The Need for a Deposit Account Agreement: Deposit Account Agreement

One of the functions of the deposit account agreement is to clarify for the customer the terms and conditions that will apply to the deposit account. If you make these terms and conditions clear to the customer from the beginning, your relationship with the customer is less likely to be acrimonious, since your customer’s expectations about how the account will operate are more likely to be accurate. For example, if your deposit account agreement states that stop-payment orders must state the exact amount of the check in order to be effective, the customer is less likely to be angry with you if you fail to stop payment on a check when her stop-payment order misstated the amount.

However, you will have customers who will be angry with you about the operation of their account no matter how clearly your deposit account agreement describes that operation. With these customers, you will need to have established legally enforceable rights. That leads us to the second function of the agreement, which is to establish an enforceable contract between you and the depositor governing the account relationship.

A “contract” is basically an agreement between two or more parties that creates legally enforceable rights. This means that should either of the parties “breach” the contract by doing something they promised in the contract not to do or by failing to do something they promised in the contract to do, the other party can go to court and either collect “damages” (money) for the breach or, in some cases, have the court order the other party to keep the promises made in the contract. In a deposit account agreement, for example, the customer may agree to pay a maintenance fee each time the account balance drops below a certain amount. If the balance goes below that amount, you have a legal right to the maintenance fee, and you could sue the customer to collect it. The contract also protects the parties from liability for taking actions which are authorized by the contract. For example, if the contract above also provided that you could take the fee directly out of the customer’s account, any legal action the customer might take against you because of your doing so would fail since you have a legal, contractual right to collect the fee in that way.

Prior to the late 1970s, financial institutions generally opened deposit accounts by having the customer sign a signature card that contained little or no contractual language. The cards would usually contain a statement similar to the following: “By signing this form, Depositor agrees to the Bank’s Rules and Regulations applicable to deposit accounts of this type.” The idea was that the customer would agree, sight unseen, to whatever rules the institution imposed on accounts of that type. The institutions might or might not have a list of rules drawn up somewhere which they would give to the very few customers who asked to see them.

In more recent years, some depositors, unhappy with the rules governing their accounts (particularly the charging of certain fees), have challenged the institutions’ right to invoke those rules. Their argument has been that the institution does not have any contractual right to invoke those rules because the customer did not know what the rules were at the time the signature card was signed. How could there be an agreement, these customers ask, between the institution and the customer as to those rules when the customer did not know what the rules were? Litigation on these issues has become a serious concern for financial institutions because the litigation usually takes the form of a “class action” lawsuit, in which one depositor sues on behalf of all other customers in a similar situation (the “class”) and asks for damages to compensate the entire class. What is a small amount of damages for a single customer can become a huge damages award when multiplied by the number of customers in the class.

The argument that the institution does not have contractual authority to invoke its rules doesn’t work if the customer has signed a valid contract agreeing to the rules. While you can never be absolutely certain that your contract with the depositor is valid since courts can invalidate contracts in whole or in part for a variety of reasons (as we’ll see below), there are a few fundamental considerations that can improve your chances of having the contract be valid.

The first of these is to have your deposit account agreement be in writing. Oral contracts are just as valid as written ones (except in some special circumstances), but proving in court the terms of an oral contract is much more difficult than proving the terms of a written contract.

Second, the agreement should be written clearly, using ordinary language and short sentences, with a logical organization. It should also be printed so that it is easily readable—an adequate type size and perhaps paragraph headings.

Third, your contract should state the rights and duties of both you and the customer. Listing only your rights and only the customer’s duties makes it appear that you have not made any promises under the contract, that you get only benefits under the contract, and you haven’t given anything up. Such a contract could be ruled invalid by a court because it lacks “consideration,” which is a legal term meaning, very basically, what it is a party is giving up under a contract in exchange for what the party is getting. A party who has not given consideration in a contract cannot have the contract enforced in court.

Fourth, you should be careful not to contract for rights that the law says are not available to you. For example, if state law does not permit you to collect a dormant account fee, your contract should not provide for one. Even if you do not actually collect the fee, the mere presence of a provision for an unauthorized fee in your contract increases the likelihood that other provisions in the contract will be ruled invalid. Some states also have deceptive trade practices laws that make it an unfair and deceptive trade practice to contract for rights that the law prohibits you from having. Some laws, however, by their own terms permit parties to agree in their contracts to vary the rules established in the laws. The Uniform Commercial Code, for example, permits contracting parties to vary many of the terms of the Code so long as in doing so no party disclaims any obligations of good faith, diligence, reasonableness, or care. The parties can contract as to what standards will apply to these obligations, as long as the standards are not “manifestly unreasonable.”

Fifth, you should have the customer sign the deposit account agreement. We feel it is a good idea to include a statement immediately above the signature to the effect that, by signing, the customer agrees to all the terms of the contract. This eliminates any arguments the customer might make later on that he or she was only providing a signature specimen and was not agreeing to the contract. We also think it is a good idea to refer to the reverse side or a separate document in this statement if your contract includes terms on both sides of a sheet of paper or terms on a separate document. This again will prevent the customer from claiming a lack of knowledge about the terms on the backside or on the separate document. While most contracts are signed by all parties to the contract, it is not necessary for a representative of the institution to sign the deposit account agreement. Contracts are signed to show that the party agreed to the contract. Deposit account agreements are usually printed forms supplied and filled out by the institution and which usually have the institution’s name printed on the form. In these circumstances, there is no question that the institution agrees to the terms on the document (it supplied the contract and filled it out), and, therefore, an institution representative signature is not necessary.

For accounts opened on-line, the federal “E-Sign” Act (the Electronic Signatures in Global and National Commerce Act) generally authorizes the use of electronic signatures and gives them the same effect as a written signature.

And finally, you should provide the depositor with a copy of the deposit account agreement. Doing so will add to the general impression that the customer is aware of the terms of the deposit account agreement which, in turn, contributes to the validity of the contract. At least one state, California, requires that the customer, in some circumstances, receive a copy of the agreement. (See Cal. Civil Code §1799.200) We also feel it is a good idea to include in the statement above the signature line an acknowledgment of receipt of a copy of the agreement.

Now that we have gone over why you need a valid deposit account agreement and some of the general considerations that help to insure its validity, we are ready to look at the sorts of provisions which should be in your agreement.