Bank and Customer Relationships

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

175

CHAPTER 6

BANK AND CUSTOMER

REL ATIONSHIPS

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 ban k. The account agreement is typically only the starti ng

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

will provide var ious 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 trans actions, or credit cards. Thus, there are re ally 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 ser vice for the customer, giving

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

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

law and in practice.

Until the late twentieth centur y, 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 t he 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 f rom three sources:

the express ter ms 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 add ress some of the other contractually based ser vices

provided to customers by ban ks but regulated by thei r own contracts,

separate from the account agreement.1

B. THE “CUSTOMER”

Any person, including a corporate per son 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. Sect ion 437(1) of the Bank Act provides that a bank m ay

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 a s relating prim arily to children below

the age of legal majority, but the banking practice of requir ing a parent

to be a joint account holder with a child is contemplated withi n the

permissive use of the word “may” in the section. In fact, it remai ns 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 pa rticular service to anyone with whom they

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

ment of some remuneration for that service.

The fundament al principle of the common l aw that pa rties a re free

to decide with whom they enter into contracts rema ins in the banking

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

ing banks to open reta il accounts for certain prescribed persons, since

1 See Chapters 9, 10, & 11.

2 The 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 lationships 177

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

this regard. The Bank Act states t hat a bank shall open a ret ail deposit

account for certain individual s3 and shall not require either an initial

minimum deposit or the mai ntenance 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 ban king serv ices in Canada.

Although any person, regardless of age or f‌ina ncial value, may be

permitted to enter into an account agreement with a ba nk, 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 ma intain accurate in formation records about

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

various state authorities on reque st.7

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

has also ar isen in relation to other is sues, in addition to legal and f‌ina n-

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 tran sactions in the account.8 An overdraft in the ac-

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

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

expanded beyond any person who ha s entered an account agreement

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

thereby entailing possible legal liability in relation to that serv ice. 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].