CAT / FIA FFM Syllabus C. Managing Cash Balances - Legal relationship between bank and customer - Notes ^{4 / 4}

The relationship between bank and customer arises from a legal contract between them

These are the main types of relationship which may exist between bank and customer:

Receivable/payable relationship

The customer deposits his/her money with the bank. 

These funds go into the customer's account and can be withdrawn at any time. 

The bank is the receivable (debtor) (for the money owed to the customer) and the customer is the payable (creditor). 

However, there are circumstances where this relationship can be reversed. 

If, for example, a customer account is overdrawn, then the customer owes money to the bank.

Bailor/bailee relationship

Banks have safes or strong rooms and will usually be willing to offer a safe deposit service to customers.

There is a bailment whenever one person (the bailor) delivers personal property to another person (the bailee). 

The bank has two obligations:

1. To take 'reasonable' care to safeguard it against damage or loss (In case of loss or damage, the burden of proof rests on the bailee.)

2. To re-deliver it only to the customer or some person authorised by the customer.

Principal/agent relationship

In many transactions one person (the agent) acts for another (the principal), usually for the purpose of making a contract between the principal and a third party.

1. A customer who receives payment of a debt by a crossed cheque must have a bank account and employs his bank as agent to present the cheque for payment and credit the proceeds to his account.

2. Where the bank arranges insurance such as household contents insurance, the bank is acting as an insurance broker and is the agent of its customer.

The bank may have to employ other agents such as stockbrokers, solicitors and other types of specialist qualified to handle particular transactions.

Mortgagor/mortgagee relationship

This relationship can come into being when the bank asks a customer to secure a loan by a charge or mortgage over assets such as property.

• The customer is the mortgagor, granting the mortgage

• the bank is the mortgagee, accepting the mortgage

If the customer does not repay the loan, the bank can sell the asset and use the proceeds to pay off or reduce the outstanding loan.

Fiduciary relationship

If one of the parties in a relationship based on trust is in an influential position, then that person could exert undue influence to make the other party enter into a contract. 

The law therefore expects the 'superior' party in the relationship to act in good faith. 

It is said to be a fiduciary relationship. 

The law expects banks to act with utmost good faith, particularly where the bank is advising the customer.