Canada: Emergence Of The Mareva By Letter: Banks’ Liability To Non-Customer Victims Of Fraud

Originally published in Business Law International - May 2011

Recent Canadian judicial decisions have established that a bank owes a duty of care to non-customers once it has actual knowledge of, or is wilfully blind to, the use of its services for fraudulent purposes. Depending on the circumstances, the possibility is still open that a bank may owe such a duty even where it does not have actual knowledge (or wilful blindness or recklessness) of the fraud. A similar recognition of a duty financial institutions have to third party victims when they are put on notice of fraud can be seen in decisions emanating from American, English and Swiss courts. The emergence of this duty increases the viability of the extrajudicial mechanism commonly referred to as a Mareva by Letter. By placing a bank on notice that its institution is being used to further fraudulent activities, and therefore opening the bank up to various public and private law duties to prevent any further misappropriation of funds, the Mareva by Letter can serve as an effective asset-preservation tool for victims of fraud. Even lacking the force of law inherent in a judicial order, the knowledge of its customer's fraud provided by a comprehensive private party letter is likely to create what amounts to a Mareva injunction – effectively compelling the financial institution to investigate and freeze the customer's account(s). As a result of its practicality, victims of fraud would be wise to add such a letter to the arsenal of weapons available to combat the potentially devastating effects of fraud. As well, banks should be aware of their potential liability and be prepared to respond to such letters appropriately.

Emergence of a duty of care owed by banks to non-customers under Canadian law

With the growth of fraudulent activity occurring through bank services, it is becoming increasingly incumbent on financial institutions to pursue with reasonable diligence not only their own clients' protection against fraud, but potential non-customer victims as well. On balance, a bank with actual knowledge of such activity is often best suited to intervene to prevent further fraudulent transactions and the dissipation of the misappropriated funds so as to reduce the ultimate harm caused to the victim. In recognition of this reality, the law has begun shifting some of the risk of fraud onto banks. The once-prominent concept that a bank owes a duty of care only to its customers has been significantly eroded within various Canadian jurisdictions in recent years. In its 2001 decision in Semac Industries Ltd v 1131426 Ontario Ltd, the Ontario Supreme Court determined that a bank that knows of a customer's fraud in the use of its facilities, or has reasonable grounds for believing or is put on its inquiry and fails to make reasonable inquiries, will be liable to those suffering a loss from the fraud.1 Numerous subsequent cases have developed this principle, and it is now well established that in certain situations, a bank will owe a duty of care to a third party who is defrauded by the bank's customer.2 Such a duty is discharged by reporting the issue to the appropriate authorities and, in many cases, freezing the customer's account.3 The nascent principle was recently restated in Dynasty Furniture, a case that arose in an effort to compensate victims of the Allen Stanford Ponzi scheme. In its decision, the Ontario Superior Court of Justice held that if a bank has actual knowledge of a customer's fraudulent activities, or is wilfully blind to or recklessly disregarded the existence of such activities, the third party victim would have a reasonable cause of action against the bank.4 In this case, the court declined to permit the claim in negligence to proceed based on constructive knowledge. However, in affirming this decision, the Ontario Court of Appeal left open the possibility that a bank may be found to have a duty to a non-customer in circumstances where it does not have actual knowledge (wilful blindness or recklessness) of the fraudulent activities being conducted through an account of its customer.5 The basis for finding liability in such a situation would be that the bank had constructive knowledge of the fraud, or ought to have known of its occurrence, and failed to take measures to prevent it.

The law in other common and civil law jurisdictions appears to be following the trend of placing a share of the risk of fraud onto the bank's shoulders. Though US and English courts have been more reluctant to find the existence of a duty of care owed by banks to third party fraud victims than courts in Canada, and as demonstrated below, Switzerland as well, there are nonetheless an increasing number of English and American decisions that indicate a willingness to find bank liability to non-customers where a fraud is evident, known and preventable.

English judicial developments

Recent English decisions have determined that there is no general duty of care owed by banks to non-customers, thus preventing successful third party actions against banks for negligence.6 However, the law does recognise liability on the basis of constructive trust theories. The classic statement setting out the liability of a third party as constructive trustee can be found in the oft-cited case of Barnes v Addy,7 where Lord Selborne said:

'[S]trangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions... unless those agents received and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.'

In this seminal case Lord Selborne laid down two branches of liability as a constructive trustee:

  1. 'Knowing assistance' (though it is now more often referred to as 'dishonest assistance' in view of the Privy Council decision in Royal Brunei Airlines v Tan);8 and
  2. 'Knowing receipt' of trust property.

Dishonest assistance

The general principle underlying this form of liability is that a stranger to a constructive trust will also be liable to account as a constructive trustee if he knowingly assists in the furtherance of a fraudulent and dishonest breach of trust. It is not necessary that the party sought to be made liable as a constructive trustee should have received any part of the trust property, but the breach of trust must have been fraudulent. The basis of the stranger's liability is not receipt of trust property but participation in a fraud.9

Where there has been a breach of fiduciary duty the key target of subsequent litigation will often not be the fiduciary, but third parties who have received assets or their proceeds from the fiduciary (knowing receipt) or who can be said to have knowingly assisted in the breach (dishonest assistance). To establish liability under the knowing or 'dishonest' assistance theory, a claimant must show that:

  1. There has been a breach of trust or fiduciary duty;
  2. Assistance was provided by the defendant in respect of that breach; and
  3. The defendant knew of the breach. In the banking context, this category of liability can encompass a situation where, for example, a bank somehow facilitates transactions involving a breach of trust or fiduciary duty.

The issue of what constitutes 'knowledge' in the context of dishonest assistance was authoritatively settled in Royal Brunei Airlines Sdn Bhd v Tan.10 The House of Lords held that dishonesty was a necessary ingredient of such liability. Lord Nicholls stated that 'in the context of the accessory liability principle acting dishonestly... means simply not acting as an honest person in the circumstances... . Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety'.11 The Royal Brunei approach was approved of in the Privy Council decision in Barlow Clowes International Ltd & Anor v Eurotrust International Ltd & Ors (Isle of Man).12 The decision in Barlow Clowes clears up some of the ambiguity that resulted in the law in this area following Twinsectra Ltd v Yardley.13 Thus in order to establish liability under this head there must be knowledge or suspicion accompanied by a conscious decision not to make enquiries and a defendant cannot escape liability simply by asserting that he did not know that the money was held in trust or did not know what a trust meant. The brief summary of the facts of that case are as follows.

Barlow Clowes was operating a fraudulent offshore investment scheme, which offered purported investments in UK gilt-edged securities. The bulk of an approximate £140 million of investments was misappropriated by Mr Clowes and his associates. By the time of Clowes' imprisonment following the collapse of the scheme, approximately £8.6 million of investors' funds had been funnelled through bank accounts maintained by companies administered from the Isle of Man by a company then known as ITC, which provided offshore financial services. Barlow Clowes (in liquidation) commenced proceedings in the High Court of the Isle of Man against ITC and two of its directors. All three defendants were found to have dishonestly assisted Mr Clowes and one of his associates ('Mr Cramer') to misappropriate funds. One of the defendants, Henwood, successfully appealed against the finding of the lower court that he had been a dishonest assistant on the basis that this conclusion was not supported by the evidence. Barlow Clowes appealed that decision to the Privy Council.

On appeal by Barlow Clowes, it was argued on behalf of Henwood that it was necessary to establish that he had to have been aware that his state of mind would, by ordinary standards, be regarded as dishonest. It was only if that was established that he could be said to be consciously dishonest and liable for dishonest assistance. In support of the argument, Henwood's counsel relied on the following statement by Lord Hutton in the Court of Appeal judgment of Twinsectra Ltd vYardley:

To see this article in full please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.