Banks are convenient deep pockets to sue when someone suffers a
loss but cannot recover from the perpetrator who has caused the
loss. But the recent decision of the Ontario Court of Appeal in Dynasty Furniture Manufacturing Ltd. v.
The Toronto-Dominion Bank, 2010 ONCA 514 puts serious
roadblocks in the way of non-customers seeking to pick the deep
pockets of a bank. Dynasty Furniture held that the scope
of a bank's liability to non-customers is extremely narrow. It
is only if the bank has actual knowledge (including wilful
blindness and recklessness) of its customer's wrongful
activities that liability to third parties who have been harmed by
the customer's activities can arise. Mere negligence on the
part of the bank is not enough. This is an important ruling for
Canadian banks, and should serve as a serious deterrent to those
looking to banks as a convenient deep pocket to sue.
The plaintiffs in Dynasty Furniture alleged that they
lost money in a fraud. Unable to recover from the perpetrators of
the fraud, they sued a bank that had provided correspondent banking
services to the alleged fraudsters, alleging that the bank owed the
plaintiffs a broad duty of care in negligence even though the
plaintiffs had no direct dealings with the bank. In essence, the
plaintiffs alleged that the bank ought to have detected the fraud
(even though the primary regulatory agency, the U.S. Securities and
Exchange Commission, had not managed to do so) and ought to have
frozen the relevant bank accounts.
The implications of the duty of care alleged by the plaintiffs
would be dire. The proposed duty would effectively require banks to
constantly monitor the activities of all of their customers for
signs of anything that might be suspicious. It could lead to
literally billions of dollars in liability if a court concluded
that a bank ought to have been able to detect a fraud but had
failed to do so.
The bank responded with a motion to strike the statement of
claim to the extent that it pleaded a duty of care based on
constructive as opposed to actual knowledge. In other words, the
bank acknowledged that if it had actual knowledge that its customer
was engaged in a fraud, it might be liable to non-customer victims
of the fraud. But it contested the ability of the plaintiffs to sue
on the basis that the bank did not actually know of the fraud but
ought to have known of it.
In very comprehensive reasons for judgment (2010 ONSC 436),
Justice Wilton-Siegel of the Ontario Superior Court of Justice
(Commercial List) granted the motion at first instance. Applying
the Anns/Cooper test of whether a duty of care exists in
tort (based on Anns v. Merton Borough Council,
 A.C. 728 (H.L) and Cooper v. Hobart,
 2 S.C.R. 2), he first concluded that the alleged duty of
care did not fall within any recognized category of negligence. He
then applied the two-part test for a novel duty of care. First, he
concluded that there was insufficient proximity between the bank
and the plaintiffs to give rise to a prima facie duty of
care in tort. Second, he concluded that even if a prima
facie duty of care arose, it would be negated on policy
grounds. He referred to a number of policy reasons for this
conclusion. The duty proposed by the plaintiffs could give rise to
indeterminate liability to an undetermined class. The duty would
effectively make banks into regulators, an unnecessary role where a
well developed regulatory regime already exists. Fulfilling the
duty would require international investigatory activities beyond
the capabilities of a single bank, since many frauds are
trans-national in scope. The proposed duty would effectively make
banks insurers in those who invest with the bank's
On appeal, the Ontario Court of Appeal affirmed the Superior
Court decision in its entirety. The Court of Appeal concluded that
in opening its customer's account, a bank does not owe a duty
to non-customers to ensure that the account will not be used for an
unlawful purpose. It further concluded that a bank does not owe a
duty to non-customers to inquire into its customer's activities
because it ought to have known that those activities were
suspicious, unusual or fraudulent.
McCarthy Tétrault Notes
Dynasty Furniture is an extremely important and welcome
ruling for Canadian banks. It has clarified that a bank does not
owe a duty of care to non-customers except where the bank has
actual knowledge that one of its customers is engaged in unlawful
activity. This is an extremely narrow basis for liability, and
should serve as a serious deterrent to plaintiffs who look to banks
as convenient deep pockets to sue when recovery is not possible
from the perpetrators who caused their losses.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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