State Bank of India v Shyama Devi (1978)

When a bank clerk steals a customer's money, is the bank liable? The customer will say yes — he was the bank's employee, and the fraud is written in the bank's own pass-book. This case holds that the answer turns on a narrower question: was the employee acting in the course of his employment with the bank when he received the money? If the customer handed her money to the clerk as her own friend and agent, outside the bank's normal procedure, the bank is not liable — even though the clerk later forged entries in the bank's books to cover the theft.

It also settles a burden-of-proof point every banking student should know: a false entry in a pass-book does not by itself shift the burden onto the bank.

On 17 September 1945 the respondent, Shyama Devi, opened a savings bank account with the Imperial Bank of India (the State Bank's predecessor) at Allahabad. She was introduced to the bank by Kapil Deo Shukla, a bank employee who was a close neighbour and a friend of her husband, Bhagwati Prasad.

Her pass-book showed several deposits which the bank denied receiving. The two that mattered were:

• Rs 4,000, shown as deposited on 17 September 1945 by a crossed "self" cheque drawn by her husband. There was no voucher, no receipt and no cash-scroll entry, and the cheque had in fact been credited to someone else's account at the Calcutta National Bank on 15 September 1945.
• Rs 7,000 (part of an entry of Rs 8,000 on 7 December 1945), shown as transferred from the current account of Bhagwati Prasad & Sons. Correspondence admitted by the High Court showed that the cheque had been cashed and credited to the personal account of "Lal Babu", that is, Shukla, at the Dass Bank.

The entries were in Shukla's handwriting, and the initials of the bank officer against them were forged. Shukla did not work at the savings bank counter.

Her own plaint said that she "quite often used to hand over the money and letter of instructions to him" — to Shukla — and trusted the pass-book. At trial her husband gave a different account, saying he deposited at the counter, but when confronted with that paragraph of the plaint he admitted it was correct.

The trial court decreed part of the claim. The Allahabad High Court decreed the whole of it, holding the bank liable for Shukla's fraud. The bank appealed on a certificate.

1. What principles govern the vicarious liability of a bank for loss caused to a customer by the fraud of an employee?
2. Was Shukla, when he received the Rs 7,000 cheque, acting in the course of his employment with the bank, or as the agent of the customer?
3. Does a false entry in the customer's pass-book, made by a bank employee, shift the burden onto the bank to prove that no deposit was made?

The bank's appeal was allowed. The claim for Rs 11,000 (the items of Rs 4,000 and Rs 7,000) and interest on it was dismissed, and the High Court's decree was reduced by that amount. The High Court's findings on the remaining items were not seriously disputed and stood. No order as to costs.

The principles of vicarious liability

The Court set out "the settled legal principles which govern the vicarious liability of an employer for the loss caused to a customer through the misdemeanour or negligence of an employee."

First, relying on the House of Lords in Leesh River Tea Co v British India Steam Navigation Co: "the employer is not liable for the act of the servant if the cause of the loss or damages arose without his actual fault or privity and without the fault or neglect of his agents or servants in the course of their employment." Mere opportunity is not enough: the Court adopted Salmon LJ's point in that case that it is not sufficient for liability that the employment merely afforded the servant an opportunity of committing the crime.

Second, the damage must be shown to have been caused by a wrongful act of the servant done within the scope or course of the employment, even if the wrongful act amounted to a crime (Lloyd v Grace, Smith & Co).

Third, following the Privy Council in United Africa Co v Saka Owoade, "a master is liable for his servant's fraud perpetrated in the course of master's business, whether the fraud was for the master's benefit or not, if it was committed by the servant in the course of his employment." And "it is a question of fact in each case whether it was committed in the course of the employment."

The Rs 7,000 item — not in the course of employment

The question was whether Shukla, when he received the money, was "acting as an agent of the plaintiff or of the Bank in the course of his employment". The documents showed that the cheque "was not handed over in the normal course of business in the defendant-Bank for transfer to respondent's account in the regular manner". Shukla was not in charge of the savings bank counter; the husband had presumably sent the cheque through him, treating him as his own agent.

So: "the act which caused the loss to the respondent could not be said to have been committed by Shukla in the course of his employment with the Bank. At the most, it could be said that the fact of his being an employee of the Bank and a friend of Bhagwati Prasad, gave him an opportunity to commit this fraud."

"The rule in Leesh River Tea Co.'s case (supra), squarely applies to this situation." Nor did the forged entries change the answer: the fact that false and fictitious entries were made by Shukla in the pass-book and ledger could not "make the embezzlement committed by Shukla an act committed in the course of his employment with the Bank."

The Rs 4,000 item — burden of proof

The High Court was wrong to reverse the trial court on this item. "The onus was on the plaintiff to show that she paid the amount to an employee of the Bank and was received by that employee in the course of his employment. The false and fraudulent entry about the deposit of this amount in the Pass Book, could not shift the onus on the Bank to prove the contrary." The entry was "obviously false": there was no voucher, receipt or cash-scroll entry, and the cheque had gone to another person's account.

A bank is vicariously liable for its employee's fraud on a customer only where the fraud is committed in the course of the employee's employment with the bank; it is a question of fact in each case. Where a customer hands money or a cheque to a bank employee as her own friend or agent, outside the bank's normal course of business, the employee's misappropriation is not an act in the course of his employment — the employment merely gave him the opportunity — and the bank is not liable. False entries made by the employee in the pass-book or ledger to cover the fraud do not convert it into an act in the course of employment, and do not shift onto the bank the burden of proving that no deposit was made.

• Direct question: When is a banker liable for the fraud of its employees? Discuss. Give the three principles (no liability without fault in the course of employment; the wrong must be within the scope of employment even if criminal; liability for fraud in the course of the master's business whether or not for the master's benefit), then apply them through Shyama Devi.
• Problem question: a customer gives cash to a bank clerk who is a family friend, asking him to deposit it; he pockets it and writes a false entry in her pass-book. Apply Shyama Devi: the clerk was her agent, not the bank's; opportunity is not course of employment; the pass-book entry does not shift the onus.
• Contrast to draw: the principles the Court stated from Lloyd v Grace, Smith & Co and United Africa Co make the master liable for fraud committed in the course of its business. The decisive facts here were that the cheque was not handed over in the normal course of the bank's business and that Shukla did not work at the savings bank counter. Show the examiner you see where the line falls.
• Practical lesson for customers: use the bank's prescribed deposit procedure — voucher, counter, receipt. The Court relied heavily on the absence of any voucher, receipt or cash-scroll entry.