Bank Account Operation

• Author: M.H. Ogilvie
• Profession: Professor of Law, Carleton University
• Pages: 253-314

253

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 relationsh ip prior to the use of express account

agreements in the late twentieth cent ury. Those four implied terms are:

(i) the implied duty of the bank to honour cheques and repay 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 render statements of

account periodically or on demand to inform the customer of the his-

torical performance 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 discussion of

the legal rules relating to account operation that will be examined in

this chapter.

These rules and the legal st andards of care governing account oper-

ation were originally formulated when customer instructions to a bank

1See Section C, b elow in this chapter.

2See Section D, below in t his chapter.

3See Section E, be low in this chapter.

4See Section F, below in thi s chapter.

BANK AND C USTOMER LAW IN CA NADA254

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

Today such instructions are more likely to be g iven electronically. 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; and in 2005, 22.5

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; and in 2005, 68.2 percent of

value was transmitted by paper. Cheques continue to be used for larger

transactions and transactions at a distance, so the transition in relation

to the amount of value f‌lowing through the clea ring system is slower in

relation to 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 that a customer may use

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

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

notwithstanding the method of communication employed. There are, of

course, specif‌ic legal r ules that are applicable to specif‌ic methods of com-

munication , but the fundament al principles of th e 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

person at their branches. The legal principles discussed in the suc-

ceeding chapters relate to electronic banking, yet they were formulated

in relation to and built upon the principles discussed here. To date,

there is very litt le case law on electronic bank ing and no legislation, so

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

transactions when dealing with the very few disputes to date regarding

electronic banking that have come before them.

5Canadi an Payments Associ ation, Annual Review 2005 (Ottawa: Canad ian Pay-

ments Asso ciation, 2005) at 23. These statist ics are for the Automated Clear-

ing Settlement Syste m (ACSS). The Large Value Transfer System began in 1999

and is restr icted to electronic tran sactions, so historic al statistics for LVTS are

neither avail able nor relevant.

Bank Account Op eration255

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 l aw standard, it may be varied by ex press 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 c ircumstances 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 The circumstances in

which a bank may become liable to the payee may be various, but the

legal requirement in each is the same, t hat is, the bank has given a con-

tractual undertaking to the payee.

Whether a customer issues instructions electronically or by some

other means, the basic elements of payment are similar, that is, three

processes must be engaged to secure the transmission of funds into

the customer’s account or from the customer’s account to a third party

payee: (i) the payment message; (ii) the movements in accounts; and

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

Quincecare Ltd., [1992] 4 All E.R. 363 (Q.B.D.).

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

8 See Section C(3), below in this chapte r.

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

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

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

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

H.C.J.) [Ciurluini]. See also Dumas 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.).