Bank Account Operation

• Author: M.H. Ogilvie
• Profession: Chancellor's Professor and Professor of Law, Carleton University
• Pages: 267-338

267

CHAPTER 8

BANK ACCOUNT

OPER ATION

A. INTRODUCTION

The account governed by contract is the central depository in relation

to which the bank and customer agreement operates. Historically, the

common law recognized this in the implied terms of that agreement,

which def‌ined their legal relationship prior to the use of express ac-

count agreements in the late twentieth century. Those four implied

terms are: (i) the implied duty of the bank to honour cheques and re-

pay deposits;1 (ii) the implied duty of the bank to collect cheques and

other payment instruments;2 (iii) the implied duty of the bank to ren-

der statements of account periodically or on demand to inform the cus-

tomer of the historical perform ance of the f‌irst two duties;3 and (iv) the

implied duty of secrecy in relation to the customer’s affairs which the

bank came to know as a result of transactions in the account.4 These

four terms continue to be appropriate organizing principles for the dis-

cussion of the legal rules relating to account operation that will be

examined in this chapter.

These rules and the legal standards of care governing account oper-

ation were originally formulated when customer in structions to a bank

1 See Section C, b elow in this chapter.

2 See Section D, below in t his chapter.

3 See Section E, below i n this chapter.

4 See Section F, below in thi s chapter.

BANK AND C USTOMER LAW IN CA NADA268

were given orally, often in person, or in writing and usually by cheque.

Today such instructions are more likely to be given elect ronically. Some

comparative statistics published by the Canadian Payments Associa-

tion (CPA) demonstrate the transition from paper to electronic trans-

actions.5 Measured by volume, in 1985, 97.6 percent of transactions

were by paper; in 1995, 61.8 percent were by paper; in 2005, 22.5 per-

cent were by paper; and in 2011, 14.1 percent were by paper. Measured

by value, the transition is also evident but not so dramatic: in 1985,

99.6 percent of value was transmitted by paper; in 1995, 98.3 percent

was by paper; in 2005, 68.2 percent of value was by paper; and in 2011,

22.3 percent of value was transm itted by paper. Cheques continue to be

used for larger transactions, transactions at a distance and in person-

to-person payments, so t he transition in relation to the amount of value

f‌lowing through the clearing system is slower than the transition in

relation to paper payment instructions.

Despite the signif‌icant movement to electronic banking in the past

twenty years, the legal rules developed in the era of paper banking re-

main fundamental to the legal relationship between bank and customer.

Whether given electronically, orally, or by paper, a customer’s instruc-

tions require the bank to execute them on the customer’s behalf; these

are simply different communication methods t hat a customer may use to

convey instructions about account operation to a bank. The legal stan-

dards of care relating to bank and customer remain the same in law

notwithstanding the method of communication employed. There are, of

course, specif‌ic legal rules t hat are applicable to specif‌ic methods of com-

munication, but the fundamental pr inciples of the common law continue

to undergird the legal relationship between bank and customer.

The legal principles discussed in this chapter relate to paper-based

banking and remain relevant for all such transactions; cheques con-

tinue to be used in vast numbers today and customers still bank in per-

son at their branches. The legal principles discussed in the succeeding

chapters relate to electronic banking, yet they were formulated in rela-

tion to and built upon the principles discussed here. To date, there is

very little caselaw on electronic banking and even less legislation, so

the courts must begin with the historic common law relating to paper

transactions when dealing with the very few di sputes to date regarding

electronic banking that have come before them.

5 Canadian Pay ments Association, An nual Review 2011 (Ottawa: Canadian Pay-

ments Asso ciation, 2012) at 23. These statistics are for the Autom ated Clearing

Settlement System (ACSS). The Large Value Transfer System (LVTS) began i n

1999 and is restr icted to electronic tran sactions, so historica l statistics for LVTS

are neither avai lable nor relevant.

Bank Account Ope ration269

B. GENERAL BACKGROUND

In addition to being characterized in law as a debtor and creditor rela-

tionship, in account operation, the bank and customer relationship is

also characterized as one of principal and agent. The bank as agent is

obliged by contract to carry out the instructions to pay money into and

out of the account of the customer as principal. The standard of care

required by the bank in performing the mandate is reasonable care.6

Since this is a common law sta ndard, it may be varied by express agree-

ment. The duty to execute the customer’s instructions is owed only to

the customer as the other party to the account contract; it is not owed

to the payee in the absence of other circum stances because the payee is

a third party to the contract.7

Those circumstances, as found by the courts, include the following

situations, in which the courts have found an express or implied con-

tract with the third party, as well as the account contract with the cus-

tomer: (i) acceptance of a cheque for certif‌ication because the funds to

pay have been removed from the customer’s account on certif‌ication;8

(ii) a promise by the bank to the payee that the cheque will be paid

once certain conditions are met;9 (iii) where an unendorsed cheque is

deposited and cleared;10 and (iv) where a branch approves payment of a

cheque drawn on it in a telephone conversation with another branch at

which the cheque is presented for payment.11 As noted earl ier,12 there is

a difference of opinion among courts as to whether or not a duty may

be owed to a third party at the time of opening an account where the

third party claims an interest in the funds deposited.13 The circum-

stances in which a bank may become liable to the payee may be vari-

6Joachimson v. Swiss Bank Corp., [1921] 3 K.B. 110 (C.A.); Selangor United Rubber

Estates Ltd. v. Cradock (No. 3), [1968] 2 All E.R. 1073 (Ch. D.); Barclays Bank plc

v. Quincecare Ltd., [1992] 4 All E.R. 363 (Q.B.D.); Good Mechanical, A Division

of 524556 Ontario Inc. v. Canadian Imperial Ba nk of Commerce (2005), 49 C.L.R.

(3d) 183 (Ont. S.C.J.).

7Schimnowski v. Schimnowski, [1996] 6 W.W.R. 194 (Man. C.A.).

8 See Section C(3), below in this c hapter.

9Simpson v. Dolan (1908), 16 O.L.R. 459 (Div. Ct.); Adams v. Craig (1911), 24

O.L.R. 490 (C.A.).

10Slovchenko v. Toronto-Dominion Bank, [1964] 1 O.R. 410 (H.C.J.).

11William Ciurluini Ltd. v. Royal Bank of Canad a (1972), 26 D.L.R. (3d) 552 (Ont.

H.C .J.) [Ciurluini]. See also Duma s v. Boivin (1936), 75 Que. S.C. 1; Steinbach

Credit Union Ltd. v. Seitz (1988), 50 D.L.R. (4th) 436 (Man. C.A.); Edmonton Mo-

tors Ltd. v. Edmonton Savings & Credit Union Ltd. (1988), 85 A.R. 29 (Q.B.).

12Chapter 6, Section I.

13 See Chapter 6, note 210 for the case s.