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Court Rules Banks Not Liable For Converting Cheques To Non-Existing / Fictitious Payees

Teva Canada Limited v. Bank of Montréal, 2016 ONCA 94

On the Ontario Court of Appeal released its decision in Teva Canada Limited v. Bank of Montréal. The case arose out of a $5M fraud perpetrated by a former employee of pharmaceutical manufacturer Teva Canada Ltd. ("Teva") against Teva and a number of banks. The former employee requisitioned and obtained fraudulent cheques from Teva made out to companies he registered with names similar to customers of Teva. The cheques were negotiated by the defendant banks through accounts opened by the fraudster in the name of the companies he registered.

Teva sued the banks for damages for conversion, a strict liability offence under the Bills of Exchange Act ("BEA"), and brought a motion for summary judgment. The defendants TD Canada Trust and The Bank of Nova Scotia brought cross-motions for summary judgment and argued that various statutory defences were available to them under the BEA. In particular, the banks argued that the cheques were made out to payees who were non-existent and / or fictitious within the meaning of section 20(5) of the BEA. Under that section, if a cheque is made out to a non-existent or fictitious payee, a bank is entitled to threat the cheque as though it were payable to bearer.

Teva was successful on its summary judgment motion. The motion judge held that the statutory defences relied on by the banks were not applicable in the circumstances. The banks appealed as of right to the Ontario Court of Appeal.

Justice Laskin, writing for himself and Justices Weiler and Kronk, allowed the banks' appeals. The Court of Appeal held that the cheques in question fell within the statutory defence found in section 20(5) of the BEA,, and that the motion judge erred in holding that the defence was not available in the circumstances. As held by Justice Laskin, "The purpose of s. 20(5) is to protect the bank from fraud on the drawer, committed by a third party, including an insider in the drawer's organization. The section allocated the loss to the drawer, who typically is better positioned to discover the fraud or insure against it." (para. 34)

A key question on the appeal was whether payees with names very similar or identical to customers of Teva fit within the scope of non-existing and/or fictitious payees. The leading case on conversion under the BEA is Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce ("Boma"), a 1996 decision of the Supreme Court of Canada. In Boma, Justice Iacobucci modified the effect of s. 20(5) of the BEA, with the effect that "even if a payee is, in fact, a creature of the fraudster's imagination, the payee may still not be non-existing if the drawer had a plausible and honest, though mistaken, belief that the payee was a real creditor of the drawer's business." (para. 41)

In present case, Teva argued that it had a plausible and honest belief that, in the circumstances, the payees (whose names were similar to those of Teva customers) were real creditors. The banks argued that this could not be the case, because the cheques were mechanically processed without proper internal approvals, and therefore Teva could not have intended to make the payments to real customers. The Court accepted the banks' argument, allowed their appeals, dismissed Teva's action, and awarded costs of $30,000 to each bank.

Justice Laskin is very careful to ensure that his reasons are consistent with the decision of Justice Iacobucci in Boma, despite noting in footnotes that a number of Justice Iacobucci's findings have subsequently been criticized. In particular, Justice Laskin interprets paragraphs in Boma which suggest on their face that Teva's intention to make the cheques payable to valid payees should be presumed or implied in light of the entirety of Justice Iacobucci's analysis, distinguishing the facts in Boma from the facts at bar.

The decision is helpful for the following reasons:

  • It affirms that non-existing and fictitious payees are distinct from each other, and that whether a payee is non-existing is a question of fact, while whether a payee is fictitious depends on the intention of the drawer.
  • It interprets Boma to stand for the proposition that that the drawer's intention to pay to valid payees will only be presumed or implied where this is supported by the facts in evidence.
  • It confirms that while the use of pre-printed cheques is commonplace, companies must put in place and follow a policy for approving their issuance, in order to rely on the BEA to hold banks accountable for losses in conversion.

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