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NEGOTIABLE INSTRUMENTS AND BILLS OF EXCHANGE - Bills, cheques and notes - Liabilities of parties

Friday, October 27, 2017 @ 1:33 PM  


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Appeal by Teva Canada Limited (Teva) from a judgment of the Ontario Court of Appeal setting aside a decision concluding that the respondent banks were liable for conversion. Teva was the victim of a fraudulent cheque scheme implemented by one of its employees, McConachie. McConachie drafted false cheque requisition forms for business entities with similar or identical names to those of Teva’s real customers. Based on McConachie’s fraudulent forms, Teva’s accounts payable department issued the cheques and mechanically applied the requisite signatures. McConachie registered the business names as sole proprietorships and opened bank accounts at several banks. He deposited 63 fraudulent cheques totaling $5,483,249 into these accounts and eventually removed the funds. Teva filed a claim against the collecting banks claiming that they were liable for conversion. The banks argued that the payees in this case were fictitious or non-existing and that they were not, as a result, liable for conversion. When a bank transferred funds to an “improper” recipient, it was liable under the strict liability tort of conversion unless a statutory defence succeeded. Liability for conversion could be avoided if a bank could bring itself within s. 20(5) of the the Bills of Exchange Act (Act). The motions judge found that the payees were not fictitious or non-existing within the meaning of s. 20(5) of the Act and that there was “a rational basis for concluding that cheques were apparently made payable to existing clients”. Accordingly, the motions judge determined that the banks could not rely on the defence in s. 20(5) of the Act and were ordered to pay Teva the full amount. The Court of Appeal determined that two of the payees were non-existing and that four others were fictitious within the meaning of s. 20(5) of the Act. Accordingly, the Court of Appeal concluded that the motions judge erred in determining that the banks should bear the loss. It found that the banks were entitled to treat all the cheques as payable to bearer and that Teva’s action for conversion could not succeed.

HELD: Appeal allowed. The Bills of Exchange Act did not define the terms fictitious or non-existing. As a result, the contours of these terms had been left to the courts to determine. The jurisprudence provided a two-step framework which outlined what a bank was required to prove to demonstrate that a payee was fictitious or non-existing. In the first step, the subjective fictitious payee inquiry, the question asked was whether the drawer intended to pay the payee. If the bank proved that the drawer lacked such intent, then the payee was fictitious, the analysis ended and the drawer was liable. If the bank did not prove that the drawer lacked such intent, then the payee was not fictitious, and the analysis proceeded to the second step, namely, the objective non-existing payee inquiry, which asked if the payee was either a legitimate payee of the drawer or a payee who could have reasonably been mistaken for a legitimate payee of the drawer. If neither of these was satisfied, then the payee did not exist, and the drawer was liable. If either was satisfied, then the payee existed, and the bank was liable. The Court’s interpretation of “fictitious” payees as incorporating a subjective standard was deeply rooted in the common law, which s. 20(5) of the Act was intended to codify. In enacting s. 20(5), Parliament intended to codify the common law false payee defence, including subjective considerations. To allocate losses to the drawer for having failed to identify and detect the fraud was inconsistent with strict liability. Conversion was a strict liability tort. This made any negligence on the part of the drawer or the banks in preventing the fraud irrelevant. Since McConachie was not lawfully entitled to the cheques, the banks were prima facie liable for conversion. Teva was not complicit in the fraud. The motions judge found that there was “a rational basis for concluding that cheques were apparently made payable to existing clients”, and that “the payees could plausibly be understood to be real entities and customers of the plaintiffs”. As a result, the payees were not fictitious or non-existing. The decision of the motions judge was restored.

Teva Canada Ltd. v. TD Canada Trust, [2017] S.C.J. No. 51, Supreme Court of Canada, B. McLachlin C.J. and R.S. Abella, M.J.Moldaver, A. Karakatsanis, R. Wagner, C. Gascon, S. Côté,R. Brown and M.J. Rowe JJ, October 27, 2017. Digest No. TLD-October232017011SCC