A study on banker as bailee in the relationship of banker and customer relationship

1. Introduction

The relationship between a Banker and a Customer is based on trust. In today’s world,
banks are considered a pivotal element for the economy of the country. It is an effective banking
system that paves the way for the proper growth of the economy. Customers avail different kinds
of services from the bank. This article critically analyses different types of relationship between
customer and banker. It also discusses different legislations that protect the interest of the banker
and customer and also provide proper remedies to them.

2. Definition of Banker 1

Halsbury's Laws of England states. "A banker is an individual, partnership or

corporation, whose sole or predominating business is banking, that is, the receipt of money on
current deposit account, and the payment of cheques drawn by and the collection of cheques paid
in by a customer".

Walter Leaf states, "A banker is an institution or individual who is always ready to
receive money on deposits to be returned against the cheques of their depositors".

Dr Harbert L. Hart defines, "A banker is one who in the ordinary course of his
business, honours cheques drawn upon him by persons from and for whom he receives money on
current accounts"

According to Mecleod, "The essential business of a banker is to buy money and debts by
creating other debts. A banker is essentially a dealer a debts or credit"
Sheldon explains that, "A person cannot claim to be carrying on the business of banking
unless he receives money or instruments representing money on current account, honours
cheques drawn thereon and collects the proceeds of cheques which his customers place into his
hands for collection"2
__________________________
1. S.R.. Myneni ,Law of Banking and Negotiable Instruments ,Asia Law House , (Edn. 5th ) 107
2. R.N.Choudhary,Banking Laws,central Law Publications, Allahabad, p-117-118.)

1
 Sir John Paget defines, “A bank or banker is a corporation of person (or group of
persons) who accepted money on current accounts, pay cheques draws upon such account on
demand and collect cheques for customers, that if such minimum services are afforded to all and
sundry without restriction of any kind, the business is a banking business, whether or not other
business is undertaken at the same time, that providing the banking business as so understood is
not a mere facade for other business, the person or corporation is a banker or bank for the
purposes of statutes relating to banking other than those where the sole criterion is the
satisfaction of some government department”

As per the Bills of Exchange Act, 1882, banker is "a person or a body of persons
incorporated or not, carrying on the business of banking".

According to Section 3 of Negotiable Instruments Act, 1881 "Banker includes any

person acting as a Banker and any post office saving bank".

Section 5 (b) of the Banking Regulation Act, 1949 states, "Banking means the accepting,
for the purpose of lending or investment, of deposits of money from the public, repayable on
demand or otherwise, and withdrawable by cheque, draft, order or otherwise".

To sum up, banker is who (i) take deposit account, (ii) take current accounts, (iii) Issue
and pay cheques, and (iv) collect cheques crossed and uncrossed for his customers.

Money lender is not considered as banker as mere money - lending does not constitute
banking business. Banker is an institution which borrows money by accepting deposits from the
public for the purpose of lending to those who are in need of money.

3. Definition of Customer 3

The term Customer of bank has been defined in the Banking Regulation Act, 1949 or in
the Negotiable Instruments Act, 1881 or in any other Act. As it is not legally defined, one has to
refer the definition of the authoritative persons in banking law and also the decisions of
important cases in the regard.

______________________________________

3. S.R.. Myneni ,Law of Banking and Negotiable Instruments ,Asia Law House , (Edn. 5th ) 108

2
Sir John Paget’s Definition of Customer

Sir John Paget defines the term as “ to constitute a customer there must be some
recognizable course or habit of dealing in the nature of regular banking business” , According to
John Paget’s view, in order to constitute a customer of a bank, a person should satisfy the
following condition
1. First, he must have an account with the banker at the time of drawing.
This was decided by Lord Dunadin in Great Western Railway company Vs. London
and country Banking Company Limited5 where a man by name Huggins, a rate collector had
been in the habit of encashing cheques over the counter at a defendant bank for a number years.
However , no account was opened by him. One day he got an account Payee crossed cheque
from the plaintiff by fraud and encashed it with the defendant bank as usual. Plaintiff sued to
recover the value of the cheque. The substantial question arised was, whether Huggin was a
customer or not? The court held that as there was no sort of account, he was not a customer of
the bank.
2. Secondly, there must be some recognizable course or habit of dealing between the
banker and the customer.
In Mathews Vs Willams Brown & Co6 , It was held that in order to consider a person a
customer of a bank, he should have some sort of an account with the bank, but that the initial
transaction in opening an account did not set up the relation of a banker and customer , and there
had to be some measure of continuity and custom .
Duration Theory

Single transaction does not constitute any person a customer. Thus, the duration aspect is
an important one and is called as “Duration Theory” Sir John Paget mentioned that “the
relationship between the banker and the customer is that of a mandator ( A customer) and
mandatory ( A bank) but it none the less, the relationship which embraces mutual duties and
obligations and privileges to both the parties.” It is a relationship peculiar to banking.
_______________________________
4. Vinod Kothari, Banking Law and Practice In India, 26 edition(Publication by Lexis Nexis),p-327-328.
5. Great Western Railway company Vs. London and country Banking Company Limite (10
TLR(1894),386)
6. Mathews Vs Willams Brown & Co (10 TLR (1894) 386)

3
 3. Thirdly , the dealing between him and the banker must be in the nature of regular
banking business. Casual transactions or services like depositing valuable for safe
custody or taking changes from a bank for currency note or encashment of cheques
occasionally without keeping an account will not constitute a customer, because these
dealings are not of banking nature. Dealing of banking nature means borrowing of
money by way acceptance of deposits, granting loan and advances, issuing and
honouring of cheques, collection of cheques crossed or uncrossed etc.

According to Dr. Herbert L. Hart “A customer is one who has an account with a
banker or for whom a banker habitually undertakes to act as such”. He discarded the element of
duration of dealing with the bank.

In view of judicial pronouncement, a customer is a person who has "same sort of an

account, either deposit or current account or some similar relation" with a banker.

In order to consider any person as a customer, he must satisfy the following conditions.
They are:

i. He must have some sort of an account;

ii. Even a single transaction may constitute him a customer;
iii. Frequency of transactions is anticipated but not insisted upon
iv. The dealing must be of a banking nature.

4. The Relationship between a Banker and a Customer5

The relationship between the banker and the customer arises out of the contract between
them and cannot be created except by mutual consent. The contractual relationship which exists
between banker and customer is a complex are founded originally upon the customs and usages
of bankers. Many of these customs and usages have been recognised by the courts, and, to the
extent that they have been so recognised, they must be regarded as implied terms of the contract
between banker and customer. The relationship between a banker and customer may be of
general or special basing on the nature of service provided by a banker.
_________________________

7. S.R.. Myneni ,Law of Banking and Negotiable Instruments ,Asia Law House , (Edn. 5th ) 108

4
5. General Relationship Between Banker and Customer6

Legal relationship arises between two parties when they conclude contract through
proposal and acceptance. In the case of banking where to person asks the banker to open an
account account for him and the banker's acceptance thereof, involved implied contractual
relationship . The actual transactions in the account will only strengthen in relation in terms of
benefits and obligations flowing from a contract.

To-day the banking business is diversified. The banker has to function in various ways to
meet the various requirements of the customer. The banker is not a depository. He is entitled to
use the money deposited by customer without being called upon to account for such use, his only
liability being to return the amount in accordance with the terms agreed to between him and the
customer. He has to make use of the money in deposit with him, for earning the maximum profit.
The banker provides different services to the customers in commercial transactions. Basing on
the functions of banking, there are the following general relationships between the banker and
customer

1. Debtor and creditor relationship

2. Principal and Agent Relationship
3. Fiduciary Relationship
4. Trustee and Beneficiary Relationship
5. Bailer and Bailee Relationship
6. Pawnee and Pawnor (or Pawner) Relationship
7. Mortgagee and Mortgagor Relationship
8. Lessee and lessor Relationship
9. Guarantor and Guarantee Relationship

__________________________________

8. S.R.. Myneni ,Law of Banking and Negotiable Instruments ,Asia Law House , (Edn. 5th ) 108

6. Bailer and Bailee Relationship7

5
 The banking sector plays a pivotal role in safeguarding personal property through
services such as safe deposit boxes. This service exemplifies the bailor and bailee relationship in
banking, governed by principles outlined in the Indian Contract Act, 1872.

Bailment : The 'bailee' is the party of whom personal property is delivered under a
contract of bailment. The 'bailor' is the party who bails or delivers goods to another under a
contract of bailment.

Section 148 of the Indian Contract Act, 1872 states, "A bailment is the delivery of
goods by one person to another for some purpose, upon a contract that they shall, when the
purpose is accomplished, be returned or otherwise disposed of according to the directions of the
person delivering them. The person delivering the goods is called the bailor. The person to
whom they are delivered is called the bailee.

There two kinds of bailee in English Law. They are:

i. A gratuitous bailee' (someone who is not paid fee) in one who is expected to take only the
same care of the deposited goods
ii. 'A bailee for reward' is one who is expected to go beyond the normal care and to use the
best possible safeguards and exercise care and skill, reflecting the fact that he is being
paid for the service.

A bailee for reward is liable for loss caused by ordinary negligence, where as a gratuitous
bailee will only be liable if gross negligence has taken place.
The Indian law draws no distinction between the liability of a gratuitous bailee and that of a
bailee for reward. Section 151 of the Indian Contract Act, 1872 reads
"In all cases of bailment the bailee is bound to take as much care of the goods bailed to him
as a man of ordinary prudence would, under similar circumstances, take of his own goods of the
same bulk, quality and value as the goods bailed".
_______________________________
9. M L Tannan, Banking Law And Practice in India 23rd Edition , Published by Lexis Nexis, Nagpur.
The bank is under no obligation to accept the property of the customs for the purpose of safe
custody. It is not even bee primary function of the bank. It is also not a basis condition required
to be fulfilled for being lame as a banker.

6
 During certain occasions, a banker becomes a bailee. It happens when he receives gold
ornaments and important documents for safe custody. The Banker takes charge of goods, articles
etc, as bailee and not as trustee or agent. In that case, he cannot make use of them to his best
advantage because he is bound to return the identical articles on demand. A banker does not
allow any interest on these articles. It is only the customer who has to pay rent for the lockers.
So, a banker acts as a bailee only when he receives articles for safe custody and not, when he
receives money on deposit account.

I. Duties of the Banker as a Bailee8

i. Duty to take reasonable care of goods bailed

When a banker accepts an item for safe custody, he is required to exercise reasonable
care and skill in the performance of his contractual duty. If a bank fails to rerun the property
which is the subject of the bailment to the bailor on a request being made by him or fails to
deliver the property in accordance with the bailor's instructions, he will be held liable.

However, Section 152 of the Indian Contract Act, 1872 exempts a bailee from liability
in respect of loss, destruction or deterioration of the goods bailed, when he has taken the same
amount of care as laid in Section 151 of the Indian Contract Act, 1872 provided no contract
exists between him and the bailor to make his liability absolute.

According to Section 152 of the Indian Contract Act, 1872. "The bailee, in the absence
of any special Contract, is not responsible for the loss, destruction or deterioration of the thing
bailed, if he has taken the amount of care of it described in Section 151."
Agreement exempting bailee bank from liability
Whether a bailee can make a special Contract to exempt himself from liability arising
under Section 151 came in for consideration.
________________________________

10. S.R.. Myneni ,Law of Banking and Negotiable Instruments ,Asia Law House , (Edn. 5th ) 119-125

Case Law

7
 9
In Central Bank of India Grains & Gunny Agencies it has been held that a Contract
exempting a bailee from liability for any loss or damage due to the fault, carelessness or
negligence of its staff binds the parties and is not unlawful as it is not hit by Section 23 of the
Indian Contract Act, 1872. Hence, there was found to be negligence of the bailee's staff resulting
in loss of goods and there was not agreement exempting the bailee from such liability, the bailee
was held liable
In UCO v Hem Chandra Sarkar10 it was explained that bailment is the delivery or
transfer of possession of a chattel with a specific mandate that requires the identical res either to
be returned to the bailor or to be dealt with in a particular way by the bailee according to the
directions of the bailor. One important distinguishing feature between agency and bailment is
that the bailee does not represent the bailor. He merely exercises, with the leave of the bailor,
certain powers of the bailor in respect of his property.
Secondly, a bailee has no power to make contracts on behalf of the bailor; nor can he
make the bailor liable for any acts that he by himself in relation to the property bailed.
i. Duty not to make unauthorised use of goods bailed

When the goods have been bailed for a particular purpose, the banker as a bailee is
supposed to use them only for that purpose and none else. If he makes unauthorised use of the
goods bailed, the bailor may terminate the bailment under Section 153 of the Indian Contract
Act and the bailee is liable to make compensation to the bailor for any damage arising to the
goods from or during such use of them under Section 154 of the Indian Contract Act.
ii . Duty not to mix bailor's goods with his own goods

A bailee should not mix the bailor's goods with those of his own without bailor's consent.
If the bailor consents, the bailee may mix the bailor's goods with those of his own, and in such a
case, the bailor and the bailee shall have an interest in the mixed goods in proportion to their
respective shares under Section 155 of the Indian Contract Act.
______________________________
11. Central Bank of India Grains & Gunny Agencies (AIR 1989 MP 28)
12. In UCO v Hem Chandra Sarkar (AIR 1990 SC 1329 = 1990 (3) SCC389]
As per Section 156 of the Indian Contract Act, if the bailee, without the consent of the
bailor, mixes the goods of the bailor with his own goods, and the goods can be separated or

8
divided, the property in the goods remains in the parties respectively, but the bailee is bound to
bear the expenses of separation or division, and any damage arising from the mixture.

According to Section 1 of the Indian Contract Act, if the bailee, without the consent of
the bailor, mixes the goods of the bailor with his own goods in such a manner that it is
impossible to separate the goods bailed from the other goods and delivered them back, the bailor
is entitled n he compensated by the bailee for the loss of the goods.

iii. Duty to return the goods on the fulfilment of the purpose

According to Section 160 of the Indian Contract Act, 1872, it is the duty of the bailee to
return, or deliver according to the bailor's directions, the goods bailed, without demand, as soon
as the time for which they were bailed has expired, or the purpose for which they were bailed has
been accomplished.
As per Section 161 of the Indian Contract Act, if, by the fault of bailee, the goods are not
returned, delivered or tendered at the proper time, he is responsible to the bailor for any loss,
destruction or deterioration of the goods from that time.
iv. Duty to deliver to the bailor increase or profit on good bailed
According to Section 163 of the Indian Contract Act in the absence of any contract to
the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any
increase or profit which may have accrue from the goods bailed.
II. Rights of Bailee Bank 11
i. Right to recover necessary expenses incurred on bailment

According to Section 158 of the Indian Contract Act, 1872, where, by the conditions of
the bailment, the goods are to be kept or to be carried, or to have work done upon them by the
bailee for the bailor, and the bailee is to receive no remuneration, the bailor shall repay to the
bailee the necessary expenses incurred by him for the purpose of the bailment.

___________________________

13. S.R.. Myneni ,Law of Banking and Negotiable Instruments ,Asia Law House , (Edn. 5th ) 119-125

ii. Right to recover compensation from the bailor

9
 Section 164 of the Indian Contract Act, 1872 states that the bailor is responsible to the
bailee for any loss which the bailee may sustain by reason that the bailor was not entitled to
make the bailment, or to receive back the goods, or to give directions respecting them.

In the case of Surender S/o.Laxman Nikose vs. Chief Manager and authorised officer,
State bank of India, it was held by the Bombay high court that once the relationship between the
banker and customer ends, it waives off every right including the right of lien.

iii. Right of lien on the goods hailed

As per Section 170 of the Indian Contract Act, 1872, where the bailee has, in accordance
with the purpose of the bailment, rendered any service involving the exercise of labour or skill in
respect of the goods bailed, he has in the absence of a Contrast to the contrary, a right to retain
such goods until he receives due remuneration for the service he has rendered in respect of them

iv. Right of suit against a wrongdoer

As per Section 180 of the Indian Contract Act, 1872, the bailee can file a suit in a court
against the wrongdoer for damages

v. Safe Custody of Customer's valuables:-

In olden days, goldsmiths. money lenders etc. undertook for safe custody of other's valuables
for a presented period and to return them on demand and charge some remuneration Tar their
service. Now, the hanks are doing such service to their customers Negotiable instruments,
jewellery, securities, boxes of plate and documents of title to property etc. are the valuables
people want to keep them in safe custody. The banks provide such safe custody and the ways
are:

a. Lockers

The banker provide safe deposit lockers in strong room. They are safeguarded against theft,
burglary, fire ete. Each locker have a separate number with double keys. One of the keys is
remained with the banker, and another key is given to the customer. The locker will be opened,if
the two keys are used. The customer keeps his valuables in the locker. The banker is not bound

10
or concerned to know the contents of a locker. The banker can only come to know the articles in
the locker-

i. when the customer dies, and his legal representative with special authority asks the bank
to take an inventory of the contents; or
ii. when the customer does not pay rent for months together, and does not response to any
notices; or
iii. when a police officer or any other officer or person duly authorized by law to search and
seizure.

"Where the bank leaves a safe deposit box the relationship of bailor and bailce exists as
to securities or valuables placed in such box, even though the bank has no knowledges to the
property deposited. It is a bailment for hire and natural benefit. This is true even though access to
the contents can be had only by use of a key retained by the lessee and the relationship is
distinguished from that of landlord and tenant. In general the right, duties and liabilities of the
parties seem to be that the bank holds out to the public the implied agreement that property
placed in its custody will be protected, so far as reasonable human foresight will permit, from the
ordinary dangers to which valuables are exposed. There appeared no special contract between the
parties herein limiting any rights, duties or liabilities. Where the contents of the box containing
jewels are to the knowledge of the bank whose record shows the contents as verified as to the
weight a value, if there has been a theft, the bank will be liable to the value where it had not
exercised proper care as to posting watchman etc.

Where there is absence of due care but the contents of the box are not known to the bank, the
loss of the jewels etc. have to be specifically proved by the depositor". Farnum v Connection
Bank and Trust Co.

b. Safe Deposit in the sealed covers or boxes

The customer keeps the valuables in the box or cover before the banker and hands it over
to the banker after locking or sealing it. The banker and customer make a joint inventory of the
valuables and enter it in a register with clear description. This inventory estoppel the customer
not to enhance the value and the number of articles. The banker and the customer sign on the
register. When the customer wants to take delivery of them, he approaches the banker and takes

11
it open delivery by acknowledging in the register the receipt of the articles. If the articles are
missed, or stolen, the banker will be held responsible.

c. Directly handling over them to the banker

In the case of pledge, the customer directly hand over the valuables such as gold, jewellery,
securities, registered title deeds or immovable property to the banker. In such circumstances, the
banker acts both as a bailee and also as a pawnee. It is the duty of the bankerto safeguard the
securities , jewellery, title deeds etc of the customer. The banker is held responsible to the
customer for the disappearance, misappropriation by the staff of bank, or the stealing away by a
third party of the valuables due to the careless and negligence of the banker. The banker has the
right to receive the payment from the customer towards the extraordinary expenses incurred in
safeguarding the pledged goods.

Bankers must maintain a book to issue receipts to the customers relating to sale custody
deposits. The banker issues this receipt after taking specimen signature of the customer.

i. Safe custody Register : Banker must maintain a register where in he enters

particulars of the items deposited before him with all other aspects.
ii. Withdrawal of Articles:- The Articles deposited with the banker can be withdrawn
by the customer after surrendering the receipt. If banker receives mandate that item
should be released only all persons sign on book when it is deposited more than two
persons, he must do like that.
iii. Locker user register:-The banker should maintain a register of Locker users
containing the entries of the date, time of entering and line of leaving and the
signature of the user. The user of the locker whenever uses locker should fill the
columns of the register.

III. Liability of the banker regarding the Safe Custody deposit:-

12
 a) The banker is liable for the loss of any security deposited with him provided, he acts
negligently;
b) The banker is liable for conversion i.e. an unauthorised act which deprives another of
his property whether temporarily or permanently;
c) The banker is liable for his property when authorised act which deprives another of
his property whether temporarily permanently;
d) The banker is liable for detaining securities because there is no lien right available to
the banker over the safe custody deport
e) The banker is liable for the fraud committed by his employee.

The banker may deliver the articles deposited under special circumstances such as
death, insolvency and mental incapacity of persons.

Precautions to be taken:-

i. The rules relating safe custody should be followed strictly.

ii. Every banker may have his own rules relating safe custody deposits;
iii. Customer may also be asked to open some fixed deposit account in the Bank to collect
the rent easily
iv. Customer must fill the proper lease document;
v. Banker should maintain the lease register;
vi. Two keys should be used to open the vaults (one key with the banker and another key
with the customer);
vii. Banker need not made known of the contents in the vaults.

7. Relevant laws

I. Consumer Protection Act, 2019

The Consumer Protection Act, 2019 is implemented with the objective to secure and
protect the interest of the consumers. It provides redressal to the grievances of consumers, who
are not satisfied by the service of the service provider. Under this act section 2(1)(o) of the act
defines the “service”. Section 2(1)(g) of the Act provides the definition of the term “services”.
Banking services also come under the scope of the service provided under the Consumer

13
Protection Act, 1986. Deficiency in any kind of services can be brought to the consumer forums
for redressal of grievances. Section 2(1)(d) of the Act says that a consumer is a person who
avails services for the consideration.

II. Limitation Act, 1963

The Limitation Act, 1963 provides for the prescribed time period within which any suit,
appeal or application can be made. The “prescribed period” means the period of limitation
computed in accordance with the provisions of the Limitation Act. A banker is allowed to file a
suit, appeal or an application for recovery of the loan only when the document is within the
period of limitation. Therefore, the bank should be careful that all the legal loan documents are
within the time limit and are held as valid.

III. Banking Ombudsman:

Banking Ombudsman Scheme is a grievance redressal system. If a customer is

dissatisfied with the service of the bank then he can approach the banking ombudsman for
further action. It is introduced under Section 35A of the Banking Regulations Act, 1949.

8. Conclusion
The bailor-bailee relationship in banking, particularly in the context of safe deposit
services, is a critical aspect of the banking industry’s fiduciary duties. Governed by the principles
of the Indian Contract Act, this relationship imposes significant responsibilities on banks to
safeguard customers’ valuables and adhere to strict standards of care.

9. Suggestions
By understanding and fulfilling these obligations, banks can build and maintain trust with
their customers, ensuring the safe custody of their personal property. For customers, awareness
of their rights and the bank’s responsibilities can help them make informed decisions and
safeguard their valuables effectively.

14
10. Reference

1. S.R.. Myneni ,Law of Banking and Negotiable Instruments ,Asia Law House , (Edn. 5 th )
107-125

2. R.N.Choudhary,Banking Laws,central Law Publications, Allahabad, p-117-118.)

3. Vinod Kothari, Banking Law and Practice In India, 26th edition(Publication by Lexis
Nexis),p-327-328.

15
4. M L Tannan, Banking Law And Practice in India 23rd Edition , Published by Lexis
Nexis, Nagpur.
5. Kuldeep Singh , Relationship between Banker and Customer , International Journal of
Trend in Scientific Research and Development (IJTSRD) Volume: 3 | Issue: 3 | Mar-Apr
2019 Available Online: www.ijtsrd.com e-ISSN: 2456 – 6470
6. S.N. Gupta, The Banking Law in Theory and Practice’, 3rd edn. vol. 1. New Delhi,
Universal Law Publishing Co.,1999. pp.1-25

16