Banking Law

• Citation: (2000) 1 SAL Ann Rev 21
• Published date: 01 December 2000
• Date: 01 December 2000

Introduction

Banking law straddles a wide area of commercial law, from banker and customer to letters of credit and from negotiable instruments to guarantees. Owing to the diverse areas covered under the subject, this review concentrates mainly on the core areas of banking law and on the decisions which have made a direct impact on these areas of the law.

Forgery and customer”s duty of care

The principle that a customer of a bank owes a duty to the bank to exercise care when he writes out his cheques so as not to facilitate the fraudulent alteration of his instructions by a third party has been recognised by a long line of decisions. This duty of care has hitherto been confined to the actual writing of a customer”s cheques so that the customer must not write out his cheques in such a way that his instructions may be easily altered by a third party. This duty of care is based on the fact that a banker has little means of detecting the alteration of a customer”s instructions if the customer has written out the instructions in such a way that a third party is given the opportunity to alter those instructions. In practice, when a customer”s instructions are altered, the banker usually has no means of detecting the alteration, especially, if the alteration has been carried out by the same person who fills out the cheque. A drawer who delegates the task of filling in a cheque to a subordinate finds himself in this situation if the subordinate subsequently alters the instructions on the cheque. A clear distinction has always been drawn by the courts between the alteration of a customer”s instructions and the forgery of the customer”s signature. When a customer”s signature is forged, the bank has all the means to detect the forgery. First, it is not only the business but also the duty of a bank to recognise the signature of a customer. It is also the duty of a bank not to make any payment from a customer”s account if the customer”s signature is a forgery. In practice, a customer”s bank is the last party to handle a cheque issued by the customer and even if the customer has been negligent in allowing the forgery to take place, the failure of the bank to detect the forgery of the customer”s signature constitutes the proximate cause of the loss. The bank has no excuse if it does not recognise or is unable to recognise a customer”s signature. This explains why the courts have never extended a customer”s duty of care to one of preventing the forgery of his signature.

Secondly, under s 24 of the Bills of Exchange Act (Cap 23, 1999 Ed), the forged signature of a customer does not give a banker who makes payment on the instrument based on the forged signature a discharge. The only exception available to a banker is when a customer is precluded from pleading the forgery. There is no mention in s 24 of any defence based on a customer”s negligence in preventing the forgery of his signature. The fact that there is no wider duty owed by a customer to a bank to prevent the forgery of his signature has long been recognised and this was affirmed by the Privy Council in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd & Ors[1986] AC 80. However, in a recent Singapore High Court decision in Khoo Tian Hock & Anor v Oversea-Chinese Banking Corporation Limited (Khoo Siong Hui, third party)[2000] 4 SLR 673, Woo JC declined to follow the Privy Council decision. The learned judicial commissioner decided, inter alia, that the duty of care which a customer owed to a banker included the duty to prevent the forgery of his signature. The plaintiffs, a husband and wife, opened a joint personal current account in 1994 with the Four Seas Bank Ltd at its Robinson Road office. They were later allowed to operate the account at the Jalan Sultan branch of the bank. In 1998, the Four Seas Bank merged with Oversea-Chinese Banking Corporation Limited. The plaintiffs alleged that the bank had wrongfully paid out five cheques amounting to $730,088.58 in which their signatures had been forged by their son. It was decided, inter alia, by Woo JC that the customers owed a duty to the bank to prevent the forgery of their signatures and the customers had failed in their duty of care by giving their son access to their cheque books. In so deciding, the learned judicial commissioner departed from a well settled line of authority established by the English courts and the Privy Council. Woo JC said at 707:

“To draw a distinction between the drawing of cheques on the one hand and other steps or omissions on the other hand is to create an artificial and unrealistic distinction. After all, fraud is not facilitated by the careless drawing of cheques alone.”

With due respect to the learned judicial commissioner, there is indeed an obvious distinction between the material alteration of the instructions given by a customer and the forgery of his signature. The alteration of a customer”s instructions may not be easily detected by the bank if the customer has been careless in drawing up his cheque. The bank is therefore entitled to require the customer to exercise care in writing out his instructions. The forgery of a customer”s signature stands on an entirely different footing. A banker is expected to recognise the signature of a customer. An inability or a reluctance by a bank to verify a customer”s signature constitutes a serious breach of contract by the bank as the customer”s signature constitutes the sole key to his bank account. One would be unduly favouring the banks if the banks are excused from carrying out this fundamental obligation merely because the customer has not taken steps to prevent the forgery of his signature. It would also

undermine the confidence a customer has in the banking system if a banker is excused from carrying out the basic duty of recognising his own customer”s signature.

Forgery and bank statements

Under s 24 of the Bills of Exchange Act (Cap 23, 1999 Ed), when a customer”s signature is forged on a negotiable instrument, a banker who makes payment on the instrument does not get a discharge unless the customer is estopped from asserting the forgery. At common law, a customer is estopped from asserting that his signature is a forgery if he actively represents to the bank that the forgery is his signature or if he fails to inform the bank after discovery of the forgery. The courts have also rejected, in the past, that a customer owes a duty to the bank to prevent the forgery of his signature even though the courts have accepted that in writing out his cheque, a customer owes a duty to the bank to ensure that the cheque is written out in such a way as not to facilitate fraudulent alteration of the customer”s instructions. Banks have in the past attempted without any success to enlarge the defence based on estoppel by the use of bank statements. They have contended that a customer owed a duty to the bank to check his bank statements and to report to the bank any discrepancies found in the statements including any forgeries of the customer”s cheques. This duty was rejected by the Privy Council in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd & Ors (supra) even though the banks in that case had expressly required their customers to examine their bank statements. Their Lordships decided that the banks owed a fundamental duty to their customers to recognise the customers” signatures and any attempt by the banks to abdicate from this basic duty must be done so in clear and unambiguous terms and not be hidden behind a term which merely required the customers to examine their bank statements. In recent times, the banks have become increasingly bolder in seeking to negative their basic responsibility to recognise a customer”s signature through the use of bank statements. One of the methods employed by the banks is to make the bank statements rendered to a customer conclusive against the customer in respect of any mistakes made by the bank in relation to his account. It has even been contended by the banks that the mistakes would include any wrongful payments made by the bank in breach of the customer”s mandate, such as making payments on the forged signature of the customer. This is indeed a very large step to take and any such term would clearly constitute not only an unusual term but also one which would not be generally comprehended by an ordinary customer. In fairness to the customer, the legal significance of such a term should be spelt out by the bank in clear terms and be brought to the immediate attention of the customer. Such a term would also come within the ambit of the Unfair Contract Terms Act (Cap 396, 1994 Ed) as constituting an attempt by the bank to exclude its own liability for breach of contract. The first Singapore case where the bank first

succeeded with such a term was in Consmat Singapore (Pte) Lte v Bank of America National Trust & Savings Association[1992] 2 SLR 828. LP Thean J (as he then was), making reference to the UK Unfair Contract Terms Act 1977, felt that the term was not unfair to the customer as the bank in that case returned all the cheques to the customer together with the bank statements. Two recent decisions of the Singapore High Court have again applied the term in favour of the banks. In the latest decision, Stephan Machinery Singapore Pte Ltd v Oversea-Chinese Banking Corporation Ltd[2000] 2 SLR 191, Lai Kew Chai J decided that a customer who had not checked his bank statements was precluded from raising...