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Malaysian Banking Law — Agent and Principal Relationship Between Banker and Customer
Introduction
Besides the debtor–creditor relationship, another important legal relationship in banking law is:
the relationship of agent and principal.
This relationship arises when:
✔ the customer authorises the bank to perform acts on the customer’s behalf.
In such situations:
✔ the customer’s instructions or mandate.
Meaning of Agency Relationship
An agency relationship exists where:
one person (the agent) is authorised to act on behalf of another person (the principal).
The acts of the agent:
✔ legally affect the principal.
In banking law, banks frequently act as agents for customers in carrying out banking instructions and transactions.
When Does a Bank Act as Agent?
A bank acts as agent when:
Customer’s Mandate
The authority given by the customer is called:
a mandate.
The bank must:
✔ follow the customer’s mandate carefully and accurately.
If the bank:
✔ breach of contract;
✔ negligence;
✔ breach of duty of care.
Examples of Agency in Banking
1. Collection of Cheques
When a customer deposits a cheque:
✔ the bank acts as agent to collect payment from another bank.
The bank receives payment:
✔ on behalf of the customer.
2. Fund Transfers
When the customer instructs:
“Transfer RM50,000 to Company A,”
the bank acts:
✔ as agent carrying out the transfer.
3. Standing Instructions
Where customers instruct banks to:
✔ as agent.
4. Trade Transactions
Banks may also act as agents in:
Important Case
Westminster Bank Ltd v Hilton
Principle
Lord Atkinson recognised that:
regarding the drawing and payment of cheques, the relationship between banker and customer is one of principal and agent.
This means:
✔ the bank acts according to the customer’s authority when honouring cheques.
How Agency Differs From Debtor–Creditor Relationship
The banker–customer relationship may involve:
Debtor–Creditor Relationship
When money is deposited:
✔ bank = debtor;
✔ customer = creditor.
This principle comes from:
Foley v Hill
Agency Relationship
When the bank performs instructions:
✔ bank = agent;
✔ customer = principal.
Thus:
Example
Ali deposits RM100,000 into his account.
At this stage:
✔ bank is debtor;
✔ Ali is creditor.
Later Ali instructs the bank:
“Transfer RM20,000 to my supplier.”
Now:
✔ bank acts as Ali’s agent.
Duty of the Bank as Agent
When acting as agent, the bank must:
Case Law on Duty of Care
Redmond v Allied Irish Banks Plc
The court stated:
banks owe a duty to exercise reasonable care and skill in carrying out customer instructions.
Practical Importance
The agency relationship is important because:
✔ banks perform transactions daily on behalf of customers.
Without agency principles:
Case Scenario
Farah instructs her bank:
“Transfer RM80,000 to ABC Trading Sdn Bhd.”
The bank mistakenly transfers the money to another company.
Legal Position
The bank may be liable because:
✔ it breached its duty as agent;
✔ it failed to carry out the customer’s mandate correctly.
This may amount to:
Another Scenario
A customer deposits a crossed cheque for collection.
The bank forwards the cheque to another bank for payment.
Here:
✔ the collecting bank acts as agent for the customer.
Critical Analysis
Modern banking increasingly depends on agency principles because banks now conduct:
Courts therefore impose:
✔ duties of reasonable care and skill on banks when acting as agents.
Relationship With Fiduciary Duties
Agency relationships:
✔ may involve fiduciary duties in some situations.
However:
✔ ordinary banking agency relationships are usually contractual rather than fiduciary.
The bank generally:
Final Examination Rule
The banker–customer relationship may operate as an agent–principal relationship when the bank performs transactions or carries out instructions on behalf of the customer. In such situations, the customer is the principal and the bank acts as agent. The bank must follow the customer’s mandate carefully and exercise reasonable care and skill when carrying out banking instructions.
Introduction
Besides the debtor–creditor relationship, another important legal relationship in banking law is:
the relationship of agent and principal.
This relationship arises when:
✔ the customer authorises the bank to perform acts on the customer’s behalf.
In such situations:
- the customer = principal;
- the bank = agent.
✔ the customer’s instructions or mandate.
Meaning of Agency Relationship
An agency relationship exists where:
one person (the agent) is authorised to act on behalf of another person (the principal).
The acts of the agent:
✔ legally affect the principal.
In banking law, banks frequently act as agents for customers in carrying out banking instructions and transactions.
When Does a Bank Act as Agent?
A bank acts as agent when:
- collecting cheques;
- making remittances;
- transferring funds;
- carrying out standing instructions;
- collecting bills;
- processing trade transactions;
- paying money according to customer instructions.
Customer’s Mandate
The authority given by the customer is called:
a mandate.
The bank must:
✔ follow the customer’s mandate carefully and accurately.
If the bank:
- ignores instructions;
- acts outside authority;
- performs instructions negligently;
✔ breach of contract;
✔ negligence;
✔ breach of duty of care.
Examples of Agency in Banking
1. Collection of Cheques
When a customer deposits a cheque:
✔ the bank acts as agent to collect payment from another bank.
The bank receives payment:
✔ on behalf of the customer.
2. Fund Transfers
When the customer instructs:
“Transfer RM50,000 to Company A,”
the bank acts:
✔ as agent carrying out the transfer.
3. Standing Instructions
Where customers instruct banks to:
- pay insurance monthly;
- pay utility bills automatically;
- transfer salary periodically;
✔ as agent.
4. Trade Transactions
Banks may also act as agents in:
- letters of credit;
- documentary collections;
- import and export financing.
Important Case
Westminster Bank Ltd v Hilton
Principle
Lord Atkinson recognised that:
regarding the drawing and payment of cheques, the relationship between banker and customer is one of principal and agent.
This means:
✔ the bank acts according to the customer’s authority when honouring cheques.
How Agency Differs From Debtor–Creditor Relationship
The banker–customer relationship may involve:
- debtor–creditor relationship;
and - agency relationship simultaneously.
Debtor–Creditor Relationship
When money is deposited:
✔ bank = debtor;
✔ customer = creditor.
This principle comes from:
Foley v Hill
Agency Relationship
When the bank performs instructions:
✔ bank = agent;
✔ customer = principal.
Thus:
- one relationship concerns ownership of money;
- the other concerns performance of instructions.
Example
Ali deposits RM100,000 into his account.
At this stage:
✔ bank is debtor;
✔ Ali is creditor.
Later Ali instructs the bank:
“Transfer RM20,000 to my supplier.”
Now:
✔ bank acts as Ali’s agent.
Duty of the Bank as Agent
When acting as agent, the bank must:
- obey instructions properly;
- act within authority;
- exercise reasonable care and skill;
- avoid negligence.
Case Law on Duty of Care
Redmond v Allied Irish Banks Plc
The court stated:
banks owe a duty to exercise reasonable care and skill in carrying out customer instructions.
Practical Importance
The agency relationship is important because:
✔ banks perform transactions daily on behalf of customers.
Without agency principles:
- modern banking operations;
- cheque systems;
- electronic transfers;
- remittances
Case Scenario
Farah instructs her bank:
“Transfer RM80,000 to ABC Trading Sdn Bhd.”
The bank mistakenly transfers the money to another company.
Legal Position
The bank may be liable because:
✔ it breached its duty as agent;
✔ it failed to carry out the customer’s mandate correctly.
This may amount to:
- breach of contract;
- negligence;
- breach of duty of care.
Another Scenario
A customer deposits a crossed cheque for collection.
The bank forwards the cheque to another bank for payment.
Here:
✔ the collecting bank acts as agent for the customer.
Critical Analysis
Modern banking increasingly depends on agency principles because banks now conduct:
- online transfers;
- international remittances;
- automated payments;
- electronic banking services.
Courts therefore impose:
✔ duties of reasonable care and skill on banks when acting as agents.
Relationship With Fiduciary Duties
Agency relationships:
✔ may involve fiduciary duties in some situations.
However:
✔ ordinary banking agency relationships are usually contractual rather than fiduciary.
The bank generally:
- follows instructions;
- protects its own commercial interests;
- does not automatically prioritise the customer’s interests above its own.
Final Examination Rule
The banker–customer relationship may operate as an agent–principal relationship when the bank performs transactions or carries out instructions on behalf of the customer. In such situations, the customer is the principal and the bank acts as agent. The bank must follow the customer’s mandate carefully and exercise reasonable care and skill when carrying out banking instructions.
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