Canara Bank v. Canara Sales Corporation
A bank cannot debit the customer's account on cheques bearing forged signatures; loss from the bank's failure to detect forgery falls on the bank, not the customer.
Facts
Cheques drawn on the customer's account bore the forged signature of the company's managing director and were paid by the bank, which debited the customer's account. The forgeries were committed by an employee of the customer over a period before discovery. The customer sued the bank to recover the amounts wrongly debited, the bank contending the customer's negligence and delay barred recovery.
Issues
- Whether a bank is entitled to debit its customer's account for payments made on cheques bearing forged signatures.
- On whom the loss arising from the bank's payment of forged cheques falls.
- Whether the customer's conduct/negligence relieved the bank of liability.
Arguments
The bank argued it acted in the ordinary course, that the customer's own employee's fraud and the customer's delay in detecting it should bar recovery. The customer argued that a forged cheque is a nullity, the bank had no mandate to pay, and the bank's contractual duty was to honour only genuinely authorised cheques.
Held
The Court held that the relationship between banker and customer is that of debtor and creditor, and the bank is bound to repay the amount on a valid order; a cheque bearing a forged signature carries no mandate to the bank to pay. As the signatures were forged, the bank had no authority to debit the customer's account and the loss had to be borne by the bank. The customer's failure to detect the forgery earlier did not amount to such negligence as would estop it or shift the loss, absent a breach of a duty owed to the bank.
Ratio decidendi
Payment by a bank on a cheque bearing a forged drawer's signature is without mandate; the bank cannot debit the customer's account and must bear the resulting loss — a duty whose breach constitutes deficiency in banking service.
Significance
A leading statement of a bank's duty of care to its customer that underpins consumer-forum decisions holding banks liable for forged cheques, fraudulent/unauthorised withdrawals and negligent debits as deficiency in service under the Consumer Protection Act.
Related
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