Supreme Court rules bank not liable for miscredited drafts in consumer case: City Union Bank vs. R. Chandramohan (27 March 2023)

Date of the Judgment: 27 March 2023
Citation: 2023 INSC 300
Judges: Justice Ajay Rastogi and Justice Bela M. Trivedi
Can a bank be held liable for deficiency in service when a demand draft is credited to an account with a similar name, but not the exact name of the intended recipient? The Supreme Court of India recently addressed this question, overturning the decisions of the National Consumer Disputes Redressal Commission and the State Consumer Disputes Redressal Commission. The court held that the bank was not deficient in service, as there was no wilful fault, imperfection, or shortcoming in their actions. The judgment was authored by Justice Bela M. Trivedi.

Case Background

The case revolves around a complaint filed by Mr. R. Chandramohan, Managing Director of “D-Cube Constructions (P) Ltd.”, against City Union Bank. Mr. Chandramohan alleged that two demand drafts, intended for his company’s account, were wrongly credited to a different account with a similar name.

Mr. Chandramohan’s company, “D-Cube Constructions (P) Ltd.”, had a current account (No. 3600) with City Union Bank. In 1996, the company was to receive two demand drafts totaling Rs. 8 lakhs from an NRI customer, Mr. Ravindra. These drafts, bearing numbers 166570 (dated 28.06.1996 for Rs. 5 lakhs) and 177923 (dated 18.11.1996 for Rs. 3 lakhs), were made out to “D-Cube Construction,” not “D-Cube Constructions (P) Ltd.”.

It was discovered that these drafts were not credited to the company’s account (No. 3600). Instead, they were credited to a separate account (No. 4160) opened in the name of “D-Cube Construction” by Mr. R. Thulasiram, a co-director of “D-Cube Constructions (P) Ltd.”, who claimed to be the proprietor of a proprietary concern with the same name. This separate account was opened on 15.02.1997. Mr. Chandramohan alleged that the bank was negligent and colluded with Mr. Thulasiram in this miscrediting of the drafts.

Timeline

Course of Proceedings

Mr. Chandramohan filed a complaint with the State Consumer Disputes Redressal Commission, Chennai (State Commission). The State Commission ruled in favor of Mr. Chandramohan, directing the bank to pay Rs. 8 lakhs along with Rs. 1 lakh as compensation. The bank appealed this decision to the National Consumer Disputes Redressal Commission, Circuit Bench at Chennai (National Commission). The National Commission dismissed the bank’s appeal, upholding the State Commission’s order. The bank then appealed to the Supreme Court of India.

Legal Framework

The Supreme Court considered the definition of “deficiency in service” under Section 2(1)(g) of the Consumer Protection Act, 1986.

Section 2(1)(g) of the Consumer Protection Act, 1986 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 Court also referred to Section 2(i)(o) of the Consumer Protection Act, 1986, which defines “service” to include banking services.

Section 2(i)(o) of the Consumer Protection Act, 1986 defines “service” as:
“service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, board or lodging or both, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service.”

Arguments

Arguments by the Appellants (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. They contended that the bank had not committed any fault, imperfection, or shortcoming in its performance.

• The bank stated that the demand drafts were issued in the name of “D-Cube Construction,” and not “D-Cube Constructions (P) Ltd.” Therefore, they were rightly credited to the account of “D-Cube Construction.”

• The bank submitted that the account was opened by Mr. R. Thulasiram, a co-director of “D-Cube Constructions (P) Ltd.”, as the proprietor of a proprietary concern, based on a letter from “D-Cube Constructions (P) Ltd.” giving “no objection” for opening the account.

• The bank argued that any dispute arising from the actions of Mr. Thulasiram, a co-director, would amount to a fraud or tortious act, which cannot be decided by the Consumer Forums.

• The bank relied on the decisions in 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 before the State Commission.

Arguments by the Respondent (R. Chandramohan):

• The respondent argued that the bank was liable for deficiency in service and vicariously liable for the actions of its employees.

• The respondent submitted that the bank should not have opened an account with a similar name to his company, as per the General Banking Principles and Guidelines laid down by the Reserve Bank of India (RBI).

• The respondent contended that without the involvement of the bank’s officers, Mr. R. Thulasiram could not have encashed the drafts by opening a new account with a similar name.

• The respondent relied on the decisions in 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 argue that the bank was deficient in service.

Innovativeness of the Argument: The bank’s argument that the Consumer Forums lack jurisdiction over cases involving fraud or tortious acts was innovative, as it sought to limit the scope of the Consumer Protection Act.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the Commission/Forum under the Consumer Protection Act, 1986 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

The following table demonstrates as to how the Court decided the issues

Authorities

Cases Relied Upon by the Court:

• Ravneet Singh Bagga vs. KLM Royal Dutch Airlines and Another [(2000) 1 SCC 66]: The Supreme Court of India held that deficiency in service cannot be alleged without attributing fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance. The burden of proving deficiency in service is on the complainant.
• Branch Manager, Indigo Airlines Kolkata and Another Vs. Kalpana Rani Debbarma and Others [(2020) 9 SCC 424]: The Supreme Court of India followed the ratio of Ravneet Singh Bagga (supra) and held that the deficiency in service has to be distinguished from the tortious acts.
• Oriental Insurance Co. Ltd. vs. Munimahesh Patel [(2006) 7 SCC 655]: The Supreme Court of India held that the proceedings before the Commission are essentially summary in nature and the issues which involve disputed factual questions, should not be adjudicated by the Commission.

Legal Provisions Considered by the Court:

• Section 2(1)(g) of the Consumer Protection Act, 1986: 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.
• Section 2(i)(o) of the Consumer Protection Act, 1986: Defines “service” to include banking services.

Judgment

How each authority was viewed by the Court?

• The Court relied on Ravneet Singh Bagga vs. KLM Royal Dutch Airlines and Another [(2000) 1 SCC 66]* to emphasize that deficiency in service cannot be alleged without attributing fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance, and that the burden of proving deficiency in service is on the complainant.
• The Court followed the ratio of Branch Manager, Indigo Airlines Kolkata and Another Vs. Kalpana Rani Debbarma and Others [(2020) 9 SCC 424]* to distinguish between deficiency in service and tortious acts.
• The Court relied on Oriental Insurance Co. Ltd. vs. Munimahesh Patel [(2006) 7 SCC 655]* to hold that the proceedings before the Commission are essentially summary in nature and the issues which involve disputed factual questions, should not be adjudicated by the Commission.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the lack of evidence of willful fault or negligence on the part of the bank. The Court emphasized that the bank had acted on the basis of the documents presented to them, and that the dispute was more of a civil or tortious nature, rather than a deficiency in service. The Court also considered the fact that the drafts were made out to “D-Cube Construction,” and not “D-Cube Constructions (P) Ltd.”, which justified the bank’s action of crediting the drafts into the account of “D-Cube Construction”.

The Court’s reasoning was based on the following points:

The Court considered the argument that the bank should not have opened an account with a similar name. However, it noted that the bank had received a letter from “D-Cube Constructions (P) Ltd.” giving “no objection” for opening the current account in the name of “D-Cube Construction”. The Court also noted that the drafts were in the name of “D-Cube Construction” and not “D-Cube Constructions (P) Ltd.”.

The Court rejected the argument that the bank was vicariously liable for its employees’ actions, stating that the bank’s employees had acted bona fide and followed due procedure.

The Court found that the proceedings before the Commission are summary in nature and not suitable for deciding complex factual disputes or allegations of fraud.

The Supreme Court stated:
“Under the circumstances, when the Current Account No. 4160 was opened by R. Thulasiram as the proprietor of “D-Cube Construction”, relying upon the letter dated 15.02.1997 written on behalf of the “D-Cube Constructions (P) Ltd.”, and when the disputed two drafts in question which were in the name of “D-Cube Construction”, were credited in the account of “D-Cube Construction”, it could not be said that there was any willful default or imperfection or short coming so as to term it as the deficiency in service on the part of the appellant-bank within the meaning of Section 2(g) of the said Act.”

The Supreme Court also 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 “deficiency in service”, as well settled, has to be distinguished from the criminal acts or tortious acts.”

The Supreme Court also stated:
“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, and is accordingly dismissed.”

There were no minority opinions in the judgment.

Key Takeaways

• Banks are not automatically liable for deficiency in service if they act on the basis of documents presented to them and follow due procedure.
• Consumer forums are not the appropriate venue for resolving complex factual disputes or allegations of fraud or tortious acts.
• The burden of proving deficiency in service lies on the complainant.
• Banks should exercise caution while opening accounts with similar names, even if there is a “no objection” letter from a related entity.

Directions

The Supreme Court quashed and set aside the orders passed by the State Commission and the National Commission, and dismissed the complaint filed by Mr. Chandramohan.

Development of Law

The ratio decidendi of this case is that a bank cannot be held liable for deficiency in service if it acts bona fide and follows due procedure, particularly when dealing with demand drafts issued in a name similar to, but not exactly the same as, the intended recipient. This judgment clarifies that consumer forums are not intended to resolve complex factual disputes or allegations of fraud, and provides guidance on the scope of “deficiency in service” under the Consumer Protection Act, 1986. This case reinforces the principle established in Ravneet Singh Bagga vs. KLM Royal Dutch Airlines and Another [(2000) 1 SCC 66], that the burden of proving deficiency in service lies on the complainant.

Conclusion

The Supreme Court’s decision in City Union Bank vs. R. Chandramohan clarifies the scope of “deficiency in service” under the Consumer Protection Act, 1986, and the limitations of the jurisdiction of Consumer Forums. The Court held that the bank was not liable for the miscrediting of the demand drafts, as there was no willful fault or negligence on its part. This judgment reinforces the principle that Consumer Forums are not the appropriate venue for resolving complex factual disputes or allegations of fraud or tortious acts.