HC Rules Bank Customers Hold Zero Liability in Third-Party Transaction Breaches

In a significant ruling, the Bombay High Court on Thursday mandated the Bank of Baroda to refund a sum of Rs 76 lakh to Pharma Search Ayurveda Private Limited, following an unauthorized transaction from the company's account. This decision came after a petition was filed by Jaiprakash Kulkarni and the company, challenging the Banking Ombudsman's refusal to direct the bank for a refund of the amount, which was fraudulently transferred.

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The division bench, comprising Justices Girish Kulkarni and Firdosh Pooniwalla, referenced a Reserve Bank of India (RBI) circular from July 2017 and the bank's Consumer Protection Policy on Unauthorized Electronic Banking Transactions. The court highlighted that customers hold zero liability for unauthorized transactions resulting from third-party breaches, provided they inform the bank within a specified timeframe.

According to the plea, on October 1, 2022, unknown entities were added as beneficiaries to the company's bank account without any One Time Password (OTP) being sent to the registered mobile number. The following day, Rs 76 lakh was siphoned off through online transactions to various unknown individuals. The petitioners promptly reported this cyber fraud to the city police's Cyber Cell and notified the bank manager.

Despite efforts to seek a refund based on the RBI's guidelines, when no restitution was forthcoming, the petitioners approached the bank ombudsman. However, their complaint was dismissed in January 2023, with the ombudsman noting that transactions were conducted after adding beneficiaries and entering valid credentials known only to account holders, indicating no fault on part of the bank.

The bench pointed out that three reports from the cyber cell confirmed that beneficiaries were added without any notification to the petitioners via SMS or email. This absence of intimation led the court to conclude that there was no negligence or collusion on part of the petitioners with the fraudsters. The court found both the bank and petitioners to be victims of third-party fraudsters.

Justice Kulkarni and Justice Pooniwalla were satisfied with the evidence presented and ruled in favor of the petitioners. They directed Bank of Baroda to refund Rs 76 lakh into Pharma Search Ayurveda Private Limited's account within six weeks. Additionally, they criticized the bank ombudsman for not conducting a proper inquiry into the matter.

This ruling underscores the importance of customer protection in cases of cyber fraud and reinforces banks' responsibilities under RBI guidelines. It also highlights the judiciary's role in addressing disputes related to unauthorized electronic banking transactions.