Holding

A forged cheque is a nullity; the bank must repay the amount and the customer's mere negligence or failure to notify does not give rise to estoppel or bar the claim.

Summary

Canara Sales Corporation held a current account with Canara Bank. The company's chief accounts officer fraudulently withdrew Rs.3,26,047.92 using 42 forged cheques. The company sued the bank to recover the amounts, alleging the cheques were unauthorized and that the bank could not rely on the company's alleged negligence, acquiescence, or limitation defenses. The bank argued that the cheques were not forged, that any negligence by the company barred recovery, that the accounts were settled, and that the claim was time‑barred. The Supreme Court held that a forged cheque is a nullity and provides no mandate to the bank; the bank is liable to repay the amounts unless it can prove the customer’s express ratification or an express contractual condition. Mere negligence, silence, or failure to promptly notice discrepancies does not constitute estoppel or a defence. Consequently, the bank’s defenses failed and the appeal was dismissed.

Issues considered

Whether a forged cheque creates a valid mandate for the bank to honour and thus shields the bank from liability.
Whether the customer's negligence, silence, or failure to inform the bank of forged cheques can give rise to estoppel, acquiescence, or bar recovery.
Whether a customer has a duty to examine pass‑book entries and bank statements and to notify the bank of discrepancies within a reasonable time.
Whether the claim is barred by the limitation period.
Whether any implied contractual term or tort duty can extend the bank’s protection beyond the statutory provisions of the Negotiable Instruments Act.

Legislation cited

Negotiable Instruments Act, 1881s. 117, s. 31, s. 6, s. 77, s. 85

Subjects

forged chequebank-customer relationshipmandateestoppelnegligencelimitationNegotiable Instruments Actcustomer dutypass book

Judgment

CANARA BANK
A
v.
. CANARA SALES CORPORATION & ORS.. ..,, ·-
,•.,,

er... • ,.,,.APRIL 22, 1987., .
8 ' '· ' t l 11·_,.,1 J'{-

[V. KHALID AND G.L. OZA, JJ.]
,.

Negotiable Instruments Act, 1881-Sections 6, 31, 77, 85 and
117-Bank and customer of the Bank-Relationship between-That of a
creditor and debtor-Cheque duly signed by a customer presented-
Mandate to Bank to pay the amount-Element of trust between Bank
C and its customer-Exists.

Banking Law-Bank and Customer-Entries in pass book and
statement of accounts furnished by bank-Customer whether duty
bound to intimate discrepancies.

D The respondent-company had a current account with the
lant-bank in its Mangalore Bonder 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
E custody of the cheque book issued by the Bank to the respondent·
company. During the process of brinaing the accounts upto date certain
i
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 hear his signature. A com•
plaint was lodged hy the respondent Company with the police and a special
r- ~
F 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 ~
i
l
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
G 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.
..... \i
The appellant-bank resisted the suit on the grounds (1) that the .!
"
!._

·cheques were not forged ones; (2) that even if they were forged ones, the l
H company was not entitled to recover the amount on account of its own
1138
Ii
CANARA BANK v. CANARA SALES 1139

negligence; (3) that there was settlement of accounts between the parties A
-., 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
cheques were 11tilised for the purpose of the company. The trial
Court negatived the contentions of the bank and passed a decree for the
sum claimed with interest at 6'1<. B

---\ _ . 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 tile the appeal.
~

+- '.
In the appeal before this Court it was contended on behalf of the c
appellant that: U) 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 detri-
ment of the hank; (2) a representalion 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 D
timely information of forged cheques, allows amount to be drawn on
such cheques_. the debit will stand for the whole amount and the con-
sumer will be estopped from· claiming the amount; and (3) in-action for
a long period would amount to such negligence as would persuade a
t" court to impute to the customer with knowledge or at any rate construe-
tive knowledge, to decline him relief in an action for recovery of amounts E
- which would be to the detriment of an innocent party, namely, the bank.

Dismissing the appeal.
-1-
HELD:" 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 F
bank to pay. the amount covered by the cheque. However. if the signa-
tu re 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 custo111er 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 G
_J customer's n~me as drawer is forged •.is a mere nullity. [1147B-D]
........
_2. ,The relationship between the customer of a bank and the bank
is that of a creditor and debtor. When a cheque presented for encash-
ment contains a forged signature the bank has no authority to make
payment against such a cheque. The bank would be acting against law H
1140 SUPREME COURT REPORTS (1987] 2 S.C.R.

A in debiting the customer with the amounts covered by such· cheques.
When a cumstomer demands payment for the amount covered by such·
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 acco~!lt flf adoll: .
;·a tion, estoppel or ra\ilication. [U46G·H; 1~~7A·Bl " ·

3. For negligence to constitute an estoppel, it is necessary tll
imply the existence of some duty which the party against whom est11p11'1
is alleged owes to the other party. There is a·4uty ofso~ts on the part pf
the customer to inform the bank of the irr~glJ!~rjties when he comes tll
know of it. But by mere negligence, one ~annot Presum~ lh!ll tl!ere l111s
C been a breach of duty by the customer lo t!te ba!!k· The cl)stonwr sllould
not by his conduct facilitate paymelll pf mll!ley un forged cheques:
In the absence of such circumstances, mere negligence will not prevent
a customer from successfully suing the bank fqr recovery of the ·
amount. [USOB·D)

D 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. (llSOD·El

5. There is no duty for a customer to inform the bank of a fraud ·
E 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. (1157G-H)

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
F 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.
O 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
H business depends upon this trust. (US6B·Dl •'
CANARA BANK v. CANARA SALES 1141

, 8. Whenever a cheque purporting to be by a customer is pre- A
._, sented before a bank it carries a niandate to the bank to pay. If a cheque
is forged there is no such ma.ndate. 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 satis-
factory ground for the bank to escape the liability. [1156D-E]
B
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 know-
ledge acknowledged the correctness of ihe accounts for the relevant
period the case of acquiescence cannot be flourished against the com- c
pany. 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
D
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. [ll50E-I'; 1151A-B; 1156B]

Bihta Co-operative Development Cane Marketing Union Ltd. &
t Anr. v. The Bank of Bihar & Ors., [196if] 1 SCR 848; London Joint
E
-
' Stock Bank Ltd. v. Macmillan, [1918] AC 777; Tai Hing Cotton Ltd. v.
Liu Chong Bank, (1985] 2 All England Reports 947; Greenwood v.
Martins Bank Ltd., [1933] AC 51 = [1932] All England R~ports 318;
and New Marine Coal Co. (Bengal) Pvt. Ltd. v. Union of India, (1964]
,J.,.
2 SCR 859, referred to.

-1
I
CIVIL APPELLATE JURISDICTION:Civil Appeal No. 1777
.
of 1973.

From the Judgment and Decree dated 25.6.1973 of the Karna-
taka High Court in Regular First Appeal No. 56 of 1968.

K.N. Bhatt, V.K. Verma and Ms Madhu Moolchandani for the
G
Appellants.

S.S. Javali and B.R. Agarwala for the Respondents.

The Judgment of the Court was delivered by
H
,
1142 SUPREME COURT REPORTS . [1987] 2 S.C.R.

A '!KHALID, J. This is an appeal by certificate, 'against the Judg-
. •J • -, ' '
- • ' •' • • ,- - • -
I ' ' • • t • ~ ' ' ,

ment dated 25th June, 1972, passed ·by a D1vmoil'.Bench of ·the·.
Kainataka High Court. The 1st defendant Bank_is'the appellant'.' " ' .··.
~'. : < t ' ' j•

1
·' Original Suit No. 72 of 1962• was filed in- . tlie Court'i:i'f Civil Judge'.'
a·. ' ' . . ' • ~-' - ' -- ; • ' . . ' • 1- .
Mangalore, by the Canara Sales Corporation, Ltd. through its Manage·,
- . -'

ing Director, V.S. Kudva. He died during the pendency of the suit and
the stiit was continued by the succeedinf Managing Difector of the
Corporation. The suit was against two deferidanis: ihe appellant-Bank
was the first defendant and the second deferidant was one Y.\r. Bh'a!'·
wlio was the Chief Accounts Officer of the plaintiff, till i961'. He died +-
during' the pendency of the appeal before the High Court and his leg~i···
c representatives were brought on record. Wheri the s~it was fiied; tlie '
appellant-Bank was called the Canara Bank Ltd. Afte.r the n'ation~lisa-'.
tion of banks it became the Canara Bank which is the appellant . - before . '
us: ':l
!.
' The suit was instituted for recovery of a sum· of Rs.3,26,047.92'.' i
D with the foIJowing allegations: The plaintiff is a private Limifod ComY
pimy with its head office at Mangalore. It had a current atcouni-~ith'
the appellant-Bank in its Mangalore Bunder brarich.'The Managing";
I'
l
Director of the company and the General Manager of a sister c_oncem
of the company had been .authorised to operate the said 'current
. account of the. plaintiff with ihe B?nk. The ·second· defendant was , 1
E attending to the maintenance of accounts of the plaintiff and was also '
in charge and cusiody"bf the cheque' books issued by the Bank to the ·
t
plaintiff. In Marth, 1961, the second defendant was absent from duty··
for some time. During that period one A. Sh~noy; who "v~s }~f;
Assistant of the second defendant. was directed to bring the accounts ·
upto date. During this process, he noticed certain irregularities in the
F . account and brought this to the notice of the plaintiff. On verificati()n, .
it was found that cheques purporting to bear the signature of Shri v:s.·
· Kudva were encashed though they did not bear his signature. In other
words the signatures were forged. On 25-3-1961, a complaint w'as made
by the plaintiff with the Superintendent of ·Police. Tlie' plaintiff·'
. ) appointed a firm of Chartered Accountants to conduct special audit of
G the company's accounts, for the years 1957'.5g to 1960-61. This special
audit disclosed that the second defendant had withdrawn, in a sum' an:
of Rs.3.,26,047.92 under 42 cheques. The suit was filed for recovery of
the amount on the pfoa that the amounts as pei the forged cheques
were not utilized for the purpo§e of the plaintiff, that they were not
8·.,, authorised ones, that there was no acquiescence. or raiificiltiiin open or
tacit on the part of the plaintiff, that the plaintiff was unaware of the

l
CANARA BANK v. CANARA SALES (KHALID, J.) 1143
/
fraud till the new accountant discovered it.
A
'·
The appellant-Bank resisted the suit on the following gro~nds in
their written .statement.:
(i)· That. the cheques were not forged ones.
'
(ii) Even i~ they :were forged ones the plaintiff was not entitled to B
recover the amount on account of its own negligence.
·-\

-
(iii) There was settlement of accounts between the parties from time
to time and as such the plaintiff was not entitled to reopen the
+-· same and claim the sums paid under the cheques in question.
p .
(iv) The suit was barred by limitation.
c
"·
The second defendant pleaded that the cheques were not forged
,-4_ ones and the amounts recovered by the cheques were utilized for the
purpose of the plljintiff.

. The Trial Court negatived the contentions of the first defendant- D
Ba~k and passed a decree for the sum claimed, with interest at 6%
from the date of the suit till recovery of the amount. In appeal before
the Division Bench, the judgment of the Trial Court was confirmed.

t The High Court certified that the case involved substantial ques-

- tio~s of law of general eublic importance and granted certificate to file
the appeal. It is thus that this appeal has come before us.
• Venkataramiah, J. as he then was, who spoke for the Bench, has
E

in his (letailed Judgment considered all the aspects of the case both on
facts and on law and agreed with the trial Court that the suit had to be
decreed, repelling the contentions raised by the first defendant. The F
courts have concurrently found that the cheques were forged and that
the second defendant was responsible for it. We do not prop<;>se to
consider the question of facts in this Judgment.

The learned counsel for the appellant, Shri Bhat argued the case
~
at length and took us through various authorities, b'earing on the ques- G
j tiop, most of which fell for consideration at the hands of the High
Court also..

In the instant case. 42 cheques with ·forged signature were pre-
sented on various dates between the year 1957 and 1961. During the
said period the appellant Bank used to send to the plaintiff-respondent »
1144 SUPREME COURT REPORTS [1987] 2 S.C.R.

A 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
accouJll with the Bank was as mentioned in the letter. Till March.
1961, the correctness of the entries in the pass sheets and half yearly
B 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
mis-appropriation of an amount of nearly Rs.3 lacs by forged cheques
by the second defendant this would have been detected by the Char-
tered· Accountants and would have come to the notice of the plaintiff-
+-
C company. The several entries in the books of account maintained by
the plaintiff company show that all the amounts covered by the
cheques in dispute had been er.edited in the books. The Managing.
Director of the plaintiff-company himself admitted that he had
received the periodical statements and that he did not at any time
intimate the Bank about the incorrectness either in the pass sheets or
D in the letters. The inaction on the part of the plaintiff-company and its
Managing Director in not informing the Bank of the ·irregularities in
the account and deliberately withholding such information from the
Bank, according to the Bank. constituted negligence. disentitling the
plaintiff from claiming any amount from the Bank in respect of forged

-
cheques. Alternatively it was contended that the principle of estoppel
E operated against the plaintiff from claiming the amount, on the ground
of adoption or acquiescence.

The case of the appellant can be summarised as follows: After
reasonable opportunities are given to the customer to examine the
Bank statements, its debit entries should be deemed to be final and
F will not be open for reconstruction to the detriment of the bank. Of
course, what is a reasonable opportunity will depend on the facts of
each case.

In law, there can always be a settled or stated account between
the banker and the customer. The question to be decided here is
G whether acceptance by the customer without protest of a balance '
struck in the pass book or statement of account constitutes a settled ·~.
account. It is submitted that this aspect of the Banking law has not yet
been authoritatively decided by this Court and invited us to pronounce
upon it.
H On the question of estoppel it was contended that a representa-
CANARA BANK v. CANARA SALES [KHALID, J.) 1145

tioli may be made either by statement or by conduct: and conduct A
included neglige11ce, silence, acquiescence or encouragement. 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 customer will be estopped
from claiming the amount. If timely information was given, the Bank
could have acted to ward off the mischief. B

It was further contended that 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. c
For this purpose. dictionary meanings of the word 'knowiedge
was brought to our notice. "Knowledge may include not only actual
knowledge, i.e., ac~al awareness of the facts relevant, but construc-
tive knowledge, i.e., knowledge attributed by law to the party in the
circumstances, whether he actually had the knowledge or not, and D
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 sug-
gest that they may well have been stolen. but who refrains from
enquiry".
E
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 costructive knowledge of such
fact, e.g., matters of public record". "Notice" means "bringing it to a
·person's knowledge".
F
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 fact when but for wilful abstention from an enquiry, he would have
known it and that in equity a man who ought to have known a fact
should be treated as if he actually does know it.
G
J He then developed his submission as follows:

It is accepted to be a duty of customer who knows that his
cheques are being forged, to inform the bank. If he fails to
give such an information, he is estopped from claiming that
the cheques were forged. In law. there should be no differ- H
1146 SUPREME COURT REPORTS (1987] 2 S.C.R.

ence in the consequence between a person having construc-
A
tive knowledge and a person having. actual• knowledge.
Thus a person having constructive knowledge of a matter.
cannot be allowed to take advantage of his own negligence.

According to him the terms of contract between a banker and its
,B customer can never be complete unless there is an implied condition
that the customer was under a duty to examine the statement of ·
account, particularly when the bank issues a notice that if no errors are
pointed out within a specified time. the bank will proceed to believe
that there are no errors. Such a notice imposes on a customer a duty to
react and failure to react would amount to negligence, leading to -+ -
estoppel.
c
The company's .Balance Sheet for four years clearly show that "'}
the auditors have examined the books and vouchers. It is in evidence
(spoken to by PW 8) that the balance sheets ~ere adopted by the
general bodies for four successive years. This shows that the state-
0 ments of account. given by the Bank was accepted as such. ·•

There is a duty on the part of the Company's directors to present
a correct Balance Sheet. Negligence to verify the obvious things:· like
examining the counterfoil of cheques amounts not only to estoppel but
to adoption and ratification. for. no one can take shelter under one's
E own failure to examine the obvious. Further. the annual reports are to .
be treated as public docuinents and public are likely to rely upon its
representation and defendant-bank is, at any rate, a member of the
public.

We have set out above, the contentions of the appellant, in
F detail, so as to bring into focus, the questions of law to be decided in
the appeal:' .. " · '

Now we propose to consider the submissions made by the appel-
lant to test their validity qua the Banking Law, applicable to India. It is
true that there is no direct authority of this Court on this Branch of the 1

G Law. It is. therefore, necessary to briefly outline the confines of this
Branch oflaw.

The relationship between the customer of a bank and the bank is
that, of a creditor and debtor. When a chel:jue which presented for
encashment contains a forged signature.the bank has no authority to
H make payment against such a cheque. The bank would be acting
CANARA .BANK v. CANARA SALES (KHALID, J.] 1147

against law in debiting the customer with the amounts covered by such A
cheques. \\hen 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 Jaw
regarding this aspect is as follows: B

..;. \\hen 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 c
bank. when it makes payment on such a cheque. cannot
resist the claim of the customer with the defence of neg-
-4, ligence on his part such as leaving the cheque book
carelessly so that third parties would 5asily 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. The D
bank can succeed only when it establishes adoption or
estoppel.

The relationship between a bank and its customers indirectly
t arose before this Court in Bihta Co-operative Development Cane
Marketing Union Ltd. & Anr. v. The Bank of Bihar & Ors., [1967] E
- SCR 848. In that case a suit was filed by a Society registered under the
Bihar and Orissa Co:operative Societies Act. 1935. and its Secretary.
This Society had an account with the first defendant-Bank. The fth
·~
' and 7th defendants were respectively its Joint Secretary and Trea-
surer. A sum of Rs. 11.000 was withdrawn from the accou.nt by means
of a cheque, not from the chequebook of the Society, but from a loose F
i cheque leaf surrendered by an ex-constitutent ofthe bank. It bore the
signature of the 7th defendant but the forged signature of the 6th .
defendant. The suit against the bank, its manager and other employees
was decreed by the Trial Court and confirmed by the High Court on
the question relevant for our purpose but dismissed on the ground of
jurisdiction. The question before us in this appeal was considered by G
this Court with reference to a Judgment of the House of Lords in
~
London Joint Stock Bank Ltd. v. Macmillan, (1918] AC 777. It was
argued before this Court that the decree against the bank could not be
sustained since even though there was negligence on the part of the
bank and its employees, the plaintiffs' Society was not altogether free
from blame or negligence in that but for the part played by at least one H
1148 Sl,JPREME
... COURT REPORTS [1987) 2 S.C.R.

A of it~ employees in the. matter of encashment- of .the cheque for
Rs'.11,000 the fraud .could not have been perpetrated. It was also
, argued. that if both the parties were negligent or blameworthy. the
"plaintiffsdaim ought not to succeed . .It was. in this connection that
. Macmillan's case fell for reference. Being a landmark case; we would
set oui the facts of that case in bri"ef:
B
The plaintiffs, Macmillan etc. brought a suit against the London
Stock Bank for a declaration that the bank was not entitled to debit the ~
plaintiffs with a cheque for£ 120. The plaintiffs had in their employment a '
confidential clerk. who made out cheques and got the signature of
partners. On a certain day. the clerk made out a cheque for£ 2 and -f-
as!<ed 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
D ·been so negligent with regard to the cheque. that their action against
the ban.k 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 ihe Judgment. Lord Finlay observed:
E
"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 un-
.F common. If the cheque is drawn in such a way as to facili-
. tale or almost invite an increase in the amount by forgery if 'r
the cheque should get into the hands of a dishonest person,
forgery is not a·r~mote but .a very natural consequence of
negligence of this description."

G The learned Lord Chancellor further observed:

Of course the negligence must be in the transaction itself.
that is, in the manner in which the cheque is drawn. It
would be no defence to the banker, if the forgery had been
that of a clerk of a customer, that the latter had taken.the
'-H clerk into his service without sufficient inquiry as to his
CANARA BANK v . . CANARA SALES !KHALID, J.) 1149

character. Attempts have often been. made to extend the A
..... principle of Young v. Grote, 4 Bing 253 beyond the case of
negligence in the immediate transact.ion, but t~ey have
'
always failed.

According to .the learned. Lord Chancellor, leaving blank spaces on
either side of the figure '2' in the cheque amounted to a clear breach of B
duty which the customer owed to the banker. ·The learned Lord
l Chancellor said:

- ~
"If the customer chooses to dispense with ordinary precau-
tions because he has complete faith in his clerk's honesty,
he cannot claim to throw upon the banker . the loss which
.
results. No. one. can be certain of preventing forgery, but it
c
is a very.simple thing in drawing a cheque to.take reason-
able and ordinary precautions against forgery. If owing to
the neglect of such precautions it is put into the power of
any dishonestperson to increase the amount by forgery,
.the customer must bea.r the loss as between himself and the D
·banker."

The principles so settled by the House of Lords was pressed into
service before. this Court in the above case. This Court held that. the
t principle settled by the House of Lords could not help the bank. The

- accepted principle that if the signatures on the cheque is genuine, E
there is a mandate by the customer to the bank to pay was reiterated.
It was also held that if an unauthorised person got hold of such a
cheque and encashed it, the bank might have had a good defence but,
however, if the signatures on the cheque or at least one of the signa-
tures are or is not genuine, there is no mandate on the bank to pay and
the question of any negligence on the part of the customer, such as F
leaving the cheque book carelessly so. that a third party could easily get
h'old of it would afford no defence io the bank .. This Court disting-
uished Macmillan's case, observing that if any of the signatures was
forged the question of negligence of the. customer in between the sig-
·nature and. the presentation of the cheque never arose. The suit was,
however, dismissed on another point arid that of jurisdiction. G
~
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 che-
ques and to communicate to the banker within a reasonable time of the
debits which he does not admit.
H
I

.~ 1 pso
\
.:.· SUPREME COURT REPORTS . < !1987) 2 S.C.R,

• , 1 , . TJie kindered.que~ti".n C!lnnected ~ith this is_whether a custome~
1
·;. ~' i~.e~topp~d. ~r~n:i disputing t~e debits.shown in the pass bouk when the,
· pass book is returned ·with9ut any comment _and whether such a con-
.·duct'would. constitute a "stated ~nd settled account.". To answer this, it
· is necessary to examine the question whether the customor owe§ a rluty
to the bank to inform it about the correctness or mis statements in the
0

'i B,'' 'entri~s in' ilie pass book within a reasonable time and whether failure
· '. , to doso· would ainciunt to such negligence as to non-suit Jtim Iii a !!Uit
.. ,, tor tecovei-y'iif the amount paid on a forged ~licque. When does negli- j-
gence constituie estoppel? For negligence to constitute an est<>ppd It 1g
. neces~~ry t~,jmply the _e,xiste.~ce o_f so.~e duty which the party l!gainst
·:whom estcippel is. alleged owes to the.other pat!)'. 'there is ii duty of
c.· sci_rt~ ci!l'.the. p~'.rt'of)hc customer,to inform the lillfik of the irregu-
Jarilles .when he comes .to koow of it, But by mere negligence one
. ' 'cannot' presume' that there has been a breach of dutl' br the customer ·
': to't&e· bank. Tiie c:Ustomer'should not by hi! eonducUadlitate pay'
·of
..· nient illoriey on.forged cheques. In the absen.:e of Mich circurn'
''.·.stances, mere' negligence will not prevent n eU!1lomer from successfully
-.! D . suing the
~ ,_ 'bank . for_,_ recovery
.~ .
of .the 11mount. • . .. . ·
.. J - '
.

A case. of acquiescence also cannot be flourished against the
, .: ~laintiff,, Ir;t order to,.sustain a plea nf ni:qulescenee, it is necessary to
proye that the party against whom the said plea is raised, had remained
, :sil~!lt. about th~ matt~r.regarding which the plea of acquiescence is
- E raised, even after knowing the truth of the matter. As indicated above,
the plaintiff did ncii, during the relevant period, when these 42 cheques
·'' r ' , ' ' '
1. w~re ,en~ashed, know. anything about the sinister design of the second
. d,efendant. If the bank had proved to the satisfaction of the Court that
. .-; ~he, plah1tiff had,-~)th full knowledge ack.nowledged the correctness of
!. . the accounts for, 'he rel~vant period, a case of acquiescence against the J
· -,_. F- Z'· plaintiff would be
,, ~ .;. ·' . , -- ,
available
'
to the bank: That
-
is not the case here. . ~
1'="-1.•·,\_, ·-·1<1t· :"~: !~.,;·,,; '·'.':··~--, ";--· -~ ,.:_~·:_; .. •..
,.. ; ;-In.this judgment under appeal, the High Court'has elaborately '!'-
~ considCred 'the law obtaining iri the United States of America on this .
. 'aspect. We. need not exercise ourselves with the Amrican Law since .
''ihe Amencan Law is different from the law that we follow .. On the
.. G · qiie~tions involved in this appeal, it is the .law that obtains in England
which had been followed by this Court and High Courts in the country.
--..,.,. · .. The,. authorities in England have, more or less consistently held that
. · th~re. i~ n,o. duty on the part of. the customer to intimate the banker.
.a~~u~ any ei:ror, that may be seen in the pass book and that he will be
entttled to claim any amount paid on a forged cheque though there
; .H may be some negligence or in-action on his part in not being careful to
. .'
CANARA BANK v. CANARA SALES [KHALID, J.[ 115.1

discover the errors in the pass book or other documents. In the instant A
~ase, there is no evidence to show that anyone other than the second
1 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 plaintiff's involv~ment, the plaintiff
cannot be nonsuited on the ground of neglig~nce or in-action.
B
Venkatramiah, J when he rendered the Judgment, under appeal,
~
I laid down the law i:om1ctly, with the aid of authorities then available

- +· and on his Pw!I 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 t.he decision in Tai Hing Cotton Ltd. v. Liu Chong
Bank, [1985) 2 All England Reports 947. c
..
~ The facts of this case are similar to the case on hand; if anything,
more to the disadvantage to the bank in terms of money involved than
the instant case. The appellant before the Privy Council was a com·
pany, a textile manufact11rer carrying on business in Hong Kong. The
company was a custp111er of the three respondent banks and main· D
tained will! eaeh 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
·t- unless the customer notified the bank of any error therein by a
...._ specifiecj time. Between 1972 and 1978 the accounts clerk employed by E
the cowpany forged the signature of the Managing Director on 300
cheques purported to be drawn by the company for a total slim of
~ $HK.5.5 million. The banks paid the cheques on presentation by the
clerk and debited the company's current account accordingly. The
clerk was able to manipulate the accounts without any obstruction or
discovery because- he was in almost sole control of the receipts and F
i payments made through the accounts. As in this case, the fraud was
uncovered in May, 1978, when a newly appointed accountant com·
menced reconciling the bank statements with the company's books.
This was an exercise which had not been followed previously. The new
accountant found at once that something was seriously wrong. He
reported the matter to the Managing Director. The errant accountant G
was interrogated and he admitted the frauds. The company took action
against the banks, the accountant and his wife. The Trial Judge basing
his decision on the fundamental premise that a forged cheque is no
mandate to pay held that unless the bank established affirmatively that
they were entitled to debit the customers current account with the
amounts of the forged cheques, the customer was entitled to the relief H
,
1152 ' 'SUPREME COURT REPORTS [!987) 2 S.CR.

A of the loss arising from the bank's payment on the forged cheques, A
case was put forward before the Trial Judge that the Company was
vicariously liable for the fraud played by its accountant .. This· was
negatived and was not pursued. The Trial Judge also rejected the
submission of the· banks that their terms of business which was .con- ·
tractual called the banking contract, should be construed as ousting ·
B the common law rule. The defence included one of estoppel raised by
each of the banks. The plea ofestoppel was put forward in two ways;

-
first, thaMhe company was estopped by its negligence in the manage-
ment of its bank accounts from asserting that the accounts had been
wrongly debited, a'rtd second, that the company was estopped by a
representation· to gbe implied from the course of conduct that the
C periodic bank iitaft,ments ~ere correct. The Trial Judge rejected the
plea of estoppel by.. negligence but held:

" .... .In the case of each bank the company by failing. to
challenge the debits shown on the bank s(atements, had
· • represented to each bank that the debits had been correctly
D made. He held that Tokyo and Chekiang had acted in
reliance on the representations so made by their willingness
to 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 suf-
fered by Liu Chong Hing as it only became exposed to the
-f
E 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 sub-
stantially diminished during the period (December 1977 to
May 1978) during which it could be said that the estoppel
F was opera~ive."

On this finding the Judge gave the company Judgment against
one bank, bllt:disinissed its claims against the other two banks. The
company appeale\! and the defeated banks cross-appealed. The Court
of appeal differed .from the Trial Judge on the general question: The
G Court of appeal.evolved a theory that the banker/customer relation-
ship 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 tort as
well as iri contract. There was difference of opinion among the Judges
H as to whether the in-action on the part of the customer in not objecting
CANARA BANK v. CANARA SALES [KHALID, J.]' 1153
. .. . • ·.·'I
to the statement Sent by the bank within the time specified would A
'i constitute conclusive' evidence of the . correctness. of the debits
recorded tilerein or whether the banking contracts.could be construe~ .
as including a term requiring !he monthly· statements to be treat~d
after a period of time as concllisive' evidence of the state of the · ·
account. But all of them were agreed that esto'ppel operated again~! the . B· ,
company by its own negligerice from challenging the correctness .of the
--\, banks statements. The banks thus succeeded in the Court of appeal.
The 'defeated ~ompany moved the Judicial Committee of the Pfivy
Council by filing appeals. This was how the matter reached the Privy
+ Council.

The Pri~y Council had to decide the c~se in the light of the law '.c ·
settled by the House of Lords in the Macmillan's c~se and~ in
~Greenwood v. Martins Bank Ltd., (1933) AC 51' = .1932 All
England Reports :i 18 .. The Privy Council posed two questions m;fore ..
it, first, whether English law recognises any duty of care owed by the''
customer to his bank in the operation of a current' account beyond.. ,... , , .
first, a duty to refrain from drawing a cheque in such a manner as lnay u
facilitate fraud or forgery and, second, a duty to informthe.bank of :
any forgery of cheque purportedly drawri on the account as soon.as he,
the customer, becomes aware of it:. · . · · ·
· The respondent banks while recognising the ,existence of both ' .E .
. the duties indicated above contended that theJaw had· evolved iii En'g"•
land after .1918 and 1933 in recqgnising an altogether wider dnty of '
care. This duty, according to them, requirecI the cust<nnerto ;take .
_Jo reasonableiprecautions in ihe management cif his.business ~ith,ihe ..
hank to prevent forged cheques being presented t6 it for .payn1e·ii1.· .
Additionally; it WllS contended, that even if this wider duty di,d not• .. : . '.
'1 exist, at any rate the customer o":ed.aduty totake such'~t_eJ's:to·cbeck.. , f ·
the periodic hank statements sent to him as .ii reason.able person in his ., .·
·. position would take to enable bijn tonotify the bank cifany debit·items: •·
in the account which he had not authori.sed,.. When ·it is aCC!Jpted that
the hank sent periodic statements to the customer. the:.bank cont~ndecl ·
that the duty and. responsibility to look' into such sta1ements and to. G 1
~ , notify to the bank were necessaryincidentsof the·contractua1 relation-, .
. ship he tween the customer and the bank. The source cihhis obligation
.· according to the banks is to, be found:both iii t~e contnlct law as an,
. implied term of the banking contracfand in· the .tort law as a civil·
obligation arising from the relationship of.banker .and customer.

Then the Privy Council proceeded to consider th~ weightier sub' ·H
·jr

1154 SUPREME COURT REPORTS [1987) 2 S.C.R.

missions advanced by the bank (1) a wider duiy.on the part of the
A customer to act with diligen.ce which must be implied inio the contract ,....
and"aiternatively that such a duty.~rises 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
B 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 mis-lead the bank or to facilitate forgery. The Privy Council
accepted that an obligation should be read into the contract as the
nature of this contract implicity requires. In other words 'the term
C soughr'to be i'mplied must be one without which the whole1ransaction
would become futile and inefficacious.' After referring to some earlier
decisions, the Privy Council rejected the implied term 'submission' and
set out 'the limits of the care of the customer a',;d the functions of the
banks in the following words:
D " ...... One can fully understand the comment of Cons JA
that the banks must today look for protection. So be it.
They can increase the severity of their terms of business
and they can use thej_r influence as they have in the past, to
seek to persuade the legislature that they should be granted 1
by statute further protection. But it does not follow that
E because they may need protection as their business -
expands the necessary incidents of their relationship with
their customer must also change. The business of banking
is the business not of the customer but of the bank. They -J..
offer a service, which js to honour their customer's cheques
when drawn on an account in credit or within an agreed .,. .
F overdraft limit. If they pay out on cheques which are not .
his, they are acting outside their mandate and cannot plead
his authority in justification of their debit to his account.
This is a risk of the service which it is their business to
offer. The hmits set to the risk in the Macmillan and
Greenwood cases can be seen to be plainly necessary inci-
G dents of the relationship. Offered such a service. a
customer must obviously take care in the way he draws his
cheque, and must obviously warn his bank as soon as he
knows that a forger is operating the account ........ "

H The limits of the duty and the confines of contractual obligation
cannot be expressed better.
CANARA BANK v. CANARA SALES (KHALID, J.) 1155

On the question of tort also the bank could not satisfy the Privy A
Council as is seen from the following observation:

"Their Lordships do not believe that there is anything to
the advantage of the law's development in searching for a
liability in tort where the parties are in a contractual rela-
tionship. This is particularly so in a commercial relation- B
ship. Though it is possible as a matter of legal semantics to
conduct an analysis of the rights and duties inherent in
some contractual relationships including that of a banker
and customer !'ither as a matter of contract law when the
question will be what. if any. terms are to be implied or as a
matter of tort lal" when the task will be to identify a duty C
arising from the proximity ancj 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. sub-
ject to a few exceptions, the right to determine their obliga- D
lions to each other. 1md 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 .... "

Their Lordships of the Privy Council sumed up the Law, as E
followers:

'Their Lordships do not, therefore, embark on an investi-
gation 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 F
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 con-
tract. If, therefore, as their Lordships have concluded, no
duty wider than that recognised in Macmillan and Green-
wood can be implied . into the banking contract in the G
absence of express terms to that effect, the respondent
banks cannot rely on the law of tort to provide them with
greater protection than that for which they have contrac-
ted.

Having rejeeted the plea of implied terms, indirectly constructive H

'
SUPREME COURT REPORTS'' . [J9S7J' 2 S.C:R.
0

1156

A notice and estoppel by negligerice, it was held tha'i the company was
not under any breach of duty owed by it to the banks' and as such niere
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.
B Unless the tranltis able to satisfy the Court of either an express condi-
tion iri'the contract with its customer or an unequivocalratification 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
c 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 cllstomer is
presented before a bank it carries a mandate to the bank to pay. If a
D cheque is forged there is no such mandate. The bank can escape liabi-
lity only if it can establish knowledge to the customer of the forgery in
the cheques. Jn-action for continuously Jong period cannot by itself
afford a' satisfactory ground for the bank to escape the li~bility. The
plaintiff in this case swung into action immediately on the discovery of i,
the fraud committed by its accountant as in the case before the Privy
E Council. ' ' ·· ·
~
We may. in passing. refer to a decision of this court on the .
question of negligence under circumstances not strictly akin to'the case: '.t •'
'': .:;
on hand reported in the New Marine Coal Co. (Bengal) Pvt. Ltd . .v •.
Union of India, {19641 2 SCR 859. There the suit was for recovery of.'.
F ·certain amount representing the price of coal supplie'd to therespon-
. dent. Inter-alia the respondent pleaded in defence,. of the s\iii thafthe .
respondent had issued and sent bills to cover th~ .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
G proper receipts. It was pleaded that the appellant's claimrhaving been
satisfied. he had no cause of action. It was established.in ihe course of . ~····.
the trial-that the appellant had not in fact authorised ~ny 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 . , ,
H intimation cards and bills addressed to the appellant. forged the docu-
ments and fralldulently received the cheque from the respondent and
CANARA BANK v. CANARA SALES [KHALID, J.] 1157

. .,, appropriated the amount for himself. We may usefully read the follow- ·A
ing passage relating to negligence in the context of a plea based on
estoppel:

"
Apart from this aspect of the matter, there is another seri- B
ous objection which has been taken by Mr. Setalved against
1 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 support of
such a plea is not the negligence as is understood in popular
language or in common sense; it has a technical denotation.
In support of a plea of estoppel on the ground of negli-
c
gence. it must be shown that the party against whom the
plea is raised owed a duly to the party who raises the plea.
Just as estoppel can be pleaded on the ground of misrepre-
sentation or act or omission, so can estoppel be pleaded on
the ground of negligence; but before such a plea can sue- D
ceed. negligence must be established in this technical
sense. As Halsbury has observed: 'before anyone can be
estopped by a representation inferred froni negligent con-
~ duct. there must be a duty to use due care towi!rds the party ·
·misled, or towards the general public of which he is one.'
There is another requirement· which has to be proved E
-- before a plea of estoppel on the ground of negligence can
be upheld and that requirement is that 'the negligence on
ri. which it is based should not be indirectly or remotely con-
nected with the misleading effect assigned to it, but must be
the proximate or real cause of that result.' Negligence.
--r according to Halsbury, which can sustain a plea of estoppel F
must be in the transaction itself and it should be so con-
nected with the result to which it led that ,it is impossible to
treat the two separately. This aspect of.the matter has not
been duly examined by Mukharji. J. when he made his find-
ing against the appellant." ·
G
4 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 in-action for a reasonably Jong
time in not discovering fraud or irregularity be made a defence to
defeat a customer in an action for loss. Thus the contentions put for- H
1158 SUPREME COURT REPORTS [1987] 2 S.C.R.

A ward by the bank cannot be accepted to defeat .the plaintiff. The vari-
ous submissions made by the counsel for \~e b~pk based on construe-. y
. tive notice in the general law and on other brannhes of law cannot be
extended to relationship between a bank ancj its customers.

B On a careful analysis of the questions of iaw, we hold that the
.iudment of 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
Ist respondent.

N.P.V. Appeal dismissed.