1

LIABILITY OF BANKER INCASE OF WRONGFUL DISHONOR OF

CHEQUES

SYNOPSIS:

1. INTRODUCTION
2. NEGOTIABLE INSTRUMENTS ACT,1881
3. CHEQUES
4. TYPES OF CHEQUES
5. DISHONOR OF CHEQUES
6. REASONS
7. TYPES-DISHONOR OF CHEQUES
8. WRONGFUL DISHONOR OF CHEQUES
9. CIRCUMSTANCES OF DISHONOR OF CHEQUES
10. PROVISIONS AS TO DISHONOR OF CHEQUES
11. LIABILITY OF BANKER TOWARDS THE CUSTOMER IN CASE OF
WRONGFUL DISHONOR
12. CASE LAWS
13. CONCLUSION.
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1.INTRODUCTION:

One common usage for a negotiable instrument is a cheque, which is mostly used to transfer
money between parties. In the world of banking, it functions as an order from the account holder
(drawer) to the bank (drawee) to pay a certain amount to the individual (payee) whose name is on
the cheque. Customer’s faith in their banks to respect genuine cheques is important to the smooth-
operation of a cheque-based payment system. A cheque that is returned unpaid without good reason
can have serious consequences for the account holder, including harm to their reputation and
financial losses. Its usual to refer to this circumstance as “wrongful dishonor of cheques.”

When a bank declines to respect a customer’s cheque even when there are enough funds in
the account and there are no procedural or legal barriers to the payment, this is known as unjust
dishonor of cheques. This behaviour is a violation of the banker-client relationship and may expose
the bank to legal action, particularly if the customer suffers financial or reputational harm as a
consequence of the dishonor.

As long as there is enough money in the account to pay the amount, the bank is required
by Section 31 of the Act to honor cheques written by its clients. A bank is responsible for paying
the customer’s damages if it neglects to do so without a valid explanation. This is known as unjust
dishonor. Courts have acknowledged that the bank’s obligation goes more than just providing
monetary compensation because there is a possibility of reputational harm, especially for clients
who are involved in commercial or professional activities. In certain situations, banks could have
to pay for both immediate monetary losses and indirect costs, including emotional pain or betrayal
of trust.

Wrongful dishonor of cheques is more than just a technical violation, it’s a move that can
have serious consequences for the client. As an important protection for clients, the Negotiable
Instruments Act of 1881 makes sure that banks honor their agreements and the confidence that is
placed in them. The Act maintains the honesty of the banking system and safeguards consumer’s
rights against unfair practices by financial institutions by making banks responsible for
wrongdoing.
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2. NEGOTIABLE INSTRUMENTS ACT 1881:

The application of negotiable instruments, including promissory notes, bills of exchange,

and cheques, is governed by the historic Negotiable Instruments Act, of 1881, in India. Due to their
simple nature of use and effectiveness in transferring funds and credit, these instruments are
frequently used in business transactions. The Act establishes a legal framework that promotes
clarity and confidence in financial transactions by outlining the rights, obligations, and duties of
parties engaged in transactions involving negotiable instruments.

The Act was first based on English law and was passed during the British colonial era in
order to address the expanding economic activities of the day. Even though it is rather old, it is
always an essential component of Indian law and has been updated on occasion to take into account
new developments and shifting economic situations. The Act, which outlines the procedures for
their establishment, endorsement, transfer, and discharge, forms the basis for all transactions using
negotiable instruments in India.

The Act covers the many kinds of negotiable instruments and is organized into multiple
sections. Promissory notes, bills of exchange, and cheques are all included in the definition of
negotiable instruments in Section 13. Under the Act, every kind of instrument has unique criteria
and ramifications. Section 6 gives a thorough definition of a check, which is an essential instrument
in daily transactions. In addition, Section 31 covers bankers' responsibilities to honor checks,
which is essential for safeguarding clients' rights throughout financial transactions.

Section 138 of the Act, which addresses the dishonoring of checks for lack of cash, is
another important component. This provision discourages the abuse of checks and upholds the
legitimacy of these instruments in business by imposing penalties, including criminal
responsibility, for issuing check without sufficient cash. The development of India's financial and
commercial sectors has been greatly aided by the Negotiable Instruments Act, 1881, which
established a dependable and uniform framework for transactions. By guaranteeing that
transactions using negotiable instruments are controlled by transparent and enforced regulations,
the Act promotes confidence among individuals and enterprises alike. By doing this, it helps to
maintain India's economic stability and progress by enabling easy financial transactions all
around the country.
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3.CHEQUES:
A cheque is a particular kind of negotiable instrument that is frequently used to transfer
money from one party to another, according to the Negotiable Instruments Act, 1881. In
accordance with the Act’s Section 6, a cheque is defined as “a bill of exchange drawn on a
specified banker and not expressed to be payable otherwise than on demand.” Therefore, a
cheque is an order in writing from an individual (the drawer) to their bank (the drawee) to release
a certain sum of money to a third party (the payee) upon demand.
FEATURES:
1. WRITTEN INSTRUMENT:
A written cheque is required. It contains information such as the date, the
name of the payee, the payment amount, and the drawer’s signature.
2. UNCONDITIONAL ORDER:
An unconditional order must be included with the cheque. This indicates
that the drawer gives the bank instructions to pay the agreed-upon amount
without adding any terms.
3. DRAWN ON A PARTICULAR BANKER:
A cheque is always drawn on a particular bank account holder’s bank. It
can only be drawn on banks and no other entities.
4. PAYABLE ON DEMAND:
A cheque is immediately payable upon request. With a cheque, payment is
expected immediately upon presentation, unlike with other negotiable
documents that may contain a future date for payment, such as bills of
exchange.
5. THREE PARTIES:
DRAWER:
The one who writes the cheque and gives the bank the order to pay
the agreed-upon amount.
DRAWEE:
The bank that receives the cheque is in charge of covering the
cheque amount.
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PAYEE:
The individual or organisation to which the money is to e sent. When
the cheque be self-drawn, the drawer may also be the payee.
4. TYPES OF CHEQUES:
Although Section 6 of the Negotiable Instruments Act, defines a cheque, it does not
specially classify the various kinds of cheques. In actuality, though, cheques are categorized
according to a number of factors, including the payee’s identity, the manner in which they are
crossed, and how they are payable. Even though not specified by particular Act provisions, these
categories are commonly accepted in banking practices.
1. BEARER CHEQUE:
A cheque that is payable to the person holding it or showing it to the bank is known as a
bearer cheque. The cheque may or may not include the payee’s name. it can be transferred simply
by delivery; no endorsement is required.
Because of this, it is a negotiable tool that is simple to transmit from one individual to
another. Bearer cheques are included in Section 13 of the Act, which talks about bearer papers and
negotiable instruments.
2. ORDER CHEQUE:
An order cheque is made payable to the specified individual or organization. If the payee
wants to give the cheque to another person, they must endorse it. This type of cheque is less
dangerous than bearer cheques as the bank must verify the identity of the individual submitting it.
Banks are protected under Section 85(1) of the Act when they pay order cheques. A bank
is released from obligation if it pays the designated individual, even if that individual is not the
real owner.
3. CROSSED CHEQUE:
Two parallel lines are often placed across the face of a crossed cheque, with the words
“Account Payee” or “Not Negotiable” written in between. This means that the cheque can no
longer be cashed at the counter and must be deposited straight into a bank account.
Although crossed cheques aren’t defined specifically in the Act, they are covered in
Sections 123 to 131, which include general crossings, which include parallel lines, and special
crossings which also include the name of a particular bank. To prevent unauthorized cashing,
Section 126 stipulates that a crossed cheque must only be paid to a banker.
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4. SELF CHEQUE:
A self cheque is one where the drawer and the payee are the same person. It is usually
written by the account holder to withdraw cash for their own use from their account. Self-cheque
are intended to be cashed by the drawer and often have the word “self” in the payee line.
Despite the Act’s lack of specific restrictions, self-cheques are a widely accepted form of
payment in banking operations.
5.DISHONOR OF CHEQUES:
A key legal term under the Negotiable Instruments Act, 1881, is the dishonor of a cheque,
which is what happens when a bank declines to honor a cheque that is given for payment. There
might be a number of reasons for this, such as the cheque begin stale, the drawer’s account not
having enough money, or the signature on the cheque not matching the one on file. A cheque that
is dishonored carries significant consequences for both the payer and the drawer and is subject to
certain Act restrictions.
A cheque is a bill of exchange issued on a designated banker and payable on demand,
according to Section 13 of the Negotiable Instruments Act. When a cheque is dishonored, it
indicates that even if the cheque was properly submitted, the bank has declined to pay the amount.
The Act expressly covers the dishonoring of cheques for lack of money in Section 138.
This clause states that the payee may file a lawsuit against the drawer if the bank returns an unpaid
cheque because there is not enough money in the drawer’s account to cover the cheque. The
following circumstances give rise to the availability of this judicial remedy:
1. The cheque had to have been written off as payment for a duty or obligation that is
enforceable by law.
2. Within three months of the cheque’s date the payee is required to present the cheque to the
bank.
3. After receiving the information about the dishonor, the payee has 30 days to notify the
drawer in writing and demand payment of the outstanding balance.
4. The payee may submit a complaint under Section 138 if the drawer does not make the
payment within 15 days of receiving the notification.
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6. REASONS FOR DISHONOR OF CHEQUES:

1. LACK OF SUFFICIENT CASH:
If a customer’s account does not have enough money, the cheque could not be honored. In
addition to having to withdraw the application, the banker faces penalties for dishonoring the
cheques that were really submitted and would have been honored if he pays a counterclaimed
cheque.
2. NOTICE OF CUSTOMER’S DEATH:
Cheques that are provided after a customer passes away should not be paid by the banker.
The cheque should be returned with the notation “Drawer Deceased.”
3. NOTICE OF CUSTOMER’S INSOLVENCY:
When the customer is declared bankrupt, the banker is required to withhold the payment
on the Cheques right away.
4. ACCEPTANCE OF THE GARNISHEE ORDER:
When a garnishee order is obtained, the banker will cease paying cheques after receiving
one that has the full amount. Cheques, however, should be honored if the leftover amount is enough
to fulfill them if the order is for a set amount, leaving the stated amount.
5. PRESENTATION OF POST-DATED CHEQUES:
The banker may refuse the cheque when the cheque is presented before the valid date.
Stale Cheques:
The banker has the right to withhold payment if a check is presented more than three
months after the date it bears.
Material Alterations:
The banker has the right to withhold payment if there has been a major modification to the
cheque.
Drawer's Signature:
The banker has the right to withhold payment if the drawer's signature on the check doesn't
match the specimen's signature.
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7. TYPES OF DISHONORS OF CHEQUES:

Cheques that fall into one of the 2 categories are not honored:
1. Rightful dishonor:
The drawee banker may refuse to honor the cheque for any of the following reasons
or for any other justifiable cause. In this case, the holder has both civil and criminal
remedies against the drawer, but no action is available against the banker.
2. Wrongful dishonor:
The banker has dishonored the cheque as a result of the employee’s negligence or
carelessness. The drawer has the right to sue the bank for any damages he incurred.
In this instance, the payee lacks legal recourse against the banker.
8. WRONGFUL DISHONOR OF CHEQUES:
It refers to an error whereby the bank fails to honor a legitimate negotiable instrument such
as a cheque that has been accidentally given to it for payment. When a cheque meets all
requirements to be considered legal and sufficient funds are in the account to cover its amount, the
cheque is not honored and is considered wrongful dishonor.
When a bank declines to accept a cheque that is offered for payment even if it is valid and
the drawer’s account has enough money, this is known as wrongful dishonoring of a cheque. The
drawer may suffer severe consequences from this situation, such as monetary loss, harm to their
reputation, and possibly even legal action.
9. CIRCUMSTANCES OF WRONGFUL DISHONOR:
The following typical situations may result in cheques being wrongfully dishonored:
1. INSUFFICIENT FUNDS:
While a common cause of dishonor is inadequate cash, there are instances in which
the bank misjudges the existence of insufficient funds. For example, if there are pending
transactions or holds on the account that the bank did not consider before dishonoring the
cheque, this can lead to wrongful dishonor.
2. TECHNICAL MISTAKES:
When processing cheques, banks sometimes commit technological mistakes. This
might consist of:
i. Incorrect data entry:
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The error committed in the data entry procedure, like typing the incorrect account
number of recording the amount wrongly, may lead to an unjustified dishonor.
ii. Systems failed:
If there are technical problems with the bank’s systems, the cheque may not be
processed properly, which could result in dishonor.
3. SIGNATURE MISMATCH:
If the signature on the cheque does not match the signature on record with the bank,
the cheque may be dishonored. However, if the signature has changed due to a
recent update or if the bank has failed to update its records, dishonor can occur
wrongfully.
4. Misrepresentation of a stale cheque:
A cheque is considered stale if it is not presented for payment within 3 months of
the date it was written. If a cheque is presented after this time but the drawer and
payee have a delayed payment agreement, and the bank declines to pay without
providing further information, this could lead to unjustification and misconduct.
5. Altered Cheque:
A cheque that seems to have been altered with the amount or the date, may not be
accepted by the bank. On the other hand, the dishonor can be incorrect if the
changes were made or approved by the drawer and the bank fails to look into or
confirm their legitimacy.
6. Lack of authority:
Sometimes, a cheque may be dishonored because the person presenting it is not
permitted to do so. The bank may mistakenly dishonor the cheque if it does not
confirm the presenter’s identification and assumes the person who gets it is not
authorized to cash it.
7. Conflicts regarding payment terms:
A bank may refuse to accept a cheque at the drawer’s request if there are
disagreements between the payee and drawer over the terms or conditions of the
payment. On the other hand, it may be considered wrongdoing if the bank took
action without first verifying that the payment was due.
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8. The Drawer’s Death:

It could be considered wrongful dishonor if the bank dishonors the cheque based
on the belief that it is not informed of the drawer’s death. Notifying the bank of the
drawer’s passing usually helps prevent these kinds of issues.
9. Invalid cheque book:
Any cheque written from a cheque book that the drawer is using that has been
reported lost, stolen, or canceled by the bank will not be honored. However, there
could be wrongful dishonor if the bank did not warn the drawer sufficiently or if
the drawer did not allow the cancellation.
10. Fraudulent activity:
The bank may dishonor the cheque without conducting a thorough investigation if
it believes there may be fraudulent activity connected to it but lacks concrete proof.
In the event that the suspicion proves to be regarded as wrongful dishonor.
10. PROVISIONS AS TO DISHONOR OF CHEQUES:
The Negotiable Instruments Act, of 1881, expressly addresses the dishonoring of cheques
for lack of funds in Sections 138 to 142. It also describes the penalties and other legal
implications that may follow from such dishonoring. In the event that a cheque is dishonored,
these sections offer a way for the drawer to be criminally prosecuted.
SECTION 138: Dishonor of cheques for Insufficiency Of Funds:
This section makes it clear that it is illegal to write a cheque that fails because there aren’t
enough funds.
The drawer faces legal penalties if a cheque they wrote to settle a legally binding debt is
retuned unpaid because they did not have enough money or because they exceeded their bank’s
agreed upon amount.
Conditions for Action:
The cheque must be presented within 3 months after the date it was issued or while it is
valid. After learning of dishonor, the payee has 30 days to notify the drawer in writing and
demand payment.
The payee has 30 days to submit a complaint if the drawer doesn’t pay within 15 days of getting
the notice. The drawer may face imprisonment for up to 2 years, a fine up to twice the cheque
amount, or both.
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SECTION 139: Presumption in favor of holder:

The section presumes that every cheque issued by the drawer is done so to satisfy a debt
or liability unless the contrary is proved. This presumption remains in place unless the drawer
can present evidence showing that there was no debt or liability, shifting the burden of proof onto
the drawer.
This Section says that presumptions are rebuttable, which means the drawer may
disprove them. It can be a difficult duty, though, for the drawer to disprove the debt or liability’s
existence with solid proof.
This presumption is meant to guarantee the validity of cheques as a form of payment.
Stating the idea that cheques are valid financial responsibilities acts as a safeguard for the cheque
holder. Section 139, encourages people to refrain from writing cheques they don’t intend to cash
in on their financial obligations by giving the person who signs them a presumption of
legitimacy, which strengthens the trustworthiness of cheques.
SECTION 140: Defence which may not be allowed:
This section lists particular defense that are prohibited under Section 188 in situations
involving the dishonoring of a cheque. This section restricts the drawer’s ability to avoid
responsibility by arguing that they were unaware of the account’s condition.
The drawer cannot claim, as a defense, that they had no knowledge or good reason to think
that the cheque would be returned for insufficient money or because the amount was more than
what was authorized for their bank account.
Section 140 places the drawer under strict obligation, which means the drawer has to make
sure there are enough money or enough arrangements cover the cheque. Under this section, the
drawers cannot take defence as they were ignorant of the insufficiency.
SECTION 141: Offenses by companies:
Section 141 of the Negotiable Instruments Act, 1881, deals with the liability of companies
and their officers in cases where a cheque is dishonored under Section 138. It describes the
obligations of businesses and the people in control in the event that a firm commits a crime
involving cheque dishonor.
When an company violates Section 138, the individuals in charge of the company’s
operations at the time of the crime are also held accountable, in addition to the organization itself.
The corporation itself, as well as everyone directly involved in the day-to-day management of the
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accountable for the company. These people are subject to accountability and the same penalties as
those for the offense of dishonoring a cheque.
If someone has proof that they all reasonable precautions to avoid the offense or that it was
committed without their knowledge, they may be released from guilt. Nominee directors who are
nominated by regulatory or governmental bodies and do not participate in the day-to-day activities
of the company are also typically immune from liability.
Legal action may be taken jointly against the accountable parties and the company. This
provision makes sure that those in charge of a corporation cannot escape responsibility for crimes
they commit just because they were done in the firm’s name.
11. LIABILITY OF BANKER:
A Banker is a person who does banking operations such as taking deposits, making loans,
providing access to facilities, and exchanging money. In other words, a “banker” is a person who
works directly in the banking industry. A banker manages every aspect of running a bank.
Unless there are good grounds to deny payment of a customer’s cheque, a banker is
required by law to honor such cheques. If he purposefully or mistakenly dishonors a cheque, he
will be responsible for paying the customer back for any losses incurred. Section 31 of the
Negotiable Instruments Act of 1881 states that the banker must compensate the drawer for any loss
or harm resulting from his failure to honor the cheques for a valid reason. The word loss and
damage include:
a. The monetary loss suffered by the customers.
b. The loss of credit or reputation in the market.
Although there are no clear consequences for wrongful dishonor in the Negotiable Instruments Act
of 1881, Section 73 of the Indian Contract Act of 1872 establishes a framework for compensation
and permits the recovery of losses or damages resulting from contract breaches.
There was no clear provision regarding criminal liability for dishonoring cheques in the
Negotiable Instruments Act, 1881 before the passage of the Amendment Act of 1988, which
introduced Section 138 to 142. The payee or the holder of the cheque has the right to use the civil
courts to recover the amount owing and collect damages compensation if any, as a result of the
dishonored cheque and that results in non-payment of the amount.
It is not true that a drawer whose cheque was eventually returned for insufficient funds was
not subject to criminal prosecution prior to the enactment of Section 138. Before the 1988 change,
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there was no particular criminal offense under the Act that dealt with the punishment for
dishonoring cheques, hence the prosecution of the drawer depended on how the appropriate
provisions of the Indian Penal Code, 1860, which address the commission of the act of cheating,
the drawer of a worthless cheque may be held legally accountable.
The act of dishonoring a cheque cannot be considered a situation of cheating. In order to
sue a drawer under these regulations, it must be proved that, in accordance with Section 415 of the
I.P.C., he cheated the payee or the holder in due course. It is also necessary to show and effectively
prove the intention to cheat and dishonor the cheque before accusing a drawer of cheating. Prior it
was decided that the mere fact that a cheque was returned due to insufficient funds, etc., did not
establish the drawer’s criminal responsibility for dishonesty. The drawer would only be in violation
of contract as a result of such dishonor.
12.CASE LAWS:
1. KEDARNATH
V.
MADHAV PRASAD (AIR 2002 AII 236)
FACTS:
Kedarnath paid a third party with a cheque in order to complete a proper business
transaction. The payee produced the cheque for payment. Kedarnath’s bank account had enough
money to cover the cheque’s amount. There were no issues with cheque itself, nor had Kedarnath
given any orders to cease payment. The cheque was wrongfully refused by the bank even though
there were enough cash in the account. There was no legitimate explanation provided by the bank
for the dishonoring of the cheque, nor it was caused by insufficient fund.
Kedarnath’s reputation suffered as a result of the dishonor, particularly since he was a
businessman whose credibility and dependability were important. The unjust disgrace suggested
that he was insecure financially, which might have a bad effect on his commercial activities.
Kedarnath sued the bank, requesting compensation for the improper rejection of the cheque. He
contended that the disgrace had damaged his reputation and cost him financial loss.
HELD:
The Court decided in Kedarnath’s favor, finding that the bank was responsible for damages.
The court highlighted the bank’s need to honor the cheques when there are enough funds, and it
determined that the bank had violated this obligation by acting in this way.
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2.BHARAT BANK Ltd.

V.
SOHAN LAL (AIR 1967 AII 268)
FACT:
As part of a commercial deal, Sohan Lal gave a third party a cheque. The payee later
brought the cheque to the bank to be paid. There were enough money in Sohan Lal’s account to
cover the cheque. Sohan Lal had not given any orders to cease payments, nor had there been any
doubts about the legitimacy or validity of the cheque.
Even though there was enough money in the cheque, the bank refused to accept it. The
bank’s clerical error, which resulted in the cheque being designated as “refer to drawer” without
account balance verification was the cause of the dishonor. The false dishonor demonstrated that
Sohan Lal was struggling financially, which might have harmed his standing in the community
and his connections in the business world. As a businessman, Sohan Lal contended that the
disgrace resulted in damage to his reputation and possible loss of business.
Sohan Lal sued Bharat Bank Ltd., requesting monetary compensation for the cheque’s
improper dishonor. He said that he suffered financial and reputational losses as a result of the
bank’s miscalculation.
HELD:
The court held Bharat Bank Ltd. liable for wrongful dishonor, ruling that the bank had a
duty to exercise care and ensure accuracy in processing cheques. The court found that the bank’s
failure to honor the cheque, despite sufficient funds, constituted a breach of contract. It concluded
that banks have an obligation to compensate customers for any harm caused by such errors,
particularly when they lead to reputational damage or loss of business.
3.RUBBER HOUSE
V.
EXCELSIOR NEEDLE INDUSTIRES Pvt. Ltd. (1989)
FACTS:
Rubber House issued a cheque to Excelsior Needle Industries Pvt. Ltd. as part of a
routine commercial transaction. The payee presented the cheque for payment. Rubber House had
sufficient funds in its account to cover the cheque. There were no instructions to stop payment or
any issues with the cheque itself.
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Despite the availability of funds, the bank wrongfully dishonored the cheque, marking it
with “insufficient funds” or “refer to drawer.” The dishonor occurred due to an error on the bank's
part, which was not justified under the circumstances.
The wrongful dishonor implied that Rubber House was not financially stable, potentially
affecting its business relationships and reputation in the market. Rubber House argued that the
bank’s actions caused reputational harm and sought damages for the wrongful dishonor. Rubber
House brought a claim for compensatory damages against the bank, citing harm to its business
reputation and potential loss of future business opportunities.
HELD:
The Supreme Court of India held that wrongful dishonor of a cheque, particularly when it
involves a business transaction, can cause significant reputational harm to the drawer. The Court
ruled that the bank was liable for damages as it breached its contractual obligation to honor the
cheque given the sufficient funds in the account.
The Court emphasized that banks must exercise a high level of diligence and care in
handling cheques, particularly for businesses, as wrongful dishonor can have severe consequences
for the customer’s reputation and financial standing. In this case, the Court awarded compensatory
damages to Rubber House for the harm suffered due to the bank's negligence.
4.CANARA BANK
V.
CANARA SALES CORPORATION AND ORS (AIR 1987 SC 1603)
FACTS:
Canara Sales Corporation issued multiple cheques to various parties as part of its
business transactions. These cheques were subsequently presented to Canara Bank for payment
Canara Sales Corporation had adequate funds in its account to cover the cheques presented.
There were no instructions to stop payment, and the cheques were valid in all respects.
Despite the sufficient funds, Canara Bank wrongfully dishonored several cheques. The
dishonor occurred due to negligence on the part of the bank, which failed to honor the cheques as
it was contractually obligated to do. The wrongful dishonor implied that Canara Sales
Corporation was financially unstable, which could damage its business relationships and
reputation. The dishonor of the cheques caused financial losses and harmed the corporation's
standing with its business partners. Canara Sales Corporation filed a lawsuit against Canara
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Bank, seeking compensatory damages for financial loss and harm to its reputation due to the
wrongful dishonor.
HELD:
The Supreme Court of India held that Canara Bank was liable for the wrongful dishonor
of cheques. The Court recognized that the bank’s failure to honor the cheques, despite adequate
funds being available, constituted a breach of the bank's duty towards its customer. The Court
noted that the bank's actions had caused reputational harm and financial loss to Canara Sales
Corporation, and awarded damages accordingly.
The Court emphasized that banks have a responsibility to exercise due care in managing
customer accounts, particularly when processing cheques. The judgment underscored that
wrongful dishonor could have severe consequences for business entities, as it can lead to loss of
reputation and credibility, which are critical in commercial dealings.
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13.CONCLUSION:
Wrongful dishonor of cheques is a serious issue that reflects a bank’s failure to fulfill its
obligations towards its customer, resulting in potential financial and reputational harm. When a
bank dishonors a cheque without valid justification—such as insufficient funds or a legal
restriction—it not only breaches its contractual duty but may also tarnish the customer’s
credibility, especially if the customer is a business entity reliant on maintaining trust in
commercial relationships.
The banker-customer relationship is built on trust and governed by an implied contract.
This contract mandates that a bank honors its customer’s cheques, provided there are sufficient
funds and no lawful reason to refuse payment. When a cheque is wrongfully dishonored, it
implies financial instability or unreliability on the part of the customer, which can severely affect
their reputation. For businesses, this can result in loss of clientele, diminished goodwill, and
damage to their standing in the market. For individuals, wrongful dishonor could undermine their
creditworthiness and personal relationships.
Indian law, particularly the Negotiable Instruments Act, 1881, and the Indian Contract Act,
1872, provide mechanisms for addressing the wrongful dishonor of cheques. Although the
Negotiable Instruments Act focuses primarily on penalizing dishonor due to insufficient funds
under Section 138, general principles of contract law under the Indian Contract Act, specifically
Section 73, offer recourse for compensation in cases of wrongful dishonor. Section 73 enables
customers to seek damages for losses directly arising from the bank’s breach of duty. This
includes not only financial loss but also potential reputational harm if the dishonor impacts the
customer’s business or personal standing.
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REFERNCES:
1. https://www.indiacode.nic.in/bitstream/123456789/1885/1/A194910.pdf
2. https://lawtimesjournal.in/legal-remedies-for-dishonour-of-cheque/
3. https://qsstudy.com/liability-of-the-banker-in-case-of-wrongful-dishonor-of-cheque
4. Dishonor of Cheque under Section 138: Reverting back to Civil Liability
(legalserviceindia.com)
5. https://www.lawtendo.com