A Bank passed the traveller's cheques for payment negligently and without scrutinising the signatures properly. In court, the bank argued that it is not responsible for any payment made on traveller's cheques to an unauthorised person due to the negligence on the part of the purchaser and any loss arising therefrom should be borne by the purchaser. The purchaser has not taken due care and caution in the safe keeping of the cheques. On receipt of information about the theft, the Bank informed all its branches but before it cheques were cashed in the ordinary course of business. Decide the case.

The Nature of Traveller's Cheques and the Bank's Special Duty

A traveller's cheque is not a conventional cheque in the ordinary sense. It is an instrument issued by a bank itself, bearing a pre-printed signature of the purchaser at the time of issuance, and it is designed to be encashed only when the presenter signs it a second time in the presence of the paying banker, whose duty it then is to compare the two signatures and satisfy himself that they correspond. This twin-signature mechanism is the very soul of the traveller's cheque system. As ML Tannan's Banking Law and Practice in India explains with precision, "the holder signs it again in the presence of the banker to whom he presents it for payment" and "this signature must correspond with the signature already on the cheque, which serves to identify the holder." This practice is so universally recognised and uniformly followed in the banking world that it has hardened into a rule of law. The obligation to scrutinise and compare signatures is not a mere recommendation of good banking practice — it is the very foundation of the protection that the traveller's cheque offers to its purchaser.

The Bank's Negligence: The Central Issue

When the bank passed the traveller's cheques without scrutinising the signatures properly, it committed a fundamental breach of this duty. Section 10 of the Negotiable Instruments Act, 1881 defines "payment in due course" as payment made "in accordance with the apparent tenor of the instrument in good faith and without negligence." A bank that fails to compare the specimen signature already on the cheque with the counter-signature made before its officer at the time of payment has plainly not acted without negligence. The payment, therefore, cannot be regarded as a payment in due course, and the protection available under the Act to a bank making payment in due course is not available in such circumstances.

The Supreme Court in Canara Bank v Canara Sales Corporation (AIR 1987 SC 1603) settled the broader principle with authority: if signatures on a cheque are not genuine, there is no mandate on the bank to pay, and no amount of negligence on the part of the customer — however reckless — can provide the bank with a defence. The court observed that while a customer's negligence can be raised in appropriate circumstances, it cannot serve as a shield for a bank that has itself failed in its basic duty. Applying this reasoning to traveller's cheques, the comparison between the two signatures is precisely the bank's obligation. When it fails to discharge it, the bank cannot turn around and blame the purchaser.

The Bank's Argument: An Examination

The bank's argument proceeds on two legs. First, it contends that the purchaser was negligent in keeping the cheques safe, and second, that payment was made in the ordinary course of business before the bank's circular to its branches could take effect. Neither of these contentions, examined carefully, can save the bank.

On the first point — the purchaser's negligence in custody — the position of law is clearly settled. The bank's own duty to check the counter-signature is a contractual and independent obligation. The failure to perform this obligation is the proximate cause of the loss, not the theft. A bank cannot escape liability for its own negligence by pointing to a separate act of negligence by its customer. Where two parties have both been careless, the law generally places the loss on the party whose negligence was the immediate and direct cause of the harm — and here, it was the bank's failure to scrutinise the signatures that allowed payment to flow to an unauthorised person. The Allahabad High Court in Lala Pirbhu Dayal v The Jwala Bank (AIR 1938 All 634) laid down the principle squarely: it is the duty of the employees of the bank to be able to identify the signatures of their customers; if they fail to discharge this duty and thereby suffer a loss, there is no reason why the customer should make good that loss. In that case, it was observed, relying on Beven on Negligence: "The banker's obligation is to honour his customer's cheque. To that end he is bound to know his customer's handwriting. If in any way he is deceived without the instrumentality of his customer, he must himself abide the loss."

The case of stolen traveller's cheques being encashed when the comparing officer ought to have noticed a substantial difference in signatures was expressly commented upon in the case law, and the action against the banker was held to be proper precisely in such circumstances — "between a customer and his banker, the action would be proper against the banker in case of encashment of stolen traveller's cheque particularly when the signature of the customer and the person encashing the same were substantially different."

On the second point — that the cheques were cashed in the ordinary course of business before the bank's circular reached all branches — this argument too must fail. The bank's circular was an internal mechanism of protection which it chose to put in place after the loss was discovered. But the bank's duty to scrutinise signatures at the time of payment is not dependent upon the receipt of any stop-payment circular. It exists independently and continuously. Every branch that paid out on a traveller's cheque without properly comparing the signatures was negligent at the moment of payment, regardless of whether a theft-notification circular had been received. The ordinary course of business that the bank invokes as its shield is, in this very context, the course of conduct which it failed to follow — namely, proper signature comparison. The bank cannot rely on "ordinary course of business" as a defence when what was done was precisely not in the ordinary course as mandated by the law and banking practice governing traveller's cheques.

The Defence of Contributory Negligence

It must be acknowledged in fairness that the law does not entirely ignore the customer's conduct. Where a customer's negligence is found to be the proximate and direct cause of the loss — such as negligently leaving a signed and pre-dated blank cheque where it can be easily misappropriated — the customer may have to bear some responsibility. However, in the present case, the theft of the traveller's cheques, while a circumstance of concern, was not what caused the money to leave the bank's hands. What caused the loss was the bank's failure, at the counter itself, to notice that the person presenting the cheque could not produce a matching counter-signature. The negligence in custody, being remote, cannot overcome the bank's own immediate negligence in payment. This distinction between proximate and remote negligence is fundamental. The bank must have regard to the well-established principle that where one of two innocent parties must suffer for the fraud of a third, it is the party whose negligence facilitated the fraud that must bear the loss.

Decision

The court should find in favour of the purchaser and hold the bank liable. The payment made on the stolen traveller's cheques without proper scrutiny of signatures was not "payment in due course" under Section 10 of the Negotiable Instruments Act, 1881. The bank failed to discharge its independent and primary obligation to compare counter-signatures at the time of payment. The purchaser's failure to safeguard the cheques, while regrettable, was a remote cause; the bank's negligence at the point of payment was the proximate and immediate cause of the loss. Neither the theft of the cheques by a third party, nor the purchaser's careless custody of them, can relieve the bank of its own fundamental banking obligation — to verify, before paying, that the person presenting the instrument is the same person who originally signed it.