Canara Bank v. Canara Sales Corporation (1987)

It settles the Indian law on a question that had produced a long and contradictory line of English decisions: where a bank pays on a cheque bearing a forged signature of the customer, and the forgery is repeated over months while the customer receives pass books and statements and says nothing, can the bank throw the loss on the customer?

The answer is no, and the reasoning is unusually blunt about why. It is also the case that tells you how much Indian law of banking is English law and how much is not: the Supreme Court has expressly said that it is the rule of law obtaining in England which has been followed by the Supreme Court and High Courts in this country — but, as the result shows, the English learning on constructive notice and estoppel by negligence has not been received.

A pass book is a replica of the ledger at the branch. Instead of the columns headed debit, credit and balance, it carries columns for amount withdrawn, amount deposited, and balance, together with a column of initials showing that the entries have been authenticated by an authorised person of the bank. It names the customer, the account number, the ledger number, the mode of operation — either or survivor, former or survivor, or any one — the date of opening, the branch, and the signature of the branch manager. Pass books are issued to all savings bank customers; in current accounts, only on demand.

Two propositions about it matter before the case can be understood.

The book belongs to the customer, but the entries are the bank's. Because the entries are made by the bank, they can be used as evidence against the bank. In Akrokerri (Atlantic) Mines Ltd. v. Economic Bank it was held that the pass book belongs to the customer and the entries made in it by the bank are statements on which the customer is entitled to act.

The customer is under no duty to examine it. In Chatterton v. London and County Bank it was held that there was no duty on the customer to examine the pass book and thus no negligence. In Kepitigalla Rubber Estates Ltd. v. National Bank of India Ltd. it was held that a company was under no obligation to organise its business so as to make forgeries impractical; an officer of a company cannot bind the company by approving the balance shown in the company's pass book.

Against those stand Vagliano Bros. v. Bank of England, where Lord Halsbury asked whether the customer was not bound to know the contents of his own pass book, and Balakrishna Pramanik v. Bhowanipore Banking Corporation Ltd., where continued and persistent acquiescence in entries of compound interest at monthly intervals gave rise to a presumption of an agreement to charge it.

The Indian position had therefore to be settled, and this case settles it.

Where cheques bearing the customer's forged signature are honoured, and the customer, receiving pass books and statements over a long period, raises no objection, can the bank defeat his claim on the footing of an implied term of the contract, of constructive notice, or of estoppel by negligence?

The Supreme Court held that the pleas of implied terms, of indirectly constructive notice, and of estoppel by negligence stand rejected. Mere 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.

The reasoning in the Court's own terms repays close reading.

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.

On the commercial reality. The banks do business for their benefit; customers also get some benefit. If banks were to insist upon extreme care by customers in minutely looking into the pass book and the statements sent by them, no bank perhaps could do profitable business. It is common knowledge that the entries in the pass books and the statements of account sent often by the bank are not readable, decipherable or legible.

On trust. There is always an element of trust between the bank and its customer. The bank's business depends upon this trust.

On the mandate. Whenever a cheque purporting to be by a customer is presented before a bank, it carries a mandate to the bank to pay. If a cheque is forged there is no such mandate. The bank can escape liability only if it can establish knowledge to the customer of forgery in the cheques.

On silence. Inaction for a continuously long period cannot by itself afford a satisfactory ground for the bank to escape liability.

A cheque bearing a forged signature carries no mandate; the bank which pays it pays without authority and must bear the loss. The customer is under no general duty to examine his pass book or statements, and his silence, omission or failure to act does not raise an implied term, constructive notice or an estoppel by negligence. The bank escapes only by proving an express condition in the contract, an unequivocal ratification, or the customer's knowledge of the forgery.

The Court discussed the position in the United States, where it is settled law that it is the duty of the customer to examine the pass book. In Morgan v. United States Mortgage and Trust Co., the New York Court of Appeals said that a depositor who sends his pass book to be written up and receives it back with his paid cheques and vouchers is bound to examine the pass book and vouchers and to report to the bank without unreasonable delay any errors discovered; negligence there means the neglect to do those things dictated by ordinary business custom and providence and fair dealing towards the bank which, if done, would have prevented the wrongdoing.

Indian law has taken the opposite view, and the reason it gives — that the entries are often not readable, decipherable or legible, and that the bank does the business for its own benefit — is the answer to any argument built on the American rule.

Where the entry is favourable to the customer. If the bank has erroneously shown a larger credit balance and the customer, relying on the accuracy of the pass book, draws a cheque, the bank is not right in returning it, and is liable in damages for wrongful dishonour. Much depends on whether the customer was led by the erroneous entry to act in a way in which he otherwise would not have done, and whether that action was to his detriment. Where a bank discovers that it has doubly credited the same remittance, it should inform the customer and should not permit further withdrawals until the matter is cleared.

Where the entry is fictitious. A fictitious entry made by a bank employee cannot be relied upon by a customer who has not received notice of it or acted so as to alter his position. In State Bank of India v. Shyama Devi (AIR 1978 S.C. 1263) a bank employee made false entries in the pass book in his own handwriting and embezzled the amounts; the cheques had been handed to him without any counterfoil or receipt being obtained, and he was not then looking after the savings bank counter. The Supreme Court held the bank not liable, because the employee had not acted within the scope of his employment; the false entry could not shift on to the bank the onus which lay on the depositor.

Balance confirmation letters. Banks send these half-yearly or yearly; in loan accounts they serve as an acknowledgement of the debt, and companies and firms call for them to satisfy their auditors. But in law the bank cannot compel the customer to sign and return them. Whether a customer who has confirmed the balance may still object to a preceding debit entry is not free from doubt; from Allahabad Bank Ltd. v. Kulbhushan it would appear that where the entry consists of payment of a forged cheque or arises out of a fraud by the bank's employees, he can.

And there is no acquiescence in an omitted credit. A banker is in no case justified in withholding from his customer any amount received for his credit but omitted to be entered in the pass book, on a plea of acquiescence. In Essa Ismail v. Indian Bank Ltd. the Kerala High Court held that unless there is evidence of a practice or custom indicating a settled account, the customer is not precluded from questioning the debit entries in the pass book.