Noting that banks must strictly follow customers’ instructions, the Supreme Court has held that a bank cannot unilaterally divert funds contrary to the mandate given by its customers.
Upholding Canara Bank’s liability for erroneously transferring $100,000 to a third party contrary to the customer’s instructions, a Bench of Justice JB Pardiwala and Justice R Mahadevan dismissed the bank’s appeal against the Madras High Court’s verdict directing it to indemnify Archean Industries Pvt Ltd for the mistake.
“Once clear instructions had been issued by its customer, the bank was required either to comply with those instructions or to seek clarification regarding the necessity of regulatory approval and whether such approval had been obtained to facilitate the remittance. The bank could not have unilaterally remitted the amount to the vessel owner,” it said.
Writing the verdict for the Bench, Justice Mahadevan said even if there were regulatory concerns regarding Reserve Bank of India’s approval, the bank could not justify fund diversion.
“Even in the absence of any RBI approval, the bank ought to have withheld the amount and awaited further instructions from its customer or sought the requisite clarification. The funds in question belonged to the customer, and the bank could not have acted contrary to the mandate given by it. Therefore, the act of the bank in transferring the funds to the owner of the vessel, who had clearly instructed the Defendant No. 1 to remit the money to the plaintiff, cannot be sustained,” the top court said.
Archean Industries had a charter party agreement with a vessel owner for shipment of granite. Under this arrangement, a portion of the freight payable by Archean to the vessel owner would be diverted to Dubai-based Goltens towards dues for repair works.
Acting on this understanding, Archean confirmed that it would retain the amount and issued a document styled as a “corporate guarantee”, assuring payment to Goltens upon the vessel’s arrival in Newark. Upon the vessel reaching its destination, Archean instructed Canara Bank to remit the amount to Goltens by submitting necessary forms.
However, instead of transferring the funds to Goltens, Canara Bank mistakenly sent the money to the vessel owner’s account in the US and despite repeated reminders, the payment was not made to Goltens which filed a suit for recovery against Archean Industries and Canara Bank.
Liable to pay the plaintiff under its contractual undertaking, Archean Industries was entitled to recover the amount from the bank through third-party procedure, the top court said.
