Understanding the Bank–Customer Relationship
As we saw in the previous post, commercial transactions often rely on tools like bills of exchange to ensure secure payment. But in modern commerce, banks play a central role in facilitating payments, storing funds, and providing credit. To fully understand how commerce operates, it is essential to understand the relationship between banks and their customers—how it is formed, what duties banks owe, and what rights customers have.
Who is a Customer?
Not everyone who interacts with a bank is automatically a “customer.” The distinction matters because banks owe duties only to their customers, not casual users of services like ATMs or one-off cheque cashers.
In modern banking, the definition can be more complex because customers may have mortgages, credit cards, or investment accounts. Even if these involve money, a customer in the common law sense is generally someone with a deposit account.
The Bank–Customer Relationship
The relationship between a bank and a customer is contractual. Key points:
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When money is deposited, it becomes the bank’s money, not the customer’s.
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The customer has a personal right to demand repayment; they are a creditor, and the bank is a debtor.
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The bank’s obligations are to receive money, collect payments on behalf of the customer, and repay on demand or as agreed.
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Example from case law: Banks repay sums against the customer’s clear written instructions, and the customer must exercise reasonable care in giving orders.
This debtor-creditor relationship was first established in Foley v Hill (1848) and has been confirmed repeatedly.
Bank’s Duty to Honour the Customer’s Mandate
The customer’s mandate is the instruction given to the bank to pay money. Key points:
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Banks must honour cheques, transfers, or other payment instructions if the account has sufficient funds or an agreed overdraft.
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If funds are insufficient, the bank may ignore the instruction, treating it as a request to lend money under the overdraft terms.
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Banks must also honour countermanded payments (instructions to stop payment), but notice must be clear and unambiguous, and the timing may limit the customer’s ability to cancel, especially with electronic payments.
Example: A customer issues a cheque. The bank must pay it if funds are available. If the cheque is stopped in time with proper notice, the bank must respect that instruction.
Bank’s Duty of Care
Banks must exercise reasonable skill and care when performing their duties, including payments and processing instructions.
In short, banks must act carefully but are not expected to detect fraud in every transaction if the standard of a prudent banker is met.
Bank’s Fiduciary Duty
Unlike some professional relationships, the bank–customer relationship is generally not fiduciary.
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Deposits and payments are debtor-creditor relationships, which conflict with fiduciary obligations.
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However, a bank may act as a fiduciary when:
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Exceptionally, a long-standing, very special relationship might create fiduciary duties (rare and often disputed).
Example: When a bank manages investments for a client or acts as a trustee, it must act in the client’s best interest, unlike standard deposit accounts.
Key Takeaways
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Not every user is a customer—a formal account or instruction is needed.
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Banks are creditors to their customers, holding deposited money and repaying under contract.
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Banks must follow customer mandates, honouring payments and respecting clear countermand instructions.
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Banks must exercise reasonable care—the standard of an ordinary prudent banker.
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The bank–customer relationship is not generally fiduciary, but fiduciary duties arise in special roles like trustee or financial adviser.
Understanding these principles is essential, because just like bills of exchange, the bank–customer relationship underpins secure and efficient commercial transactions. Banks are more than storage; they are contractual partners, bound by clear duties and responsibilities that protect both parties in modern commerce.
Who is legally considered a “customer” of a bank?
Anyone who has an account or has given an instruction to the bank.
Anyone who uses an ATM or cashes a cheque once.
Any person who visits a bank branch for advice.
In the bank–customer relationship, whose money is deposited funds considered to be?
The bank’s money; the customer has a personal right to repayment.
Always the customer’s property until withdrawn.
They are jointly owned by the bank and the customer.
What is the bank required to do when a customer issues a payment instruction, such as a cheque?
Honour the instruction if funds are available or within agreed overdraft limits.
Only process instructions in writing once a month.
Only process electronic payments, not cheques.
What standard of care is expected from banks when handling customer instructions?
Reasonable skill and care of an ordinary prudent banker.
Detect all fraudulent activity regardless of cost.
Only check written instructions, ignoring electronic mandates.
In which situation does a bank have a fiduciary duty to a customer?
When acting as trustee, financial adviser, or agent managing funds for the customer.
Always, for every customer account.
Never, fiduciary duties are irrelevant in banking.
