Law of Banking and Insurance in Nigeria Summarized

TABLE OF CONTENTS

LAW OF BANKING AND INSURANCE PART I AND II.

DEFINITION OF A BANK.

DISTINGUISHING A BANK FROM OTHER SIMILAR ENDEAVOURS

BRIEF HISTORY.

BANKER AND CUSTOMER RELATIONSHIP NATURE, SCOPE, IMPLICATION, RIGHTS AND OBLIGATION, JURISDICTION OVER BANKER-CUSTOMER DISPUTES, AND REGULATION.

WHEN CAN A CHEQUE/WITHDRAWAL ORDER BE DISHONOURED?

REGULATION OF FOREIGN EXCHANGE.

THE CENTRAL BANK OF NIGERIA (CBN); FUNCTIONS, CONSTITUTION, TOOLS OF MONETARY CONTROL, ETC.

THE BANKS AND OTHER FINANCIAL INSTITUTIONS ACT (BOFIA); AN EXTENSIVE (BUT SUCCINCT) EXAMINATION OF CERTAIN ESSENTIAL PROVISIONS.

FAILED BANKS AND BANK EXAMINATION.

THE NIGERIA DEPOSIT INSURANCE CORPORATION NDIC. JUSTIFICATION, CONSTITUTION, FUNCTIONS, ETC.

NEGOTIABLE INSTRUMENTS. BILL OF EXCHANGE. CHEQUES. PROMISSORY NOTES.

PART II.

LAW OF INSURANCE.

HISTORY

NATURE, CHARACTERISTICS AND DEFINITION OF INSURANCE.

PARTIES TO THE CONTRACT OF INSURANCE.

INSURABLE INTEREST IN LIFE INSURANCE.

FORMATION OF THE CONTRACT OF INSURANCE.

THE DOCTRINE OF UTMOST GOOD FAITH UBERRIMAE FIDEI.

INSURANCE INTERMEDIARIES.

WARRANTIES AND CONDITIONS.

INTERPRETATION/CONSTRUCTION OF INSURANCE POLICIES.

RISK AND CAUSATION.

ASSIGNMENT

SETTLEMENT OF INSURANCE CLAIMS.

SUBROGATION.

CONTRIBUTION AND DOUBLE INSURANCE.

MOTOR VEHICLE INSURANCE.

SETTLEMENT OF INSURANCE CLAIMS UNDER THE INSURANCE ACT.

STATUTORY REGULATION OF INSURANCE BUSINESS.

 

LAW OF BANKING AND NEGOTIABLE INSTRUMENT.

DEFINITION OF A BANK.

:: There is no all-encompassing definition of a bank. However, it is necessary to embark upon the herculean task of defining a bank considering the various statutory rights, duties and obligations attached to a bank. for example the obligation to be duly registered and licenced to carry out banking operation imposed by Section 2 of the BOFIA.

:: By Section 2 of the Bills of Exchange Act 1990 it is a body of persons incorporated or not who carry on the business of banking (a similar definition is provided under Section 2 of the Evidence Act).[1]

:: Section 43 of the Banking Act: defines a bank as any person who carries on banking business. It goes further to define banking business as the business of receiving monies… granting loans… acceptance of credits, bills, cheques, purchase and sale of securities… and others as the minister may designate… Same definition of banking business is provided under Section 66 of the Banks and Other Financial Institutions Act.

:: In UDT V Kirkwood, the court noted that a bank accepts money, honours cheques, and keeps accounts. Lord Denning noted that he who does not do these is not a banker[2].

:: Dr Hart: defines it as a person or company carrying on the business of receiving monies and honouring cheques for customers. A Similar definition was given by Sir John Paget[3].

:: Horace White: notes that a bank is a manufacturer of credit.

:: Wordweb dictionary defines it as a financial institution which collects deposits and channels it towards lending activities.

:: Harry G Brown notes that essentially, a bank acts as an intermediary between the surplus spenders (depositors) and deficit spenders (borrowers). Also noted that it is a departmental store of financing.

There are a thousand and one definitions of a bank. However, we can observe that the combined interpretation of the various definitions of a bank would reveal that:

1.      Essentially, a bank receives deposits, grants loans and honours cheques.

With the evolution of commerce and the facilitative effect of technology and communication, banks also:

2.      Deal in shares, debentures, treasury bills, bonds and other kinds of investments.

3.      Deal in negotiable instruments like bill of exchange, promissory notes and so on- Woods V Martins Bank.

4.      Provide financial advice to customers[4].

5.      Buy and sell foreign exchange.

6.      Act as agents of their customer in nearly all financial transactions like periodic subscriptions, bill payment, online shopping, and so on. This has been facilitated by the use of credit cards, debit cards, ATM cards, Mobile banking, Quickteller and so on.

7.      Banks perform other functions which the CBN governor may direct.

The court has noted in Banbury V Bank of Montreal that the limits of a bank’s business cannot be laid down as a matter of law[5]. An all-encompassing definition may be impossible.

DISTINGUISHING A BANK FROM OTHER SIMILAR ENDEAVOURS

MONEYLENDING: A moneylender is someone who lends money at an interest. Unlike a money lender, a bank diversifies into various commercial spheres. The Moneylenders Act does not apply to a banker- Ojikutu V Agbomagbe Bank Ltd, as in this case, the banker was not obliged to obey the 15 percent interest ceiling imposed by Section 13 of the Money Lender’s Act because he was not engaged in “moneylending” but banking.

A SAVINGS ORGANIZATION: Savings organization collects money from its members/customers for saving. Although a bank does same, it diversifies into other various fields. In AG Federation V Umoh Ekpa, the appellant was charged for operating banking business without a valid licence. The court held that he merely collected money from market women and deposited same into the bank. He was a daily collector and not a banker. The appellant’s charge for operating without a valid banking licence was quashed.

INSURANCE BUSINESS. Is not the same as banking business. Just like “banking” there is no widely accepted definition of insurance-Medical Defence Union V Department of Trade. In Prudential Insurance Co V Inland Revenue Commissioners, it was seen as an agreement to pay a sum of money upon the happening of an uncertain event after the payment of consideration (called premium). A contract whereby the insurer agrees to indemnify the insured against loss upon the happening of an event after the payment of consideration called premium.-Charles Chime V United Nigeria. From the definition of a bank above, they do not really seek to guard against an uncertain occurrence or risk. Moreover, they are regulated by different Statutes.

BAILMENT: Bailment involves where the bailor gives the Bailee his property for a particular purpose (usually for temporary keeping) on the understanding that it shall be returned once the purpose has been fulfilled. The Bailee should keep the property in good conditions. A bailor is generally precluded from dealing with the property bailed. A bank on the other hand can deal with the cash deposited through lending, acquisition of properties and other transactions. Provided it can pay the customer on demand.

:: To qualify as a bank, “banking” has to form a substantial part of the business[6].

In conclusion, Lord Denning once remarked that it is easier to identify a bank than to define it.

BRIEF HISTORY.

:: Ancient civilisations like Babylon made loans from their temple’s treasuries as early as 2000 BC.

:: The Early Goldsmiths of 17th century took deposits of gold and coins from individuals and merchants for safekeeping as private storage was fraught with uncertainties. The depositor was given a claim slip which he would be required to supply when he wishes to collect his gold coins back. Subsequently, the goldsmiths began to lend the coins in their possession provided the holder of a claim slip was paid on demand.

The Nigerian position.

:: With the advent of the British in Nigeria and the growth of commercial activities… The Bank of British West Africa (renamed First Bank) was established in 1894 to serve the needs of the British Colonial Government.

:: In 1912, the West African Currency Board was established to issue and distribute currency within the region of West Africa. Then followed Barclays Bank (now Union Bank) in 1917. The first indigenous bank; The Industrial and Commercial Bank was established in 1929.

:: Following the Clamour for a people-oriented indigenous bank, various indigenous banks like; Agbonmagbe bank, Standard Bank, African Continental Bank, Afro-Seas Credit Bank etc sprang up in the late 40s and early 50s. However, many of these banks failed due to lack of regulation, dishonesty, inadequate record keeping and unprofessionalism.

:: The failure of these banks had dire consequences on their Nigerian customers and the Nigerian economy. Hence, the Banking Ordinance was enacted in 1952. It mandated that a bank’s nominal capital must not be less than £25,000 of which not less than £12,500 (N25,000) is paid up. In the case of a foreign company E100,000 (N200,000). These values have been increased overtime by the subsequent decrees like the Banking Ordinance of 1958 and the Banking Decree of 1969.

:: In 1958, the Central Bank of Nigeria Ordinance was passed. This established the CBN to better carry out the functions of the WACB and more.

:: In 1991, the Banks and Other Financial Institutions Decree was enacted. It mandated that a bank must be properly incorporated and licenced to carry on banking activities.

:: In 1998 Section 1 of the NDIC Act[7] established the Nigerian Deposit Insurance Corporation. The NDIC aims to protect customers (depositors) and enhance bank stability by administering the Insurance Deposit Scheme. The IDS is a risk control mechanism which mandates all banks and deposit taking institutions to insure their deposits with the NDIC-Section 15 NDIC Act. The premiums/monies so insured shall be used to resuscitate a failing bank or settle depositors of a failed bank.

:: The Universal Banking System was introduced on the 1st of Jan 2000 which sought to widen the range of services which a bank can offer. Hitherto, banks were classified based on the range of banking services they offered. For example Commercial, Merchant, Agricultural Bank, Mortgage bank, Micro-finance Bank, etc. with the introduction of the UBE, a single bank can offer commercial, mortgage, agricultural, merchant and other services all at once.

:: In 2005 the CBN mandated that banks must attain a minimum capital of N25,000,000,000. Many banks failed due to their inability to meet up with the N25,000,000,000 requirement.

:: Over time, various issues and developments have arisen in the banking sector… At present, the Nigerian banking system consists of the CBN, the NDIC, the Federal Ministry of Finance and the banking sector regulated by the various Acts. In 2006, NDIC Act was enacted and in 2007 CBN Act was enacted as revisions of the previously existing statutes.

BANKER AND CUSTOMER RELATIONSHIP.

DEFINITION OF A BANKER AND CUSTOMER.

Who Is A Banker?

:: The layman defines a banker as a person that works in a bank. This is CERTAINLY NOT the legal position.

:: In Akanle V Reginam, the court noted that “banker” refers to the company licenced to carry on banking business. The conviction of the manager for granting illegal loans was quashed on the ground that the banker rather than the manager ought to have been sued since the banker customer relationship was that of debtor-creditor.

:: Section 2 Bills of Exchange Act 1954 defines a banker as a body of persons whether incorporated or not who carry on the business of banking. This definition is faulty as Section 2 of the Banks and Other Financial Institutions Act makes it a condition precedent for persons carrying on banking business to be incorporated.

:: By Section 2 of the Evidence Act, a person, partnership or company carrying on the business of banking. Similar definition given by Section 41(1) of the Banking Decree.

:: A banking business has been defined in Section 66 BOFIA as the business of receiving monies… granting loans… acceptance of credits, bills, cheques, purchase and sale of securities… others as the minister may designate.

Therefore, a banker refers to a company that has been incorporated and licensed to carry on banking business. E.g. Stanbic IBTC, GTB, UBA and so on.

Who Is A Customer?

:: In ordinary terms, he is regarded as a person buying the goods or employing the services of another. It is however important to know the strict legal meaning of a customer in order to decipher whom the bank legally owes a duty.

:: In Ladbroke and Co V Todd, the court held that to qualify as a customer, one must have an account with the bank. Same position was followed in Commissioners of Taxation V English Scottish and Australian Bank, where it was held that duration was irrelevant provided there was an account with the bank. In Woods V Martins Bank, the court noted that a finalised agreement to open an account could suffice notwithstanding that no actual deposit has been made. In Robinson V Midland Bank, where A opened an account in B’s name. The court held that the banker-customer relationship was between A and the bank notwithstanding that the account was opened in B’s name since the bank only knew A. In Great Western Railway Company V London and County Banking Co, one Huggins had been cashing cheques over the counter at the defendant bank for almost 20 years. The court held that since Huggins had no account with the bank, he was not a customer. Similarly, in Ademiluyi and Lamuye V ACB, A and B (prominent members of a ruling party; NCNC) opened an account with ACB. ACB believed that the account was opened on behalf of NCNC whom they regarded as their customer. “A” sought to cash money from the account but NCNC countermanded the cheque. The court held that the countermand by NCNC was ineffective because the banker-customer relationship existed only between ACBank and AandB who were the account holders.

A SHIFT IN POSITION: The cases of Hedley Byrne Co V Heller and Partners and Agbonmagbe Bank V CFAO Ltd the courts drawing from the decision of Donoghue V Stevenson, have held that a bank can be liable in negligence to a person notwithstanding that he does not have an account with the bank so long as it is reasonably foreseeable that they shall be affected by the bank’s negligence.

In conclusion, every case must be determined on its own merits. The courts may impose a duty of care on a banker depending on the nature of the transaction and the demands of justice and equity notwithstanding that a person does not have an account with the bank.

NATURE OF BANKER-CUSTOMER RELATIONSHIP

The earliest banking with goldsmith seemed like bailment[8] until the goldsmiths realised that the coins could be lent out. After concluding that a banker-customer relationship exists, the next question to ask is: how should such relationship be regulated? What are the rights and obligation of the parties based on their relationship?

1. It has generally been accepted that they stand in a debtor-creditor relationship.

-         Where the bank receives deposits of cash from the customer. (Here the bank is the debtor of the customer and should pay on demand).

-         Where the bank loans money to its customer. (Here, the banker is the creditor and the customer is the debtor).

In Foley V Hill, the appellant claimed that his bank should render accounts and profits on how his money was being used. lord Cottenham noted that the relationship is debtor-creditor rather than bailment. To this effect, the bank can utilise customer’s money without prior permission of the customer… subject to the condition that it shall be repaid on demand. The court in Joachimson V Swiss Bank Corporation followed the above position… Atkin J added that the bank should only pay on demand during working hours and in the branch of initial payment (technology now makes payment flexible). The customer owes a duty to take proper care in executing his order so as not to mislead the bank or facilitate forgery. The debtor-creditor position has also been maintained in the following cases: Osawaye V National Provincial Bank Ltd; Carr V Carr; Sims V Bond, Yusuf V Co-operative Bank Ltdto mention a few.

Little wonder Lord Goddard once said that the only person that has money in a bank is the bank itself.

Due to the intricacy and diversity of banking business the following relationships may arise:

2. Bailment: where the bank accepts an item (like certificate) for safe custody.

3. Agency: The bank is regarded as an agent where it collects cheques for and on behalf of its customers-Agbonmabe Bank V CFAO… Where it buys shares, treasury bills and the likes for and on behalf of its customers-Hall V Fuller.

4. Fiduciary relationship: In Hedley Byrne V Heller and Partners Co, the court noted that the bank would be regarded as being in a fiduciary relationship where it gives advice to customers with the knowledge that it is being relied upon. A fiduciary duty may also be construed in other deserving circumstances.

4. Trusteeship/Executorship: where the bank executes a person’s will or is asked to administer trust property. The trusteeship/executorship relationship could exist.

IMPLICATIONS OF BANKER CUSTOMER RELATIONSHIP.

Here we are looking at the various rights and obligations which flow from the banker-customer relationship.

According to Lord Atkin in Joachimson V Swiss Bank Corporation; the bank undertakes to receive money and pay on demand while the customer on the other part should take care in executing his orders so as not to mislead the bank or facilitate forgery-.

Duties of the Bank.

1.      To collect deposits: of cash, valuables, cheques and the likes from, for and on behalf of customers-in Dike V ACB ltd,the bank was compelled to collect deposit from the customer being its duty.

2.      To pay on demand and honour customer’s cheques: Generally, a bank should not dishonour its customer’s cheque or demand (Conditions for a dishonour shall be discussed later). A wrongful dishonour may amount to a breach of the contractual relationship-Marzetti V Williams entitling the customer to damages. In Roline V Steward, the court held that damages is presumed where the customer is a trader. In Ejimofor V UBNhowever, the court held that delay in payment without more would not amount to wrongful dishonour. In this case, the customer payee got impatient and left after waiting for several hours in the bank. The court held that the delay by the bank does not necessarily amount to a dishonour.

The duty to pay on demand does not prevent the bank from making enquiries and exercising due care and skill before making the payment-Karak Rubber co V Burden and Others.

3.      Duty of secrecy: to treat its customer’s information and affairs as private and strictly confidential. The right of privacy is preserved by Section 37 of the 1999 constitution subject to certain legal justifications.

In Tournier V National Provincial Bank, the banker disclosed certain confidential information[9] relating to the customer’s account and credit worthiness. The customer’s employers acted on the information and refused to renew his employment. The court held that the defendant bank had failed in their duty of secrecy and were liable to pay damages.

The duty of secrecy shall be dispensed with/ignored in the following situations:

·        Legal compulsion: Section 45 of the 1999 constitution provides for derogation on reasonably justifiable law. Section 7 Bankers Books Evidence Act 1879 empowers the courts to order for the inspection of a bank’s books of account, may be for judicial evidence or other legitimate need to disclose.The CBN Act and BOFIA also contain certain provisions for the inspection of bankers books and information in the interest of investors and the public.

·        For overriding public interest. like during war where customer is suspected to be dealing with enemy. Section 45 of the 1999 constitution allows for certain derogations.

·        Where disclosure is made with the express or implied consent of the customer.

·        Where the interest of the bank requires disclosure. For example where it is suing the customer on an overdraft.

4.      To inform the customer on developments and (or) suspicious activity in relation to his account.

5.      To act as collecting banker[10] to the customer: receive all amounts payable to the customer and clear with other banks. The account of the customer shall be credited to that effect. The banker should act expediously-Foreman V Bank of England.

6.      To exercise due care and skill-Agbomagbe Bank V CFAO. Hedley Byrne and co V Heller and Partners Co.  In Imersel Chemical Co ltd V National Bank of Nigeria Ltd, the plaintiffs, relying on the statement of the bank (that the defendant was credit worthy) suffered some detriment in dealing with the defendant. The court held that this could be actionable negligence. In Woods V Martins Bank, imprudent advice given by the manager of the bank to a customer grounded liability.

7.      To give reasonable notice before closing the customer’s account.

Rights of a bank.

1.      To use deposited money without seeking approval from the customer-Joachinson V Swiss Bank Corporation.

2.      To charge interest on credit facilities.

3.      To refuse a payment order where there is a legal or reasonable justification. (shall be discussed later).

4.      To obtain reimbursement from customer for reasonable expenses incurred on his/her behalf.

5.      To exercise a right of lien over the customer’s property in its possession.

6.      Combination of accounts: right of a bank to generally retain a credit balance in a customer’s account against a debt due to the bank from the customer’s other account. Provided the debt is due-Co-operative Bank V Joe Golday Co. ltd. Although there has been several arguments against this right. Mr A has two bank accounts in ACB. His first account is overdrawn (owes the bank 1million), the other account has credit (2million). The bank can refuse to pay more than 1million from the second account.

Duties of a Customer.

1.      To seek out the bank whenever he wants to withdraw his money rather than the bank to seek him out.

2.      To draw his cheque (or make his withdrawal order) with due diligence and care so as not to facilitate misrepresentation or fraud-Joachimson V Swiss Bank Corporation. In London Joint Stock Bank V Macmillan and Arthur, a cheque (E12) was drawn payable to the bearer and the amount in words was not written. The clerk altered the cheque to show E120 (by adding a “0” behind the E12) and reflected same in words. Held that the customer was not careful in drawing his order as his failure to stipulate the amount in words facilitated the fraud.

Although the customer is to exercise due care in making his order, he may not be liable where the cheque book, seal, stamp and other items that can give the forger access to the customer’s money is used. In Bank of Ireland V Evans Charities Trustees, the secretary of the defendants used their seal (which was in her possession) to forge a cheque. The court held that the customer was not liable. In Kepitigalla Rubber Estate V National Bank of India, a secretary forged the signature of the customer on cheques. The bank cashed the cheque. The court held that the customer was entitled to a refund. Same position was followed in Nigerian Advertising Services Ltd V U.B.A ltd upon similar facts. It all depends on the facts of each case.

3.      To inform the bank of any suspicious dealings in his account which comes to his knowledge. Failure may translate into acquiescence and may estop a customer from claiming refund or reliefs in the event of any loss resulting therefrom-Brown V National Westminster Bank Ltd. In Greenwood V Martins Bank, the appellant discovered that his wife was in the habit of obtaining money from his account by forged cheques. Eight months after this discovery, he sought to recover all the monies obtained by his wife through the forged cheques. It was held that since he delayed for 8 months before informing the bank of such, his action for recovery should fail.

4.      To repay borrowed funds with reasonable interest and re-credit his account where overdraft[11] facilities have been granted to him. In Ojikutu V Agbonmagbe Bank, the customer noted that the interest rate was arbitrary. The court noted that this cannot excuse the customer from repaying the loan.

5.      To ensure that his account is in credit to meet cheques and other payment instructions.

RIGHTS OF THE CUSTOMER.

1.      The right to have his deposit accepted by the bank: the courts, in Ladbrooke V Todd, and the case of Joachimson V Swiss Bank Corporation (Per Lord Atkin) have noted that a bank must collect deposits of cash and cheques from its customers.

2.      Appropriation of Payment. This is the right of the customer (who has more than one account with a bank) to choose the account that would be credited by his deposit-Bradford Old Bank V Sutcliffe.

3.      Right to be paid on demand.

4.      Right to obtain information relating to his account. Like balance, statement of transactions that have occurred on his account, and so on.

TERMINATION OF BANKER-CUSTOMER RELATIONSHIP

The banker-customer relationship may be terminated by:

-          Mutual agreement between the banker and the customer. Provided obligations on both sides have been performed (like repayment of overdraft).

-          Death of customer. Section 75 BOEXAct.

-          When the banker is notified of the customer’s insanity-Younge V Toynbee.

-          Where the customer is adjudged bankrupt, withdrawal requests from the account would be dishonoured. Conversely, where the bank is wound up, the NDIC then takes control to couch the effect of failure… during this period, the banker customer relationship would be suspended.

-          The outbreak of war keeps the relationship in abeyance[12].

JURISDICTION OVER BANKER-CUSTOMER DISPUTE.

What court has the jurisdiction to entertain disputes between a bank and customer?

:: The Federal Revenue Act 1973 stipulated the jurisdiction of the FHC (then FRC) but the 1979 constitution failed to succinctly stipulate the jurisdiction of the FHC.

:: Luckily, the 1999 Constitution clearly enumerated the jurisdiction of superior courts.

For the sake of this topic, only Section 251(1D) and 272of the 1999 Constitution are “really” relevant.