Laws of Banker and Customer

The law relating to bankers and banking in India fall under two major heads :

1. Law regulating relations between bankers, customers and outside world: These laws deal with matters relating to collection of various financial instruments, loans and advances, bankers’ lien, pledge, mortgage and hypothecation. These laws are mainly contained in Contract Act, 1872, and the Negotiable instruments Act, 1881.
2. Law regulating the Bankers & Banking: These laws deal with matters relating to incorporation, control, management and dissolution of banking companies and are mainly contained in  Companies Act, 1956 and Banking Regulation Act, 1949.

Banker: As per N I Act, the term Banker includes any person acting as a Banker. The Banking Regulation Act, 1949 defines ‘Banking Company’ as “a company which transacts the business of banking in India” (s.3).

Bank Customer : A person becomes a customer of a bank when he opens an account with the bank for any banking service.

A Banker and a customer establish a contractual relationship between them.

Rights and Obligations of Banker

1. Rights
   1. Banker’s General Lien
   1. Claim incidental charges and interest
   1. Right to set-off
   1. Right of appropriation
2. Obligations
   1. Honour cheque
   1. Record of transactions
   1. Follow instructions of customer
   1. instances when banker may dishonour customer’s cheque

Rights of Banker

• Banker’s General Lien : In the absence of a contract to the contrary, the banker may, retain goods and securities bailed to him as security for general balance of account (sec.171 of the Indian Contract Act).
• Claim incidental charges and interest : The banker has the right to claim incidental charges and interest on money lent and banking services rendered to the customer as per rules.
• Right to set-off : The banker may combine two or more accounts of a customer to set off Debit Balance of an account against credit balance of another account of the customer with the bank.
• Right of appropriation : The banker may make appropriation of Receipts & Payments in a current account of customer, as per Sec 59 to 61 of the Indian Contract Act, 1872. As per this rule, unless there is a standing rule or instruction to the contrary, the first credit would be set off against first debit and balance carried to the next set of transaction and so on.

Obligations of Banker

• Honour cheques  : A banker must honour his customer’s cheques (s. 31) if the customer has sufficient fund in his account and the cheque is properly applicable for the payment, otherwise he is liable to customer damages for financial loss and also for injury of customer’s reputation. In case of wrongful dishonour the banker is only liable to the drawer only (and not to the payee or the holder of the cheque as there is no contract between them and the banker).
• Record of transactions  : The banker must keep a proper and accurate record of all the transactions of the customer.
• Follow instructions of customer : The banker must abide by express and clear instructions of the customer, subject to the laws laid down in the N I Act. In absence of any express instructions, the banker must act according to the usage prevailing at the place of his banking business applying reasonable skill and diligence in his work.  [R.J.Mohamed v. Indian Bank]
• Keep confidentiality : The banker should take adequate care to keep the state of account of his customer’s affairs confidential and not disclose to other parties which may injure the customer’s reputation and credit. If the banker fails in this duty, he is liable in damages.

Instances when banker may dishonour customer’s cheque

A banker may dishonour customer’s cheque in the following cases:

• Insufficient Fund : The banker does not have sufficient funds to honour the cheque in full.
• Available Funds not proper : Funds to the credit of the customer are not applicable to the payment of the cheque (e.g., when the money is held in trust).
• The cheque not proper : The cheque drawn is ambiguous or of doubtful legality, irregular,  materially altered, not duly presented, torn or mutilated.
• Signature not matching : The customer’s signature does not agree with the specimen signature in the bank’s record, or signature not properly done (e.g not signed by all the required signatories).
• Post Dated Cheque : The cheque is presented before the ostensible date of the cheque.
• Stale Cheque : The cheque is not presented within its validity (six months from the date of its issue).
• Cheque presented at wrong branch : If the cheque is presented at a branch other than the one where the customer has the account.
• Set Off : The banker has a claim for set-off and the cheque is excess of the claim.
• Undated cheque: A banker is not bound to pay an undated cheque (cheque which does not contain any date on its face).
• Presentment after banking hours: The bank may refuse to pay a cheque if the cheque is presented after banking hours. But, a bank may pay a cheque even after business hours, at its discrection.

8.6 Instances when banker must dishonour customer’s cheque

A Banker must dishonour a cheque at the following instances:

• Customer becomes insolvent or an order of adjudication has been made against him.
• The customer orders the banker not to honour a cheque.
• The banker receives notice of the customer’s death or insanity.
• A garnishee or other legal order attaching the funds of the customer is served on the banker.
• When the customer gives notice to the banker to close the account or assignment of the credit balance of his account.
• The title of the person presenting the cheque is defective.
• The holder gives a notice of loss of a cheque to the banker. 
• Prohibitions by Government. A banker must not pay a cheque if the payment of such cheque is prevented by the Government or under Exchange Control Restrictions.
• Cheque not signed by all the joint holders. The banker must refuse cheque payment if it is not signed by all the joint holders.  However, if all the joint holders have authorised any of them to draw cheque the banker must pay the cheque signed by the authorised joint holder singly.
• Material alteration. The banker must not make the payment of materially altered cheque. Cheque without making sufficient inquiries and obtaining evidence thatthe holder has a valid title to the cheque.
• Irregular endorsement. Where a cheque payable to order is endorsed, which appears to be forged or otherwise irregular, the banker must not pay the cheque.
• Prohibition in case of trust money. A banker must refuse to honour a cheque drawn in breach of trust where he has notice of breach.

Protection of paying Banker : The privileges of the paying banker are listed below for (s.85),

Cheques payable to order [s. 85 (1)] 

1. Where a banker pays a cheque payable to order, purporting to be endorsed by or on behalf of the payee, he is discharged from liability by making the payment in the due course. The banker can debit his customer’s account with the amount so paid even if the endorsement turns out to be is forged, or without authority. [Charles v. Blackwell], [Canara Bank v. Canara Sales Corpn],  [Charles v. Blackwell], [Smith v. Union Bank of London],
   1. However, the banker cannot debit the account of his customer in the following cases :
2. Where the payment is not made in due course and in accordance with the apparent tenor of the cheque.
3. If there is a discrepancy between the name of the payee and his indorsement.
4. Where the payment of a crossed cheque is made on the counter.
5. If signature of the customer is forged. But if the forgery is due to the negligence of the customer the banker can debit the account of the customer intimately connected with the negligence.

Cheques payable to bearer [s. 85 (2)]

1. Where a cheque is originally drawn payable to bearer, the paying banker is discharged by making the payment to the bearer of the cheque, provided such payment is a payment in due course.
   1. If payment is made in due course, the paying banker shall not be liable, even if –
      1. any endorsement (whether in full or in blank) has been made on the cheque or
      1. any endorsement made on the cheque restricts or excludes the right of further negotiation.

Thus, the rules in case of bearer cheques is, “once a bearer, always a bearer”, or “A bearer cheque is always a bearer cheque”.

Crossed cheques

1. Payment of cheque crossed generally: The drawee banker is discharged by payment in due course of a generally crossed cheque to a banker.(s.126)
2. Payment of cheque crossed specially: The draweee banker is discharged by payment in due course of a specially crossed cheque to the banker to whom it is crossed or his agent for collection. (s.127)
3. Payment of crossed cheque in due course: The drawee banker is discharged when he pays a crossed cheque in due course (i.e., in good faith and without negligence) the proceeds of the cheque reaches the hands of the true owner. (s. 128)
4. Payment of crossed cheque out of due course: When the banker pays a crossed cheque otherwise than in accordance (i.e., pays otherwise than to a banker to whom it is crossed), he is liable to the true owner of the cheque for any loss sustained by such default. (s. 129)

Thus s.85 gives protection to a banker where a banker makes payment on forged cheque only if the payment is made in due course. [Canara Bank vs. Canara Sales Corporation]

Collecting Banker

A collecting banker is one who receives instrument from his customer in order to collect the proceeds and credit them to his customer’s account. So the collecting banker acts as the holder for value and simultaneously as an agent of the customer.

Protection to Collecting Banker

1. Collecting banker as a holder in due course: When collecting banker acquires a cheque for value and in good faith, he collects it for himself and has all the privileges of a holder in due course.
2. Collecting banker as an agent of the customer: A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself, does not incur any liability to the true owner of the cheque, even if the title to the cheque proves defective. A collecting banker does not get any protection in case of a cheque crossed ‘not negotiable’. 

Duties of Collecting Banker

1. The collecting banker is bound to show due care and diligence in the collection of cheque given to it. If he fails and consequently, the customer suffers loss, the collecting banker is responsible to compensate the loss.
2. The collecting banker must show due diligence in informing his customer about the dishonour of a cheque.

Non-liability of banker receiving payment of cheque

A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself, shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment. (Sec. 131)

Examples

Ex. 8.1 A cheque drawn ‘payable to B or order’ is stolen and B’s indorsement is forged. The banker pays the amount in due course. The banker is discharged from liability

Ex. 8.2 A cheque is drawn ‘payable to B or order” is delivered to B in payment of a debt. B’s agent, indorses the cheque ‘per pro’ for B and obtains payment of the money and misappropriates it. The banker is discharged by payment in due course.

Ex. 8.3 A draws on X bank a cheque payable to B or order and forwards it to his agent, C with instructions to hand it over to B. C forges B’s indorsement and collects payment on the cheque. The banker is discharged by payment in due course.

Ex. 8.4 E draws a cheque on his banker for Rs. 50 carelessly leaving a blank space before the words and figures ‘fifty’. The holder fills it up as a cheque for Rs. 550 and obtains payment. The banker can debit his account for the amount so paid.

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