Facts of the case
- A customer of Royal Bank issued an open cheque for ₹1000 payable to P.
- The cheque was stolen and the thief forged P’s endorsement.
- The thief presented the cheque at the issuing branch.
- The bank cashier paid the cheque without verifying the identity of the presenter.
Issues in the case
- Whether the bank is liable for making payment on a forged endorsement.
- Whether the bank has a duty to verify the identity of the presenter of an open cheque.
- To whom is the bank responsible for the loss caused by this negligence?
Principles associated with the case
- Under the Negotiable Instruments Act, a bank must act with due diligence when making payment.
- Payment made on a forged endorsement is not valid and does not discharge the bank’s liability to the true payee.
- A bank paying a cheque on a forged endorsement is liable to the true owner of the cheque — in this case, P.
- The drawer (customer) is not liable for the bank’s negligence unless he himself was negligent.
- An open cheque is payable to the bearer, but if endorsed, the endorsement must be genuine for the cheque to be validly paid.
Judgement
- The bank is liable to P, the payee, for paying on a forged endorsement.
- The bank’s failure to verify the presenter’s identity amounts to negligence.
- The bank must compensate P, and cannot debit the drawer’s account unless the drawer was involved in the fraud or negligent.