The relation between a bank and its customer is of such a nature that it gives the right to the bank to set-off the customer’s debit and credit balances irrespective of the type of his accounts. The bank in this respect has the right to ascertain how an account of a customer stands through a simple calculation and to set-off any balance due from any other account or accounts of the same customer which are in credit. This right is called banker’s lien or set-off and is applicable in Cyprus, as seen in dealings at the Co-op this week.
A lien generally exists where there is a debt owed to the creditor and the latter retains possession of an object given to him by the debtor until the debt is paid off. If in the meantime the creditor loses possession of the item he also loses the right of lien. The creditor has the right to retain only possession of the item and he cannot sell it unless an order of the court is issued. Whereas in the case of the banker’s lien, if the account of the customer is overdrawn and a cheque is presented to the bank for payment, the bank has the right to retain the cheque or its amount until the customer pays off the overdraft or even to cash it and use the money to re-pay the overdraft. It should be noted that the bank does not lose the banker’s lien if in the meantime it allows the customer to withdraw money from the cheque. The question which may be raised is whether the bank is entitled to set-off a credit with a debit account of a customer. The answer is that the bank has such a right, it can set-off at any time the two accounts and it will be responsible to the customer only for any credit balance, unless there is an expressed or implied agreement with the customer to keep the two accounts separate.
Another question raised is what the relation between the bank and the customer is. It is well known that every bank and banking institution accepts deposits, loans and other credit facilities under a license issued to them by the Central Bank. The customer, when depositing money, is considered to be a creditor and the bank is considered as his debtor and vice versa when the customer borrows money. The bank, seeking to safeguard its rights, requires the customer to sign certain documents which clearly define the bank’s authority or give the right to it, among others, to exercise the banker’s lien or set-off the customer’s accounts. It is a common practice and most of us do not care to know the contents of the documents and the agreements we sign, even though they are binding.
As stated in case-law, the right of the bank to set-off one account with another or joint accounts of the same customer is generally applied, unless there is an agreement to the contrary. The banker’s lien is not similar to any other lien and derives from the relation between the bank and the customer; any amounts deriving from mutual but independent obligations cannot be set-off. Therefore, a customer who is at the same time a depositor, a debtor or a guarantor and wishes his deposits to be independent and excluded from any other liabilities or obligations he may have towards the bank, should make a relevant agreement with the bank to avoid the banker’s lien.
Despite the above, the recent set-off by the Cyprus Co-operative Bank raises questions as to its legality, given the time and circumstances under which it was carried out. Moreover, the fact that no set-off was previously made their customers were led to believe that there wouldn’t be any set-off, so the said ex-banking institution may be deemed to have waived this right.