Strict liability of Banks towards forged cheques.

Bank’s duty to detect forgery:

Withdrawal of amount on the basis of forged cheques:

The respondent-company had a current account with the appellant-bank in its Mangalore Builder Branch. The Managing Director of the company and the General Manager of a sister concern of the company had been authorised to operate the said current account. The second defendant was attending to the maintenance of accounts of the respondent-company and was also in charge and had the custody of the cheque book issued by the Bank to the respondent-company. During the process of bringing the accounts upto date certain irregularities were noticed in the account and on verification it was found that cheques purporting to bear the signature of the Managing Director were encashed, though they did not bear ‘his signature. A complaint was lodged by the respondent Company with the police and a special audit of the company’s accounts for the years 1957-58 to 1960-61 by a firm of Chartered Accountants disclosed that the second defendant had withdrawn a sum of Rs.3,26.047.92 under 42 cheques. A suit was filed for the recovery of the said amount on the plea that the amounts as per the forged cheques were not utilised for the purpose of the respondent company. that they were not authorised ones. that there was no acquiescence or ratification open or tacit on the part of the respondent company and that the respondent was unaware of the fraud till the new accountant discovered it.

Defence of the Bank about forged cheques:

The appellant-bank resisted the suit on the grounds:

(1) that the cheques were not forged ones;
(2) that even if they were forged cheques the company was not entitled to recover the amount on account of its own negligence;
(3) that there was settlement of accounts between the parties from time to time and as such. the company was not entitled to reopen the same and claim the sums paid under the cheques; and
(4) that the suit was barred by limitation.

The second defendant pleaded that the forged cheques were utilised for the purpose of the company. The trial Court negatived the contentions of the bank and passed a decree in respect of forged cheques, for the sum claimed with interest at 6%. In appeal the Division Bench confirmed the judgment of the trial court but as the case involved substantial questions of law of general public importance it granted a certificate to file the appeal.

Appeal to Supreme Court by Bank:

In the appeal before Supreme Court it was contended on behalf of the appellant that:

(1) after reasonable opportunities are given to the customer to examine the bank statements, its debit entries should be deemed to be final and will not be open for reconstruction to the detriment of the bank;

(2) a representation may be made either by statement or by conduct, and conduct included negligence, silence, acquiescence or encouragement, and if a customer of a bank, by his negligence, to give timely information of forged cheques, allows amount to be drawn on such cheques. the debit will stand for the whole amount and the consumer will be estopped from claiming the amount; and

(3) inaction for a long period would amount to such negligence as would persuade a court to impute to the customer with knowledge or at any rate constructive knowledge, to decline him relief in an action for recovery of amounts which would be to the detriment of an innocent party, namely, the bank.

Duty of Bank towards customer:

Forged cheque is without mandate:

1. When a cheque duly signed by a customer is presented before a bank with whom he has an account there is a mandate on the bank to pay the amount covered by the cheque. However. if the signature on the cheque is not genuine. there is no mandate on the bank to pay. The bank. when it makes payment on such a cheque, cannot resist the claim of the customer with the defence of negligence on his part such as leaving the cheque book carelessly so that third parties would easily get hold of it. This is because a document in cheque form. on which the customer’s name as drawer is forged. is a mere nullity.

Relationship between the customer and bank:
2. The relationship between the customer of a bank and the bank is that of a creditor and debtor. When a cheque presented for encashment contains a forged signature the bank has no authority to make payment against such a forged cheque. The bank would be acting against law in debiting the customer with the amounts covered by such cheques. When a customer demands payment for the amount covered by such forged cheques, the bank would be liable to pay the payment to the customer. The bank can succeed in denying payment only when it establishes that the customer is disentitled to make a claim either on account of adoption, estoppel or ratification.
Negligence, Estoppel, acquiscence or ratification about forged cheques:
For negligence to constitute an estoppel. it is necessary to imply the existence of some duty which the party against whom estoppel is alleged owes to the other party. There is a duty of sorts on the part of the customer to inform the bank of the irregularities when he comes to know of it. But by mere negligence. one cannot presume that there has been a breach of duty by the customer to the bank. The customer should not by his conduct facilitate payment of money on forged cheques. In the absence of such circumstances. mere negligence will not prevent a customer from successfully suing the bank for recovery of the amount.
4. In order to sustain a plea of acquiescence, it is necessary to prove that the party against whom the said plea is raised. had remained silent about the matter regarding which the plea of acquiescence is raised. even after knowing the truth of the matter.
Inaction by customer is irrelevant:
5. There is no duty for a customer to inform the bank of a fraud committed on him, of which he was unaware. Nor can in-action for a reasonably long time in not discovering fraud or irregularity be made a defence to defeat a customer in an action for loss.
6. There is no duty on the part of the customer to intimate the banker about any error that may be seen in the pass book and he will be entitled to claim any amount paid on a forged cheque though there may be some negligence or in-action on his part in not being careful to discover the errors in the pass book or other documents.
7. Banks do business for their benefit. Customers also get some benefit. If banks are to insist upon extreme care by the customers in minutely looking into the pass book and the statements sent by them, no bank perhaps can do profita- ble business. It is common knowledge that the entries in the pass books and the statements of account sent by the bank are either not readable. decipherable or legible. There is always an element of trust between the bank and its customer. The bank’s business depends upon this trust.
Knowledge of customer about forgery:
8. Whenever a cheque purporting to be by a customer is presented before a bank it carries a mandate to the bank to pay. If a cheque is forged there is no such mandate. The bank can escape liability only if it can establish knowledge to the customer of the forgery in the cheques. In-action for continuously long period cannot by itself afford a satisfactory ground for the bank to escape the liability.

Knowledge about forged cheques:

9. In the present case. during the relevant period when 42 cheques were encashed, the company did not know anything about the sinister design of the second defendant. Since the bank had not proved to the satisfaction of the court that the company had with full knowledge acknowledged the correctness of the accounts for the relevant period the case of acquiescence cannot be flourished against the company. There is no evidence to show that any one other than the second defendant knew that the forged cheques had been encashed. After the matter was discovered immediate action was taken. Therefore, in the absence of any evidence of the respondent-company’s involvement. it cannot be non-suited on the ground of negligence or in-action. Unless the bank is able to satisfy the court of either an express condition in the contract with its customer or an unequivocal ratification it will not be possible to save the bank from its liability.

[Source: Canara Bank vs Canara Sales Corporation, AIR 1987 SC 1603, 1987 SCR (2)1138.(Supreme Court of India)]