The special relationship between banker and customer refer to certain rights of the banker as stated below:

1. Rights of Lien.
2. Right of Set-off and
3. Right of Appropriation of Payments or the Rule in Clayton’s case.
4. Banker’s right to claim incidental charges.
5. Banker’s right to charge interest.

Lien: Meaning : Banker’s right of lien is an important special feature of banker customer relationship. The term ‘lien’ means “the right of a creditor to retain in his possession the goods and securities owned by the debtor until the debt has been discharged, but not the right to sell”. In simple, lien means right to retain the goods or securities till the debt is cleared.

Lien is of two kinds namely:

1. Particular or Special Lien; and
2. General Lien

A particular lien gives the right to retain possession only of goods in respect of which the charges or dues have arisen.

Eg. A tailor’s right to retain the clothes till the stitching charges are paid.

A General Lien is one, which gives right to retain possession until the whole balance of the account is paid. It extends not only towards goods pledged as security but also in respect of others. A Banker exercises/possesses the right of ‘General Lien’.

It confers on Banker (as a creditor) right to retain the goods and other securities owned by the debtor until the debt due from him, is repaid. For instance, when a bank sanctions loan to a customer against a particular security. At the time of repayment/to clear off the loan, the security/pledged/mortgaged is not sufficient to meet the liability, the banker may proceed (exercise lien) against other securities (moveable or immovable) pertaining to the customer (debtor). Where as a particular lien confers right over a particular debt only, the general lien is applicable to all debts due from debtor to the creditor.

Section 171 of the Indian Contract Act, 1872 confers on Banker, the right of general lien. The banker can exercise his right of lien on all goods and securities entrusted to him in the capacity as a banker. The Banker cannot exercise his right of lien in respect of :

1. the goods and securities entrusted to him as a trustee or an agent; and
2. the goods and securities entrusted to him for some specific purpose.

Banker’s lien, an implied pledge : If goods are delivered as security by one person to another, it is called ‘Pledge’. Eg. If a farmer delivers 100 bags of paddy or wheat for securing a loan from the bank, it is called ‘Pledge’. The former is pledger and the banker is pawnee. In pledge, the pledges (creditor) can exercise the right of sale. With the right of lien, the banker can sell the goods and securities in case of default by the customer. However, he cannot sell the title deeds of an immovable property.

Therefore, the Delhi High Court in Vijay Kumar vs. Jullundur Body Builders & Others¹⁾ has judicially defined banker’s lien as an Implied Pledge.

The Banker cannot exercise the right of general lien in the following cases :

1. Safe custody deposits : When the customer deposits with the banker, valuables, securities, documents, etc. for safe custody, the right of General Lien cannot be exercised over them.
2. Documents deposited for Special Purpose.
3. When the customer, negligently or mistakenly left the securities with the banker.
4. When the right of general lien becomes particular lien.

The expression ‘Set-off’ means “Combining two accounts of the same customer”. It is a mutual adjustment/arrangement between the banker (as creditor) and customer (as debtor) in respect of payments due to the creditor. Set off may aptly be described as the right of a Banker to appropriate the credit balance in one account in order to arrive at the net sum due. It is a statutory right, which a banker is entitled to exercise in order to combine two accounts in the name of the same customer to recover the debts due by the customer (debtor). The banker adjusts the debit balance in one account with the credit balance in one account with the credit balance in another account. For instance, one of his customer’s accounts shown debit balance i.e. overdraft of Rs. 10,000/- and another account shows a credit balance of Rs. 5,000/-. Then, the banker can adjust the credit balance of RS. 5,000/- against the debit balance by combining the two accounts and can claim the remaining amount of Rs. 5,000/- only from the customer.

Conditions : The banker can exercise the right of set-off subject to the following conditions:

1. The accounts must be in the same name of the customer and in the same right/capacity.
2. The right is in respect of debts due only : not in respect of future debts.
3. The amount of debts must be certain and undisputed.
4. There should not be any agreement express or implied to the contrary.
5. The right cannot be exercised after the Garnishee Order has been passed by the court.

Automatic Right of Set-off: Banker’s right to set-off arises automatically under the following circumstances:

1. On the death, insanity or insolvency of the customer.
2. On the insolvency of the partner of the firm or on the winding up of a company.
3. On the receipt Garnishee Order.
4. On receiving notice of assignment of a customer’s credit balance, and
5. On receiving notice of second mortgage over the security charged to the banker.

It is generally believed that a banker could combine his customer’s accounts unless there is an agreement contrary to that effect. This view was laid down, basing on the decision in:

Garnett vs. Mc. Kervan²⁾ : In this case, the plaintiff had a dormant overdraft with one branch of a bank and a few years after he had stopped business with the branch, he opened a new account with another branch of the same bank, where his credit balance just exceeded the amount of the dormant debit balance referred to above. The amount required for the clearing of the overdraft with the first branch was transferred from his account with the second branch, which led to the dishonour of the customer’s cheques drawn against his credit balance. The court’s decision was in favour of the bank, as it was held that there was no special contract or usage proved to keep the accounts separate and that, while it might be proper and considerable to give notice to a customer of intention to combine accounts, there was no legal obligation on a bank to do so arising either from the express contract of course of dealings.

Halesowen Presswork & Assemblies Ltd v. Westminster Bank Ltd³⁾ : In this case, the court held that the bank is not entitled to combine two accounts if there was an arrangement with its customer at the time of opening the accounts to keep the accounts separately for a period unless the Bank had given notice to determine the arrangement by reason of special circumstances, the Bank having taken no steps to determine.

The rule in Clayton's case: The expression ‘Appropriation of payments’ means “adjusting the payment towards the debts”. When a debtor owes several distinct debts to a creditor, and makes a payment not sufficient to clear/discharge all the debts, the question, that arises is : against which debt/debts the payment is to be adjusted/appropriated ? Similarly, when the customer takes more than one loan, he owes to the banker different debts. Later, the customer takes more than one loan, he owes to the banker different debts. Later, the customer may make payment, which is not adequate to clear all such distinct debts. Here, also the question of appropriation arises.

To answer this questions, four rules were laid down in the Clayton’s case. Hence, it came to be known as “The Rule in Clayton’s Case”. These rules are embodied in Sections 59 to 61 of the Indian Contract Act, 1872, as follows :

1. When the debtor intimates, against what debt/debts (in full or in part) the payment is to be appropriated/adjusted, the creditor has to adjust/appropriate accordingly (Sec. 59).
2. When the debtor (while making payment) does not indicate as to appropriation, the circumstance so implies that the payment is to be appropriated against a particular debt (implied appropriation). Eg. The payment may imply appropriation towards a debt which is about to be barred by limitation period.
3. When the debtor does not indicate as to appropriation, the creditor has a discretion to appropriate the payment against any debt including time barred, but not disputed one (Sec. 60).
4. Where neither of the parties appropriates, the payment shall be applied to discharge the debts including time barred ones in chronological order i.e. in order of time. If the debts are of equal standing, the payment shall be appropriated proportionately.

Question may arise whether the payment made by the debtor is to be adjusted first towards the interest or the principal in the absence of agreement to that effect ? In M/s Kharavela Industries Pvt. Ltd. vs. Orissa State Financial Corporation & other : It was held that in the case of a debt due with interest, any payment made by the debtor should be adjusted first towards satisfaction of interest and thereafter towards the principal unless there is an agreement, to the contrary.

The rule in Clayton’s case is of great importance to the Bankers. The above four rules were laid down in the case of Devaynes vs. Noble⁴⁾ (popularly known as ‘Clayton’s Case). Hence, the above rules as to the appropriation of payment, came to be known as “The Rule in Clayton’s Case”.

Facts of the case : A firm of Bankers Devaynes, Daives, Noble & Co. had five partners. Devaynes, a senior partner died. The surviving partners continued the business. After one year, the firm became bankrupt and the creditors (customer) continued to deal with the firm even after the death of Devaynes. Clayton had a credit balance on the death of partner. Later, he withdrew in excess of the balance and also paid in, so as to arrive at credit balance. Mr. Clayton claimed that the payments in, should be appropriated against the withdrawals so as to leave the credit balance intact at the time of partner’s death. The court rejected his contention and denied the claim and laid down the above rules.

Thus, in case of death, retirement or insolvency of a partner, the existing debt (due from the firm) is adjusted by making subsequent credit made in the account. Then the banker has no right to claim such debt from the assets of the deceased/retired partner.

Every customer is expected/supposed to maintain a minimum balance with his account. If he fails to do so, the banker may impose/collect certain incidental charges for the purpose. Similarly, the banker may collect charges for issuing the statement of account of the customer’s account.

If the banker has given a loan to the customer, as a lender the banker has a right to debit the interest to the customer’s account. It is an implied right of the banker to charge interest for his loans, unless there is a contract to the contrary to this right. He is also entitled to collect the compound interest on the amount due to him at half yearly rests.