Contractual and Notice Provisions to Reduce Liability

Deposit account agreement language

The protective language in the deposit account agreement should specify what constitutes an effective stop-payment order. In our Wolters Kluwer account agreements, we have used language similar to the following:

: We may accept an order to stop payment on any item from any one of you. You must make any stop-payment order in the manner required by law and we must receive it in time to give us a reasonable opportunity to act on it before our stop-payment cutoff time. Because stop-payment orders are handled by computers, to be effective, your stop-payment order must precisely identify the number, date, and amount of the item, and the payee.

This provision incorporates the UCC’s reasonableness standard with respect to the “time” issue, or when the stop-payment order must be received by the financial institution. However, it deviates from the reasonableness standard with respect to the form the stop-payment order must take. It requires precision with respect to the important identifying features of the item, namely the number, date, amount, and name of the payee.

We are not familiar with any cases that have dealt with such a provision in a deposit account agreement. However, we believe the provision should be valid. Start with the fact that parties to an agreement may vary the terms of the UCC. Section 4-103(1) of the UCC provides that variation of the terms of the UCC by agreement is permissible but that:

: …no agreement can disclaim a bank’s responsibility for its own lack of good faith or failure to exercise ordinary care or can limit the measure of damages for such lack or failure; but the parties may, by agreement, determine the standards by which such responsibility is to be measured if such standards are not manifestly unreasonable.

We do not feel that our stop-payment language is a disclaimer of responsibility for lack of good faith or failure to exercise ordinary care. We feel that the language merely establishes the standards by which it will be determined whether the financial institution acted in good faith or with ordinary care. In other words, our provision determines that the financial institution will not be failing to act with ordinary care if it fails to stop payment on a check that the customer did not precisely identify.

We also feel the provision is not “manifestly unreasonable” since it merely requires the customer to be precise about certain important identifying features of the check. The customer certainly ought to be able to be precise about these features since the customer wrote the check or has access to the person who did.

Notice on stop-payment form

In addition to including protective language in your deposit account agreement, you should include a notice on your stop-payment form. This notice should be a reminder of the requirements created by your deposit account agreement. We include the following language on Wolters Kluwer forms:

: ITEM DESCRIPTION: Because of the large volume of items we process, we do not visually inspect each item. We use a computer system. Therefore, every one of the item descriptions indicated by a “x” must be EXACT or our computer system will not be able to identify the item, making this stop-payment order ineffective.

(Taken from Wolters Kluwer Form STOP-ESP. Slightly different language appears on Form STOP-ESPV, which is designed for institutions with computer systems that can vary their search methods from customer to customer.)

Such a notice will help establish that the customer was aware of these requirements at the time when it is most important, when he or she is filling out the stop-payment form. Many cases have emphasized the importance of the customer being aware of the need for exactness at the time the stop-payment order is made.

Many financial institutions have this sort of notice on their stop-payment forms, but have nothing concerning stop-payment orders in their deposit account agreements. It is very important to include this sort of language in both documents. If you only have a notice in your stop-payment form, the customer could argue that you are imposing conditions on the “right” to stop payment to which the customer never contractually agreed. Further, the customer is not finding out about those conditions until it is too late, when he or she actually needs to stop payment on a check. The customer may be unable to give you an exact amount for the item at that time, but had the customer known earlier that you required the exact amount, the customer might have kept better records. The customer assumed that the description of the check only needed to meet the UCC reasonableness standard. Therefore, the argument goes, you cannot impose those conditions and the customer need not supply the exact information about the check if the conditions were not spelled out in the deposit account agreement. So include the language in your deposit account agreement to establish the customer’s contractual agreement to these conditions.