TMI Blog1987 (4) TMI 500X X X X Extracts X X X X X X X X Extracts X X X X ..... f banks it became the Canara Bank which is the appellant before us. 3. The suit was instituted for recovery of a sum of ₹ 3,26,047.92, with the following allegations : The plaintiff is a Private Limited Company with its head office at Mangalore. It had a current account with the appellant- bank its Mangalore Bunder 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 of the plaintiff with the Bank. The second defendant was attending to the maintenance of accounts of the plaintiff and was also in charge and custody of the cheque books issued by the Bank to the plaintiff. In March, 1961, the second defendant was absent from duty for some time. During that period one A. Shenoy, who was the Assistant of the second defendant was Directed to bring the accounts up to date. During this process, he noticed certain irregularities in the account and brought this to the notice of the plaintiff. On verification, it was found that cheques purporting to bear I the signature of Shri V.S. Kudva were encashed though they did not bear his signature. In other words the signature were for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argued the case at length and took us through various authorities, bearing on the question, most of which fell for consideration at the hands of the High Court also. 10. In the instant case, 42 cheques with forged signature were presented on various dates between the year 1957 and 1961. During the said period the appellant Bank used to send to the plaintiff-respondent pass sheets containing the debit and credit entries in the current account of the plaintiff with the Bank every month and at the end of every half year ending 30th June and 31st December, a letter used to be sent asking the respondent to confirm that the balance in his account with the Bank was as mentioned in the letter. Till March, 1961, the correctness of the entries in the pass sheets and half yearly statements was not questioned by the plaintiff. The accounts of the plaintiff company were being audited as required by the Companies Act by Chartered Accountants. The Bank contended that if there was misappropriation of an amount of nearly ₹ 3 lacs by forged cheques by the second defendant this would have been detected by the Chartered Accountants and would have come to the notice of the plaintiff company. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecline him relief, in an action for recovery of amounts, which would be to the detriment of an innocent party, namely the Bunk. 15. For this purpose, dictionary meanings of the word 'knowledge' was brought to our notice. Knowledge may include not only actual knowledge, i.e., actual awareness of the fads relevant, but constructive knowledge, i.e., knowledge attributed by law to the party in the circumstances, whether he actually had the knowledge or not and knowledge may be attributed to a person who has sought to avoid finding out, or has shut his eyes to obvious means of knowledge, e.g., the man who is offered valuables cheaply in circumstances which suggest that they may well have been stolen, but who refrains from enquiry . 16. Black's Law Dictionary Fifth Edn.; defines, Constructive knowledge as, if one by exercise of reasonable care would have known a fact, he is deemed to have had constructive knowledge of such fact, e.g., matters of public record . Notice means bringing it to a person's knowledge . 17. Then he referred us to the Transfer of Property Act, Trusts Act, Law of Agency, etc., to contend that a person is said to have noticed of a fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is, therefore, necessary to briefly outline the confines of this Branch of Law. 24. The relationship between the customer of a bank and the bank is that of a creditor and debtor. When a cheque which presented for encashment contains a forged signature the bank has no authority to make payment against such a 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 cheques, the bank would be liable to pay the amount 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. The principle of law regarding this aspect is as follows : 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 lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut a cheque for 2 and asked one of the partners to sign it, which the partner did. The next day the clerk did not turn up. The partners became suspicious and went to the bank, when they discovered that the cheque for 2 was distorted by using the space on either side of the figure '2' by the clerk by insertion of additional figures 1 0 and thus he pocketed 120. The question before the House of Lords was whether the plaintiffs had been so negligent with regard to the cheque that their action against the bank should fail. The Trial Judge found that the plaintiffs were not guilty of negligence in the mode of signing the cheque and decreed the suit. The Court of Appeal upheld this decision. The House of lords reversed the judgment, We may usefully quote the following passages from the judgment. Lord Finlay observed : As the customer and the banker are under a contractual relation in this matter, it appears obvious that in drawing a cheque the customer is bound to take usual and reasonable precautions to prevent forgery. Crime, is indeed, a very serious matter, but every one knows that crime is not uncommon. If the cheque is drawn in such a way as to facilitate or almo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was forged the question of negligence of the customer in between the signature and the presentation of the cheque never arose. The suit was however, dismissed on another point and that of jurisdiction. 28. That takes us to the question as to 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. 29. The kindred question connected with this is whether a customer is estopped from disputing the debits shown in the passbook when the pass book is returned without any comment and whether such a conduct would constitute a stated and settled account. To answer this, it is necessary to examine the question whether the customer owes a duty to the bank to in form it about the correctness or misstatements in the entries in the pass book within a reasonable time and whether failure to do so would amount to such negligence as to non-suit him in a suit for recovery of the amount paid on a forged cheque. When does negligence constitute estoppels? For negligence to constitute an estoppel it is necessary to imply the existence of some duty which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intiff cannot be non-suited on the ground of negligence or inaction. 32. Venkataramiah, J. when he rendered the Judgment, under appeal, laid down the law correctly, with the aid of authorities then available and on his own reasons. Now we are in a more advantageous position. We have, an authority, more or less identical on facts, rendered by the Privy Council, in the decision in Tai Hing Cotton Mill Ltd. v. Liu Chong Bank Ltd. (1985) 2 All ER 947. 33. The facts of this case are similar to the case on hand; if anything, more to the disadvantage to the hank in terms of money involved than the instant case. The appellant before the Privy Council was a company, a textile manufacturer carrying on business in Hong Kong. The company was a customer of the three respondent hanks and maintained with each of them a current account. The banks were authorised to pay cheques on behalf of the company if signed by its Managing Director or two authorised signatories. The banks agreed to send the appellant periodic statements which were deemed to be confirmed unless the customer notified the bank of any error therein by the specified time. Between 1972 and 1978 the accounts clerk employed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir willingness continue operating their respective accounts and to expose themselves to the risk of paying out on forged cheques. He did not find the same prejudice had been suffered by Liu Chong Hing as it only became exposed to the fraud in November 1977, the first representation to it not being made until the company's failure to query the December 1977 statement of account. The Judge found that the chance of recovery from Leung had not been substantially diminished during the period (December 1977 to May 1978) during which it could be said that the estoppel was operative. 34. On this finding the Judge gave the company Judgment against one bank, but dismissed its claims against the other two banks. The company appealed and the defeated banks cross-appealed. The Court of Appeal differed from the Trial Judge on the general question. The Court of Appeal evolved a theory that the banker/customer relationship is such as to give rise to a general duty of care in the operation of its banking account and on this basis held that the company was in breach of the duty which they held, it owed to the banks and must bear the loss. According to the Court of Appeal this duty arose in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncidents of the contractual relationship between the customer and the bank. The source of this obligation according to the banks is to be found both in the contract law as an implied term of the banking contract and in the tort law as a civil obligation arising from the relationship of banker and customer. 37. Then the Privy Council proceeded to consider the weightier submissions advanced by the bank (1) a wider duty on the part of the customer to act with diligence which must be implied into the contract and alternatively that such a duty arises in tort from the relationship between banker and customer. The Privy Council parted company with the observation by the Court of Appeal here and repelled the plea that it was necessary to imply into a contract between a banker and the customer a wider duty and that it was not a necessary incident of banker/customer relationship that the customer should owe his banker a wider duty of care. This duty is in the form of an undertaking by the customer to exercise reasonable care in executing his written orders so as not to mislead the bank or to facilitate forgery. The Privy Council accepted that an obligation should be read into the contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be implied or as a matter of tort law when the task will be to identify a duty arising from the proximity and character of the relationship between the parties, their Lordships believe it to be correct in principle and necessary for the avoidance of confusion in the law to adhere to the contractual analysis: on principle because it is a relationship in which the parties have, subject to a few exceptions, the right to determine their obligations to each other and for the avoidance of confusion because different consequences do follow according to whether liability arises from contract or tort e.g. in the limitation of action.... 40. Their Lordships of the Privy Council, summed up the Law as follows : Their Lordships do not, therefore, embark on an investigation whether in the relationship of banker and customer it is possible to identify tort as well as contract as a source of the obligations owed by the one to the other. Their Lordships do not however, accept that the parties mutual obligations in tort can be any greater than those to be found expressly or by necessary implication in their contract. If, therefore, as their Lordships have concluded, no duty wider than that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ills to cover the amount and the intimation cards in accordance with the usual practice in the ordinary course of dealings. The respondents it was alleged paid the amount by cheque to a person authorised by the appellant and on presentation of proper receipts. It was pleaded that the appellant's claim having been satisfied, he had no cause of action. It was established in the course of the trial that the appellant had not in fact authorised any person to issue the receipts but a certain person not connected with the appellant firm without the consent or knowledge of the appellant got hold of the intimation cards and bills addressed to the appellant, forged the documents and fraudulently received the cheque from the respondent and appropriated the amount for himself. We may usefully read the following passage relating to negligence in the context of a plea based on estoppel (at P. 158 of AIR) : ... Apart from this aspect of the matter, there is another serious objection which has been taken by Mr. Setalvad against the view which prevailed with Mukharji. J. He argues that when a plea of estoppel on the ground of negligence is raised negligence to which reference is made in su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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