Bank of Bihar Ltd vs Mahabir Lal and Ors

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 340 of 1960

Decision Date: 7 February 1963

Coram: J.R. Mudholkar, Raghubar Dayal

In this case the Court recorded that the petitioner was Bank of Bihar Limited and the respondents were Mahabir Lal and others, who carried on business under the name and style of M s Jogilal Probhu Chand. The respondents had obtained a cash‑credit facility from the Bihar Sharif Branch of the Bank. On the basis of a promissory note executed by the firm, the firm drew a cheque on the Bank and the cheque was presented for payment. The High Court found that the amount due on the cheque was not actually paid to the firm. Instead, the money was retained in the hands of a potdar, who was a servant or agent of the Bank, with the intention of paying it to another firm located in Patna. The potdar accompanied the respondents on the journey to Patna but failed to meet them at the shop of the Patna firm, which had been the place agreed for delivery of the money. Before the High Court, counsel for the appellant (the Bank) conceded that the potdar had taken the money with him. When the matter reached this Court, the appellant contended that no such concession had been made, as alleged in the High Court’s judgment, and urged that the payment to the potdar should be deemed a payment to the firm. The appellant further relied on sections 85 and 118 of the Negotiable Instruments Act, 1881, and argued that the Bank could not be held liable for the misappropriation of the money by the potdar because the potdar’s act was a criminal one.

The Court held that a statement appearing in a judgment indicating that a particular fact either happened or did not happen should not ordinarily be allowed to be challenged by a party unless both parties to the litigation agree that the statement is erroneous. The Court observed that because the money had not passed into the actual custody of the firm, nor into the custody of any person who was a servant or agent of the firm, the firm could not be held liable for the loss. To invoke the provisions of section 85 of the Negotiable Instruments Act, the Court clarified, it must be established that payment had in fact been made either to the firm itself or to a person authorized to receive the payment on behalf of the firm. The Court further held that section 118 of the Act had no bearing on the present dispute. Consequently, the Court concluded that vicarious liability could not be attached to the Bank for the criminal act of the potdar, who was not an employee of the Bank but a stranger, and that the Bank could not be held responsible for the money misappropriated by the potdar.

The Court referred to the decision in Ltd. (1925) I. L. R. 50 Bom. 118 and held that it was to be distinguished on the facts of the present case. It observed that while vicarious liability may, in appropriate circumstances, be imposed upon a master for the acts of his servant, such liability cannot extend to a stranger for the criminal acts committed by a servant of another person. The Court indicated that the principles laid down in Gopal Chandra Bhattacharjee v. The Secretary of State for India (1909) I. L. R. 36 Cal. 647 and in Cheshire v. Bailey, [1905] 1 K. 9. 237 were also distinguished.

The judgment concerned a civil appeal filed in appellate jurisdiction, identified as Civil Appeal No. 340 of 1960. The appeal arose from a judgment and decree dated 11 March 1958, rendered by the Patna High Court in Appeal No. 230 of 1950. Counsel for the appellant, identified as the Bank, were Sarjoo Prasad and R. C. Prasad. Counsel for the first respondent comprised N. C. Chatterjee, M. K. Ramamurthy, R. K. Garg, S. C. Agarwala and D. P. Singh. The decree was pronounced on 7 February 1963, and the judgment of this Court was delivered by Justice Mudholkar.

The appeal was based on a certificate granted by the Patna High Court, which permitted the defendants—referred to as defendants 1 and 2—to prosecute an appeal before the High Court, and which dismissed the claim of the plaintiff Bank, who was the appellant before this Court, seeking recovery of the sum of Rs. 35,000. According to the Bank, defendants 1 and 2 conducted business at Bihar Sharif under the firm name Messrs. Jogilal Prabhu Chand. On 17 February 1941, they executed a cash‑credit agreement with the Bank, whereby credit facilities were sanctioned up to Rs. 50,000 against cloth bales, subject to certain terms. Under that agreement, an amount of Rs. 15,000 was advanced to the firm on the same day.

Subsequently, on 28 August 1947, the firm executed a promissory note in favour of the Bihar Sharif branch of the Bank for Rs. 50,000 and approached the branch manager requesting an immediate advance of Rs. 35,000 to enable payment of the price of cloth allotted to them by M/s. Manohardas Jainarain, wholesale dealers of Patna. The Bank asserted that an arrangement was then entered into between the firm and the branch manager, under which the firm was permitted to draw on the security of the promissory note provided that it pledged the cloth bales as additional security after receiving them from the wholesalers. Acting on that agreement, the firm drew a cheque for Rs. 35,000 on 29 August 1947 in favour of the second defendant. The Bank claimed that the cheque was actually presented for payment by the branch manager and the amount was paid to the second defendant.

The Bank further alleged that on 30 August 1947 a telegram, described as “false and mischievous,” was received by the branch manager. The telegram purported to be from defendant 2, Mahabir Lal, and claimed that the Potdar of the Bank, who had accompanied the manager with the money, had not deposited the amount and could not be traced. The telegram also contained a further request that the sum of Rs. 35,000 be made immediately available to the firm. The Bank maintained that these allegations were unfounded and formed part of the controversy surrounding the claim.

On August 30, 1947 a telegram demanded that the sum of thirty‑five thousand rupees be released to the firm without delay; the manager of the Bihar Sharif branch subsequently declared on September 1, 1947 that the statements contained in that telegram were entirely false. Later, on September 9, 1947, the manager received a letter bearing the signature of Mahabir Lal in which the sender alleged that, in concert with the bank’s potdar, the manager had misappropriated the same amount of thirty‑five thousand rupees. The bank maintained that these allegations were untrue and that the present appeal arose from a suit instituted to recover the money for which the firm had drawn a cheque on August 29, 1947, a cheque that the manager had actually cashed. The defendants rejected the bank’s claim, insisting that the suit was entirely false and that it constituted a retaliatory action against a criminal complaint they had filed against the manager and the potdar of the Bihar Sharif branch, accusing them of misappropriation.

The defendants acknowledged that they had entered into arrangements with the Bihar Sharif branch for a loan of thirty‑five thousand rupees in order to obtain forty‑two bales of cloth allotted to them by M/s Manohardass Jainarain, wholesale dealers in Patna, but they asserted that they had been informed that, under bank rules, a loan could be advanced only against goods physically held in the bank’s custody. They further alleged that the manager had agreed to advance the loan of thirty‑five thousand rupees provided that four conditions were satisfied: first, that the firm execute both a loan bond and a promissory note for fifty thousand rupees as additional security; second, that the firm draw a cheque for thirty‑five thousand rupees made payable to itself; third, that the second defendant consent that, rather than receiving the cash personally, the amount be transmitted by the manager, Mr Kapur, through the bank’s potdar, Ram Bharosa Singh, for payment to M/s Manohardass Jainarain; and fourth, that after disbursing the money, the potdar would take delivery of the allotted cloth and bring it to the bank’s premises at Bihar Sharif where the goods would remain pledged until the loan was repaid. The firm therefore denied that the sum of thirty‑five thousand rupees had ever been paid or advanced to it by the manager of the Bihar Sharif branch. According to the firm’s account, a cheque was drawn at five o’clock the following morning, handed to Mr Kapur, who entered the bank’s treasury alone with the potdar, returned carrying an object wrapped in a gamchha that he tied around the potdar’s waist, and instructed the potdar to deliver the money to M/s Manohardass Jainarain, collect the goods, and bring them to the bank’s premises where they would be kept as pledge.

After the Potdar and the second defendant, together with one Mahadeo Ram, a servant of the Firm, boarded a bus for Patna, they arrived at the ekka stand in Patna. There, the Potdar instructed the second defendant to proceed to the premises of M/s Manohardass jainarain, explaining that he himself had to go to the Patna City Branch of the Bihar Bank and would follow later. The Potdar also assured the second defendant that he would bring the sum of Rs 35,000 along with him. Acting on this direction, the second defendant went to the premises of M/s Manohardass jainarain and waited for the Potdar’s arrival. When the Potdar did not appear within a reasonable period, the second defendant went to the Patna City Branch of the Bank, only to discover that the Potdar was also absent there. Subsequently, the telegram referred to in the plaint was sent to Mr Kapur and a report was filed with the police at Patna. On his return to Bihar Sharif on 30 August, the second defendant met Mr Kapur and narrated the entire episode. Mr Kapur responded that the second defendant should not worry and that he would ensure that the bales of cloth were promptly released by M/s Manohardass jainarain. Despite this assurance, no further action was taken, and the defendants consequently lodged a criminal complaint against both Mr Kapur and the Potdar. The criminal complaint ultimately failed.

The trial court, in its judgment, observed that “even if it be accepted for the sake of argument that Ram Bharosa Singh went with the money along with Mahabir Lal as alleged, according to the term of the contract he would be deemed to be a temporary servant of Mahabir Lal for that purpose, which fact is evident from the defendants’ evidence also as according to their evidence Mahabir Lal met the cost of his Nashta (breakfast) and fare of the bus.” During the appeal before the High Court, counsel for the Bank conceded that Ram Bharosa Singh, the Potdar, had indeed taken the money to Patna where he traveled together with the second defendant, a circumstance that implies that the second defendant had not actually received the amount for which the Firm had drawn a cheque. The High Court recorded the following statement: “Mr B. C. De, who appeared for the plaintiff, conceded at the outset that, in fact, Ram Bharosa Singh, Potdar, had taken the money to Patna City to pay to the Firm of Manohardass jainarain as is the case of the contesting defendants. He however, urged that, even then, the defendants would be liable for the claim of the plaintiff. He urged that Rs 35,000 had gone out of the coffers of the Bank against the cheque for Rs 35,000 issued by the defendants. The Bank was, therefore, not responsible as to who, in fact, got the money.” This passage reflects the Bank’s position that the sum of Rs 35,000 left the Bank’s funds in accordance with the cheque presented by the defendants, and consequently the Bank claimed no liability for the ultimate recipient of the money.

After the cheque had been properly presented and honored by the bank, the High Court observed that counsel Mr De had relied on certain decisions of the Calcutta and Bombay High Courts and on section 85 of the Negotiable Instruments Act. In the present appeal, the bank contended that Mr De had not actually made the concession attributed to him. The second defendant had filed an affidavit that contradicted the statement made on behalf of the bank. The Supreme Court noted that when a judgment records a factual statement, that statement may not ordinarily be challenged by a party unless both parties agree that the statement is incorrect or the court itself acknowledges an error. If the High Court had proceeded on a mistaken impression that Mr De had admitted that the money had been taken to Patna by Ram Bharosa Singh, the bank could have promptly filed an application for review before the High Court after the judgment was pronounced, or could have drawn the court’s immediate attention to the error when the judgment was read aloud. The bank did not take either step, and therefore it was untimely to now claim that the statement was wrong. The bank had previously argued, at the trial level, that even assuming the money had been taken to Patna by Ram Bharosa Singh, the suit should still have been decreed. Consequently, the Court found no reason to doubt the concession that the High Court recorded as having been made by Mr De. Accordingly, the Court declined to re‑examine the contents of the High Court’s judgment that had been quoted earlier.

The next issue concerned whether the sum of thirty‑five thousand rupees could be said to have been paid by the bank to the firm. Assuming, as admitted, that the amount of thirty‑five thousand rupees was not actually received by the firm in the sense that it was not handed directly to the second defendant who presented the cheque, the question arose whether the payment could nevertheless be deemed to have been made to the firm because it was delivered to the potdar for transport to Patna. While it was undisputed that the potdar accompanied the second defendant to Patna, the Court considered it difficult to hold that, being a servant or agent of the bank, the potdar could also be regarded as an agent appointed by the firm to carry the money. The bank did not argue that the money was handed to the potdar at the suggestion of the second defendant. Moreover, it was not normal for a potdar to carry money on behalf of a bank for payment to a party at its place of business. Thus, even if the potdar’s role was unusual, the Court could not overlook that the arrangement between the firm and Mr Kapur was itself atypical, and that Mr Kapur lacked authority to pay the sum to the firm before the goods or the documents of title were in the bank’s custody. The Court therefore concluded that the mere fact that the potdar accompanied the second defendant did not establish that the bank had, by that act, effected payment to the firm.

In this case the Court observed that, even if it were not customary for a bank to make a payment to a party at that party’s place of business, the particular arrangement that had been reached between the Firm and Mr Kapur was nevertheless highly unusual. Mr Kapur had admitted that he possessed no authority to remit the sum of thirty‑five thousand rupees to the Firm before the goods or the documents of title to those goods were placed under the custody of the Bank. The Court therefore inferred that, in order to assist the Firm without contravening the Bank’s internal rules, Mr Kapur must have intended, by handing the money over to the Potdar, to designate the Potdar as the Bank’s agent for the purpose of delivering the payment to the Firm of Manohardass Jainarain and, at the same time, of obtaining delivery of the goods and the corresponding documents of title from that Firm. The Court noted that there would have been no reason for the Potdar to accompany the second defendant to Patna and to carry the cash if he were not to act as the Bank’s agent in that transaction. The Firm had contended that the second defendant did not travel alone to the Bank on the morning of 29 August, but that he was accompanied by his servant Mahadeo, and that the presence of two people together made it unlikely that a third person would be taken along merely to carry cash. Consequently, the Court held that, because the money never passed into the actual custody of the Firm nor into the custody of any person who was a servant or agent of the Firm, the Firm could not be held liable for the amount. Regarding section 85 of the Negotiable Instruments Act, 1881 (26 of 1881) and the decision in Jagjivandas, Jamnadas v. The Nagar Central Bank Ltd., the Court clarified that, before the provisions of section 85 could be invoked in favour of the Bank, it must first be established that a payment had in fact been made to the Firm or to a person acting on its behalf. A payment to a person unrelated to the Firm, or to an agent of the Bank, does not constitute a payment to the Firm. The Court further observed that section 118 of the Negotiable Instruments Act, upon which reliance had been placed before it, bore no relevance to the facts of this case. The Bank had subsequently argued that, even assuming the money had been misappropriated by the Potdar, it could not be held responsible for his act because his act was a criminal one. To support this submission, the Bank relied on the decisions in Gopal Chandra Bhattacharjee v. The Secretary of State for India and Cheshire v. Bailey. The principle derived from those cases is that a master’s liability for the misconduct of a servant extends only to fraud committed in the course of the servant’s employment and for the master’s benefit, and does not extend to fraud committed for the servant’s own private benefit. The Court found that this principle offered no assistance to the Bank in the present circumstances.

The Court observed that the liability of a master extends only to fraudulent acts committed by his servant while the servant is acting in the course of his employment and for the benefit of the master. A master is not responsible for misconduct that the servant pursues for his own private benefit. The Court found it difficult to see how the cited decisions could assist the Bank, because the Bank was attempting to attach liability to the Firm for the amount for which it had drawn a cheque. In order for the Firm to be held liable, the amount represented by the cheque would first have to be shown to have been actually paid to the Firm. Instead, the amount had been handed over by the Bank to its Potdar with the declared intention of paying it to the firm of Manohardass Jainarain, but the Potdar did not in fact make such a payment. Assuming that the Potdar had misappropriated the money, the Court asked how the Bank could then seek to hold the Firm liable. The situation was not one in which the defendants were attempting to hold the Bank responsible for a criminal act of one of its servants; rather, the Bank was trying to impose liability on the Firm for a criminal act committed by the Bank’s own servant. The Court held that such a proposition was unsupportable in law.

The Court explained that vicarious liability may, in appropriate cases, rest on the master with respect to the acts of his servant, but it cannot rest on an unrelated third party for the criminal acts of another’s servant. The principle underlying a master’s liability is that the servant must have acted within the scope of his authority when committing the act. If the servant acted outside that scope, the master is not liable and only the servant bears responsibility. A third party who suffers damage because of the servant’s act may hold the servant liable, and may also hold the master liable if the act fell within the servant’s authorized duties. The Court pointed out that this principle could not be applied to create liability against a stranger from whom the servant could not be said to have derived any authority.

Consequently, the Court concluded that whether the money had been misappropriated by the Potdar or by the Manager, the Bank, as their employer, must bear the loss. The drawer of the cheque, namely the Firm, had not received any portion of the money from the Bank and therefore could not be compelled to make good the amount to the Bank. For these reasons, the Court affirmed the decree appealed from, dismissed the appeal with costs, and ordered that the appeal be dismissed.