Banking law

Overdrawn accounts

Emerald Meats (London) Ltd v AIB Group (UK) Plc [2002] EWCA Civ 460

Meat wholesalers Emerald Meats held a current bank account with AIB Group.

The account was overdrawn for significant periods.

Two business days after Emerald paid into its overdrawn account a cheque drawn on another bank, AIB would receive value from the bank upon which the cheque was drawn.

However, the balance on Emerald's account at AIB would not be reduced for the purpose of the calculation of interest until the following day.

Therefore, Emerald paid interest on the unreduced balance of its overdraft for an extra day after AIB had received value from the paying bank.

For example, if Emerald paid a cheque into its overdrawn account on a Monday, AIB would receive value for the cheque from the paying bank on the Wednesday but Emerald's account would not be reduced for the purpose of the calculation of interest until Thursday.

Emerald claimed that AIB was not authorised to charge the extra day's interest and brought a claim against it for 4,136.

The judge at first instance dismissed the claim; Emerald appealed to the Court of Appeal.

AIB sought to justify its practice by implying its standard terms of trading into the contract between itself and Emerald.

AIB argued that its standard terms and practice applied unless the particular term sought to be implied was the subject of an agreement to the contrary or was extortionate or contrary to all acknowledged and approved banking practice.

On the facts of this case, there was no conflicting term expressly agreed between the parties.

Furthermore, the expert evidence confirmed that AIB's practice was not extortionate or contrary to what is a widely adopted practice in the banking community.

Emerald argued that AIB could not imply its normal banking practice where the term sought to be implied was not obvious.

The customer claimed that a term ought to be implied entitling AIB to charge interest only during the period that the money borrowed was outstanding.

Since AIB charged interest on an unreduced balance for an extra day after receiving value, it was effectively charging interest for a day longer than the whole of the money borrowed was effectively outstanding.

The court preferred AIB's argument and dismissed the appeal.

The expert evidence in the case suggested that the practice of former building societies mirrored that of AIB in this case.

Consequently, although the sums of money at stake in this litigation were relatively small, the consequences for the wider banking community if the customer had succeeded would have been seismic.

The case also graphically illustrates the perpetual difficulties that customers have in seeking to imply terms into the customer banker contract.

Bank customers are faced with a stark reality: either they negotiate all the individual terms of their contracts, or rely on the implication of the bank's standard terms - unless those terms are extortionate or contrary to banking practice.

The former option is, in the vast majority of cases, impractical.

By Simon Sugar, barrister, 36 Bedford Row, London