Duties of a Bank to its Customers

Written by: Bianca Kratt 

The relationship between a bank and a customer is complex and it is not always clear what duties each party owes to the other. Generally, the bank owes the customer a duty of care, meaning that the bank must use reasonable care and skill while conducting business concerning the customer, but other duties exist as well. To assist in your understanding, we have outlined these specific duties below.

Handling Account Withdrawals

When a customer deposits money into the bank, this money is on loan to the bank and the bank’s most important obligation is to follow the customer’s instructions in relation to this money. The customer can withdraw money from the account at any point, and they can also stop payment of a cheque by informing the bank. If an overdraft agreement is in place, the bank must also give reasonable written notice of any decision to reduce overdraft credit.

Depending on the situation, a bank may be liable for refusing or incorrectly allowing withdrawals. A bank cannot refuse to honour a customer’s cheque without justification. If the refusal results in the breach of a contract between the customer and a third party, or if it results in damages or risk to a customer’s credit, the bank may be liable for any related damages. On the other hand, if a bank pays out a cheque that was not correctly endorsed, this would be a breach of the bank’s duty of care. Similarly, paying out a cheque in peculiar and/or unusual circumstances without contacting the customer and confirming instructions as needed may also constitute a breach of this duty. Banks can, and should, contact customers to clarify their instructions about a cheque if there is any doubt about its authenticity. However, a customer must also take steps to not draft cheques in a way that benefits forgers, such as leaving space for the amount to be altered. If the customer knows that a forged check will be/has already been deposited, they must let the bank know.

There are instances where a bank can, and must, refuse withdrawal from an account. If a bank receives multiple cheques at once and there are insufficient funds in the account to honour them all, the bank must refuse payment of all the cheques. When there are sufficient funds, the bank is not entitled to refuse payment of the cheque, even if it is aware that paying it out will result in difficulties for the customer to meet future liabilities due by the customer to the bank. In the following circumstances, the bank’s duty to honour a customer’s cheques and repay deposits can end entirely: (1) the bank closes an account on its own (unilaterally); (2) the bank gives reasonable notice that it will not be permitting overdrafts anymore; (3) the bank is justified in closing an account immediately in special circumstances, such as where there is fraudulent activity in the account.

A bank may, for its own internal purposes, combine multiple accounts from a customer at various branches and treat the ultimate balance as being available. However, this does not mean that the customer can access that full amount from any branch. This is because the branch is a separate entity from other branches and may not have that full amount available.

Collecting from Cheques and Bills

In addition to withdrawals, a bank must also collect the correct amount from cheques and other items on the customer’s behalf and deposit it in the correct account. Depending on the financial instrument received, the bank must follow the proper procedure in a reasonable amount of time, depending on the circumstances, and must provide notice to the customer if the money cannot be collected. If the customer sustains any losses due to the bank not following the appropriate procedures, the bank will be liable. A bank is allowed a reasonable amount of time to record the collected amount in the account before a customer can withdraw it, but a customer may be able to withdraw before receipt of payment if an agreement (express or implied) exists.

If a bank collects for a customer who is not the intended payee of a cheque and the collection was not made in good faith/without negligence, it could be sued (either in tort or in implied contract) for the collection. It is not expected that a banker must be abnormally suspicious but, where the transaction of paying the cheque and the surrounding circumstances were so out of the ordinary that it should raise doubt in the banker’s mind, the bank may be found negligent if it did not inquire further about the transaction. However, if the customer is also found to be negligent in the situation, the amount of damages that may be recovered from the bank may be reduced.

Providing Account Statements

Banks must provide customers with account statements, either on a regular basis or upon request. Account statements are understood to be the “true state” of the account, but they can be challenged by the bank or the customer. Normally, a customer does not have to examine the statements and report errors to the bank. If the bank did take money from the account due to a forged cheque, it would be liable for the amount deducted. However, the bank and customer may enter into a verification agreement, which means that the customer agrees to verify the correctness of the statements. Verification agreements provide some protection to the bank, since the customer must check an account and give prompt notice if they are to enforce any liability against the bank, but Canadian courts rarely interpret these agreements in a way that favours banks.

If a credit appears on a statement due to a bank error, a customer is entitled to rely on the statement as accurate as long as they are not being negligent. Where a bank does not honour a customer’s cheque due to this credit error, the customer is entitled to sue the bank for breach of contract as if the statements were accurate. However, if the bank fixes the error before the customer becomes aware, the customer is not entitled to the amount credited because they did not rely on it.

Maintaining Confidentiality

The relationship between a bank and a customer is confidential, meaning that a bank generally cannot share customer information, such as the balance of a customer’s account, with any third party. If a customer consents, the bank can answer general questions about their position and character to a third party who is considering doing business with the customer. In this case, the bank can only be held responsible for false or fraudulent answers if they are in writing and signed by the banker. In certain circumstances, the bank may disclose customer information without the customer’s consent, for the bank’s protection or where there is a danger to the public. This duty to the public includes disclosing information about misrepresentations by the customer, even if they do not amount to fraud. The bank may also be compelled to disclose information by law, however it is required to inform the customer of any subpoenas or legal compulsion. If the bank breaches the duty of confidentiality without proper consent or legal compulsion, the customer may take legal action against the bank for negligence.

If you are interested in learning more or discussing the Banks’ duty of care, you can contact Bianca Kratt at bkratt@parlee.com