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