Liability of banks W.R.T. customer’s forged signature on cheque

Krisha Kamal | Presidency University, Bangalore | 24^th April 2020

INTRODUCTION

The relationship between the bank and customer is considered to be an established contractual relationship. By virtues of this relationship banks are having certain set of liabilities towards their customers. It is the legal duty of bank to pay the cheques that its customer writes. However, there are instances where banks are not supposed to make any payment. 

In case of making payment of cheques with customer’s forged signature on the same, The Negotiable Instrument Act, 1881 provides relief to the bank. Section 85 of the Negotiable Instrument Act, 1881 deals with the provision called cheques payable to order. It states:

Cheque payable to order:

1. Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course.
2. Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing, thereon, and notwithstanding that any such endorsement purports to restrict or exclude further negotiation.

According to the given provision, banks are expected to make the payment once the cheque is deposited to the bank provided that it should be payable. The above provision provides protection to the bank for a reasonable cause as bankers cannot be anticipated to know and recognize all the signatures. If the payment is done in due course, the bank is always discharged from any liability.

In case of forgery, the protection given to the banks is to prove that the act of forgery was done with the knowledge of the payee and any action has not been taken by the payee for a very longer period^[1]. The duty to inform the bank about any fraudulent transaction lies on the customer. Customers are not bound with this duty. He/ she can get exempted from this obligation in case they are not aware of any such fraudulent transaction being done.

A forged cheque is considered as no cheque. Even in case where there is a delay in action from the customer’s end or if there is any act of carelessness observed from the customer’s end such as not taking the proper care of the cheque or the relevant cheque book in proper custody, then also bank is not accountable for the debit of the said amount when the signature on the cheque is forged. So, the protection given to the bank by section 85 of the Negotiable Instrument Act, 1881 is not available in respect of a forged cheque.^[2]

The liability on Bank cannot be avoided by simply ascertaining that the payment was done in due course based on the apparent gist of the cheque or with reasons such as no dissimilarity was observed between the signature on cheque and the specimen signature. The only way the bank can protect itself from any liability when it is able to prove that there was a ratification or estoppel.^[3]

UNIFORM COMMERCIAL CODE

Uniform Commercial Code gives the provisions related to the avoiding of liability of bank in case of defrauding of a commercial customer. Article 4A and Article 12 of UCC and Lowa UCC respectively protects the bank from its liability in case of fraudulent transaction.^[4]

These provisions allow the bank to shift the risk of loss to the customer. In order to practice the same the bank and the customer has to set up a security procedure in order to be protected from the fraudulent transactions. Provided that the procedure has to be commercially reasonable and the bank has to follow the written instructions and also has to make sure that the payment order has accepted by the bank in good faith.

CONCLUSION

The sole liability of the protection of transaction cannot be given to any party. Both customer as well as bank has to take proper care of the cheques and the procedures o be followed for its encashment. However, the responsibility of custody of cheque is on customer but the bank cannot free itself entirely. The bank holds the liability with respect to customer’s forged signature on cheque. It is very obvious that there exists a contractual relationship of banks with their respective customers. Banks have certain responsibilities and liabilities towards its customers. And the only possible way to escape from the case of forged signature on the cheque is when the bank is able to prove that the act was done within the knowledge of the customer.

^[1] Canara Bank v Canara Sales Corporation and ors., 1987 AIR 1603 (India).

^[2]Babulal Agarwalla v State Bank of India, Bikaner and Jaipur, 1989 AIR Cal 92.

^[3]Citizen Cooperative Bank Ltd. And v Ritesh Mittal 2003 AIR  J&K 67. 

^[4]Fredrikson, Byron PA, Avoiding Bank Liability when a commercial Customer is defrauded/UCC Article 4A  www.lexology.com