1987 (4) TMI 500 - SC - Indian Laws

Bank cannot escape liability for forged cheques by claiming customer negligence in examining statements

The SC dismissed the bank's appeal regarding losses from forged cheques. The bank argued that the customer was negligent in not examining passbooks and ... Forged cheque - loss arising from the bank's payment on the forged cheques - Plea of acquiescence - Whether there is a duty on the part of the customer to examine the pass book and inner part of cheques and to communicate to the banker within a reasonable time of the debits which he does not admit - HELD THAT:- According to the Court of Appeal this duty arose in tort as well as in contract. There was difference of opinion among the Judges as to whether the inaction on the part of the customer in not objecting to the statement sent by the bank within the time specified would constitute conclusive evidence of the correctness of the debits record therein or whether the banking contracts could be construed as including a term requiring the monthly statements to be treated after a period of time as conclusive evidence the state of the account. But all of them were agreed that estoppel operated against the company by its own negligence from challenging the correctness of the banks statements. The banks thus succeeded in the court of Appeal. The defeated company moved the Judicial Committee of the Privy Council by filing appeals. This was how the matter reached the Privy Council. Having rejected the plea of implied terms, indirectly constructive notice and estoppel by negligence, it was held that the company was not under any breach of duty owed by it to the banks and as such mere silence, omission or failure to act is not a sufficient ground to establish a case in favour of the bank to non-suit its customer. We adopt the reasoning indicated above with great respect. 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. The 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 profitable 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. 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. Inaction for continuously long period cannot by itself afford a satisfactory ground for the bank to escape the liability. The plaintiff in this case swung into action immediately on the discovery of the fraud committed by its accountant, as in the case before the Privy Council. This is how this Court understood how a plea of estoppel based on negligence can be successfully put forward. We have seen that there is no duty for a customer to inform the bank of fraud committed on him, of which he was unaware. Nor can inaction for a reasonably long time in not discovering fraud or irregularity be made a defence to defeat a customer in an action for loss. Thus the contentions put forward by the bank cannot be accepted to defeat the plaintiff. The various submissions made by the Counsel for the bank based on constructive notice in the general law and on other branches of law cannot be extended to relationship between a bank and its customer. On a careful analysis of the question of law, we hold that the judgment the High Court and that of the Trial Judge have to be upheld. We do so. We accordingly dismiss the appeal with costs of the 1st respondent. Issues Involved:1. Whether the cheques were forged.2. Whether the plaintiff was negligent and thus disentitled to recover the amount.3. Whether there was a settlement of accounts precluding the plaintiff from reopening the matter.4. Whether the suit was barred by limitation.5. Whether the plaintiff was estopped from claiming the amount due to conduct or negligence.Detailed Analysis:1. Whether the cheques were forged:The trial court and the High Court both found that the cheques in question were indeed forged. The second defendant, who was the Chief Accounts Officer of the plaintiff, was found responsible for forging the signatures on 42 cheques, leading to the withdrawal of Rs. 3,26,047.92. This finding was based on the special audit conducted by a firm of Chartered Accountants, which disclosed the misappropriation. The Supreme Court did not propose to reconsider the factual findings of the lower courts on this matter.2. Whether the plaintiff was negligent and thus disentitled to recover the amount:The appellant Bank argued that the plaintiff was negligent in not detecting the forged cheques earlier, as the bank had periodically sent pass sheets and half-yearly statements that were not questioned by the plaintiff. The Bank contended that the plaintiff's inaction constituted negligence, which should estop the plaintiff from claiming the amounts. However, the Supreme Court held that mere negligence or inaction on the part of the customer does not constitute a defense for the bank when the cheques are forged. The Court emphasized that the relationship between a bank and its customer is that of a creditor and debtor, and the bank has no authority to pay against a cheque with a forged signature. The bank can only deny payment if it establishes adoption, estoppel, or ratification by the customer.3. Whether there was a settlement of accounts precluding the plaintiff from reopening the matter:The appellant Bank argued that there was a settlement of accounts between the parties from time to time, which precluded the plaintiff from reopening the matter and claiming the sums paid under the forged cheques. The Supreme Court rejected this argument, stating that the acceptance of periodic statements by the customer without protest does not constitute a settled account that precludes the customer from disputing the entries later. The Court clarified that there is no duty on the part of the customer to examine the passbook and communicate any errors to the bank within a reasonable time.4. Whether the suit was barred by limitation:The appellant Bank contended that the suit was barred by limitation. However, the Supreme Court did not find merit in this argument, as the plaintiff discovered the fraud in March 1961 and took immediate action by filing a complaint with the Superintendent of Police and appointing Chartered Accountants to conduct a special audit. The suit was filed in a timely manner after the discovery of the fraud.5. Whether the plaintiff was estopped from claiming the amount due to conduct or negligence:The appellant Bank argued that the plaintiff was estopped from claiming the amount due to its conduct or negligence in not detecting the forged cheques earlier. The Supreme Court rejected this argument, stating that estoppel by negligence requires the existence of a duty owed by the customer to the bank, which was not established in this case. The Court held that the customer is not under a duty to inform the bank of fraud committed on him of which he was unaware. Furthermore, mere inaction or failure to discover the fraud within a reasonable time does not constitute a defense for the bank.Conclusion:The Supreme Court upheld the judgments of the High Court and the trial court, confirming that the cheques were forged and that the plaintiff was entitled to recover the amount claimed. The Court dismissed the appeal with costs, emphasizing that the bank cannot escape liability for paying against forged cheques unless it can establish knowledge or ratification by the customer.