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Duties of a banker

The obligations or duties of a banker may be explained under the following heads :

  1. Obligation to honour cheques.
  2. Vicarious liability of a Banker for the fraud committed by his servants.
  3. Obligation or duty to maintain Secrecy of Customer’s Account.
  4. Banker’s obligation for Articles deposited with the bank and valuables kept in safe deposit vaults.
  5. Duty, not to close customer’s account without his consent.

Obligation to Honour Cheques

It is one of the implied terms of the contract between a banker and a customer to honour cheques drawn by the customer subject to fulfilment of certain conditions under section 31 of the Negotiable Instruments Act, 1881. The Banker is under statutory obligation to honour his customer’s cheques, provided the following conditions are satisfied :

  1. There must be sufficient funds (credit balance) or within the permissible limit of overdraft.
  2. The funds must be properly applicable to the payment of cheque. (Eg. The customer may have two accounts : one showing more credit balance and the other showing less credit balance. He cannot present a cheque for higher amount against his account showing less credit balance, although his other account shows sufficient credit balance).
  3. The banker must be duly required to pay. This means the cheque must be presented within a reasonable time i.e., within 6 months. After 6 months (3 months asper RBI Notification), it becomes stale and cannot be honoured. Similarly post-dated (i.e. cheque with future date) cheque cannot be honoured. The customer shall present post dated che1ue on or after the date of cheque and
  4. The customer shall not be disqualified by law or order of the court (Garnishee Order) to draw the amount from his bank account).

Liability of Banker for Wrongful Dishonour

A banker has a statutory obligation to honour his customer’s cheques provided, the conditions under Sec. 10 of the Negotiable Instruments Act, are satisfied. (P.S : This topic ‘Banker’s obligation to honour customer’s cheques also appears in Negotiable Instruments Act). According to Section 31 of the Negotiable Instruments Act, 1881, the Banker is liable to compensate the drawer for loss or damage caused by such wrongful dishonour. Section 31 funs as follows: “The drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to the payment of such cheque must pay the cheque when duly required to do so and, in default of such payment, must compensate the drawer for any loss or damage caused by such default”.

If there are sufficient funds to meet the cheque and the same is dishonoured by a bank, it can be held liable for the wrongful dishonour of the cheque and required to pay compensation for the damage caused thereby. It may be noted that the banker’s liability is towards the payee or the holder of the cheque. The banker has a contractual relationship with the customer only, having a duty to honour his cheques, and therefore, only a customer i.e. the drawer can bring an action against the bank for the wrongful dishonour of the cheque.

Assessment of Damages

While assessing computing damages payable as a consequence of wrongful dishonour, the following factors/points are to be taken into consideration.

  1. Monetary loss caused to the drawer, payee and
  2. Loss of credit and reputation.

The expression wrongful dishonour of a cheque means failure to make payment against the cheque by mistake or negligence on the part of the Banker or its employee. Eg. An amount deposited and collected had not been credited to customer’s account in time. Consequently cheques issued by such customer have been dishonoured for lack of funds. Or dishonour may take place, when the banker gives wrong debit to such customer’s account instead of another by mistake.

The terms loss or damage under sec. 31 denotes :

  1. monetary loss suffered by the customer: and
  2. loss of credit or reputation.

In other words, the Banker is liable to compensate not only actual monetary loss, but also the loss of reputation suffered by the customer as a consequence of wrongful dishonour. Sometimes, the customer may claim special damages also.

Justification of Dishonour

A banker is bound or justified in dishonouring the cheques of his customer under the following circumstances:

  1. Where the customer countermands the payment.
  2. Where there are not sufficient funds in the customer’s account to meet the cheque.
  3. When the funds in the customer’s account are meant for being utilized for some other purpose (for instance, the banker has lien over such funds under Sec. 171 of the Negotiable Instruments Act.)
  4. If the cheque is not properly presented.
  5. When the banker receives the notice of customer’s death, bank’s authority to pay gets terminated since the funds of the account vests in the legal representatives of the deceased customer.
  6. When the banker receives the notice of customer’s insanity.
  7. When the Banker receives order from Court, prohibiting the payment.
  8. When the cheque is stale or post-dated and
  9. When the cheque is of doubtful legality.

Vicarious Liability of a Banker for the Fraud committed by his Servants

The word ‘Vicar’ means the person, who performs the functions of another, a substitute, Vicarious liability means “Liability, which is incurred for or instead of another”. For instance, liability of a master for the wrong/tort committed by his servant. Section 238, Indian Contract Act, provides that misrepresentation made, or frauds committed, by agents acting in the course of their business for their principals, have the same effect on agreement made by such agents as if such misrepresentations or frauds had been made or committed by the principals, but misrepresentations made, or frauds committed by agents in matters which do not fall within their authority, do not affect their principals. It means that when an agent makes a misrepresentation or commits a fraud, acting in the course of the principal’s business, the principal will be vicariously liable for the same. This provision relates to the liability of every principal, including a banker.

The position may be explained by referring to the case of: Lloyd vs. Grace Smith & Co1) : In this case it was held that the master is also held liable for fraudulent acts done by servant for his (Servant’s) own benefit. The defendants were a firm of solicitors. The plaintiff, a widow requested the defendant to prepare documents for sale of her property. But the defendant’s servant prepared the documents to transfer the property in his own name. In an action by the plaintiff, the defendant was held liable for the fraudulent act of their servant.

The above view was followed in National Bank of Lahore Vs. Sohan Lal2) : In this case, the appellant (defendant) bank was held liable for the fraud committed by the Manager of one of its branches.

Garnishee Order

When a creditor who has lent money fails to recover the money, he may file a suit against the debtor and obtain a decree from the court for payment of the debt. Sometimes, the creditor may not find any property in the possession or debtor for execution of decree. Yet, there may be some person who is in possession of debtor’s property. In such the creditor may request the court to issue an order attaching the debtor’s property in the hands of the their part. If the court passes such order, such order is called ‘Garnishee Order’.

The word ‘Garnishee’ is derived from a Latin word ‘garnir’ which means to warn the third party. Since it is a warning to the third party with regard to property of others in his hand, it is named as garnishee order. As stated above, there are certain cases in which a creditor may request the court to issue an order to attach the property belonging to the judgement debtor in the hands/possession of some third party so as to enable him (creditor) to execute the decree. In such a case, if the court issues order, it is called the ‘Garnishee Order’. Section 60 of the Code of Civil Procedure, 1908, lays down the provisions relating Garnishee Order.

The banker has an obligation to honour his customer’s cheques, and is liable for wrongful dishonour. Similarly, the Banker has an obligation to stop payment by dishonouring his customer’s cheque, when he receives Garnishee Order against his customer’s account.

According to section 60 of the Code of Civil Procedure, 1908, debts due to a judgement debtor by third parties are liable to attachment in execution of the decrees of Civil Courts. Garnishee Order is an order of the court, issued under Order XXI, Rule 46 of the Code of Civil Procedure, 1908, directing the banker to stop payment to a particular customer, whose name is mentioned in the order.

When a debtor fails to repay his creditor, the latter (creditor) may apply to the court for the issue of a Garnishee Order on the banker of his debtor. By Garnishee Order, the debtor’s account with the banker stands suspended and the debtor (customer) will not be allowed to draw, though he has a credit balance. The creditor at whose request, the order is issued is called ‘the judgement Creditor’, the customer is called judgement debtor, and the banker (debtor of the judgement debtor) is called Garnishee’.

Features of Garnishee Order

  1. It (Garnishee Order) attaches the entire or specific amount of the customer (Judgement Debtor).
  2. It does not extend to over draft account of the Judgement debtor, though he had not drawn the amount permitted under over draft.
  3. It is not applicable in case of cheques, bills of exchange, drafts etc. presented by customer and sent for collection (which remain uncleared at the time of order).
  4. It cannot attach the amounts deposited into the customer’s account after the order.
  5. It is not effective in respect of payments already made before the receipt of the order.
  6. It is not applicable to money held abroad by the Judgement Debtor.
  7. It is not applicable to securities held in safe custody of the Banker or trustee.
  8. It may be served on the Head Office of the Bank concerned and it will be treated as sufficient notice to all the branches.
  9. It is not effective against a joint account in which only one is a judgement debtor or all are not judgement debtors.
  10. It may be issued against income tax defaulters also.

Kinds of Garnishee Order

The Garnishee Order issued by the court is of two kinds namely:

  1. Order Nisi or Preliminary Order and
  2. Order Absolute or Final Order.

Order Nisi : Order Nisi is a preliminary order issued to the banker :

  1. to stop the payment over the customer's account.
  2. To give explanation, why, the judgement debtors credit balance in his account should be used for the purpose of payment of the judgement creditor and
  3. it is also a duty of the banker to inform the same to his customer.

Order Absolute: It is a final order issued by the court to the banker to pay the amount in the judgement debtors account to the judgement creditor (decree holder) according to the direction given by the court.

Effect of Garnishee Order

After receiving garnishee order, banker is justified in dishonouring the cheques of his customer. So customer cannot claim the damages for dishonour.

Secrecy of Customer’s Accounts

The Banker is under an obligation to take utmost care to maintain the secrecy of his customer’s account. Secrecy in the sense, the banker should not disclose the position of his customer’s accounts to any member of the public or Government official except under statutory or lawful authority (Eg. Garnishee Order).

Section 13 of the ‘Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, imposes on Banker, such obligation to maintain secrecy of his customer account. The duty to maintain the secrecy of the customer’s established. This duty is not only limited to the bank accounts, but also it extends to all other facts, such may come to the notice/knowledge of the banker from any other sources. The duty/obligation to maintain secrecy of the customer’s account was legally imposed on banker in 1924 in a leading case.

Tournier v National Provincial and Union Bank of England3) : In this case it was held that the banker must not disclose the position of the customer’s account except on reasonable and proper occasions and he should not disclose the state of customer’s account even after the account is closed.

Tournier was the plaintiff and National Provincial and Union Bank of England Ltd was the defendant. The plaintiff was working in M/s Kenyon & Co. on temporary basis and his employment was to be permanent. He overdrew from the defendant bank to a sum of 9 pounds 8 cents 6 d., and he agreed to pay by weekly instalments of 1 pound. Out of this amount, he paid some amount to a bookmaker towards the purchase of certain goods.

On one day, Tournier did not come to duty. The Directors of the Kenyon & Co. telephoned the Bank Manager of the defendant company to know the plaintiff’s address. In the conversation, the Bank Manager passed the information that the plaintiff was over drafted and he made the payment to a bookmaker. The Directors misled the information that the plaintiff was a gambler and was in practice of betting, and also he was insolvent. Therefore, they did not permanent the plaintiff and ousted him from the employment. Therefore, they did not permanent the plaintiff, who filed a suit against the bank for not keeping the secrecy of the customer, and for the compensation of the job he lost.

The lower court dismissed his petition. He preferred appeal. The Court of Appeal allowed his appeal and gave the judgement in his favour holding that the Bank Manager violated his duty and caused loss to the customer (plaintiff).

Exceptions: Disclosure of customer’s account is justified under the following circumstances:

  1. The Banker’s Book of Evidence Act.
  2. The Income Tax Act, 1961.
  3. The Companies Act, 1956.
  4. The Reserve Bank of India Act, 1934.
  5. The Banking Regulation Act, 1949.
  6. The Gift Tax Act, 1958.
  7. The Code of Criminal Procedure, 1973 and
  8. The Foreign Exchange Regulations Act, 1933.

Consequences of wrongful disclosure

When the banker improperly discloses any information of his customer’s account in which customer incurs any loss, the banker is liable for that. Now banker’s liability is of two types i.e.

  1. Liability to the customer, and
  2. Liability to third party.

The customer may sue for breach of contract in case he incurs loss. Sometimes a third party may also incur some loss due to disclosure of the customer’s account, then the banker is also liable to the third party :

  1. When he gives such an information with the knowledge that it is false, and
  2. Such party acts on that information and suffers a loss.

Banker’s Obligation for Valuables Kept in Safe Deposit Vaults

When a cheque, bill of exchange, dividend warrant or other such instrument is deposited with a bank for collection, he has a duty to collect the same and credit the customer’s account with the proceeds realized. For such collection he serves as an agent of the customer. If a cheque is dishonoured, the bank to whom the same was given for a collection, has a duty to inform the customer of the same, and to return the dishonoured cheque. If a cheque could not be collected and is lost in transit, the bank should inform his customer about the same within a reasonable time.4). `

Valuables Kept in Safe Deposit Vaults : A bank is not a bailee of the valuables kept by a customer in a locker of the safe deposit vault of a bank, and therefore, it does not attract the liability of the bank as a bailee in respect of such goods. The position would, however, be different when the lock of a locker has been tampered with by a bank employee before hiring the locker to a customer in National Bank of Lahore v. Sohan lal (AIR 1962 Punjab 534), the manager of a bank in which the customer had hired a locker and kept his valuables, had filed the levers of the lock before handing over the possession of the locker to the customer. The manager, who was living in the bank premises, could open the locker without the customer’s key. He opened the locker and took out the valuable of the customer. The bank was held liable for this fraud of the bank manager. The bank’s liability arose in its capacity as bailee, because due to the defective lock, the possession of the valuables kept in the locker was with the bank, rather than the customer. The bank was also liable on the basis of the principle of vicarious liability, for the fraud committed by its servant (agent) in the course of employment.

When there is no proof of entrusting exclusive control to the bank of jewellery kept in the locker, and also no proof of the contents of the locker, it is not a case of bailment to attract bank’s liability for negligence. More so, where there is no sufficient material to hold that robbery occurred due to the bank’s negligence, the bank cannot be held liable for alleged loss of jewellery allegedly kept in the bank locker.

In Atul Mehra v. Bank of Maharashtra5) the customer alleged that be had hired a bank locker and kept jewellery worth Rs. 4,26,100/- and the same was stolen due to the bank’s negligence and he claimed compensation in respect of the same. It was held that:

  1. It was not a case of bailment as there was no exclusive banking over the possession of jewellery to the bank, and in the absence of bailment under section 148 of the Contract Act, bank’s liability could not arise.
  2. The plea that bank robbery had occurred due to the bank’s negligence, was also rejected, as there was no sufficient material to hold bank’s negligence in the matter. The bank could not be held liable for the reason also.

Another obligation of the banker is not to close the customer’s account without his consent. By closing the account, it severed the relationship between the banker and the customer. Every customer had a right to open an account in any scheduled bank when he satisfies the requirements to open an account. Once money is deposited and it is accepted by the banker, it is his obligation to keep the account without closing even if it is not operated by the customer. When banker wants to close the customer’s account, he should inform the customer in writing and it should be accepted by the customer, then only banker can close the account, otherwise the banker is responsible to his customer. If customer wants to close the account, he can do so by sending a written notice to the banker.

1912 A.C. 716
A.I.R. 1962 Punjab 534
1924 K.B. 461
Syndicate Bank v. Swaika Chemical Works, (1987) 61 Comp. Cas. 752
2002 (2) ISJ (Banking) 575 (P&H)

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