# CANARA BANK v. CANARA SALES - **Citation:** [1987] 2 S.C.R. 1138 - **Court:** Supreme Court of India - **Decided:** 1987-04-22 - **Case number:** Civil Appeal No. 1777 of 1973 - **Bench:** V. Khalid, G.L. Oza - **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/canara-bank-v-canara-sales-9441 - **Pages:** 21 ## Headnote 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 presentedMandate 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 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 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accounts for the years 1957·58 to 1960·61 by a firm of Chartered Accountants disclosed that the second defendant had withdrawn a sum of Rs.3,26.047 .92 under 42 cheques.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 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. 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 H company was not entitled to recover the amount on account of its own 1138 i ~ r- ~i ~ l . ,._ ..... \" !._ . !l i 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 B sum claimed with interest at 6'1<. ---\ _ . 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 detriment of the hank; (2) a representalion may be made either by statement or by conduct, and conduct included negligence, silence, acquiescence D or encouragement, and 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 consumer will be estopped from· claiming the amount; and (3) in-action for t" a long period would amount to such negligence as would persuade a court to impute to the customer with knowledge or at any rate construetive 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 F 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 ## Text _Characters 0–39,955 of 52,148. This is a partial read: ask again with offset=39955 for what follows._ A 8 CANARA BANK v . . CANARA SALES CORPORATION & ORS.. ..,, ·- ,•.,, er... • ,.,,.APRIL 22, 1987., . ' '· 'tl 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 presentedMandate 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 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 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 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. 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 H company was not entitled to recover the amount on account of its own 1138 i ~ r- ~i ~ l . ,._ ..... \" !._ . !l i 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 B sum claimed with interest at 6'1<. ---\ _ . 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 detriment of the hank; (2) a representalion may be made either by statement or by conduct, and conduct included negligence, silence, acquiescence D or encouragement, and 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 consumer will be estopped from· claiming the amount; and (3) in-action for t" a long period would amount to such negligence as would persuade a court to impute to the customer with knowledge or at any rate construetive 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 F 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 signatu 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 G get hold-of it. This is because a document in cheque form. on which the _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 encashment contains a forged signature the bank has no authority to make H payment against such a cheque. The bank would be acting against law 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: D 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) 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 • ' .· )... ... , ._, • .>., - ,,..__ ~ t ' - ,J.,. -1 CANARA BANK v. CANARA SALES 1141 8. Whenever a cheque purporting to be by a customer is presented 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 satisfactory ground for the bank to escape the liability. [1156D-E] 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 knowledge acknowledged the correctness of ihe accounts for the relevant period the case of acquiescence cannot be flourished against the company. 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 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. & Anr. v. The Bank of Bihar & Ors., [196if] 1 SCR 848; London Joint 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] 2 SCR 859, referred to. I CIVIL APPELLATE JURISDICTION:Civil Appeal No. 1777 of 1973. From the Judgment and Decree dated 25.6.1973 of the Karnataka High Court in Regular First Appeal No. 56 of 1968. K.N. Bhatt, V.K. Verma and Ms Madhu Moolchandani for the Appellants. S.S. Javali and B.R. Agarwala for the Respondents. The Judgment of the Court was delivered by A B c D E .. G H , 1142 SUPREME COURT REPORTS . [1987] 2 S.C.R. '!KHALID, J. This is an appeal by certificate, 'against the Judg- . • - • I ' ' • • J • -, ' ' ' • ' • • , - - • - 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 • A ·' Original Suit No. 72 of 1962 was filed in tlie Court'i:i'f Civil Judge'.' 1 • ' ' . ~ - . . ' • -' - ' -- ; • ' .. ' • 1- . - . - ' a·. 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: . - . ' ' The suit was instituted for recovery of a sum· of Rs.3,26,047.92'.' 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"; Director of the company and the General Manager of a sister c_oncem of the company had been . authorised to operate the said 'current E . account of the. plaintiff with ihe B?nk. The ·second· defendant was , 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 · 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 an: a sum' 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 ':l !. i I ' l 1 t 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 "· ,-4_ The second defendant pleaded that the cheques were not forged 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 defendantD 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 questio~s of law of general eublic importance and granted certificate to file E - the appeal. It is thus that this appeal has come before us. • Venkataramiah, J. as he then was, who spoke for the Bench, has 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 quesG 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 presented 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 Chartered· Accountants and would have come to the notice of the plaintiffC 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. F G H 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 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 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. On the question of estoppel it was contended that a representa- +- - ' ·~. J CANARA BANK v. CANARA SALES [KHALID, J.) 1145 tioli may be made either by statement or by conduct: and conduct 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. 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. 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 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". 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". 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. 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 differA B c D E F G H 1146 A ,B SUPREME COURT REPORTS ( 1987] 2 S.C.R. ence in the consequence between a person having constructive 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 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 state0 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 appellant 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 G Law. It is. therefore, necessary to briefly outline the confines of this Branch oflaw. H 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 make payment against such a cheque. The bank would be acting 1 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 B regarding this aspect is as follows: . .;. \\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 -4, resist the claim of the customer with the defence of negligence 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 D customer's name as drawer is forged. is a mere nullity. The bank can succeed only when it establishes adoption or estoppel. t The relationship between a bank and its customers indirectly arose before this Court in Bihta Co-operative Development Cane E Marketing Union Ltd. & Anr. v. The Bank of Bihar & Ors., [ 1967] - 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 Treasurer. A sum of Rs. 11.000 was withdrawn from the accou.nt by means F of a cheque, not from the chequebook of the Society, but from a loose i cheque leaf surrendered by an ex-constitutent of the 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 G jurisdiction. The question before us in this appeal was considered by ~ 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 H from blame or negligence in that but for the part played by at least one A B 1148 Sl,JPREME COURT REPORTS ... [1987) 2 S.C.R. 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: 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 -fas! serious matter, but every one knows that crime is not uncommon. 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: '-H 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 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 B either side of the figure '2' in the cheque amounted to a clear breach of duty which the customer owed to the banker. ·The learned Lord l Chancellor said: -~ "If the customer chooses to dispense with ordinary precautions because he has complete faith in his clerk's honesty, he cannot claim to throw upon the banker the loss which . . c results. No. one. can be certain of preventing forgery, but it is a very.simple thing in drawing a cheque to.take reasonable 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, D .the customer must bea.r the loss as between himself and the ·banker." The principles so settled by the House of Lords was pressed into t service before. this Court in the above case. This Court held that. the 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 signatures are or is not genuine, there is no mandate on the bank to pay and F the question of any negligence on the part of the customer, such as 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 distinguished 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, G however, dismissed on another point arid that of jurisdiction. ~ 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. H I .~ 1 pso \ SUPREME COURT REPORTS . < !1987) 2 S.C.R, .:.· •1, 1 , . TJie kindered.que~ti".n C!lnnected ~ith this is_whether a custome~ ·;. ~' 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 0statements in the '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 neglij- 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 irreguJarilles .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' .. · nient ·of 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 plaintiff would be available to the bank: That is not the case here. . ~ . - Z'· ,, ~ .;. ·' . , -- , ' - 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 1 ~ase, there is no evidence to show that anyone 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 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, ~ laid down the law i:om1ctly, with the aid of authorities then available I 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 ·tappellant periodic statements which were deemed to be confirmed 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 i discovery because- he was in almost sole control of the receipts and F 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 H amounts of the forged cheques, the customer was entitled to the relief , 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 management 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: D E F " .... .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 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 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 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 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 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 - -f 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:.