1977 (8) TMI 182 - HC - Indian Laws

Summary

Issues Involved:
1. Fraud by bank officials
2. Liability of banks to the customer
3. Material alteration of the cheque
4. Negligence and good faith under the Negotiable Instruments Act
5. Breach of contract by the bank
6. Liability of the collecting bank
7. Policy considerations for banks regarding fraudulent activities by employees

Detailed Analysis:

1. Fraud by Bank Officials:
"This is a blatant case of fraud practiced on banks by their officials to the prejudice of the banks as well as the customer or the drawer of a cheque." The judgment highlights the fraudulent actions of bank officials who colluded with an individual named S. P. Madan to defraud both the banks and the customer, Durga Devi.

2. Liability of Banks to the Customer:
"The liability of the banks to the customer was never in doubt." The court affirmed that the banks are liable to the customer for the fraudulent actions of their officials. The Punjab National Bank and the National and Grindlays Bank were held jointly and severally liable to pay Rs. 18,000 and interest to the plaintiff.

3. Material Alteration of the Cheque:
The cheque issued by Durga Devi was materially altered by substituting "Shri Satya Pal Madan" in place of "The State Bank of India," and the date and amount were overwritten. "The whole cheque except the signature of Durga Devi was, therefore, materially altered when presented for collection." This alteration was obvious, and the acceptance of such a cheque indicated collusion by the bank officials.

4. Negligence and Good Faith under the Negotiable Instruments Act:
The Punjab National Bank could have been protected under section 10 of the Negotiable Instruments Act if the payment was made "in accordance with the apparent tenor of the instrument in good faith and without negligence." However, the court found that the officials acted with fraud and collusion, negating any claim of good faith. "There was total negligence on the part of the officials of the Punjab National Bank."

5. Breach of Contract by the Bank:
The court held that the Punjab National Bank breached its duty of care to the plaintiff. "The liability of the Punjab National Bank to the plaintiff arises out of a breach of contract." The bank's failure to detect the forgery and material alteration of the cheque resulted in a loss to the plaintiff, making the bank liable for damages.

6. Liability of the Collecting Bank:
The National and Grindlays Bank was also held liable under section 131 of the Negotiable Instruments Act for failing to act in good faith and without negligence. "The trial Court has held the National and Grindlays Bank as being also under obligation to act in good faith and without negligence."

7. Policy Considerations for Banks Regarding Fraudulent Activities by Employees:
The judgment criticized the banks for not taking immediate action against fraudulent employees and for dragging customers into unnecessary litigation. "We think that banks are public institutions... they owe a duty of fairness to their customers." The court suggested that banks should admit liability when convinced of the justice of a claim and take prompt action against erring employees. This issue was recommended for consideration by the Department of Banking, Ministry of Finance, and the Reserve Bank of India.

Conclusion:
The appeal by the Punjab National Bank was dismissed with costs, and the court emphasized the need for banks to adopt fair practices and avoid unnecessary litigation. "With the above observations, the appeal is dismissed with costs."