Where a banker incurs loss through forgery or fraud in circumstances Fraud. not covered by statutory protection, his right to relief, if any, must depend on general principles. He cannot charge his customer with payments made on a forgery of that customer's signature, on the ground either that he is presumed to know such signature or that the payment is unauthorized. But if the customer has accredited the forgery, or, having knowledge or reasonable ground for belief that it has been committed, has failed to warn the banker, who has thereby suffered loss or prejudice, the customer will be held estopped from disputing the banker's right to debit him with the amount (Vagliano v. Bank of England [1891], A.C. 107; McKenzie v. British Linen Co. 6 A.C. 82; Ewing v. Dominion Bank [1904], A.C. 806). The doctrine of the fictitious person as payee may also exonerate a banker who has paid an order bill to a wrongful possessor. Payment on a forgery to an innocent holder is payment under mistake of fact; but the ordinary right of the payor to recover money so paid is subordinated to the necessity of safeguarding the characteristics of negotiability. Views differ as to whether the recovery is precluded only where the opportunity of giving notice of dishonour is lost or prejudiced by delay in reclaiming payment, or whether mere possibility of damage is sufficient (cf. London & River Plate Bank v. Bank of Liverpool [1896], 1 Q.B. 7, and Imperial Bank of Canada v. Bank of Hamilton [1903], A.C. 49).
Cases have frequently arisen where the carelessness of a customer in filling up cheques has enabled a person to fraudulently increase the sum for which such cheques were originally drawn. In Colonial Bank of Australasia v. Marshall [1906], A.C. 559, the judicial committee of the privy council held that the affording such facilities for forgery was no breach of the customer's duty to his banker, and that the latter was not entitled to debit the customer with more than the original amount. As before stated, the customer's dealings with the pass-book cannot, in the present state of the authorities, be relied on as debarring him from disputing unauthorized payments appearing therein.
The payment of bills accepted payable at the bank is not, Custody of valuables. like the payment of cheques, an essential obligation of the banker, and the risk involved is enhanced by the fact that the banker must pay or refuse payment at once, no interval being allowed for verification of endorsements. The abolition or modification of the practice has frequently been advocated, but it is one of the facilities which competition compels bankers to extend to their customers. On the same basis stands the receipt of a customer's valuables for safe custody. The question of the banker's responsibility for the loss of goods so deposited with him was raised, but not decided, in an action brought by Mrs Langtry against the Union Bank of London in 1896. Certain jewels belonging to her had been delivered up by the bank to an unauthorized person on a forged order. The case was settled; but bankers being desirous to ascertain their real position, many legal opinions were taken on the point, and after consideration of these, the Central Association of Bankers issued a memorandum, in which they stated that the best legal opinion appeared to be that a distinction must be drawn between cases in which valuables were by mistake delivered to the wrong person and cases in which they were destroyed, lost, stolen or fraudulently abstracted, whether by an officer of the bank or some other person. That in the former case the question of negligence did not arise, the case being one of wrongful conversion of the goods by a voluntary act for which the bank was liable apart from any question of negligence. That, in the second case, that of loss or theft, the banker, being a gratuitous bailee, would only be liable if he had failed to use such care as an ordinary prudent man would take of valuables of his own. The latter rule is practically that laid down in Giblin v. MacMullen, L.R. 2 P.C. 318, but in estimating the amount of care to be taken by the banker, the nature of the goods, if known or suspected, and the exceptional means of protection at the disposition of bankers, such as strong-rooms, must be taken into consideration. Methods of obviating both classes of risk by means of special receipts have frequently been suggested, but such receipts do not appear to have come into general use.
Theoretically, bankers are supposed to refuse accounts which Trustees. are either expressedly or are known to be trust accounts. In practice, however, it is by no means uncommon to find accounts opened with a definite heading indicating the fiduciary capacity. In other cases, circumstances exist which affect the banker with notice of that capacity. In either case, however, the obligation to honour the customer's cheque is the predominant factor, and the banker is not bound or entitled to question the propriety or object of the cheque, unless he has very clear evidence of impending fraud (Gray v. Johnston, L.R. 3 H. of L. 1). Even though the banker have derived some personal benefit from the transaction, it cannot be impeached unless the banker's conduct amount in law to his being party or privy to the fraud, as where he has stipulated or pressed for the settlement or reduction of an ascertained overdraft on private account, which has been effected by cheque on the trust account (Coleman v. Bucks & Oxon Union Bank [1897], 2 Ch. 243). A banker is entitled, in dealing with trust moneys, known to be such, to insist on the authority of the whole body of trustees, direct and not deputed, and this is probably the safest course to adopt. Scarcely larger responsibility devolves on Joint Stock Banks appointed custodian trustees under the Public Trustee Act 1906,
a remunerative position involving custody of trust funds and securities, and making and receiving payments on behalf of the estate, while leaving the active direction thereof in the hands of the managing trustees.
Other incidents of the ordinary practice of banking are the Bill-discounting. discounting of bills, the keeping of deposit accounts, properly so called, and the making of advances to customers, counting either by way of definite loan or arranged overdraft. So far as the discounting of bills is concerned, there is little to differentiate the position of the banker from that of any ordinary bill-discounter. It has been contended, however, that the peculiar attribute of the banker's lien entitled him to hold funds of the customer against his liability on current discounted bills. This contention was ultimately disposed of by Bowen v. Foreign & Colonial Gas Company, 22 W.R. 740, where it was pointed out that the essential object of a customer's discounting bills with his banker was to feed the current account, and that a possible liability constituted no set-off against an existing debt. Whether a particular bill has been taken for discount or collection is a question of fact. As in the payment of bills, so in the collection of them, there is no statutory protection whatever for the banker; as against third parties he can only rely either on the customer's title or his own as a holder for value, if no forged endorsement intervene and he can establish a consideration.
A deposit account, whether at call or on fixed notice, does not Deposit accounts. constitute any fiduciary relation between the depositor and the banker, but merely a debt due from the latter to the former. It has been suggested that cheques can be drawn against deposit account on call, and, though a banker might safely honour such a cheque, relying, if necessary, on his right of lien or set-off, there appears no legal right in the customer to enforce such payment. Deposit receipts given by bankers are exempt from stamp duty, even though they contain an undertaking with respect to payment of principal and interest. They are clearly not negotiable instruments, but it is difficult to deduce from the cases how far dealings with them may amount to an equitable assignment of the moneys they represent. Probably deliberate definite transfer, coupled with endorsement, would confer an effective title to such moneys. Where, as is not uncommon, the form of deposit note includes a cheque, the banker could not refuse to pay were the cheque presented and any superadded formalities complied with.
There is no obligation on a banker to permit his customer Overdrafts and advances. to overdraw, apart from agreement express or implied from course of business. Drawing a cheque or accepting a bill payable at the banker's which there are not funds meet is an implied request for an overdraft, which the banker may or may not comply with. Interest is clearly chargeable on overdrafts whether stipulated for or not. There is no direct authority establishing this right in the banker, and interest is not usually recoverable on mere debts, but the charge is justifiable on the ground of the universal custom of bankers, if not otherwise. The charging of compound interest or interest with periodical rests has been supported where such system of keeping the accounts has been brought to the notice of the customer by means of the pass-book, and not objected to by him, but in the present attitude of the courts towards the pass-book some further recognition would seem necessary. Such system of charging interest, even when fully recognized, only prevails so long as the relation of banker and customer, on which it is founded, continues in force; the taking a mortgage for the existing debt would put an end to it.
The main point in which advances made by bankers differ Lien. from those made by other people is the exceptional right possessed by bankers of securing repayment by means of the banker's lien. The banker's lien is part of the law merchant and entitles him, in the absence of agreement express or implied to the contrary, to retain and apply, in discharge of the customer's liability to him, any securities of the customer coming into his possession in his capacity as banker. It includes bills and cheques paid in for collection (Currie v. Misa, 1 A.C. 564). Either by virtue of it, or his right of set-off, the banker can retain moneys paid in by or received for the credit of the customer, against the customer's debt to him. Goods deposited for safe custody or moneys paid in to meet particular bills are exempt from the lien, the purpose for which they come to the banker's hands being inconsistent with the assertion of the lien. The existence of the banker's lien entitles him to sue all parties to bills or cheques by virtue of sec. 27, subs. 3 of the Bills of Exchange Act, and to the extent of his advances his title is independent of that of the previous holder. Moreover, the banker's lien, though so termed, is really in effect an implied pledge, and confers the rights of realization on default pertaining to that class of bailment. But with regard to the exercise of his lien, as in many other phases of his relation to his customer, the banker's strict rights may be curtailed or circumscribed by limitations arising out of course of business. The principle, based either on general equity or estoppel and independent of definite agreement or consideration, requires that when dealings between banker and customer have for a reasonable space of time proceeded on a recognized footing, the banker shall not suddenly break away from such established order of things and assert his strict legal rights to the detriment of the customer. By the operation of this rule, the banker may be precluded from asserting his lien in particular cases, as for instance for an overdraft on one account against another which had habitually been kept and operated on separately. It equally prevents the dishonouring of cheques in circumstances in which they have hitherto been paid independent of the actual available balance.
Restrictions arising from course of business can of course be put an end to by the banker, but only on reasonable notice to the customer and by providing for outstanding liabilities undertaken by the latter in reliance on the continuance of the pre-existing state of affairs (see Buckingham v. London & Midland Bank, 12 Times L.R. 70). As against this, the banker can, in some cases, fortify his position by appeal to the custom of bankers. The validity of such custom, provided it be general and reasonable, has frequently been recognized by the courts. Any person entering on business relations with a banker must be taken to contemplate the existence of such custom and implicitly agree that business shall be conducted in accordance therewith. Practical difficulty has been suggested with regard to proof of any such custom not already recognized in law, as to how far it can be established by the evidence of one party, the bankers, unsupported by that of members of the outside public, in most cases impossible to obtain. It is conceived, however, that on the analogy of local custom and the Stock Exchange rules, such outside evidence could be dispensed with, and this is the line apparently indicated with relation to the pass-book by the court of appeal in Vagliano's case (23 Q.B.D. at p. 245). The unquestionable right of the banker to summarily debit his customer's account with a returned cheque, even when unindorsed by the customer and taken by the banker in circumstances constituting him a transferee of the instrument, is probably referable to a custom of this nature. So is the common practice of bankers to refuse payment of a so-called "stale" cheque, that is, one presented an unreasonable time after its ostensible date; although the fact that some banks treat a cheque as stale after six months, others not till after twelve, might be held to militate against the validity of such custom, and lapse of time is not included by the Bills of Exchange Act among the matters working revocation of the banker's duty, and authority to pay his customer's cheque. Indirectly, this particular custom obtains some support from sec. 74 (2) of the Bills of Exchange Act, although the object of that section is different.