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

Last Updated: May 13 2011
Article by Lincoln Caylor

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.

Lincoln Caylor
Similar Articles
Relevancy Powered by MondaqAI
Bennett Jones LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Bennett Jones LLP
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions