Whose bank account is it anyway? A bank's right to close an account against the customer's will 

publication 

June 2011

Litigation Bulletin

It is not good business for a bank to tell a customer to move its accounts elsewhere, but banks will occasionally do so. Typically, this happens where there has been a breakdown of trust in the banking relationship, for example where the bank suspects fraudulent activity, such as money laundering or cheque kiting, or ties to terrorism. In fact, banks are not only wise to terminate the relationship in these circumstances, but are often required to do so pursuant to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.1

However, the grounds upon which a bank may wish to end a relationship are occasionally less clear and clients, not always thrilled to learn that their bank accounts have been terminated, will often take issue with the right of the bank to do so. The question becomes: is a bank entitled to close a client account and terminate a banking relationship at its discretion? Courts have said that the answer is yes.

banks assert right to close accounts

Financial institutions are consistently threatened with litigation for terminating banking relationships and closing down client accounts. Plaintiffs will often find creative ways to argue that a bank is obliged to continue to operate accounts for the former client. Any number of claims have been asserted, including: (a) breach of the express terms of the account agreement; (b) breach of an implied term in the account agreement not to terminate; (c) breach of a duty of good faith; (d) breach of a fiduciary duty; and (e) unlawful interference with economic interests. Plaintiffs have also alleged that any clause permitting the bank to terminate the account without notice is unconscionable and should have been brought to the client's attention.

courts uphold bank's right to close accounts

A review of recent Canadian case law reveals no reported instances where such claims have succeeded. The reported decisions all support a bank's unfettered right to close client accounts and judges have refused to grant mandatory injunctions requiring the banks to continue to operate accounts against their will.2 Banks have also had success in having these claims dismissed entirely on motions for summary judgment.3 In some cases, the allegations levied against the banks have been ultimately characterized as frivolous or vexatious.4

the terms of account agreement will govern

Courts have held that the account agreement between a bank and its client constitutes a contract like any other and the general rules of contractual interpretation will apply. As such, the terms of the account agreement will govern the relationship between the parties.

Courts have upheld a bank's right to terminate a client account, without notice, when the account agreement expressly allows it to do so. Clauses of this nature are not unusual, onerous or unconscionable and don't need to be specifically drawn to the attention of the client – especially when the client is a sophisticated commercial entity. However, if the account agreement does not permit a bank to terminate the relationship immediately, courts may read in a requirement that the bank provide reasonable notice.5

Further, as per general rules of contract law, there can be no implied terms read into an account agreement that contradict the explicit terms on the page. Courts will not read in an obligation that the bank continue to operate the accounts indefinitely and financial institutions are not required to continue to contract with clients they no longer wish to do business with. In short, banks do not require a "commercially reasonable justification" for terminating an account.6

Courts have also routinely rejected the argument that a fiduciary duty exists between a bank and its clients or that the bank owes a duty of good faith not to close the account. It has also been decided that the closure of a company's bank account does not constitute unlawful interference with their economic interests, even if business disruption occurs.

an individual's right to a personal deposit account

The erroneous belief that banks are not entitled to terminate client accounts likely stems from section 4(1) of the Access to Basic Banking Services Regulations, which states that subject to a few exceptions, a bank shall open an personal deposit account with a deposit of less than $150,000 for an individual who can present valid identification.7 However, there are two catches:

  • Firstly, these Regulations only deal with accounts opened by natural persons for non-business purposes. They do not apply more generally to corporate bank accounts.
  • Secondly, these Regulations don't explicitly deal with the termination of bank accounts. As stated by one judge: "I accept the defendant's submissions that this section and the Regulations pertain to the opening of bank accounts not to the closing of bank accounts which, therefore, remains subject to the terms of the agreement between the bank and customer."8 Therefore, while a bank may be obligated to open a personal deposit account for an individual, they are not obliged to continue that banking relationship indefinitely.

implications

The case law makes it clear that businesses do not have an inalienable right to a bank account and financial institutions can insist that clients – both individuals and companies – take their business elsewhere. The explicit terms of the account agreement will determine each party's rights upon termination and both banks and clients would be best served to review the terms of their agreements carefully.

by Hilary Clarke, Lisa Brost and Richard McCluskey

1 SC 2000, c 17.

2 RCG Forex Service Corp v HSBC Bank Canada, 2011 BCSC 315 ["RCG Forex"]; B-Filer Inc v Bank of Nova Scotia, 2005 ABQB 704; B-Filer Inc v TD Canada Trust, 2008 ABQB 749.

3 Lovric v Toronto Dominion Bank, 2008 BCSC 478 ["Lovric"]; Mechar v Bank of Nova Scotia, 2011 BCSC 500.

4 RCG Forex at para 46; Lovric at para 28.

5 RCG Forex at para 32. See also Skovsgaard v Toronto Dominion Bank, 1994 CarswellOnt 3894 at para 20, aff'd at 1995 CarswellOnt 3395 (CA), and Semac Industries Ltd v 1131426 Ontario Ltd, 16 BLR (3d) 88 at para 61 (Ont SCJ).

6 RCG Forex at para 33.

7 SOR/2003-184 (the "Regulations"), made pursuant to the Bank Act, SC 1991, c 46.

8 Lovric at para 14.

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2011