Emphasising that banks must strictly adhere to customer instructions, the Supreme Court held that a bank cannot unilaterally divert funds contrary to the mandate given by its customer, and upheld the liability of Canara Bank for erroneously remitting USD 100,000 to a third party.
A bench of Justices JB Pardiwala and R Mahadevan dismissed the bank's appeal, affirming a Madras High Court ruling that directed it to indemnify Archean Industries Pvt. Ltd. for the mistaken transfer.The dispute arose out of a 1998 transaction involving Dubai-based Goltens, which had carried out repair works on a vessel, Master Panos. As the repair charges remained unpaid, a settlement was reached under which part of the liability was to be discharged through a payment of USD 100,000.
Around the same time, Archean Industries had entered into a charter party agreement with the vessel owner for shipment of granite. Under this arrangement, it was agreed that a portion of the freight payable by Archean to the vessel owner would be diverted to Goltens towards the repair dues. 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.
After the vessel reached its destination, Archean instructed its banker, Canara Bank, to remit the amount to Goltens and submitted the necessary forms. However, instead of transferring the funds to Goltens, the bank mistakenly remitted the amount to the vessel owner's account in the United States. Despite repeated demands, the payment was not made, leading Goltens to institute a recovery suit against both Archean and the bank.
Aggrieved by the finding fastening liability on it, Archean approached the Supreme Court contending that the so-called “corporate guarantee” was not a guarantee in law but merely a payment arrangement arising out of the charter party, and that it had discharged its obligation by issuing instructions to the bank. It argued that the liability, if any, arose due to the bank's mistake and could not be foisted upon it.
Canara Bank, on the other hand, challenged the direction requiring it to indemnify Archean, contending that it was merely an authorised dealer in foreign exchange and could not remit funds to a third party without regulatory approval. It also sought to justify the remittance to the vessel owner by referring to the underlying commercial arrangement.
Rejecting the bank's defence, the Supreme Court underscored that once a clear mandate is issued by a customer, the bank has no discretion to act contrary to it.Rejecting the bank's reliance on foreign exchange regulations and the underlying charter party arrangement, the Court observed:
"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".
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