Obligated: Examining the Duty of Care in Banking

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He that thinks he can afford to be negligent is not far from being poor.” The foregoing quote attributed to Dr. Samuel Johnson forewarns against the consequence of negligent conduct: that it may well leave one in a precarious economic state. Bankers are no more immune from this warning than the common man, and sufficient care ought therefore to be taken by banks to avoid negligent conduct at all times. This can be achieved by strictly observing and discharging the duty of care.

The common law has established that a duty of care is owed to persons whom one could reasonably have contemplated may be harmed by his action (or inaction in certain cases). However, even though a duty is owed, no liability attaches unless the harm suffered was of a foreseeable kind.

The Neighbour Principle

The duty of care may be succinctly summed up as the duty not to injure your neighbour. In the landmark case of Donoghue v Stevenson (1932) All ER 1, the House of Lords enunciated the neighbour principle as follows:- “The rule that you are to love your neighbour becomes in law: You must not injure your neighbour; and the lawyer’s question: who is my neighbor; receives a strict reply. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law is my neighbour? The answer seems to be persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.”

The law lays down the general rules which determine the standard of care to be attained and it is a question of fact whether one has failed to attain the standard of care required in the particular case. The standard of care required is not that of the defendant himself, but that of a person of ordinary prudence or a person using ordinary care and skill, while for professionals, the standard of care is that of an ordinary professional. Consequently, it is not a defence to state that one acted to the best of his own judgment, if his best judgment fell short of that of the ordinary, reasonable man, or the professional man, as the case may be.

Bank’s Duty of Care

Arising from the neighbour principle, it may be said that a banker owes a duty of care to any person (customer or otherwise) that he can reasonably foresee as likely to suffer injury by his action, while the standard of care to be applied is that of a reasonable banker. We now turn to consider the duty of care that a bank owes to its customers and non-customers, as well as the duty owed by customers to banks.

Duty of Care to Customers
The bank-customer relationship is contractual in nature and it may therefore be said that a bank has a contractual duty to its customer to exercise reasonable care and skill. In Karak Brothers Company Ltd v Burden (1972) All ER 1210 the Court had this to say about a bank’s contractual duty to its customer:-

…. a bank has a duty under its contract with its customer to exercise “reasonable care and skill” in carrying out its part with regard to operations within its contract with its customer. The standard of that reasonable care and skill is an objective standard applicable to bankers. Whether or not it has been attained in any particular case has to be decided in the light of all the relevant facts, which can vary almost infinitely.

A bank’s duty of care to its customers may also arise concurrently in tort. The case of Hedley Byrne v Heller & Partners Ltd (1963) 2 All ER 575 introduced the idea of “assumption of responsibility” by recognising liability for pure economic loss not arising from a contractual relationship.

A bank’s duty of care to its customers is wide and ranges from protecting a customer from fraud by agents such as directors and partners in issuing cheques and other payment instructions, to ensuring that the financial advice it issues is sound and reliable, to explaining the meaning and effect of security documents. The list is not exhaustive and whether a bank owes a duty of care is determined on a case by case basis, the test being whether the customer has suffered injury due to action or inaction of the bank that the bank ought to have reasonably foreseen the action or inaction as likely to injure the customer.

Duty of Care to Non-Customers

A bank may owe a duty of care to non-customers. One of the first cases to find such a duty of care was J & F Transport Ltd v Markwart (1982) CanLII 2660 (SK QB). The facts of the case are that the plaintiff, a trucking company, hired Mr. Markwart as a bookkeeper. About eight months later, Markwart established an account at the Bank of Montreal, fraudulently using his employer’s name as the account holder. When the account was opened, the bank failed to obtain the usual information such as evidence concerning the incorporation of the company or the names of the signing officers. Markwart proceeded to fraudulently deposit and cash cheques payable to the employer. The Court held that “the losses and frauds perpetrated by Markwart were solely the result of the negligence of the defendant in allowing him to set up a bank account into which he could deposit and cash cheques made payable to the plaintiff.” The Bank had failed in its duty of care by not making proper inquiry when the account was opened.

Similarly, in Vitalaire (A General Partnership) v Bank of Nova Scotia (2002) OJ No. 4902 (SCJ) the Court held that a bank that has reasonable grounds to suspect fraud by its customers will be liable to a non-customer if it fails to make reasonable inquiries to uncover or prevent the fraud, while in Dupont Heating & Air Conditioning Limited v Bank of Montreal (2009) CanLII 2906 (ON SC) it was held that a bank may owe a duty of care to a third party who is defrauded by the bank’s customer.

From the foregoing cases, it emerges that the duty of care owed by banks may indeed extend to non-customers and this includes instances where fraud which the bank ought reasonably to have foreseen is perpetrated and causes injury to a non- customer. This demands a high standard of care from banks that requires them to exercise reasonable care, skill and diligence in respect of every transaction undertaken within the bank, and it is not open to a bank to simply state, “he is not my customer”.

Customers’ Duty of Care to the Bank

The bank-customer relationship is symbiotic and it is only fair that customers should owe a duty of care to the bank. The main duties of care owed by a customer to the bank are those laid out in London Joint Stock Ltd vs Macmillan (1906) AC 439 and Greenwood vs Martins Bank Ltd (1918) AC 777. In the former case it was held that the customer owes his bank a duty to refrain from drawing cheques or other payment orders in such a manner as to facilitate fraud or forgery, while in the latter case the Court held that the customer owes a duty to inform his bank of any forged payment order as soon as he becomes aware of it.

The duties to refrain from facilitating fraud or forgery and the duty to promptly inform the bank of a forgery discovered by the customer have come to be known as the Macmillan Duty and the Greenwood Duty respectively.

Closer home, the High Court in the case of Barclays Bank of Kenya vs Jandy (2004) 1EA 8 stated that the customer’s duty of care to the bank includes acting in good faith, exercising reasonable care in executing written orders so as not to facilitate fraud or forgery and the duty to inform the bank of any forged payment orders, which includes the duty to notify the bank of unexpected deposits into one’s bank account.
Case law also suggests that any wider duty of care on the part of the customer will not be recognised unless the term contended satisfies the strict requirements for the implication of a contractual term.

The circumstanaces in which a duty of care might arise are wide and infinitely varying. It is well near impossible to have an exhaustive list of all such circumstances . In signing off, it is apt to quote John Stuart Mills:

A person may cause harm to others, not only by his actions but by his inaction, and in either case he is justly accountable to them for the injury.