The American writer Greg Bear famously quipped, “It is the bullets you don’t hear that gets you.” Banks and other institutions are usually adept at avoiding liabilities when they properly understand their legal duties. But when legal duties are unclear or misapprehended, troubles can arise. So, what duties does a bank owe to its customers? And what, if any, duties does it owe to a non-customer?
TORT LAW VS. CONTRACT LAW
Except for the duties created by statute, the law recognizes two main types of legal duties. The first type is created by tort law, which protects people and their property from physical harm by imposing a duty of reasonable care. For example, a bank must ensure that its lobby is free of tripping hazards. A party who is injured by a bank’s negligence may suffer significant harm and may receive significant compensation from a negligent party.
The second type of duty recognized by the law is based on contracts or agreements. In this instance, recoverable damages are more limited. Here the law protects expectancy interests. It merely ensures that parties obtain the benefit of their bargains, and damages are therefore much more limited.
Many of the most interesting questions — and most of the bullets that might surprise a bank — arise at the boundary
between tort law and contract law. Because obtainable damages under tort theories can often be much higher than those obtained under contract theories, plaintiffs frequently seek
First, in the absence of a statute, a bank’s duties to its customers are governed by the agreement between the parties and not by tort law. Second, a bank does not owe duties to non-customers (other than the duties that all institutions owe to protect life and property).
to find tort theories to use in their claims against financial institutions. The Utah Court of Appeals recently issued an
opinion that clarifies the boundary between tort claims and contract-based claims against a bank.
THE ECONOMIC LOSS RULE
An important legal theory that helps define the boundary between tort law and contract law is known as the economic loss doctrine. This doctrine, which has long been applied by Utah courts, prevents the recovery of economic damages under a tort theory when a contract covers the subject matter of the dispute between the parties. In other words, if a party to a contract does not experience an injury to the party’s person or property (but only a loss of money), the injured party may recover only what is contemplated by the contract. However, there is an important exception to this rule. If a bank owes a duty that is independent of the contract, then the injured party may still be able to obtain tort damages, including punitive damages. For obvious reasons, this exception is the focus of considerable litigation.
THE GENERAL DUTY OF CARE DOES NOT AVOID APPLICATION OF THE ECONOMIC LOSS DOCTRINE.
In 1988, the Utah Supreme Court issued an opinion in the case of Arrow Industries, Inc. v. Zions First National Bank, 767
P.2d 935 (Utah 1988). In that case, the court stated that there is a “general duty owed by all banks to act in good faith and exercise ordinary care in handling all banking transactions.” Id. at 937. Relying on this language, a party recently sued two banks, arguing that the banks should have prevented theft from the plaintiff. In the case of Legal Tender Services, PLLC v. Bank of American Fork, 2022 WL 570666 (Utah Ct. App., Feb. 25, 2022), the Utah Court of Appeals answered the question of whether a bank owes a general duty of care, such that the economic loss rule does not apply. The court clarified that the general duty of care does not apply to “every transaction that a bank is ever involved in.” Id. at ¶ 56. The court noted that the Arrow Industries case involved a statutory duty and that the language in Arrow Industries does not apply in the absence of a duty imposed by statute. The court clearly stated that because the plaintiff’s claim against the Bank of American Fork was governed by a contract, the plaintiff’s negligence claim was barred by the economic loss rule.
The importance of the Legal Tender Services case to banks is this: In the absence of a statute, there is no “general” duty of care that allows a customer to sue a bank for negligence in a dispute covered by a contract.
But what about parties who are not customers? The Legal Tender Services case answers this question as well.
A BANK DOES NOT OWE A DUTY OF CARE TO NON-CUSTOMERS
In Legal Tender Services, the court of appeals reaffirmed that, in the absence of a customer relationship or contractual
relationship, banks do not owe a duty to non-customers. The court held that because the plaintiff was not a customer of one of the banks in the case, that particular bank did not owe the plaintiff any tort-based duty.
SUMMARY
Plaintiffs are likely to continue to push the boundary between tort claims and contract claims, but the latest pronouncement of the Utah appellate courts is good news for banks. First, in the absence of a statute, a bank’s duties to its customers are governed by the agreement between the parties and not by tort law. Second, a bank does not owe duties to non-customers (other than the duties that all institutions owe to protect life and property).
For over twenty years, Mr. Wride has been helping clients with litigation and insolvency-related problems. He has extensive experience in the areas of commercial litigation and bankruptcy, representing creditors in large bankruptcy cases and lawsuits. He also has significant experience with insurance company insolvencies. In addition, he has represented many clients in large appeals before numerous appellate courts, including the Utah Supreme Court, various federal circuit courts of appeal, and the United States Supreme Court.
