The Supreme Court has recently made an observation that a Bank/Post Office cannot be absolved of its vicarious liablity when it is established that fraud or any wrongful act was perpetrated by an employee.

The Division Bench comprising of Justice L. Nageswara Rao, Justice Sanjiv Khanna and Justice B.R. Gavai stated that the Bank/ Post Office is entitled to proceed against the concerned employee, but they have to bear their liability as well.

Brief Facts of the Case

In the appeal before the Court, an NCDRC order has been challenged. Via the impugned order, the Consumer Forum has held that postal department authorities cannot be held vicariously liable for the fraud committed by a postal agent with respect to enashment of Kisan Vikas Patras.

The appellants during the years 1995 and 1996 had purchased Kisan Vikas Patras, ‘KVPs’ for short, in joint names from various post offices located in the State of Uttar Pradesh in different denominations and with varying dates of maturity. The combined face value on maturity was Rs.32.60 lacs; however, the KVPs were encashable at the post offices before the maturity date at a lower value after the stipulated/lock-in period of holding. The Post Master suggested that the transfer process being too cumbersome, the appellants could avail the services of one Rukhsana, an agent appointed by the State of Uttar Pradesh. On 03.03.2000, as per Rukhsana's instructions, the appellants signed original KVPs on the backside and handed over the same along with Monthly Income Scheme passbook to her, against which she provided a document confirming receipt of the KVPs. In June, 2000, the appellant came to know that Rukhsana had been arrested for cheating several investors. Upon enquiry, it was learnt that she had encashed the appellants' KVPs and pocketed an amount of Rs. 25,54,000, which was paid to her in cash by Yahiyaganj and Lal Bagh Post Office. It came to the knowledge of the appellants that M.K. Singh, Sub-Post Master of Yahiyaganj Post Office was working hand in gloves with Rukhsana. Eventually, the appellants filed a complaint under the Consumer Protection Act before the NCDRC.

In the impugned judgment, the NCDRC, while accepting that some negligence could be attributed to the respondents in making the payment, dismissed the complaint against the respondents holding that they had acted in accordance with Rules 14 and 15 of the 1988 Rules. Further, the appellants had not been truthful as it was difficult to fathom as to why they had signed and acknowledged payment on the backside of the KVPs and thereafter the KVPs were given to an unknown agent. The appellants, having done so, acted with open eyes and at their own peril and risk. The claim that the KVPs were handed over to Rukhsana without transfer application is unbelievable as appellant No.1 is a well-educated person. The appellants had remained silent for three months and did not make enquiries from the Post Office, Yahiyaganj located merely 800 metres from their residence. The appellants being negligent, the complaint against the respondents, including the fourth respondent, was dismissed.

Supreme Court Observation

The Court mentioned that Section 31 of the Negotiable Instruments Act, 1881, states that a ‘banker’ includes any person acting as a banker and any post office savings bank. In terms of this section, a post office savings bank is a banker under the NI Act. KVPs issued by the post office are a promissory instrument as defined by Section 42 of the NI Act, as it is an unconditional undertaking signed by the maker to pay a certain sum of money to, or to the order of a certain person, or the bearer of the instrument. Section 134 of the NI Act states that a negotiable instrument may be payable either to order or to bearer.

The Court mentioned U. Ponnappa Moothan Sons, Palghat Vs. Catholic Syrian Bank Ltd. & Ors, 1990 Latest Caselaw 287 SC, has elaborately considered and elucidated on Sections 9, 10 and clause (g) of Section 118 of the NI Act.

"English Law states that the holder in taking the instrument should act in good faith. When he has no knowledge of the defect in the title and acts honestly, whether he is negligent or not, he is deemed to have acted in good faith. Indian law is stricter than the English law and requires the person to exercise due diligence, which means no person should take a security of this kind from another without using reasonable caution."

It went onto note that elucidation on the aspect of care required to be exercised by the bankers to seek statutory protection under Section 131 of the NI Act is to be found in Indian Overseas Bank Vs. Industrial Chain Concern, 1989 Latest Caselaw 334 SC wherein while deciding whether the bank is negligent it is necessary to see whether the rules or instructions of the bank are followed or not, though this may not always be conclusive, it was noted:

"Till an account is opened, banker and customer relationship is not created, but once the account is opened contractual relationship is created. Moreover, mutual rights and obligations between the banker and customer are also created under law. In case of fraudulent encashment of cheques, the collection and payment embraces the bank’s duty to the real owner, if the customer happens not to be the real owner. In such cases, the bank’s liability is protected on the satisfaction of the conditions mentioned under Section 131 of the NI Act and not otherwise. This is so because the drawer of the cheque is not the customer of the bank while the payee is. Consequently, if there is anything to arouse suspicion regarding the cheque and the ownership of the customer, the bank may find itself beyond the protection of Section 131 of the NI Act. Suspicion may arise when the amount is very large, credibility and identity of the customer is pied etc. Further, negligence may be established when collection and payment is made contrary to the tenor of the instrument. Carelessness occurs when there is failure to pay due attention to the actual terms of the mandate. At the same time we must be realistic and pragmatic not to narrow down banker’s protection under Section 131 of the NI Act to make the banker’s position vulnerable. This would be disadvantageous to the expansion of banking business. Banking has penetrated and is widespread and, therefore, precautions at one time may not be a proper guide. Corresponding standard of reasonable care and not stricter liability is conducive and the correct test. The officers of the banks are not required to be amateur detectives, albeit they can be attributed the degree of intelligence ordinarily required from a person in their position. Therefore, microscopic examination of the cheque paid in collection may not ordinarily be necessary, but this may be required when facts are sufficient to raise reasonable ground to suspect that there may be a wrongdoing."

 It also remarked that it is the duty of every banker who receives payment based on an electronic image of a truncated cheque to verify the prima facie genuineness of the cheque, and exercise due diligence and ordinary care to verify fraud, forgery or tampering apparent on the face of the instrument. Therefore, the bank can escape only when the banker acts in good faith and without negligence. The latter is the sine qua non for a banker to get absolved under Section 131 of the NI Act. Hence, to claim statutory protection the bank will have to meet the statutory conditions, and the courts will not accept any attempt to override and get over the obligation. 

The Court opined that the presumption under clause (g) to Section 118 would not apply as Rukhsana is not an indorsee and the instrument was in the name of the appellants. Further, Rukhsana is not a ‘holder in due course’, for she had, and the respondents accept, obtained possession of the instrument from the lawful owners, i.e. the appellants, by means of an offence or fraud. It is an admitted case of the parties that Rukhsana was convicted and sentenced for the fraud committed. However, Section 78 uses the expression ‘holder’ and not ‘holder in due course’. Rukhsana was not the ‘holder’ as defined under Section 8 of the NI Act. She was not entitled to sue the maker, acceptor or indorser of the instrument of the amount due thereon in her name. Further as elucidated below are primarily predicating our decision on the application of clause (c) to Section 82 read with Section 10 of the NI Act as the KYPs were bearer instruments. The respondent can claim discharge under Section 82(c) of the NI Act by showing that they had complied with the requirements of Section 10, that is, they had acted in good faith and without negligence.

It added that Sections 8 and 11 of the GSC Act have no application in the present case. 

The Court observed that as Rukhsana had not entered appearance or contested the order of NCDRC before thev Court, the same had attained finality for her. It was noted that the KVPs were not presented for encashment at the Post Office where it was issued. Under Rule 11 of the Kisan Vikas Patra Rules, 1988 it could be so encased only after duly verifying that the person presenting the KVPs for encashment were entitled to do so. Under Rule 9, surrendering identity slip at the time of discharge is mandatory. But, the Court observed that there was no document on record to suggest that the concerned officials had complied with the said Rules. On perusal of Sections 8 and 78 of the Negotiable Instruments Act, 1881, the Court observed that though the KVPs, which are negotiable instruments, were in possession of Rukhsana, she had no right to recover the amount and therefore, was not a 'holder'.

"As per Clause 23(1) of the Post Office Bank Manual, in case a holder seeks to encash KVPs from a Post office other than the issuing one, they have to provide an application with requisite details appended with their signature. No such application was filed. Under Clause 23(2), the post master is to verify the signature and satisfy himself about the authenticity of the certificate and title of the holder. Considering the relevant provisions of law and material on record, the Court was of the opinion that payment of Rs. 25,54,000 made in cash to Rukhsana by the respondent officers of the post office was an act of negligence, especially when notification dated 18.08.1989 required the payment to be made in cheque. Further, it opined that it was also a case of fraud. The Court held that the conduct of the officials was in violation of Section 82 of NI Act, which stated that the maker of a negotiable instrument is discharged of their liability upon payment, but Section 10 requires such payment to be made in good faith and without negligence."

 The Court found that the NCDRC had been rather harsh in holding that the appellants were silent and, therefore, guilty of negligence. The finding overlooks that no one would like to avail services of a stranger or an agent if the work, that is, transfer of KVP certificates, could be otherwise handled and done with ease. Further, no one would like to lose money to a stranger. Necessarily, we would accept that the appellants had remained in touch with Rukhsana but were given the impression that the exercise is complex and would take time. Further they had belief that the post office would take care of their interest, act in good faith and would not be negligent, the Court stated.

CONTRIBUTORY NEGLIGENCE

While examining the issue and question of contributory negligence, the Court referred to Kerala State Co-Operative Marketing Federation Vs. State Bank of India & Ors 2004 Latest Caselaw 57 SC and Canara Bank Vs. Canara Sales Corporation & Ors, 1987 Latest Caselaw 127 SC, and held that the bank, when it makes payment of a forged cheque, it cannot resist the claim of the customer with the defence of negligence on the customer’s part. The bank can succeed on the plea of negligence of the customer when it establishes adoption, estoppel or rectification on the customer’s part.

VICARIOUS LIABILITY

Noting that M.K. Singh is not a third person but an officer and an employee of the Post Office. Post Office, as an abstract entity, functions through its employees, the Court observed:

"Employees, as individuals, are capable of being dishonest and committing acts of fraud or wrongs themselves or in collusion with others.20 Such acts of bank/post office employees, when done during their course of employment, are binding on the bank/post office at the instance of the person who is damnified by the fraud and wrongful acts of the officers of the bank/post office. Such acts of bank/post office employees being within their course of employment will give a right to the appellants to legally proceed for injury, as this is their only remedy against the post office. Thus, the post office, like a bank, can and is entitled to proceed against the officers for the loss caused due to the fraud etc., but this would not absolve them from their liability if the employee involved was acting in the course of his employment and duties."

 Referrence was made to State Bank of India Vs. Shyama Devi, 1978 Latest Caselaw 105 SC wherein it was held that held for the employer to be liable, it is not enough that the employment afforded the servant or agent an opportunity of committing the crime, but what is relevant is whether the crime, in the form of fraud etc., was perpetrated by the servant/employee during the course of his employment. Once this is established, the employer would be liable for the employee’s wrongful act, even if they amount to a crime. Whether the fraud is committed during the course of employment would be a question of fact that needs to be determined in the facts and circumstances of the case.

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Sheetal Joon