Banker's Negligence and Wrongful Dishonour (Sections 31 and 77)

Banks can cause loss in two quite different ways when dealing with instruments: by refusing a cheque they should have paid, and by mishandling an instrument presented to them. The first is wrongful dishonour, a breach of the duty in Section 31 owed to the customer. The second is covered, for bills payable at a bank, by Section 77. This note explains both, and the remedies available.

1. Wrongful Dishonour

Under Section 31, a bank holding sufficient funds of the drawer, properly applicable, must pay a duly presented cheque, and on default "must compensate the drawer for any loss or damage caused by such default" (Topic 33). Dishonour is wrongful where all these conditions were satisfied and the bank nevertheless refused, for example because of:

• a clerical error in posting a credit or in reading the balance;
• a misreading of the signature or the cheque;
• acting on a countermand or attachment relating to a different account or customer;
• exercising a lien or set-off where none was available.

2. Who Can Sue and for What

• Only the drawer: the duty is owed to the customer. The payee or holder has no claim against the drawee bank (Topic 17).
• Defamation: returning a cheque with words implying insolvency or dishonesty, such as "refer to drawer" or "insufficient funds", may also found a claim in defamation where the words were untrue.
• Damages for loss of credit: the main head of loss is injury to the drawer's credit and reputation. In the classic English cases, a trader could recover substantial damages without proof of special loss (Rolin v. Steward, 1854), while a non-trader was limited to nominal damages unless special damage was proved (Gibbons v. Westminster Bank, 1939). Later English authority rejected that distinction, recognising that credit matters to everyone (Kpohraror v. Woolwich Building Society, Court of Appeal, 1996).

3. Indian Remedies in Practice

• Civil suit: for damages for breach of contract and, where appropriate, defamation.
• Consumer fora: wrongful dishonour is a deficiency in service under the Consumer Protection Act, 2019, and consumer commissions regularly award compensation for it.
• Banking Ombudsman: complaints may be filed under the Reserve Bank Integrated Ombudsman Scheme, 2021 after approaching the bank.
• Defence to Section 138: a drawer whose cheque was wrongly dishonoured despite sufficient funds commits no offence, since insufficiency of funds is an ingredient of Section 138 (Topic 42). The bank's records and a corrected memo are key evidence.

4. Negligent Dealing with a Bill (Section 77)

• Which instruments: a bill of exchange accepted payable at a specified bank.
• When: after it has been duly presented there and dishonoured.
• What is negligent: keeping the bill too long, losing it, damaging it, or returning it in a way that prevents the holder from giving timely notice or protest and so protecting his rights against prior parties.
• Liability to the holder: unlike Section 31, the bank's liability here runs to the holder, who may sue for his loss.

5. Other Liabilities of Banks Under the Act

• Paying out of due course: liability to the true owner for paying a crossed cheque contrary to its crossing (Section 129; Topic 34).
• Negligent collection: loss of Section 131 protection and liability in conversion to the true owner (Topic 36).

6. Related Topics and Provisions

• Liability of drawer, drawee and maker (Topic 17)
• Banker and customer (Topic 33)
• Ingredients of the Section 138 offence (Topic 42)