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Malaysian Banking Law – Difference Between Fiduciary Duties, Contractual Duties, and Negligence
Introduction
In banking law, contractual duties, fiduciary duties, and negligence are separate legal concepts.
Although they may arise from the same banker-customer relationship, each duty:
  • comes from a different legal source;
  • imposes different obligations;
  • applies different standards; and
  • provides different remedies.
A bank may sometimes owe:
  • contractual duties;
  • duties of care in negligence; and
  • fiduciary duties simultaneously.


1. CONTRACTUAL DUTIES
Meaning
Contractual duties arise from:
  • agreements;
  • contracts; or
  • banking mandates between the bank and customer.
The banker-customer relationship is primarily contractual in nature.
The bank must perform obligations:
  • expressly agreed; or
  • implied by law or banking practice.


Sources of Contractual Duties
Contractual duties may arise from:
  • account agreements;
  • loan agreements;
  • cardholder agreements;
  • remittance instructions;
  • standing orders; and
  • customer mandates.


Main Features of Contractual Duties
Source
  • Contract
  • Agreement
  • Customer instructions
Nature
  • Based on promises and agreed terms
Main Obligation
  • Perform according to the contract
Standard
  • What parties agreed to
Main Focus
  • Proper performance of obligations
Purpose
  • Protect contractual expectations
Who Can Sue
  • Contracting parties only


Banking Examples
The bank may owe contractual duties to:
  • honour valid cheques;
  • execute payment instructions;
  • maintain customer accounts;
  • provide financing facilities;
  • maintain confidentiality; and
  • comply with banking mandates.


Example
If the bank dishonours a valid cheque despite sufficient funds:
  • the bank breaches contractual duty because it failed to honour its promise.


Remedies for Breach of Contract
Main Remedies
  • damages;
  • specific performance;
  • injunctions; and
  • rescission or termination in some cases.


Damages
The most common remedy.
Purpose:
  • place the customer in the position he would have been in if the contract had been properly performed.


Relevant Case
  1. Joachimson v Swiss Bank Corporation
  • banker-customer relationship is contractual in nature.


2. FIDUCIARY DUTIES
Meaning
A fiduciary duty arises where:
  • trust;
  • confidence; and
  • loyalty exist between parties.
A fiduciary must:
  • act honestly;
  • act in good faith;
  • avoid conflicts of interest;
  • avoid secret profits; and
  • prioritise the beneficiary’s interests.


Main Features of Fiduciary Duties
Source
  • Relationship of trust and confidence
Nature
  • Loyalty and utmost good faith
Main Obligation
  • Act in another person’s best interests
Standard
  • Higher equitable standard
Main Focus
  • Loyalty rather than skill
Purpose
  • Prevent abuse of trust


Banking Position
Ordinarily, banks do NOT owe general fiduciary duties because:
  • banking relationships are commercial in nature.
However, fiduciary duties may arise where:
  • the bank acts as investment adviser;
  • the bank manages customer investments;
  • the customer relies heavily on bank expertise; or
  • special trust and confidence exist.


Banking Examples
Situations where fiduciary duties may arise:
  • investment advisory services;
  • wealth management;
  • discretionary portfolio management;
  • financial planning services.


Example
A bank adviser secretly receives commissions from recommending certain investments.
This may amount to:
  • breach of fiduciary duty because of conflict of interest and secret profit.


Remedies for Breach of Fiduciary Duty
Main Remedies
  • equitable compensation;
  • account of profits;
  • constructive trust;
  • rescission;
  • injunctions; and
  • tracing remedies.


Account of Profits
A fiduciary who gains unauthorised profits:
  • may be ordered to surrender those profits even if the customer suffered no loss.


Constructive Trust
Property improperly obtained:
  • may be held on trust for the beneficiary.


Relevant Cases
  1. Foley v Hill
  • ordinary banker-customer relationship is debtor-creditor, not trustee-beneficiary.
  1. Lee Cheong Chee v HSBC Bank Malaysia Bhd
  • banks generally do not owe fiduciary duties unless special circumstances exist.


3. NEGLIGENCE
Meaning
Negligence is a tort based on breach of duty of care.
A person is negligent when he:
  • fails to exercise reasonable care; and
  • causes foreseeable loss or harm.
Negligence focuses on:
  • carelessness rather than loyalty.


Elements of Negligence
The claimant must prove:
  1. duty of care;
  2. breach of duty;
  3. causation; and
  4. damage.


Main Features of Negligence
Source
  • Duty imposed by law
Nature
  • Failure to exercise reasonable care
Main Obligation
  • Avoid foreseeable harm
Standard
  • Reasonable person standard
Main Focus
  • Carelessness
Purpose
  • Protect against loss or injury


Banking Examples
A bank may be negligent where it:
  • transfers money to wrong account;
  • fails to detect obvious forgery;
  • processes suspicious transactions carelessly;
  • ignores fraud indicators; or
  • fails to verify instructions properly.


Example
A bank officer accidentally enters the wrong account number during a transfer.
This may amount to:
  • negligence because the mistake resulted from lack of reasonable care.


Remedies for Negligence
Main Remedy
  • compensatory damages for foreseeable losses.


Does Negligence Belong to Fiduciary Duties?
NO
Negligence and fiduciary duties are separate legal concepts.
They may coexist but are legally different.


Differences Between Fiduciary Duties and Negligence
Fiduciary Duty
  • concerns loyalty;
  • focuses on conflicts of interest;
  • equity-based;
  • higher standard of honesty and loyalty.
Negligence
  • concerns carelessness;
  • focuses on reasonable care;
  • tort-based;
  • requires proof of lack of care.


Important Principle
A person may:
  • breach fiduciary duties without being negligent; OR
  • be negligent without owing fiduciary duties.


Examples
Fiduciary Breach Without Negligence
Investment adviser secretly earns commissions.
Even if advice was financially sound:
  • fiduciary duty breached because of undisclosed conflict of interest.


Negligence Without Fiduciary Breach
Bank clerk transfers money to wrong account accidentally.
This may amount to:
  • negligence;
    BUT
  • not fiduciary breach because there was no dishonesty or conflict of interest.


Can All Three Exist Together?
YES
The same banking conduct may involve:
  • breach of contract;
  • negligence; and
  • breach of fiduciary duty simultaneously.


Example
Bank provides investment advisory services.
Failure to follow agreed terms
→ breach of contract
Careless investment advice
→ negligence
Secret commissions/conflict of interest
→ fiduciary breach


Critical Analysis
Courts are cautious about imposing fiduciary duties too broadly on banks because:
  • banks are commercial institutions, not trustees.
Therefore:
  • ordinary banking transactions usually involve contractual duties and negligence;
  • fiduciary duties arise only in special circumstances involving trust and reliance.
If fiduciary duties were imposed too broadly:
  • banks would face excessive liability;
  • commercial banking operations would become impractical.
Negligence is more commonly imposed because banks are expected to:
  • exercise reasonable care in handling customer funds and instructions.
Modern banking litigation frequently combines:
  • contract claims;
  • negligence claims; and
  • fiduciary claims.
Customers often raise fiduciary claims because equitable remedies may provide broader relief than contractual damages.
Courts therefore distinguish carefully between:
  • poor performance or mistakes → negligence;
  • failure to comply with agreement → contract breach;
  • abuse of trust/conflict of interest → fiduciary breach.


Conclusion
Contractual Duties
  • arise from agreements and promises.
Fiduciary Duties
  • arise from trust, loyalty, and confidence.
Negligence
  • arises from failure to exercise reasonable care.
Negligence does NOT belong to fiduciary duties because:
  • both concepts protect different legal interests;
  • both originate from different legal principles.
However, all three duties may coexist depending on the facts of the banking relationship.


Summary of Remedies
Contractual Breach
  • damages;
  • specific performance;
  • injunctions.
Negligence
  • compensatory damages for foreseeable loss.
Fiduciary Breach
  • equitable compensation;
  • account of profits;
  • constructive trust;
  • rescission;
  • tracing remedies.

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