What constitute customer:-

According to Sir John Paget view, to constitute a customer there must be some recognisable
course or habit of dealing in the nature of regular banking business. Therefore for constituting
a customer 2 things are important firstly, there was to be some recognisable course or habit of
dealing between him and the bank and secondly, the transactions were to be in the nature of
regular banking business.

MATHEW V.WILLIAMS BROWN & CO.

In order to constitute a person a customer of a bank, he should have some sort of an account
with the bank and not only this is sufficient but also it must have some continuity and custom.

DURATION THEORY for establishing customer

LADBROKE V. TODD

It observed relation between banker and customer begins as soon as the first cheque is paid in
and accepted for collection and not merely when it is paid. It was held that a person begins to
become a customer when he goes to the bank with money or cheque and asks to have an
account opened in his name, and then bank accepts the money or cheque and is prepared to
open an account in the name of that person. It is then that he is entitled to be a customer and
not necessary that he should have drawn any money or even to say should be in a position to
draw money. This was reaffirmed in the case

COMMISSIONER OF TAXATION V. ENGLISH SCOTTISH AND AUSTRALIAN BANK

In this case, judge held that the word ‘customer’ signifies a relationship in which duration is
not of the essence…. A person whose money has been accepted by the bank on the footing
that the bank undertakes to honour cheques up to the amount standing in his credit, is in the
view of their lordships, a customer of the bank in the sense of the statute irrespective of
whether his connection is of long or short standing.

CENTRAL BANK OF INDIA LTD. V. GOPINATHAN NAIR

Kerala High Court held that the term customer is not defined in the Negotiable Instruments
Act 1851. Broadly speaking customer is a person who has a habit of resorting to the same
place or person to do the business. So far as banking transactions are connected he is a
person, whose money has been accepted on the footing that the banker will honour up to the
amount standing to his credit irrespective of his connection being of short or long standing.

Therefore through the above case, it can be considered that even a single transaction can lead
to banker customer relationship.

SINGLE TRANSACTION CONSTITUTE A CUSTOMER

In Savory & Co v. Lloyds Bank ltd. the plaintiff gave cheque to bank to post it and instead
of posting one of the employee stole it and went to another bank and got it deposited. Plaintiff
sued employee as well as another bank to recover the amount on fraud of the employee. The
court held that employee was another bank’s customers as single transaction may constitute a
customer of the bank.

Another requirement is that dealing must be of a banking nature. This means it should not be
casual services rendered by a banker to persons who have opened no account with him.

CUSTOMER UNDER SECTION 131 OF NEGOTIABLE INSTRUMENT ACT

Nowhere in the section it is made clear that a person does not become a customer only for the
reason that the banker has performed service to him, either as collecting banker, or a paying
banker, without obtaining a reference on him. It is just a mere precaution.

GENERAL WESTERN RAILWAY V. LONDON AND COUNTRY BANKING LTD.

Huggins having by false pretences obtained from the appellants a cheque crossed “& Co” and
marked not negotiable took it to the respondent bank. The bank at his request paid a part of
the amount of the cheque into the account of one of their customers and handed the balance
to the Huggins. After respondent receive payment of cheque from the bank it was drawn
Huggins fraud was discovered and appellants sued respondent for the amount. It was found
that bank received amount in good faith and without negligence because they were in a habit
of cashing cheque for Huggins from past many years. He had no account or passbook with
them and hence it is not a customer and hence they did not receive payment of cheques
within the meaning of Sec 82 of English Cheques Act 1957.

2 judges held that Huggins cannot constitute a customer for the respondent bank as he had no
account of any sort with the bank. Nothing was put to debit and credit by the bank and there
has to be some relation to make it a customer banker relation and hence did not receive
payment of the cheque for him within the meaning of section 82 and could not be protected
by that section.

1 judge held that the habitually lodging of cheque for presentation itself constitute a banker
customer relation and will fall under section 82.

GENERAL RELATION OF BANKER TO CUSTOMER

1. Debtor Creditor

The money being deposited by a customer belongs to the bank and the customer has credit for
sum deposited as an actionable claim for that amount. The relationship between a banker and
customer is the ordinary relation of the debtor and creditor with superadded obligation arising
out of customs of bank to honour the customer’s draft. The position is that once a sum of
money is deposited with the bank, there remains a debt due from bank to the customer and
money can be used by bank in any permissible manner.

The contractual relation arises as soon as customer asks banker to open the account and the
actual amount in the bank will only strengthen the relation in terms of benefits and obligation
flowing from a contract.

FOLEY V. HILL

The Lord Chancellor Cottenham said the following in judgement

Money, when paid into a bank, ceases altogether to be the money of the principal; it is by
then the money of the banker, who is bound to return an equivalent by paying a similar sum
to that deposited with him when he is asked for it. The money paid into a banker’s is money
known by the principal to be placed there for the purpose of being under the control of the
banker; it is then the banker’s money; he is known to deal with it as his own; he makes what
profit of it he can, which profit he retains to himself, paying back only the principal,
according to the custom of bankers in some places, or the principal and a small rate of
interest, according to the custom of bankers in other places. The money placed in custody of a
banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he
is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts
it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal
with it as the property of his principal; but he is, of course, answerable for the amount,
because he has contracted, having received that money, to repay to the principal, when
demanded, a sum equivalent to that paid into his hands.
That has been the subject of discussion in various cases, and that has been established to be
the relative situation of banker and customer. That being established to be the relative
situations of banker and customer, the banker is not an agent or factor, but he is a debtor.

Thus the settled position of the law is that when you deposit, the bank becomes the owner of
the money deposited and you become a creditor to the bank.

JOACHIMSON V. SWISS BANK CORPORATION

Debt due from a banker to customer and a debt due form ordinary borrower have two
distinctions. So far as banker and customer question is concerned, it has an exception to the
rule that the debtor should find his customer. Here the creditor has to make a demand on the
debtor. The demand can be made only at the branch of the bank where customer account is
kept.

It was held that in case of a debt due from a bank an express demand for repayment by the
customer is necessary before the debt becomes actually and accruingly due on the ground that
otherwise the banker by offering the money due to his customer would summarily close his
customer’s account without notice and possibly injure his customer’s credit by dishonouring
the cheque.

BANKER AS AGENT OF CUSTOMER

TRAVANCORE NATIONAL V. QUILON BANK

An amount was paid into the bank for remittance as a telegraphic transfer to a company in
Bombay, it was declared that such money was held by bank on behalf of the applicant and as
the property of the applicant apart from the money held as the property of the bank. The bank
received the money in capacity of a mere agent.

BANK OF INDIA V. OFFICIAL LIQUIDATOR

It was held that monies paid by the customer for the purpose of effecting a specific
transaction puts the bank receiving such monies in a fiduciary position, and the relationship
then is not that of debtor and creditor.
Where a bank receives a crossed cheque from his customer for collection then he acts as an
agent and not holder in due course. However when cheques are discounted or negotiated or
purchased by the bank, the property with it passes on to the bank and bank become holder in
due course.

BANKER AS A TRUSTEE

Where the bank has suspended his business before receipt of such amount, he holds the
money as trustee for his customer irrespective of whether or not the latter has an account with
him on the date of receipt of the money and whether or not the money has been credited in
that account.

NEW BANK OF INDIA V. PEAREY LAL

A trust results also

1. when money is paid to a bank with special instructions to retain it pending further
instructions, or to pay it over another person who had no banking account with the
bank and when bank accepts such an instruction and holds the property pending
receipt of further instructions from the lodger of such money
2. when instructions are given by a customer to his banker that a part of amount lying in
his account be forwarded to meet a bill falling due and payable by him and banker
accepts such instruction.

It was held that if specific instructions are not given at the time of payment then even if it is
to be held in suspense account, the banker does not act as a trustee of the customer.

SHANTI PRASAD JAIN V. DIRECTOR OF ENFORCEMENT

The law is well settled that moneys are deposited in a bank the relationship that is constituted
between the banker and customer is of debtor and creditor. The banker is entitled to use
money without being called upon to account for such use. However there might be some
special circumstances under which banker might be constituted as trustee but apart from such
an arrangement his position is that of a debtor and creditor.

BANKER AS A BAILEE

The legal relation that arises in case of safe deposit or safe custody is that of bailment.
Customer is bailor and bank the bailee.
BANKER AS A PRIVILEGED CUSTOMER

An express demand by a customer for repayment of a current account is a condition

precedent to the right to sue the banker for the amount.

FOLEY V. HILL

It laid down a quasi-legal relationship between customer and banker stating that banker is
not the agent.

STATUTORY OBLIGATIONS ON BANKS IN INDIA

1. Obligation to honour cheques having sufficient funds (section 31 of NI Act 1881)

Section 31 of negotiable instruments act- if there are sufficient funds in the accounts of the
customer and if it is presented within the time limit, then banker must pay cheques.

2. Duty of banker to act as per customer’s direction

Banker is bound to act as per the directions of the customer and if no directions, then
according to usage in the locality and the applicability to the matter in hand.

3. Duty to take care of goods as ordinary prudence

Under Section 151 of Indian Contract Act, a paid bailee is under duty to take as much care of
goods as a person of ordinary prudence would have taken of his own goods of the same kind.

4. Secrecy of customer’s account

As the disclosure of matters related to customers financial position may do considerable harm
to his credit and business, the banker should take scrupulous care not to disclose the state of
his customer’s account.

TOURNEIR V. NATIONAL PROVINCIAL AND UNION BANK OF ENGLAND

SHANKARLAL V. SBI

Customer owned 261 bank currency notes of Rs 1,000/- each. He tendered these notes to the
bank with the declaration form under the High Denomination Bank. The bank made
declaration to the ITD who issued notice under Sec 226(3) attaching the said sum which was
later released.

The Court held that among the duties, there is a duty of secrecy. Such a duty is a legal one
arising out of the contract and not merely a moral one. Though its not an absolute duty and is
qualified one subject to certain conditions. These are :- (1) the duty to obey an order under
the banker’s book evidence act (2) cases where a higher duty than the private duty is involved
as where danger to public supersede the duty of agent and principal. Court further observed
that all banks are directed to furnish all particulars regarding the deposit of bank notes to the
ITD as soon as such notices are received and hence the above case is within this exception.

RIGHTS OF THE BANKER

Bankers lien:- Section 171 of the Indian Contract Act- banker may retain any goods or
securities bailed to them for the purpose of recovering the amount.

It confers upon them the right to retain any securities in respect of the general balance due by
their owner to the banker. It extends to all securities place by his customer which are not
specifically appropriated.

Bankers generally receive for safe custody deposit are regarded as those left with the banker
for a specified purpose are not subject to banker’s general lien and is contract to the contrary
is implied because while taking such acts as a bailee and not as a banker or may be because
entrustment is for a special purpose inconsistent with the assertion of the lien.

Bankers right to appropriation:

CLAYTON’S CASE (DEVAYNES V. NOBLE)

Where there is no special appropriation necessary to be made, then the banker may hold the
amount paid by the customer to be the payment of the earlier unpaid debit in the account. The
first item on the debit side must be the item discharged or reduced by the first item on the
credit side.

Where debtor intimated that the payment was towards a particular debt then the creditor
having accepted it could not later appropriate it towards some other debt.

GARNISHEE ORDER
Where a person has obtained a judgement for recovery of money he may by application to the
court obtain a garnishee order which when served upon a banker will attach any money in the
banker’s hand belonging to the person against whom judgement is given. After garnishee
order is passed judgement debtor is restrained from parting with any money due or accruing
due to the judgement debtor. If the cheque is issued before the order, then it will not be
attached unless the order expressly state so. Joint account cannot be attached under garnishee
order.