B. General Background

AuthorM.H. Ogilvie
ProfessionLSM, B.A., LL.B., M.A., D.Phil., D.D., F.R.S.C. Of the Bars of Ontario and Nova Scotia Chancellor's Professor and Professor of Law, Carleton University
Pages255-257

Page 255

In addition to being characterized in law as a debtor and creditor relationship, 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 standard, it may be varied by express agreement. 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 circumstances 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 contract with the third party, as well as the account contract with the customer: (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;10and (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, that is, the bank has given a contractual 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

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(iii) settlement between accounts and banks through the clearing and settlement system.12

The first process (the payment message) requires the mandate or instruction from a customer to his bank to make a payment or receive a payment, either by giving a payment instruction, for example, by cheque, or by depositing a payment instruction received from another payer. Where a bank acts without the initiating instruction of its customer, the bank is in breach of contract and the customer may claim legal redress. That...

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