ON Civil Appeal No 1777 of 1973
From the Judgment and Decree dated 2561973 of the Karnataka High Court in Regular First Appeal No 56 of 1968
KN Bhatt VK Verma and Ms Madhu Moolchandani for the Appellants
SS Javali and B R
Agarwala for the Respondents
The Judgment of the Court was delivered by 1142 KHALID J
This is an appeal by certificate
against the Judgment dated 25th June 1972 passed by a Division Bench of the Karnataka High Court
The 1st defendant Bank is the appellant
Original Suit No 72 of 1962 was filed in the Court of Civil Judge
Mangalore by the Canara Sales Corporation Ltd through its Managing Director VS Kudva
He died during the pendency of the suit and the suit was continued by the succeeding Managing Director of the Corporation
The suit was against two defendants the appellant Bank was the first defendant and the second defendant was one YV Bhat who was the Chief Accounts Officer of the plaintiff till 1961
He died during the pendency of the appeal before the High Court and his legal representatives were brought on record
When the suit was filed the appellant Bank was called the Canara Bank Ltd
After the nationalisation of banks it became the Canara Bank which is the appellant before us
The suit was instituted for recovery of a sum of Rs32604792
with the following allegations The plain tiff is a private Limited Company with its head office at Mangalore
It had a current account with the appellant Bank in its Mangalore Bunder branch
The Managing Director of the company and the General Manager of a sister concern of the company had been authorised to operate the said current account of the plaintiff with the Bank
The second defendant was attending to the maintenance of accounts of the plain tiff and was also in charge and custody of the cheque books issued by the Bank to the plaintiff
In March 1961 the second defendant was absent from duty for some time
During that period one A Shenoy who was the Assistant of the second defendant was directed to bring the accounts upto date
During this process he noticed certain irregularities in the account and brought this to the notice of the plain tiff
On verification it was found that cheques purporting to bear the signature of Shri VS Kudva were encashed though they did not bear his signature
In other words the signatures were forged
On 25 3 196 1 a complaint was made by the plaintiff with the Superintendent of Police
The plaintiff appointed a firm of Chartered Accountants to conduct special audit of the company s accounts for the years 195758 to 1960 61
This special audit disclosed that the second defendant had withdrawn in all a sum of Rs32604792 under 42 cheques
The suit was filed for recovery of the amount on the plea that the amounts as per the forged cheques were not utilized for the purpose of the plaintiff that they were not authorised ones that there was no acquiescence or ratification open or tacit on the part of the plaintiff that the plaintiff was unaware of the 1143 fraud till the new accountant discovered it
The appellant Bank resisted the suit on the following grounds in their written statement i That the cheques were not forged ones
ii Even if they were forged ones the plaintiff was not entitled to recover the amount on account of its own negli gence
iii There was settlement of accounts between the parties from time to time and as such the plaintiff was not entitled to reopen the same and claim the sums paid under the cheques in question
iv The suit was barred by limitation
The second defendant pleaded that the cheques were not forged ones and the amounts recovered by the cheques were utilized for the purpose of the plaintiff
The Trial Court negatived the contentions of the first defendant Bank and passed a decree for the sum claimed with interest at 6 from the date of the suit till recovery of the amount
In appeal before the Division Bench the judg ment of the Trial Court was confirmed
The High Court certified that the case involved substan tial questions of law of general public importance and granted certificate to file the appeal
It is thus that this appeal has come before us
Venkataramiah J as he then was who spoke for the Bench has in his detailed Judgment considered all the aspects of the case both on facts and on law and agreed with the Trial Court that the suit had to be decreed repelling the contentions raised by the first defendant
The courts have concurrently found that the cheques were forged and that the second defendant was responsible for it
We do not propose to consider the question of facts in this Judgment
The learned counsel for the appellant Shri Bhat argued the case at length and took us through various authorities bearing on the question most of which fell for considera tion at the hands of the High Court also
In the instant case
42 cheques with forged signature were presented on various dates between the year 1957 and 1961
During the said period the appellant Bank used to send to the plaintiff respondent 1144 pass sheets containing the debit and credit entries in the current account of the plaintiff with the Bank every month and at the end of every half year ending 30th June and 31st December a letter used to be sent asking the respondent to confirm that the balance in his account with the Bank was as mentioned in the letter
Till March
1961 the correctness of the entries in the pass sheets and half yearly statements was not questioned by the plaintiff
The accounts of the plaintiff company were being audited as required by the Companies Act by Chartered Accountants
The Bank contended that if there was mis appropriation of an amount of nearly Rs3 lacs by forged cheques by the second defendant this would have been detected by the Chartered Accountants and would have come to the notice of the plaintiff company
The several entries in the books of account maintained by the plaintiff company show that all the amounts covered by the cheques in dispute had been credited in the books
The Managing Director of the plaintiff company himself admitted that he had received the periodical statements and that he did not at any time intimate the Bank about the incorrect ness either in the pass sheets or in the letters
The inac tion on the part of the plaintiff company and its Managing Director in not informing the Bank of the irregularities in the account and deliberately withholding such information from the Bank according to the Bank
constituted negli gence
disentitling the plaintiff from claiming any amount from the Bank in respect of forged cheques
Alternatively it was contended that the principle of estoppel operated against the plaintiff from claiming the amount on the ground of adoption or acquiescence
The case of the appellant can be summarised as follows After reasonable opportunities are given to the customer to examine the Bank statements
its debit entries should be deemed to be final and will not be open for reconstruction to the detriment of the bank
Of course
what is a reasona ble opportunity will depend on the facts of each case
In law there can always be a settled or stated account between the banker and the customer
The question to be decided here is whether acceptance by the customer without protest of a balance struck in the pass book or statement of account constitutes a settled account
It is submitted that this aspect of the Banking law has not yet been authorita tively decided by this Court and invited us to pronounce upon it
On the question of estoppel it was contended that a repre senta 1145 tion may be made either by statement or by conduct and conduct included negligence silence acquiescence or en couragement
If a customer of a bank by his negligence to give timely information of forged cheques allows amount to be drawn on such cheques
the debit will stand for the whole amount and the customer will be estopped from claiming the amount
If timely information was given the Bank could have acted to ward off the mischief
It was further contended that inaction for a long period would amount to such negligence as would persuade a Court to impute to the customer with knowledge or at any rate constructive knowledge to decline him relief in an action for recovery of amounts which would be to the detriment of an innocent party namely the Bank
For this purpose
dictionary meanings of the word know ledge was brought to our notice
Knowledge may include not only actual knowledge ie actual awareness of the facts relevant
but constructive knowledge
ie knowledge at tributed by law to the party in the circumstances whether he actually had the knowledge or not and knowledge may be attributed to a person who has sought to avoid finding out or has shut his eyes to obvious means of knowledge
eg the man who is offered valuables cheaply in circumstances which suggest that they may well have been stolen
but who refrains from enquiry
Black s Law Dictionary Fifth Edn defines
Constructive knowledge as If one by exercise of reasonable care would have known a fact
he is deemed to have had costructive knowledge of such fact eg matters of public record
Notice means bringing it to a person s knowledge
Then he referred us to the Transfer of Property Act
Trusts Act Law of Agency
etc to contend that a person is said to have noticed of a fact when but for wilful absten tion from an enquiry
he would have known it and that in equity a man who ought to have known a fact should be treat ed as if he actually does know it
He then developed his submission as follows It is accepted to be a duty of customer who knows that his cheques are being forged to inform the bank
If he fails to give such an information he is estopped from claiming that the cheques were forged
In law
there should be no differ 1146 ence in the consequence between a person having constructive knowledge and a person having actual knowledge
Thus a person having constructive knowledge of a matter
cannot be allowed to take advantage of his own negli gence
According to him the terms of contract between a banker and its customer can never be complete unless there is an implied condition that the customer was under a duty to examine the statement to account particularly when the bank issues a notice that if no errors are pointed out within a specified time
the bank will proceed to believe that there are no errors
Such a notice imposes on a customer a duty to react and failure to react would amount to negligence leading to estoppel
The company s Balance Sheet for four years clearly show that the auditors have examined the books and vouchers
It is in evidence spoken to by PW 8 that the balance sheets were adopted by the general bodies for four successive years
This shows that the statements of account
given by the Bank was accepted as such
There is a duty on the part of the Company s directors to present a correct Balance Sheet
Negligence to verify the obvious things
like examining the counterfoil of cheques amounts not only to estoppel but to adoption and ratifica tion
for no one can take shelter under one s own failure to examine the obvious
Further the annual reports are to be treated as public documents and public are likely to rely upon its representation and defendant bank is at any rate a member of the public
We have set out above the contentions of the appellant in detail so as to bring into focus the questions of law to be decided in the appeal
Now we propose to consider the submissions made by the appellant to test their validity qua the Banking Law ap plicable to India
It is true that there is no direct au thority of this Court on this Branch of the Law
It is
therefore necessary to briefly outline the confines of this Branch of law
The relationship between the customer of a bank and the bank is that of a creditor and debtor
When a cheque which presented for encashment contains a forged signature the bank has no authority to make payment against such a cheque
The bank would be acting 1147 against law in debiting the customer with the amounts cov ered by such cheques
When a customer demands payment for the amount covered by such cheques
the bank would be liable to pay the amount to the customer
The bank can succeed in denying payment only when it establishes that the customer is disentitled to make a claim either on account of adop tion
estoppel or ratification
The principle of law regard ing this aspect is as follows When a cheque duly signed by a customer is presented before a bank with whom he has an account there is a mandate on the bank to pay the amount covered by
the cheque
However
if the signature on the cheque is not genuine
there is no mandate on the bank to pay
The bank when it makes payment on such a cheque cannot resist the claim of the customer with the defence of negligence on his part such as leaving the cheque book carelessly so that third parties would easily get hold of it
This is because a document in cheque form on which the customer s name as drawer is forged is a mere nullity
The bank can succeed only when it establishes adoption or estoppel
The relationship between a bank and its customers indi rectly arose before this Court in Bihta Co operative Devel opment Cane Marketing Union Ltd  Anr
vs The Bank of Bihar  Ors  In that case a suit was filed by a Society registered under the Bihar and Orissa Co operative Societies Act 1935 and its Secretary
This Society had an account with the first defendant Bank
The and 7th defend ants were respectively its Joint Secretary and Treasurer
A sum of Rs11000 was withdrawn from the account by means of a cheque not from the cheque book of the Society but from a loose cheque leaf surrendered by an ex constitutent of the bank
It bore the signature of the 7th defendant but the forged signature of the 6th defendant
The suit against the bank its manager and other employees was decreed by the Trial Court and confirmed by the High Court on the question relevant for our purpose but dismissed on the ground juris diction
The question before us in this appeal was consid ered by this Court with reference to a Judgment of the House of Lords in London Joint Stock Bank Ltd vs Macmillan It was argued before this Court that the decree against the bank could not be sustained since even though there was negligence on the part of the bank and its employees the plaintiffs  Society was not altogether free from blame or negligence in that but for the part played by at least one 1148 of its employees in the matter of encashment of the cheque for Rs11000 the fraud could not have been perpetrated
It was also argued that if both the parties were negligent or blameworthy
the plaintiffs claim ought not to succeed
It was in this connection that Macmillan s case fell for reference
Being a landmark case we would set out the facts of that case in brief The plaintiffs Macmillan etc
brought a suit against the London Stock Bank for a declaration that the bank was not entitled to debit the plaintiffs with a cheque for pound 120
The plaintiffs had in their employment a confidential clerk who made out cheques and got the signature of part ners
On a certain day
the clerk made out a cheque for pound 2 and asked one of the partners to sign it which the partner did
The next day the clerk did not turn up
The partners became suspicious and went to the bank
when they discovered that the cheque for pound
2 was distorted by using the space on either side of the figure 2  by the clerk by insertion of additional figures 1  0 and thus he pocketed pound
The question before the House of Lords was whether the plaintiffs had been so negligent with regard to the cheque that their action against the bank should fail
The Trial Judge found that the plaintiffs were not guilty of negligence in the mode of signing the cheque and decreed the suit
The Court of Appeal upheld this decision
The House of Lords reversed the judgment
We may usefully quote the following passages from the Judgment
Lord Finlay observed As the customer and the banker are under a contractual relation in this matter
it ap pears obvious that in drawing a cheque the customer is bound to take usual and reasonable precautions to prevent forgery
Crime is indeed a very serious matter but every one knows that crime is not uncommon
If the cheque is drawn in such a way as to facilitate or almost invite an increase in the amount by forgery if the cheque should get into the hands of a dishonest person forgery is not a remote but a very natural consequence of negligence of this description
 The learned Lord Chancellor further observed Of course the negligence must be in the trans action itself that is in the manner in which the cheque is drawn
It would be no defence to the banker if the forgery had been that of a clerk of a customer that the latter had taken the clerk into his service without sufficient inquiry as to his 1149 character
Attempts have often been made to extend the principle of Young vs Grote  beyond the case of negligence in the immediate transaction but they have always failed
According to the learned Lord Chancellor leaving blank spaces on either side of the figure 2  in the cheque amounted to a clear breach of duty which the customer owed to the banker
The learned Lord Chancellor said If the customer chooses to dispense with ordinary precautions because he has complete faith in his clerk s honesty he cannot claim to throw upon the banker the loss which re sults
No one can be certain of preventing forgery but it is a very simple thing in drawing a cheque to take reasonable and ordi nary precautions against forgery
If owing to the neglect of such precautions it is put into the power of any dishonest person to increase the amount by forgery the customer must bear the loss as between himself and the banker
 The principles so settled by the House of Lords was pressed into service before this Court in the above case
This Court held that the principle settled by the House of Lords could not help the bank
The accepted principle that if the signatures on the cheque is genuine there is a mandate by the customer to the bank to pay was reiterated
It was also held that if an unauthorised person got hold of such a cheque and encashed it the bank might have had a good defence hut however if the signatures on the cheque or at least one of the signatures are or is not genuine   there is no mandate on the bank to pay and the question of any negligence on the part of the customer such as leaving the cheque book carelessly so that a third party could easily get hold of it would afford no defence to the bank
This Court distinguished Macmillan s case observing that if any of the signatures was forged the question of negligence of the customer in between the signature and the presenta tion of the cheque never arose
The suit was however dismissed on another point and that of jurisdiction
That takes us to the question as to whether there is a duty on the part of the customer to examine the pass book and inner part of cheques and to communicate to the banker within a reasonable time of the debits which he does not admit
1150 The kindered question connected with this is whether a customer is estopped from disputing the debits shown in the pass book when the pass book is returned without any comment and whether such a conduct would constitute a stated and settled account To answer this it is necessary to examine the question whether the customer owes a duty to the bank to inform it about the correctness or mis statements in the entries in the pass book within a reasonable time and wheth er failure to do so would amount to such negligence as to non suit him in a suit for recovery of the amount paid on a forged cheque
When does negligence constitute estoppel  For negligence to constitute an estoppel it is necessary to imply the existence of some duty which the patty against whom estoppel is alleged owes to the other party
There is a duty of sorts on the part of the customer to inform the bank of the irregularities when he comes to know of it
But by mere negligence One cannot presume that there has been a breach of duty by the customer to the bank
The customer should not by his conduct facilitate payment of money on forged cheques
In the absence of such circumstances mere negligence will not prevent a customer from successfully suing the bank for recovery of the amount
A case of acquiescence also cannot be flourished against the plaintiff
In order to sustain a plea of acquiescence it is necessary to prove that the party against whom the said plea is raised had remained silent about the matter regarding which the plea of acquiescence is raised even after knowing the truth of the matter
As indicated above the plaintiff did not during the relevant period when these 42 cheques were encashed know anything about the sinister design of the second defendant
If the bank had proved to the satisfaction of the Court that the plaintiff had with full knowledge acknowledged the correctness of the accounts for the relevant period a case of acquiescence against the plaintiff would be available to the bank
That is not the case here
In this judgment under appeal the High Court has elabo rately considered the law obtaining in the United States of America on this aspect
We need not exercise ourselves with the American Law since the American Law is different from the law that we follow
On the questions involved in this appeal it is the law that obtains in England which had been followed by this Court and High Courts in the country
The authorities in England have more or less consistently held that there is no duty on the part of the customer to intimate the banker about any error that may be seen in the pass book and that he will be entitled to claim any amount paid on a forged cheque though there may be some negligence or in action on his part in not being careful to 1151 discover the errors in the pass book or other documents
In the instant ease there is no evidence to show that anyone other than the second defendant knew that the forged cheques had been encashed
After the matter was discovered immedi ate action was taken
Therefore in the absence of any evidence of the plaintiff s involvement the plaintiff cannot be nonsuited on the ground of negligence or in ac tion
Venkatramiah J when he rendered the Judgment under appeal laid down the law correctly with the aid of author ities then available and on his own reasons
Now we are in a more advantageous position
We have an authority more or less identical on facts rendered by the Privy Council in the decision in Tai Hing Cotton Ltd vs Liu Chong Bank 1985 2 All England Reports 947
The facts of this case are similar to the case on hand if anything more to the disadvantage to the bank in terms of money involved than the instant case
The appellant before the Privy Council was a company a textile manufac turer carrying on business in Hong Kong
The company was a customer of the three respondent banks and maintained with each of them a current account
The banks were authorised to pay cheques on behalf of the company if signed by its Manag ing Director or two authorised signatories
The banks agreed to send the appellant periodic statements which were deemed to be confirmed unless the customer notified the bank of any error therein by a specified time
Between 1972 and 1978 the accounts clerk employed by the company forged the signature of the Managing Director on 300 cheques purported to be drawn by the company for a total sum of HK55 million
The banks paid the cheques on presentation by the clerk and debited the company s current account accordingly
The clerk was able to manipulate the accounts without any obstruction or discovery because he was in almost sole control of the receipts and payments made through the accounts
As in this case the fraud was uncovered in May 1978 when a newly appointed accountant commenced reconciling the bank state ments with the company s books
This was an exercise which had not been followed previously
The new accountant found at once that something was seriously wrong
He reported the matter to the Managing Director
The errant accountant was interrogated and he admitted the frauds
The company took action against the banks the accountant and his wife
The Trial Judge basing his decision on the fundamental premise that a forged cheque is no mandate to pay held that unless the bank established affirmatively that they were entitled to debit the customers current account with the amounts of the forged cheques the customer was entitled to the relief 1152 of the loss arising from the bank s payment on the forged cheques
A case was put forward before the Trial Judge that the Company was vicariously liable for the fraud played by its accountant
This was negatived and was not pursued
The Trial Judge also rejected the submission of the banks that their terms of business which was contractual called the banking contract should be construed as ousting the common law rule
The defence included one of estoppel raised by each of the banks
The plea of estoppel was put forward in two ways first that the company was estopped by its negli gence in the management of its bank accounts from asserting that the accounts had been wrongly debited and second that the company was estopped by a representation to be implied from the course of conduct that the periodic bank statements were correct
The Trial Judge rejected the plea of estoppel by negligence but held   
In the case of each bank the company by failing to 
challenge the debits shown on the bank statements had represented to each bank that the debits had been correctly made
He held that Tokyo and Chekiang had acted in reliance on the representations so made by their willingness to continue operating their respective accounts and to expose themselves to the risk of paying out on forged cheques
He did not find the same prejudice had been suffered by Liu Chong Hing as it only became exposed to the fraud in November 1977 the first representation to it not being made until the company s failure
to query the December 1977 statement of account
The Judge found that the chance of recovery from Leung had not been substantially diminished during the period December 1977 to May 1978 during which it could be said that the estoppel was operative
 On this finding the Judge gave the company Judgment against one bank but dismissed its claims against the other two banks
The company appealed and the defeated banks cross appealed
The Court of appeal differed from the Trial Judge on the general question
The Court of appeal evolved a theory that the bankercustomer relationship is such as to give rise to a general duty of care in the operation of its banking account and on this basis held that the company was in breach of the duty which they held it owed to the banks and must bear the loss
According to the Court of appeal this duty arose in tort as well as in contract
There was difference of opinion among the Judges as to whether the in action on the part of the customer in not objecting 1153 to the statement sent by the bank within the time specified would constitute conclusive evidence of the correctness of the debits recorded therein or whether the banking contracts could be construed as including a term requiring the monthly statements to be treated after a period of time as conclu sive evidence of the state of the account
But all of them were agreed that estoppel operated against the company by its own negligence from challenging the correctness of the banks statements
The banks thus succeeded in the Court of appeal
The defeated company moved the Judicial Committee of the Privy Council by filing appeals
This was how the matter reached the Privy Council
The Privy Council had to decide the case in the light of the law settled by the House of Lords in the Macmillan s case and in Greenwood vs Martins Bank Ltd  1932 All England Reports 3 18
The Privy Council posed two questions before it first whether English law recognises any duty of care owed by the customer to his bank in the operation of a current account beyond first a duty to refrain from drawing a cheque in such a manner as may facil itate fraud or forgery and second a duty to inform the bank of any forgery of cheque purportedly drawn on the account as soon as he the customer becomes aware of it
The respondent banks while recognising the existence of both the duties indicated above contended that the law had evolved in England after 19 18 and 1933 in recognising an altogether wider duty of care
This duty according to them required the customer to take reasonable precautions in the management of his business with the bank to prevent forged cheques being presented to it for payment
Additionally it was contended
that even if this wider duty did not exist
at any rate the customer owed a duty to take such steps to check the periodic bank statements sent to him as a reasona ble person in his pOsition would take to enable him to notify the bank of any debit items in the account which he had not authorised When it is accepted that the bank sent periodic statements to the customer the bank contended that the duty and responsibility to look into such statements and to notify to the bank were necessary incidents of the con tractual relationship between the customer and the bank
The source of this obligation according to the banks is to be found both in the contract law as an implied term of the banking contract and in the tort law as a civil obligation arising from the relationship of banker and customer
Then the Privy Council proceeded to consider the weightier sub 1154 missions advanced by the bank 1 a wider duty on the part of the customer to act with diligence which must be implied into the contract and alternatively that such a duty arises in tort from the relationship between banker and customer
The Privy Council parted company with the observation by the Court of Appeal here and repelled the plea that it was necessary to imply into a contract between a banker and the customer a wider duty and that it was not a necessary inci dent of banker customer relationship that the customer should owe his banker a wider duty of care
This duty is in the form of an undertaking by the customer to exercise reasonable care in executing his written orders so as not to mis lead the bank or to facilitate forgery
The Privy Coun cil accepted that an obligation should be read into the contract as the nature of this contract implicity requires
In other words the term sought to be implied must be one without which the whole transaction would become futile and inefficacious  After referring to some earlier decisions the Privy Council rejected the implied term submission  and set out the limits of the care of the customer and the functions of the banks in the following words  
One can fully understand the com ment of Cons JA that the banks must today look for protection
So be it
They can increase the severity of their terms of business and they can use their influence as they have in the past to seek to persuade the legislature that they should be granted by statute fur ther protection
But it does not follow that because they may need protection as their business expands the necessary incidents of their relationship with their customer must also change
The business of banking is the business not of the customer but of the bank
They offer a service which is to honour their customer s cheques when drawn on an account in credit or within an agreed overdraft limit
If they pay out on cheques which are not his they are acting outside their mandate and cannot plead his authority in justification of their debit to his account
This is a risk of the service which it is their business to offer
The limits set to the risk in the Macmillan and Greenwood cases can be seen to be plainly necessary incidents of the relationshi p Offered such a service a customer must obviously take care in the way he draws his cheque and must obviously warn his bank as soon as he knows that a forger is operating the account    The limits of the duty and the confines of contractual obligation cannot be expressed better
1155 On the question of tort also the bank could not satisfy the Privy Council as is seen from the following observation Their Lordships do not believe that there is anything to the advantage of the law s development in searching for a liability in tort where the parties are in a contractual relationship
This is particularly so in a commercial rela tionship
Though it is possible as a matter of legal seman tics to conduct an analysis of the rights and duties inher ent in some contractual relationships including that of a banker and customer either as a matter of contract law when the question will be what
if any
terms are to be implied or as a matter of tort law when the task will be to identify a duty arising from the proximity and character of the relationship between the parties
their Lordships believe it to be correct in principle and necessary for the avoidance of confusion in the law to adhere to the contractual analy sis on principle because it is a relationship in which the parties have
subject to a few exceptions the right to determine their obligations to each other
and for the avoidance of confusion because different consequences do follow according to whether liability arises from contract or tort eg in the limitation of action   Their Lordships of the Privy Council sumed up the Law as followers Their Lordships do not therefore embark on an investiga tion whether in the relationship of banker and customer it is possible to identify tort as well as contract as a source of the obligations owed by the one to the other
Their Lordships do not however accept that the parties  mutual obligations in tort can be any greater than those to be found expressly or by necessary implication in their con tract
If therefore as their Lordships have concluded no duty wider than that recognised in Macmillan and Greenwood can be implied into the banking contract in the absence of express terms to that effect the respondent banks cannot rely on the law of tort to provide them with greater protec tion than that for which they have contracted
Having rejected the plea of implied terms indirectly con structive 1156 notice and estoppel by negligence it was held that the company was not under any breach of duty owed by it to the banks and as such mere silence omission or failure to act is not a sufficient ground to establish a case in favour of the bank to non suit its customer
We adopt the reasoning indicated above with great re spect
Unless the bank is able to satisfy the Court of either an express condition in the contract with its custom er or an unequivocal ratification it will not be possible to save the bank from its liability
The banks do business for their benefit
Customers also get some benefit
If banks are to insist upon extreme care by the customers in minutely looking into the pass book and the statements sent by them no bank perhaps can do profitable business
It is common knowledge that the entries in the pass books and the state ments of account sent by the bank are either not readable decipherable or legible
There is always an element of trust between the bank and its customer
The bank s business depends upon this trust
Whenever a cheque purporting to be by a customer is presented before a bank it carries a man date to the bank to pay
If a cheque is forged there is no such mandate
The bank can escape liability only if it can establish knowledge to the customer of the forgery in the cheques
In action for continuously long period cannot by itself afford a satisfactory ground for the bank to escape the liability
The plaintiff in this case swung into action immediately on the discovery of the fraud committed by its accountant as in the case before the Privy Council
We may in passing
refer to a decision of this court on the question of negligence under circumstances not strictly akin to the case on hand reported in the New Marine Coal Co Bengal Pvt Ltd vs Union of India  There the suit was for recovery of certain amount represent ing the price of coal supplied to the respondent
Inter alia the respondent pleaded in defence of the suit that the respondent had issued and sent bills to cover the amount and the intimation cards in accordance with the usual practice in the ordinary course of dealings
The respondents it was alleged paid the amount by cheque to a person authorised by the appellant and on presentation of proper receipts
It was pleaded that the appellant s claim having been satisfied he had no cause of action
It was established in the course of the trial that the appellant had not in fact authorised any person to issue the receipts but a certain person not con nected with the appellant firm without the consent or knowl edge of the appellant got hold of the intimation cards and bills addressed to the appellant
forged the documents and fraudulently received the cheque from the respondent and 1157 appropriated the amount for himself
We may usefully read the following passage relating to negligence in the context of a plea based on estoppel  
Apart from this aspect of the matter there is another serious objection which has been taken by Mr Setalved against the view which prevailed with Mukharji J He argues that when a plea of estoppel on the ground of negligence is raised negligence to which reference is made in support of such a plea is not the negligence as is understood in popu lar language or in common sense it has a technical denota tion
In support of a plea of estoppel on the ground of negligence
it must be shown that the party against whom the plea is raised owed a duty to the party who raises the plea
Just as estoppel can be pleaded on the ground of misrepre sentation or act or omission
so can estoppel be pleaded on the ground of negligence but before such a plea can suc ceed negligence must be established in this technical sense
As Halsbury has observed before anyone can be estopped by a representation inferred from negligent con duct
there must be a duty to use due care towards the party misled or towards the general public of which he is one  There is another requirement which has to be proved before a plea of estoppel on the ground of negligence can be upheld and that requirement is that the negligence on which it is based should not be indirectly or remotely connected with the misleading effect assigned to it but must be the proxi mate or real cause of that result  Negligence
according to Halsbury which can sustain a plea of estoppel must be in the transaction itself and it should be so connected with the result to which it led that it is impossible to treat the two separately
This aspect of the matter has not been duly examined by Mukharji
J when he made his finding against the appellant
 This is how this Court understood how a plea of estoppel based on negligence can be successfully put forward
We have seen that there is no duty for a customer to inform the bank of fraud committed on him
of which he was unaware
Nor can in action for a reasonably long time in not discovering fraud or irregularity be made a defence to defeat a customer in an action for loss
Thus the contentions put for 1158 ward by the bank cannot be accepted to defeat the plaintiff
The various submissions made by the counsel for the bank based on constructive notice in the general law and on other branches of law cannot be extended to relationship between a bank and its customers
On a careful analysis of the questions of law we hold that the judgment of the High Court and that of the Trial Judge have to be upheld
We do so
We accordingly dismiss the appeal with costs of the 1st respondent
NPV Appeal dis missed


Summary:
The respondent company had a current account with the lant bank in its Mangalore Builder Branch
The Manag ing Director of the company and the General Manager of a sister concern of the company had been authorised to operate the said current account
The second defendant was attending to the maintenance of accounts of the respondent company and was also in charge and had the custody of the cheque book issued by the Bank to the respondent company
During the process of bringing the accounts upto date certain irregu larities were noticed in the account and on verification it was found that cheques purporting to bear the signature of the Managing Director were encashed though they did not bear his signature
A complaint was lodged by the respond ent Company with the police and a special audit of the company s accounts for the years 1957 58 to 1960 61 by a firm of Chartered Accountants disclosed that the second defendant had withdrawn a sum of Rs32604792 under 42 cheques
A suit was filed for the recovery of the said amount on the plea that the amounts as per the forged cheques were not utilised for the purpose of the respondent company
that they were not authorised ones
that there was no acquiescence or ratification open or tacit on the part of the respondent company and that the respondent was unaware of the fraud till the new accountant discovered it
The appellant bank resisted the suit on the grounds 1 that the cheques were not forged ones 2 that even if they were forged ones
the company was not entitled to recover the amount on account of its own 1139 negligence 3 that there was settlement of accounts be tween the parties from time to time and as such
the company was not entitled to reopen the same and claim the sums paid under the cheques and 4 that the suit was barred by limitation
The second defendant pleaded that the cheques were utilised for the purpose of the company
The trial Court negatived the contentions of the bank and passed a decree for the sum claimed with interest at 6
In appeal the Division Bench confirmed the judgment of the trial court but as the case involved substantial ques tions of law of general public importance it granted a certificate to file the appeal
In the appeal before this Court it was contended on behalf of the appellant that 1 after reasonable opportu nities are given to the customer to examine the bank state ments its debit entries should be deemed to be final and will not be open for reconstruction to the detriment of the bank 2 a representation may be made either by statement or by conduct and conduct included negligence silence acquiescence or encouragement and if a customer of a bank by his negligence to give timely information of forged cheques allows amount to be drawn on such cheques
the debit will stand for the whole amount and the consumer will be estopped from claiming the amount and 3 in action for a long period would amount to such negligence as would persuade a court to impute to the customer with knowledge or at any rate constructive knowledge_to decline him relief in an action for recovery of amounts which would be to the detriment of an innocent party namely the bank
Dismissing the appeal
HELD 1
When a cheque duly signed by a customer is presented before a bank with whom he has an account there is a mandate on the bank to pay the amount covered by the cheque
However
if the signature on the cheque is not genuine
there is no mandate on the bank to pay
The bank
when it makes payment on such a cheque cannot resist the claim of the customer with the defence of negligence on his part such as leaving the cheque book carelessly so that third parties would easily get hold of it
This is because a document in cheque form
on which the customer s name as drawer is forged
is a mere nullity
1147B D 2
The relationship between the customer of a bank and the bank is that of a creditor and debtor
When a cheque presented for encashment contains a forged signature the bank has no authority to make payment against such a cheque
The bank would be acting against law 1140 in debiting the customer with the amounts covered by such cheques
When a customer demands payment for the amount covered by such cheques the bank would be liable to pay the payment to the customer
The bank can succeed in denying payment only when it establishes that the customer is disen titled to make a claim either on account of adoption estop pel or ratification
1146G H 1147A B For negligence to constitute an estoppel
it is neces sary to imply the existence of some duty which the party against whom estoppel is alleged owes to the other party
There is a duty of sorts on the part of the customer to inform the bank of the irregularities when he comes to know of it
But by mere negligence
one cannot presume that there has been a breach of duty by the customer to the bank
The customer should not by his conduct facilitate payment of money on forged cheques
In the absence of such circum stances
mere negligence will not prevent a customer from successfully suing the bank for recovery of the amount
1150B D 4
In order to sustain a plea of acquiescence it is necessary to prove that the party against whom the said plea is raised
had remained silent about the matter regarding which the plea of acquiescence is raised
even after knowing the truth of the matter
1150D E 5
There is no duty for a customer to inform the bank of a fraud committed on him of which he was unaware
Nor can in action for a reasonably long time in not discovering fraud or irregularity be made a defence to defeat a customer in an action for loss
1157G H 6
There is no duty on the part of the customer to intimate the banker about any error that may be seen in the pass book and he will be entitled to claim any amount paid on a forged cheque though there may be some negligence or in action on his part in not being careful to discover the errors in the pass book or other documents
Banks do business for their benefit
Customers also get some benefit
If banks are to insist upon extreme care by the customers in minutely looking into the pass book and the statements sent by them no bank perhaps can do profita ble business
It is common knowledge that the entries in the pass books and the statements of account sent by the bank are either not readable
decipherable or legible
There is always an element of trust between the bank and its custom er
The bank s business depends upon this trust
1156B D 1141 8
Whenever a cheque purporting to be by a customer is presented before a bank it carries a mandate to the bank to pay
If a cheque is forged there is no such mandate
The bank can escape liability only if it can establish knowledge to the customer of the forgery in the cheques
In action for continuously long period cannot by itself afford a satisfac tory ground for the bank to escape the liability
1156D E 9
In the present case
during the relevant period when 42 cheques were encashed the company did not know anything about the sinister design of the second defendant
Since the bank had not proved to the satisfaction of the court that the company had with full knowledge acknowledged the cor rectness of the accounts for the relevant period the case of acquiescence cannot be flourished against the company
There is no evidence to show that any one other than the second defendant knew that the forged cheques had been encashed
After the matter was discovered immediate action was taken
Therefore in the absence of any evidence of the respondent company s involvement
it cannot be non suited on the ground of negligence or in action
Unless the bank is able to satisfy the court of either an express condition in the contract with its customer or an unequivocal ratifica tion it will not be possible to save the bank from its liability
1150E F 1151A B 1156B Bihta Co operative Development Cane Marketing Union Ltd Joint Stock Bank Ltd vs Macmillan  Tai Hing Cotton Ltd vs Liu Chong Bank 1985 2 All England Reports 947 Greenwood vs Martins Bank Ltd  1932 All England Reports 318 and New Marine Coal Co Bengal Pvt Ltd vs Union of India   referred to