spoken or written. In business transactions, this relationship is usually established through writing an agreementImplied Agency:An authority is referred to as implied when it is inferred from the conduct of the parties or circumstances of the case.Definitions of express and implied authority as contained in section 187 of the Act is given below:An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted for circumstances of the case.

RIGHTS AND DUTIES OF AGENT AND PRINCIPALRIGHTS OF THE AGENT:These are discussed in the following paragraphs:When agents remuneration becomes due-Sec 219:In the absence of any special contract, payment for the performance of any act is not due to the agent until the completion of such act; but an agent may detain moneys received by him on account of goods sold, although the whole of the goods consigned to him for sale may not have been sold, or although the sale may not be actually complete.Agent to be indemnified against consequences of lawful acts (sec 222)The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.Agent to be indemnified against consequences of acts done in good faith (sec 223)Where one person employees another to do an act and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it cause an injury to the rights of third persons.Compensation to agent for injury caused by principals neglect (sec 225) The principal must make compensation to his agent in respect of injury caused to such agent by the principals neglect or want of skill.Enforcement and consequences of agents contracts (sec 226)Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences as if the contracts had been entered into and the acts done by the principal in person.Principals liability with regard to agreements caused by misrepresentation or fraud by agent: Sec 238Misrepresentation made, or frauds committed, by agents acting in the course of their business for their principals, have the same effect on agreements made by such agents as if such misrepresentations or frauds had been made or committed by the principals; but misrepresentations made, or frauds committed, by agents, in matters which do not fall within their authority, do not affect their principals.DUTIES OF THE AGENT:Duties of agent are contained in sec 211 to 218 of the Contract Act. Some of the important duties are given below: To follow principals instructions To show required skill and diligence Agent to render proper accounts Agent to pass on any benefits derived by himAgents duty in conducting principals business. (sec 211)An agent is bound to conduct the business of his principal according to the directions given by the principal, or, in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the place where the agent conducts such business. When the agent acts otherwise, if any loss be sustained, he must make it good to his principal, and, if any profit accrues, he must account for it.Illustrations(a) A, an agent engaged in carrying on for B, a business, in which it is the custom to invest from time to time, at interest, the moneys which may be in hand, omits to make such investments. A must make good to B the interest usually obtained by such investments. (b) B, a broker, in whose business it is not the custom to sell on credit, sells goods of A, on credit to C, whose credit at the time was very high. C before payment becomes insolvent. B must make good the loss to A.(c) An agent, instructed to warehouse goods at a particular place, warehouse a portion of them at another place, where they are destroyed, without negligence. He is liable to the principal for the value of the goods destroyed. (d) An agent, instructed to insure goods, neglects to do so. He is liable to the principal for their value in the event of their being lost. (e) A broker, entrusted with goods for sale, sells them by auction at an inadequate price, not having made an estimate of the value in accordance with the custom of the particular trade. He must make good the loss. (f) An auctioneer, contrary to the usual custom, takes a bill of exchange in payment of the price of goods sold. He is liable to the principal for the amount of the bill in the event of its being dishonored. (g) An agent, bound by his contract to keep proper books of account, omits to scrutinize, examine or check the accounts of his subordinates whom he implicity trusts. Taking advantage of this, the subordinates commit gross frauds on him and his employers. The frauds and defalcations being due to the agents failure to perform his duty he is liable to make good the loss thereby caused. Skill and diligence required from agent (sec 212)An agent is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and to make compensation to his principal in respect of the direct consequence of his own neglect, want of skill or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill or misconduct.Illustrations(a) A, a merchant in Islamabad, has an agent, B, in London to whom a sum of money is paid on As account, with orders to remit. B retains the money for a considerable time. A, in consequence of not receiving the money, becomes insolvent. B is liable for the money and interest from the day on which it ought to have been paid, according to the usual rate, and for any further direct lossas e.g., by variation of rate of exchangebut not further. (b) A, an agent for the sale of goods, having authority to sell on credit, sells to B on credit, without making the proper and usual inquiries as to the solvency of B. B, at the time of such sale, is insolvent. A must make compensation to his principal in respect of any loss thereby sustained. (c) A, an insurance broker, employed by B to effect an insurance on a ship, omits to see that the usual clauses are inserted in the policy. The ship is afterwards lost. In consequence of the omission of the clauses nothing can be recovered from the underwriters. A is bound to make good the loss to B.) A, a merchant in England, directs B, his agent at Karachi who accepts the agency, to send him 100 bales of cotton by a certain ship. B, having it in his power to send the cotton, omits to do so. The ship arrives safely in England. Soon after her arrival, the price of cotton rises. B is bound to make good to A, the profit which he might have made by the 100 bales of cotton at the time the ship arrived, but not any profit he might have made by the subsequent rise.Agents accounts (section 213) An agent is bound to render proper accounts to his principal on demand.Agents duty to communicate with principal (section 214)It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions. Agent is under a duty to consult principal in a difficult situation so as to save repudiation of his action by principal.Right of principal when agent deals, on his own account, in business of agency without principals consent.( sec 215)If an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows either that any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him.Principals right to benefit gained by agent dealing on his own account in business of agency (sec 216)If an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction. Agents right of retaining out of sums received on principals account.( sec 217)An agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as agent.Agents duty to pay sums received for principal (sec 218)Subject to such deductions, the agent is bound to pay to his principal all sums received on his account.SCOPE AND DUTIES OF PRINCIPAL:

Duties of the principal are enumerated below: Payment of remuneration to the agent Not to prevent his agent from performing the duties/ acts assigned to him under the contract and for which remuneration is payable. Any legitimate expenses which have been incurred by the agent in the course of performance of his duties are to be indemnified by the principal.

CONCLUSION

"While the term "bank' has received a number of definitions differing considerably in language, but all expressing of course the same fundamental ideas, and the sense in which it is intended to be used is largely determined by its connection with other language, perhaps the most concise and at the same time complete definition to be found in the books is that a bank is "an association or corporation whose business it is to receive money on deposit, cash cheques or drafts, discount commercial paper, make loans, and issue promissory notes payable to bearer called 'bank notes'. The term is also used to designate the buildings apartment, or office where such business is. transacted.' A bank is usually, but not necessarily, an incorporated institution; and while it has been said that a bank is an institution of a quasi public character, it is nevertheless true that, where, as is usually the case, the stock is owned by individuals, a bank is a private corporation." The primary functions of commercial banks may be summarized as borrowing and lending of money. Besides these two main functions, a commercial bank also undertakes a variety of other activities. These activities involve services offered by banks to help the customers (account holders). Such activities include collection of cheques, dividend, warrants, etc. on behalf of customers as well as effecting transfer of funds, remittances by mail and telegram. In order to attract customers and make banking services effective, banks always make efforts to diversify their activities. Such diversification takes place by way of new service activities and schemes. These services offered by banks are generally known as agency services. The relationship between a customer and a bank is that of a Principal and Agent. The bank acts as an agent on behalf of the customer as principal. When any bank acts as an agent, the services rendered by it are known as agency services. Under agency services, the bank undertakes payment of subscriptions, premium on insurance, collection of cheques, dividends, etc. It acts as a trustee, executor or administrator and an agent for buying and selling shares, stocks, debentures on behalf of the customer. General utility services refer to those non-bank services which are in the interest of general public, i.e. the society at large. Such services are called non-banking services because they are not directly concerned with the main banking activities.

BIBLIOGRAPHY

BOOKS 1. Dr. S. R. Myneni. Law of Banking, Asia Law House: Hyderabad.2. Tannan M, 2001, Banking Law and Practice in India, India Law House: New Delhi.3. Tandon P, 1989, Banking Century: A Short History of Banking in India, Viking: New Delhi.

WEBSITES REFFERED http://kalyan-city.blogspot.com/2012/04/banker-customer-relationship-explained.html http://hanumant.com/Banking%20law%20-%20Meenakshi%20Natesan.html http://www.indg.in/financial-literacy/financial_quiz/relationship_between_banker_and_customer.pdf http://www.indiankanoon.org/doc/5446/ http://www.rbi.org.in/scripts/AboutUsDisplay.aspx?pg=UrbanBankDept.htm

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