Supreme Court overturns Consumer Commission order in bank service deficiency case: City Union Bank vs. R. Chandramohan (2023)

Date of the Judgment: 27 March 2023
Citation: [Not provided in the source]
Judges: Hon’ble Justices Ajay Rastogi and Bela M. Trivedi
Can a bank be held liable for deficiency in service when a co-director of a company fraudulently diverts funds? The Supreme Court of India recently addressed this question, overturning the National Consumer Disputes Redressal Commission’s order. This case revolves around a dispute where a bank was accused of negligence for crediting funds into an account with a similar name, leading to a claim of deficiency in service. The judgment was delivered by a two-judge bench comprising Justices Ajay Rastogi and Bela M. Trivedi, with Justice Bela M. Trivedi authoring the opinion.

Case Background

The case involves Mr. R. Chandramohan, the Managing Director of “D-Cube Constructions (P) Ltd.”, who filed a complaint against City Union Bank Ltd. The complaint arose because two demand drafts, totaling Rs. 8 lakhs, intended for his company, were not credited to the company’s account. Mr. Chandramohan had a current account (No. 3600) with the bank. The drafts were issued by an NRI, Ravindra, for the purchase of three flats in the company’s projects.

The drafts, bearing No. 166570 dated 28.06.1996 for Rs. 5 lakhs and No. 177923 dated 18.11.1996 for Rs. 3 lakhs, were made out in the name of “D-Cube Construction,” not “D-Cube Constructions (P) Ltd.” It was discovered that these drafts were credited to a separate account (No. 4160) opened in the name of “D-Cube Construction” by R. Thulasiram, another director of “D-Cube Constructions (P) Ltd.” This separate account was opened on 15.02.1997. Mr. Chandramohan alleged that the bank was negligent and colluded with R. Thulasiram in this diversion of funds.

Timeline

Course of Proceedings

The State Consumer Disputes Redressal Commission, Chennai, ruled in favor of Mr. Chandramohan, directing the bank to repay Rs. 8 lakhs along with compensation for mental agony. The National Consumer Disputes Redressal Commission upheld this decision. The bank then appealed to the Supreme Court.

Legal Framework

The case hinges on the interpretation of “deficiency in service” under Section 2(1)(g) of the Consumer Protection Act, 1986. This section defines deficiency as:

“any fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance which is required to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service”.

The Supreme Court also considered the nature of proceedings under the Consumer Protection Act, emphasizing that they are summary in nature and not suitable for resolving complex factual disputes.

Arguments

Appellants’ Arguments (City Union Bank):

• The bank argued that there was no deficiency in service as defined under Section 2(1)(g) of the Consumer Protection Act, 1986.
• The bank contended that the drafts were in the name of “D-Cube Construction,” and they were credited to an account with the same name.
• The bank stated that R. Thulasiram, a co-director of “D-Cube Constructions (P) Ltd.”, had opened the account in the name of “D-Cube Construction” as a proprietary concern and had given a letter stating that the company had no objection for opening the account.
• The bank argued that if any fraud was committed by the co-director, it would not fall under the jurisdiction of the Consumer Commission.
• The bank relied on Ravneet Singh Bagga vs. KLM Royal Dutch Airlines and Another [(2000) 1 SCC 66] and Branch Manager, Indigo Airlines Kolkata and Another Vs. Kalpana Rani Debbarma and Others [(2020) 9 SCC 424] to argue that the complaint was not maintainable.

Respondent’s Arguments (R. Chandramohan):

• The respondent argued that the bank was vicariously liable for the acts of its employees.
• The respondent stated that the bank should not have opened an account with a similar name to the company of which the complainant was the Managing Director.
• The respondent argued that without the involvement of bank officers, R. Thulasiram could not have encashed the drafts.
• The respondent relied on Kerala State Cooperative Marketing Federation Vs. State Bank of India and Others [(2004) 2 SCC 425] and Indian Overseas Bank vs. Industrial Chain Concern [(1990) 1 SCC 484] to support his claim of deficiency in service.

Innovativeness of the argument: The respondent argued that the bank should not have opened an account with a similar name to the company of which the complainant was the Managing Director, which was a novel argument in the context of banking practices.

Issues Framed by the Supreme Court

The key issue before the Supreme Court was:

1. Whether the Commission/Forum under the Consumer Protection Act could have entertained the complaint involving highly disputed questions of facts or involving allegations of tortious acts, the proceedings before the Commission/Forum being summary in nature?

Treatment of the Issue by the Court

Authorities

The court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The Supreme Court followed the ratio in Ravneet Singh Bagga vs. KLM Royal Dutch Airlines and Another [(2000) 1 SCC 66]*, which defined “deficiency in service” and stated that the burden of proving deficiency in service is on the complainant.
• The Supreme Court followed the ratio in Branch Manager, Indigo Airlines Kolkata and Another Vs. Kalpana Rani Debbarma and Others [(2020) 9 SCC 424]*, which followed the ratio of Ravneet Singh Bagga.
• The Supreme Court distinguished the facts of the case from Kerala State Cooperative Marketing Federation Vs. State Bank of India and Others [(2004) 2 SCC 425]* and Indian Overseas Bank vs. Industrial Chain Concern [(1990) 1 SCC 484]*.
• The Supreme Court cited Oriental Insurance Co. Ltd. vs. Munimahesh Patel [(2006) 7 SCC 655]* to emphasize that the proceedings before the Commission are summary in nature.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that there was no evidence of willful fault, imperfection, or shortcoming on the part of the bank. The court emphasized that the bank acted based on the name on the demand drafts and the no-objection letter provided by “D-Cube Constructions (P) Ltd.” The Court also highlighted that the proceedings before the Consumer Commission are summary in nature and not suitable for resolving complex factual disputes or allegations of fraud.

Logical Reasoning:

The court reasoned that the bank had acted in good faith and followed due procedure. The court stated that the “deficiency in service” has to be distinguished from the criminal acts or tortious acts. The court also stated that there could not be any presumption with regard to the wilful fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance in service, as contemplated in Section 2(1)(g) of the Act. The burden of proving the deficiency in service would always be upon the person alleging it.

The Supreme Court observed, “The deficiency in service cannot be alleged without attributing fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance which is required to be performed by a person in pursuance of a contract or otherwise in relation to any service.”

The Supreme Court further stated, “The proceedings before the Commission being summary in nature, the complaints involving highly disputed questions of facts or the cases involving tortious acts or criminality like fraud or cheating, could not be decided by the Forum/Commission under the said Act.”

The Court also noted, “In the instant case, respondent-complainant having miserably failed to discharge his burden to prove that there was a deficiency in service on the part of the employees of the appellants-bank within the meaning of Section 2(1)(g) of the Act, his complaint deserved to be dismissed.”

There was no minority opinion in this case.

Key Takeaways

• Banks are not automatically liable for deficiency in service if they act in good faith and follow due procedure.
• Consumer Commissions are not the appropriate forum for resolving complex factual disputes or allegations of fraud.
• The burden of proving deficiency in service lies with the complainant.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that the Consumer Commission cannot entertain complaints involving highly disputed questions of facts or allegations of tortious acts. This judgment reinforces the principle that the burden of proving deficiency in service lies with the complainant and that the proceedings before the Consumer Commission are summary in nature. This judgment clarifies the scope of “deficiency in service” under the Consumer Protection Act, 1986, and limits the jurisdiction of the Consumer Commissions in cases involving complex factual disputes or allegations of fraud.

Conclusion

The Supreme Court allowed the appeal of City Union Bank, setting aside the orders of the State Commission and the National Commission. The court held that the bank was not deficient in service, as it had acted in good faith and followed due procedure. The judgment emphasizes that Consumer Commissions are not the appropriate forum for resolving complex factual disputes or allegations of fraud.

Category

Parent Category: Consumer Protection Act, 1986

Child Categories:

• Section 2(1)(g), Consumer Protection Act, 1986
• Deficiency in Service
• Banking Law
• Consumer Dispute

FAQ

Q: What is “deficiency in service” under the Consumer Protection Act?
A: It refers to any fault, imperfection, shortcoming, or inadequacy in the quality, nature, and manner of performance of a service.

Q: Can I file a case in the Consumer Commission for any kind of service issue?
A: Not always. The Consumer Commission is not suitable for cases involving complex factual disputes or allegations of fraud.

Q: What should I do if I think a bank has wrongly debited money from my account?
A: First, approach the bank with a written complaint. If you are not satisfied with their response, you can approach the Banking Ombudsman or a civil court, depending on the complexity of the case.

Q: What does it mean when the Supreme Court says that the proceedings before the Consumer Commission are summary in nature?
A: It means that the Consumer Commission follows a simplified procedure to resolve disputes quickly. It is not meant for resolving complex cases involving detailed evidence and cross-examination.

Q: What is the significance of this judgment for banking customers?
A: This judgment clarifies that banks are not automatically liable for every mistake or fraud. If they act in good faith and follow due procedure, they may not be held liable for deficiency in service.