Payment in Good Faith, Without Negligence of an instrument on which Alteration is not Apparent :

The expressions ‘in good faith’ and ‘without negligence’ are found in section 10 of Negotiable Instruments Act that defines what is known as ‘payment in due course’ Suppose a paying banker pays a cheque which is altered but the alteration cannot be made out on the face of the cheque out of reasonable scrutiny and examination in the normal course of banking, whether a bank can be held liable by reason only of the fact that it did not keep an ultraviolet lamp?

Supreme Court passed a land mark judgment is this matter in case Bank of Maharashtra v. M/s Automotive Engineering Co. (1993) 2 SCC 97. Honorable Supreme Court dealt with the effect of sections 10, 89 and 31 of Negotiable Instrument Act and their impact on the paying banker.

The question that arose for consideration in the appeal before Supreme Court was whether the paying banker was bound to keep an ultraviolet lamp and scrutinize the cheque under the said lamp even if no infirmity on the face of the cheque on visual scrutiny was found.

The respondent, a partnership firm, opened a Current Account with the Wagle Industrial Estate branch of the appellant bank. This branch was in the industrial area on the outskirts of city of Mumbai, where forgery of cheques were rampant and although other branches of the appellant bank were provided with ultraviolet ray lamps, this one did not have that particular arrangement. On 26 may 1967, one Mr. Shah, as proprietor of M/s Tube and Hardware Mart, opened an account, in the name of his proprietary concern, with the branch of the Union Bank of India. Mr. Shah presented a cheque dated 29 may 1967 for Rs. 6500/- in favour of his concern to Union Bank of India. On presentation of the cheque through clearing, the appellant bank passed the cheque and debited the amount to the account of the respondent. Later on, on receipt of the objection from the respondent defendant, the said cheque was examined under the ultraviolet ray lamp and it transpired that the original was issued in favour of Mr. G R Pardawala and the amount of the cheque was Rs. 95.98.

The writing on the cheque was chemically altered with regard to date, the name of the payee and also the amount. The respondent made demands to the appellant bank to credit the amount to its account.

The appellant bank filed a suit in which the agent of the appellant was examined. The agent (branch manager) stated before the court before passing the said cheque he had checked the serial number and date of the cheque and had compared the signature of the respondent with the specimen signature and that from the visual appearance of the cheque no infirmity was noted by him and from the tenor of the cheque it appeared to be a genuine one.

The Trial Court dismissed the suit on the ground that by not providing the facility of ultraviolet ray lamp, the appellant bank had failed to discharge proper care and therefore, did not pass the said cheque with the due diligence.

On appeal, the District Judge, while agreeing that no abnormal features to suspect the genuineness of the cheque could be found on visual inspection of the cheque, was of the view that the appellant bank was not entitled to protection for the lapse in subjecting the said cheque for scrutiny under the ultraviolet lamp.

On further appeal, the High Court of Bombay, while accepting the finding that the cheque in question apparently did not show any sign of alteration, held that the appellant bank did not act with proper care and caution in not providing necessary device for detecting forged cheques. Since the absence of such lamp amounted to negligence on the apart of the appellant bank, no protection was available because payment was not made in due course.

The appellant bank referred an appeal to Supreme Court. The Supreme Court allowed the appeal of the bank on the following grounds:

1. Section 89 of the Negotiable Instruments Act gives protection to the paying banker of a cheque which has been materially altered but does not appear to have so altered, if payment was made according to the apparent tenor thereof at time of payment and otherwise in due course.

2. Section 10 of the Act defines payment in due course to mean payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.

3. Section 31of the said Act obliges the drawee bank having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque, to make payment of the cheque when duly required to do so.

4. On analyzing the evidence, the lower courts had held that on visual examination no sign of forgery tampering with the writings on the cheque could be detected. It was found that the agent of the appellant bank had verified the serial number and signature on the cheque and had compared the signature on the cheque with the specimen signature of the respondent and on scrutiny of the cheque visually no defects could be detected by him. There was sufficient funds of the drawer with the appellant bank, which had no occasion to doubt the genuineness of the cheque from the apparent tenor of the instrument. There was no evidence to hold that the payment was not made in good faith. Simply because the ultraviolet ray lamp was not kept in the branch and the said cheque was not subject to such lamp, would not be sufficient to hold the appellant bank guilty of negligence more so when it has not been established on evidence that the other branches of the appellant bank or the other commercial banks had been following a practice of scrutinizing each and every cheque or cheques involving a particular amount under such lamp by way of extra precaution.

5. In such circumstances, it is not correct legal proposition that the bank, in order to get absolved from the liability of negligence, was under an obligation to verify the cheque for further scrutiny under advanced technology for that matter under ultraviolet ray lamp apart from visual scrutiny even through the cost of such scrutiny was only nominal and it might be desirable to keep such lamp at the branch to take aid in appropriate case.

6. The lower courts were not justified in holding that the bank had failed to take reasonable care in passing the cheque for payment without subjecting it for further scrutiny under ultraviolet ray lamp because the branch was in the industrial area where such forgery was rampant and other branches of the appellant were provided with such lamp.

The appeal was, therefore allowed and the suit of the appellant bank was decreed for the principal amount without any interest on the same.

The protection granted to a banker under section 89 had held by courts from time to time. Let us see one more case in this respect for further understanding and clarity. In the case Brahma Shumshere Jung Bahadur vs. chattered Bank of India (AIR 1956Cal.399), one B who was member of the royal family of Nepal had an overdraft account with the bank for which certain securities were deposited with the bank. The overdraft limit was not a fixed limit and fluctuated depending on the securities deposited. In April 1946, B requested the bank to enhance the overdraft limit which however was not agreed to by the bank and the limit was Rs. 70000/-. In July 1946, B sent a cheque by post drawn on the overdraft account which was intercepted in the mail and the amount was raised from Rs. 256 to Rs. 2,34,081 /-. The cheque was put for collection in another bank which was piad by B’s bank. B on coming to know about the forgery sued both the paying and collecting bank, contending that through the cheque was signed by him it was written out by some other person and as such it should have aroused the suspicion of the bank. The court, however, held that since no alteration or obliteration was visible at the time of payment, the payment was made according to the apparent tenor of the cheque. Further since B had on other occasions also issued cheque singed by him and written by others, the bank’s suspicion could not have been aroused. The court also held that the words ‘liable to pay’ appearing in the third paragraph of section 89 included a liability to lay under an overdraft agreement as much as it applied to an ordinary deposit account.

In yet another case, Tanjore Permanent Bank v. S R Rangachari (AIR1959 Madras 199) the High court decided a case in which a cheque was materially altered and the bank sought protection under section 89. In this case one R had an overdraft account with the bank and requested the manager to advance him Rs. 16,000/- to debit of his account. The manager asks R to send him three blank cheques signed. R accordingly did the same. However, of the three cheques only one was utilized for the payment of Rs. 16000/-. The other two cheques were alleged to have been filled by the accountant of the bank for Rs.7, 600/- and Rs. 4,200/- and the names of two clerks were written as the payees. In both the cheques the alterations were appetent and visible but the bank paid these cheques. On R not clearing the debit balance, the bank sued him. R contended that the two debit entries for Rs. 7,600/- and Rs. 4,200/- were made by the bank wrongly and as such he cannot be held liable.

The court held that since the material alteration on both the cheques were visible and since they were not authenticated by the drawer, the payment made by the bank was not according to the apparent tenor of the instrument and as such the bank cannot claim protection under section 89 of the Negotiable Instruments Act. The court held in this case as under:

“The bank has also to see whether there are any alterations in the cheque and whether they have been properly authenticated. Therefore, where an instrument in a cheque is signed not by all the drawers but only some of them, the bank will be paying the amount on the said cheque at its own risk. In this connection it is necessary to notice that under section 89 protections are afforded to the bank paying a cheque where the alteration is not apparent.”

Note that as per section 89 the bank can seek protection only if there is material alteration in the cheque and does not appear to have been altered. This, however, does not protect a banker in case the signature of the customer is forged. A forged cheque is no mandate of the customer and as such the bank cannot make payment on a cheque where the signature of the customer is gorged. The question whether a signature is forged or not depend on the evidence and the court in coming to a conclusion that the signature is forged would look into the facts and circumstances that led to the payment of the cheque.