UNIVERSITY OF NAIROBI

SCHOOL OF LAW

GROUP 6

DAY CLASS

4.1 MODULE 1

COURSE : BANKING LAW

COURSE CODE : GPR 423

GROUP : 6

TOPICS ASSIGNED : Liens, Appropriation and Combinations

Termination of Banker-Customer Relationship

COURSE INSTRUCTORS : DR. NJARAMBA GICHUKI

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GROUP 6 MEMBERS

NO GROUP MEMBER REGISTRATION DIGITAL

NUMBER SIGNATURES
1 OTIENO BRANDON G34/3365/2017

2 CHEMONGES MICHELLE CHEBET G34/3353/2017

3 MUTUA CAROLINE WAHU G34/3251/2017
4 OOKO HEZBON G34/3360/2017
5 CHEROP FAITH CHEPTUM G34/33542017

6 OTIENO BRIAN ODIWUOR G34/33782017

7 ADENY STELLA ATIENO G34/3393/2017

2
 Table of Contents
List of Cases....................................................................................................................................4

Introduction................................................................................................................................5

LIENS, APPROPRIATIONS AND COMBINATIONS............................................................5

Liens............................................................................................................................................5

Appropriation............................................................................................................................8

Combinations and set off.........................................................................................................12

Limitation.................................................................................................................................14

Bank as Bailee..........................................................................................................................15

TERMINATION OF THE BANKER-CUSTOMER RELATIONSHIP................................17

Conclusion................................................................................................................................21

Bibliography.................................................................................................................................22

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List of Cases

Buckingham and Co. v London and Midland Bank Ltd (1895)

Coggs vs. Bernard (1703)

Deeley v Lloyd’s Bank (1912)

Devaynes v Noble (1816)

Joachimson case (1923)

Paul Wandamati Mbochi v National Bank of Kenya (2013)

Re Keever (1966)

Rosenberg vs International Banking Corporation (1923)

Southcott vs. Bennett (1601)

Truphena Atieno Osiemo v KCB

Wilson v Windland Bank Ltd (1961)

4
Introduction

Lien, appropriations and combinations are rights that can be exercised by the bank. They arise by
operation of law and function separately, although together they give the bank powerful rights. 1
This paper discussing the concepts above in detail. Additionally, it looks into the concepts of
limitation, bank as a Bailee and the instances in which the relationship between a bank and
customer can be terminated.

LIENS, APPROPRIATIONS AND COMBINATIONS.

Liens

Generally, the right to lien refers to a right to keep possession of property belonging to another
person until a debt owed by that person is fully discharged. 2 As a general rule of lien, the
ownership of the property will still vest in the owner and the possessor (creditor) cannot sell it. 3
The rights of the creditor are only extended till the time the borrower does discharges his debt.

In the context of banking, a banker’s lien can be defined as an enforceable right of a bank to hold
in its possession any money or property belonging to a customer and to apply it to the repayment
of any outstanding debt owed to the bank by the customer.4 The customer’s property in the above
case should only come into the hands of the bank in the ordinary course of banking business. 5
The lien only exists where the customer owes the bank money. 6 It is important to note that a
banker’s lien is an exceptional lien (more than a general lien) in that it gives the bank the right to
sell the defaulting borrower’s property after reasonable notice is given to the customer. 7 It is
therefore argued that the nature of a banker’s lien is that of an implied pledge.8
1
Gichuki Njaramba, Law of Financial Institutions in Kenya (2nd edn, Law Africa Publishing Ltd 2013) 128.
2
ibid.
3
Mattuba Nyerembe, ‘Bankers Right to Lien Customers Deposit, Its Legal Implication, Challenges and
Applicability’
<https://www.academia.edu/19762763/Bankers_right_to_lien_customers_deposit_its_legal_implication_challenges
_and_applicability> accessed 9 November 2020.
4
‘Banker’s Lien Law and Legal Definition’ (USLegal) <https://definitions.uslegal.com/b/bankers-
lien/#:~:text=Banker's%20lien%20is%20an%20enforceable,already%20burdened%20with%20other%20debts>
accessed 9 November 2020.
5
Antara Dasgupta, ‘Bankers Right to Lien and Set Off’ (Legal Services India, 2018)
<http://www.legalservicesindia.com/articles/lien.htm> accessed 10 November 2020.
6
Njaramba (n 1) 129.
7
‘Banker’s Lien Law and Legal Definition’ (n 4).
8
Rosenberg vs International Banking Corporation (1923)14 LI.LR 344 at 347.

5
The right of lien of banks may be upheld in two situations: (i) where an account is overdrawn
when a cheque is paid into the bank, the bank may be deemed to have a lien for the amount of
the cheque or the overdraft9 and (ii) where an account with insufficient or no funds is overdrawn
and a cheque is collected and then a cheque is returned unpaid, the bank is deemed to have a lien
for any part of the amount of the cheque which cannot be debited into the customer’s account.10

In Re Keever,11 the banker’s right of lien was upheld by the court. The customer in this case was
declared bankrupt on 30th November 1962. 15 days prior to that on 15 th November, a cheque of
3000 euros had been paid into her account. The trustee in bankruptcy stated that the bank should
not apply money in reduction of the customer’s overdraft of 350 euros. The court held that the
bank had a lien on the cheque since it had given value and was unaware of the impending
bankruptcy and that it was a holder in due cause until such a time when the cheque was
cleared .12
The enforcement of a banker’s lien, however, depends on the type of property and the reason
why such property was handed over to the bank.13 Some property may be subject to lien while
others may not.
Properties that may be subject to banker’s lien include:14
a) Stock and share certificates
b) Negotiable securities, that is, cheques, treasury bills and government bonds
c) Promissory notes15
d) Title deeds and documents
e) Shipping documents
f) Insurance policies
g) Orders to pay a particular person

Where the property held is a cheque, the bank will be regarded as a holder of value for the
amount over which it has a lien. In addition to that, in a case where the bank has given value to
9
Njaramba (n 1) 129.
10
ibid.
11
[1966] 3 All ER 631.
12
Njaramba (n 1) 129.
13
‘Banker’s Lien Law and Legal Definition’ (n 4).
14
Njaramba (n 1) 129.
15
‘Banker’s Lien Law and Legal Definition’ (n 4).

6
its own customer, it can be a holder in due cause and thus enabling it to sue all prior parties to the
cheque.16

There are certain instances where the bank cannot exercise its right to lien over a customer’s
property, that is, where the nature of the transaction is inconsistent with the lien. 17 For example,
in Paul Wandamati Mbochi v National Bank of Kenya,18 the court found the transaction
between the parties to be inconsistent with the lien. The bank was therefore ordered to release the
property held to the applicant. Properties which bank cannot exercise lien over include:
a) Property lodged for safekeeping.
b) Property deposited by way of pledge.
c) Property such as customer’s credit account balance.
d) Property charged by way of mortgage.
e) Property which is in the bank’s hands in its capacity as agent, for example shares or
stocks where the customer has asked the bank to arrange for the sale.
f) Property lodged by a customer which is known by a bank to be trust property.19

The banker’s lien is considered the least useful way of recovering a debt since it has several
problems. For its right to be retained, the bank must be in possession of the cheque such that
losing or giving it up destroys its right of lien, for example if a cheque is dishonored and
therefore returned to the customer.20 If a customer wishes to exercise their right of appropriation,
the bank automatically loses its lien.21 Further, the bank also has a duty to its customer to present
a cheque within a reasonable time and therefore a lien cannot be held for a very long time.22

16
Njaramba (n 1) 129.
17
Ibid 130.
18
[2013] eKLR.
19
Njaramba (n 1) 130.
20
ibid.
21
Ibid.
22
Ibid.

7
Appropriation

Appropriation is defined as the designation or the use of a fund for the purpose of securing
payment of a specific debt.23 In Banking law, the right of appropriation is the right a customer or
a bank has, to choose which debt to be paid off when a payment is made and it does not offset all
the existing debts.24

(1). Appropriation by customer

The right of appropriation is usually vested in the customer who is the debtor and he/she has the
first right to appropriate the payment of a debt of choice. This can be done either expressly or
implied from the contract.25 The circumstances under which the customer can appropriate
include;
a) Where the customer has a loan account and a credit account and wants to use the credit
account to pay off the loan account.26
b) Where credit is paid into an account and is specifically stated to be for the use of a
cheque that has been drawn.27
c) In a case where the customer has a sole account, appropriation is rarely done.28

(2). Appropriation by bank

In case the customer does not appropriate the money paid into the account and he/she was
provided with a genuine opportunity to do so then the Bank assumes the right of appropriation.
This is possible if the customer did not appropriate the money either in an express or implied
manner and the Bank gave the opportunity to do so. A bank has the right to appropriate all legal
debts owed to it regardless of the statute of limitation on the debts.29

Circumstances under which the Bank will appropriate include;

23
Black’s law dictionary 2nd edn
24
Njaramba Gichuki, Law of Financial Institutions in Kenya (2nd edn, Law Africa pub 2013) 130
25
Indian Contract Act 1872, s 59
26
Njaramba Gichuki, Law of Financial Institutions in Kenya (2nd edn, Law Africa pub 2013) 131
27
Ibid
28
Ibid
29
Indian Contract Act 1872, s 60

8
 a) Where the customer has two accounts with one being overdrawn and the other being a
credit account then the Bank will use the receipt of the customer to pay off the overdrawn
account.30
b) Where the customer has a lien account which is secured and a credit account that is
overdrawn and unsecured, the Bank might use the customer’s receipt on the overdrawn
account.31
c) Where a customer has a sole account and joint account both of which are overdrawn then
any payment made can be applied to either accounts.32

(3). Clayton’s Rule

There are two ways in which appropriation is done which is through a customer or a bank as we
have seen above. However, in a situation where the customer and the Bank have not appropriated
the money then, a third option is available. This is through the Clayton’s rule which in simple
terms is the first sum paid in caters for the first sum paid out. According to the Indian Contract
Act, where there has been no appropriation by either party, then the payment shall be applied in
discharge of the debts in the order of time.33

34
This rule is established from the English case of Devaynes v Noble where Mr. Clayton had
dealings with the banking firm of Devaynes, Dawes, Noble and co. One of the partners died and
Mr. Clayton was left on credit. After the death of the partner, Clayton continued dealing with the
firm and later on the firm became insolvent leaving Clayton to make a claim for the money owed
to him to the estate of the deceased. The court ruled that the estate of Devaynes was not liable to
Clayton as the payments made by surviving partners was regarded as completely discharging the
firm’s liability to Clayton at the time of the partner’s death. Therefore, the court held that the
payment into an account is the repayment of the earliest outstanding debt. Using this principle,
the payment to C by the firm after the death of the partner was repayment of debt owed as at the
partner’s death and the new debt accrued afterwards made the estate of the deceased not liable.

30
Njaramba Gichuki, Law of Financial Institutions in Kenya (2nd edn, Law Africa pub 2013) 131
31
Ibid
32
Ibid
33
Indian Contract Act 1872, s 61
34
(1816) 35 ER 781

9
This common law principle has been used in subsequent cases over the years helping to
determining the appropriation of debts in a case where the debtor and creditor did not
appropriate. In the case of Deeley v Lloyd’s Bank, 35 Mr. Glaze granted a mortgage to the bank to
secure overdraft of 2500pounds, a second charge was given to Mrs. Deeley to secure money she
had lent to him. Although there was a notice, the overdrawn current account was maintained in
the same way and the mortgaged property was possessed and sold by the Bank to offset the
overdrawn account. The case was ruled in favour of Mrs. Deeley after an appeal to the House of
Lords was made.

The Clayton’s rule can be stopped from coming into effect through the freezing of accounts,
ruling off or breaking of the account. In Lloyd’s case, the Bank did not apply either of these
which resulted in the court ruling that the Bank had lost its mortgage priority. 36 In the Kenyan
case of Truphena Atieno Osiemo v KCB,37 the plaintiff relied on the Clayton’s rule in making
her claim that her title deed was used as a charge for securing a loan by a borrower whose
payments had been made and extinguished under Clayton’s rule and yet the bank was threatening
to sell the property.

Clayton’s case works to appropriate in situations where the bank and customer have not
appropriated. It can however work to the benefit or detriment of the Bank.

Benefit of the Bank

a) In a case where the Bank operates a wages account and an overdrawn current account.
The wages account can be used to pay the credit account.38
b) Where a floating charge is executed when the company is insolvent.39

Detriment of the Bank

35
[1912] A.C. 757
36
Elizabeth Ovey, ‘Clayton’s Case: the 21st century impact of a 19th century bank failure’ (2018) <
https://www.lexisnexis.co.uk/blog/docs/default-source/loan-ranger-
documents/JIBFL_2018_Vol33_Issue3_Mar_pp158-161.pdf > Accessed on 9 November 2020
37
Limited [2008] eklr

38
Njaramba Gichuki, Law of Financial Institutions in Kenya (2nd edn, Law Africa pub 2013)134
39
Ibid

10
 a) In a joint account, where one of the account holders dies, becomes bankrupt or mentally
incapacitated then the account should be stopped by the bank so that liability is not
extinguished by the credits paid in.40
b) Where during guaranteeing there is a time limit on the guarantee document and the Bank
does not adhere to this timeline and stop the account41
c) Where the Bank receives notice that the guarantor has died, is bankrupt or mentally
incapacitated.
d) Where a second charge or mortgage is created with the Bank being the first mortgagee.42
e) Where the wages are paid with the company being in liquidation

When does the Clayton rule not apply?

Although appropriation can also be done following Clayton’s rule, there are certain
circumstances where the rule will not apply which include;43
1. Where principal’s money has been mixed with agent’s money in agent’s bank account.
Any withdrawal from the account would be presumed to belong to the agent.
2. Where the customer has two accounts with the bank then the rule will be applied to each
account separately.
3. Where the account in the bank has been frozen, broken or stopped.
4. Where Bank has the right to appropriate at the time of payment
5. Where the parties agree not to apply the rule and is applied as a clause in the document
signed with customer’s consent.

40
Welingkar, Chapter 17: Banker’s rights <http://elearning.nokomis.in/uploaddocuments/Banking
%20Fundamentals/Chp.17%20Bankers%20RIghts/Summary/chapter%2017.pdf > Accessed on 10 November 2020
41
Ibid
42
Ibid
43
Njaramba Gichuki, Law of Financial Institutions in Kenya (2nd edn, Law Africa pub 2013)134

11
Combinations and set off

Combination is the legal right which entitles a debtor to take into account the sum immediately
owing to him by a creditor. Set-off is defined as the legal right which entitles a debtor (bank) to
take into account the sum immediately owing to it by a creditor (customer).When determining
the net sum due to the creditor. Below criteria must be satisfied; the debts must be ascertained
sums due (already due) and by the same parties, right and name. For example If one debit
balance is in the joint names of Mr. and Mrs. Mau and the credit balance is held in Miss Mau’s
daughter name, then they are not in the same right, hence right to set off will not be available.44

Banks right to combine running accounts

Customers’ accounts can be combined by a bank other than loan accounts at any time unless
there is an express or implied agreement forbidding the same. A bank and its customer can agree
formally or informally to a combination. In the formal, a clause giving the bank the right to set
off all credit balances against all debit balances at any time without notice.45

Combination with loan accounts

If a customer has both a current and loan account, they can only be combined after giving
reasonable notice. Even when a customer has failed to make a loan reduction on the due date, the
loan account still cannot be combined with the current account without notice.46

Automatic set off and combination

The bank has automatic right of combination in the following instances;
1. On the death of a customer.
2. Mental incapacity of the customer
3. On the bankruptcy of a firm or individual
4. On winding up a limited liability company
5. On receipt of a garnishee order
6. On receiving notice of assignment of a customer’s credit balance
44
Njaramba Gichuki(2013)Law of Financial Institutions in Kenya(Second Edition)Law Africa Publishing
Ltd,Nairobi.
45
ibid
46
ibid

12
 7. On receiving of a second mortgage of a security charged to the bank.

Accounts that cannot be combined; each situation will have to be treated on its own merits;
Designated accounts, Joint ownership accounts, trust account and partnerships.47

Express right of combination

A bank and his customer can either formally or informally agree to allow the right of
combination and set off. It is usually by a way of agreement and includes clauses stating that this
will be a continuing security covering all the customers’ balances, a right for the bank to be able
to set off all credit balances against all debit balances at any time and without notice and a right
to be able to combine their customer account at any time and without notice.

47
G.P Tumwine Mukubwa(2009)Essays in African Banking Law and Practice, 2nd Edition, The Written Word
Publications, Kampala

13
Limitation

This refers to a time limit within which a legal action can be brought before a court of law. An
expiry of the set limit of years automatically bars the aggrieved party from commencing any
legal proceedings. For an ordinary contract, it is six years. For special contracts such as transfer
of land, the period is twelve years. For current accounts, the limitation is counted from the date
when a demand is made, unless:
a. The debtor writes to the creditor acknowledging the debt
b. When the debtor makes a part payment

The same principles apply for accounts in credit. Deposit account balance are subject to 7 years
of notice and its limitation period begin to run when a demand for the balance is made. For a
current account, the customer does not have a right of action against its bank for repayment of
sums until the customer makes a demand.48 That time for limitation periods does not run until
that demand is made. The demand for repayment must also be made at the branch where the
account is kept.49

On the other hand, for accounts in debit, the period starts to run when the customer defaults in
the payment of one installment or on demand.
In the case of Secured creditors, the period begins to run from the time when the bank could first
have sought recovery not when the interest falls due. Similarly, it begins when there is a default
or a demand. For life assurance policies or other contracts which produces a sum of money
payable at a future date, it begins at maturity. 50

48
Joachimson case [1923] 3 KB.
49
Chamila S. Talagala (25 February 2010). “The law relating to Bank-customer relationship: some salient Duties of
Banks.”
50
Njaramba Gichuki (2013) Law of Financial Institutions in Kenya (Second Edition) Law Africa Publishing Ltd,
Nairobi.

14
Bank as Bailee

Banks sometimes hold their customers property deposited to them for safe keeping. This is one
of the services banks offer to the customers pursuant to an agreement where the customer
entrusts their documents or valuables and the banks accepts to keep them safe and this can range
from jewelry, title deeds, certificates or any other kind of valuable possession . This brings out a
bailment arrangement where the bank is the Bailee and the customer is the bailor.

Bailment is a common law relationship that involves transferring goods or personal property
from one person to another for a specific purpose and this can be for the advantage of one or
both of the parties51. A Bailee can be taken to mean any person who accepts property from
another upon an understanding and further how they will handle the property in question 52. The
bank upon receiving the property issues a receipt to the customer which contains details on when
the customer may need to repossess the property or to who may the property be delivered to and
their signature. The bank as the bailee therefore has the duty to ensure that the chattels in its
possession are taken care of at all times of the bailment agreement or otherwise they will be
liable.

It is clear that the bank then faces a lot of risks while in possession of the customer’s property.
This may include theft from outsiders or theft by the banks employees, natural disasters that
can cause destruction to the room where the property is being held or even the carelessness of
the employees and this can lead to the loss of the customer’s property. The general laws on
bailment impose a liability on the bailee in such instances. In Southcott vs. Bennett53 it was
decided that when the bailee agrees to keep the property it means he agrees to keep it safely, and
in case the possession is lost the bailee is undeniably liable. This rule went unquestioned for
years until Lord Holt’s judgment in Coggs vs. Bernard54 where it was determined that the bailee
will then be liable in case of their negligence. If the bank therefore fails to put in extreme
measures to ensure that the property is not stolen then it will be liable. If the property is stolen by

51
Black’s law Dictionary,(2nd edn, 1910)
52
Beale H G.; Chitty, Joseph et al., chitty on contracts, Volume 2, London 2004.
53
(1601) QB, Pasch.43 Eliz.
54
(1703) 2 Ld Raym 909, 92 ER 107.

15
the employees, the bank will still be vicariously responsible for the employee’s theft, and this
may be because the bank gave special openings to the employees to access the property or they
didn’t undertake efficient background checks on these employees. The bank therefore has to
ensure it does everything possible to ensure the safety of the customer’s property.

When the customer needs to repossess the property from the bank, he or she then produces the
reciept to the bank for it to be cancelled, for the bailment agreement will have come to an end.
However if the customer seeks to remove only part of the property then an amendment is to be
made to the receipt and the customer’s signature added to the amended receipt. The bank would
also not allow any transfer without the receipt unless the customer presents a sworn statement
from an advocate and other proper identification. These steps are put in place to ensure the bank
is not defrauded the property in its possession.

The banks can sometimes commit the tort of conversion regarding the property in its possession.
Conversion refers to unlawfully interfering with the goods belonging to another by asserting
certain rights over the goods55. The bank will be committing conversion when it gives the
property to another party who is not the customer or someone not authorized by the customer or
when the bank refuses to give the goods to the customer. This is regardless of the fact that the
bank may have been misled or even if it had no intention to do so. This may seem extreme but as
Lord Holt stated in Coggs vs. Bennet56, these rules have been put in place to prevent any instance
where the Bailee, who in this case is the bank, can undertake to rob the bailor off their property
by use of third parties. The rules in place also safeguard the dealings in the bailment agreement
where the customer entrusted their possession with the bank with the faith they will be safe.

The bank has to take every reasonable step to ensure it doesn’t commit conversion because
sometimes the customer can give authority for a third party to take over the property held by the
bank. The bank should therefore require that the third party present documentations to ascertain
their identity and an acknowledgement of the customer’s authority given to the third party. The
bank would also require a copy of the receipt issued to the customer and a signature. In case the
bank allows the transfer to the third party and it is found out the signature presented to it was a
55
Rogers W V H, Winfield and Jolowicz on Tort, 15th edition, 1998 Pg. 588.
56
(1703) 2 Ld Raym 909, 92 ER 107

16
forgery then the bank takes liability for the tort of conversion. There are also instances where the
customer can allow third parties to access the property in the bank’s possession. This however
does not mean that the property is to be transferred and thus the bank should be there when the
third party accesses the property to ensure its security.

The bank therefore as a Bailee has an enormous responsibility when it comes to safeguarding the
customer’s property. It has to take all steps necessary in order to evade any liability that may be
incurred when anything happens to the property until the bailment agreement comes to an end.

TERMINATION OF THE BANKER-CUSTOMER RELATIONSHIP

The relationship that exists between a bank and a customer is usually based on a contract that has
certain terms and conditions57. In some instances, when any of the express provisions within such
a contract are violated by a customer, the bank is usually at liberty to terminate the relationship
by closing the account.58 This is however not usually the case in most situations. This is because
it is not possible to exhaustively list the duties that both the bank and customer owe each other in
the course of their relationship. There exists a variety of ways in which the relationship between
a banker and a customer can be terminated.59 These ways include:
(a). Termination by either the bank or the customer when either of the parties decide to close
the account
(b). Death of a customer
(c). Liquidation of a bank
(d).Order of the court
(e). Death of a joint account holder
(f). Mental incapacity of a customer
(g).Bankruptcy of a customer

57
Perry F, The Law and Practice Relating to Banking (5th Edition, Penguin, London 1987) pg. 46
58
Gichuki N, Law of Financial Institutions in Kenya (2nd edition, Nairobi, LawAfrica, 2013)pg. 141
59
Ibid

17
(a). Termination by either the bank or the customer when either of the parties decide to
close the account
A banker-customer relationship can be terminated in this way as a result of many practical
possibilities or challenges that arise in the daily lives of people. A good example is a situation
where a customer has moved from one geographical area to another such as from Kenya to the
United Kingdom. Another scenario in which either a bank or customer may opt for the closing of
an account is when the relationship between the two entities gets marred with a lot of difficulties
to the extent that there exists a lot of disagreements.

This kind of termination is very much allowed but there are some reservations that come with it.
If a customer decides at any given point to close his or her account with a bank then a written
express statement should be issued to the bank in that regard in order to prevent any scenario of
misunderstandings that concern outstanding cheques.60 In the case of Wilson v Windland Bank
Ltd61, the customer sued the bank for breach of contract and libel. The facts of the case are that
there were conflicting statements between the bank manager and the customer in regard to
whether they had a telephone call in which the customer expressed the wish to close his account.
The bank had taken the action of closing the account after the conversation. This created
confusion because a cheque that was later drawn by the customer was returned with the remarks
‘no account’. Court held that the bank was liable on both accounts (breach of contract and libel)
because it closed the account without establishing the customer’s true intention.

If a bank decides to close the account of a customer, it should also give a reasonable and
sufficient notice of the decision.62 In the case of Buckingham and Co. v London and Midland
Bank Ltd63, the bank had informed the customer that it would close its account because it was
anxious about the security. The bank also stated to the customer that it would no longer honor its
cheques or pay his bills of exchange. Two cheques and two bills were dishonored a day after
that. Court awarded the customer substantial damages for breach of contract because the bank
did not give a reasonable notice before closing the account.

60
Ibid
61
[1961]
62
Gichuki N, Law of Financial Institutions in Kenya (2nd edition, Nairobi, LawAfrica, 2013)pg. 142
63
[1895] 12 TLR 70

18
In a situation where the bank is dealing with an individual customer, especially one whose
account is intended for the credit of salary and withdrawal, a notice of up to one month must be
given to the customer before such an account is closed. 64 In circumstances where the account is a
business one (either belonging to a company, partnership or an individual), the bank must give
such customers notice of over one month. The purpose of such notices is to grant the customers
sufficient time to make alternative arrangements and inform business customers of their new
statuses. Furthermore, any cheque that is outstanding must be processed properly before a
customer’s account is closed. Failure by a bank to act according to these established rules when
terminating its relationship with a customer can lead to the customer suing for breach of contract
and for libel.
(b). Death of a customer
A bank has the mandate of terminating its relationship with a customer once it receives a notice
of the customer’s death.65 The termination is purely pegged on the receipt of the notice and not
the occurrence of the death. The rationale for closing the account stems from the fact that the
bank has no further mandate to act on behalf of the customer.

In any case where there are cheques that have been issued to some third parties, which have not
been paid, the bank should return the cheques to the third party while informing them that the
customer is deceased. Any cheques that are to be credited into the account of the deceased
customer should be processed the normal way but the money should be put in a suspense account
of the bank instead of the accounts of the deceased. The bank can only pay money from the
deceased’s account once there is confirmation of grant or if court orders from the court are issued
in regard to the same.

(c) Liquidation of a bank

When a bank is wound up, the banker-customer relationship comes to an automatic end. In the
case of Re Russian Commercial and Industrial Bank 66 , the court held that the relationship
between a customer and a bank would be terminated when once the legal personality of the bank

64
Gichuki N (n 2) pg 143
65
Ibid, pg 142
66
[1955] 1 CH 148

19
ceases to exist. Once this happens, any credit balance that the customer held is payable to him or
his estate.

(d) Order of the court

A bank may receive certain legal order that prescribe for the termination or the altering of the
banker-customer relationship in a very fundamental way. One example of such would be
garnishee orders.67

(e) Death of a joint account holder

When one of the joint account holders die, his relationship with the bank dies. This means that
the surviving account holder gets the authority over the proceeds and can access them at any
moment he or she wishes without any express permission from anyone. 68 The death of a joint
account holder therefore revokes any authority that is given by him jointly with others to the
bank.

(f) Mental Incapacity of a customer

The effect that mental incapacity has on a banker-customer relationship is that of termination.
The termination applies regardless of whether the customer has a sole or joint account. The bank
does not afterwards allow any withdrawals or credits from such an account until a guardian with
legal authority is appointed by the court to manage the affairs of the customer. It is essential to
note that a person is only considered incapacitated mentally or insane if he is incapable of
understanding the nature of his contract with the bank.

(g) The Bankruptcy of a customer

When a customer is declared bankrupt, his or her rights are usually lost and the affairs
transferred to a trustee.69 The customer relationship with the bank maybe therefore be terminated
because the bank would be operating the account only according to the instructions given by the
trustee.

67
Gichuki (n 2) pg. 144
68
Ibid
69
Ibid

20
Conclusion

This paper has delved deeply into some crucial issues within the realm of Banking Law. It has
examined the concept of banker’s lien and stated some of the challenges that comes with it. It has
also looked into the concepts of appropriation, combinations, set offs, the use of banks as Bailee,
limitations and how the relationship between banks and customers can be terminated.

21
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