Banking Law

• Date: 01 December 2006
• Author: POH Chu Chai LLB (University of Singapore), LLM, LLD (London); Advocate and Solicitor (Singapore); Associate Professor, Faculty of Law, National University of Singapore.
• Published date: 01 December 2006

Banker and customer

Bank statement

4.1 A bank is exposed to a potential business risk when a third party fraudulently withdraws funds from a customer”s account by forging the customer”s signature or by other fraudulent means. To provide the bank with some measure of relief against this risk, the courts have recognised that a customer owes an implied duty of care in writing out his instructions so that the bank will not be misled. The courts, however, stopped short of implying an additional duty that the customer is to exercise care to prevent forgery of his signature. However, the Singapore High Court in Khoo Tian Hock v Oversea-Chinese Banking Corp Ltd[2000] 4 SLR 673, departing from a long line of authorities, decided that a customer”s duty to prevent the forgery of his signature could be implied from the banker and customer contract. This decision has now been doubted by the Singapore Court of Appeal.

4.2 In practice, there is a world of difference between a customer”s duty to write his cheques carefully and the duty to prevent the forgery of his signature. The alteration of a customer”s instructions is not easy to detect if the customer is careless in drawing up his instructions. The forgery of a customer”s signature, however, stands on an entirely different footing. A banker is expected to know a customer”s signature. A banker”s inability or reluctance to verify a customer”s signature constitutes a serious breach of contract as the customer”s signature is his sole key to the account. A customer”s confidence in the banking system will be severely undermined if a bank is excused from carrying out this basic duty of recognising the customer”s signature. For this reason, the courts have been extremely reluctant to extend a customer”s duty of care to cover the forgery of the customer”s signature. What the common law does not give to a bank, the bank can always appropriate by means of an express term. In the past, banks have made bold attempts to impose a duty on a customer to prevent the forgery of his signature indirectly through the use of bank statements by requiring the customer to check the statements. However, all these attempts failed and were flatly rejected by the Privy Council in

Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80. While the common law rejected such a duty, Canada and the US recognised that such a duty could be created by a bank through the use of a verification agreement containing a conclusive evidence clause.

4.3 In Singapore, such a term was used by the Bank of America and upheld by the Singapore High Court in Consmat Singapore (Pte) Ltd v Bank of America National Trust & Savings Association[1992] 2 SLR 828, following the Canadian Supreme Court”s decision in Arrow Transfer Co Ltd v Royal Bank of Canada(1972) 27 DLR (3d) 81. Such a term is highly controversial in a setting where the common law does not recognise the duty. In addition, the provision operates as an exemption clause and is often couched in ambiguous terms without referring directly to the risk the bank is seeking to exclude. Thus, in Arrow Transfer Co Ltd v Royal Bank of Canada(1972) 27 DLR (3d) 81, Laskin J, delivering the dissenting opinion in the Canadian Supreme Court, observed (at 98):

I find it strange that a bank which seeks by contract to throw the risk of all forged drawer signatures upon its customer should be so reticent about referring expressly to such an eventuality.

Further, a term literally transplanted from Canada and the US has to be viewed against the background of our own consumer protection laws, especially the Unfair Contract Terms Act (Cap 396, 1994 Rev Ed) (‘UCTA’) and other consumer protection legislation. Close scrutiny should be made to see whether the banks are justified in imposing such a term as most bank customers are not in a position to negotiate terms with the bank. Equally, decisions which uphold such a term should take into account consumer interests.

4.4 However, in Pertamina Energy Trading Limited v Credit Suisse[2006] 4 SLR 273, the Singapore Court of Appeal decided that a conclusive evidence clause requiring a customer to object ‘in writing to any of the matters contained’ in a bank statement was wide enough to cover a fraudulent withdrawal from the customer”s account. The court, however, limited its holding to a corporate customer but reserved its views in respect of an individual customer. The court further decided that the UCTA was applicable to the term but the term was not unfair to a corporate customer.

4.5 Pertamina Energy Trading Limited, the appellant, was a Hong Kong company and a wholly owned subsidiary of PT Pertamina (‘Pertamina’), the Indonesian national oil company. The appellant”s Singapore operations were managed by Soekono Wahjoe (‘Wahjoe’), the company president, and

Zainul Ariefin (‘Ariefin’), its vice-president of finance and administration. The appellant deposited a sum of US$8m under a fixed deposit with Credit Suisse, the respondent. The appellant”s contract with the bank required the appellant:

To examine all statements of account, bank statements, printed forms, deposit slips, credit advice notes, transaction advices and other documents (hereinafter in this Clause referred to collectively as “statements”) supplied by the Bank setting out transactions on any of the Accounts and agrees that unless the Customer objects in writing to any of the matters contained in such statement within 14 days of the date of such statement, the Customer shall be deemed conclusively to have accepted all the matters contained in such statement as true and accurate in all respects.

4.6 Ariefin, without proper authority, established a US$10m credit facility secured by a charge over the US$8m fixed deposit account. The funds in the credit facility were diverted to Aceasia Commercial Enterprises Pte Ltd (‘Aceasia’), a private banking client of the respondent. The appellant sought to recover the US$8m placed on fixed deposit with the bank. The bank pleaded that the credit facility and drawdown of the credit were duly authorised by the appellant. In addition, the bank also relied on the conclusive evidence provision in the agreement and common law estoppel. The court found that the credit facility and the drawdown were not properly authorised by the appellant and the bank had acted without proper authority. V K Rajah J (as he then was), delivering the court”s judgment, said at [48]:

Given our findings thus far, we are of the opinion that the ratification resolution was forged; the drawdown was not properly authorised; and further, the charge document was not properly sealed and therefore of no legal significance or effect.

4.7 The court further decided that common law estoppel was not applicable as the bank did not adduce evidence to show that it was prejudiced by the appellant”s failure to inform the bank about the unauthorised transactions. Rajah J said at [87]:

Second, we are not satisfied that in this case, the respondent did, in fact, lead satisfactory evidence demonstrating that its chances of recovering the loan moneys from either Aceasia or Dedy (or even Lim) had been materially prejudiced by the appellant”s silence, thereby causing it to suffer detriment. Indeed, upon the drawdown of the appellant”s account, the moneys were promptly transferred out of the jurisdiction. To that extent, the respondent”s bare and unsubstantiated assertion that the respondent would have taken action had it known of the forgery falls far short of

discharging the burden to show that the appellant stood a ‘real chance’ of recovering the moneys. Accordingly, the defence of estoppel must fail.

4.8 The court, however, decided that the conclusive evidence clause operated against the appellant as a corporate customer to preclude its claim against the bank. Rajah J said at [61]:

It bears emphasis that in holding that conclusive evidence clauses if and when properly and reasonably defined are enforceable, we restrict such a conclusion to cases where the customers are commercial entities. In the context of banks on the one hand (which would otherwise bear the onerous, if not near impossible task of detecting forgeries given the advent of modern technology) and commercial entities on the other (which only have to check their own records), we do not find it onerous or unreasonable to place the risk of loss on the latter if this has already been agreed upon. However, we are not required to express a general opinion as to the reasonableness of conclusive evidence clauses as and when applied to individuals and non-corporate customers since the issue does not arise in the present context. Each case will entail a careful examination of its own peculiar factual matrix starting with a careful scrutiny of the conclusive evidence clause that is being questioned.

4.9 In the course of its judgment, the court affirmed a number of basic principles of banking law and made a number of observations. Firstly, the court reiterated that at common law, a customer did not owe a duty to a bank to prevent the forgery of his signature. In so doing, the court doubted the correctness of the High Court decision in Khoo Tian Hock v Oversea-Chinese Banking Corp Ltd (supra para 4.1). Rajah J said at [54]:

In considering the issue of whether a customer”s common law duties extend ‘thus far and no further’ than those laid down in [London Joint Bank, Limited v Macmillan and Arthur[1918] AC 777] and Greenwood [v Martins Bank, Limited[1933] AC 51], we do observe that, notwithstanding considerable judicial opinion elsewhere, particularly in such major financial centres as Hong Kong and London, the position in Singapore is somewhat obscured by the decision in Khoo Tian Hock v Oversea-Chinese Banking Corp Ltd[2000] 4 SLR 673. In that case, Woo Bih Li JC (as he then was) held that business efficacy dictates that there should be a term implied by law in a customer-banker contract...