Bank and Customer Relationships

• Author: M.H. Ogilvie
• Profession: Professor of Law, Carleton University
• Pages: 175-225

175

CHAPTER 6

BANK AND CUSTOMER

RELATIONSHIPS

A. INTRODUCTION

The legal relationship of bank and customer comes into being when a

customer opens a bank account, that is, enters a legally binding con-

tract with a bank. The account agreement is typically only the starting

point, however, for a long-term relationship during which the bank

will provide various services for the customer either encompassed by

the account agreement or subject to additional contracts for those spe-

cif‌ic services, such as loans, safety deposit boxes, mortgages, foreign

exchange transactions, or credit cards. Thus, there are really many re-

lationships in law between a single customer and a bank regulated by

the many contracts into which they might enter during the duration of

their dealings w ith one another. In addition, and in common with other

relationships base d on contract, tortious and f‌iduciary obligation s might

also be implied into the relationship from time to time, such as when

a bank is performing any contractual service for the customer, giving

advice to the customer, or giving a reference to a third party in relation

to the customer. The bank and customer relationship is multif aceted in

law and in practice.

Until the late twentieth century, the contract opening a bank ac-

count was found as much in the common law as on paper. Historically,

account agreements were simple and understood against the common

law background of numerous implied terms. However, the account

BANK AND C USTOMER L AW IN CA NADA176

agreement is now a relatively sophisticated and lengthy standard form

contract, in contrast to the earlier contracts consisting of eight or nine

short terms replicated on the “signature c ard” or even on a chequebook

cover. The terms of the contract today are drawn from three sources:

the express terms contained in the agreement executed by bank and

customer, the terms implied by the common law, and the terms i mplied

by operation of the Bank Act, which incre asingly over the past two dec-

ades has made provi sion for the regulation of the contr act in relation to

certain matters of a political origin.

This chapter and the next two chapters (Chapters 7 and 8) will

focus on the account agreement and its operation, and subsequent

chapters will address some of the other contractually based services

provided to customers by banks but regulated by their own contracts,

separate from the account agreement.1

B. THE “CUSTOMER”

Any person, including a corporate person in law, has the potential to

be a “customer”2 of a bank, and the absence of legal capacity to enter

into contracts generally is not a bar to enter ing into an account contract

with a bank. Section 437(1) of the Bank Act provides that a bank may

without the intervention of any other person accept a deposit from any

person whether or not qualif‌ied by law to enter into contracts. This

provision is widely regarded as relating primarily to children below

the age of legal majority, but the banking practice of requiring a parent

to be a joint account holder with a child is contemplated within the

permissive use of the word “may” in the section. In fact, it remains the

case that banks are free in law to decide whether or not to enter into

an account agreement with anyone so applying; to determine whether

or not they will provide a particular service to anyone with whom they

have an account agreement; and to provide a service only on the pay-

ment of some remuneration for that service.

The fundament al principle of the common law that parties are free

to decide with whom they enter into contracts remains in the banking

context, notwithst anding the 2001 amendments to the Bank Act requir-

ing banks to open retail accounts for certain prescribed persons, since

1See Chapters 9, 10, & 11.

2The word “customer” continue s to be used in legal literat ure, although increas-

ingly banker s refer to “clients.” For legal purposes, t here appears to be no

distinct ion between the two words, and I w ill continue to use “customer” here.

Bank and Customer Re lationships177

the regulations continue to per mit banks to exercise their discretion in

this regard. The Bank Act states that a bank shall open a retail deposit

account for certain individuals3 and shall not require either an initial

minimum deposit or the maintenance of a minimum balance.4 In addi-

tion, low fee retail deposit accounts are authorized for such persons.5

These amendments were intended to ensure that low-income individ-

uals would have access to banking services in Canada.

Although any person, regardless of age or f‌inancial value, may be

permitted to enter into an account agreement with a bank, banks are

also now required to know their customers for certain statutory pur-

poses, in particular, pursuant to the Proceeds of Crime (Money Launder-

ing) and Terrorist Financing Act.6 The guidelines for implementing the

provision s of this legislat ion place a duty on all f‌in ancial institut ions to

ensure that they get and maintain accurate information records about

their customers and, when required, to disclose such information to

various state authorities on request.7

At common law, the def‌inition of who may be a customer of a bank

has also arisen in relation to other issues, in addition to legal and f‌inan-

cial capacity to enter into a contract and identif‌ication for the purpose of

detecting criminal activities. Any person with whom a bank has entered

into an account agreement is clearly a “customer,” and the contractual re-

lationship comes into existence when the contract is executed, although

there are as yet no transactions in the account.8 An overdraft in the ac-

count is immaterial to the existence of the legal relationship.9

However, the def‌inition of a customer at common law has been

expanded beyond any person who has entered an account agreement

to include other persons for whom a bank has provided some service,

thereby entailing possible legal liability in relation to that service. In

Woods v. Martins Bank,10 the bank was found liable for breach of a duty

3 Bank Act, S.C. 1991, c. 46, s. 448.1(1).

4 Ibid., ss. 448.1(2) & (3) and Access to Basic Ba nking Service s Regulations, SOR/

2003-184 for the detail s of what is required to open an acc ount and the grounds

on which a bank ma y refuse to do so.

5 Ibid., s. 448.2 .

6 S.C. 2000, c. 17 as am.

7 See generally A lison Manzer, A Guide to Canad ian Money Launder ing Legislation

(Markham: LexisNexis Canada, 2005).

8 Lacave & Co. v. Credit Lyonnais, [1897] 1 Q.B. 148; Ladbroke & Co. v. Todd (1914),

19 Com. Cas. 256; Great Western Railway v. Lond on & County Banking Co.,

[1901] A.C. 414 (H.L.).

9 Clarke v. London & County Banking Co., [1897] 1 Q.B. 552.

10[1959] 1 Q.B. 55 (Leeds As sizes) [Woods].