23 Cheque is payable to R or Order. It is stolen and the thief forges R’s signature and presents it to the Banker who makes payment in due course. Can R recover the amount from the Bank?

Facts of the Case

  • A cheque was drawn and made payable to “R or order”, indicating that R’s endorsement is necessary for negotiation.
  • The cheque was stolen before it reached R.
  • The thief forged R’s signature and presented the cheque to the bank.
  • The bank, unaware of the forgery, made the payment in due course.
  • R, having neither received nor endorsed the cheque, seeks to recover the amount from the bank.

Issues in the Case

  • Whether the bank was authorized to make payment on a forged endorsement.
  • Whether the bank can be held liable despite making payment in due course.
  • Whether R, as the rightful payee, retains the right to claim the amount from the bank.
  • The effect of a forged endorsement on the title to a cheque.

Principles Associated with It

  • Under the Negotiable Instruments Act, a cheque payable “to order” must be endorsed by the payee for a valid transfer of title.
  • A forged endorsement is legally a nullity; it gives no title to the holder.
  • A banker who pays a cheque bearing a forged endorsement, even in good faith and without negligence, does not make a valid payment and cannot debit the drawer’s account nor discharge the instrument.
  • The concept of “payment in due course” under Section 10 of the Act does not protect payments made under a forged endorsement.
  • Relevant case laws include:
    • Canara Bank Ltd v Canara Sales Corporation – held that a forged signature does not operate to transfer any right or title.
    • Bank of Bihar Ltd v Damodar Prasad – ruled that a banker paying on a forged endorsement is not protected and must bear the loss.
    • Smith v Union Bank of London – reaffirmed that forged endorsements do not convey title.

Judgement

  • The bank, by paying on the basis of a forged endorsement, did not obtain a valid discharge of its liability.
  • R, the true payee, never endorsed the cheque and therefore never lost title to the amount.
  • The payment made by the bank was unauthorized and invalid under law.
  • The bank is liable to R for the amount of the cheque and must compensate the loss.
  • The principle that a forged endorsement gives no title is decisive, making the bank’s payment wrongful despite acting in good faith.

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