Section 31 of Negotiable Instruments Act,1881
Liability of drawee of cheque. 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 so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default.
It is the banker that is always the drawee of a cheque. This section lays down under what conditions the banker must pay the cheque. The banker as the debtor of his customer is always under the obligation to honour the cheque of the latter provided:
If in spite of the three aforesaid conditions being fulfilled the banker defaults to make such payment he is bound to compensate the drawer for any loss or damage caused by such default. The loss or damage mentioned in the section is not only the actual pecuniary loss or damage the drawer suffers by such non-payment but it also includes the loss of business or prestige.
The relationship between the banker and his customer is that of a debtor and creditor with an additional obligation on the part of the banker to honour the cheques of his customer so long: as there are assets of the latter in his hands. The contract admits of being renewed or determined at the instance of either party. Just as the banker has his obligation to perform the customer has his duty as well in that he must take reasonable care not to mislead the bank, and for any negligence on his part to discharge his duty the customer will be held responsible. But in order to make him liable for negligence, the neglect must be shown to be intimately connected with the transaction itself and must be the proximate cause of the loss. The remedy of a holder of a cheque that has been dishonoured is against the drawer and not against the drawee who refuses payment as there is no privity of contract between the holder and the drawee. But once the banker places the amount to the credit of the payee or promises payment to the payee the latter is entitled to recover from the bank. Pass book entry may be shewn by the bank to be due to mistake unless the customer has acted on the representation so as to change his position.
Generally the customer opens an account with a bank by deposit of money there and, when necessary, draws cheques upon such deposits in the bank. So long as the funds in deposit are sufficient to meet the amount payable on the cheque the bank is bound to make payment. But if the cheque is for amounts greater than the funds in deposit the bank is not bound to pay even the amount in its hand. If, however, there is a contract between the bank and its customer to grant overdrafts the bank is bound to honour the cheque even if there is no sufficient fund or where there are securities of the customer in the bank but not sufficient money, the bank is bound to honour a cheque if it did so on a previous occasion.
Where the bank already applied the money to the payment of customer's acceptance which was made payable at the bankers, or where requisite funds were paid in the bank shortly before dishonour so that the money could not be earned into the customer’s account, or if a customer having accounts in some branches of a bank draws a cheque upon a branch where there is no account the bank will not be made liable for dishonour. Branches of the same bank in different places are distinct units and may give notice of dishonour to each other. Reasonable time should be allowed for payment as the circumstances may warrant. Thus, time is necessary for the banker to satisfy himself about the genuineness of the signature or for ascertaining the position of the account of the customer in the bank. Four hours have been held to be reasonable time.
Where there is an understanding between the customer and the banker and the former contrary to such understanding draws a cheque, the payment of the cheque will not be a proper application of the fund. A trust fund should not be payable for any purpose not consistent with the objects of the trust. But the bank is not bound to enquire if the amounts drawn by the cheque are for the use of the drawer provided the cheques are drawn in proper form by the trustee. A banker should not honour a cheque or apply the balance to a particular object when he knows that by so doing he will be participating in a fraud.
This means when the cheque is presented in proper form and at proper hour by the payee. The cheque must be presented during the banking hours and not at all hours, nor on bank holidays. Payment should be made according to the priority of presentment.
Besides the circumstances stated before, a bank will also be justified in refusing payment if,