UNITED BANK LIMITED Versus TRUSTEES OF THE PORT OF KARACHI

1. SYED HAIDER ALI PIRZADA, J.‑‑‑ This appeal under section 3 of the Law Reforms (Amendment) Ordinance, 1972 (hereinafter referred to as the `Ordinance') is directed against the judgment and decree dated 31‑5‑1989 passed in Suit No. 563 of 1975 decreeing the suit of the respondents.

2. The facts leading to the filing of this High Court Appeal are that on 30‑12‑1973 the respondents had invited short notice tender for the construction of 64 H. Type Quarters for Custom Department near Timber Pond, Keamari, Karachi. As per terms, of the Tender Notice, tenderers were required either to deposit in cash or by Pay Order an amount equivalent to 4 per cent of the estimated costs of Rs.19,47,000 as earnest money i.e. Rs.77,880. On 10‑1‑1974 M/s. Haji Moosa and Sons, Karachi submitted a tender for a sum of Rs.23,13,493.35 which was valid up to 9‑4‑1974. Alongwith the tender, the said firm, in lieu of cash amount of earnest money, is alleged to have deposited a Pay Order for Rs.77,880 issued by Commerce Bank Ltd., Siddiq Wahab Road, Timber Market Branch, Karachi (which bank stood merged with appellants Bank with effect from 1‑1‑1975) in favour of Chief Engineer, Karachi Port Trust, Karachi. Although the tender submitted by M/s. Haji Moosa and Sons was valid up to 9‑4‑1974, it is alleged that the said firm in contravention of clause 8 of the tender form withdrew its tender vide its letter dated 13‑3‑1974. Therefore on the basis of the recommendations of its Tender Committee, the Respondent by Resolution No. 684. dated 20‑3‑1974 awarded the said contract to the second lowest tenders viz. M/s. Sindh Construction Co. for Rs.24,31,060.08. It was further resolved by the said resolution that the earnest money allegedly deposited by M/s. Haji Moosa and Sons be forfeited. It is alleged that on or about 21‑3‑1974 the said M/s. Haji Moosa and Sons in contravention of the respondent's resolution dated 20‑3‑1974 and by Manipulation managed to obtain the said Pay Order from the respondent's Engineering Department. It is further alleged that despite the fact that the said Pay Order, which was in favour of the respondents and that it contained the respondent's Eneineerine Departments stamp which showed that in fart that the Pay Order was used for the purpose for which it was issued, and without notice or any reference to the respondents paid the amount of the Pay Order to M/s. Moosa and Sons.

3. The case of the respondents, as set out in the plaint, is that in the circumstances the appellant had sufficient notice that the Pay Order was deposited with the respondent's Engineering Department and that the Pay Order was in favour of the respondent. However the appellant refunded the amount of the said Pay Order to said firm without making any reference to the respondents and thereby caused inter alia loss of the above‑stated amount of Rs.77,880 to the respondents. It is the case of the respondents that as the Pay Order was in favour of the respondents and as the said Pay Order had contained the stamp of the respondent's Engineering Department, the appellants were not entitled in law to pay the amount of the Pay Order to M/s. Haji Moosa and Sons without first obtaining discharge from the respondents. The respondents filed the said suit for recovery of the amount.

4. The appellants contested the suit by filing written statement. The appellants denied that the Pay Order contained the respondent's Engineering Department stamp or that the said Pay Order was used for the purpose for which it was got issued by M/s. Haji Moosa and Sons. The appellants denied that the Pay Order was unauthorisedly obtained by the said firm, if at all it was deposited by it with the respondents.

5. The parties had filed consent issues. The respondents examined Irshad Ahmad Khan, Senior Clerk, Engineering Department. The appellants examined Adam Ayub.

6. It was contended on behalf of the respondents before the learned ,Single Judge that the Pay Order which was admittedly drawn in favour of the Chief Engineer, KPT, had been actually delivered to the payee. It was therefore not open to the purchaser firm of the said Pay Order to encash it without getting it endorsed in its favour by the payee. Upon delivery of the Pay Order to the drawee, the purchaser had lost his right to get the Pay Order cancelled and to receive the amount of the Pay Order.

7. The contention of Mr. Abbas Ahmad is that the said Pay Order having been prepared in the name of the Chief Engineer, KPT, was handed over to the purchaser‑firm and hence the purchaser‑firm had no authority to cancel the said Pay Order which was already acted upon and it was only the Chief Engineer, KPT in whose name the Pay Order was issued and he could only claim the amount.

8. Mr. Mansoorul Arfin, learned counsel for the appellant Bank, on the other hand, contended that the appellants did not know that the Pay Order had been delivered to the respondents. There is n 0tting in evidence to show that the appellants had the knowledge of the Pay over having been delivered by the purchaser‑firm to the respondents. The submission of Mr. Mansoorul Arfin is that the purchaser‑firm had the right to get the payment of the Pay Order upon its presentation.

9. The question for our determination is whether the purchaser of a Pay Order from a Bank, which has been issued in favour of a third party, has any right to encash it, and if so till what stage can he do so? Before referring to the decisions cited by the learned counsel would prefer to deal with the relevant provisions of the Negotiable Instruments Act (hereinafter referred to as the `Act').

10. What is "Payment in due course" is defined in the following terms in section 10 of the Act:

11. "`Payment in due course' means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount there in mentioned "

12. Section 85‑A of the Act is in the following terms:‑‑

13. "Where any draft, that is, an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand, purports to be endorsed by or on behalf of the payee, the bank is‑discharged by payment in due course."

14. This question has been dealt with in the following decisions:‑‑

(1) Travancore National and Quilon Bank Ltd., S: Barkat Ali and others v. Secretary, All India Spinners Association, Tamilnad Branch (AIR 1940 Madras 101).

(2) Malik Barkat Ali v. Central Board, Imperial Bank of India, Calcutta through Imperial Bank of India, Lahore and another JAIR 1945 Lahore 213).

(3) In the matter of Indian Companies Act, 1913 and of the New Bank of India Ltd., Amritsar (AIR 1949 East Punjab 373).

(4) The Traders Bank Ltd. v. S. Kalyan Singh (AIR 1953 Punjab 194).

(5) Birbhum Central Cooperative .Bank Ltd v. Pioneer Bank Ltd. (AIR 1956 Calcutta 615).

(6) Lairak v. Amar Singh and others (AIR 1957 Assam 131).

15. In Travancore National and Quilon Bank Ltd. S, Barkat Ali and others v. Secretary, All India Spinners Association, Tamilnad Branch (AIR 1946 Madras 101), the All India Spinners Association had given three cheques for collection to the Bank. The proceeds of the said cheques were realized by the Bank after it suspended payment. It was held that such person is entitled to preferential payment regarding such proceeds.

16. In Malik Barkat Ali v. Central Board, Imperial Bank of India, Calcutta through Imperial Bank of India, Lahore and another (AIR 1945 Lahore 213), Malik Barkat Ali was selected as Provincial Manager of the Crown Branch Tea Company at Dacca and he was required to deposit a certain amount by way of security money by means of a bank draft. His father accordingly purchased a draft for Rs.5,000 made out in favour of the Crown Branch Tea Company by the Imperial Bank of India on its Dacca Branch and instructed that Bank to debit the amount of the draft to his current account which was done on 19‑12‑1940. Malik Barkat Ali thereafter proceeded to take charge of his post but as soon as he arrived at Dacca, he formed the impression that the company was a bogus concern and he accordingly sent a telegram to his father the same evening that payment of the draft should be stopped "any how". His father accordingly sent a telegram to Dacca Branch of the Imperial Bank asking them to stop payment which reached that Branch on 23‑12‑1940. His father went personally to the office of the Imperial Bank in Lahore and asked them to arrange for their Dacca Branch to stop payment of the draft explaining the reasons for doing so. Malik's father who was the purchaser of the draft, thereafter sued the Imperial Bank on the ground that they had acted negligently in refusing to stop payment on being asked to do so for the reasons given to them at that time. It was held as follows:‑‑

17. "The issue of the draft is regarded in banking practice as a matter of purchase, the person at whose instance the draft is issued, being regarded as the purchaser. The question that falls to be decided .is what are the conditions in which a bank can stop payment of a draft after it has reached the hands of the person in whose favour it is drawn, and whether it can do so at the instance of the purchaser."

18. It was further observed:‑‑‑

19. "Ordinarily, a bank cannot stop payment of a draft unless there is some doubt as to the identity of the person presenting it as being or properly representing the person in whose favour it is drawn. This appears from Sheldon's Practice and Law of Banking, 1931 page 155. The position of a bank in regard to its own drafts is not quite the same as its position in regard to cheques drawn on it, since it has taken on commitments of its own in favour of a third person at the instance of the purchaser. This seems to be in accordance with the provisions of the Negotiable Instruments Act." It was further observed:

20. "This section (section 10 of the Act) would seem to indicate that the question with regard to which a bank has to satisfy itself is that of the title of the person presenting the draft. If a draft is lost, for, example, a risk may arise that it will be presented by someone who is not entitled to be the holder and there may be a forged endorsement. In such cases, the purchaser may reasonably ask the bank to be on its guard against presentation by the wrong person; and, if the bank does not exercise the necessary precautions, the purchaser may sue the bank for negligence. It is with cases of this kind that the reported decisions are mostly concerned. On the other hand, it does not appear that the purchaser is entitled to ask the issuing bank to stop payment on other grounds, such as matters relating to the consideration in respect of which the draft has been at his instance, for this would often put the bank in an impossible position, as when the purchaser of the draft is dissatisfied with some bargain which he has made with the person in whose favour the draft has been issued."

21. In the matter of the Indian Companies Act of 1913 and of the New Bank of India Ltd., Amnitsar (AIR 1949 East Punjab 373), the question that arose for decision was whether the petitioners or any of them were entitled to the payment in full of the amounts claimed by them or they must rank with the general body of the creditors and content themselves with receiving only such dividends as were payable under the scheme to such creditors. It was held:

22. "That where a banker remits a certain sum of money, either to his own branch at another place, or to some other bank doing business at that place, whether by means of book entries, made in the case of another banker with the express or implied consent of such banker, or according to some other usual method of transmitting money, for the express purpose of such sum being paid to a named individual or his nominee, the sum must be deemed to have been specifically appropriated for the purpose of such payment. In case the bank charged with the duty of paying the said sum closes business before discharging the obligation, the payee will have the right to be paid that sum in full and cannot be obliged to rank with the general body of creditors, his having accepted a draft for the amount drawn on the branch or the bank notwithstanding."

23. It was further observed:‑‑‑

24. "However, the rule I have stated above will apply only to a case where it is proved beyond the possibility of reasonable doubt that the holder of the draft, or the person who secured the draft in his name, had paid the money to a banker only and expressly for the purpose of being transmitted to another place for being paid to a specified person or for being otherwise spent in a specified manner and that the draft was obtained merely with the object of facilitating realization of money at the place of destination by the party to whom it was intended to be transmitted. The rule will have no application where the draft was obtained by the party concerned either for gain in the shape of exchange commission or under a contract for giving accommodation to the prior or any other party or otherwise for commercial purposes generally."

25. In the Traders Bank Ltd. v. S. Kalyan Singh (AIR 1953 Punjab 194) it was held:‑‑‑

26. "There can be no doubt that ordinarily the position of the Bank `vis‑a vis' a person dealing with the Bank is that of debtor and creditor. It is of course perfectly open to such person to show that in a particular transaction the Bank has received money in trust. A common instance is where a bank is paid money for the express purpose of it being remitted to a person at some other place. In any particular case it is for the person alleging trust to establish it."

27. In Lairak v. Amar Singh and others (AIR 1957 Assam 131), it was held:

28. "Ordinarily the purchaser of a demand draft from a bank is just in the position of a creditor of a bank and there is no fiduciary relationship between the bank which issued the draft and the customer, who took it.

29. It was further held as follows:‑‑

30. "The ownership of a money, paid for the purchase of the draft passes to the bank as one of the usual and well recognized banking practice and the purchaser gets what he has bargained for, namely a draft of a bank the payment whereof depends on the solvency of the head office at the time of, the presentation of the draft. But as I pointed out, in the decision in question, there is an exception to this general rule where a bank issues a draft on its own branch and there is an express or implied agreement between the parties at the time of the issue of the draft by the bank on its own branch that the sole object of the issue of the draft is to transmit the money from one place to another for the express purpose of being paid to the person applying for the draft or some nominee of his."

31. In all the above cases except (M.J. Rice & Atta Mills) AIR 1957 Assam 133, AIR 1949 EP 373 and AIR 1956 Calcutta 615, the claim of the purchaser to get back the money has been upheld and it has been held to be in the position of an ordinary creditor of the bank though his claim to have preferential treatment has been negatived except in those cases in which the draft was obtained only for transmission of the money from one place to another.

32. In cases in which a draft was purchased in the ordinary course of banking business; it was held that the, bank continued to the agent of the purchaser of the draft till the amount was actually paid and on this account the relationship between the purchaser and the bank was the fiduciary relationship of a principal and agent. In such cases therefore the purchaser could not only claim the amount but could also claim preference over the claim of ordinary creditors.

33. In the cases reported in AIR 1949 E.P. 373 and AIR 1956 Calcutta 615, the drafts were issued not in the names of the purchasers themselves but in the names of some other persons and the claims were being made by the purchasers.

34. All these cases were considered by a Single Judge of .the Allahabad High Court in the case of Sindh Nath v. Punjab National Bank (AIR 1960 Allahabad 238) in which the facts were that on the 12th of September 1947 the plaintiff paid a sum of Rs.6,000 to the defendant‑bank at .its Nayaganj Branch in the City of Kanpur for the preparation of a draft in the name of one Dr. Ram Narain in Lucknow. A draft was prepared for Rs.6,000 and was handed over to the plaintiff. The plaintiff retained the draft with himself and did not hand over to Dr. Ram Narain. He informed the defendant that the draft should be cancelled and the money paid back to him. He also offered to furnish an indemnity bond for the amount though he contended that it was not necessary. The defendant‑bank, however, refused to pay the amount to the plaintiff. The plaintiff filed suit for recovery of Rs.6,300.

35. The suit was contested by the defendants who admitted that the plaintiff had paid Rs.6,00U for the purchase of the draft and that the draft having been prepared in the name of Dr. Ram Narain had been handed over to the plaintiff. It, however, contended that the plaintiff had no authority to cancel the instructions already acted upon and that it was only Dr. Ram Narain in whose name, the draft had been prepared who could claim the amount. The plaintiff, it was urged,‑ had no right left and could not get the amount or any interest there on. 'It‑was denied that the plaintiff had at any time gone to the defendant with the draft in question or had notified his intention to cancel it. It was also ‑pleaded that Dr. Ram Narain was in any case a necessary party and the suit could not proceed without his being impleaded.

36. The suit was `tried by Additional Civil Judge of Kanpur. HC relying on the case of Malik Barkat Ali (supra) took the view that though the plaintiff had purchased the draft, the only person who could claim its amount and give a discharge to the bank m respect of it was Dr. Ram Narain, the person in whose favour the draft had been prepared and it was not open to the plaintiff to cancel the draft or to stop its payment. The suit was dismissed. The plaintiff preferred an appeal before the Allahabad High Court. It was held by Sristava, J. that it was not as if a draft could never be countermanded or its' payment stopped in any circumstances, but that the difficulty in countermanding or stopping payment of a draft could arise only when the draft had already passed into the hands of the payee or had been endorsed in favour of another person.

37. It was stated that it was only after delivery that the payee of the draft could claim any rights in respect of it and become entitled as a holder to receive or recover its amount.

38. It was laid down that before the draft was delivered to the payee, it was, therefore, open to the purchaser to get the draft cancelled and instruct the bank not to pay the amount to any one else but to return it to him as the purchaser could treat the bank which had issued the draft as his own debtor and could, as a creditor demand the amount from the bank, and the bank could be liable to satisfy that demand it was further held that:

39. "The only thing it can insist on is that the draft should be handed back to it so that there may be no chance left of any other person making a claim on its basis. It is only after the draft has been delivered to the payee and his rights have come in that the purchaser's right to claim the money and to stop the payment becomes disputable. At that stage the bank can reasonably say that in order to have an effective discharge from liability it is necessary to have the consent of the payee before the amount can be paid to the purchaser."

40. In a case reported in AIR 1976 Bombay 185, the facts of the case were that one Dundage had purchased some gram Dal from the plaintiff who carried on business at Kolhapur. The agreed price of the said goods was Rs.863:94 out of which Dundage had already made a part payment Rs.180 on 17‑8‑1965. On that date, goods in question were loaded in a truck but were looted at Kolhapur in the course of some disturbances there and the balance of Rs.683.94 remained to be paid by Dundage to the plaintiff towards the price of the said goods. On 19‑8‑1965 Dundage purchased a draft for the said balance of Rs.683.94 from the Shankeshwar Branch of the Belgium Bank, and it is common ground that it was despatched by him by post to the plaintiff on that very date. The defendant‑Bank received instructions from Dundage to stop payment of the said draft to the plaintiff. The said draft was presented for encashment to the Kolhapur Branch of the defendant‑Bank on 22‑8‑1965. The defendant‑Bank declined to make payment of the said draft to the plaintiff by reason of the instructions given by Dundage to stop payment. The plaintiff filed the suit to recover the amount of the draft from the defendant‑Bank. The matter ultimately came before the Division Bench of the Bombay High Court. The Bench deduced the following prepositions:‑‑

(1) The relationship of the purchaser of a draft and the bank from which that draft has been purchased is merely that of debtor and creditor;

(2) the purchaser of the draft can, therefore, call upon the bank from which he has purchased it to cancel the draft and pay back the money to him at any time before the draft has been delivered to the payee;

(3) if, however, the some object of tli4 issue of the draft was to transmit the money to another person, a fiduciary relationship is created between the purchaser of the draft and the bank which issued it and the purchaser of the draft can countermand payment only if the bank has not actually parted with the money held by it as agent, thus terminating the relationship of principal and agent;

(4) ordinarily, a bank issuing a draft cannot refuse to pay the amount thereof, unless there was some doubt as to the identity of the person presenting it as being or properly representing the person in whose favour it was drawn, or, in other words, unless there is reasonable ground for disputing the title of the person presenting the draft; and

(5) once the draft has been delivered to the payee or his agent, the purchaser is not entitled to ask the issuing bank to stop payment of the draft to the payee on other grounds such as matters relating to consideration, and the issuing bank can thereafter pay back the amount of the draft to the purchaser of the draft only with consent of the payee."

41. It was held that the draft in question had reached the payee before payment thereof was purported to be stopped by Dundage on 20‑8‑1965. They relying on the decision of Lahore High Court in Barkat Ali's case (AIR 1945 Lahore 213) held that Dundage was not entitled to ask the defendant‑Bank to stop payment on that account, and the defendant‑Bank was not entitled to refuse to pay the amount of that draft to the plaintiff. It was laid down that the payment of the draft to him by the defendant‑Bank could amount to payment in due course within the terms of section 10 of the Negotiable Instruments Act and the defendants‑Bank could be discharged from liability on the basis of the principle embodied in section 85A of the Act. In that view of the matter, the plaintiff's suit was decreed.

42. Turning to the facts of the present case, in the light of this legal position, the first and the most important question which arises is, when was the draft in the present case delivered to the plaintiff/respondents who are the payees thereof or to their agent. The learned Single Judge has come to the conclusion that having regard to the evidence of P.W. Irshad Ahmad Khan that the Firm, M/s. Haji Moosa & Sons, had submitted tender for consideration of 54‑1‑1 type quarters of the Customs Department for the estimated cost of Rs.19,47,000 and that alongwith the tender 4 per cent. of the estimated amount viz. Rs.77,880 in terms of the tender notice, through a pay order in favour of Chief Engineer, K.P.T. He also came to the conclusion that it is admitted by the defendant/appellant in their written statement that under the terms of the tender notice the tenderers were required either to deposit in cash or to deposite the pay order in lieu of cash amount being 4% of the estimated cost of Rs.99,47,000 as earnest money viz. Rs.77,880. In that view of the matter, he found that there is no evidence in rebuttal led by the defendants/appellants and hence there is no escape from the conclusion that the pay order in question had passed into the hands of the payee, that is, the plaintiffs/respondents' Engineering Department.

43. In our opinion, that finding, is however, not correct. It has come on record that the respondents had not produced the original tender document. There is nothing on record to show that the said firm had given pay order alongwith the tender document. There is undoubtedly no evidence available on record‑ to hold that the defendants/appellants had knowledge of its being deposited with the, plaintiffs/respondents.

44. The learned Single Judge has come to the conclusion that the defendants/appellants‑bank, in the instant case had no knowledge of the pay order having been deposited with the plaintiff/respondents, nevertheless upon actual delivery of the Pay Order to plaintiffs/respondents the contract on this negotiable instrument became complete and irrevocable. In our opinion, that finding is, however, not correct. We do not agree with the observation of the learned Single Judge that upon actual delivery of the pay order to the plaintiffs/respondents the contract of this negotiable instrument became complete and irrevocable.

45. The amount of the pay order would, in our opinion, amount to payment in due course within the term of section 10 of the Negotiable Instruments Act and the appellant bank would be discharged from the liability on the.basis of the principle embodied in section 85‑A of the Act.

46. A' bare reading of the Pay Order (Exh. 5/2) clearly shows that it does not contain any stamps of the respondents' Engineering Department. The learned Single Judge's observation that it cannot absolve the appellants of their primary responsibility to pay the amount of the Pay Order to the respondents/plaintiffs if the essential ingredient of delivery thereof to the respondents is proved, which has been proved‑We have already held that there is nothing on record to show that the Pay Order was handed over to the respondents. We are of the view that even mere handing over of the Pay Order to the respondents would not be of any effect. It has come on record that their letter dated 21‑5‑1974 addressed to Chairman, Karachi Port Trust referred that M/s. Haji Moosa & Sons presented the said Pay Order for cancellation and encashment on the basis of its alleged by them non‑utilization and in support of their statement they executed an indemnity bond.

47. It is well‑settled that the relationship between the purchaser of the pay order and the Bank issuing it is not of creditor and a debtor and the mere F3 issuing of the draft could not absolve the Bank from liability for the amount it had received.

48. The position taken by the appellant‑Bank in this case was therefore tenable in law. The. amount of Rs.77,880 for which the pay order has been issued, has been paid by the said firm. Unless the amount was actually paid to the payee to whom the said firm wanted it to be paid, the, appellant‑Bank was bound to refund it to the said firm. Till the payment or refund was made, the appellant‑Bank remained the debtor in respect of the amount and the said firm. remained the creditor. As the pay order was never actually delivered to the Chief Engineer' of the respondents in whose favour it had been issued, no rights accrued in favour of the Chief Engineer. Before encashment of the pay order by the respondents, there was nothing to debar 'the said firm from countermanding its payment and from directing the appellant‑Bank to cancel the pay order and to pay back its amount to the said firm. In these circumstances, it appears to us, that the appellant‑Bank was justified in C resulting to pay the amount of the pay order to the plaintiffs/respondents. The claim of the plaintiffs/respondents was, therefore, not well‑founded.

49. No other point was urged before us.

50. The appeal is consequently allowed: The suit of the plaintiffs/respondents is dismised with no order‑as to costs.

51. The above are the reasons for our short‑order allowing the appeal on conclusion of the arguments.

52. AA./V‑154/K Appeal accepted.