The aim of this article is to analyse the liability of the bankers under the provisions of Information Technology Act, 2000(IT Act) and the Negotiable Instruments Act, 1881 (NIA). The advent of information technology (IT) has also given rise to certain additional responsibilities, which the bank using the Internet banking facility may face in the future. These liabilities are in addition to the traditional liability of the bankers to act in good-faith and without negligence.

I. INTRODUCTION

A sound and effective banking system is the backbone of an economy. The economy of a country can function smoothly and without many hassles if the banking system backing it is not only flexible but also capable of meeting the new challenges posed by the technology and other external as well as internal factors. The importance and role of information technology for achieving this benign objective cannot be undermined. There is an urgent need for not only technology upgradation but also its integration with the general way of functioning of banks to give them a rim in respect of services provided to the customers, better housekeeping, optimising the use of funds and building up of management information system for decision making. The technology has the potential to change methods of marketing, advertising, designing, pricing and distributing financial products and services and cost savings in the form of an electronic, self-service product-delivery channel. The technology holds the key to the future success of Indian Banks. Thus, “Internet Banking”[1] is the need of the hour, which cannot be lost sight of except at the cost of elimination from the competition. The existence of Internet banking also becomes inevitable due to the standards required to be matched at the international level. Thus, the domestic as well as the international standards mandates the adoption of Internet banking at the earliest possible moment.

II. INTERNET BANKING REQUIREMENTS

The information technology in itself is not a panacea and it has to be effectively utilized. The concept of Internet banking cannot work unless and until we have a centralised body or institution, which can formulate guidelines, regulate, and monitor effectively the functioning of Internet banking. The most important requirement for the successful working of Internet banking is the adoption of the best security methods. This presupposes the existence of a uniform and the best available technological devices and methods to protect electronic banking transactions. In order for computerisation to take care of the emerging needs, the recommendations of the Committee on Technology Upgradation in the Banking Sector (1999) may be considered. These are:

(1) Need for standardisation of hardware, operating systems, system software, and application software to facilitate interconnectivity of systems across branches

(2) Need for high levels of security

(3) Communication and networking – use of networks which would facilitate centralised databases and distributed processing

(4) Need for a technology plan with periodical upgradation

(5) Need for business process re-engineering

(6) Need to address the issue of human relations in a computerised environment

(7) Need for sharing of technology experiences

(8) Need of Payment systems which use information technology tools. The Reserve Bank of India has played a lead role in this sphere of activity - with the introduction of cheque clearing using the MICR (Magnetic Ink Character Recognition) technology in the late eighties.

The Reserve Bank of India constituted a “Working Group on Internet Banking” which focused on three major areas of I-banking, i.e., (i) technology and security issues, (ii) legal issues and (iii) regulatory and supervisory issues. These areas are selected in such a manner that the problems faced by banks and their customers can be minimized to the maximum possible extent. The Group recommended certain guidelines for the smooth and proper working of Internet banking. These centralised guidelines would bring uniformity in the selection and adoption of security measures, with special emphasis on a uniform procedure. The security of Internet banking transactions would not be jeoparadised if these security mechanisms are adopted. This is because the success of Internet banking ultimately depends upon a uniform, secure and safe technological base, with the most advanced features. The RBI has accepted the recommendations of the Group, to be implemented in a phased manner.

III. INTERNET BANKING AND IT ACT, 2000

The Internet banking cannot operate properly unless it is in conformity with the IT Act. 2000. A holistic approach should be adopted, the purpose of which should be to bring uniformity and harmony between the provisions of the Act on the one hand and the guidelines issued by the RBI on the other. It must be appreciated that in case of conflict between the provisions of the Act and the guidelines, the former would prevail. The following provisions of the Act have a direct bearing on the functioning of Internet banking in India:

(1) The authentication of electronic records for the purposes of Internet banking should be in accordance with the provisions of the Act[2],

(2) The electronic records duly maintained for the purposes of Internet banking would be recognized as legally valid and admissible[3],

(3) The digital signature affixed in a proper manner would satisfy the requirement of signing of a document for the purposes of Internet banking[4],

(4) Any kind of paper work, which is required to be filed in the government offices or its agencies, would be deemed to be duly filed if it is filed in the prescribed electronic form[5]. Thus the paper formalities can be effectively substituted with electronic filings for Internet banking purposes,

(5) The banking business requires certain documents or records to be retained for a fixed period. In Internet banking such documents or records can be retained in an electronic form[6],

(6) The rules, regulations, order, bye-law, notification or any other matter pertaining to Internet banking can be published in the Official Gazette or Electronic Gazette, as the case may be[7],

(7) The Internet banking presupposes the existence of attribution and certainty. If any electronic record is sent by the originator himself, by his agent, or by an information system programmed by or on behalf of the originator to operate automatically, then the electronic shall be attributed to the originator[8],

(8) The requirement of acknowledgement of documents sent for the purposes of Internet banking is adequately safeguarded by the Act[9],

(9) The Internet banking may require to determine the time and place of dispatch and receipt of electronic records. This problem can be easily solved by applying the provisions of the Act[10],
(10) The Internet banking would require the secured electronic records for its proper working. Where any security procedure has been applied to an electronic record at a specific point of time, then such record shall be deemed to be a secure electronic record from such point of time to the time of verification[11],

(11) A digital signature meeting the specified requirements would be deemed to be a secured digital signature for carrying out Internet banking transactions[12],

(12) The Central Government has the power to prescribe the security procedures to give effect to the provisions of the Act, having regard to the commercial circumstances prevailing at the time when the procedure was used[13]. Thus, the Central Government can specify safety measures and security procedures for Internet banking under the provisions of the Act.

(13) The Controller of Certifying Authorities (CCA) can issues licences to the Certification Authority under the IT Act, 2000[14]. The Certifying Authority is assisted by the Registration Authority, which is created at the level of the organisations subscribing to the services of the Certifying Authority .The Reserve Bank would function as a Registration Authority (RA) for the proper functioning of Internet banking.

Thus, the information Technology Act, 2000 has laid down the basic legal framework conducive to the Internet banking in India. In case of any doubt or legal problem, the provisions of the Act can be safely relied upon. It must be noted that the object of the Act is to facilitate e-commerce and e-governance[15], which are essential for the functioning of Internet banking in India. There may be challenges of Internet banking which cannot be tackled appropriately with the existing legal framework. To meet such challenge appropriate amendments can be made either to the Act itself or a separate new law dealing specifically with the Internet banking can be enacted.

IV. BANKER’S LIABILITY FOR NEGLIGENCE

A banker, whether traditional one or one dealing in Internet banking, can be held liable for the wrongful payment of money on a forged or illegal cheque. It must be noted that, section 131 of the Negotiable Instruments Act provides that a banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment. It is thus to be seen that a banker, who encashes a cheque, in respect of which his client had no title, would become liable in conversion or for money had and received. However, Section 131 of the Negotiable Instruments Act protects the banker, provided he has received payment in good faith and without negligence of a cheque crossed generally or specially. Further, explanation II of section 131 provides that it shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care. Thus, both the traditional bankers and the banks dealing in Internet banking are liable for the loss of money, if they did not exercise reasonable care and caution while dealing with paper cheques and truncated electronic cheques.

The principles governing the liability of a collecting banker have also been extracted in various judgments from time to time. They are as follows:

(1) As a general rule the collecting banker shall be exposed to his usual liability under common law for conversion or for money had and received, as against the 'true owner' of a cheque or a draft, in the event the customer from whom he collects the cheque or draft has not title or a defective title.

(2) The banker, however, may claim protection from such normal liability provided he fulfils strictly the conditions laid down in S. 131 of the Act and one of those conditions is that he must have received the payment in good faith and without negligence.

(3) It is the banker seeking protection who has on his shoulders the onus of proving that he acted in good faith and without negligence.

(4) The standard of care to be exercised by the collecting banker to escape the charge of negligence depends upon the general practice of bankers which may go on changing from time to time with the enormous spread of banking activities and cases decided a few decades ago may not probably offer an unfailing guidance in determining the question about negligence today.

(5) Negligence is a question of fact and what is relevant in determining the liability of a collecting banker is not his negligence in opening the account of the customer but negligence in the collection of the relevant cheque unless, of course, the opening of the account and depositing of the cheque in question therein from part and parcel of one scheme as where the account is opened with the cheque in question or deposited therein so soon after the opening of the account as to lead to an inference that the depositing the cheque and opening the account are interconnected moves in a integrated plan.

(6) Negligence in opening the account such as failure to fulfill the procedure for opening an account which is prescribed by the bank itself or opening an account of an unknown person or non-existing person or with dubious introduction may lead to a cogent, though not conclusive, proof of negligence particularly if the cheque in question has been deposited in the account soon after the opening thereof.

(7) The standard of care expected from a banker in collecting the cheque does not require him to subject the cheque to a minute and microscopic examination but disregarding the circumstances about the cheque which on the face of it give rise to a suspicion may amount to negligence on the part of the collecting banker.

(8) The question of good faith and negligence is to be judged from the stand point of the true owner towards whom the banker owes no contractual duty but the statutory duty which is created by this section and it is a price which the banker pays for seeking protection, under the statute, from the otherwise larger liability he would be exposed to under common law.

(9) Allegation of contributory negligence against the paying banker could provide no defence for a collecting banker who has not collected the amount in good faith and without negligence."

These principles are relevant while deciding bankers’ liability.

V. JUDICIAL PRECEDENTS

A “comparative analysis” of the judicial precedents of English Legal System and Indian Legal System would be helpful in this regard.

In Turner v London and Provincial Bank[16], evidence was admitted as proof of negligence, that the customer had given a reference on opening the account and that this was not followed up.

In Ladbroke and Co v Todd[17], the plaintiff drew a cheque and sent it to the payee by post. The letter was stolen and the thief took it to the defendant, a banker, and used it for the purpose of opening an account for the purpose of which he forged the payee's endorsement. The defendant accepted believing him to be the payee. He was not introduced to the bank and no references were obtained. The defendant opened the account and the cheque was specially cleared at the request of the thief, and he drew out the proceeds on the next day. On the discovery of the fraud the plaintiff brought an action against the defendant for conversion. One of the main questions raised was whether the account having been opened by payment in all the cheques to be collected the defendant could be properly regarded as having received payment for a customer. It was held that as account was already opened when the cheque was collected, payment had been received for a customer. The drawer thereupon sent another cheque to the real payee and took an assignment of his rights in the stolen cheque and, as holders of the cheque or alternatively as assignees, brought an action against the bank to recover the proceeds collected by the bank as money had and received to their use. Evidence was given that it was the general practice of bankers to obtain a satisfactory introduction or reference. It was held that the banker had acted in good faith, but was guilty of negligence in not taking reasonable precautions to safeguard the interests of the true owner of the cheque and that therefore he had put himself outside the protection of Section 82 of the Bills of Exchange Act, 1882[18]. Bailhache, J. also said that the banker would have been entitled to the protection of the section as having received payment for a customer, but had lost it owing to his want of due care. It was also held that the relation of banker and customer began as soon as the first cheque was handed in to the banker for collection, and not when it was paid.

It was held in Commissioners of Taxation v. English, Scottish and Australian Bank[19] that negligence in collection is not a question of negligence in opening an account, though the circumstances connected with the opening of an account may shed light on the question whether there was negligence in collecting a cheque.

In the case of Brahma v Chartered Bank[20], it has been held that the onus of proving "good faith" and "absence of negligence" is on the banker claiming protection under Section 131 of the Negotiable Instruments Act. It is held that in deciding whether a collecting banker has or has not been negligent it becomes necessary to take into consideration many factors such as the customer, the account and the surrounding circumstances. It is held that if the cheque is of a large amount, then the bank has to be more careful unless the customer was a customer of long standing, good repute and with great personal credit and was one who regularly deposited and withdrew cheques of large amounts.

The Supreme Court has also considered this question in the case of Indian Overseas Bank v Industrial Chain Concern[21]. In this case, on the basis of evidence lead by the bank the bank was exonerated. The Court observed that if the banker was negligent in following up the references given at opening of account and subsequently cheques etc. are collected for the customer paid into that account and those happened to be of someone else the Bank may be liable for conversion, unless protected by law. In the instant case, S having been known to the Manager who gave the introduction, there was no violation of any instruction or rules.

In the case of Syndicate Bank v United Commercial Bank[22], it was held that the Appellant bank had to prove that it had acted in good faith and without negligence. It was held that the fact that the customer had just opened the account and had only one transaction with the bank, namely the encashment of the cheque, showed that the bank had not acted in good faith and without negligence.

In the case of Indian Overseas Bank v Bank of Madura Ltd[23], the receiving banker was held guilty of negligence and lack of good faith inasmuch as it had allowed the opening of an account with a small amount and shortly thereafter, i.e. within 9 days allowed withdrawal of a sum of Rs. 9,500/-. It was held that the opening of the account, the presentation of the draft and withdrawal of the amount were part of one integral scheme. The fact that the person who introduced the account holder had not been examined in the suit was held against the Bank.

In Kerala State Co-operative Marketing Federation v State Bank of India[24] the transaction of opening of the account, depositing the exact amount for being entitled to receive a cheque book, depositing of the cheque of Rs. 1,00,000/- and the withdrawal of the sum of Rs. 50,000/- were all held part of the same transaction by the Supreme Court. All these took place in close proximity to each other. Thereafter even though initially the account was opened with only Rs. 20/- the exact amount of Rs. 80/- was deposited for purposes of receipt of a cheque book. The bank does not seem to have put on its guard, even when a cheque for a very large amount i.e. Rs. 1,00,000/- was deposited soon thereafter. Even after it was found out that that a cheque had been forged and stop payment notice had been issued, no enquiry was made by the Bank with the introducer. The Supreme Court held the bank liable for negligence.

VI.CONCLUSION

The adoption of Internet banking in India will have its own advantages to both the banks and the ultimate customers. The use of information technology will not only reduce the costs of operation but also would be effective, easy to maintain, speedier and highly competitive. The banks cannot remain standoffish from this concept of Internet banking, and they should bring apposite changes to meet the necessities and challenges of Internet banking. The challenges posed by the Internet banking are mostly of procedural nature, which can be easily counterbalanced by adopting suitable technological and security measures. The domestic standards of banking have to be in conformity with the well-known international standards and in the near future international dealings from India would be a reality, which are presently not liberal enough. No system or institution can hope to benchmark it against international standards without making optimal use of technology. There can be no doubt about the enormous potential and emancipated opportunities offered by advances in technology. However, there are pre-requisites and preparations, which have to be made before the full benefits of the technology can be harvested.


© Praveen Dalal. All rights reserved with the author.
* Arbitrator, Consultant and Advocate, Delhi High Court,
Contact at:  pd37@rediffmail.com/  perry4law@yahoo.com
Telephone No: 9899169611.

[1] Internet Banking should not be confused with e- banking which merely uses computers for selective purposes only (like e-fund transfer). Internet banking is a wider term, which includes e-banking.
[2] Section 3
[3] Section 4
[4] Section 5
[5] Section 6
[6] Section 7
[7] Section 8
[8] Section 11
[9] Section 12
[10] Section 13
[11] Section 14
[12] Section 15
[13] Section 16
[14] Section 21
[15] Refer Statement of Objects and Reasons
[16] (1903) XXIV Journal of Institute of Bankers 220.
[17] (1914) 30 TLR 433: (1914) 111 LT 43: 19 Com Cas 256
[18] Section 131 of the NIA, 1881 is almost on similar lines.
[19] (1920 AC 683).
[20] AIR 1956 Calcutta 399.
[21] (1990) 1 SCC 484.
[22] (1991) 70 Company Cases 748.
[23] (1992) Vol. 75 Company Cases 481.
[24] (2004) 2 SCC 425.