Facts of the Case
- A customer of Royal Bank issued an open cheque for Rs. 1000, payable to ‘P’.
- The cheque was stolen, and the thief forged the endorsement of the payee (‘P’).
- The forged cheque was presented at the branch where the account was held.
- The bank cashier paid the amount without verifying the presenter’s identity.
- The issue is whether the bank is liable for payment made on a forged endorsement.
Issues in the Case
- Is a bank justified in paying an open cheque with a forged endorsement?
- Does the failure to verify identity amount to negligence?
- Who bears the loss when a bank pays on a forged endorsement?
Principles Associated With It
- Under Section 85(1) of the Negotiable Instruments Act, a paying banker is protected only when payment is made in due course on an order cheque.
- In the case of an open cheque (bearer cheque), payment is made to the holder, and endorsement is not necessary.
- However, if the cheque is crossed or made payable to order, and the endorsement is forged, then the payment is not valid, and the bank is liable.
- A bank has a duty of care toward its customer and can be held liable for negligence, especially if it fails to verify the identity of the person presenting the cheque.
- Forged endorsements do not confer title, and the bank cannot debit the customer’s account for such payment.
Judgement
- Since the cheque was payable to ‘P’, and endorsement was forged, the bank’s payment was not in due course.
- The bank failed to exercise due diligence by not verifying the identity of the presenter.
- Therefore, the bank is liable to its customer, and it cannot debit the customer’s account for the amount paid.
- The loss must be borne by the bank due to its negligence and payment on a forged endorsement.