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Malaysian Banking Law – Is the Agency and Principal Relationship a Contractual Duty or Fiduciary Duty?
The relationship between agent and principal in banking law is primarily contractual in nature. However, the relationship may also give rise to fiduciary duties because agency is recognised in law as a fiduciary relationship. Therefore, the correct legal position is that the agency and principal relationship is fundamentally contractual in origin, but fiduciary obligations arise from the agency relationship itself.
An agency relationship is created through an agreement between the principal and the agent. In banking transactions, the customer authorises the bank to act on the customer’s behalf. The relationship may arise through express agreement, implied agreement, or customer mandates and instructions. Since the authority of the bank originates from the consent and instructions of the customer, the relationship is primarily contractual in nature.
In banking practice, the bank acts as an agent in several situations. These include collecting cheques, carrying out standing instructions, making remittances, processing payment orders, executing fund transfers, and conducting trade transactions for customers. In all these situations, the bank performs specific tasks because the customer instructed or authorised the bank to do so. The duties therefore arise from the contractual mandate given by the customer.
This principle was recognised in Westminster Bank Ltd v Hilton, where Lord Atkinson stated that regarding the drawing and payment of cheques, the relationship between banker and customer is one of principal and agent. The case establishes that the bank acts according to the customer’s authority and mandate when processing cheques and payments.
Although agency originates from contract, the law also imposes fiduciary obligations on agents because agents are entrusted to act on behalf of another person. As a result, an agent must act honestly, in good faith, within the scope of authority, and must avoid conflicts of interest or secret profits. These obligations are fiduciary in nature because they focus on loyalty and protection of the principal’s interests.
Therefore, agency relationships contain both contractual obligations and fiduciary duties. The contractual aspect focuses on whether the bank properly performed the customer’s instructions and complied with the agreed mandate. The fiduciary aspect focuses on whether the bank acted loyally, honestly, and without conflict of interest.
For example, if a customer instructs the bank to transfer RM50,000 to a supplier and the bank mistakenly transfers the money to the wrong account, the issue mainly involves breach of contractual duty and negligence. This is because the bank failed to perform the customer’s instructions properly and failed to exercise reasonable care in carrying out the transaction.
In contrast, if a bank investment officer secretly receives commissions from promoting investment products without informing the customer, this may amount to breach of fiduciary duty. The officer placed personal interests above the customer’s interests, acted in a conflict situation, and obtained secret profits without disclosure. The issue here is not poor performance of instructions, but disloyalty and abuse of trust.
Nevertheless, although agency relationships are fiduciary in nature, courts generally do not treat the entire banker-customer relationship as fiduciary. The ordinary banker-customer relationship remains primarily contractual and debtor-creditor in nature. Fiduciary obligations arise only in limited situations involving advisory roles, discretionary authority, or special trust and confidence.
This principle was reinforced in Foley v Hill, where the court rejected the argument that banks generally hold customer money as trustees. Similarly, Lee Cheong Chee v HSBC Bank Malaysia Bhd confirmed that banks do not ordinarily owe broad fiduciary duties unless special circumstances exist.
The dual nature of agency explains why banking law combines both contract law and fiduciary principles. From a commercial perspective, banks require contractual certainty in order to conduct transactions efficiently. At the same time, customers require fiduciary protection where banks exercise discretion, influence, or advisory power over their affairs. The law therefore attempts to balance commercial practicality with protection against abuse of trust.
Modern banking increasingly involves advisory and investment-related services, making fiduciary issues more important than in traditional banking relationships. However, courts remain cautious about imposing extensive fiduciary obligations because banks are commercial profit-making institutions rather than trustees. Consequently, ordinary transaction processing remains mainly contractual, while discretionary advisory roles are more likely to attract fiduciary obligations.
In conclusion, the agency and principal relationship in banking law is primarily contractual because it arises from agreement and customer mandate. However, agency also creates fiduciary duties because an agent is legally required to act loyally, honestly, and in good faith for the benefit of the principal. Therefore, the relationship itself is contractual in origin, while fiduciary obligations arise as legal duties flowing from the agency relationship. In banking practice, executing customer instructions is mainly contractual in nature, whereas avoiding conflicts of interest and secret profits is fiduciary in character.
The relationship between agent and principal in banking law is primarily contractual in nature. However, the relationship may also give rise to fiduciary duties because agency is recognised in law as a fiduciary relationship. Therefore, the correct legal position is that the agency and principal relationship is fundamentally contractual in origin, but fiduciary obligations arise from the agency relationship itself.
An agency relationship is created through an agreement between the principal and the agent. In banking transactions, the customer authorises the bank to act on the customer’s behalf. The relationship may arise through express agreement, implied agreement, or customer mandates and instructions. Since the authority of the bank originates from the consent and instructions of the customer, the relationship is primarily contractual in nature.
In banking practice, the bank acts as an agent in several situations. These include collecting cheques, carrying out standing instructions, making remittances, processing payment orders, executing fund transfers, and conducting trade transactions for customers. In all these situations, the bank performs specific tasks because the customer instructed or authorised the bank to do so. The duties therefore arise from the contractual mandate given by the customer.
This principle was recognised in Westminster Bank Ltd v Hilton, where Lord Atkinson stated that regarding the drawing and payment of cheques, the relationship between banker and customer is one of principal and agent. The case establishes that the bank acts according to the customer’s authority and mandate when processing cheques and payments.
Although agency originates from contract, the law also imposes fiduciary obligations on agents because agents are entrusted to act on behalf of another person. As a result, an agent must act honestly, in good faith, within the scope of authority, and must avoid conflicts of interest or secret profits. These obligations are fiduciary in nature because they focus on loyalty and protection of the principal’s interests.
Therefore, agency relationships contain both contractual obligations and fiduciary duties. The contractual aspect focuses on whether the bank properly performed the customer’s instructions and complied with the agreed mandate. The fiduciary aspect focuses on whether the bank acted loyally, honestly, and without conflict of interest.
For example, if a customer instructs the bank to transfer RM50,000 to a supplier and the bank mistakenly transfers the money to the wrong account, the issue mainly involves breach of contractual duty and negligence. This is because the bank failed to perform the customer’s instructions properly and failed to exercise reasonable care in carrying out the transaction.
In contrast, if a bank investment officer secretly receives commissions from promoting investment products without informing the customer, this may amount to breach of fiduciary duty. The officer placed personal interests above the customer’s interests, acted in a conflict situation, and obtained secret profits without disclosure. The issue here is not poor performance of instructions, but disloyalty and abuse of trust.
Nevertheless, although agency relationships are fiduciary in nature, courts generally do not treat the entire banker-customer relationship as fiduciary. The ordinary banker-customer relationship remains primarily contractual and debtor-creditor in nature. Fiduciary obligations arise only in limited situations involving advisory roles, discretionary authority, or special trust and confidence.
This principle was reinforced in Foley v Hill, where the court rejected the argument that banks generally hold customer money as trustees. Similarly, Lee Cheong Chee v HSBC Bank Malaysia Bhd confirmed that banks do not ordinarily owe broad fiduciary duties unless special circumstances exist.
The dual nature of agency explains why banking law combines both contract law and fiduciary principles. From a commercial perspective, banks require contractual certainty in order to conduct transactions efficiently. At the same time, customers require fiduciary protection where banks exercise discretion, influence, or advisory power over their affairs. The law therefore attempts to balance commercial practicality with protection against abuse of trust.
Modern banking increasingly involves advisory and investment-related services, making fiduciary issues more important than in traditional banking relationships. However, courts remain cautious about imposing extensive fiduciary obligations because banks are commercial profit-making institutions rather than trustees. Consequently, ordinary transaction processing remains mainly contractual, while discretionary advisory roles are more likely to attract fiduciary obligations.
In conclusion, the agency and principal relationship in banking law is primarily contractual because it arises from agreement and customer mandate. However, agency also creates fiduciary duties because an agent is legally required to act loyally, honestly, and in good faith for the benefit of the principal. Therefore, the relationship itself is contractual in origin, while fiduciary obligations arise as legal duties flowing from the agency relationship. In banking practice, executing customer instructions is mainly contractual in nature, whereas avoiding conflicts of interest and secret profits is fiduciary in character.
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