In its recent decision in Teva Canada Limited v. Bank of
Montreal, the Ontario Court of Appeal revisited defences
available to banks under the Bills of Exchange Act in
cases of employee cheque fraud. Finding in favour of the appellant
banks, the Court of Appeal found that companies that fail to put in
place and follow cheque approval policies may be deprived of their
strict liability recourse against the banks. Teva has now filed an
application for leave to appeal to the Supreme Court of Canada,
whose decision is pending.
Where a fraudulent employee misappropriates cheques from its
employer, an innocent party, be it the employer or the banks that
dealt with the cheques, must typically bear the loss.
When a bank pays the value of a cheque to a person who is not
entitled to possession of the cheque, the bank is strictly liable
to the drawer of the cheque for the tort of conversion. The
dominant case law on the subject is to the effect that the bank
cannot absolve itself of liability by proving that the defrauded
employer was somehow negligent.
However, Banks do have a defence to the tort of conversion under
section 20(5) of the Bills of Exchange Act,1
which provides that "[w]here the payee is a fictitious or
non-existing person, the bill may be treated as payable to
bearer". While this provision has existed in Canadian law
since the late 19th century, its interpretation remains
subject to discord when applied to the actions of fraudulent
The Supreme Court of Canada has previously addressed this issue,
notably in the 1970s in Concrete Column Clamps2
and then, in the 1990s in Boma.3 In both cases,
the majorities found that the stability and certainty in the
Canadian cheque system requires that banks negotiating cheques
– however innocent – bear the risk of such fraudulent
employee cheque schemes.4 Both of these judgments
however contained strong dissenting opinions, and have attracted
much academic criticism.
In Teva Canada Limited v. Bank of Montreal, a former
employee of the Plaintiff's finance department fraudulently
caused its employer to issue well over $5 Million in cheques
payable to entities with names similar or identical to those of
actual customers or suppliers. The former employee then
misappropriated the cheques, and deposited them into accounts he
had opened, which accepted the cheques for deposit and credited the
fraudulent employee with the funds.
After discovering the fraud, the defrauded company sued the
banks for converting the cheques. At the Ontario Superior Court of
Justice, the Motion Judge ruled in favour of Plaintiff on summary
judgment, finding that the banks were liable for converting the
cheques and that the fictitious payee defence did not apply in this
Applying the majority opinion of the Supreme Court in
Boma, the Motion Judge found that the payees were not
fictitious or non-existent, as the company "believed at
the time that each cheque was generated to satisfy a legitimate
obligation to a customer"5, as it
"did not at any time intend or authorize [the employee] or
his associates to possess or use the cheques for their own personal
use"6 and as "[t]he actual account
holders were not intended by [the employer company]to be the payees
of the cheques."7
In its February 2, 2016 decision, the Ontario Court of Appeal
overturned the decision of the Motion Judge, finding that the
payees were in fact "fictitious" and
"non-existent" and that the employer company
– and not the banks – must therefore absorb the loss
caused by the fraud. In support of its decision, the Court of
Appeal notably found that no directing mind or responsible officer
at the employer company had reviewed the fraudulent cheques,
especially since their internal cheque approval policies had not
been followed. 8 Therefore, the Court of Appeal
determined that the employer company could not prove that it
"intended" to pay real creditors for legitimate
obligations, as no one in authority had reviewed the fraudulent
This case, if followed, could well reallocate the burden of
preventing employee cheque fraud, as between banks and
1 Bills of Exchange Act, RSC 1985, c B-4
2 Royal Bank of Canada v. Concrete Column Clamps
(1961) Ltd.,  2 SCR 456 ("Concrete
3 Boma Manufacturing Ltd. v. Canadian Imperial Bank
of Commerce,  3 SCR 727
4 Concrete Column Clamps, p. 484; Boma,
5 Teva Canada Limited v. Bank of Montreal, 2014
ONSC 828 ("Trial Judgment"), para. 16.
6 Trial Judgment, para. 17.
7Trial Judgment, para. 18.
8 Teva Canada Limited v. Bank of
Montreal, 2016 ONCA 94, paras. 53, 75, and 84 ("Court of
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